Behind Dish And T-Mobile’s Spectrum Auction Shenanigans

Jessica Lowman and Steve Pociask American Consumer Institute
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Dish Network and T-Mobile are reportedly in talks about a possible merger, a move motivated by Dish’s recent acquisition of wireless broadband spectrum at the AWS-3 spectrum auction. Dish and T-Mobile’s potential consolidation will be detrimental to consumers, wireless service providers and the government, when placed in the larger context of Dish’s potentially anticompetitive behavior. To understand T-Mobile’s interest in Dish is to understand how Dish got access to its latest swath of spectrum.

The AWS-3 spectrum auction, like previous auctions, was supposed to be competitive and require anonymous bidding. Competitive auctions are a simple concept – the highest bidder wins, which means that no bidder is advantaged and the spectrum will go to its best use. Also, competitive auctions maximize the proceeds, which go to the U.S. Treasury. In general, fair and competitive spectrum auctions should benefit taxpayers, wireless services and, ultimately, consumers.

There is one notable exception to the FCC’s competitive auction rules. In an effort to increase diversity among the handful of large wireless service providers, the FCC gives small and disadvantaged businesses a 25 percent discount. This exception brought about a surprising result. Of the 66 firms participating in the AWS-3 auction, two virtually unknown small businesses, Northstar and SNR, won 44% of the licenses. That gave these two small businesses more wireless licenses than any other bidder, and qualified Northstar and SNR for 93% of the FCC’s discounts, which amounted to more than $3.3 billion that would have gone to the U.S. Treasury.

The problem is this. Northstar and SNR are 85 percent owned by a not-so-small company, Dish TV – a $15 billion in revenue company and fifth largest holder of wireless spectrum in its own right. Because of Dish’s close ownership of these small businesses, some might see the auction as using taxpayer dollars to dole out corporate welfare, and they might question how competitive and fair the auction really was. The loss of revenue from the auction could have gone toward reducing the nation’s debt or offset financing public initiatives, but it did not go to the highest bidder and will not go toward these uses.

In addition, Dish’s endeavor to use small businesses to get cheap spectrum has many other problems. Auction prices communicate the hierarchical structure of value. When some bids are effectively subsidized, they can lead to artificially higher prices, which can crowd the market and cause other bidders to believe that other parties place more value on those licenses. That dynamic can cause other bidders to substitute towards less optimal licenses or cause them to drop out of the auction altogether.

Essentially, spectrum was being misallocated and competing firms were on the losing end, particularly other small business that would have qualified for the discount. The implications could have effects on network investment and jobs, service innovation, rural development, and the potential for deteriorating quality of services from increased wireless network congestion. This issue is compounded by reports of T-Mobile and Dish entering talks about a merger, most likely due to the spectrum that Dish now maintains.

Other major problems with the auction are reports of potential antitrust violations. Among them is a statistical analysis by Duke Professor Leslie Marx, where she finds patterns of collusion and coordination in the bidding of Dish and its two small businesses.  For example, she found 80 wireless licenses where Dish’s small businesses did not bid for the first round and then simultaneously submitted higher, but equal, bids. In comparison, she could find no examples where other competitors coincidently did the same.

According to FCC auction rules, when participants submit high bids at are tied during auction rounds, one of the high bidders is randomly selected to be the lead bid for the next round. This means that if tie bids were being coordinated, Dish’s two small businesses were taking the lead position but not outbidding each other. In fact, when it comes to bidding against each other, the two firms rarely did. Her analysis suggests that the two small businesses competed against other firms, won the most licenses, and then refrained from bidding against one another, once in the lead.

Marx estimated that had they outbid one another just once in each winning license, the auction proceeds would have been more than $600 million higher. Therefore, her analysis suggests that coordination not only crowded the market and scared off potential bidders, but it could have suppressed the winning bids. While the two small businesses won 702 wireless licenses, Dish never directly won a single license, though it participated in some early round bidding.

Where do we go from here? Dish will now possibly leverage these assets to initiate a merger with T-Mobile. The merger buttresses objections to awarding Dish the $3.3 billion subsidy. Spectrum that was misallocated to Dish’s small businesses would be further misallocated to T-Mobile’s portfolio. This appears anticompetitive because T-Mobile paid $1.7 billion for 151 licenses and now they are set to gain over 700 licenses.

The FCC is now contemplating what to do about the shenanigans. Should it let the auction results stand and allow Dish’s small business to receive a discount, or should it undo the results and penalize what appears to be collusive bidding? If the past twenty years of FCC auction statements provide any guide, “non-competitive or rigged bids are per se violations of Section One of the Sherman Antitrust Act.”  The FCC even reiterated this point prior to the AWS-3 auction. However, maybe talk is cheap.  While the FCC’s pending decision may seem obvious, some are not so sure that the FCC will come down hard on Dish, which explains T-Mobile’s interest in merging. In fact, T-Mobile has had a history of getting favors from the FCC, when it comes to auction rules and roaming charges, often at its competitors’ expense.

Auctions are supposed to promote public benefits through competition. Dish has undermined this objective when they acquired spectrum through what appears to be anticompetitive means, and now T-Mobile sees a way to buy this cheap spectrum through an acquisition.

Spectrum, when well allocated, can yield a plurality of economic benefits, improving consumer welfare, as well as increasing innovation and investments that will yield increased economic output and jobs. Now these benefits are on hold.

Jessica Lowman is a research intern at the American Consumer Institute and an economics student at George Mason University, and Steve Pociask is president at the American Consumer Institute. For more information about the Institute, visit www.theamericanconsumer.org.