H Block Spectrum Highlights Risk of No Shows at FCC Incentive Auction

by on November 18, 2013 · 0 comments

I recently prepared a paper for the Expanding Opportunities for Broadcasters Coalition and Consumer Electronics Association that provides empirical data regarding the costs of restricting the eligibility of large firms to participate in FCC spectrum auctions (available in PDF here). The paper demonstrates that there is no significant likelihood that an open incentive auction would substantially harm the competitive positions of Sprint and T-Mobile. It also demonstrates that Sprint and T-Mobile have incentives to constrain the ability of Verizon and AT&T to expand their network capacity, and that Sprint and T-Mobile could consider FCC restraints on their primary rivals a “win” even if Sprint and T-Mobile don’t place a single bid in the incentive auction. (Winning regulatory battles is a lot cheaper than winning spectrum in a competitive auction.)

Some might think it is implausible that Sprint or T-Mobile would decide to forgo participation in the incentive auction. However, the recent announcement by Sprint that it won’t compete in the H block auction highlights the difficulty in predicting accurately whether any particular company will participate in a particular auction. Sprint’s announcement stunned market analysts, who had considered Sprint a key contender for the H block spectrum. Until recently, Sprint had given every indication it was keen to acquire this spectrum, which is located directly adjacent to the nationwide G block that Sprint already owns. It participated heavily in the FCC’s service rules proceeding for the H block (WT Docket No. 12-357) and even conducted its own testing to assist the FCC in assessing the technical issues. But, by the time the H Block auction was actually announced, Sprint decided its business would be better served by focusing its efforts on the deployment of its trove of spectrum in the 2.5 GHz band.

Such reversals are not unusual during the FCC auction process. Frontline Wireless, a company that no longer exists, successfully persuaded the FCC that it would build a nationwide, interoperable public safety network in the 700 MHz band, if the FCC imposed a public/private partnership condition on the D Block. But, shortly before the auction was scheduled to start, Frontline announced that it had been unable to obtain sufficient financing, and as a result, the D block was never sold.

To be clear, I’m not suggesting that Sprint or Frontline acted deceitfully in seeking spectrum rules they considered favorable to their interests without actually participating in the resulting auction. My point is that there is a critical distinction between regulatory efforts and business decisions. Companies often participate in regulatory proceedings to optimize their potential business options, but the results they seek are just that – options – until a business decision must be made.

This distinction leads to another important point: It is impossible for the FCC to predict accurately the ultimate business decisions of multiple independent companies whose particular business plans and the circumstances determining them are unknown to the FCC or anybody else. A particular company often cannot accurately predict its own decisions in rapidly changing circumstances (e.g., when Frontline was lobbying the FCC, it could not know with certainty that it would obtain the financing it required to buy the D Block). This inherent uncertainty is why the discredited licensing methodology of comparative hearings failed. It required the FCC to make reliable predictive judgments about the needs and efficiency of potential spectrum users, which proved to be an impossible task.

Ironically, the bidding restrictions proposed for the incentive auction are a form of “comparative hearing lite”. The DOJ’s recommendation – that the FCC “ensure” that Sprint and T-Mobile win spectrum in the incentive auction – is based on its own predictive judgments regarding the relative spectrum needs of all four nationwide mobile providers and their willingness to use future spectrum resources efficiently. Of course, there is no reason to believe that the DOJ is capable of judging such matters more reliably than the FCC did during the era of comparative hearings. As the H and D Block auctions demonstrate, it is impossible for the DOJ to know whether Sprint and T-Mobile will even show up to participate in the incentive auction.

Previous post:

Next post: