[Senate Hearing 113-340]
[From the U.S. Government Publishing Office]
S. Hrg. 113-340
CRAFTING A SUCCESSFUL INCENTIVE AUCTION: STAKEHOLDERS' PERSPECTIVES
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HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 10, 2013
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington ROY BLUNT, Missouri
MARK PRYOR, Arkansas MARCO RUBIO, Florida
CLAIRE McCASKILL, Missouri KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota DEAN HELLER, Nevada
MARK WARNER, Virginia DAN COATS, Indiana
MARK BEGICH, Alaska TIM SCOTT, South Carolina
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
BRIAN SCHATZ, Hawaii DEB FISCHER, Nebraska
EDWARD MARKEY, Massachusetts RON JOHNSON, Wisconsin
CORY BOOKER, New Jersey
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
John Williams, General Counsel
David Schwietert, Republican Staff Director
Nick Rossi, Republican Deputy Staff Director
Rebecca Seidel, Republican General Counsel and Chief Investigator
C O N T E N T S
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Page
Hearing held on December 10, 2013................................ 1
Statement of Senator Pryor....................................... 1
Statement of Senator Thune....................................... 2
Letter dated November 20, 2013 to Hon. Thomas Wheeler,
Chairman, Federal Communications Commission from Hon.
Charles E. Schumer, U.S. Senate............................ 3
Letter dated October 29, 2013 to Hon. Mignon Clyburn, Federal
Communications Commission from Larry Cohen, President,
Communications Workers of America.......................... 4
Letter dated December 5, 2013 to Hon. Jay Rockefeller and
Hon. John Thune from Leslie M. Marx, Ph.D., Robert A.
Bandeen Professor of Economics, Duke University and former
Chief Economist, Federal Communications Commission......... 6
Report dated September 18, 2013 entitled ``Economic Analysis
of Proposals that Would Restrict Participation in the
Incentive Auction'' by Leslie M. Marx, Ph.D., Robert A.
Bandeen Professor of Economics, Duke University and former
Chief Economist, Federal Communications Commission......... 7
Statement of Senator Booker...................................... 84
Statement of Senator Markey...................................... 86
Statement of Senator Klobuchar................................... 88
Statement of Senator Blunt....................................... 90
Statement of Senator Blumenthal.................................. 92
Statement of Senator Warner...................................... 93
Statement of Senator Nelson...................................... 95
Statement of Senator Ayotte...................................... 97
Witnesses
Gary Epstein, Special Advisor and Chair, Incentive Auction Task
Force, Federal Communications Commission....................... 49
Prepared statement........................................... 50
Joan Marsh, Vice President, Federal Regulatory, AT&T............. 51
Prepared statement........................................... 52
Hal J. Singer, Ph.D., Senior Fellow, Progressive Policy Institute 55
Prepared statement........................................... 56
Steven K. Berry, President and Chief Executive Officer,
Competitive Carriers Association............................... 57
Prepared statement........................................... 59
Preston Padden, Executive Director, Expanding Opportunities for
Broadcasters Coalition......................................... 64
Prepared statement........................................... 65
Rick Kaplan, Executive Vice President, National Association of
Broadcasters................................................... 68
Prepared statement........................................... 69
Harold Feld, Senior Vice President, Public Knowledge............. 72
Prepared statement........................................... 73
Appendix
Hon. John D. (Jay) Rockefeller IV, U.S. Senator from West
Virginia, prepared statement................................... 105
Letter dated December 10, 2013 to Hon. John D. Rockefeller IV and
Hon. John R. Thune from Ellen Stutzman, Director of Research &
Public Policy, Writers Guild of America, West; Harold Feld,
Senior Vice President, Public Knowledge; Michael Calabrese,
Director, Wireless Future Project, Open Technology Institute,
New America Foundation; and Matt Wood, Policy Director, Free
Press.......................................................... 106
Letter dated December 10, 2013 to Hon. John D. Rockefeller IV and
Hon. John R. Thune from Kathleen Ham, Vice President, Federal
Regulatory, T-Mobile USA, Inc.; Jeffrey Blum, Senior Vice
President and Deputy General Counsel, DISH Network LLC;
Lawrence R. Krevor, Vice President, Legal and Government
Affairs, Sprint Corporation; Grant Spellmeyer, Vice President,
Federal Affairs & Public Policy, US Cellular; Eric B. Graham,
Senior Vice President--Strategic Relations, C Spire Wireless;
Cathy Sloan, Vice President, Government Relations, Computer &
Communications Industry Association; and Tim Donovan, Vice
President--Legislative Affairs, Competitive Carriers
Association.................................................... 107
Letter dated November 14, 2013 to Hon. Thomas Wheeler, Chairman,
Federal Communications Commission from Charlie Ergen, Chairman,
DISH Network Corp.; John J. Legere, President and Chief
Executive Officer, T-Mobile US, Inc.; Daniel R. Hesse,
President and Chief Executive Officer, Spring Corporation; Hu
Meena, President and Chief Executive Officer, C Spire Wireless;
Edward Black, President and Chief Executive Officer, Computer &
Communications Industry Association; Steven K. Berry, President
and Chief Executive Officer, Competitive Carriers Association;
Kenneth R. Meyers, President and Chief Executive Officer, U.S.
Cellular; Ronald Smith, President and Chief Executive Officer,
Bluegrass Cellular; and Jonathan Foxman, President and Chief
Executive Officer, MTPCS, LLC d/b/a Cellular One............... 108
Response to written questions submitted to Gary Epstein by:
Hon. Mark Warner............................................. 109
Hon. Amy Klobuchar........................................... 111
Response to written questions submitted to Joan Marsh by:
Hon. Amy Klobuchar........................................... 112
Hon. Mark Warner............................................. 112
Response to written questions submitted by Hon. Mark Warner to:
Hal J. Singer, Ph.D.......................................... 115
Steven K. Berry.............................................. 115
Preston Padden............................................... 117
Response to written questions submitted to Rick Kaplan by:
Hon. Amy Klobuchar........................................... 117
Hon. Mark Warner............................................. 119
Response to written questions submitted by Hon. Mark Warner to
Harold Feld.................................................... 119
CRAFTING A SUCCESSFUL INCENTIVE AUCTION: STAKEHOLDERS' PERSPECTIVES
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TUESDAY, DECEMBER 10, 2013
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:39 p.m., in
room SR-253, Russell Senate Office Building, Hon. Mark Pryor,
presiding.
OPENING STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. I will go ahead and call the hearing to
order. I want to thank everyone for being here. I especially
want to thank our witnesses. I know it has been a snow day here
in D.C. and some of you had to make arrangements. So thank you
for being here.
And, you know, in early 2012, we passed bipartisan
legislation, which originated in this committee, to make
available a significant amount of new spectrum for commercial
use and, at the same time, establishing and funding a public
safety wireless broadband network.
Now, as part of that, the FCC has the authority to conduct
voluntary incentive auctions of spectrum. The FCC is in the
midst of setting up the rules for the first of these incentive
auctions. And, also, the rules include protections to make sure
that the auction does not unduly harm TV stations that are not
interested in participating.
So I think the Congress rightly left many practical and
technical decisions to the Federal Communications Commission,
as the expert agency. Today the Committee will hear from the
FCC and various stakeholders about what it will take to craft a
successful incentive auction.
Now, designing one of these is immensely complicated,
possibly the most complicated of these type of auctions ever
designed by the FCC. They must get a sufficient number of
broadcasters to participate in the reverse auction in order to
have adequate spectrum to sell the forward auction.
In the forward auction, the FCC must balance competing
interests with the need to raise enough money to cover the
incentive payments and pay for the priorities set forth in the
2012 legislation, including FirstNet that I mentioned. And
during the repacking process, the FCC must meet its statutory
duty to make ``all reasonable efforts,'' quote/unquote, ``all
reasonable efforts'' to protect remaining TV stations' coverage
areas while designing a practicable and workable band plan for
mobile wireless services.
So, as you can tell, this is complicated.
And on the technical side, the FCC must also craft software
and hardware to accomplish this first ever incentive auction.
And, of course, we have learned in the last few weeks that
software and hardware are important when it comes to these type
of things, and they want to get it right.
But if the FCC is to get it right, it means innovative, new
wireless services and more robust wireless networks to meet
consumers' insatiable demands, a revitalized TV broadcast
industry, and a new international precedent and standard for
smart spectrum policy.
I know we have a large panel of witnesses today. It is very
unusual for us to have seven. But if there is ever a topic that
may require this many witnesses, I think this is it.
And this hearing is also very timely because on Friday FCC
Chairman Tom Wheeler set a timeline to hold the voluntary
broadcast TV incentive auction in the middle of 2015. I think
that, in effect, is a six-month delay or so from what it was
previously thought to be. So I encourage everyone here on the
panel today, all the stakeholders who are watching or
participating, to work constructively with the FCC to make this
auction a success.
I look forward to hearing your testimony, but first I would
like to recognize Senator Thune.
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman, for holding this
hearing. And I want to thank our witnesses for being with us
today.
American consumers are hungry for more mobile connectivity.
The innovation economy is being driven by mobility, and
spectrum is what fuels those wireless services. We must make it
a priority to increase the availability of spectrum for
commercial use, both licensed and unlicensed, as quickly as
possible.
Last week, as Chairman Pryor mentioned, FCC Chairman
Wheeler announced that the agency's timeline for the broadcast
incentive auction has slipped from 2014 to mid-2015. It is
important for the auction to be completed as soon as possible,
but one lesson from the disastrous rollout of Healthcare.gov is
that a short delay of this complicated effort may be justified.
Consumers will benefit from a speedy reallocation of
spectrum for more valuable uses, but those households that
continue to receive over-the-air TV broadcasts after the
auctions must not be unduly disrupted during the channel-
repacking process. Congress was clear about this in the
Spectrum Act of 2012, and the technical details to make this
work deserve an appropriate amount of time and deliberation.
As we all know, the mobile market is no longer focused on
voice calls alone; it is increasingly about robust broadband
Internet connectivity. During the Committee's recent broadband
adoption hearing, we learned that one in eight online Americans
now access the Internet solely through their mobile smartphones
rather than subscribing to a fixed broadband service. With that
in mind, I hope our witnesses will share their thoughts about
what spectrum policies will make it more likely for wireless to
develop as a substitute for and a competitor to wireline
broadband.
Getting more spectrum into the marketplace for broadband
via auction to the parties that will put it to highest use is
ultimately the best way for Federal policymakers to encourage
new services, spur competition, and benefit consumers.
In the incentive auction, I believe the FCC should let all
interested participants freely compete against one another in
the open market and should avoid putting its thumb on the
scale, as we are apparently witnessing in connection with the
Justice Department's settlement agreement in the American
Airlines and U.S. Airways merger. The value of using spectrum
auctions is that the free market is more effective at
allocating spectrum than relying on the subjective opinions and
predictions of government officials. American consumers should
pick who wins in the marketplace, not the government.
And with the U.S. being the global leader in 4G LTE
connectivity, this approach has clearly been very successful.
By any measure, including usage, coverage, speed, and price,
consumers have benefited enormously from market-driven spectrum
auctions.
As the Commission moves forward, its primary focus needs to
be on how to maximize participation in the upcoming incentive
auction among both broadcasters and wireless bidders, not on
how to limit their participation. I agree with our colleague
Senator Schumer, who recently urged the Commission to avoid
imposing auction rules that could discourage broadcasters from
participating, could limit bidding by certain wireless
carriers, and could ultimately reduce the amount of spectrum
offered as well as the revenue that would be generated in
return.
Mr. Chairman, I would ask for consent to submit for the
record Senator Schumer's letter, along with two additional
documents that echo his and my concerns.
Senator Pryor. Without objection.
Senator Thune. The first is an analysis by Dr. Leslie Marx,
a Professor at Duke University and a former Chief Economist at
the FCC. And the second document is a letter to the FCC from
Larry Cohen, the President of the Communications Workers of
America.
[The information referred to follows:]
United States Senate
Washington, DC, November 20, 2013
Hon. Thomas Wheeler,
Chairman,
Federal Communications Commission,
Washington, DC.
Dear Chairman Wheeler:
As you assume the helm of the FCC, one of the most important tasks
that lies before you is the structuring of the incentive auctions
authorized by the Middle Class Tax Relief and Job Creation Act of 2012.
I was a strong supporter of the provisions of the law that authorized
these auctions, and I am deeply committed to ensuring their success.
The success of the incentive auctions is critical to our Nation in
several ways. First and foremost, the auctions will generate the
revenue needed to establish a national, interoperable public safety
broadband network. The creation of this network is an unfilled
recommendation of the 9/11 Commission; over a decade after that tragic
day, we are finally on the precipice of establishing a system to
prevent the communications failures that hampered the evacuation and
rescue operations of our heroic first responders.
Second, the auctions will help put back into the market spectrum
that is currently not being used to its fullest potential. In an era of
rapidly increasing demand for spectrum, ensuring that this limited
resource is being used most efficiently and effectively is a high
priority for businesses and consumers alike.
It is the responsibility of the Commission to structure the auction
so that broadcasters will realize substantial benefit for choosing to
put spectrum up for auction, broadcasters who will have to move to new
channel assignments can be adequately compensated, and so that the
auctions generate maximum revenue in order to adequately fund FirstNet.
That is why I urge you, in structuring these auctions, to maximize
participation by broadcasters and bidders alike by avoiding limitations
that could lower the potential return and disincentivize broadcasters
from offering their spectrum for auction. While I understand that some
have advocated for rules that would limit participation by certain
wireless carriers, the effect of such rules would simply be to reduce
the amount of spectrum offered for auction as well as the revenue that
would be generated in return. Ultimately, then, the biggest loser would
be FirstNet and the public safety network America needs to thrive in
the 21st century.
I appreciate that this is a challenging issue, and look forward to
working with the Commission to structure the most successful auction
possible.
Sincerely,
Charles E. Schumer,
United States Senator.
______
Communications Workers of America,
Washington, DC, October 29, 2013
Hon. Mignon Clyburn,
Federal Communications Commission,
Washington, DC.
RE: Expanding the Economic and Innovation Opportunities of
Spectrum through Incentive Auctions, GN Docket No. 12-268
Dear Chairwoman Clyburn and Commissioners:
The Federal Communications Commission (FCC) now has the critical
mission of designing rules for an upcoming auction of valuable public
airwaves that will help speed the continued nationwide deployment of
high-speed mobile broadband service.
The FCC faces a most important near-term challenge as it attempts
to make more airwaves available--at auction--to advance the deployment
of and investment in high-speed mobile wireless communications. Getting
the design of the upcoming auction right is critical. As the Commission
has long recognized, high-speed wired and wireless networks are
essential to job creation, economic growth, and improvements in
education, health care, public safety, civic participation, and closing
the digital divide.
The Communications Workers of America (``CWA'') represents 700,000
workers, including more than 40,000 in the wireless industry, whose
families and communities depend on the success or failure of unionized
wireless carriers. As such, CWA urges the Commission to construct an
open and competitive auction in which every carrier and any other
qualified bidder can participate equally on a level playing field.
Because an open competition is the best way to serve the public
interest, CWA supports an auction that:
Provides for continued investment, innovation, and job
creation in the wireless industry
Efficiently allocates additional spectrum for consumer
wireless to support the speedy deployment of LTE networks and
the continued expansion of other services
Maximizes auction proceeds and provides full funding for the
planned public safety network, FirstNet
T-Mobile and Sprint are now asking the FCC to establish different
rules for different bidders, potentially slowing the spread of wireless
and the investment and jobs that go with it. Yet, past FCC experience
demonstrates that open auctions, in which bidders compete without
restrictions, have generated the most revenue and assigned spectrum to
the providers who will put it to work quickly and efficiently for the
American public. A recent economic analysis found that if spectrum
limits had been put in place in the 2008 auction of 700 MHz spectrum it
would have reduced auction revenue by 45 percent or almost $9
billion.\1\
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\1\ Dr. Leslie Marx, ``Economic Analysis of Proposals that Would
Restrict Participation in the Incentive Auctions,'' Sept. 18, 2003.
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As former Chairman Julius Genachowski has noted, such even-handed
policies have created a wireless boom and enabled our country to
recapture world leadership in wireless and mobile technology.\2\
According to a recent White House report on broadband, wireless
investment has climbed more than 40 percent to $30 billion a year since
2009, and the top two wireless companies have combined to invest more
than the top five oil companies and nearly four times more than the big
three auto companies.\3\ As a whole, the wireless industry now supports
3.8 million jobs.\4\
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\2\ Julius Genachowski Farewell Remarks, March 22, 2013
\3\ ``Four Years of Broadband Growth,'' White House Office of
Science and Technology Policy and the National Economic Council, June
2013
\4\ ``50 Wireless Quick Facts,'' CTIA, updated May 2013
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The FCC should not favor one competitor over another. Each of the
four national carriers have ample resources to bid aggressively for the
spectrum they need without rules that tilt the playing field one way or
the other. T-Mobile is strengthened by its recent combination with
MetroPCS, the spectrum it acquired from AT&T and Verizon Wireless, and
the $3 billion cash penalty fee it received from AT&T. Sprint, now
majority owned by the Japanese firm Softbank, received billions of new
funds as part of that deal and, in combination with its affiliate
Clearwire, controls more spectrum than any competitor.\5\ These
companies are strong competitors.
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\5\ ``Sprint Set to Become 'Spectrum Powerhouse,' '' Computerworld,
June 25, 2013
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We also are concerned that rules that limit participation by any
bidder would reduce auction revenues and jeopardize funding for
deployment of the Nation's public safety mobile broadband network
(FirstNet). A recent independent study by Georgetown University found
that bidding restrictions on Verizon and AT&T could reduce auction
revenues by as much as $12 billion and create a funding deficit for
FirstNet.\6\ That result would make it harder and more dangerous for
first responders to do their job and would expose the American people
to needless risk.
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\6\ ``The Economic Implications of Restricting Spectrum Purchases
in the Incentive Auction,'' Robert J. Shapiro, Douglas Holtz-Eakin, and
Coleman Bazelon for the Georgetown University Center for Business &
Public Policy, April 30, 2013
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A dedicated and interoperable nationwide broadband network will
save lives by providing public safety personnel with the modern
communication tools necessary to provide effective, speedy, and
coordinated response in emergency situations. The network, first
recommended a decade ago by the 9/11 Commission, is long overdue.
Auction rules that limit funding should not be allowed to endanger
first responders or the U.S. public they serve.
In addition to the revenue needed to fund the public safety
network, the wireless auction must raise enough funds to pay
broadcasters to give up their spectrum. Limitations on participation in
the auction would reduce the funds available to pay the broadcasters.
If not enough money is raised to meet the broadcasters' price, the
spectrum goes unsold, and the auction fails.
Sprint and T-Mobile have suggested that the Commission should
establish special rules for low-frequency spectrum, claiming that such
spectrum is an essential input for wireless services due to its
superior propagation. Because Sprint and T-Mobile failed to bid in the
700 MHz auction, and have chosen not to purchase low-frequency spectrum
on the open market, they have little low frequency spectrum. Yet, both
companies are competing aggressively with national 4G LTE networks that
rely almost entirely on high-frequency spectrum. As recently explained
by noted economists, low-and high-frequency spectrum are substitutes
and wireless carriers do not require low-frequency spectrum in order to
compete. Therefore, the Commission need not adopt special low-frequency
spectrum aggregation rules.\7\
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\7\ Michael L. Katz, Philip A. Haile, Mark A. Israel, and Andres V.
Lerner, ``Comment on the Submission of the U.S. Department of Justice
Regarding Auction Participation Restrictions,'' WT Docket No. 12-269,
June 13, 2013
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The U.S. Department of Justice (DOJ) has raised concerns that AT&T
and Verizon might pursue a ``foreclosure strategy'' by purchasing and
warehousing spectrum to keep it out of the hands of rivals.\8\
According to leading economists, such strategy is highly unlikely
because it would require the acquisition of large amounts of expensive
spectrum and depend on the ability of auction participants to ``read
the minds'' of other auction bidders.\9\ But more important, there is a
far simpler and more effective method to block any foreclosure
strategy: the FCC should impose build-out requirements, complete with
timetables and benchmarks, on any spectrum acquired at auction.
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\8\ U.S Department of Justice, Ex parte Submission, In the Matter
of Policies Regarding Mobile Spectrum Holdings, WT Docket No. 12-269,
April, 2013.
\9\ Michael L. Katz, Philip A. Hail, Mark A. Israel, and Andres V.
Lerner, Comment on the Submission of the U.S. Department of Justice
Regarding Auction Participation Restrictions, Policies Regarding Mobile
Spectrum Holdings, WT Docket No. 12-269, June 13, 2013.
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As President Obama recently noted, wireless communications and the
digital economy have been a bright spot in the U.S. economy. Continued
expansion of wireless services and the resulting consumer benefits they
enable should not be placed at risk from the spectrum shortage
identified by the Commission in its National Broadband Report. Done
correctly, the coming incentive auction is a vital part of the
solution. CWA respectfully urges the Commission to support continued
growth in U.S. wireless capabilities and the jobs that will be created
by designing an open and competitive auction in which every bidder can
compete without handicaps for the spectrum it needs.
Sincerely,
Larry Cohen,
President.
Cc: Commissioner Jessica Rosenworcel
Commissioner Ajit Pai
______
The Fuqua School of Business--Duke University
Durham, NC, December 5, 2013
Hon. Jay Rockefeller,
Chairman,
Hon. John Thune,
Ranking Member,
Committee on Commerce, Science, and Transportation,
United Senates Senate,
Washington, DC.
Dear Chairman Rockefeller and Ranking Member Thune:
Thank you for the opportunity to contribute to this hearing on the
FCC's upcoming Incentive Auction. I am the Robert A. Bandeen Professor
of Economics at Duke University and former Chief Economist at the FCC.
I regularly research auctions, including spectrum auctions and
incentive auctions. Verizon asked me to analyze proposed bidding
restrictions in the upcoming incentive auction. I attach that report,
``Economic Analysis of Proposals That Would Restrict Participation in
the Incentive Auction,'' which has been filed with the FCC.
Congress and the FCC are counting on the ``incentive auction'' to
accomplish two goals: (1) transfer a substantial amount of low-
frequency spectrum from broadcasters to mobile wireless service
providers who need the spectrum to give consumers the high-speed
broadband they demand; and (2) thereby raise revenue for the U.S.
Government and public safety. But the spectrum in this auction already
is licensed to television broadcasters, and the auction rules do not
compel them to transfer their spectrum. For this auction to work, the
broadcasters must be induced to relinquish their spectrum. That
inducement comes in the form of high bids from wireless carriers--if
the broadcasters are offered enough money, they'll move; if not, they
won't. Higher bids thus increase the amount of spectrum that can be
transferred from broadcasters to mobile wireless providers.
As the economics literature and my own research have shown, the
best way to maximize auction revenues is to have as many eligible
bidders as possible. But some, including T-Mobile and Sprint, have
urged the FCC to adopt rules that restrict Verizon and AT&T from
bidding in the incentive auction. Should the FCC impose such
restrictions, the overall bids for broadcast spectrum would be lower.
As a result, less money would be raised for the government and public
safety, and less scarce spectrum would be made available for use by
wireless carriers, leading to either higher prices or lower quality, or
both, for consumers. It is also possible that the entire auction would
fail: the bids would be too low to induce broadcasters to sell their
spectrum.
My report quantifies the likely effect of rules that restrict
bidding by Verizon and AT&T. Using actual bidding data from two recent
FCC auctions, I modeled the effect of such restrictions. I concluded
that any restriction that materially reduces the demand that Verizon
and AT&T bring to the Incentive Auction risks a substantial reduction
in auction revenue and thus the amount of spectrum reallocated. If, for
example, the FCC restricted Verizon and AT&T from bidding where they
hold more than one-third of the low frequency spectrum, revenue would
have been reduced by 15 percent and 40 percent in the auctions that I
studied. Outright exclusion of AT&T and Verizon would have reduced
revenues by 16 percent in one auction and 45 percent in the other.
I also simulated a two-sided incentive auction and showed that the
risks created by imposing bidding restrictions are greater than in a
traditional auction. Indeed, my model shows that bidding restrictions
in a two-sided auction reduce both the maximum possible revenue and the
maximum possible quantity of repurposed spectrum that can be achieved,
thus jeopardizing both goals of the incentive auction.
Finally, it is not apparent to me why the government would put the
success of this critical auction at risk based on the stated concerns
of those who advocate for restrictions.
First, it has been suggested that the low frequency
broadcast spectrum has special characteristics that make it
essential for wireless carriers to compete effectively. But
contrary to what I would expect if T-Mobile and Sprint required
low-frequency spectrum to compete effectively,\1\ they did not
participate at all in the most recent auction for low-frequency
spectrum (the 700 MHz Auction), and have bought almost no low-
frequency spectrum in private market transactions. Of the 2,096
low frequency spectrum transactions I examined from January
2007 to May 2013, T-Mobile and Sprint combined bought only one.
And public statements by both T-Mobile and Sprint indicate
their belief that their spectrum positions overall provide them
a competitive advantage. Indeed, their highly advertised
unlimited data plans suggest they have sufficient spectrum to
handle volume increases.
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\1\ Sprint has the largest spectrum holdings of any wireless
provider and has some low frequency spectrum, but Sprint has less low
frequency spectrum than Verizon or AT&T.
Second, even if there were some basis for a concern that
Sprint or T-Mobile could be ``foreclosed'' from acquiring
spectrum that is essential for them to compete, the FCC can
prevent foreclosure using tools that do not create the risks
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that bidding restrictions create.
It can impose build-out requirements requiring
companies that obtain licenses to deploy the spectrum
promptly, thus making it uneconomic for a firm to
``warehouse'' spectrum it does not actually need.
It can (as it usually does) conduct an ``anonymous''
auction where no party knows who else is bidding on a
particular license. That would make it virtually impossible
for Verizon or AT&T to target a specific competitor because
they would not know who they were bidding against.
And DOJ and the FCC can continue their existing
practice of examining the auction results in particular
markets and taking corrective action if competitive
conditions warrant.
I thank you and the Committee for the opportunity to submit these
materials and for your important work on this topic.
Sincerely,
Leslie M. Marx, Ph.D.
______
September 18, 2013
Economic Analysis of Proposals that Would Restrict Participation in the
Incentive Auction
By Leslie M. Marx, Ph.D., Robert A. Bandeen Professor of Economics,
Duke University and former Chief Economist, Federal Communications
Commission
Table of Contents
I. Executive summary
I.A. Empirical evidence and economic theory contradict
assertions that there is a risk of foreclosure if all bidders
are permitted to participate fully in the Incentive Auction
I.B. The economics literature confirms that bidding
restrictions are expected to reduce auction revenue
I.C. Bidding restrictions in past FCC auctions would have
substantially reduced revenue
I.D. Bidding restrictions in the Incentive Auction would risk
auction failure
II. Introduction and scope of submission
II.A. Relevant qualifications
II.B. Background and scope of analysis
III. There is no evidence that Sprint and T-Mobile have been foreclosed
from access to low-frequency spectrum
III.A. Sprint and T-Mobile were not foreclosed from acquiring
spectrum in the 700 MHz and AWS spectrum auctions
III.A.1. 700 MHz Auction
III.A.2. AWS spectrum auction
III.B. Evidence from secondary market transactions shows that
Sprint and T-Mobile have not been foreclosed
III.B.1. Sprint and T-Mobile buy and sell spectrum in
the secondary market
III.B.2. Neither T-Mobile nor Sprint has chosen to
acquire low-frequency spectrum in the secondary market
despite significant opportunities to do so
III.B.3. Sprint and T-Mobile have failed to act on
opportunities to purchase low-frequency spectrum in
rural areas
III.C. Evidence from pricing plans suggests a pattern of
capacity constraints that makes foreclosure unlikely
IV. Verizon and AT&T are unlikely to have the incentive or ability to
foreclose Sprint and T-Mobile in the Incentive Auction
IV.A. As a policy tool to prevent foreclosure, build-out
requirements have significant advantages over bidding
restrictions
Iv.B. Incentives to free ride imply that there is unlikely to
be a unilateral incentive for significant foreclosure by either
Verizon or AT&T
IV.C. Anonymous auction design makes foreclosure less likely
IV.D. Uncertainty about the level and elasticity of supply in
an incentive auction makes a foreclosure strategy difficult to
implement
IV.E. The market for wireless services is unlikely sufficiently
concentrated to make foreclosure profitable
V. Effects of bidding restrictions in the economics literature
V.A. Papers on auction design suggest that bidding restrictions
are likely to reduce revenue and efficiency
V.B. Assertions that bidding restrictions might not suppress
revenue are based on unrealistic hypothetical scenarios
V.C. Empirical evidence from timber auctions further undermines
the revenue theory advanced by Sprint and T-Mobile
VI. Simulating the effects of bidding restrictions in past spectrum
auctions suggests large negative effects on revenue
VI.A. Procedure
VI.B. Results--Auction 66--AWS spectrum auction
VI.C. Results--Auction 73--700 MHz auction
VII. Bidding restrictions in a simulated incentive auction
VII.A. Procedure
VII.B. Results
VII.B.1. Exclusion of bidders in a two-sided mechanism
worsens the choices available to an auctioneer
VII.B.2. Exclusion of bidders in a two-sided mechanism
can cause revenue and transaction goals to be
unattainable
VII.C. Proposals for a contingent auction would distort the
auction process and potentially contribute to auction failure
VIII. Conclusion
Appendix A. Curriculum vitae of Leslie M. Marx, Ph.D.
Appendix B. Secondary market transactions, all bands
Appendix C. Band plans for spectrum auctioned in the AWS and 700 MHz
auctions
Appendix D. Results assuming CMA-only licenses
Appendix E. Modeling details for the simulated incentive auction
______
Table of Figures
Figure 1 Number of B-block licenses won by top bidders in rural and
non-rural CMAs in 700 MHz Auction
Figure 2 Number of A-block licenses won by top bidders in rural and
non-rural CMAs in AWS spectrum auction
Figure 3 Secondary market transactions by band, January 2007-May 2013
Figure 4 MHz*POPs traded, all bands, January 2007-May 2013 (whole
licenses only)
Figure 5 Number of transactions of low-frequency whole licenses,
January 2007-May 2013
Figure 6 MHz*POPs of low-frequency spectrum transacted from January
2007 to May 2013 (whole licenses only)
Figure 7 Number of transactions of low-frequency rural licenses traded,
January 2007-May 2013 (whole licenses only)
Figure 8 Rural MHz*POPs of low-frequency spectrum transacted January
2007-May 2013 (whole licenses only)
Figure 9 Comparison of individual 2013 (Jan-Jun) post-paid plans
including unlimited anytime minutes and unlimited text messaging--
monthly charge ($) and corresponding included data usage (GigaBytes)
Figure 10 The effect of spectrum aggregation caps on Verizon's and
AT&T's ability to bid in the Incentive Auction
Figure 11 AWS spectrum auction simulation example (license AW-REA001-F)
Figure 12 700 MHz auction simulation example (license WY-CMA167-B)
Figure 13 Summary of simulated revenue reductions in the AWS spectrum
auction
Figure 14 Summary of simulated revenue reductions in the 700 MHz
auction
Figure 15 Expected number of trades and auction revenues in a simple
two-sided auction
Figure 16 Impact of exclusion in a simple two-sided auction (max trades
under no exclusion=100; max auctioneer revenue under no exclusion=100)
Figure 17 Exclusion may cause the illustrative two-sided auction to
fail
Figure 18 Number of transactions, all bands, January 2007-May 2013
(whole and partial licenses)
Figure 19 Auction 66 (AWS-1) band plan, reserve price, and minimum
opening bids
Figure 20 Auction 73 (700 MHz) band plan, reserve prices, and winning
bids
Figure 21 Simulated auction revenue change with artificial CMA-only AWS
spectrum auction licenses in different scenarios of Verizon and AT&T
exclusion
Figure 22 Simulated percent change in the MHz*POP with CMA-only AWS
spectrum auction licenses in different scenarios of Verizon and AT&T
exclusion
______
I. Executive summary
(1) This report analyzes proposals to restrict Verizon's and AT&T's
participation in the Federal Communication Commission's
(FCC's) upcoming Incentive Auction. My key conclusions are:
Foreclosure
Proposals to restrict the participation of Verizon and AT&T
in the Incentive Auction do not address any real world problem.
The assertion that some smaller wireless operators are at risk
of being foreclosed from the spectrum necessary for them to
compete is inconsistent with those firms' own behavior,
including their repeated decisions to forego opportunities to
acquire low-frequency spectrum. Other evidence, including
Sprint's and T-Mobile's marketing of unlimited usage plans,
further belies the assertion that those operators face capacity
constraints that could be exploited though a foreclosure
strategy.
Even if (despite the evidence to the contrary) a strategy
by Verizon and AT&T to attempt to foreclose rivals were
rational, implementing it would be difficult. A foreclosure
strategy is particularly difficult to implement in the context
of the Incentive Auction because higher bids on the part of
buyers result in a greater quantity of spectrum being made
available from sellers, thus increasing the costs of
foreclosure. In addition, in an auction with anonymous bidding,
it would be difficult for AT&T and Verizon to know whether they
are bidding against the foreclosure targets or against one
another. Furthermore, even if a foreclosure strategy were
feasible, Verizon and AT&T would each have an incentive to
``free ride'' on the other's willingness to pay supra-
competitive prices for spectrum.
Bidding Restrictions
Based on the economics literature, empirical data from past
FCC auctions, and a model of a two-sided auction mechanism, I
conclude that restricting Verizon and AT&T in the Incentive
Auction would put at risk its twin priorities of raising
significant revenue and reallocating a substantial amount of
spectrum from broadcast to mobile wireless services.
My simulations of past auctions show that, without
Verizon and AT&T, revenue in the 700 MHz auction would have
been 45 percent lower and revenue in the AWS-1 auction
would have been 16 percent lower.
I also analyze bidding restrictions that would not
fully exclude Verizon or AT&T, such as spectrum aggregation
caps. The evidence indicates that any restriction that
causes a material reduction in the participation of Verizon
and AT&T risks a significant reduction in auction revenue
and a failure of the auction.
Parties supporting auction restrictions speculate that they
might actually increase revenue by ensuring that smaller firms
are not discouraged from participating. But they support that
conjecture only with hypothetical examples. Their theories are
undermined by the empirical evidence, including the historical
fact that smaller firms routinely compete successfully in
auctions despite the unrestricted presence of larger bidders.
Although Sprint's and T-Mobile's economists speculate that
restricting larger bidders might encourage small bidders to
participate more robustly, they do not assert that their own
clients would choose not to participate because of the
unrestricted presence of Verizon and AT&T.
I also analyze T-Mobile's complex proposal to successively
ease the proposed restrictions, after each round and on a
market-by-market basis, if the restrictions cause the auction
to fall short of an unspecified revenue target. That proposal
would not avoid the revenue-suppressing effects of the auction
restrictions. In addition, the added complexity and incentives
created for strategic bidding threaten to distort auction
outcomes.
(2) Both the risks and costs of auction failure are further
heightened by the overall complexity of the Incentive
Auction and the significant difficulties associated with
reallocating spectrum from broadcast to mobile wireless at
a later date, if it is not reallocated as part of the
Incentive Auction. Therefore, in the absence of evidence
that anticompetitive foreclosure is likely (which has not
been presented by any party), the FCC should avoid imposing
restrictions on participation in the Incentive Auction. And
if the FCC nevertheless believes that evidence of a
foreclosure risk does exist, it can be addressed through
other policies, such as build-out requirements, that do not
present the same risk of auction failure.
Empirical evidence and economic theory contradict
assertions that there is a risk of foreclosure if all
bidders are permitted to participate fully in the Incentive
Auction
(3) There is no basis for assertions that Sprint or T-Mobile has
been foreclosed from acquiring low-frequency spectrum. The
evidence points instead to a choice by Sprint and T-Mobile
not to compete for low-frequency spectrum, rather than
foreclosure from access to it. These carriers have not
purchased it in the secondary market, where there were
2,153 licenses available since 2007: Sprint bought none and
T-Mobile bought only one. And they did not purchase it in
the FCC's recent auction of low-frequency spectrum, the 700
MHz auction in 2008, despite the claimed need for the low-
frequency spectrum on offer there. It is particularly
notable that Sprint and T-Mobile, despite the claimed need
for low-frequency spectrum in order to build out rural
areas, have acquired no such spectrum in rural markets
despite numerous opportunities to do so.
(4) Evidence on pricing plans is inconsistent with a finding that
Verizon and AT&T have an incentive to ``warehouse''
spectrum in order to keep T-Mobile and Sprint capacity-
constrained. Sprint and T-Mobile both tend to offer plans
with unlimited data usage, and T-Mobile explicitly touts
its network as being less congested than that of its
competitors. By contrast, Verizon and AT&T tend to offer
plans that require incremental payments for data use beyond
a specified level. That pattern is the opposite of what
would be expected under theoretical conditions where the
smaller national competitors' access to a key input is
constrained.
(5) Head-to-head competition between AT&T and Verizon where no other
bidders were present accounted for more than $4.2 billion
in revenue during the 700 MHz auction. Those dollars would
not have been spent by Verizon and AT&T if the purpose of
their bidding had been simply to keep spectrum out of the
hands of other operators.
(6) Concerns that Verizon and AT&T might pursue a foreclosure
strategy against Sprint and T-Mobile also ignore a number
of key features of the market and the Incentive Auction.
First, the FCC can directly address the issue using tools
that would not create a risk of auction failure, such as
imposing build-out requirements on licenses won in the
Incentive Auction. Second, free-rider issues make
foreclosure less likely because Verizon and AT&T would each
prefer that the other incur the costs of such a strategy.
Third, anonymous auction design makes a foreclosures
strategy difficult and costly to implement. Fourth, a
foreclosure strategy is particularly difficult to implement
in the context of an incentive auction because higher bids
on the part of buyers result in a greater quantity of
spectrum being made available from sellers. Fifth, the
market for mobile wireless services does not appear to be
sufficiently concentrated to support the profitability of a
foreclosure strategy.
I.B. The economics literature confirms that bidding restrictions are
expected to reduce auction revenue
(7) The theoretical literature concludes that excluding bidders
reduces auction revenue. In addition, empirical evidence on
the effects of bidding restrictions at U.S. Forest Service
timber auctions shows that set-asides reduced auction
revenue and the amount of timber sold. The literature also
identifies key ways in which a two-sided auction differs
from the more familiar one-sided auction. In particular, a
two-sided auction can be more sensitive to the exclusion of
buyers than a one-sided auction.
(8) Thus, the literature indicates that regulators should expect
reductions in revenue and the quantity transacted as a
result of restrictions on bidders at the Incentive Auction.
In addition, a reduction in the amount of spectrum
transacted in the Incentive Auction means that less
spectrum will be reallocated from broadcast use to mobile
wireless services. This potentially has broader economic
consequences given that there appears to be a consensus
that the wireless industry as a whole is likely to suffer
from a spectrum shortage as data usage continues to
increase. Failure to promote the FCC's goal in its National
Broadband Plan to repurpose a substantial amount of
spectrum for wireless operations could lead to higher
prices for consumers, reduced quality of services, and
stalled innovation.\1\
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\1\ See, e.g., National Broadband Plan: Connecting America at
p.xii.
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I.C. Bidding restrictions in past FCC auctions would have substantially
reduced
revenue
(9) I simulate the effects of bidding restrictions in two previous
FCC auctions, Auction 66, the AWS spectrum auction, and
Auction 73, the 700 MHz auction. The simulation results
show that bidding restrictions at these past FCC auctions
would have lowered revenues and prices and negatively
affected efficiency. The results show that, in the absence
of Verizon and AT&T, auction revenues would have been 16
percent lower in the FCC's 2006 AWS spectrum auction and 45
percent lower in the 2008 700 MHz spectrum auction. In the
AWS auction, T-Mobile would have benefited from a
substantial subsidy if bidding restrictions had been
imposed on Verizon and AT&T: in the simulation, the average
price per MHz*Pop that T-Mobile pays for the licenses it
wins falls by 18 percent.
(10) I also analyze the impact of spectrum share caps that, as
proposed by some parties, fall short of outright exclusion,
and find revenue reductions of 15 percent in the AWS
spectrum auction and of 41 percent in the 700 MHz auction.
While the simulation of such caps in past auctions cannot
be expected to provide precise estimates of the impact of
such policies in the Incentive Auction, the empirical
evidence indicates that any policy that leads to a
significant reduction in the participation of Verizon and
AT&T risks a significant negative revenue impact. The
larger the reduction in participation, the larger will be
the negative impact on revenue. As these simulations show,
the loss of Verizon and AT&T as active competitors in the
auction leads to substantial reductions in revenue.
I.D. Bidding restrictions in the Incentive Auction would risk auction
failure
(11) I simulate the effects of bidding restrictions in a two-sided
auction using a theoretical model of buyer and seller
behavior in a two-sided auction, one where sellers must be
enticed to give up their assets by the magnitude of the
buyers' bids. This model illustrates how the risk of
auction failure is heightened where bidding restrictions
are imposed in the context of a two-sided auction.
(12) Bidding restrictions would reduce the maximum possible revenue
and the maximum possible quantity of repurposed spectrum
that can be achieved. In fact, the entire set of possible
outcomes is shifted in the direction of lower revenue and a
lower quantity of repurposed spectrum. If a minimum
combination of revenue and quantity is required in order
for the auction to succeed, then the elimination of two
buyers could make that objective impossible to achieve,
causing the auction to fail.
(13) Moreover, it is my understanding that there may be a minimum
amount of spectrum the FCC will need to clear in the
reverse auction in order to offer spectrum in the forward
auction that is attractive to a majority of wireless
operators. Specifically, it is my understanding that in any
market where less than 72 MHz of spectrum is available to
be sold to wireless operators, it may be challenging or
even impossible to configure a technically viable band plan
featuring paired spectrum. To the extent that technical
considerations dictate a quantity floor below which the
Incentive Auction may not fall, the risk that auction
restrictions would cause auction failure is increased.
II. Introduction and scope of submission
(14) I have been asked by Verizon to evaluate the claim that Verizon
(possibly in conjunction with AT&T) has an incentive and
ability to foreclose Sprint and T-Mobile from gaining
access to low-frequency spectrum through the FCC's upcoming
Incentive Auction, which is meant to reallocate spectrum
from broadcasters to providers of mobile wireless
services.\2\ In addition, I have been asked to analyze the
likely effects of some of the proposals to limit Verizon's
and AT&T's participation in the Incentive Auction.
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\2\ For background on the FCC's Incentive Auction, see http://
www.fcc.gov/incentiveauctions. For additional discussion, see Simon
Loertscher, Leslie M. Marx, and Tom Wilkening (2013), ``A Long Way
Coming: Designing Centralized Markets with Privately Informed Buyers
and Sellers,'' Working Paper, Duke University, available at https://
faculty.fuqua.duke.edu/ marx/bio/papers/incentiveauction.pdf. An early
proposal suggesting that the FCC put in place an incentive auction type
of mechanism was put forward by Evan Kwerel and John Williams (2002),
``A Proposal for a Rapid Transition to Market Allocation of Spectrum,''
OPP Working Paper No. 38, Federal Communications Commission.
(15) A number of parties argue in submissions to the FCC that,
because of purported concerns about foreclosure of Sprint,
T-Mobile, or other wireless operators, the FCC should limit
Verizon's and AT&T's participation in the Incentive
Auction. \3\ However, the principal goals of the Incentive
Auction are to reallocate spectrum to a higher-valued use
and to raise revenue to fund other priorities. Therefore,
limiting participation in the Incentive Auction by two
buyers that have shown that they place a high value on
spectrum puts the goals of the Incentive Auction at risk.
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\3\ See, e.g., U.S. Department of Justice, ``Ex Parte Submission of
the United States Department of Justice,'' WT Docket No. 12-269, April
11, 2013 (DOJ ex parte).
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II.A. Relevant qualifications
(16) I am the Robert A. Bandeen Professor of Economics at the Fuqua
School of Business at Duke University. In addition, I am a
Partner at the economic consulting firm Bates White, LLC. I
received my PhD in Economics from Northwestern University.
I served as Chief Economist for the FCC from August 2005 to
August 2006 and served as a consultant to the Wireless
Telecommunications Bureau of the FCC from August 2006 to
August 2007. I have published numerous articles on various
industry organization topics and on auction theory, and
have recently focused on the economics of two-sided
auctions. My CV is attached as Appendix A.
(17) My opinions are based on my training and experience as an
economist, including my experience working with the FCC,
and my analysis of the available evidence and data.
II.B. Background and scope of analysis
(18) In 1993, the U.S. Congress directed the FCC to design and
implement auctions to assign spectrum licenses to providers
of mobile wireless services. Although nothing like that had
been done before, the first auction was held in 1994, and
since then the FCC has held more than 80 auctions, issued
more than 36,000 licenses, and raised more than $50 billion
for the United States Treasury.\4\
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\4\ Congressional Hearing on ``Keeping the New Broadband Spectrum
Law on Track'' (U.S. House Energy and Commerce Committee, 12 Dec.
2012), statement of FCC Commissioner Jessica Rosenworcel.
(19) In 2012, the U.S. Congress directed the FCC to design and
implement a new type of auction. The upcoming Incentive
Auction will create a centralized market for the exchange
of spectrum licenses in the 600 MHz frequency band from
---------------------------------------------------------------------------
broadcasters to providers of mobile wireless services.
(20) The authorizing legislation for the Incentive Auction states
that, in order for any transactions to occur, the sale of
licenses to providers of wireless services must raise funds
sufficient to cover: (i) the accepted bids of the
television broadcasters, (ii) the FCC's out-of-pocket costs
of conducting the auction, and (iii) the expected
reimbursement costs of broadcasters and certain other
parties associated with the license reassignments occurring
as part of the auction.\5\ The legislation authorizing
incentive auctions does not explicitly require the FCC to
raise any additional revenue, but it does state that any
additional revenue shall be transferred to the Public
Safety Trust Fund for various enumerated purposes.\6\
Statements by members of Congress and FCC Commissioners
indicate that the auction is expected to generate
sufficient revenue to fund the FirstNet public safety
network.\7\
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\5\ Public Law 112-96, Section 6403(c)(2)(B), http://www.gpo.gov/
fdsys/pkg/PLAW-112publ96/pdf/PLAW-112publ96.pdf.
\6\ See Sec. 6403(d)(4)(A).
\7\ In Congressional Hearings on ``Keeping the New Broadband
Spectrum Law on Track'' (U.S. House Energy and Commerce Committee, 12
Dec. 2012), FCC Commissioner Ajit Pai argued that if the incentive
auction did not yield any net revenues, ``That would mean no money for
the First Responder Network Authority (FirstNet) to build out a
nationwide, interoperable public safety broadband network; no money for
state and local first responders; no money for public safety research;
no money for deficit reduction; and no money for next-generation 911
implementation. Most of the problem stems from the structure of the
proposed auction. The only closing condition set forth in the NPRM is
that the revenues from the forward auction must cover the costs of the
reverse auction.'' In the question-and-answer portion of the hearing,
the FCC Commissioners were asked, ``Should the Commission ensure that
the auction raises $7b [for a nationwide interoperable public safety
network]?'' The responses were: ``Pai: Yes, we should focus on
maximizing revenue. Rosenworcel: Yes, absolutely. Clyburn: Absolutely.
McDowell: Yes. Genachowski: Yes.''
(21) At the same time, the Department of Justice (DOJ) and various
parties to the Spectrum Holdings and Incentive Auctions
proceedings have expressed concerns about allowing AT&T and
Verizon to acquire spectrum licenses at the Incentive
Auction.\8\ DOJ expressed particular concerns that Verizon
and AT&T might acquire the low-frequency spectrum in rural
areas only to hamper the ability of other carriers to
compete in those markets. DOJ argues that low-frequency
spectrum is particularly important for providing coverage
in rural areas and Sprint and T-Mobile have ``virtually
none.'' \9\
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\8\ DOJ ex parte.
\9\ DOJ ex parte at p.14.
(22) Assistant Attorney General Bill Baer later clarified in
testimony to the Senate Judiciary Committee that the DOJ's
submission was designed to ``urge the FCC. . .to take a
look. . .at whether or not the playing field is already
tilted in favor of big guys who may or may not--we were not
making a factual judgment--. . . [be] using what they
already have and use that as a factor in deciding what
rules to set in the auction.'' \10\
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\10\ Senate Judiciary Hearing, April 16, 2013, available at http://
www.judiciary.senate.gov/resources/webcasts/index.cfm.
(23) Nonetheless, DOJ states that, ``The Commission's policies,
particularly regarding auction of new low-frequency
spectrum, can potentially improve the competitive landscape
by preventing the leading carriers from foreclosing their
rivals from access to low-frequency spectrum.'' \11\ It
goes on to say, ``[f]or instance, rules that ensure that
the two smaller nationwide carriers are not foreclosed from
access to more spectrum, and particularly low-frequency
spectrum, could benefit consumers. Auction rules of this
nature would ensure the smaller nationwide networks, which
currently lack substantial low-frequency spectrum, would
have an opportunity to acquire it.'' \12\
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\11\ DOJ ex parte at p.14.
\12\ DOJ ex parte at p.23.
(24) In addition, in reply comments to the FCC on the design of the
Incentive Auction, other commenters suggest the imposition
of rules that would restrict the acquisition of additional
spectrum by certain firms.\13\
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\13\ As reported in the communications trade press, ``[a]mong the
areas of continuing disagreement is whether the FCC should impose a cap
on the ability of Verizon Wireless and AT&T to buy spectrum in the
auction.'' (``Sharp Disagreements Remain on Incentive Auction Rules,''
Communications Daily, March 15, 2013) See, for example, the comments by
T-Mobile: ``One of the strongest deterrents to widespread participation
in the 600 MHz auction is the prospect that bidding will be pointless
if the Nation's two largest carriers--each of which has a market
capitalization roughly ten times that of its next largest competitor--
are given an unfettered ability to acquire all of the spectrum offered.
Most commenters, therefore, support imposing a cap on spectrum
acquisitions. . . .'' (Reply Comments of T-Mobile USA, Inc., GN Docket
No. 12-268, March 12, 2013, pp.iv-v, available at http://apps.fcc.gov/
ecfs/document/view?id=7022130363, accessed March 20, 2013) Other
examples include the reply comments of the Competitive Carriers
Association and Cellular South, Inc. in the same docket.
(25) As I show in this report, there is substantial conflict between
the desire to raise revenue and reallocate spectrum through
the Incentive Auction and the proposals to restrict the
ability of Verizon and AT&T to compete in the auction. Such
restrictions would potentially overcomplicate an already
complex auction and put at risk achieving the dual goals of
raising revenue and reallocation of spectrum. In addition,
I show that historical bidding behavior indicates that
restrictions on Verizon and AT&T are unlikely to
substantially affect the allocation of licenses in rural
areas, which appeared to be the key concern of DOJ.
III. There is no evidence that Sprint and T-Mobile have been foreclosed
from access to low-frequency spectrum
(26) Throughout this submission, I define low-frequency spectrum as
spectrum that is at a frequency below one GHz.\14\ Data on
the availability of low-frequency spectrum--both at auction
and on the secondary market--are relevant for two reasons.
First, to the extent that there are significant
opportunities for wireless operators to acquire low-band
spectrum through vehicles other than the Incentive Auction,
such firms have the ability to bypass any theoretical
``foreclosure'' by Verizon and AT&T. Second, assertions
that Sprint's and T-Mobile's ability to compete are reduced
if they are not guaranteed access to low-frequency spectrum
in the Incentive Auction can be tested against the conduct
of these carriers in pursuing recent opportunities to
acquire such spectrum.
---------------------------------------------------------------------------
\14\ This is a common definition of ``low frequency'' in this
context as noted in the DOJ ex parte at p.12.
(27) I conclude, based on the empirical evidence, that the existence
of a liquid market for low-frequency spectrum undercuts the
assertion that there is a risk that AT&T and Verizon could
foreclose rivals from such spectrum by buying up all
available spectrum. I also conclude that the behavior of
Sprint and T-Mobile, who have consistently failed to
purchase low-frequency spectrum even when given numerous
recent opportunities to do so, undercuts the assertion that
either of those firms is at risk of being ``foreclosed''
from an input that is crucial to their ability to compete.
III.A. Sprint and T-Mobile were not foreclosed from acquiring spectrum
in the 700 MHz and AWS spectrum auctions
III.A.1. 700 MHz Auction
(28) The 2008 700 MHz auction was a large, relatively recent auction
where the FCC auctioned 80 MHz of low-frequency (700 MHz)
spectrum. It concluded in March 2008. Licenses sold in the
700 MHz auction can be used for mobile wireless services,
including voice and mobile broadband, among other things.
(29) Neither T-Mobile nor Sprint participated in the 700 MHz
auction. By contrast, Verizon and AT&T, along with 99 other
entities, actively participated. That 99 other entities
participated is evidence that Verizon's and AT&T's
participation in that auction did not discourage other
interested buyers from bidding in the auction.
(30) It is useful to focus on the 700 MHz B-block licenses because
these licenses cover areas the size of Cellular Market
Areas (CMA) and thus can be easily defined as rural or non-
rural.\15\ As reported in Figure 1, the majority of rural
CMA-level licenses (72 percent in terms of numbers of
licenses and 62 percent in terms of MHz*POPs \16\) were won
by entities other than Verizon and AT&T.\17\ Thus, DOJ's
concern that Verizon and AT&T may foreclose other buyers of
the low-frequency spectrum in rural areas is misplaced.
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\15\ In fact, the FCC identifies certain CMAs as rural areas.
\16\ The term ``MHz-POPs'' is defined as the product of the number
of megahertz associated with a license and the population of the
license's service area, both of which affect the value of a license.
Because trades can involve licenses of different sizes, both in terms
of MHz and population coverage, an examination of the MHz*POP
associated with trades provides additional information.
\17\ 72 percent is calculated by dividing the number of rural
licenses won by participants other than Verizon and AT&T (305) by the
total number of rural licenses (425). Similarly 62 percent is
calculated by dividing 488 by 783.
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Figure 1 Number of B-block licenses won by top bidders in rural and
non-rural CMAs in 700 MHz Auction
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on the FCC data and documentation.
III.A.2. AWS spectrum auction
(31) In order to further evaluate claims that Sprint and T-Mobile
have been foreclosed from acquiring spectrum suitable to
expand coverage in rural areas, I analyze data from the
2006 AWS spectrum auction. The AWS spectrum auction,
referred to as the ``AWS-1 Auction,'' was another large,
relatively recent auction. It concluded in September 2006.
Licenses sold in the AWS-1 spectrum auction can be used for
mobile wireless services, including voice and mobile
broadband. In this section, I focus on the AWS-1 A-block
licenses, which are 20 MHz licenses defined over the 734
CMAs. It is useful for the purposes of this section to
focus on the A-block licenses because CMA-sized areas can
more easily be defined as either rural or non-rural.
(32) Figure 2 reports the number and MHz*POPs of A-block licenses
won by bidder broken down by rural and non-rural CMAs. The
vast majority of these rural licenses (96 percent in terms
of numbers of licenses and 95 percent in terms of MHz*POPs)
were won by an entity other than Verizon, AT&T, T-Mobile,
or Sprint. This suggests that Sprint and T-Mobile had an
opportunity to acquire additional spectrum that would have
expanded their rural coverage, but chose not to, even
though Verizon and AT&T were not actively bidding on these
licenses themselves either to acquire the spectrum or to
keep it out of the hands of Sprint and T-Mobile.
Figure 2 Number of A-block licenses won by top bidders in rural and
non-rural CMAs in AWS spectrum auction
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on the FCC data and documentation.
III.B. Evidence from secondary market transactions shows that Sprint
and T-Mobile have not been foreclosed
(33) The availability of low-frequency spectrum on the secondary
market would make it difficult for Verizon and AT&T to
implement a successful foreclosure strategy at the
Incentive Auction. AT&T and Verizon cannot prevent other
providers from purchasing low-frequency (or any other)
spectrum on the secondary market, unless they stand ready
to purchase all or most of the available supply--and the
evidence shows that they have not.
(34) In addition, past secondary market transactions suggest that
Sprint and T-Mobile have not been particularly interested
in acquiring low-frequency spectrum--a fact that undercuts
the assertion that they are at risk of being foreclosed.
(35) Verizon gave me data, taken from the publicly available
sources, on all of the assignment and transfer applications
that the FCC received from January 8, 2007, to January 30,
2013. These transactions were consummated between February
16, 2007, and May 10, 2013. I use these data to investigate
whether the empirical evidence supports the claim that
Sprint, T-Mobile, or other wireless operators have not had
opportunities to substantially increase their holdings of
low-frequency spectrum.
(36) The secondary market transactions data contain 5,153 spectrum
trades.\18\ Eighty-eight percent of these transactions
(4,510 out of 5,153) involved the transfer of the whole
license. In the remaining 12 percent of transactions, the
license was partitioned or disaggregated. When only one
part of a license is transferred, the database does not
report the fraction of the total licensed spectrum that was
traded.
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\18\ I excluded 23 internal trades between two entities both under
Verizon's control (2) or AT&T's control (21).
(37) Figure 3 reports the number of whole and partial license
transactions and the MHz*POPs million \19\ transacted as a
part of whole license transfers. Because only 12 percent of
transactions involved the partial assignment of a license
and because the data do not specify the size of the partial
assignment, I exclude these transactions from my analysis
of secondary market transactions.
---------------------------------------------------------------------------
\19\ Because trades can involve licenses of different sizes, both
in terms of MHz and population coverage, an examination of the MHz*POP
associated with trades provides additional information.
---------------------------------------------------------------------------
Figure 3 Secondary market transactions by band, January 2007-May 2013
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on FCC data and documentation.
III.B.1. Sprint and T-Mobile buy and sell spectrum in the secondary
market
(38) By looking at all transactions, not just low-frequency
transactions, I establish that Sprint and T-Mobile actively
participated in the secondary market, engaging in
approximately the same number of buy transactions as sell
transactions. That active participation suggests that
Sprint and T-Mobile were able to acquire useful spectrum
through this channel, but as I show below, they did not
take advantage of the secondary market to acquire low-
frequency spectrum. Figure 18 in Appendix B reports the
number of transactions by buyer and seller.
(39) As shown in Figure 4 below, the evidence in terms of MHz*POPs
traded (based on the 4,510 trades involving whole licenses)
shows that both Sprint and T-Mobile were net buyers of
spectrum in secondary market transactions, including
purchases of spectrum from Verizon and AT&T. Furthermore,
the data show that Sprint and T-Mobile could have purchased
an additional 24,233 million MHz*POPs that spectrum holders
other than Verizon and AT&T put up for sale. (These 24,233
million MHz*POPs correspond roughly to an 80 MHz license
covering the entire United States.) Figure 4 shows that T-
Mobile was able to increase its spectrum holdings
substantially through secondary market transactions and
that it could have purchased about six times more from
sellers other than Verizon and AT&T than it decided to buy.
(T-Mobile purchased 4,180 million MHz*POPs from ``Other''
sellers, but 24,233 million MHz*POPs sold by those other
sellers were purchased by ``Other'' buyers.) The fact that
Sprint only purchased 304 out of 24,233 million MHz*POPs
from ``Other'' sellers suggests that although the secondary
market was relatively active across most commercial
spectrum bands, Sprint failed to take advantage of
opportunity to acquire spectrum. The evidence from these
secondary market transactions does not support claims that
Sprint and T-Mobile have been anticompetitively foreclosed
from acquiring spectrum.
Figure 4 MHz*POPs traded, all bands, January 2007-May 2013 (whole
licenses only)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on FCC data and documentation.
III.B.2. Neither T-Mobile nor Sprint has chosen to acquire low-
frequency spectrum in the secondary market despite significant
opportunities to do so
(40) Since January 2007, there have been 2,153 transactions of low-
frequency spectrum. T-Mobile bought one license and Sprint
did not buy any.\20\ Although Verizon and AT&T have been
active buyers of low-frequency spectrum, a significant
proportion of the spectrum transacted did not involve
Verizon or AT&T and thus could not have been subject to
foreclosure by Verizon and AT&T.
---------------------------------------------------------------------------
\20\ T-Mobile bought a 25 MHz Cellular A license from SunCom
Wireless Holdings covering CMA 629 (South Carolina 5--Georgetown) where
about 375,000 people currently reside. This was a part of T-Mobile's
acquisition of SunCom Wireless Holdings, Inc. that was announced in
September 2007 and consummated in February 2008. In addition to one 25
MHz Cellular A license, T-Mobile also received 27 PCS licenses as part
of the acquisition.
(41) In particular, focusing on the 2,096 low-frequency transactions
that involved the transfer of a whole license, Figure 5
shows that--at a minimum--Sprint or T-Mobile could have
been the buyer in 729 transactions when the buyer and
seller were firms other than Verizon or AT&T. Figure 6
reports the quantities of low-frequency spectrum transacted
in MHz*POPs rather than in numbers of transactions.
Approximately thirty percent of the MHz*POPs of low-
frequency spectrum transacted (3,691 million out of 12,832
million) were sold and purchased by a firm other than
Verizon or AT&T and thus could not have been subject to
foreclosure by Verizon or AT&T; this is roughly the same
MHz*POPs as a 12 MHz license covering the entire United
States. This evidence supports the conclusion that Sprint
and T-Mobile have had opportunities to purchase low-
frequency spectrum but have chosen not to.
Figure 5 Number of transactions of low-frequency whole licenses,
January 2007-May 2013
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on FCC data and documentation.
Figure 6 MHz*POPs of low-frequency spectrum transacted from January
2007 to May 2013 (whole licenses only)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on FCC data and documentation.
(42) Verizon offered for sale all of its licenses in two blocks of
the Lower 700 MHz band in 2013. This spectrum could have
provided significant coverage in low-frequency spectrum for
T-Mobile or Sprint, but neither company bought any of these
licenses. The CFO of Deutsche Telekom said, ``We are not
interested in 700 megahertz spectrum at this time [. . .]
[T]his spectrum is nothing which would be attractive for
us.'' \21\
---------------------------------------------------------------------------
\21\ Q1 2012 Investor call (May 10, 2012).
---------------------------------------------------------------------------
III.B.3. Sprint and T-Mobile have failed to act on opportunities to
purchase low-frequency spectrum in rural areas
(43) In the previous section, I show that there were opportunities
for firms to purchase low-frequency spectrum on the
secondary market, but that Sprint and T-Mobile did not take
advantage of those opportunities. The evidence shows that
they passed up these opportunities even in rural areas.
This is noteworthy because DOJ has indicated a particular
concern about potential foreclosure in rural markets, where
low-frequency spectrum can facilitate deployment of
wireless service with fewer cell sites because of its
ability to propagate signals further.
(44) The 2007-2013 data show that there were significant
opportunities to purchase low-frequency spectrum in rural
areas, which the FCC defines as areas where population
density is currently below 100 inhabitants per square
mile.\22\ According to the transactions data, Sprint and T-
Mobile made no purchases of low-frequency spectrum in rural
areas.
---------------------------------------------------------------------------
\22\ ``We establish a baseline definition of `rural area' as those
counties (or equivalent) with a population density of 100 persons per
square mile or less, based upon the most recently available Census
data.'' Facilitating the Provision of Spectrum-Based Services to Rural
Areas and Promoting Opportunities for Rural Telephone Companies to
Provide Spectrum-Based Services, Report and Order, 19 FCC Rcd 19078, at
11, 79 (2004).
(45) Figure 7 and Figure 8 below report transactions of low-
frequency spectrum in rural areas. A significant proportion
of the transactions involves neither Verizon nor AT&T as
either the buyer or seller and thus could not have been
subject to anticompetitive foreclosure by either. Yet of
these 469 low-frequency licenses sold in rural areas,
Sprint and T-Mobile bought none.
Figure 7 Number of transactions of low-frequency rural licenses traded,
January 2007-May 2013 (whole licenses only)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on FCC data and documentation.
Figure 8 Rural MHz*POPs of low-frequency spectrum transacted January
2007-May 2013 (whole licenses only)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on FCC data and documentation.
(46) There may be limitations to secondary market opportunities, and
engaging in a sequence of small secondary market
transactions may not be attractive for a carrier because of
the risk that the carrier may be unable to purchase
sufficient licenses at attractive prices to support its
business plan. But T-Mobile's and Sprint's failures to make
any meaningful attempts to acquire low-frequency spectrum,
particularly rural low-frequency spectrum, suggest that
they have chosen to target other bands of spectrum, not
that they have been foreclosed. And the active secondary
market for spectrum, including for rural low-frequency
spectrum, would make it difficult for Verizon and AT&T to
successfully execute a foreclosure strategy in the future.
III.C. Evidence from pricing plans suggests a pattern of capacity
constraints that makes foreclosure unlikely
(47) DOJ states that, ``[a]bsent compelling evidence that the
largest incumbent carriers are already using their existing
spectrum licenses efficiently and their networks are still
capacity-constrained, the Department would normally expect
the highest use value for new spectrum that is in the
public interest to come from rivals to the leading firms
that could effectively make use of additional spectrum to
expand capacity, improve coverage, or introduce new
services in an effort to challenge the dominant firms.''
\23\
---------------------------------------------------------------------------
\23\ DOJ ex parte at p.12.
(48) This report does not address the extent to which mobile
wireless service providers are capacity constrained. That
question has been separately addressed by economists and
industry analysts. For example, Allan Shampine submitted a
declaration on behalf of Verizon in which he calculated the
customers per MHz*POP of various wireless operators and
concluded that Verizon and AT&T use their spectrum more
intensively than other operators, including T-Mobile and
Sprint.\24\ And a recent market research report by Deutsche
Bank labels Sprint the ``new spectrum powerhouse'' and
emphasizes that Sprint has ``more bandwidth available for
LTE than all of its national competitors combined.'' \25\
Similarly, Macquarie Capital recently commented that Sprint
and T-Mobile have a ``strong spectrum and network capacity
position'' and that Verizon and AT&T ``will need to
purchase additional spectrum'' within the next two
years.\26\
---------------------------------------------------------------------------
\24\ Declaration of Allan L. Shampine, In the Matter of Policies
Regarding Mobile Spectrum Holdings, Docket No. 12-269 (Nov. 26, 2012),
at 18-19, available at http://apps.fcc.gov/ecfs/document/
view?id=7022067975.
\25\ See Brett Feldman et al., Deutsche Bank Market Reports
Research, Sprint Nextel Corp. The New Spectrum Powerhouse; Restating
Coverage at Buy at 1, available at http://apps.fcc.gov/ecfs/document/
view?id=7520931274.
\26\ July 29, 2013 Macquarie Capital report, ``US Telecom Services:
Spectrum and network capacity vs. traffic demand for the Big 4 wireless
carriers.''
(49) Additional economic evidence speaking to the issue can be found
in a review of pricing plans offered by the four national
providers. On the one hand, if a wireless carrier is
relatively unconstrained in terms of its network capacity,
one would expect that it would offer pricing plans that
allow for customers to use large amounts of data or even
offer plans with unlimited data usage. On the other hand,
one would expect carriers that are more capacity
constrained to offer plans that encourage customers to
---------------------------------------------------------------------------
conserve on network capacity.
(50) Statements by the FCC and industry analysts support the
economic logic that wireless operators' pricing plans can
be expected to reflect their relative capacity constraints.
For example, in the Fifteenth Annual CMRS Competition
Report, the FCC stated: ``In late 2009 [. . .] the chief
executive of AT&T's wireless operations hinted that the
company would eventually shift from unlimited data pricing
to charging subscribers based on the amount of data used in
order to encourage high-usage customers to curb demand for
network capacity and improve the operator's ability to
manage its network. Analysts have long anticipated the
introduction of usage-based wireless data pricing, arguing
that a departure from the unlimited data pricing model is
only a matter of time. In June 2010, AT&T became the first
national operator to move from unlimited data pricing to
usage-based tiered data pricing for smartphones.'' \27\ In
the Sixteenth CMRS Competition Report, the FCC confirmed
that more wireless carriers facing capacity constraints are
shifting to usage-based data plans: ``the Fifteenth Report
[. . .] had focused on the industry's shift from unlimited
data pricing to tiered, usage-based data pricing for
smartphones. As discussed in the Fifteenth Report, this
shift was a response to the effects of increased bandwidth
consumption by smartphone users on network utilization and
capacity constraints.'' The report also stated that Sprint
has an ``unlimited data pricing [. . .] and T-Mobile
reintroduced an unlimited smartphone data pricing option.''
\28\
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\27\ See In the Matter of Implementation of Section 6002(b) of the
Omnibus Budget Reconciliation Act of 1993 Annual Report and Analysis of
Competitive Market Conditions With Respect to Mobile Wireless,
Including Commercial Mobile Services, WT Docket No. 10-133 (2011)
(``Fifteenth CMRS Competition Report''), at 87-88.
\28\ The FCC also reported that ``[t]he same network management
issues motivating the ongoing shift from unlimited data pricing to
tiered smartphone data plans in the postpaid segment--namely, the
impact of higher bandwidth consumption by smartphone users on network
utilization and capacity constraints--are also beginning to induce
changes in the pricing and service terms and conditions of high-end
prepaid plans for users of smartphone data.'' 167; see In the Matter
of Implementation of Section 6002(b) of the Omnibus Budget
Reconciliation Act of 1993 Annual Report and Analysis of Competitive
Market Conditions With Respect to Mobile Wireless, Including Commercial
Mobile Services, WT Docket No. 11-186, released March 21, 2013
(``Sixteenth CMRS Competition Report'').
(51) Figure 9 compares the individual post-paid plans of Verizon,
AT&T, T-Mobile, and Sprint. During the first half of 2013,
Sprint and T-Mobile offered service plans to their
customers that allow those customers to increase their data
use in an unlimited way at zero incremental cost to those
customers. Sprint offered an unlimited data plan at $110
per month, and T-Mobile offered an unlimited data plan at
$90 per month during the first quarter and $70 per month
during the second quarter, for an average price of $80 per
month. This type of pricing is consistent with a lack of
binding capacity constraints. If network capacity were a
problem for T-Mobile and Sprint, I would have expected to
see pricing plans that encourage customers to conserve on
network usage. In fact, a recent T-Mobile advertisement
portrays AT&T's network as overcrowded but T-Mobile's
network as having ample capacity.\29\ Similarly, Sprint
recently announced that customers who choose the ``New
Unlimited, My Way Plan'' starting at $80 per month would
receive the ``Sprint Unlimited Guarantee,'' an offering
that allows the customers ``to lock-in unlimited talk, text
and data not for just the next two years, but for life.''
\30\
---------------------------------------------------------------------------
\29\ See, e.g., PhoneArena.com, ``T-Mobile ad attacks AT&T for
having slow pipes,'' available at http://www.phonearena.com/news/T-
Mobile-ad-attacks-AT-T-for-having-slow-pipes_id42743, site accessed
July 4, 2013; T-Mobile ``Pipes'' Apple iPhone 5 Commercial, available
at http://www.youtube.com/watch?v=h2Scc6fGz9o, site accessed July 4,
2013.
\30\ See, e.g., ``Sprint Launches Unlimited Guarantee and New
Unlimited, My Way Plan,'' available at http://newsroom.sprint.com/news-
releases/sprint-launches-unlimited-guarantee-and-new-unlimited-my-way-
plan.htm?view_id=2933, site accessed July 23, 2013.
---------------------------------------------------------------------------
Figure 9 Comparison of individual 2013 (Jan-Jun) post-paid plans
including unlimited anytime minutes and unlimited text
messaging--monthly charge ($) and corresponding included data
usage (GigaBytes)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Verizon.
(52) In contrast, Verizon and AT&T have commonly offered service
plans that cap the amount of data that is available to
customers at zero incremental cost. Most recently, both
Verizon and AT&T offered plans that allow for 4 GB of data
usage at $110 per month. Plans that limit the data usage
that is available at no incremental cost are consistent
with the kind of pricing that I would expect from a
wireless carrier that is capacity constrained relative to
carriers offering unlimited plans.
(53) Therefore, the pricing behavior of the four national wireless
operators is not consistent with the assertion that Verizon
and AT&T are purchasing spectrum they do not need for their
operations in order to ensure that their competitors remain
capacity constrained.
IV. Verizon and AT&T are unlikely to have the incentive or ability to
foreclose Sprint and T-Mobile in the Incentive Auction
(54) In its submission, DOJ expresses concern that Verizon and AT&T
will engage in a form of predatory bidding that will drive
up the price of spectrum in the Incentive Auction to such
an extent as to deny Sprint and T-Mobile the ability to
acquire low-frequency spectrum in rural areas, which DOJ
claims is needed to improve network coverage. But the DOJ
paper includes no data or other evidence to support its
concern, and DOJ subsequently clarified that it has not
made any judgment about what the FCC will find when it
undertakes the factual analysis needed to evaluate the
concerns.\31\
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\31\ Senate Judiciary Hearing, April 16, 2013, available at http://
www.judiciary.senate.gov/resources/webcasts/index.cfm.
(55) Verizon and AT&T could have an incentive to purchase spectrum
with the intent of withholding it from the market and thus
decreasing supply in order to raise or maintain price
levels only if smaller rivals are already constrained in
terms of spectrum and Verizon and AT&T are not. However,
the pricing plan evidence that I present in section III.C
---------------------------------------------------------------------------
suggests that the opposite is true.
(56) If margins are high and either Verizon or AT&T faces spectrum-
capacity constraints in the coming years, then purchased
spectrum will most likely be deployed in order to expand
output at the high margins rather than withheld from the
market. Furthermore, if smaller rivals are already
unconstrained by their spectrum holdings, then withholding
additional spectrum from them is unlikely to have any
effect, while at the same time being costly to the larger
wireless carriers. Therefore, if, as the evidence suggests,
Verizon and AT&T are capacity-constrained relative to their
smaller rivals, Verizon and AT&T would have no incentive to
foreclose by purchasing spectrum to keep it out of the
hands of their rivals.
(57) Additionally, DOJ suggests that its concerns about low
frequency spectrum may extend beyond rural markets if
carriers require that spectrum to ``offer[] coverage across
a broad service area.'' (DOJ ex parte at 14). But Sprint
already has low frequency spectrum in the 800 MHz band,
which it is using for its LTE deployment.\32\ And T-
Mobile's senior management has made clear that any coverage
constraints it may face can be remedied with the
acquisition of a small amount of low-band spectrum:
according to an analyst at Jefferies who recently met with
T-Mobile's leadership, T-Mobile believes it only needs a
5x5 block of low frequency spectrum to improve its coverage
``dramatically.'' \33\ This suggests that Verizon and AT&T
would have to buy up almost all of the low frequency
spectrum at the 600 MHz auction to succeed in a foreclosure
strategy targeting DOJ's potential non-rural concerns.
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\32\ See Sprint Q2 2013 Earnings Call (July 30, 013).
\33\ August 28, 2013 Jefferies report, ``T-Mobile USA''. (``. . .
T-Mobile believes that its coverage would improve dramatically with
just a small (5x5) channel of low band spectrum.'').
(58) In the remainder of this section, I first address a much more
direct remedy at the FCC's disposal that, unlike bidder
participation restrictions, does not risk the success of
the Incentive Auction. Then, I discuss some additional
reasons why foreclosure by bidding up the price of spectrum
in the Incentive Auction is unlikely to be an effective or
profitable strategy for Verizon and AT&T: (1) Given the
high costs associated with foreclosure and the uncertain
benefit, both Verizon and AT&T would have an incentive to
free ride on the efforts of the other to bid up the cost of
spectrum. (2) Anonymous auction design would make the
implementation of a foreclosure strategy difficult and
costly. (3) The supply of spectrum is likely to increase as
Verizon and AT&T bid up the price, increasing the cost of
implementing a foreclosure strategy (4) The market does not
appear to be sufficiently concentrated to make the
foreclosure strategy profitable enough to justify the costs
to Verizon and AT&T.
IV.A. As a policy tool to prevent foreclosure, build-out requirements
have significant advantages over bidding restrictions
(59) If, despite the evidence to the contrary, the FCC believes that
foreclosure by purchasing spectrum with the intent of
withholding it from use is likely, then a more direct and
less risky remedy is available to the FCC.
(60) The FCC can defeat a foreclosure strategy simply by imposing
build-out requirements for licenses purchased at the
Incentive Auction. DOJ notes in its ex parte submission
that bidders may consider both use value and foreclosure
value of spectrum when bidding. But bidders must also
consider holding costs of any spectrum won, which offsets
the perceived value. Holding costs of spectrum are
increased by the extent to which the FCC requires that
holders of spectrum pursue the build out of capacity in
order to make use of acquired spectrum. Thus, the FCC has a
tool at its disposal by which it can directly reduce the
likelihood that firms will find it profitable to withhold
spectrum from the market through a warehousing strategy.
(61) The imposition of a build-out requirement does not have to
cause the significant risks and distortions that bidding
restrictions do. Suppose that, as the evidence suggests,
neither Verizon or AT&T (or anyone else) has any intention
of purchasing spectrum in the Incentive Auction to withhold
it from the market. Then a properly designed build-out
requirement would only minimally impact bidding behavior,
if at all. In such a case, however, bidding restrictions
would unnecessarily put at risk the goals of the Incentive
Auction and interfere with the efficient allocation of
spectrum. Therefore, build-out requirements will tend to be
a much more efficient means of deterring foreclosure than
bidding restrictions.
(62) In addition, because increases in the supply of spectrum reduce
the profitability of a foreclosure strategy, the FCC can
address foreclosure concerns by taking steps to accelerate
the reallocation of spectrum, such as that currently
assigned to the Federal Government, to use for commercial
mobile wireless services.
(63) Moreover, if DOJ is concerned about foreclosure in rural areas,
it could examine the results of the auction and bring
challenges if it uncovers anticompetitive conduct. For the
reasons described in this report, I think it is unlikely
that Verizon and AT&T would have an incentive to engage in
foreclosure, but DOJ could easily determine whether AT&T
and Verizon had purchased all or almost all of the relevant
spectrum in the auction at prices significantly in excess
of expectations, and then DOJ could investigate whether
that was in pursuit of foreclosure. DOJ could use such a
post-auction review to challenge foreclosure instead of a
prophylactic rule restricting bidding by Verizon and AT&T.
(64) Because the FCC could impose build-out requirements and the DOJ
could examine bidding behavior post-auction in rural areas,
policy tools exist for addressing foreclosure concerns that
avoid the undesirable effects of bidding restrictions.
IV.B. Incentives to free ride imply that there is unlikely to be a
unilateral incentive for significant foreclosure by either
Verizon or AT&T
(65) Free rider concerns suggest that a foreclosure strategy may be
difficult for AT&T and Verizon to implement. DOJ's theory
involves Verizon and AT&T both being willing to warehouse
all or almost all the rural spectrum up for auction to
prevent Sprint and T-Mobile from gaining access to that
spectrum. That means that a significant portion of the
foreclosure costs borne by Verizon or AT&T will benefit the
other firm.
(66) The effect of this will be to greatly reduce Verizon's and
AT&T's unilateral incentives (if any) to foreclose well
below the incentive that a single large firm would have. A
single large firm would internalize all of the additional
profits from the foreclosure strategy. When benefits are
shared, however, each firm sharing the benefits would
prefer to free ride on the other's efforts, leading to
significantly less foreclosure than would have occurred if
the benefits were not shared.
IV.C. Anonymous auction design makes foreclosure less likely
(67) The FCC can make auction design choices that reduce concerns
related to foreclosure. In past auctions, the FCC has used
anonymous bidding procedures in order to limit the scope
for strategic bidding. By using anonymous bidding in the
Incentive Auction, the FCC can prevent bidders from knowing
the identity of rivals for a particular license, making a
foreclosure strategy more difficult and costly to
implement.
(68) In the context of an auction with anonymous bidding, it would
not be possible for Verizon or AT&T to know when one of
them (as opposed to one of the firms supposedly a target of
their foreclosure strategy) has won a license. The result
is that Verizon and AT&T would not know when to stop
bidding. Notably, as discussed in Section VI.C below, in
the 700 MHz Auction, Verizon and AT&T competed head-to-head
with one another for spectrum in various markets, even
after all other participants had stopped bidding. In fact,
that head-to-head competition between Verizon and AT&T
contributed to more than $4.2 billion in additional
revenues that would not have been received if AT&T and
Verizon had stopped bidding as soon as one of them was
guaranteed to acquire the license. None of the parties
asserting that there is foreclosure risk has put forth a
theory explaining how foreclosure could take place in the
context of anonymous bidding and direct competition between
Verizon and AT&T.
IV.D. Uncertainty about the level and elasticity of supply in an
incentive auction makes a foreclosure strategy difficult to
implement
(69) A foreclosure strategy is particularly difficult to implement
in the context of an incentive auction because higher bids
on the part of buyers result in greater quantity being made
available from sellers.
(70) In an incentive auction, unlike other auctions the FCC has run,
there is significant uncertainty regarding the ultimate
supply of spectrum to the market. The nature of the
Incentive Auction involves broadcasters making decisions
about the price at which they are willing to supply
spectrum to the market. It will be difficult for
participants to predict before the auction how much will be
supplied at a given price level. A company seeking to
implement a foreclosure strategy that involves bidding up
the price of spectrum so as to purchase that spectrum in
order to withhold it from the market already faces
uncertainty over how high it will have to bid in order to
keep spectrum away from rival bidders. An incentive auction
introduces additional uncertainty associated with how much
spectrum will have to be purchased at inflated bids. This
uncertainty makes planning and implementing this
foreclosure strategy difficult and costly.
(71) The extent to which higher prices stimulate sellers to offer
more spectrum for sale is reflected in the elasticity of
supply. If supply is highly elastic, then a small increase
in price results in a large increase in the quantity of
spectrum supplied. To analyze the effects of supply
elasticity, auction theorists consider the set of
equilibria of an auction, where an equilibrium is a
specification of bidding strategies, one for each bidder,
that are mutual best responses. These equilibria provide
predictions on likely outcomes for the auction. The theory
for one-sided auctions suggests that the elasticity of
supply and uncertainty regarding that elasticity affects
the set of equilibria in these auctions, with greater
uncertainty and more elastic supply eliminating certain
equilibria that may be undesirable from the perspective of
the auction designer.\34\ It seems likely that uncertainty
regarding the elasticity of supply in the Incentive Auction
would further inhibit attempts by bidders to coordinate on
a foreclosure strategy. For example, if bidders are unsure
about the elasticity of supply, they may be unsure about
whether coordination on foreclosure strategies can be
supported as an equilibrium, or if their beliefs about the
elasticity of supply differ, they may disagree regarding
foreclosure strategies.
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\34\ See Paul Milgrom (2004), Putting Auction Theory to Work,
Cambridge University Press, Chapter 7.2, showing that when bidders at a
multi-unit auction face elastic supply rather than inelastic supply,
some low-revenue equilibria may be eliminated.
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IV.E. The market for wireless services is unlikely sufficiently
concentrated to make foreclosure profitable
(72) In all models of competition that I am aware of, the effects of
foreclosing a rival diminish as the number of firms already
effectively competing in the market increases. For example,
a monopolist that is able to foreclose an entrant in order
to remain a monopolist rather than sharing a duopoly profit
will find that foreclosing that rival is significantly more
profitable than foreclosing a rival that, had it been able
to enter, would have become the third competitor rather
than the second. Similarly, foreclosure of a fourth rival
is significantly less profitable than foreclosing the
third.
(73) For example, consider a market consisting of symmetric firms
competing by setting quantities facing inverse demand equal
to p = 100 - q, where p is the market price and q is the
total quantity supplied to the market. This is an example
of a model of Cournot competition.\35\ Assuming that firms
produce at zero cost, the equilibrium price is equal to
100/(n + 1), where n is the number of symmetric firms in
the market. Equilibrium profit of each firm is equal to
(100/n + 1)) \2\. The aggregate value to the remaining
firms of foreclosing one potential entrant decreases as the
number of firms in the market increases. Specifically, if
there are two potential competitors but one is foreclosed,
the value of foreclosure is approximately 1,389.\36\ If
there are three potential competitors but one is
foreclosed, the joint value of foreclosing the third firm
for the two other firms is approximately 972.\37\ If there
are four potential competitors but one is foreclosed, the
joint value of foreclosing the fourth firm for the three
other firms is 675.\38\
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\35\ See, e.g., Jean Tirole (1989), The Theory of Industrial
Organization, Cambridge, MA: MIT Press, Section 5.4.
\36\ The profit of a monopolist is 2500, whereas the profit of a
duopolist is approximately 1111, where 2500-1111=1389.
\37\ With three firms, each firm has profit 625, but with two each
has profit 1111, and 2(1111)-2(625)=972.
\38\ With four firms, each firm has profit 400. Using the prior
result, 3(625)-3(400)=675.
(74) The current market structure for mobile wireless services in
the United States involves a significant number of national
and regional competitors of various sizes and strengths.
The potential foreclosure that is described by DOJ does not
involve the complete foreclosure of a rival by a monopolist
but rather is marginal in nature. It involves
(theoretically) foreclosing rivals' access to a small
subset of the available input when there are already many
small, medium, and large-sized rivals and therefore the
value of that foreclosure and its effect would likely be
---------------------------------------------------------------------------
small.
(75) In addition, the costs of a successful foreclosure strategy are
likely to be large because it would require a firm to
purchase licenses for large amounts of spectrum and then to
fulfill any build-out requirements associated with those
licenses.
(76) In sum, in the Incentive Auction, bidders likely will not know
whom they are bidding against, making a targeted
foreclosure strategy difficult or impossible to implement.
In addition, a firm will not know whether a higher bid will
have the effect of increasing the total amount of spectrum
available in the market. This uncertainty, together with
the limited benefits and high costs of a foreclosure
strategy, suggests that firms will not have the incentive
to engage in such a strategy.
V. Effects of bidding restrictions in the economics literature
V.A. Papers on auction design suggest that bidding restrictions are
likely to reduce revenue and efficiency
(77) Economic theory supports the intuitive conclusion that a seller
should be able to raise more money when running an auction
that does not exclude any bidder than an auction that
excludes even a single bidder. Bulow and Klemperer (1996)
prove a theorem that shows that, when the auctioneer's goal
is to raise the highest amount of money possible, ``an
auction with N + 1 bidders beats any standard mechanism for
selling to N bidders.'' \39\
---------------------------------------------------------------------------
\39\ Jeremy Bulow and Paul Klemperer (1996), ``Auctions Versus
Negotiations,'' The American Economic Review, Vol. 86, No. 1, pp. 180-
194.
(78) The authors show that this conclusion requires only that the
bidders are ``serious,'' that is, they value the object for
sale more than the seller, and holds true under fairly
general conditions. In particular, the conclusion that
there is nothing as valuable to a seller as attracting one
extra bona fide bidder to a competitive auction holds true
both under ``private values'' conditions, ``common value''
conditions, and anything in-between. In a ``private value''
scenario, each bidder knows how much she values the object
for sale; this information is private to herself and would
not affect the values of other bidders if that information
were revealed to them. In contrast, in a ``common value''
scenario, the value of the object for sale is the same for
all bidders, but it is unknown at the time of the auction
(e.g., the amount of oil that can be extracted after
---------------------------------------------------------------------------
winning an oil lease auction).
(79) This result suggests that a seller should generally focus on
maximizing the number of bidders. In the authors' own
words: ``A simple competitive auction with N + 1 bidders
will yield a seller more expected revenue than she could
expect to earn by fully exploiting her monopoly selling
position against N bidders.'' \40\
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\40\ See also Vijay Krishna (2002), Auction Theory, New York:
Academic Press. More nuanced effects are possible in models with
participation costs and investments. For example, in Flavio M. Menezes
and Paulo K. Monteiro (2000), ``Auctions with endogenous
participation,'' Review of Economic Design 5, 71-89, the authors
distinguish between the number of bidders who pay the participation
costs required to actually participate in an auction and the number of
bidders who could potentially participate in an auction. The
auctioneer's expected revenue always increases in the number of bidders
who actually participate in an auction, but they show that an increase
in the number of bidders who could potentially participate could in
theory cause the auctioneer's expected revenue to decrease, although
they conclude that not much can be said in general about the likelihood
of this effect. In Richard J. Gilbert and Paul Klemperer (2000), ``An
Equilibrium Theory of Rationing,'' RAND Journal of Economics 31(1), 1-
21, the authors consider a model in which the seller sets its pricing
policy and then each of two buyers must make an initial sunk investment
that determines probabilistically whether its value is positive or
zero. In this case, the seller's prices must provide incentives for
investment and the seller may prefer to commit to sell to only one
buyer in order to promote investment.
(80) Combining theoretical and empirical analysis, Brannman, Klein,
and Weiss (1987) show that having more bidders results in
higher winning bids both in theory and in the data in a
range of different auction settings, including
underwriters' spreads on tax-exempt general obligation
bonds and on tax-exempt revenue bonds, U.S. Department of
Interior offshore oil lease auctions, and oral ascending
and sealed-bid auctions of National Forest Service timber
in the Pacific Northwest.\41\
---------------------------------------------------------------------------
\41\ Lance Brannman, J. Douglass Klein and Leonard W. Weiss (1987),
``The Price Effects of Increased Competition in Auction Markets,''
Review of Economics and Statistics 69(1), pp. 24-32.
---------------------------------------------------------------------------
V.B. Assertions that bidding restrictions might not suppress revenue
are based on
unrealistic hypothetical scenarios
(81) In his March 12, 2013, declaration on behalf of T-Mobile,\42\
Prof. Jonathan B. Baker posits the following theoretical
exception to the typical revenue result expected when
bidding restrictions are imposed: ``Given the non-trivial
fixed costs of auction participation, a firm expecting to
be outbid could readily be deterred from participating in
the auction in the first place. If auction participation is
thin as a result of this dynamic, the large incumbent firms
that are in principle willing to pay to obtain foreclosure
benefits may enjoy these benefits without bidding up the
auction price to a level that pays for those benefits
fully, leaving the public with a less competitive wireless
sector and the government with lower revenues than could be
obtained.'' Similarly, in their paper on behalf of Sprint,
economists Dr. Stanley M. Besen, Dr. Serge X. Moresi, and
Prof. Steven C. Salop state that: ``Economic theory has
shown that unrestricted auctions can discourage some
potential bidders and lead to the result that auction
revenues fall far short of expectations.'' \43\
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\42\ Jonathan B. Baker, ``Spectrum Auction Rules That Foster Mobile
Wireless Competition,'' paper submitted on behalf of T-Mobile, In the
Matter of Policies Regarding Mobile Spectrum Holdings, WT Docket No.
12-269.
\43\ Stanley M. Besen, Serge X. Moresi, & Steven C. Salop, Why
Restricting Participation in Spectrum Auctions Can Increase Bidder
Participation, Increase Auction Revenues, and Increase Competition in
Wireless Markets, Mar. 12, 2013 (filed with Sprint's reply comments in
Docket No. 12-268), p. 3, emphasis added.
(82) However, both T-Mobile's and Sprint's economists limit
themselves to hypothetical examples illustrating how the
typical outcome--a reduction in revenue--might not occur
(under their theories) if certain theoretical conditions
are met. They present no evidence that the conditions that
they claim might lead to a revenue-enhancing outcome are
present in the context of the Incentive Auction or any
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other spectrum auction in the United States.
(83) For example, neither Dr. Baker nor Sprint's economists provide
evidence that in the Incentive Auction smaller bidders will
face ``non-trivial fixed costs'' to participate, or that
such costs would cause them to be discouraged from
participating if larger bidders are permitted to
participate without restrictions.
(84) The data indicate that the hypothetical conditions posited by
T-Mobile's and Sprint's economists do not appear to be
present. For example, in the AWS auction, it was known that
Verizon, AT&T, and T-Mobile would participate without
restrictions, yet 168 qualified bidders registered for the
auction and 104 bidders won licenses during the
auction.\44\ One of those bidders was T-Mobile, which won
more licenses and spent more money than either Verizon or
AT&T. Similarly, in the 700 MHz auction, there were 214
qualified bidders, of which 101 won licenses. Neither T-
Mobile's nor Sprint's economists explain how the
substantial number of active participants in those past
actions is consistent with their apparent assumption that
``non-trivial fixed costs'' of auction participation may
deter smaller bidders from participating in future U.S.
spectrum license auctions.
---------------------------------------------------------------------------
\44\ See http://wireless.fcc.gov/auctions/
default.htm?job=auction_summary&id=66.
(85) Sprint's and T-Mobile's economists do not appear to assert that
their clients are among the ``smaller'' firms that may be
deterred from participating in auctions if there are not
restrictions on Verizon and AT&T. Given those companies'
substantial financial resources and their proven historical
ability to acquire spectrum when they seek to acquire it,
there does not appear to be a basis to conclude that the
presence of ``non-trivial fixed costs'' for participating
in the Incentive Auction would discourage their
participation. Indeed, even if they provided factual
support for their conjecture that smaller firms may be
deterred by the presence of unrestricted larger firms (and
they do not), Sprint and T-Mobile do not explain why their
own presence would not similarly deter smaller rivals from
participating.
V.C. Empirical evidence from timber auctions further undermines the
revenue theory advanced by Sprint and T-Mobile
(86) U.S. Forest Service timber auctions are an apposite and
instructive real-world test for Sprint's and T-Mobile's
conjecture about likely outcomes when smaller bidders face
non-trivial fixed costs to participate in auctions. When
the U.S. Forest Service sells the rights to harvest timber
in a given area (``tract'') by auction, it allows would-be
participants to survey the tract to gather information
about the value of the timber to be harvested. The
evaluations of the idiosyncratic features of each tract are
typically done through on-foot surveys of each tract by
experienced experts known as ``cruisers.'' \45\ These
surveys represent a non-trivial fixed cost of auction
participation for small loggers who may consider
participating in the auction in competition with large
mills.\46\ The U.S. Forest Service sets a fraction of
harvesting contracts aside for small firms, thus providing
the FCC with what economists call a ``natural experiment''
about the effects of bidder participation restrictions in a
non-trivial context--timber sales were about $1.5 billion
per year in the early 1980s (although now they are about 1/
10 of that amount).\47\
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\45\ As stated in Baldwin, Marshall, and Richard (1997) ``Bidder
Collusion at Forest Service Timber Sales' ''' Journal of Political
Economy, 105: 657-699 at page 666, ``Certain other facts regarding
Forest Service sales are relevant to our study. . . . Second, old-
growth timber is highly heterogeneous. Bidders invest significant
resources in assessing its value through `cruises.' Cruises are
analogous to geological reports for offshore oil tract sales.''
\46\ Athey, Levin, and Seira (2011) ``Comparing Open and Sealed-Bid
Auctions: Evidence from Timber Auctions,'' Quarterly Journal of
Economics, 126: 207-257, state that ``the costs of surveying a tract
can run to several thousand dollars'' and estimate the median survey
cost to be about $3,000 in the Northern forests and about $5,000 in the
California forests. The authors also report that the median expected
profit from winning an auction is roughly $45,000 gross of surveying
costs. For smaller bidders who tend to win half or a quarter of the
auctions that are won by a median sized bidder, expected profit would
tend to be 50 to 25 percent of $45,000 or $22,500 to $11,500.
Therefore, survey costs for such small bidders would represent a
relatively large percentage of the overall expected profit from bidding
in an auction.
\47\ See historical summary and graph of Forest Service cut and
sold data, available at http://www.fs.fed.us/forestmanagement/
documents/sold-harvest/documents/1905-2012_Natl_Summ
ary_Graph.pdf.
(87) Athey, Coey, and Levin (2013) estimate that, far from
increasing revenue, set-asides reduced revenue from U.S.
Forest Service auctions by 5 percent between 1982 and 1989
(around that time, timber sales were slightly less than $1
billion per year) and reduced auction efficiency by 17
percent.\48\ Brannman and Froeb (2000) estimate that,
between 1974 and 1989, eliminating the set-aside program
would have increased auction revenues by 15 percent. In
that period, the U.S. Forest Service timber auction
revenues were slightly more than $1 billion per year.\49\
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\48\ Susan Athey, Dominic Coey, and Jonathan Levin, (2013), ``Set-
Asides and Subsidies in Auctions,'' American Economic Journal:
Microeconomic, 5(1): 1-27. The authors find that set-asides did
increase small firms' participation, but argue that bidding subsidies
targeted at small firms would have increased small firms' profits and
the U.S. Forest Service revenues with a much more limited
``efficiency'' cost in terms of reduced quantity harvested.
\49\ Lance Brannman and Luke M. Froeb, (2000) ``Mergers, Cartels,
Set-Asides, and Bidding Preferences in Asymmetric Oral Auctions,''
Review of Economics and Statistics, 82(2): 283-290. These authors
concur with the Athey, Coey and Levin (2013) conclusion that a policy
of granting bidding preference to targeted bidders is superior to set-
asides.
(88) Thus, set-asides failed to increase auction revenue and the
amounts traded in timber auctions, even though a
theoretical argument could be made for large bidders having
an advantage over smaller ones in those auctions. It is
thus unreasonable to expect that set-asides primarily
benefitting large bidders, such as Sprint and T-Mobile,
would increase auction revenue (and auction efficiency as
well) in the Incentive Auction.
VI. Simulating the effects of bidding restrictions in past spectrum
auctions suggests large negative effects on revenue
(89) In this section, I describe my simulation analysis and results
of the impact of bidding restrictions if they had been
imposed on the FCC's AWS spectrum auction (Auction 66) and
700 MHz auction (Auction 73). These are two large,
relatively recent auctions in which Verizon and AT&T
participated. Sprint and T-Mobile participated in the AWS
spectrum auction, making that auction of interest for
examining how bidding restrictions on Verizon and AT&T
might affect those firms. The 700 MHz auction involved low-
frequency spectrum, similar to the Incentive Auction. Thus,
these two auctions provide useful test cases for the
effects of bidding restrictions.
(90) I simulate the effects of a number of different bidding
restrictions, all of which would have a significant effect
on the licenses that Verizon and AT&T would be able to bid
on in the Incentive Auction:
a. outright exclusion of AT&T and Verizon from the auction;
b. a 33 percent cap on low-frequency (below 1 GHz) spectrum
holdings, applied pre-auction by market, such that a
carrier would be excluded from bidding at auction in any
market where its pre-auction spectrum holdings exceed 1/3
of the low-frequency spectrum in that market;
c. a 33 percent cap on low-frequency spectrum holdings applied
post-auction by market, assuming that both AT&T and Verizon
purchase 20 MHz of spectrum at auction.\50\
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\50\ One of the problems with Sprint's and T-Mobile's proposals is
that it is not clear what amount of to-be-auctioned spectrum would be
included in the denominator for purposes of determining a bidder's
share of low-frequency spectrum. Given that the quantity of supply is
unknown prior to the Incentive Auction, how a spectrum aggregation cap
affects a participant's ability to bid in a particular market depends
on how much additional spectrum is cleared in the auction, which is an
unknown variable in the context of the Incentive Auction. That
constitutes a significant uncertainty regarding how the cap would be
applied. In the post-auction share cap exclusion scenarios, I assume
that a total of 70 MHz is reallocated in the Incentive Auction. In
other words, I assume the denominator used to calculate the firm's
share includes the presently-available low-frequency spectrum plus 70
MHz of to-be-auctioned spectrum. That is consistent with T-Mobile's
proposal that the FCC adopt a band plan featuring 35x35 MHz of paired
spectrum.
(91) The range of restrictions that I model is designed generally to
cover the types of restrictions being proposed that would
limit participation by AT&T and Verizon in the Incentive
Auction. Differences between past auctions and the
Incentive Auction, such as different license sizes (both
spectrally and geographically) and different amounts of
auctioned spectrum, make it difficult to model precisely
some of the specific proposals that have been presented.
For example, I understand that Sprint and T-Mobile have
proposed that if AT&T or Verizon would be completely
excluded from bidding in a particular market under their
proposed 1/3 cap on low-frequency spectrum holdings, a
``safety valve'' may be appropriate under which they could
bid on a small amount of spectrum (e.g., 10 MHz or 1/6 of
the to-be-auctioned spectrum). Although precise modeling of
the effects of such a policy is challenging, based on my
findings regarding the effects of restrictions that fall
short of outright exclusion, it is clear that any measure
that materially reduces the demand that AT&T and Verizon
bring to the Incentive Auction risks a material reduction
---------------------------------------------------------------------------
in auction revenue.
(92) Currently, both Verizon's and AT&T's individual shares of low-
frequency spectrum are at least 33 percent in many of the
172 Economic Areas (EAs) into which the United States was
divided by the Bureau of Economic Analysis of the U.S.
Department of Commerce at the time of the first FCC
auctions.\51\ Any Incentive Auction participation rule that
prevents a carrier from participating in the bidding if its
pre-auction low-frequency spectrum holdings are above the
33 percent threshold would be equivalent to excluding AT&T
and Verizon, as reported in Figure 10. The calculations are
based on 134 MHz of available low-frequency spectrum.
---------------------------------------------------------------------------
\51\ In 2004 the Bureau of Economic Analysis redefined its EAs,
increasing their number from 172 to 179. See http://www.bea.gov/SCB/
PDF/2004/11November/1104Econ-Areas.pdf. For the purposes of the AWS and
700 MHz Auctions, there were 176 EAs (see the band plans in Appendix
B).
---------------------------------------------------------------------------
Figure 10 The effect of spectrum aggregation caps on Verizon's and
AT&T's ability to bid in the Incentive Auction
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
* U.S. EAs only, that is, excluding Puerto Rico (EA
#173), U.S. territories (EAs #174-175) and Gulf of Mexico EA (#176).
Note: assumes Verizon's current Lower 700 MHz block B holdings are
assigned to AT&T and Grain, pursuant to transfer applications recently
approved by the FCC.
Source: Calculations based on current spectrum holdings data
provided by Verizon.
(93) Figure 10 also reports how extensive the restraint on Verizon
and AT&T would be under apparently less stringent
participation rules based on post-auction low-frequency
holdings. For illustrative purposes, I assume that the
Incentive Auction would reallocate 70 MHz of spectrum. I
then report the population in EAs where Verizon or AT&T
could not win 20 MHz of spectrum because that additional
spectrum would bring them above the 33 percent threshold
(that is, above 68 MHz).\52\ Figure 10 highlights how
limits, seemingly less stringent than outright exclusion,
would still have the effect of preventing Verizon from
procuring spectrum to serve over half of the U.S.
population.
---------------------------------------------------------------------------
\52\ If Verizon and AT&T theoretically sought to acquire only a
single 5x5 license, the proposed cap would exclude Verizon from markets
representing 50 percent of the population and AT&T would be excluded
from markets representing 30 percent. Although historical purchasing
patterns suggest that Verizon might not be interested in making a 5x5
MHz purchase, I simulated this scenario and found that it would have
led to revenue reductions in both of the auctions. Even assuming that
those smaller licenses would have substantial value by themselves (a
questionable assumption given the fixed costs Verizon and AT&T would
incur deploying spectrum in a new band class), my analysis indicates
revenue reductions of up to 25 percent under the simulation methodology
described below. That reduction likely understates the revenue effect
because I did not attempt to account for the lower levels of demand
(i.e., only a 5x5 license instead of the amount actually acquired in
the past auction) that AT&T and Verizon would have brought to the
auction under this assumption.
---------------------------------------------------------------------------
VI.A. Procedure
(94) For each auction under consideration, I identify the following
data:
1. The complete set of bid amounts and net bid amounts (the actual
paid amount including the bidding credit) submitted by each
participant in every round for each license offered in that
auction.
2. Information on whether particular bids were withdrawn or
dropped and the tie-breaking random numbers associated with
each bid.
3. Information on whether any of the bidders raised their own bid
even though they did not need to do so to remain the
highest bidder and the provisional winner in a particular
round.
(95) To determine the ranking of bidders, I first look at the
bidders' round-specific highest bids. If there are ties,
those are resolved by using the tie-breaking random numbers
assigned by the FCC.
(96) In my AWS spectrum auction and 700 MHz auction simulations, in
order to simulate the effects of bidder participation
restrictions, I assume that all bids in the auctions remain
as they were submitted, but I remove the bids of AT&T and
Verizon as appropriate for the particular restriction
scenario. For example, consider the effect of the exclusion
of Verizon in the bidding over a particular license. As
demonstrated in Figure 11, Verizon wins license AW-REA001-F
in round 16 and pays $1,335 million (highlighted in
yellow). The provisional winning bid for each round (shown
in bold) is defined as the round-specific highest bid (as
in round 9). If there are ties, I use the tie-breaking
random numbers assigned by the FCC to determine the
provisional winning bid (as in rounds 10 or 12). Now assume
that Verizon is not permitted to bid. The second-highest
bidder, in this case T-Mobile, wins and pays an amount that
exceeds the bid submitted by the third-highest bidder or
equals the bid of the third-highest bidder but has a higher
tie-breaking random number. In this example, T-Mobile pays
$644 million (highlighted in green), a bid that exceeds
Dolan's $537 million submitted in round 10. I refer to this
as the ``As bid'' method. I make adjustments for reserve
prices, the absence of other bidders, and ties.
Figure 11 AWS spectrum auction simulation example (license
AW-REA001-F)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: FCC documentation.
Note: The provisional winning bids for each round are in bold. The
original win is highlighted in yellow and the simulated win is in
green.
(97) As another example, if Verizon were the second-highest bidder
and so determined the price paid by the winner, then, when
excluding Verizon, I assume that the same bidder wins but
pays only the bid amount that would have been just enough
to outbid the third-highest bidder, again adjusting
appropriately for reserve prices. For instance, as
demonstrated in Figure 12, AT&T wins license WY-CMA167-B in
round 26 and pays $3.17 million (highlighted in yellow). If
Verizon and AT&T are not permitted to bid, the second
highest bidder, in this case MetroPCS, becomes a winner.
MetroPCS pays $1.66 million if I use the ``As bid'' method
(highlighted in blue) because in round 21 MetroPCS has to
overbid Verizon's $1.51 million submitted in round 20. But
if Verizon and AT&T are unable to bid, MetroPCS only needs
to overbid Alltel, which submitted $0.96 million in round
12. Hence, it is enough to bid only $1.15 million submitted
in round 13 by AT&T (highlighted in green). I refer to this
as the ``Minimum required bid'' method and use it in the
analysis that follows. This method is preferable to the
``As bid'' approach because it uses a more accurate model
of bidding behavior. In particular, bidders would
rationally bid only as much as it is necessary to overbid
the preceding highest bid.
Figure 12 700 MHz auction simulation example (license WY-CMA167-B)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: FCC documentation.
Note: The provisional winning bids for each round are shown in
bold. MetroPCS wins and pays $1.66 million under the ``As Bid''
simulation method (highlighted in blue) and only $1.15 million under
the ``Minimum required bid'' method (green).
(98) This methodology does not provide a perfect measure of the
effects of excluding bidders, but it has the advantage of
relying on the bids actually submitted at the auction to
estimate effects. On the one hand, it will understate the
revenue loss from excluding Verizon and AT&T in the
following types of cases. Suppose bidder A would like to
purchase one of two different licenses, which it views as
substitutes, and that in the auction it wins one license
and finishes as the second-highest bidder on the other,
losing to Verizon. When I reevaluate the bids without
Verizon, my methodology will predict that bidder A wins
both licenses, when bidder A, who wants only one of the two
licenses, might not have bid in such a way as to win both
(even though prices are lower in the absence of Verizon).
On the other hand, this methodology could theoretically
overstate the revenue loss from excluding bidders if the
absence of bidders such as Verizon and AT&T causes bidders
to win licenses they would not have otherwise, and the
acquisition of these licenses increases their value for
other licenses due to complementarities, causing them to
bid more aggressively on those other licenses. In addition,
my methodology could theoretically overstate the revenue
loss from exclusion if, for example, knowledge of the
exclusion of certain bidders prior to the auction induces
additional entry into the auction (in expectation of lower
prices) thus increasing the competitiveness of the auction.
However, I am not aware of any reason to expect that either
the understatement or overstatement effect that is possible
in my methodology would dominate.\53\
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\53\ As discussed in Section V.C above, the empirical evidence
appears to undercut the suggestion by some parties that bidding
restrictions on Verizon and AT&T might increase revenue by encouraging
the participation of other bidders.
(99) This approach allows a detailed examination on a license-by-
license basis of the potential impact of excluding specific
bidders in specific markets that I believe is informative
as to the likely effects of restrictions on bidder
participation. In the absence of Verizon and AT&T, I expect
that the bidding of other auction participants would have
been largely similar (especially given the anonymous
bidding format of 700 MHz Auction). Thus, I view the
simulation results as informative as to the revenue
reductions that one might expect to observe as a result of
restrictions on the ability of Verizon and AT&T to
participate.
VI.B. Results--Auction 66--AWS spectrum auction
(100) In this section I describe simulation results for the AWS
auction. Appendix C describes the band plan for this auction.
(101) As previously described, I considered three scenarios:
outright exclusion of AT&T and Verizon, a pre-auction 33
percent share cap applied to AT&T and Verizon, and a post-
auction 33 percent share cap assuming purchase of 20 MHz in the
market applied to AT&T and Verizon. Simulating the effects of
these exclusion scenarios results in a 15 percent to 16 percent
reduction in revenue.
Figure 13 Summary of simulated revenue reductions in the AWS spectrum
auction
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on the FCC data and documentation.
(102) As Figure 13 reports for the three scenarios, the simulation
estimates a revenue drop of between 15 and 16 percent. This
implies that a pre-or post-auction share cap of 33 percent
would have had almost the same effect as outright exclusion of
Verizon and AT&T in the AWS auction.
(103) I simulated the changes in the average price paid by top
bidders as a result of the exclusion of Verizon and AT&T. T-
Mobile enjoys the largest decrease in the average price per
MHz*POP as a result of the exclusion--18 percent. SpectrumCo
(Sprint) enjoyed a 6 percent decrease in the average price it
paid per MHz*POP.
(104) Also, I calculated the results of a hypothetical version of
the AWS auction in which all of the licenses were auctioned on
a CMA basis. This provides a robustness check and offers a way
to reduce effects related to the presence of small numbers of
large licenses. The results, which are set forth in Appendix D,
are similar to the results of the simulation of the actual
auction.
VI.C. Results--Auction 73-700 MHz auction
(105) I ran a similar simulation in the 700 MHz auction. This
auction involved six categories of licenses referred to as
Blocks A through F. Appendix C describes the band plan for this
auction.
(106) I simulate 700 MHz auction results under the same restriction
scenarios as in the AWS spectrum auction simulations. Figure 14
summarizes my results.
Figure 14 Summary of simulated revenue reductions in the 700 MHz
auction
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on the FCC data and documentation.
(107) In this auction, the revenue drop is even more dramatic. This
is likely because of the particularly intense competition
between Verizon and AT&T during that auction. In the 700 MHz
Auction, AT&T and Verizon often competed against each other
when bidding for 12 MHz of Block B CMA-level licenses. AT&T won
227 CMA-level licenses and paid $6,637 million. Verizon won 77
CMA-level licenses and paid $2,052 million.
(108) If, hypothetically, AT&T and Verizon had not bid against each
other in the auction,\54\ my analysis of the auction data
suggests that they would still have won all 304 CMA-level
licenses, but would have paid only $4,453 million instead of
$8,689 million. Thus, absent competition between AT&T and
Verizon, 700 MHz auction total revenues would be $14,722
million instead of $18,958 million--22 percent lower. That
result confirms that restrictions on Verizon and AT&T in the
Incentive Auction would limit not just the participation of two
significant buyers, but two significant buyers who have
historically competed aggressively against one another, to the
benefit of auction revenues.
---------------------------------------------------------------------------
\54\ There is no basis to expect, and no party appears to assert
otherwise, that Verizon and AT&T would risk violating both the FCC's
bidder collusion rules and the antitrust laws by agreeing to not bid
against one another.
(109) The fact that head-to-head competition between Verizon and
AT&T was robust also contradicts the suggestion that Verizon
and AT&T were pursuing a foreclosure strategy: they
collectively paid over four and a half billion dollars more for
their spectrum than they would have had to if their goal had
been to keep the spectrum out of the hands of competitors.
VII. Bidding restrictions in a simulated incentive auction
(110) In addition to the revenue simulations described above, I also
simulate the effects of restricting the participation in the
Incentive Auction using a theoretical model of a two-sided
auction.\55\ Although the model does not capture all the
complexity of the Incentive Auction, it does model the
important interaction between supply and demand in a two-sided
auction.
---------------------------------------------------------------------------
\55\ Our model is based on the two-sided auction mechanism of Simon
Loertscher and Claudio Mezzetti (2013), ``A Dominant Strategy Double
Auction with Multi-Unit Traders,'' Working Paper, University of
Melbourne, available at http://www.simonloertscher.net/data/downloads/
12120/LM-DoubAuc3.pdf. This paper introduces a double auction mechanism
in which buyers and sellers with multi-unit demand and supply have a
dominant strategy to bid truthfully. The mechanism produces nonnegative
revenue for the auctioneer and traders never regret participating (ex-
post individual rationality is satisfied). In this Loertscher-Mezzetti
double auction, the short side of the market trades at a single price,
while the long side trades at prices determined by the well-known in
the economics literature Vickrey-Clarke-Groves (VCG) mechanism (with a
reserve price).
(111) The interaction between supply and demand in a two-sided
auction makes the problem of designing an incentive auction
fundamentally different from the problem of designing a
standard auction. The auctioneer does not know how much buyers
are willing to pay nor how much sellers would require in order
to be willing to sell. The auction mechanism must elicit this
information from buyers and sellers, determine the quantities
to be exchanged, and determine the amounts to be charged to
buyers and paid to sellers, retaining the difference between
the total amount received from buyers and the total amount paid
to sellers as revenue to the auctioneer. Key ways in which a
two-sided incentive auction differs from the standard one-sided
auction include: \56\
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\56\ The discussion in this paragraph is based on Simon Loertscher,
Leslie M. Marx, and Tom Wilkening (2013), ``A Long Way Coming:
Designing Centralized Markets with Privately Informed Buyers and
Sellers,'' Working Paper, Duke University, available at https://
faculty.fuqua.duke.edu/ marx/bio/papers/incentiveauction.pdf.
(1) Fully efficient two-sided mechanisms do not generate
positive revenue. In a two-sided market, in order to
guarantee that goods are reallocated to their highest-value
use--in the case at hand, making sure that this one-time
opportunity to reallocate broadcast spectrum to higher-
value wireless services does not go to waste--the market
designer must be willing to take a loss in order to induce
both sides of the market to reveal their true valuation of
the object. In the Incentive Auction, as previously noted,
Congress and the FCC seek to generate positive revenue, so
---------------------------------------------------------------------------
a fully efficient mechanism is not an option.
(2) The revenue-efficiency trade-off is steeper in an
incentive auction. In order to maximize revenue, the market
designer must give up more in terms of the market's ability
to allocate licenses to the highest valuing users than in a
standard auction. Parties involved need to appreciate the
negative efficiency consequences of demands for revenue on
the Incentive Auction.
(3) The exclusion of strong buyers can have more severe
consequences in an incentive auction. An incentive auction
can be more sensitive to the exclusion of a strong buyer
than a standard auction. The effect is more pronounced the
stronger is the strong buyer and less pronounced as the
number of other buyers increases. In addition, in the
Incentive Auction, a reduction in the amount of spectrum
transacted has broader implications because it means that
less spectrum will be reallocated from broadcast use to
mobile wireless services and could potentially affect the
repacking of the remaining broadcast licenses.
