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A Sky News broadcast is shown on television screens in an electrical store in Edinburgh Scotland January 27, 2011. Strong demand for broadband and high-definition TV lifted first-half profits at bid target BSkyB by 26 percent, increasing pressure on Rupert Murdoch A Sky News broadcast is shown on television screens in an electrical store in Edinburgh Scotland January 27, 2011. Strong demand for broadband and high-definition TV lifted first-half profits at bid target BSkyB by 26 percent, increasing pressure on Rupert Murdoch's News Corp to secure its takeover deal without delay. News Corp has offered to buy the 61 percent of BSkyB it does not own and faces a six-month competition inquiry if it cannot allay fears such a move will give it too much media control. REUTERS/David Moir (BRITAIN - Tags: BUSINESS) - RTXX5A5  

The FCC disincentive auction

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Scott Cleland
Chairman, NetCompetition
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      Scott Cleland

      Scott Cleland is Chairman of NetCompetition® a pro-competition e-forum supported by broadband interests and President of Precursor LLC, a research consultancy for Fortune 500 companies. He is author of the book: Search & Destroy Why You Can’t Trust Google Inc.

The Federal Communications Commission’s upcoming “incentive” auction of TV airwaves is already at war with itself.

Somehow the FCC imagines it can maximize the revenue necessary to incent TV broadcasters to sell their 600 MHz spectrum by minimizing actual revenue collection via dis-incenting, and even banning some wireless company bids.

Old habits die hard.

Apparently, in its zeal to solve a wish-list of secondary wireless goals, in one fell auction swoop the FCC has lost sight of first principles – the need to economically-align all participants’ market incentives in order to maximize auction revenues.

It is obvious the FCC has never attempted such a complex two-sided auction of sellers in a “reverse auction” and buyers in a traditional “forward auction.” If they had, they would give more than lip service to “economics” and focus much more on economically aligning the market incentives of both sellers and buyers.

If this was really to be a market “incentive” auction of spectrum, the collective incentive for broadcasters to sell their spectrum, would be matched by the collective incentive of the wireless industry to bid for the broadcasters’ licenses. It is not.

The FCC has created Rube Goldberg auction rules to mask that the FCC will effectively ban the two largest wireless providers, Verizon and AT&T, from bidding and winning badly needed spectrum in roughly two-thirds of the country.

This is a big problem for the potential success of the incentive auction and most Americans because Verizon and AT&T have the highest network utilization and hence the highest real consumer-demand for this spectrum. They also have the most financial wherewithal to bid.

Any entry-level economics student understands that if most demand is eliminated from a market by banning the biggest bidders, potential prices will plummet. Predictably, broadcasters will suffer from earning a fraction of what a real market incentive auction would generate.

And the FCC-chosen wireless beneficiaries permitted to bid will enjoy the bargain of a lifetime – the best spectrum possible at a multi-billion dollar discount, unwittingly paid for by the American taxpayer.

Since the FCC does have excellent economists, the only explanation for the FCC’s obvious misalignment of economic incentives is that the FCC is not trying to maximize revenues at all.

It is trying to maximize its regulatory power to pick market winners and losers and to tilt the competitive playing field by politically reallocating the foregone, multi-billion-dollar market-surplus largely to Sprint and T-Mobile.

Another big way this auction is at war with itself is that it is proposing to act anti-competitively to ostensibly promote competition.

Just over two years ago the Department of Justice and FCC blocked the AT&T/T-Mobile merger because they determined it would reduce a four-competitor market to three competitors because Verizon, AT&T, Sprint, and T-Mobile comprised over 90 percent of the U.S. wireless market.

Using the government’s own recent wireless market definition, the DOJ and FCC plan to reduce the effective bidding competition for this 600 MHz spectrum auction market from four existing national competitors effectively to two.

Ironically the DOJ and FCC are creating and blessing a de facto, “wireless duopoly” of auction bidders for low-band spectrum – Sprint and T-Mobile.

A large reason that the DOJ and FCC ostensibly argued for a four-competitor market is that they believe a market of just two or three players creates a much higher opportunity and incentive to collude and carve up markets.

So on what basis do the DOJ and FCC believe that their artificially-created wireless bidding duopoly, Sprint and T-Mobile, which are widely-reported to be in behind-the-scenes talks to merge, would not have substantial opportunity and “incentive” to collude to win spectrum at the lowest possible price?

This DOJ-sanctioned auction bidding duopoly is in stark contrast to standard DOJ policy and precedent that normally opposes bid-rigging of government auctions.

In prosecuting a company which attempted a scheme to rig bids on military contracts, then DOJ Antitrust Chief Thomas O. Barnett said,“The antitrust division is committed to protecting the competitive market for Americans. We will continue to bring to justice those who rig bids and thereby deprive the public the benefits afforded by a competitive bidding process.”

How does DOJ square the circle that it’s ok for government agencies to do what is illegal for companies to do? How do their purported pro-competitive ends justify their anti-competitive means?

The problem here is doubly simple – unfairness.

First, it is unfair to shortchange the American taxpayer of many billions of dollars of deficit reduction so the FCC effectively can steer unauthorized, multi-billion dollar, implicit-bidding subsidies to Sprint and T-Mobile, who don’t even need them to bid in this auction. Sprint is owned by the wealthiest person in Japan and T-Mobile is one-third owned by the German government.

Second, without due process, the DOJ and FCC are unfairly punishing Verizon and AT&T financially and competitively for having done nothing wrong under the law. It’s not their fault Sprint and T-Mobile chose not to bid in the last “low-band” auction for 700 MHz spectrum.

This new contrived bifurcation of the spectrum market into lower-than, and higher-than, 1GHz segments specifically for the purposes of this 600 MHz auction, arbitrarily and capriciously punishes only two companies for legal competitive success without the due process of a judicial proceeding.

Hopefully, the FCC will reconsider these uneconomic and unfair auction rules.

Scott Cleland served as Deputy U.S. Coordinator for International Communications & Information Policy in the George H. W. Bush Administration. He is President of Precursor LLC, a research consultancy for Fortune 500 companies, and Chairman of NetCompetition, a pro-competition e-forum supported by broadband interests.