(112) The simple two-sided auction model that I present in this
section illustrates the trade-offs that the auctioneer faces
and how the exclusion of bidders negatively affects the
outcomes that the auctioneer may expect to realize. The
auctioneer's two conflicting goals are auction revenue
maximization on one hand and efficiency maximization on the
other (i.e., the goal of facilitating all transactions for
which the buyer values the good more than the seller).
(113) If the auctioneer knows how much each seller and each buyer
values the goods for sale, the auctioneer can achieve both
goals by allowing all the trades where the buyer values the
good more than the seller, and then requiring that each trading
pair surrender the (positive) difference between their two
values. However, in real world situations, the auctioneer will
not know how much each seller and each buyer values the goods
for sale, and therefore the auctioneer needs to design a
mechanism to induce them to reveal such private information
through their bids. In order to earn revenue, the auctioneer
necessarily must reduce the number of trades below the
efficient level. The distortion in the number of transactions
may be large if the auctioneer seeks to maximize its revenue
from the two-sided auction at the expense of efficiency.
(114) In what follows, I show how market conditions, including the
number of potential traders and their uncertain valuations from
the auctioneer's point of view, give rise to a range of
possible outcomes. These outcomes reflect the inherent trade-
off in two-sided markets between auctioneer revenue and the
efficiency of the auction. The outcome implemented by an
auctioneer will depend on the auctioneer's preferences between
the two conflicting goals. I show that the exclusion of bidders
can substantially worsen the range of outcomes available to the
auctioneer.
VII.A. Procedure
(115) I calculate a relatively simple example to illustrate the
trade-off between auctioneer revenue and efficiency and the
effect of bidder exclusion. Given that this model is purely
illustrative and not meant to be a quantitative prediction of
the effects of exclusion, I do not attempt to calibrate it to
expected parameter values. In my set-up, 10 potential sellers
each holding 1 unit of a homogenous good face 5 potential
buyers, each interested in purchasing up to 4 units.
(116) The auctioneer does not know how much the potential sellers
value the units that they own. The auctioneer only knows that
the value for any given seller is between $0 and $1 and that
values between $0 and $1 are equally likely. Thus, I assume
that the auctioneer expects that, on average, an individual
seller values her unit at $0.50, but the auctioneer knows that
among the 10 sellers some sellers will randomly draw values
much less than $0.50 (and hence, relatively more willing to
sell) and some sellers will randomly draw values much more than
$0.50 (hence, relatively less willing to sell). In particular,
the auctioneer expects that, if it could see the valuations and
line them up from lowest to highest, there would be a range of
seller values spread between $0 and $1.\57\
---------------------------------------------------------------------------
\57\ I assume that sellers draw values randomly from the uniform
distribution over the unit interval.
(117) Similarly, the auctioneer does not know how much potential
buyers are willing to pay for each of the 4 units each buyer is
interested in. The auctioneer only knows that the value any
given buyer places on a unit is between $0 and $1, but I assume
that values greater than $0.50 are relatively more likely so
that the auctioneer expects that, on average, an individual
buyer will value an individual unit at $0.75.\58\
---------------------------------------------------------------------------
\58\ More formally, I assumed that each buyer's value for a given
unit is a random variable with support [$0, $1] and cumulative
distribution F(x) = x\3\.
(118) To illustrate the trade-off between auction revenue and
auction efficiency, I consider the outcomes the auctioneer can
expect to achieve if it runs a two-sided auction mechanism
based on the work of Loertscher and Mezzetti (2013). We can
view the mechanism as a two-sided version of a multi-unit
Vickrey auction with a reserve price,\59\ which is a multi-unit
extension of a second-price auction, in which bidders submit
bids and the high bidder wins but pays only the amount of the
second-highest bid. In Appendix E, I provide the technical
details behind the illustrative simulations results presented
in this section.
---------------------------------------------------------------------------
\59\ See Vickrey, William (1961), ``Counterspeculation, Auctions,
and Competitive Sealed Tenders,'' Journal of Finance, 16: 8-37. This
mechanism is sometimes referred to as a Vickrey-Clarke-Groves auction,
as Clarke and Groves independently reached similar conclusions, see
Clarke, E.H. (1971), ``Multipart Pricing of Public Goods,'' Public
Choice, XI, 17-33, Groves, Theodore (1973), ``Incentives in Teams,''
Econometrica, 41: 617-31.
---------------------------------------------------------------------------
VII.B. Results
(119) A two-sided auction can be designed to emphasize revenue or to
emphasize efficiency through the selection of auction design
parameters. In the model I use, a design that provides
relatively high payments to sellers encourages them to supply
more units, which tends to increase efficiency but reduce
expected auctioneer revenue. A design that provides relatively
low payments to sellers not only lowers the price paid to
sellers but also reduces the number of units supplied, which
increases competition among the buyers and thus increases the
average price buyers pay and the expected revenue to the
auctioneer. Therefore, depending on the auction design, the
auctioneer can emphasize revenue, efficiency, or balance the
two.
(120) That trade-off in my model is depicted in Figure 15. (See
Appendix E for the details underlying this illustration.)
Expected auctioneer revenue is on the vertical axis, and the
expected number of units reallocated or traded is represented
on the horizontal access, where a larger number of units
reallocated implies that the auction is more efficient. The
curves in Figure 15 are downward sloping, which indicates that
auction designs that produce greater expected revenue also
produce a lower expected number of trades.
(121) The blue line in Figure 15 shows the combinations of average
revenue and numbers of trades that are feasible without
exclusion. That is, without exclusion, if the auction is
designed to maximize revenue, the auctioneer can expect to earn
nearly $2 with an average of 4 units changing hands. If instead
the auction is designed to maximize efficiency, the auctioneer
will expect to earn less than $0.50 with an average of
approximately 7.5 units changing hands. The blue curve between
these two extremes represents all of the intermediate
combinations of expected revenue and number of trades that are
achievable depending on the auction design parameters
chosen.\60\ Similarly, the green curve depicts the combinations
that are achievable if two of the five identical buyers are
excluded.
---------------------------------------------------------------------------
\60\ These combinations of revenue and numbers of trades are
achievable in an expected sense. The values of the buyers and sellers
are random in the model. Therefore, for a given reserve price the
number of trades and revenue will depend on the actual values drawn.
The combinations of revenue and numbers of trades are the mean outcomes
when values are redrawn and auction rerun many times.
---------------------------------------------------------------------------
Figure 15 Expected number of trades and auction revenues in a simple
two-sided auction
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations.
VII.B.1. Exclusion of bidders in a two-sided mechanism worsens the
choices
available to an auctioneer
(122) In my illustrative model, the number of units traded are not
calibrated to real-world values, so I redraw Figure 15 to
express the shift inward of the auction outcomes under
exclusion as a percentage of the maximum number of trades
achievable under no exclusion--the point representing
approximately 7.5 units in Figure 15 corresponds to 100 units
in Figure 16 below. Similarly, because auction revenues in the
model are not calibrated to real-world values, I redraw the
figure so that approximately $2.00 in auctioneer revenues in
Figure 15 corresponds to 100 in Figure 16.
Figure 16 Impact of exclusion in a simple two-sided auction (max trades
under no exclusion=100; max auctioneer revenue under no
exclusion=100)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations.
(123) As shown in Figure 16, exclusion reduces the maximum
auctioneer revenue by just under 20 percent. (You can see this
in the figure by noting that the maximum revenue value for the
green line is just over 80.) Exclusion also reduces the
efficiency-maximizing number of trades by approximately 15
percent. (The maximum number of trades for the green line is
approximately 85.) An auctioneer aiming to find a compromise
solution between these two conflicting targets stands to lose
more than 20 percent on auction revenue and more than 15
percent on efficiency from exclusion. (The green line is more
than 20 percent below the blue line, except close to the point
of maximum revenue where it is slightly less than 20 percent
below, and the green line is more than 15 percent to the left
of the blue line.)
(124) The set of revenue levels and numbers of transactions that can
be achieved in a two-sided mechanism shifts down and to the
left (towards lower revenue levels and fewer trades) when
buyers are excluded. Bidding restrictions mean that the maximum
possible revenue is reduced and the maximum number of
transactions that can be achieved is reduced. Furthermore, the
feasible set of revenue levels and numbers of transactions is
worsened from the perspective of the auctioneer.
VII.B.2. Exclusion of bidders in a two-sided mechanism can cause
revenue and transaction goals to be unattainable
(125) As described above (see para. (20)), the Incentive Auction
must raise a minimum level of revenue in order to succeed in
reallocating licenses from broadcast TV to mobile wireless
services. In addition, although not required by the authorizing
legislation, it is clear that the Incentive Auction is being
relied upon to fund the First Responder Network Authority
(FirstNet) (see fn. 7).
(126) Furthermore, the National Broadband Plan calls for the FCC to
take steps to reallocate 120 MHz from the broadcast TV bands as
part of the goal of making an additional 300 megahertz between
225 MHz and 3.7 GHz available for mobile use by 2015. As
described in the National Broadband Plan, ``Incentive auctions
can be especially useful where fragmentation of spectrum
licenses makes it difficult for private parties to aggregate
spectrum in marketable quantities.'' \61\
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\61\ National Broadband Plan, Section 5.3, http://
www.broadband.gov/.
(127) If minimum thresholds of revenue and quantity transacted are
required for the auction to succeed, then the elimination of
two buyers can make achieving those thresholds impossible,
causing the auction to fail. This case is illustrated in Figure
17, which assumes that auction success requires at least 70
percent of the maximum number of trades and 60 percent of the
maximum revenue achievable under unrestricted competition. The
blue-shaded box represents the range of outcomes that satisfy
both requirements for auction success. As Figure 17 shows,
exclusion results in failure to satisfy either requirement.
Figure 17 Exclusion may cause the illustrative two-sided auction to
fail
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations.
(128) My understanding is that there are substantial technical
challenges associated with configuring a band plan that makes a
reasonable amount of paired spectrum available to wireless
operators. Specifically, I understand that no party has
presented a band plan designed to repurpose paired spectrum if
the amount of cleared spectrum is less than 72 MHz in numerous
markets because that is the minimum amount needed to configure
a 25x25 MHz band plan. Given the potentially drastic result of
an outcome where that minimum clearing threshold is not met,
imposing restrictions that would materially suppress the
quantity of spectrum repurposed would present a particularly
acute risk of outright auction failure.
(129) Therefore, bidding restrictions on buyers at the Incentive
Auction have the potential to create an environment in which
the goals for the Incentive Auction of revenue generation and
spectrum reallocation cannot be achieved. In this sense,
bidding restrictions can cause the Incentive Auction to fail.
VII.C. Proposals for a contingent auction would distort the auction
process and
potentially contribute to auction failure
(130) T-Mobile recently proposed that the FCC apply strict bidding
restrictions to Verizon and AT&T, but if certain revenue goals
are not met, then the restrictions would be relaxed and the
auction rerun, and so on, relaxing the restrictions repeatedly
until revenue goals are met.\62\ That proposal would increase
the complexity of an already complex Incentive Auction and
would increase the risk of auction failure. Rerunning auctions
can cause a number of problems from increased risk of
coordinated bidding to distorted bidding incentives in an
effort to game the system, which in complicated auctions can be
difficult to predict and therefore avoid. In addition, even if
such a mechanism theoretically allows the auction to achieve a
revenue target, bidding restrictions will still decrease the
amount of reallocated spectrum. Perhaps the most fundamental
problem with the T-Mobile proposal is that it subverts the
benefits of a two-sided auction as a means of determining the
efficient allocation. The proposal would use a revenue target
determined outside of the auction context to determine the
amount of spectrum to be reallocated, but there is no way such
a revenue target can reasonably be expected to achieve an
efficient reallocation. If the auction were to meet the
arbitrary set of revenue targets with restrictions on Verizon
and AT&T, it is likely that the auction would have reallocated
additional spectrum and/or raised more revenue had there been
no restrictions.
---------------------------------------------------------------------------
\62\ See http://apps.fcc.gov/ecfs/document/view?id=7520934888.
(131) It has been shown in the economics literature that contingent
re-auctions are generally neither efficient nor optimal for the
seller.\63\ Strategic bidding in the 700 MHz auction as a
result of the contingent re-auction format has been documented
in the economics literature.\64\ In order to avoid incentives
for strategic bidding in the proposed auction format, detailed
and potentially complex and restrictive activity rules would
have to be put in place. However, such complicated restrictions
would likely reduce the efficiency of the auction and would
themselves create additional harmful effects.
---------------------------------------------------------------------------
\63\ Sandro Brusco, Giuseppe Lopomo, and Leslie M. Marx (2011),
``The Economics of Contingent Re-Auctions,'' American Economic Journal:
Microeconomics 3(2), 165-193.
\64\ Sandro Brusco, Giuseppe Lopomo, and Leslie M. Marx (2009),
``The `Google Effect' in the FCC's 700 MHz Auction,'' Information
Economics and Policy 21, 101-114.
(132) One such harmful effect is illustrated by T-Mobile's attempt
to address potential strategic bidding incentives by imposing
an ``activity rule'' under which restrictions would be relaxed
only in markets where the restricted bidders are actively
bidding. That rule creates an exposure risk because it may
require restricted bidders to bid on licenses that in and of
themselves are of little value in order to retain and expand
their eligibility to bid on the licenses they actually want.
Take the example of a restricted bidder whose business plan
calls for a 10x10 MHz license in a particular market and who
places little value on a single 5x5 license. If the bidder only
has ``headroom'' under the cap to bid on a single 5x5 MHz
licenses, under T-Mobile's proposal it would need to bid on a
license that has little value by itself in order to have a
chance of acquiring the license it does want. A firm in that
position may choose not to bid on the smaller license because
of the risk that it wins it without the ability also to acquire
the complementary licenses that are needed for its business
plan. That exposure problem is further complicated and
exacerbated by the fact that, under the cap, firms will have
different levels of headroom in different markets, which
introduces an additional layer of complexity for firms
interested in acquiring footprint-wide licenses of particular
---------------------------------------------------------------------------
sizes.
(133) T-Mobile's proposal would also compromise the ability of
restricted bidders to move their demand between geographic
markets based on price feedback received during the auction.
Consider a firm that is interested in acquiring a license in
either Milwaukee or Kansas City, but not in both markets. Under
a normal auction, that bidder could first seek to acquire a
license in Kansas City and see how the bidding proceeds there,
and then it may choose to shift its demand to Milwaukee if the
Kansas City license becomes too expensive. Auction designs that
support the ability of bidders to move demand between markets
have been promoted by the FCC. But under the proposal, that
strategy would be prohibited because the firm would lose its
ability to bid in Milwaukee if it has not been actively bidding
there starting in round one. The result is that a rational firm
may not acquire any license even though it would have acquired
a license in an unrestricted auction.
(134) The exposure risks and strategic bidding incentives created by
the proposal would not be limited to the restricted bidders.
For example, the risk that the proposal leaves money on the
table is heightened by the fact that non-restricted bidders
would have the incentive to bid strategically to ensure that
the revenue is target is met, but not exceeded, in order to
avoid letting the restricted bidders have the opportunity to
bid on more spectrum, which would increase overall bidding.
(135) In sum, my prediction on the auction outcome under T-Mobile's
proposal is that Sprint and T-Mobile would raise their bids
just enough to meet the revenue target and win the licenses at
depressed prices. They and/or other winners at the auction
would then have the ability to sell that spectrum on the
secondary market to Verizon and AT&T at higher prices.
VIII. Conclusion
(136) I have analyzed proposals to restrict the participation of
Verizon and AT&T in the Incentive Auction in order to prevent
the anticompetitive foreclosure of smaller rivals. The evidence
does not support assertions that anticompetitive foreclosure is
likely. (1) I have reviewed the outcomes of previous auctions
and find no evidence of foreclosure. (2) The evidence from
secondary market transactions and previous auctions suggests
that Sprint and T-Mobile failed to take advantage of numerous
opportunities to purchase low-frequency spectrum. (3) A review
of the pricing plans offered by Verizon, AT&T, Sprint, and T-
Mobile is consistent with the conclusion that the networks of
Verizon and AT&T are capacity constrained relative to Sprint
and T-Mobile, implying that little would be gained from
foreclosing Sprint and T-Mobile. (4) As both Verizon and AT&T
would supposedly benefit from foreclosure of Sprint and T-
Mobile, incentives to free ride on the other's efforts would
further reduce any gains from foreclosure. (5) Successful
foreclosure is complicated and made more costly by the fact
that, in the Incentive Auction, an increase in bid amounts to
deny Sprint and T-Mobile spectrum will tend to increase the
amount of spectrum supplied to the market. (6) Finally, the
market for wireless services does not appear to be sufficiently
concentrated to make foreclosure profitable.
(137) While not addressing a real problem, proposals to restrict the
bidding of Verizon and AT&T conflict with the goals of the
Incentive Auction: reallocation of spectrum to higher valued
uses and revenue generation. In order to assess the impact of
bidding restrictions, I have simulated their impact on Auction
66 (AWS) and Auction 73 (700 MHz) and found that restrictions
would have significantly reduced the revenue generated in those
auctions. In addition, I have simulated the exclusion of two
bidders in an illustrative example of a two-sided market
similar in structure to the Incentive Auction. The results
illustrate the trade-off faced by an auctioneer in a two-sided
setting between revenue generation and efficiency. Excluding
bidders reduces both the amount of spectrum reallocated and the
potential revenue generated.
(138) The Incentive Auction represents a unique opportunity to
reallocate underutilized spectrum to higher valued uses. It
would be particularly unwise to artificially reduce demand in
the Incentive Auction through restrictions on the bidding of
Verizon and AT&T. Bidding restrictions conflict with the goals
of the Incentive Auction by reducing both the amount of
spectrum reallocated and the revenue potential of the auction.
Such restrictions risk a complete failure of the auction by
making the achievement of minimum revenue and spectrum
reallocation thresholds impossible to achieve. Despite the
evidence I have presented, if the FCC believes that foreclosure
by Verizon and AT&T of smaller rivals is a real problem, I urge
the FCC to consider other less distortionary policies to
address the potential problem, such as build-out requirements
and anonymous bidding. Complicated bidding procedures and
bidding restrictions on top of an already complicated two-sided
auction put at risk the goals of the Incentive Auction. I find
such proposals both unnecessary and counterproductive.
______
Appendix A. Curriculum vitae of Leslie M. Marx, PhD
A.1. Education
PhD, Economics, Northwestern University
MA, Economics, Northwestern University
BS, Mathematics, Duke University
A.2. Professional experience
Fuqua School of Business, Duke University, Robert A.
Bandeen Professor of Economics, 2013-present
Fuqua School of Business, Duke University, William and
Sue Gross Research Fellow and Professor of Economics, 2012-
2013
Fuqua School of Business and Department of Economics,
Duke University, Professor of Economics, 2008-2013
Associate Professor of Economics, Fuqua School of
Business, Duke University, 2002-2008
Chief Economist, U.S. Federal Communications Commission,
August 2005-August 2006
Associate Professor of Economics and Management, W.E.
Simon Graduate School of Business Administration,
University of Rochester, 2000-2002
Visiting Associate in Economics, California Institute of
Technology, January 2000-June 2000
Associate Professor of Economics and Management, W.E.
Simon Graduate School of Business Administration,
University of Rochester, 1999-2000
Assistant Professor of Economics and Management, W.E.
Simon Graduate School of Business Administration,
University of Rochester, 1994-1999
A.3. Teaching
MBA: Managerial Decision Analysis, Managerial Game
Theory, Environmental Economics
Executive MBA: Managerial Economics, Managerial Decision
Analysis, Managerial Game Theory
PhD: Game Theory, Industrial Organization
A.4. Publications
``Tacit Collusion in Oligopoly'' (with Edward Green and
Robert C. Marshall). In Oxford Handbook of International
Antitrust Economics, eds. Roger D. Blair and D. Daniel
Sokol. Oxford University Press, forthcoming.
``Economics and the Efficient Allocation of Spectrum
Licenses'' (with Simon Loertscher). In Mechanisms and Games
for Dynamic Spectrum Access, eds. Tansu Alpcan, Holger
Boche, Michael L. Honig, and H. Vincent Poor. Cambridge
University Press, forthcoming.
``The Economics of Auctions and Bidder Collusion'' (with
Robert C. Marshall and Michael J. Meurer). In Game Theory
and Business Applications, 2nd ed., eds. Kalyan Chatterjee
and William F. Samuelson. New York: Kluwer Academic
Publishers, forthcoming.
The Economics of Collusion: Cartels and Bidding Rings
(with Robert C. Marshall). Cambridge: MIT Press, 2012.
``Plus Factors and Agreement in Antitrust Law'' (with
William E. Kovacic, Robert C. Marshall, and Halbert L.
White). Michigan Law Review 110, no. 3 (2011): 393-436.
Winner of the Tenth Annual Jerry S. Cohen Memorial Fund
Writing Award given for the best antitrust writing during
the prior year.
``Bidder Collusion at First-Price Auctions'' (with
Giuseppe Lopomo and Peng Sun). Review of Economic Design
15, no. 3 (2011): 177-211.
``Carbon Allowance Auction Design: An Assessment of
Options for the U.S.'' (with Giuseppe Lopomo, David
McAdams, and Brian Murray). Review of Environmental
Economics and Policy 5, no. 1 (2011): 25-43.
``Coordinated Effects in the 2010 Horizontal Merger
Guidelines'' (with Wayne-Roy Gayle, Robert C. Marshall, and
Jean-Francois Richard). Review of Industrial Organization
39, no. 1 (2011): 39‒56.
``The Economics of Contingent Re-Auctions'' (with Sandro
Brusco and Giuseppe Lopomo). American Economic Journal:
Microeconomics 3, no. 2 (2011): 165-93.
``Break-Up Fees and Bargaining Power in Sequential
Contracting'' (with Greg Shaffer). International Journal of
Industrial Organization 28, 451-463 (2010).
``Slotting Allowances and Scarce Shelf Space'' (with Greg
Shaffer). Journal of Economics & Management Strategy 19,
no. 3 (2010): 575-603.
``Cartels as Two-Stage Mechanisms: Implications for the
Analysis of Dominant-Firm Conduct'' (with Randall D. Heeb,
William E. Kovacic, and Robert C. Marshall). Chicago
Journal of International Law 10, no. 1 (2009): 213-31.
``Individual Accountability in Teams'' (with Francesco
Squintani). Journal of Economic Behavior & Organization 72,
no. 1 (2009): 260-73.
``Quantitative Analysis of Coordinated Effects'' (with
William E. Kovacic, Robert C. Marshall, and Steven P.
Schulenberg). Antitrust Law Journal 76, no. 2 (2009): 397-
430.
``The `Google Effect' in the FCC's 700 MHz Auction''
(with Sandro Brusco and Giuseppe Lopomo). Information
Economics and Policy 21 (2009): 101-14.
``The Vulnerability of Auctions to Bidder Collusion''
(with Robert C. Marshall). Quarterly Journal of Economics
124, no. 2 (2009): 883-910.
``Cartel Price Announcements: The Vitamins Industry''
(with Robert C. Marshall and Matthew E. Raiff).
International Journal of Industrial Organization 26 (2008):
762-802. Awarded the 2009 Paul Geroski Best Article Prize
for one of the best two articles published in the
International Journal of Industrial Organization in 2008.
``Bidder Collusion'' (with Robert C. Marshall). Journal
of Economic Theory 133 (2007): 374-402.
``Coordinated Effects in Merger Review: Quantifying the
Payoffs from Collusion'' (with William E. Kovacic, Robert
C. Marshall, and Steven P. Schulenberg). In Annual
Proceedings of the Fordham Competition Law Institute:
International Antitrust Law & Policy, ed. Barry E. Hawk,
271-85 (Huntington, NY: Juris Publishing, Inc., 2007).
``Exploring Relations Between Decision Analysis and Game
Theory'' (with Jules van Binsbergen). Decision Analysis 4
(2007): 32-40.
``Lessons for Competition Policy from the Vitamins
Cartel'' (with William E. Kovacic, Robert C. Marshall, and
Matthew E. Raiff). In The Political Economy of Antitrust,
vol. 282, eds. Vivek Ghosal and Johan Stennek, 149-176 (New
York: Elsevier, 2007).
``Rent Shifting and the Order of Negotiations'' (with
Greg Shaffer). International Journal of Industrial
Organization 25 (2007): 1109-25.
``Upfront Payments and Exclusion in Downstream Markets''
(with Greg Shaffer). RAND Journal of Economics 38 (2007):
823-43.
``Bidding Rings and the Design of Anti-Collusion Measures
for Auctions and Procurements'' (with William E. Kovacic,
Robert C. Marshall, and Matthew E. Raiff). In Handbook of
Procurement, eds. Nicola Dimitri, Gustavo Piga, and
Giancarlo Spagnolo, 381-411 (Cambridge: Cambridge
University Press, 2006).
``Economics at the Federal Communications Commission.''
Review of Industrial Organization 29 (2006): 349-68.
``Inefficiency of Collusion at English Auctions'' (with
Giuseppe Lopomo and Robert C. Marshall). Contributions in
Theoretical Economics 5, no. 1 (2005): article 4, http://
www.bepress.com/bejte/contributions/vol5/iss1/art4.
``Opportunism and Menus of Two-Part Tariffs'' (with Greg
Shaffer). International Journal of Industrial Organization
22 (2004): 1399-1414.
``Opportunism in Multilateral Vertical Contracting:
Nondiscrimination, Exclusivity, and Uniformity: Comment''
(with Greg Shaffer). American Economic Review 94 (2004):
796-801.
``The Joint Determination of Leverage and Maturity''
(with Michael J. Barclay and Clifford W. Smith, Jr.).
Journal of Corporate Finance 9 (2003): 149-67. Winner of
Outstanding Paper in Corporate Finance at the 1997 Southern
Finance Association Meetings.
``Adverse Specialization'' (with Glenn M. MacDonald).
Journal of Political Economy 109 (2001): 864-99.
``Insurer Ownership Structure and Executive Compensation
as Complements'' (with David Mayers and Clifford W. Smith,
Jr.). Journal of Risk and Insurance 68 (2001): 449-63.
Winner of Outstanding Paper in Financial Services at the
1998 Southern Finance Association Meetings.
``Dynamic Voluntary Contribution to a Public Project''
(with Steven A. Matthews). Review of Economic Studies 67
(2000): 327-58.
``Adaptive Learning and Iterated Weak Dominance.'' Games
and Economic Behavior 26 (1999): 253-78.
``Odd-Eighth Avoidance as a Defense Against SOES
Bandits'' (with Eugene Kandel). Journal of Financial
Economics 51 (1999): 85-102.
``Payments for Order Flow on Nasdaq'' (with Eugene
Kandel). Journal of Finance 54 (1999): 35-66.
``Predatory Accommodation: Below-Cost Pricing Without
Exclusion in Intermediate Goods Markets'' (with Greg
Shaffer). RAND Journal of Economics 30 (1999): 22-43.
``Process Variation as a Determinant of Bank Performance:
Evidence from the Retail Banking Study'' (with Frances
Frei, Ravi Kalakota, and Andrew Leone). Management Science
45 (1999): 1210-20.
``Efficient Venture Capital Financing Combining Debt and
Equity.'' Review of Economic Design 3 (1998): 371-87;
Winner of the Koc University Prize for the Best Paper of
the Year in Review of Economic Design.
``The Effects of Transaction Costs on Stock Prices and
Trading Volume'' (with Michael J. Barclay and Eugene
Kandel). Journal of Financial Intermediation 7 (1998): 130-
50.
``Cost Effective Use of Muscle Relaxants: A Decision
Analysis'' (with Jeffrey S. Rubenstein, Wendy Colin, Darryl
Jackson, Craig Lockwood, and Janice Molloy). Pediatrics 100
(1997): 451-52.
``Nasdaq Market Structure and Spread Patterns'' (with
Eugene Kandel). Journal of Financial Economics 45 (1997):
35-60.
``Order Independence for Iterated Weak Dominance'' (with
Jeroen M. Swinkels). Games and Economic Behavior 18 (1997):
219-45. ``Corrigendum.'' GEB 31 (2000): 324-29.
A.5. Working papers
``Antitrust Leniency with Multi-Product Colluders'' (with
Robert C. Marshall and Claudio Mezzetti), 2013.
``A Long Way Coming: Designing Centralized Markets with
Privately Informed Buyers and Sellers'' (with Simon
Loertscher and Tom Wilkening), 2013.
``Monopolization Conduct by Cartels'' (with Robert C.
Marshall and Lily Samkharadze), 2013.
``Buyer Resistance for Cartel versus Merger'' (with
Vikram Kumar, Robert C. Marshall, and Lily Samkharadze),
2013.
``Buyer Power, Exclusion, and Inefficient Trade'' (with
Greg Shaffer), 2009.
``Opportunism and Nondiscrimination Clauses'' (with Greg
Shaffer), 2002.
A.6. Grants
National Science Foundation Grant #SES-0849349, Applied
Mechanism Design, 2009-2011
National Science Foundation Grant #SES-0001903,
``Economic Analysis of Sequential Vertical Contracting
Environments,'' 2000-2001
Emerging Scholar Program Grant from the American
Compensation Association, ``Compensation and Control in
Entrepreneurial Ventures,'' 1997
A.7. Selected honors and awards
Honored as an FCC Woman Leader by The Minority Media and
Telecommunications Council, April 2013
Honored as one of the Global Competition Review Top 100
Women in Antitrust, March 2013
Named Financial Times Business School Professor of the
Week, July 2012
Awarded the 2012 Tenth Annual Jerry S. Cohen Memorial
Fund Writing Award, given to the best antitrust writing
during the prior year (Awarded for ``Plus Factors and
Agreement in Antitrust Law,'' published in the Michigan Law
Review)
Awarded the 2009 Paul Geroski Best Article Prize for one
of the best two articles published in the International
Journal of Industrial Organization in 2008
Simon School Teaching Honor Roll, 1999, 2001
Koc University Prize for the Best Paper of the Year in
Review of Economic Design, 1998
Outstanding Paper in Financial Services at the Southern
Finance Association Meetings, 1998
Outstanding Paper in Corporate Finance at the Southern
Finance Association Meetings, 1997
Alfred P. Sloan Doctoral Dissertation Fellowship, 1993-
1994
National Science Foundation Graduate Fellowship, 1989-
1992
A.8. Professional activities
Council Member of Game Theory Society, 2013-present
Editorial Board of International Journal of Game Theory,
12/2009-present
Editorial Board of Journal of Economic Literature, 2010-
2012
Advisory Editor for Games and Economic Behavior, 2010-
2012
Editorial Board of American Economic Journal:
Microeconomics, 2007-present
Academic Affiliate of the Center for the Study of
Auctions, Procurements and Competition Policy at Penn State
University, 2007-present
Associate Editor, International Economic Review, 2002-
2005
Appendix B. Secondary market transactions, all bands
Figure 18 Number of transactions, all bands, January 2007-May 2013
(whole and partial licenses)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on FCC data and documentation.
Appendix C. Band plans for spectrum auctioned in the AWS and 700 MHz
auctions
(139) The figures in this appendix provide background information on
the band plans used in the AWS and 700 MHz Auctions.
Figure 19 Auction 66 (AWS-1) band plan, reserve price, and minimum
opening bids
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: FCC documentation. Note: As for the reserve price, the FCC
ruled as follows: ``the winning bids (net of bidding credits) in the
auction must total at least approximately $2.06 billion in order for
the Commission to conclude the auction and award the licenses.'' (FCC
06-47, April 12, 2006)
Figure 20 Auction 73 (700 MHz) band plan, reserve prices, and winning
bids
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: FCC documentation.
Appendix D. Results assuming CMA-only licenses
(140) In Auction 66, AWS licenses were defined over 734 small
Cellular Market Areas (CMA), over 176 larger Economic Areas
(EA), and over 12 large Regional Economic Area Groups (REAG).
Under the 33 percent share exclusion rule, if the weighted
average MHz market share of low-band spectrum for a large REAG
were below 33 percent, AT&T and Verizon would be allowed to bid
for such a license. However, if the proposed Incentive Auction
is conducted at the CMA level, AT&T and Verizon would be
excluded from many CMA markets within the REAG. Alternatively,
AT&T or Verizon could be excluded from a particular REAG as a
result of the 33 percent share exclusion rule, but would have
been allowed to bid in many of the CMA markets within the REAG.
Therefore, basing exclusion on shares in larger geographic
regions may distort the degree of exclusion from the 33 percent
share exclusion rule. As a robustness check, we rescale the AWS
spectrum auction so that all licenses are over a CMA. I find
that my results are generally consistent with my simulation
results without this rescaling.
(141) In order to account for the circumstances described above, I
use the Auction 66 results to create a new set of auction
results. For each EA and REAG license, I create a set of
artificial licenses associated with each CMA within an EA or
REAG. In order to simulate bidding on these artificial CMAs, I
assume that the bidders on the artificial CMA licenses are the
same as the bidders for the associated EA or REAG, and I
allocate the bids on the EA or REAG to the artificial CMA
licenses proportionally to the population of the CMA. By
creating these artificial CMA licenses, I create an auction in
which each CMA has 6 licenses associated with it, one from
Block A, which was the original CMA license, and others from
Blocks B, C, D, E, and F, represented by the artificial
licenses with scaled-down bids.\65\ In this way, I can
demonstrate how simulation results change if the 33 percent
share cap is applied at the CMA level instead of at the EA or
REAG level.
---------------------------------------------------------------------------
\65\ Counties from one CMA can be included in several EAs or REAGs.
In such cases, I allocate all of a CMA's counties to an EA or a REAG
that accounts for the highest population share in this CMA.
(142) The results based on the artificial auction with CMA-only
licenses do not differ much from the original simulation
results. The auction revenue would fall significantly in all
scenarios: from 16 percent in the outright exclusion scenario
to 8 percent in the scenario in which AT&T and Verizon are
excluded from the CMA markets where their post-auction spectrum
share would have been above 33 percent had they purchased 10
MHz of spectrum. When exclusion is made at the CMA-level, the
degree of exclusion (and associated revenue reduction) based on
post-auction shares after 10 MHz purchase in the auction is
much higher than the exclusion with the actual set of AWS
---------------------------------------------------------------------------
spectrum licenses (see footnote 49).
(143) Figure 21 and Figure 22 report simulation results of exclusion
in an artificial AWS auction with CMA-only licenses. Auction
revenue would fall nearly 16 percent in an outright scenario,
and 10-14 percent in share capped exclusion scenarios.
Figure 21 Simulated auction revenue change with artificial CMA-only AWS
spectrum auction licenses in different scenarios of Verizon and
AT&T exclusion
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on the FCC data and documentation.
(144) The results based on the auction with CMA-only licenses show
that Verizon and AT&T, even under capped exclusion, lose the
bulk of their MHz*POPs. These MHz*POPs are captured by T-Mobile
and SpectrumCo.
Figure 22 Simulated percent change in the MHz*POP with CMA-only AWS
spectrum auction licenses in different scenarios of Verizon and
AT&T exclusion
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations based on the FCC data and documentation.
Appendix E. Modeling details for the simulated incentive auction
(145) In this appendix, I provide an overview of the Vickrey
mechanism as applied to the sale of multiple units, where
buyers potentially desire more than one unit. I refer to this
as the multi-unit Vickrey mechanism. I begin by discussing this
mechanism in an environment where the auctioneer owns the items
for sale. This is the ``one-sided'' setting. Then I discuss the
mechanism in an environment like the Incentive Auction where
the auctioneer must provide incentives for sellers to
participate. This is the ``two-sided'' setting.
(146) Let me first illustrate the multi-unit Vickrey mechanism in a
one-sided setting--that is, where the auctioneer owns the items
to sell (so the auctioneer does not have to induce sellers to
reveal their willingness to pay). In a single-unit case, the
auctioneer will open the sealed envelopes and award the item to
the highest bidder (provided her bid exceeds the reserve
price), but, using the Vickrey mechanism, the auctioneer will
charge the winner the amount offered by the second-highest
bidder.
(147) In the case of multiple units for sale, buyers submit bids
consisting of multiple amounts: a bid for the 1st unit, a bid
for the 2nd unit, a bid for the 3rd unit, and a bid for the 4th
unit. If there are, say, 4 units for sale, the auctioneer
awards the items to the bidder(s) who have placed the 4 highest
bids (this could be a single buyer whose bids placed in the top
four spots in the ranking). The identification of the winners
is thus an easy extension of the single-item set-up--the
highest bids win.
(148) The determination of the amount each winning bidder must pay
for each unit she won is slightly more complex when more than
one unit is being sold, but still follows quite
straightforwardly from the single-unit set-up. In the single-
unit set-up, the auctioneer can be thought of saying to the
winner: ``If you had not participated, I would have given the
item to the second-highest bidder. Because she was willing to
pay the amount she wrote in her envelope, I am now asking for
that amount from you (unless the second-highest bid is below
the reserve price, in which case you owe me the reserve
price).''
(149) In the multi-item set-up, consider for example a bidder who
placed 2 of the top 4 highest bids. The auctioneer would say:
``If you had not participated, two lower bids that did not make
the top-4 list would have now made the top-4 to replace your
bids. As a consequence, I am now charging you those two amounts
for the two units you actually won (unless those lower bids
that would replace your two bids are below the reserve price,
in which case you owe me the reserve price).''
(150) Vickrey's mechanism induces the bidders to truthfully bid
their valuations because it gives a bidder no incentive to lie
about her valuation: by under-reporting her willingness to pay,
a potential buyer only hurts her chances to be named the winner
(her bid is less likely to make it to the top of the list), but
it does not reduce the amount she pays if she wins because that
amount does not depend on her bid at all. It depends only on
the nonwinning bids of other buyers.
(151) Because my illustrative model pertains to a two-sided auction
rather than a one-sided multi-unit Vickrey auction, the
auctioneer will proceed as follows (see Loertscher and
Mezzetti, 2013).
(152) First, the auctioneer will call out a reserve price and ask
buyers and sellers to bid, that is, to report their willingness
to pay or to accept in exchange for the license (which they
have an incentive to do). Once both sides have submitted their
bids, the auctioneer will count how many sellers have submitted
a bid below the reserve price: these are the units available
for sale at that reserve price. Similarly, the auctioneer will
determine how many units the buyers demand at the reserve
price.
(153) When the units offered at the reserve price are fewer than the
units demanded (suppliers are on the ``short side''), the
auctioneer will pay each willing seller the reserve price; the
auctioneer will then run a one-sided Vickrey auction to select
the winning buyers and determine the price they will pay.
(154) Each winning buyer (who could win one or more units) pays a
``personalized'' price for each unit won--as described above,
the highest bid(s) that would have made the winning circle in
her absence, or the reserve price, whichever is highest.
(155) Conversely, when the units offered at the reserve price are
more than the units demanded, the buy-side is the short side
that determines how many units are traded. The auctioneer will
collect the reserve price from each of them. The auctioneer
will then run a one-sided Vickrey auction among the sellers to
select the winners (those asking for the lowest payments), and
pay them ``personalized'' prices--the next-highest request in a
winner's absence, or the reserve price, whichever is the
lowest.
(156) For each possible reserve price that the auctioneer could set
between $0.05 and $0.95 (in increments of 5 cents), I have
computed the average number of trades and corresponding average
auction revenues the auctioneer can expect to realize.\66\
These results are illustrated in Figure 15.
---------------------------------------------------------------------------
\66\ This is based on 5,000 random draws for the sellers' and the
buyers' valuations.
(157) For the purposes of Figure 15, I have assumed that buyers
demand up to 20 units while suppliers will offer only up to 10
units. Moreover, I have assumed that buyers are expected, on
average, to be willing to pay more for any given unit, $0.75,
than the sellers are asking to give it up, $0.50. Under these
assumptions, an efficiency-driven auctioneer wishing to
maximize the number of efficient transactions will use a
reserve price well above $0.50 (about $0.80), inducing all but
the extremely high valuing sellers to give up their units. Then
the auctioneer will take advantage of high demand (at that
reserve price, sellers will still be more likely than not on
the short-side, i.e., demand at a price of $0.80 likely exceeds
supply) to assign those units to buyers valuing them more than
---------------------------------------------------------------------------
the reserve price via the Vickrey mechanism among buyers.
(158) An auctioneer can increase expected auction revenue at the
expense of efficiency by using a lower reserve price. The lower
reserve price reduces the number of trades, but allows the
auctioneer to collect higher prices from the buyers, who on
average will be on the long-side competing for those fewer
sales in most or all of the random draws. In my simulation, the
highest expected revenue (the top-left point on the blue curve)
that can be achieved occurs when the auctioneer uses a reserve
price of approximately $0.40. While only 4 units are sold on
average in this case, the ``personalized'' prices that the
auctioneer can extract from each buyer--the expected 5th
highest valuation, the first unit that does not make the top
4--is about $0.90, yielding a $0.50 = $0.90--$0.40 unit margin
per sale and $2.00 in auction revenues. By using a high reserve
price, the auctioneer acts like a profit-maximizing monopolist
that restricts the quantity traded in order to collect high
margins.
Senator Thune. Instead of exploring auction rules to
arbitrarily limit or benefit certain carriers, the FCC has the
ability to consider setting a limit on the amount of spectrum
any single bidder can win in the incentive auction. Such a
limit applying equally to every bidder would at least allow all
companies to have a fair shot at acquiring the spectrum they
need while preventing any single entity from winning all the
licenses.
At a minimum, such a proposal should be explored, as it
seems to make sense and could result in an open and competitive
auction. I hope our witnesses spend some time discussing this
and other reasonable ways to find consensus on forward auction
bidding.
Another way to encourage more bidder activity and to
benefit rural areas in particular is to auction licenses in a
variety of geographic sizes. At a previous hearing, our
committee heard that offering spectrum licenses covering
smaller geographic areas can result in more bidders, more
license winners, more revenue, and better service to rural
areas. This approach appeared to work quite well in the 700-
megahertz auction that occurred in 2008.
I would like to hear our panelists' thoughts on how smaller
license sizes have been used in the past, what the results have
been, and how they could play a role in the broadcast incentive
auction.
Mr. Chairman, the FCC should not be distracted by proposals
that could lead to less spectrum being made available and less
auction proceeds being realized for national priorities like
deficit reduction and FirstNet.
Thanks again for holding today's hearing, and I look
forward to hearing from our panelists.
Senator Pryor. Thank you.
And, again, I want to thank all the panelists for being
here. And you all know that your written statements will be
made part of the record, which we understand will be a more
complete statement than what you will give here in a few
moments.
We would ask that you all, if you could, limit your remarks
to 3 minutes each. Typically we go 5 minutes, but the rumor
going around the Senate rumor mill--we don't know if it is ever
true, but we think we are going to be having votes around 4 on
the floor. I don't know if we can finish this hearing by then,
but if we can keep the opening-statement portion shorter, we
will have a better chance of doing that.
So let me just run through who is on the panel, and then I
will recognize Mr. Epstein.
First we have Gary Epstein, Chair of the Incentive Auction
Task Force and Special Advisor to the Chairman at the Federal
Communications Commission.
Next we have Ms. Joan Marsh, Vice President, Federal
Regulatory Affairs, AT&T Services, Inc.
Then we have Mr. Hal Singer, Senior Fellow, Progressive
Policy Institute.
Then we have Mr. Steven K. Berry, President and Chief
Executive Officer, Competitive Carriers Association.
Then Mr. Preston Padden, Executive Director, Expanding
Opportunities for Broadcasters Coalition.
Next is Mr. Rick Kaplan, Executive Vice President, National
Association of Broadcasters.
And last and certainly not least, we have Mr. Harold Feld,
Senior Vice President of Public Knowledge.
Mr. Epstein?
STATEMENT OF GARY EPSTEIN, SPECIAL ADVISOR
AND CHAIR, INCENTIVE AUCTION TASK FORCE,
FEDERAL COMMUNICATIONS COMMISSION
Mr. Epstein. Good afternoon, Chairman Pryor and Ranking
Member Thune and members of the Committee. Thank you very much
for the opportunity to discuss the Commission's efforts to
carry out Congress's statutory direction in designing and
implementing the Broadcast Television Spectrum Incentive
Auction.
This voluntary, market-based means of repurposing spectrum
for mobile broadband is an important part of ensuring that our
wireless networks are capable of supporting the critical
economic, public safety, healthcare, and other important
services which are guided by the four primary principles
expressed in the Spectrum Act: one, alleviating spectrum
constraints to economic growth and development by creating a
market-based process for repurposing the maximum amount of UHF
spectrum for licensed and unlicensed flexible use; two,
fulfilling our statutory obligations and congressional
objectives that include reimbursing repacked broadcasters,
helping to fund FirstNet, and reducing the deficit; three,
providing a unique financial opportunity for participating
broadcasters while preserving a healthy broadcast service for
those who do not contribute their spectrum; and, four,
promoting innovation and allowing the U.S. to continue to lead
the world in a new generation of licensed and unlicensed
wireless technologies.
Throughout the proceeding, we have engaged stakeholders and
the public to promote an open dialogue about how the auction
should work, listened to the stakeholders, analyzed the complex
issues, and worked to design and develop the actual software
systems.
Stakeholder engagement has been the cornerstone of this
proceeding. We have released detailed public notices seeking
comment. We have held six public workshops on topics including
channel sharing, the band plan, broadcast transition costs, and
the unlicensed spectrum in the 600-megahertz band, and
participated in over 300 ex parte meetings. In addition, we
expect to release additional public notices before we finalize
our recommendations.
Our new chairman is at the helm, and we have a full
commission with the addition of Commissioner O'Rielly. We have
been conducting extensive briefings on the full range of
incentive auction issues under consideration.
As Chairman Pryor noted, Chairman Wheeler recently issued a
blog on Friday stating that we expect to complete developing
policy recommendations and to present these policy
recommendations to the Commission in a proposed report and
order early next year. This will enable the Commission to vote
on the report in the spring.
Following the adoption of the report and order, in the
second half of the year we plan to release an auction comment
public notice and procedures public notice. This timeline will
allow us to conduct the auction in mid-2015.
Throughout our entire process, we will be researching,
developing, testing, and retesting the operating system and
software necessary to conduct the auction. We will ensure that
the auction operating system and software meet the strictest
performance requirements and work from the moment the first bid
is placed until the final broadcast station is repacked.
We have made significant strides with respect to each of
the closely interrelated components and plan to make the
auction a success. We will hold an auction which fulfills the
statutory objectives and congressional priorities, including
funding FirstNet, making a substantial amount of spectrum
available for flexible use, preserving a healthy broadcast
industry, and promoting innovation.
Thank you very much.
[The prepared statement of Mr. Epstein follows:]
Prepared Statement of Gary Epstein, Special Advisor and Chair,
Incentive Auction Task Force, Federal Communications Commission
Good morning, Chairman Rockefeller, Ranking Member Thune, and
members of the Committee. My name is Gary Epstein and I am the Special
Advisor and Chair of the Federal Communications Commission's Incentive
Auction Task Force. Thank you for the opportunity to discuss the
Commission's efforts to carry out Congress's statutory direction in
designing and implementing the Broadcast Television Spectrum Incentive
Auction.
This voluntary market-based means of repurposing spectrum for
mobile broadband is an important part of ensuring that our wireless
networks are capable of supporting the critical economic, public
safety, healthcare and other important services on which our Nation's
citizens rely. In our effort to design and implement the auction, we
are guided by four primary public interest objectives expressed in the
Middle Class Tax Relief and Job Creation Act of 2012:
One, alleviating spectrum constraints to economic growth and
development by creating a market-based process for repurposing
the maximum amount of UHF spectrum for licensed and unlicensed
flexible use.
Two, fulfilling our statutory obligations and Congressional
objectives that include reimbursing repacked broadcasters,
helping to fund FirstNet, and reducing the deficit.
Three, providing a unique financial opportunity for
participating broadcasters while preserving a healthy broadcast
service for those who do not contribute their spectrum.
And four, promoting innovation and allowing the U.S. to
continue to lead the world in a new generation of licensed and
unlicensed wireless technologies.
Throughout the proceeding, we have engaged stakeholders and the
public to promote an open dialogue about how the auction should work,
listened to stakeholders to improve our processes, analyzed the complex
issues underlying the auction's various components, and worked to
design and develop the actual software systems that will run the
auction.
Stakeholder engagement has been the cornerstone of this proceeding.
We have released detailed Public Notices seeking comment on band plans,
the new OET-69 methodology and TVStudy software for predicting and
analyzing interference among television stations, repacking data of
permissible channel assignments based on TVStudy, and broadcaster
relocation costs. We also have held six public workshops on topics
including channel sharing, the band plan, broadcaster transition costs
and unlicensed spectrum in the 600 MHz band, and participated in over
300 ex parte meetings. In addition, we expect to release additional
public notices on key issues before we finalize our recommendations for
the Report and Order.
Our new Chairman is at the helm and we have a full Commission with
the addition of Commissioner O'Rielly. We have been conducting
extensive briefings on the full range of incentive auction issues under
consideration. Chairman Wheeler recently stated that since his arrival
he has spent more time working on the Broadcast Television Spectrum
Incentive Auction than any other single issue. While we are still in an
open proceeding and the Commission has made no final determinations, we
are confident that the full Commission will provide invaluable
leadership both in guiding our consideration of policy options and in
charting a path to a successful auction.
As Chairman Wheeler announced this past Friday, we expect to
complete developing policy recommendations and to present these policy
recommendations to the Commission in a proposed R&O early next year.
This will enable the Commission to vote on the R&O in the spring.
Following the adoption of the R&O, in the second half of next year,
we plan to release an Auction Comment Public Notice and a Procedures
Public Notice that will provide additional details and seek comment on
specific parts of the auction. This timeline will allow us to conduct
an auction in mid-2015.
Throughout our entire process, we will be researching, developing,
testing, and retesting the operating systems and software necessary to
conduct the auction. As with every part of this proceeding, our
software development process will continue to be open and transparent
and will involve opportunities for stakeholder input. We will ensure
that the auction operating systems and software meet the strictest
performance requirements and ``work from the moment the first bid is
placed until the final broadcast station is repacked.''
We have made significant strides with respect to each of the
closely interrelated components of the incentive auction and have a
plan to make this auction a success. We will hold an auction that
fulfills our statutory objectives and Congressional priorities,
including funding FirstNet, makes substantial amounts of spectrum
available for flexible use, preserves a healthy broadcast industry, and
promotes innovation. We recognize that we must get the incentive
auction right and will spare no effort to ensure that the auction is
both well designed and well implemented.
Thank you very much. I would be happy to take any questions you may
have.
Senator Pryor. Thank you.
Ms. Marsh?
STATEMENT OF JOAN MARSH, VICE PRESIDENT,
FEDERAL REGULATORY, AT&T
Ms. Marsh. Thank you, Chairman Pryor and Ranking Member
Thune, for inviting AT&T to join in the discussion today.
Much has changed since the incentive auction proceeding was
initiated by the Commission last fall. A once-struggling T-
Mobile has dramatically improved its spectrum portfolio by
acquiring additional spectrum and, earlier this year, MetroPCS.
Fortified by its improved spectrum position, T-Mobile has
completed a robust LTE deployment and now runs ads claiming
that its network is less congested than AT&T's. And in each of
the last two quarters, T-Mobile led the industry in postpaid
phone ads.
SoftBank/Sprint, for its part, now has by far the largest
spectrum arsenal in the industry. Indeed, its spectrum holdings
are so significant that it shocked the wireless industry a few
weeks ago when it announced it was no longer interested in
pursuing the H Block at auction, a block of spectrum that it
had long pursued.
Against this backdrop of robust competition, the FCC has
made substantial progress on the incentive auction proceeding,
and it has built a significant record on a wide range of
issues. Yet many open issues remain, including the key question
of who should be permitted to participate at the auction and by
what rules. That will be the focus of my comments today.
AT&T continues to believe that an open and unrestricted
auction will raise the most revenue at auction while producing
a multiplicity of winners. History shows this is true. In the
700-megahertz auction, which was open and unrestricted, over
200 entities qualified to participate and over 100 bidders won
licenses. While some allege that AT&T dominated that auction,
the fact is that AT&T bid on and won spectrum in only a single
block of the five blocks available at auction.
Nonetheless, some argue that new rules must now be adopted
for the incentive auction to ensure a multiplicity of winners.
If that is the goal, the lead proposal for restrictions in the
auction, the T-Mobile Dynamic Market Proposal, falls far short.
T-Mobile's proposal would impose dramatic restrictions on AT&T
and Verizon, while leaving T-Mobile and others free to run the
table should they so choose. Indeed, if T-Mobile's proposal
were adopted, AT&T and Verizon would be limited to bidding on a
single 5-megahertz pair in most major markets, an amount that
even T-Mobile admits is inefficient for LTE deployment.
AT&T continues to believe that any restriction that
disadvantages some bidders to the advantage of others is
discriminatory, inefficient, and contrary to statutory language
and objectives. We also believe that such an approach will
ultimately undermine auction success.
In stark contrast to T-Mobile's proposal, some countries
have adopted auction rules that define either by megahertz or
percentage the amount of spectrum any one bidder can acquire at
auction. Like any proposals that restrict auction
participation, these proposals could suppress bidding
competition and impact auction revenues. But, assuming such
limits were adopted appropriately, this approach would at least
ensure multiple winners in a fair and nondiscriminatory manner.
One final note on scoring. We are convinced by recent
advocacy that no scoring is the best approach. It is simple and
transparent, it avoids price discrimination, and perhaps most
importantly, it will motivate participation. Without willing
participants, this auction cannot succeed.
Thank you.
[The prepared statement of Ms. Marsh follows:]
Prepared Statement of Joan Marsh, Vice President, Federal Regulatory,
AT&T
Thank you, Chairman Rockefeller, and Ranking Member Thune, for
inviting AT&T to join in the discussion today.
Much has changed since the incentive auction proceeding was
initiated by the Commission last year. T-Mobile has substantially
bolstered its spectrum footprint with additional AWS holdings, and
earlier this year, it completed its acquisition of MetroPCS. Over the
last few quarters, T-Mobile has re-emerged as a formidable competitor.
Indeed, during each of the last two quarters, T-Mobile added more
branded postpaid phone customers than either AT&T or Verizon.
SoftBank/Sprint for its part emerged victorious in a battle with
Dish to solidify its ownership of Clearwire and now has the largest
spectrum arsenal in the industry. According to Sprint's CEO, this
spectrum gives Sprint ``competitive parity'' and ``will give us
extraordinary capacity and some speed and performance advantages in the
market.'' Indeed, its spectrum holdings are so significant that it
recently announced it was no longer interested in pursuing the PCS H
Block at auction, a block that is adjacent to PCS spectrum that Sprint
already holds and thus uniquely suited to Sprint, and a block Sprint
had long fought to protect.
These recent developments underscore the robust and intensifying
competition that characterizes the mobile wireless services market in
the United States.According to the FCC's most recent report to
Congress, the U.S. market remains among the least concentrated in the
world--over 90 percent of Americans have 4 or more providers from which
to choose, and more than 99 percent of Americans have access to mobile
broadband services. Usage continues to skyrocket, with data traffic
more than doubling every year for the last four years. Capital
investment by the industry has increased as carriers deploy advanced
technology and deploy more site density to keep up with demand. And
despite soaring capital investment, prices have been in steady decline,
with the average price of a minute of voice usage falling from from
$0.47 to less than $0.04 over the last 18 years. SMS prices have fallen
continuously since 2008, and data prices fell from $0.47 per megabyte
to $0.05 per megabyte, an 89 percent decrease, in just two years.\1\
While the FCC has declined in its recent reports to draw any broad
conclusions about just how intensely competitive the wireless industry
is, the data in its reports speak volumes: this is an intensely
competitive market, not one where regulatory intervention is necessary
to preserve competition.
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\1\ 16th Report at 2.
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This robust competition has made the U.S. industry the envy of the
world. U.S. customers use more wireless service than elsewhere, and
they pay much less for it. We lead the world in LTE deployment and
adoption. We lead the world in smartphone adoption. The most advanced
network technologies, smartphones and applications are released in the
U.S. first. The reallocation of UHF-TV spectrum to mobile wireless use
will be critically important to ensure that this leadership can
continue, by affording wireless carriers the opportunity to continue to
grow, to advance, and to innovate.
Against the backdrop of all of this competitive activity, the FCC
has made substantial progress on the incentive auction proceeding and
has built a significant record on a wide range of issues, including the
band plan, auction design and repacking. Yet, many open issues remain,
including the key question of who should be permitted to participate at
auction and by what rules. That will be the primary focus of my
comments here today.
AT&T continues to believe that an open and unrestricted auction is
the best way forward. First, an open auction is the fairest method to
assign licenses because it ensures that all applicants have the same
opportunity to obtain spectrum. Second, an open auction would allow
market competition, rather than regulation, to allocate spectrum,
ensuring that it is put to its best and highest use. Third, an open
auction will raise the most revenue at auction, maximizing the amount
of spectrum made available for mobile broadband, while raising funds
for public safety and deficit reduction. Moreover, an open auction will
produce a multiplicity of winners. History shows this is true. In the
700 MHz auction--which was open and unrestricted--over 200 entities
qualified to participate and over 100 bidders won licenses. While AT&T
is often accused of dominating that auction, the fact is that AT&T bid
on and won spectrum in only a single block of the 5 spectrum blocks
available.
It bears noting that this single block of spectrum, combined with
additional allocations AT&T acquired on the secondary market, have been
the foundation for billions of dollars of investment in LTE deployments
that have helped to make the United States the world leader in mobile
broadband. By that measure, the 700 MHz auction was an enormous
success.
Similarly, the AWS auction in 2006 was an open auction, and it
attracted 167 different applicants. Notably, T-Mobile, not AT&T or
Verizon, was the big winner in that auction. What history shows,
therefore, is that no one ``runs the table'' in an open auction, and--
if there were any lingering concerns about that possibility--the
heightened scrutiny triggered by the Commission's existing spectrum
screen is more than sufficient to address those concerns.
Nonetheless, some argue that new rules must now be adopted for the
incentive auction to ensure a multiplicity of winners. If that is the
goal, the lead proposal for restrictions in the auction--T-Mobile's
Dynamic Market Proposal--falls far short. T-Mobile's proposal would
impose dramatic restrictions on only two potential bidders--AT&T and
Verizon--while leaving T-Mobile free to amass as much spectrum as it
chooses, and at prices depressed by the restrictions on AT&T and
Verizon. Indeed, if T-Mobile's proposal were adopted, AT&T and Verizon
would be allowed to bid on only a single 5MHz pair in most major
markets, an amount that even T-Mobile admits is too little to deploy
LTE efficiently.
The purported justification for proposed auction restrictions are
that a carrier must have some low band spectrum--spectrum below 1 GHz -
in order to compete effectively. If that were, in fact, true it begs
the question of why T-Mobile and Sprint, which are owned by two of the
largest telecommunications providers in the world, cannot obtain
spectrum through an open bidding process. As noted, they have won
spectrum at prior Commission auctions, even when faced with competing
bids by AT&T, Verizon and others. But in all events, the argument that
low band spectrum is a prerequisite to effective competition is
entirely belied by the facts.
As an initial matter, the fact that T-Mobile is adding customers
faster than its competitors, despite the fact that it has no ``low
band'' spectrum is proof in itself that low band spectrum is not
essential to compete effectively. Moreover, if low band spectrum were
as critical as T-Mobile and Sprint now claim, surely T-Mobile and
Sprint would have made some effort to obtain such spectrum at the only
recent auction of this spectrum or on the secondary market. In fact,
neither company even applied to bid at the auction, although over 100
other carriers bid and won band spectrum at that auction. Likewise,
while T-Mobile and Sprint have acquired huge amounts of spectrum on the
secondary market in the past year, they did not pursue low band
spectrum--despite the availability of such spectrum in the secondary
market. Instead, T-Mobile chose to acquire AWS spectrum from AT&T and
Verizon, and bought MetroPCS and its high band spectrum portfolio. For
its part, Sprint purchased Clearwire and its massive trove of high band
spectrum.
The reason T-Mobile and Sprint have not deemed it necessary to
obtain low band spectrum is because claims regarding the
indispensability of such spectrum are not true. While it is true that,
all else being equal, signals can propagate farther over low band
spectrum, there is no inherent network quality advantage in using low
frequency spectrum versus high frequency spectrum. As a matter of both
physics and engineering, a provider can achieve the same coverage with
either type of spectrum; it is merely a question of how the provider
builds out its network. Likewise, all providers can address in-building
penetration challenges with high-frequency spectrum by increasing
network density and deploying femtocells, picocells, wi-fi offload, and
other means. To be sure, denser networks cost more to build, but to the
extent high band spectrum entails higher build out costs, the spectrum
itself will sell for lower prices in the marketplace. This is critical
because the cost of provisioning a service includes spectrum costs as
well as network build out costs. Sprint and T-Mobile's claims about low
band spectrum simply write spectrum costs out of the equation.
Beyond that, and in all events, it is no longer the case that low
band spectrum permits significantly lower build out costs than high
band spectrum. To the contrary, the explosive growth of mobile
broadband services has dramatically diminished differences in the real
world costs of building out low band and high band spectrum, and that
trend will only accelerate in the coming years. As a result of this
dramatic growth, the industry faces what former FCC Chairman Julius
Genachowski referred to as a ``looming spectrum crisis,'' under which
the principal challenge facing wireless providers today is meeting
rapidly escalating demand for bandwidth. What that means is that in
today's broadband world, unlike the voice world of yesterday, network
deployments are driven by network capacity needs, not coverage.
Regardless of whether a carrier is using high band or low band
spectrum, it must build dense networks in all but the most rural areas
where network congestion is not an existing or looming challenge. And
to optimize building penetration, they must deploy small cells as well.
Indeed, the superior propagation of low band spectrum leads to certain
relative disadvantages in the form of increased interference between
cells, particularly in densely populated cities.
The restrictions T-Mobile proposes thus are not about ensuring that
Sprint and T-Mobile get access to an essential input--they are
pretextual. They are intended to ensure that AT&T and Verizon are
effectively excluded from the auction, and that T-Mobile itself has an
easy path to winning as much spectrum as it would like--at bargain
prices. This proposal is not pro-competitive; it is not consistent with
the intent of the authorizing legislation; it is not fair; and it is
not a reflection of informed public policy.
In stark contrast to T-Mobile's proposal, some countries have
adopted auction rules that define either by MHz or percentage the
amount of spectrum any one bidder can acquire at auction. Like any
proposals that restrict auction participation, these proposals could
suppress bidding competition and impact auction revenues. But assuming
the limits adopted permitted all winners to obtain at least a 10 x 2
paired allocation, this approach would at least ensure multiple winners
in a fair and nondiscriminatory manner--unlike the T-Mobile proposal,
which pretends to be fair, but which in reality tries to preclude
Verizon and AT&T from effective participation.
As to broadcaster participation, AT&T continues to believe that
broadcasters who come to auction are not selling a broadcast business.
They are relinquishing their rights to 6 MHz of spectrum much needed
for mobile wireless use. Indeed, as AT&T continues to study this
problem it is becoming more apparent that the issue that matters the
most is how difficult a broadcaster is to repack.
If a broadcaster that presents significant repacking challenges
agrees to surrender its spectrum, that deal should be struck, even if a
premium is necessary. Any valuation mechanisms adopted in the reverse
auction should be consistent with that reality and opening bid prices
should be set at a level that will encourage the broadest
participation.
Finally, a word on timing. This is by far the most complex auction
proceeding ever undertaken anywhere in the world. The Commission must
persuade two different sets of auction bidders to participate in two
separate but inter-related auctions. While those auctions proceed, the
Commission must conduct a dynamic repacking analysis that protects and
repacks the broadcasters that remain. The enormous complexity of this
task cannot be overstated. While AT&T is eager to see these new
allocations brought to market as soon as practical, we appreciate the
enormity of the task the Commission faces and believe that time must be
taken to get it right.
In conclusion, AT&T remains confident that under Chairman Wheeler's
leadership, the Commission will ultimately conduct a successful auction
that maximizes participation, raises significant revenue and achieves
all the attendant benefits Congress envisioned.
Senator Pryor. Thank you.
Mr. Singer?
STATEMENT OF HAL J. SINGER, Ph.D., SENIOR FELLOW, PROGRESSIVE
POLICY INSTITUTE
Mr. Singer. A key policy issue facing this committee is
whether to impose asymmetric limits on the amount of spectrum
that a bidder may acquire at the auction depending on the
location of the bidder's spectrum holdings--that is, whether to
impose an asymmetric spectrum cap.
In April of this year, the Department of Justice advocated
for policies that would support an asymmetric spectrum cap
designed to favor bidders that lacked so-called low-frequency
spectrum. And at his first major policy speech at Ohio State
last week, Federal Communications Commission Chairman Tom
Wheeler cited the DOJ's letter in support of such limits.
I want to make three simple points about the wisdom of an
asymmetric spectrum cap from the perspective of an economist
concerned with promoting consumer welfare.
First, as a condition of slanting the auction rules in a
way to favor certain bidders, one must establish empirically
that carriers without access to low-frequency spectrum are
impaired in their ability to compete effectively. Although this
particular input is not distributed uniformly across carriers,
it is hard to detect any impairment in the output market.
Despite its lack of low-frequency spectrum, Sprint's net
additions for contract customers were up 18 percent in 2012.
And during the third quarter of 2013, Sprint's postpaid service
revenues and average revenue per unit hit record levels.
T-Mobile, another carrier that relies largely on high-
frequency spectrum, enjoyed its biggest growth spurt in 4 years
in the second quarter of 2013, adding 1.1 million new
subscribers. In July, T-Mobile was gaining two subscribers from
AT&T for every one it lost to AT&T. This evidence is hard to
square with the notion of impairment.
If access to low-frequency spectrum were essential to
compete effectively, as the DOJ implies in its comments, then
AT&T and Verizon would be running away with the wireless prize.
But U.S. wireless concentration, as measured by the FCC, has
held steady since 2008. And if Sprint and T-Mobile continue to
grow faster and steal customers from AT&T and Verizon, wireless
concentration could actually decline in the coming years.
Perhaps the alleged impairment has manifested itself in the
form of rising wireless prices? Not here. With one exception in
2009, when prices held steady, U.S. wireless prices have
declined every year since the Bureau of Labor Statistics began
tracking them in 1998. According to a recent survey by Wall
Communications commissioned by the Canadian telecom regulator,
U.S. mobile broadband prices were within a few dollars of
comparable offerings of 5-gigabits-per-month plans in Canada,
the U.K., and in Japan.
Second, given the nascent and growing substitution between
wireless and wireline broadband services, regulators should not
narrowly focus on promoting wireless broadband competition.
Instead, they should be focused on promoting broadband
competition in any form.
According to the FCC's latest deployment data, 62 percent
of U.S. households had three or more broadband providers
capable of supporting download speeds of 6 megabits per second.
Adding one more broadband pipe to the remaining homes served by
one or two providers by stimulating investment by a large
nationwide wireless carrier will generate significantly greater
consumer benefits than promoting de novo wireless entry.
Third, and my last point, less restrictive remedies than
asymmetric spectrum caps can address any alleged impairment
leading to competition concerns. For example, if regulators do
not like the outcome of an unconstrained auction, they have the
power to compel ex-post divestiture under existing law.
And if regulators insist on going down the path of spectrum
caps, symmetric auction-specific caps that are agnostic to pre-
auction spectrum holdings and treat all bidders equally would
protect against the remote possibility that any single bidder
acquired too much spectrum at auction.
Thank you.
[The prepared statement of Mr. Singer follows:]
Prepared Statement of Hal J. Singer, Ph.D., Senior Fellow,
Progressive Policy Institute
The key policy issue facing this Committee is whether to impose
asymmetric limits on the amount of spectrum that a bidder may acquire
at the auction depending on the location of the bidder's spectrum
holdings--that is, whether to impose an ``asymmetric spectrum cap.'' In
April of this year, the Department of Justice (DOJ) advocated for
policies that would support an asymmetric spectrum cap designed to
favor bidders that lack low-frequency spectrum. And at his first major
policy speech at Ohio State last week, Federal Communications
Commission (FCC) Chairman Tom Wheeler cited the DOJ's letter in support
of such limits. I want to make four simple points about the wisdom of
an asymmetric spectrum cap from the perspective of a competition
economist concerned with promoting consumer welfare.
First, as a condition of slanting the auction rules in a way to
favor certain bidders, one must establish empirically that carriers
without access to low-frequency spectrum are impaired in the ability to
compete effectively. Although this particular input is not distributed
uniformly across carriers, it is hard to detect any impairment in the
output market. Despite its lack of low-frequency spectrum, Sprint's net
additions for contract customers were up 18 percent in 2012, and during
the third quarter of 2013, Sprint's postpaid service revenue and ARPU
hit record levels. T-Mobile, another carrier that relies largely on
high-frequency spectrum, enjoyed its biggest growth spurt in four years
in the second quarter of 2013, adding 1.1 million new subscribers. In
July, T-Mobile was gaining two subscribers from AT&T for every one it
lost to AT&T. This evidence is hard to square with the notion of
impairment.
If access to low-frequency spectrum were essential to compete
effectively, as the DOJ implies in its comments, then AT&T and Verizon
would be running away with the wireless prize: But U.S. wireless
concentration as measured by the FCC has held steady since 2008. And if
Sprint and T-Mobile continue to grow faster than and steal customers
from AT&T and Verizon, wireless concentration could decline in the near
future.
Perhaps the alleged impairment has manifested itself in the form of
rising wireless prices? With one exception in 2009, when prices held
steady, U.S. wireless prices have declined every year since the Bureau
of Labor Statistics began tracking them in 1998. According to recent
survey by Wall Communications commissioned by the Canadian telecom
regulator, U.S. mobile broadband prices were within a few dollars of
comparable offerings of 5 Gb per month plans in Canada, the U.K., and
Japan.
Second, although there may have been a role for smaller wireless
carriers in the past, given the massive and growing economies of scale
associated with providing nationwide wireless networks capable of
supporting bandwidth-intensive applications like streaming video, it
makes no sense to steer scarce spectrum away from companies with large
customers bases that have invested heavily in LTE networks in favor of
smaller companies that are ill-suited for this colossal undertaking. In
the presence of such economies, promoting small carriers is an
invitation for higher costs. U.S. consumers take pride in supporting
small businesses like cafes, brew pubs, restaurants, and boutiques, but
when it comes to wireless services, they want their provider to blanket
the country in LTE coverage.
Third, given the nascent and growing substitution between wireless
and wireline broadband services, regulators should not narrowly focus
on promoting wireless broadband competition. Instead, they should focus
on promoting broadband competition in any form. According to the FCC's
latest deployment data, 62 percent of U.S. households had three or more
broadband providers capable of supporting download speeds of 6 Mbps:
Adding one more broadband pipe to the remaining homes served by one or
two providers by stimulating wireless investment will generate
significantly greater consumer benefits than promoting entry among
wireless providers.
Fourth, less restrictive remedies than asymmetric spectrum caps can
address any alleged impairment leading to competition concerns. For
example, if regulators do not like the outcome of an unconstrained
auction, they have the power to compel ex-post divestitures under
existing law. And if regulators insist on going down the path of
spectrum caps, symmetric spectrum caps that are agnostic to pre-auction
spectrum holdings but instead treat all bidders equally would protect
against the remote possibility that any single bidder acquired ``too
much'' spectrum at the auction.
In sum, proponents of asymmetric spectrum caps have failed to meet
their evidentiary burden of establishing any evidence of impairment
among carriers that lack low-frequency spectrum. This Committee should
ask the FCC: How has this alleged impairment manifested itself? With
persuasive evidence of impairment leading to supra-competitive price or
reduced output, it would be reasonable to consider asymmetric spectrum
caps. But in its absence of such evidence, this policy appears designed
solely to benefit certain competitors at the expense of broadband
consumers and taxpayers.
Suggested Reading
The FCC's Incentive Auction: Getting Spectrum Policy Right, Progressive
Policy Institute Paper (2013), co-authored with David Balto.
Is the U.S. Government's Internet Policy Broken? Review of Susan
Crawford's ``Captive Audience,'' 5 Policy and Internet 340-63 (2013),
co-authored with Robert Hahn.
Avoiding Rent-Seeking in Secondary Market Spectrum Transactions, 65
Federal Communications Law Journal (2013), co-authored with Jeffrey
Eisenach.
Assessing Competition in U.S. Wireless Markets: Review of the FCC's
Competition Reports, 64 Federal Communications Law Journal (2012), co-
authored with Gerald Faulhaber and Robert Hahn.
Senator Pryor. Thank you.
Mr. Berry?
STATEMENT OF STEVEN K. BERRY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COMPETITIVE CARRIERS ASSOCIATION
Mr. Berry. Thank you, Chairman Pryor and members of the
Committee. Thank you for allowing me to testify.
I am here on behalf of CCA, the Nation's leading
association of competitive wireless carriers. Our association
is made up of over 100 competitive carriers, ranging from
small, rural providers serving less than 5,000 consumers to
regional and national providers serving millions of consumers.
The entire mobile ecosystem is dependent on vibrant
competition in the wireless industry, and access to spectrum is
a critical element in supporting competition. CCA's diverse
membership is bound together by a shared goal of a competitive
regulatory framework and a shared concern over the growing
market power of the ``Twin Bells.'' We do not need an industry
marching toward a duopoly.
I know several members of this committee, as well as the
FCC, DOJ, and the Small Business Administration, have voiced
similar concerns about the increasing consolidated nature of
the industry. The incentive auction provides a unique
opportunity to promote competition and allow carriers of all
sizes access to a limited resource that meets consumer demand.
CCA members are prepared to invest, to innovate, and to create
jobs, but competitive carriers must have a fair opportunity to
acquire the resources to compete. And the FCC has one shot to
get it right.
A successful incentive auction must attract sellers and
buyers alike, maximizing participation in both the reverse and
forward auctions.
In the forward auction, the FCC must provide all carriers a
meaningful opportunity to bid for spectrum, focusing on four
critical areas. This will increase competition, and we also
believe it will enhance revenues. All carriers, including the
largest carriers, must have an opportunity to bid on spectrum
where needed. One or two carriers should not be allowed to walk
away with the entire pie. Spectrum must be made available in
sufficiently small geographic areas to allow participation by
rural, regional, and nationwide carriers.
The 600-megahertz spectrum must be interoperable. This will
ensure open ecosystem access via every carrier. And I commend
the members of this committee for their work to restore
interoperability in the lower 700-megahertz band. And let's
learn from the past: Interoperability is essential.
Finally, policymakers should reject bidding packages that
keep smaller carriers from accessing spectrum.
And on the reverse-side auction, broadcasters must show up,
they must participate for a successful auction. The whole
purpose of the auction is to reallocate valuable, underutilized
spectrum to a higher, more efficient use--i.e., mobile
broadband. Failure could have significant consequences for
competition and consumers.
And under the statute, the Committee was wise. The proceeds
of the H Block, the AWS-3, and the incentive auction all will
fund FirstNet, a public emergency responder network. While the
reclaimed 600 megahertz is critical to the funding sources, the
incentive auction is one of several streams established under
the Spectrum Act to fund the creation of FirstNet.
So, fortunately, the goals of promoting competition and
raising revenue are not mutually exclusive. Auctions with the
greatest number of bidders are typically the ones that raise
the most revenue.
In summary, to meet these complex, multifaceted goals, CCA
proposes the FCC take steps to give every carrier the
opportunity to participate and possibly win in this much-needed
low-band spectrum for mobile broadband. And after a decade of
consolidation, a successful incentive auction is vital to
promote sustainable competition for the digital age.
Thank you for the opportunity.
[The prepared statement of Mr. Berry follows:]
Prepared Statement of Steven K. Berry, President and Chief Executive
Officer, Competitive Carriers Association
Chairman Rockefeller, Ranking Member Thune, and Members of the
Committee, thank you for inviting me to testify regarding the
implementation of the first-ever incentive spectrum auction. I am here
today on behalf of Competitive Carriers Association (``CCA''), the
Nation's leading association of competitive wireless carriers. Our
association is made up of over 100 competitive carriers ranging from
small, rural providers serving fewer than 5,000 customers to regional
and national providers serving millions of customers. We also represent
over 200 Associate Members--small businesses, vendors and suppliers
that provide products and services to carriers of all sizes and employ
your constituents. The entire mobile ecosystem is dependent on vibrant
competition in the wireless industry at all levels, and access to
finite electromagnetic spectrum is critical to supporting this
competition.
CCA's diverse membership is bound together by the shared goal of a
competitive regulatory framework and the shared concern over the
growing market power of the ``Twin Bells''--AT&T and Verizon. Through a
steady stream of acquisitions of both competitive carriers and
spectrum, these two dominant carriers have turned what once was a
robustly competitive wireless marketplace into an industry marching
towards duopoly. I know several members of this Committee, as well as
the Federal Communications Commission (``FCC'' or ``Commission''), the
Department of Justice (``DOJ''), and Small Business Administration have
voiced similar concerns about the increasingly consolidated nature of
the industry.
The incentive auction presents a unique opportunity to promote
competition in our consolidating industry. Carriers of all sizes
require increasing access to limited spectrum resources to provide the
services consumers demand. As the DOJ has noted, ``spectrum is a scarce
resource and a key input for mobile wireless services.'' Allowing all
carriers, and particularly competitive carriers, to access adequate
spectrum resources promotes competition. With an appropriate framework
for access to spectrum and other critical inputs, competitors are
prepared to invest, innovate, and create jobs to deliver significant
benefits to consumers and the economy. Like DOJ Antitrust Division
Assistant Attorney General William Baer recently stated, ``When you
have feisty rivals whose survival depends on innovating and
differentiating, they can gain market share and loosen the oligopoly.''
Amidst consolidation in our industry, the incentive auction
represents the only near-term opportunity for competitive access to
critical low-band frequencies. CCA commends Congress, and particularly
the leadership shown by this Committee, for authorizing the FCC to
conduct a voluntary incentive auction to reallocate licensed spectrum
for mobile broadband use through the Middle Class Tax Relief and Job
Creation Act of 2012 (``Spectrum Act''). We are also pleased with the
Commission's efforts, to date, to implement the Spectrum Act with a
watchful focus on the importance of competition. The upcoming incentive
auction is unique in many ways, including authorizing the FCC to
conduct only one reverse auction and repacking of broadcast television
spectrum. With one shot to complete this effort, it is vital that the
auction is structured to provide maximum benefits to competition and
consumers.
A successful incentive auction must attract sellers and buyers
alike, maximizing participation in both the reverse and forward
auctions. In the forward auction, the FCC must provide all carriers
with a meaningful opportunity to bid for needed spectrum. No one or two
carriers should be able to aggregate all the reclaimed spectrum and
effectively exclude rivals and potential rivals from access to low-band
frequencies. Consistent with the Spectrum Act, all carriers, including
the two largest carriers, must have an opportunity to bid on spectrum
where needed; however, no one should be allowed to foreclose
competitors' access. In addition to reasonable aggregation limits,
spectrum must be made available in sufficiently small geographic areas
to allow participation by rural, mid-size, and regional carriers, as
well as national providers. The 600 MHz spectrum also must be
interoperable, so that the largest carriers cannot use their massive
market power to prevent competitors from gaining access to the
necessary equipment to provide service using spectrum in the
reallocated band. Finally, policymakers should reject bidding packages
and blind bidding that may prevent competitive carriers from accessing
spectrum even if these other conditions are met, and include bidding
credits as appropriate. Beyond creating a successful forward auction,
appropriate incentives, outreach, and regulatory certainty are needed
for broadcasters to fully consider their options to maximize
participation. If broadcasters do not show up to participate in the
reverse auction, there will be no forward auction.
These goals and policies will not only promote competition and
benefit consumers, but will raise significant revenue for using
taxpayer-owned spectrum resources. Proceeds from the incentive auction
to fund the First Responder Network Authority (``FirstNet''), a
nationwide interoperable broadband network for public safety users,
must come from revenue generated in auctions of spectrum identified in
the Spectrum Act. While the broadcasters' reclaimed 600 MHz spectrum is
included, the incentive auction is one of several funding streams
established through the Spectrum Act that will fund the creation and
deployment of FirstNet. Revenue will also support deficit reduction,
911 services, and research and development. Fortunately the goals of
promoting competition and raising revenue are not mutually exclusive--
auctions with the greatest number of bidders are typically the ones
that generate the most revenue.
As a result of Congress's direction to the FCC to conduct
competitive spectrum auctions, competition was introduced, and many of
CCA's members entered the wireless market. After a decade of
consolidation, a successful incentive auction is vital to promote
sustainable competition for the digital age.
Benefits for Competition
Not all spectrum is created equal, which is why the incentive
auction of low-band spectrum is critical to restoring competition in
the wireless market. With its excellent propagation characteristics,
low band spectrum (or spectrum below 1 GHz) travels greater distances
and penetrates into buildings. As AT&T CEO Randall Stephenson stated
last year, low-band spectrum ``propagates like a bandit.'' This makes
low-band spectrum important for expanding coverage in all areas, urban
and rural. Carriers must be able to provide services responsive to
consumer demands, or they do not have a competitive offering. It is
more difficult and costly for a competitor to provide service absent
low-band spectrum. Low-band spectrum has superior in-building
penetration and its broader coverage results in significant deployment
cost savings by requiring fewer towers to serve a larger area.
It is important to note that AT&T and Verizon hold the majority of
sub-1 GHz spectrum, and that much of this spectrum was given to the two
largest companies for use before the FCC had spectrum auction
authority. Early commercials for Verizon's 700 MHz LTE touted its
capabilities for ``the most consistent speeds indoors or out and
obviously astonishing throughput,'' and AT&T claimed that T-Mobile
``customers [would] enjoy improved coverage, including superior in-
building and in-home service, because of the denser grid and access to
850 MHz spectrum'' as a benefit to its since abandoned takeover attempt
of T-Mobile.
The incentive auction is the only near-term opportunity for
increased access to low-band spectrum through FCC auctions. While
existing mobile spectrum licenses may be bought on the secondary
market, this process is largely controlled by the two largest carriers.
For example, in 2012, AT&T and Verizon accounted for nearly 55 percent
of all secondary market transactions, and 70 percent of all
acquisitions involving spectrum below 1 GHz. For many smaller carriers,
the secondary market is not working. This only serves to underscore the
importance of gaining access to critical low-frequency spectrum
resources through the upcoming incentive auction.
The incentive auction also has significant benefits for rural
America. Some have claimed that there are no benefits to rural America
in the incentive auction, and that it is an urban-focused or ``New
York'' auction. This is not the case. With its superior propagation
characteristics, the 600 MHz spectrum that will be made available
through the incentive auction is exactly what is needed to blanket
rural America with next generation mobile broadband coverage. On that
note, I would also like to dispel the myth that rural Americans, and
the carriers that serve them, are not on the cutting-edge of mobile
broadband technology and use. In fact, a recently CCA-commissioned
study found that 80 percent of rural Americans that plan to purchase a
new device within the next three months, plan to purchase smartphones.
Specifically, almost 70 percent of individuals surveyed that earn
$25,000 a year or less plan to purchase a smartphone, and 34 percent of
rural smartphone owners use wireless exclusively to access the
Internet. The benefits of mobile broadband use for mHealth, education,
public safety, and economic innovations are magnified in rural areas.
Yet close to 40 percent of rural wireless consumers feel they have less
choice when it comes to devices and service plans when compared to
their city-dwelling neighbors. Increased access to low-band spectrum
for competitive carriers will help bridge this gap, yielding
significant benefits for rural America.
Current 600 MHz operations in rural areas also provide auction
efficiencies through inclusion in the incentive auction. There are more
``white spaces'' in the current broadcast band in rural parts of the
country. Accordingly, fewer existing broadcasters will need to
relinquish spectrum in rural areas, and when remaining broadcasters are
repacked following the auction, it will be easier to reach clearing
thresholds for the newly reallocated band plan. This means that through
the reverse auction, the FCC will need to ``buy back'' fewer broadcast
licenses, while still compensating rural broadcasters that elect to
participate, in order to make the same or greater amounts of spectrum
available in the forward auction for mobile broadband use. The funds
generated from spectrum in rural America will contribute to higher
revenue amounts with lower incentive and relocation costs, helping the
FCC reach higher clearing thresholds in urban areas as well. While the
benefits of increased mobile broadband service in rural America alone
are significant, rural carriers also play an important function in the
success of the incentive auction overall. It is important, however,
that the forward auction is structured so that all competitors have a
meaningful opportunity to bid for, win, and provide service using this
spectrum.
Priorities for the Forward Auction
Congress has provided the FCC with the necessary tools to structure
and conduct a forward auction that incents the maximum number of
participants and supports competition while meeting its obligation to
promote the dissemination of licenses among a wide variety of
applicants, including small businesses and rural operators.
Specifically, the Spectrum Act reaffirms FCC authority to ``adopt and
enforce rules of general applicability, including rules concerning
spectrum aggregation that promote competition.'' The FCC should utilize
these tools to structure a competitive auction that allows all carriers
to bid on licenses they need and provide services to meet consumers'
ever increasing demands for mobile broadband access. Specifically, the
FCC must prevent spectrum aggregation, right-size spectrum licenses,
require interoperability and adopt procompetitive auction procedures.
Prevent Spectrum Aggregation
An auction that cements the two largest carriers' dominance of low-
band spectrum holdings would be detrimental to wireless competition.
The FCC can easily prevent this by adopting clear, ex ante aggregation
limits. The auction's structure has an enormous impact on whether and
how competitive carriers can participate. As Chairman Pryor noted about
the 700 MHz auction in 2008, ``[h]istory will show that the way the FCC
structured the auction basically helped the two big wireless companies
to the detriment of competition in this country.'' Let's not make the
same mistake. It is vital that the FCC structure the forward auction in
a manner that supports competition nationwide.
No one, including CCA and its members, has advocated for excluding
AT&T or Verizon from participating in the forward auction. As stated
above, consistent with the Spectrum Act, all carriers should have the
opportunity to participate. Policymakers must ensure, however, that the
largest two carriers cannot leverage their tremendous resources to
aggregate all reclaimed spectrum in the auction and foreclose
competitors from access to the 600 MHz band while they stock their
spectrum warehouses. As Chairman Wheeler recently noted, ``A key goal
of our spectrum allocation efforts is ensuring that multiple carriers
have access to airwaves needed to operate their networks.''
Accordingly, the FCC must set clear ex ante rules that signal to
competitors that they will have a realistic opportunity to win spectrum
if they participate in the auction, and that the largest two will not
be allowed to dominate and foreclose their rivals. The FCC has in the
past successfully used auction rules to foster competition while
exceeding revenue projections, and should again seek to accomplish both
goals through pro-competitive measures.
Some have claimed that smaller competitors seek generally
applicable aggregation rules to tilt the playing field in their favor.
But it is the opposite: having no aggregation limits in the auction
would dramatically tip the scales in favor of the largest incumbents
that already control an enormous portfolio of low-band spectrum. Well-
crafted auction rules are necessary, not to favor competitors, but to
ensure that there can be a dynamic market for competition.
Beyond the incentive auction, the FCC should take steps to prevent
excessive spectrum aggregation generally, and I urge the FCC to
complete its pending Mobile Spectrum Holdings proceeding and update the
broken spectrum screen. More specifically, since the incentive auction
is the only near-term opportunity to gain access to low-band spectrum,
the importance of effective aggregation rules that promote competition
are underscored. Although the incentive auction is the first of its
kind in many respects, policymakers should not rely on theoretical
analysis alone to understand the impact of spectrum aggregation
restraints in low-band spectrum auctions. The experiences of many
international regulatory bodies have not only shown the rural and in-
building coverage benefits and cost savings of low-band spectrum, but
also have demonstrated that appropriate, up-front aggregation limits
promote further competition in auctions and in the market and yield
higher revenues.
Right-Sized Spectrum Licenses
Spectrum licenses must be made available in geographic sizes that
allow competitors of all sizes to bid for, access and use new licenses
won at auction. This is a threshold issue that must be resolved;
otherwise competitive carriers will face a barrier to participation.
Right-sized spectrum licenses permit smaller carriers to bid for
spectrum that matches their current service footprint, while allowing
larger carriers to piece together the licenses they need, up to
nationwide coverage. This promotes increased carrier participation in
the forward auction.
Cellular Market Areas (``CMAs'') are the best geographic license
size to promote competition, to raise revenue and to protect the public
interest. As a recently CCA-commissioned study demonstrated, CMAs would
allow smaller carriers to bid on smaller spectrum licenses without
being forced to bid for spectrum they cannot efficiently use. Without
smaller geographic license sizes, many smaller carriers will be
foreclosed from bidding altogether, putting auction participation and
ultimately auction revenues unnecessarily at risk. These smaller
license sizes also increase opportunities for market variation in areas
where lower amounts of spectrum is reclaimed, and helps mitigate
problems regarding coordination along our borders. CMAs also support a
more dynamic secondary market for years after the auction has closed.
By making more spectrum available for mobile broadband use by reducing
the number of licenses with potential encumbrances, CMAs maximize
available spectrum and likely increase overall auction revenues. Any
auction that does not include sufficiently small license sizes to allow
for all carriers to have a meaningful opportunity to bid amounts to
regulatory exclusion of smaller carriers. In previous auctions, smaller
licenses sizes have raised greater revenue per MHz/POP. For example, in
Auction 73, the lower 700 MHz B Block, licensed using CMAs, generated a
price twice as high as the larger EA sized lower A Block.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Because the FCC seems focused on using larger Economic Area
(``EA'') size licenses, CCA is also currently evaluating the potential
for a middle-ground compromise. While we are still vetting the
possibilities and socializing ideas among CCA's members, subdividing
EAs into Partial Economic Areas (``PEAs''), may preserve some of the
benefits of using CMAs. Along with appropriate spectrum aggregation
limits, right-sized geographic licenses, whether CMAs or PEAs, will
help to maximize the spectrum available and encourage auction
participation by carriers of all sizes.
Require Interoperability
While interoperability was once a shared need, continuing
consolidation now requires an up-front requirement that devices
utilizing the same technology and operating within the same spectrum
band interoperate across all networks using the same technology and
band. Interoperability helps ensure nationwide service coverage and
preserves consumers' choice of service provider, and the FCC has
historically promoted interoperability of other service bands. CCA
commends Chairwoman Clyburn and her staff, the FCC's Wireless Bureau,
and Members of Congress, including several members of this Committee,
for their work to restore interoperability to the Lower 700 MHz band.
Competitive carriers bid aggressively in Auction 73, including nearly
$2 billion in winning bids from CCA members, under the assumption that
the spectrum, like all spectrum before, would be interoperable. It was
not until after Auction 73 closed that AT&T created a boutique band
class, stranding the Lower A Block without access to devices. After
four years, with the help of Chairwoman Clyburn, the industry finally
reached an agreement to restore interoperability. During those four
years, consumers, especially in rural America, were not able to realize
the benefits of expanded mobile broadband service. Precious resources
were expended as capital was stranded on spectrum that could not yet be
used and expansive testing and investment focused on restoring
interoperability instead of deploying coverage.
I am pleased to report that these carriers are now moving forward
to deploy services, and that many competitive carriers are refocused on
participating in upcoming spectrum auctions. But it is important that
this mistake is not repeated in the incentive auction. An up-front
requirement for interoperability in the 600 MHz band is critical to
provide the certainty needed for competitive carriers to participate in
the incentive auction. Interoperability is necessary to support
technological compatibility for consumers to continue to receive
service when roaming outside of their carrier's network coverage, a
critical element for less-than-national carriers to provide access to
the nationwide services consumers demand. A clear rule stating that
interoperability will be required is necessary for competitors to raise
capital, develop business plans, and invest to provide new services.
Package Bidding and Blind Bidding
As already noted, spectrum aggregation limits, right-sized
licenses, and interoperability are critical to the incentive auction's
success. But the benefits of an auction that includes these elements
may be lost if other practices, such as package or combinatorial
bidding and blind bidding, are allowed to undo these competitive
safeguards. CCA understands the largest carriers' desires to bid for a
large spectrum footprint at once; however, these packages will not
change a carrier's incentives to bid on particular markets and may
curtail or eliminate participation by smaller carriers and may reduce
the revenues generated in the auction. Large packages
disproportionately burden rural and regional carriers, and may
undermine the benefits of auctioning spectrum using right-sized
geographic units.
Additionally, policymakers should avoid blind bidding practices
that distort competition in auctions, and support pro-competitive
bidding credits to foster a diverse group of bidders. Blind bidding
adds unnecessary complexity to the process of valuing spectrum, and may
impact the availability of devices and roaming partners. Accordingly,
the use of blind bidding has disproportionate adverse effects on
smaller carriers. Conversely, the appropriate use of bidding credits
promotes participation by small businesses.
Funding Targets and Public Safety Benefits
While previous spectrum auctions have returned significant benefits
to taxpayers to the tune of billions of dollars to the Treasury, the
incentive auction is again unique in providing particular targets for
funds raised through this auction. Among these targets, the Spectrum
Act dedicates funding for creating and deploying FirstNet, a nationwide
interoperable mobile broadband network for public safety.
Congress wisely provided several funding streams for this important
goal, including not only the incentive auction but also several other
auctions that will likely be completed and raise billions of dollars
before the incentive auction begins. These auctions include the H
block, which will be auctioned in January, and the yet-to-be-scheduled
AWS-3 auction. CCA commends Congress, the FCC, National
Telecommunications and Information Administration and the Department of
Defense for recent developments to reallocate the 1755-1780 MHz band to
be paired with the 2155-2180 MHz band for auction. This pairing will
maximize the use and potential revenue generated from its upcoming
auction, and provides another important opportunity for competitive
carriers to access needed spectrum in a globally harmonized LTE
equipment ecosystem. Based on various estimates, it is likely that
these auctions will fully fund the Spectrum Act's $7 billion obligation
to FirstNet before conducting the incentive auction.
FirstNet's success is not only dependent on obtaining this funding,
but also on public-private partnerships with the wireless industry to
make nationwide mobile broadband coverage a reality. FirstNet benefits
from competition among commercial wireless carriers through having
additional potential partners for deployment and roaming, as well as
having a greater number of potential buyers of excess capacity on
FirstNet on a secondary basis. Partner carriers, particularly in rural
areas, will require spectrum below 1 GHz to efficiently cover large
land masses with low populations. If these carriers cannot gain access
to needed spectrum through the incentive auction, either due to
aggregation efforts of the largest two carriers or because they were
foreclosed from participating due to the size of licenses offered, they
will not be able to form partnerships with FirstNet for the benefit of
the new nationwide interoperable broadband public safety network.
Broadcaster Incentives
The entire incentive auction process hinges on sufficient
participation by broadcasters, and policymakers must ensure that
broadcasters are equipped to fully evaluate their options in the
incentive auction. This includes not only education and outreach to all
potential reverse auction participants, but also the regulatory
certainty to evaluate future valuations of broadcast business plans.
Pending rulemakings must be completed where possible, as they may have
significant impact on how broadcasters approach their decision to
relinquish or share some or all of their existing spectrum.
Accordingly, the FCC must be open and transparent regarding post-
auction broadcaster flexibility, both in terms of repacking and the
regulatory regime.
Other Efforts to Promote Competition
I would be remiss if I did not acknowledge other efforts led by
members of this Committee to promote competition in the wireless
industry. I commend Senators Klobuchar and Fischer for their work to
ensure that unused spectrum is available for use by smaller and rural
carriers. While this does not replace the need for access to spectrum
through auctions, their recently introduced legislation could help
smaller carriers access spectrum on the secondary market. Additionally,
I support Senator Ayotte's focus on Universal Service Fund issues, and
look forward to working with her on making sure that support is
competitively neutral. CCA appreciates the opportunity to work with
Senators on these and several other issues before the Committee.
Conclusion
The FCC faces many challenges in pioneering the first incentive
auction, but also has the potential to reinvigorate mobile broadband
competition while generating significant revenue for use of a finite,
taxpayer-owned resource. I support Chairman Wheeler's announcement and
milestones to conduct the auction in a way that ensures we get it
right. I urge policymakers to view a successful auction as one that not
only generates revenue, but also reallocates the maximum amount of
spectrum to meet our Nation's growing mobile broadband demands, ensures
that carriers of all sizes have a meaningful opportunity to bid, and
bolsters competition by providing more carriers access to critical sub
1 GHz spectrum. In turn, a competitive mobile broadband industry will
yield untold dividends to consumers for years to come. The FCC should
use the tools provided by Congress to conduct an auction that delivers
not only revenue but also competition to allow continued growth and
innovation in the wireless industry under a light touch regulatory
regime.
CCA appreciates the Committee's oversight and focus on this
important issue, and I thank you for the opportunity to testify before
you today. I welcome any questions.
Senator Pryor. Thank you.
Mr. Padden?
STATEMENT OF PRESTON PADDEN, EXECUTIVE DIRECTOR,
EXPANDING OPPORTUNITIES FOR BROADCASTERS COALITION
Mr. Padden. Thank you, Mr. Chairman.
I serve as Executive Director of a group of more than 70 TV
stations who are open to voluntary participation in the
incentive auction under the right circumstances and are
committed to making the auction a success.
Consumer demand for wireless broadband is increasing like a
hockey stick. Given the dearth of other sources of additional
spectrum, the FCC should seek to reallocate the full 120
megahertz specified in the National Broadband Plan.
Unfortunately, the FCC has not attracted the critical mass
of spectrum sellers that will be necessary to have a successful
auction. Without sufficient TV spectrum sellers, there will be
no auction. From this point forward, every issue much be
evaluated through the prism of whether it will help or hinder
the effort to attract TV spectrum sellers.
According to analysis by recognized auction expert Dr.
Peter Cramton, the FCC's proposal to score stations will not
improve the efficiency of the auction unless the FCC somehow
knows the secret reserve price in the mind of every
participating broadcaster, which is obviously impossible, and
unless the FCC adjusts its scoring dynamically between every
round of the auction, which would add enormous complexity to an
already complex auction.
T-Mobile and Sprint are lobbying for bidding restrictions
because they want to get this spectrum for less than they would
have to pay if they have to bid against AT&T and Verizon. But
Fred Campbell, the former chief of the FCC's Wireless Bureau,
has conducted a thorough analysis of bidding restrictions in
past auctions and concluded that they dramatically reduce
revenue--revenue needed in this auction to attract a sufficient
number of TV spectrum sellers.
If the FCC hopes to recover significant broadcast spectrum,
it must permit and even encourage innovative, out-of-the-box
channel-sharing proposals by TV stations. Stations should be
free to relocate within their market, to change their City of
license, and to share a channel with any other station in their
market provided the result is to free up spectrum for the
auction.
In a letter to the FCC, some Senators expressed a concern
that the incentive auction might interfere with broadcast
service to rural viewers by translator stations. Recently, our
coalition prepared an analysis of the Minneapolis, Minnesota,
market and concluded that rural consumers will continue to have
access to translator service after the incentive auction.
Before stations can decide to participate in the auction,
they need to know the starting level of prices the FCC will
offer, they need to know when they will be paid, and they need
to know when they will be expected to cease broadcasting
operations. The sooner the FCC can make this information
available, the sooner more stations will be seriously able to
evaluate auction participation.
In closing, I want to reiterate the enormous respect and
appreciation we have for the professionalism, dedication, and
openness of the FCC's Incentive Auction Task Force, led by Mr.
Epstein.
Thank you.
[The prepared statement of Mr. Padden follows:]
Prepared Statement of Preston Padden, Executive Director, Expanding
Opportunities for Broadcasters Coalition
Chairman Rockefeller, Ranking Member Thune, and Members of the
Committee, my name is Preston Padden. I had a long career in television
including many appearances before this Committee. I retired from the
Walt Disney Company in 2010, taught Communications Law for three years,
and now serve as Executive Director of the Expanding Opportunities for
Broadcasters Coalition. Our Coalition is comprised of more than 70 TV
Stations weighted toward the largest markets. These Stations are open
to voluntary participation in the Incentive Auction under the right
circumstances.
Our Coalition is committed to working with the FCC to make the
Incentive Auction a success. We believe that if it adopts the right
rules and policies, the FCC can achieve the Congressional goals of
reallocating 120 MHz of spectrum from broadcasting to wireless
broadband, raising $7 billion to fund FirstNet, and raising additional
monies to contribute to deficit reduction
The FCC's Incentive Auction Task Force has great leadership and is
doing a terrific job. All parties interested in the Auction have
enjoyed extraordinary access to the dedicated professionals who
comprise the Task Force. The process has been open, constructive, and
collaborative. If fact, as someone who has been around the FCC for 40
years, I have never seen a more impressive administrative effort.
Graphs of increased consumer demand for wireless broadband look
like a ``hockey stick.'' And, consumer embrace of online video,
including wireless video, has dramatically increased the importance of
supplemental downlink to support asymmetric network architecture. Given
the dearth of other sources of additional spectrum, the FCC should
press to reallocate the full 120 MHz specified in the National
Broadband Plan.
Unfortunately, the FCC has not yet attracted anything approaching
the critical mass of TV Station volunteers that will be necessary to
have a successful auction. The ``Canary-In-The-Coalmine'' of this
Auction is the fact that a top FCC media bureau official, whose
responsibilities included outreach to broadcasters, just resigned to
take a job with the broadcasting company most opposed to the auction.
Without sufficient TV Station volunteers, the FCC will have no spectrum
to auction, consumers will get no relief from dropped calls and
spinning pinwheels, and there will be no money for FirstNet or for
deficit reduction.
Our Coalition believes that the case can be made to convince TV
Stations to participate in the auction. The key is the ``Spectrum Value
Gap'' identified by the FCC in its Omnibus Broadband Initiative (OBI)
Technical Paper # 3. The opportunity to monetize a Station's spectrum
based on the higher values present in the wireless industry is the
incentive to bring TV Stations in the front door of the auction. But,
broadcasters do have alternatives. Just one of those alternatives is to
wait for a new digital transmission standard and then to deploy the
Tower Overlay system that was demonstrated successfully this past
August at the International Broadcasting Convention. This system would
enable TV Stations to embed LTE transmissions to wireless devices in
their broadcast transmissions, potentially earning an ongoing revenue
stream from wireless carriers. Some stations find this potential route
to monetize their spectrum compelling.
Going forward, the FCC's number one priority must be to convince
more broadcasters that the Incentive Auction is a more attractive and
more immediate opportunity to monetize their spectrum. The FCC has
spent a lot of time thinking about a band plan. But if enough
broadcasters don't walk through the front door of the Auction, there
will be no need for a band plan. And, the FCC has spent a lot of time
debating bidding restrictions. But without enough broadcast volunteers,
there will be no need to restrict bidding because there will be nothing
for any wireless carrier to bid on.
From this point forward, every issue, every rule, and every
procedure must be evaluated by the Commission through the prism of
whether it will help or hinder the effort to attract a critical mass of
TV Stations. No matter how compelling other considerations might be,
the FCC simply cannot afford to make decisions or to adopt policies
that will discourage broadcaster participation. Let me offer a few
examples.
Scoring: The FCC's Notice of Proposed Rulemaking for the Auction
proposes to ``score'' stations based on population covered or some
other station characteristic. This proposal is contrary to the
statutory directive that payments to stations should be based on the
market forces of an auction. Stations are selling 6 MHz of spectrum,
not TV station businesses. The only legitimate basis to distinguish
between stations is their relative contribution to repacking the
broadcast band and to clearing spectrum. For this purpose, scoring is
unnecessary because the Commission's auction design automatically will
freeze hard-to-repack stations at early, higher-priced rounds of the
auction.
Recognized expert auction economist Peter Cramton recently
presented a deck to the FCC's Staff demonstrating that scoring would
produce inefficiencies in repacking and clearing spectrum. That deck is
attached to my testimony as Exhibit No. 1. Professor Cramton explains
that scoring TV Stations in the Auction cannot be effective unless: (1)
the FCC knows the reserve price of every TV Station in the Auction,
which is impossible; and (2) the scoring weights are dynamically
adjusted between Auction rounds, which would add unacceptable
complexity and delay to what already is the most complex auction ever
attempted by human kind. Most importantly, the prospect of some
arbitrary and opaque scoring mechanism is breeding distrust among
broadcasters and is driving them away from the Auction. Scoring is an
example of a proposal that the FCC must evaluate through the prism of
whether it will help or hinder the effort to attract to the Auction a
critical mass of broadcasters.
Bidding Restrictions: There has been vigorous advocacy among the
carriers regarding bidding restrictions on AT&T and Verizon. Our
Coalition, which receives no funds from any carriers, strongly opposes
such restrictions. The wireless market is at least workably
competitive. T-Mobile is coming on strong and actually beat AT&T and
Verizon in subscriber growth in recent quarters. Sprint is now
controlled by Softbank--a company that has enjoyed enormous competitive
success in Japan's wireless market.
T-Mobile and Sprint's claims about the superiority of lower band
spectrum are overstated, and it would be perverse to reward these two
companies for their decision to not bid in the 700 MHz auction. Fred
Campbell, former Chief of the FCC's Wireless Bureau, conducted a
thorough analysis of bidding restrictions in past auctions and
concluded that they dramatically reduce auction revenue. His analysis
is appended to my testimony as Exhibit No. 2. Reduced auction revenue
would leave the FCC without the funds necessary to attract a sufficient
number of TV station spectrum sellers. Whatever the perceived benefits
of bidding restrictions, those benefits must be weighed against the
very real danger of inadequate revenue to buy the spectrum necessary
for a successful auction.
Channel Sharing: The FCC has a legacy of strict rules regulating a
TV Station's City of license, changes in City of license, and signal
coverage over that City of license. In the Incentive Auction Notice of
Proposed Rulemaking, the FCC proposed to adhere to these legacy rules
by, for example, requiring that a station that surrenders its channel
and then shares another station's channel continue to place a city
grade signal over every square inch of its current City of license.
But, in this new world, with a statute that encourages stations to
simply go out of business and to serve absolutely no one, strict
adherence to City of license regulation simply makes no sense. If the
FCC hopes to recover significant broadcast spectrum, it must permit,
and even encourage, innovative ``out-of-the-box'' channel sharing
proposals.
Specifically, stations should be free to relocate within their
market, to change their City of license, and to share a channel with
any other station in their market provided that the result is to free
up spectrum for the Commission. The stations that are co-located at a
market's central ``antenna farm'' typically will take up only one
channel in the repack of the TV band while stations scattered elsewhere
in a market each are likely to take up three channels because of
adjacent-channel interference. This engineering fact means that channel
sharing, City of license changes, and moves to a central ``antenna
farm'' can be critical to clearing sufficient spectrum for reallocation
to wireless. A decision to continue to require compliance with legacy
City of license regulation is an example of a decision that would work
against the goal of a successful auction.
TV Translators: In a letter to the FCC, some Senators expressed a
concern that the Incentive Auction could interfere with broadcast
service to rural viewers by translator stations. However, translators
are used to bring broadcast service to viewers in areas that primary
broadcast transmissions do not reach. By definition, translator areas
are not areas characterized by spectrum scarcity. Recently our
Coalition prepared an analysis of the Minneapolis, Minnesota market and
concluded that rural consumers will continue to have access to
translator service after the Incentive Auction. A copy of that analysis
is appended to my testimony as Exhibit No. 3.
Auction Pricing: TV stations are ongoing businesses with building
leases, equipment leases, programming contracts, and employment
agreements--all of which need to be renewed from time to time. Before
stations can decide to participate in the auction they need to know the
level of starting prices the FCC will offer; they need to know when the
auction will be held; and they need to know when they will be expected
to cease broadcasting operations. The sooner the FCC can make this
information available, the sooner more stations will be seriously able
to evaluate auction participation.
* * *
In closing I want to reiterate the enormous respect and
appreciation we have for the professionalism, dedication, and openness
of the FCC's Incentive Auction Task Force. Although our Coalition does
not always agree with their current views on every critical issue, we
absolutely are committed to the success of the Incentive Auction and
will do everything possible to help to achieve that result.
______
Mr. Padden also submitted the following documents, which can be
found on-line.
1. Peter Cramton, Professor of Economics, University of Maryland,
``Scoring in Reverse Auction'' [slides], December 4, 2013.
http://apps.fcc.gov/ecfs/document/view?id=7520960932
2. Fred B. Campbell, Adjunct Professor of Law, University of
Nebraska Space, Cyber, and Telecom Program and former Chief of
the Wireless Telecommunications Bureau, Federal Communications
Commission, ``Maximizing the Success of the Incentive
Auction,'' prepared for the Expanding Opportunities for
Broadcasters Coalition and the Consumer Electronics
Association, November 4, 2013. http://www.ce.org/CorporateSite/
media/Government-Media/GLA/auction-whitepaper-10-31-2013-FINAL-
revised-v2.pdf
3. Letter dated November 21, 2013 to Marlene Dortch, Secretary,
Federal Communications Commission, from Preston Padden,
Executive Director, Expanding Opportunities for Broadcasters
Coalition, Re: Expanding the Economic and Innovation
Opportunities of Spectrum Through Incentive Auctions, GN Docket
No. 12-268 http://apps.fcc.gov/ecfs/document/view?id=7520959122
Senator Pryor. Thank you.
Mr. Kaplan?
STATEMENT OF RICK KAPLAN, EXECUTIVE VICE PRESIDENT, NATIONAL
ASSOCIATION OF BROADCASTERS
Mr. Kaplan. Good afternoon, Mr. Chairman, Ranking Member
Thune, and members of the Committee. Thank you for inviting me,
on behalf of the National Association of Broadcasters, to
testify before you today.
At the outset, NAB would like to commend Chairman Wheeler
on his recent decision to step back and take a deep breath and
appreciate the enormous complexity of the incentive auction. He
clearly understands that there are a number of critical
unresolved issues that are going to take more work before we
give ourselves the best chance for a successful auction.
We at NAB believe there are at least three essential
ingredients necessary to craft a successful auction.
First, the FCC should take public engagement to an all new
level. This means providing as much information to the outside
world as possible and demanding the best fact-based data from
all of us along the way. This could entail further notices on
issues such as the new band plan, co-channel interference, or,
as Commissioner Rosenworcel has suggested wisely, a series of
en banc hearings.
Second, the FCC must preserve broadcasters' coverage areas
and populations served. This directive from Congress is not as
much about broadcasters as it is about viewers, your
constituents, who rely on us for essential news and
information. The notion is simple: If their stations remain on-
the-air broadcasters, the constituents should continue to
receive them.
Third, as Chairman Wheeler acknowledged, this auction is
exceedingly complex. There are many i's to be dotted, t's to be
crossed. Members of this committee have noted a few. For
example, Senators Begich, Fischer, Heller, and Klobuchar have
asked, what are the effects of different policy decisions on
the future of translators and low-power television in rural
America? This must be studied and understood by the FCC.
And with the leadership of Senator Klobuchar, Senators
Klobuchar, Ayotte, Blumenthal, Boxer, and Johnson have
recognized how critical it is to secure agreements with Canada
and Mexico. Without them--I want to be clear about this--the
auction will raise hundreds of millions, if not well over a
billion dollars less, harming FirstNet and other congressional
priorities. It will also make subsequent repacking and a future
unified band plan nearly impossible.
So thank you again for the opportunity to appear here
today, and I very much look forward to answering your
questions. Thank you.
[The prepared statement of Mr. Kaplan follows:]
Prepared Statement of Rick Kaplan, Executive Vice President, Strategic
Planning, National Association of Broadcasters
Good afternoon, Chairman Rockefeller, Ranking Member Thune and
members of the Committee. Thank you for inviting me, on behalf of the
National Association of Broadcasters (NAB), to testify before you
today.
Broadcasting, unlike any other medium, reliably offers local and
national news, emergency information, sports and entertainment without
charge to Americans throughout our great country. We connect people to
their communities--wherever they may live--provide them with critical,
lifesaving information, and embrace public service obligations that are
unique to our industry. While new technologies have come and gone,
broadcasting has long endured because local stations are indelibly
woven into the fabric of American society.
NAB is committed to doing everything we can to ensure that the
broadcast television incentive auction has the best chance for success.
If done correctly, the auction could benefit consumers, public safety
through FirstNet funding, and the U.S. Treasury in the form of deficit
reduction. We believe there are at least three elements essential to
achieving these aims.
First, as NAB has recently demonstrated, when parties engage
constructively, where there is a respect and healthy appreciation on
all sides for the value of various communications services, and where
decisions are based on facts and data, almost anything can be
accomplished. When we began working with the Department of Defense
(DOD) this summer on sharing the broadcast auxiliary spectrum (BAS) at
2025-2110 MHz, very few observers were optimistic about the chances of
reaching agreement, especially in the short time available. However,
both DoD and NAB came to the table constructively, made a genuine
attempt to understand the key concerns of the other party, and grounded
our decisions in facts and data, rather than clinging to unyielding
demands about the need for exclusive-use spectrum. All parties to the
incentive auction proceeding, including the Federal Communications
Commission (FCC), should take a page from that book, and proactively
and constructively engage with an eye towards fostering consensus among
the stakeholders wherever possible, and to base their positions and
decisions, respectively, on facts and not merely desired outcomes.
Second, not only does the Spectrum Act require it, but common sense
and consumer welfare also dictate that the FCC make all reasonable
efforts to preserve non-auction participants' coverage areas and
populations served. While television viewers may inevitably lose a
favorite station or link to certain news or information because a
particular station volunteers for the auction, TV viewers should not
lose access to channels that remain on the air as a result of an
untested, sub-optimal repacking software and band plan.
Third, ``crafting a successful auction'' means a number of things.
It certainly means that the FCC should make it as simple as possible to
participate in the auction (although it does not mean actively
encouraging or coercing broadcasters into participating). Crafting a
successful auction also means developing a good, long-term band plan,
and ensuring that rural and underrepresented consumers do not lose
essential television service as a result of discounting rural or
diversity concerns. Moreover, it undoubtedly means taking the time to
maximize auction revenue (and thus being able to fund FirstNet) by
ensuring that broadcasters along the border regions can be repacked.
Constructive Engagement
Everyone at this table understands that the voluntary broadcast
incentive auction and repacking process is extremely complex. It has
been called ``first in the world,'' ``unprecedented,'' ``unique,''
``groundbreaking,'' and a host of other adjectives that make it clear
we are venturing into unexplored territory. Despite the challenges of
this novel enterprise, I can say with confidence that if we all work
together--Congress, the FCC, stakeholders--there is a sweet spot where
the auction can be a success for all involved.
NAB has been at the forefront in working collaboratively and
solving problems in the incentive auction process. In this proceeding,
we have worked closely with AT&T, T-Mobile, Verizon Wireless, Sprint,
Google, Shure, NCTA, CTIA, Qualcomm, Microsoft, Intel and members of
the public interest community to try to find areas of common ground. In
our view, such collaboration is essential to a successful auction.
Where we identify a problem or concern, we propose solutions. We
are always looking for areas of agreement and compromise and have been
an open book for other industries and the FCC. We have shared widely
our extensive data and analyses--as well as any assumptions that
underlie them--and have done everything we can to listen and understand
the ideas of others and share our views on the various paths to
success.
As I noted earlier, this approach led us to remarkable progress in
an unrelated spectrum proceeding. Despite the fact that NAB and its
members had little to gain, we nonetheless worked hard to find a way,
based on facts and data, to arrive at a framework with DoD officials to
help free up 50 megahertz of spectrum that will benefit the wireless
industry and, we hope, the greater good. This effort to help Congress,
the Administration and the FCC achieve their spectrum goals
demonstrates NAB's commitment to constructive engagement, and
hopefully, can serve as a model for other industries, including the
wireless industry, in the future.
Protecting Viewers
Along with many others, I have worked tirelessly on this auction
for well over a year. What has surprised me most during this time is
that lost in the debates over competitive rules, band plans, and
unlicensed versus licensed spectrum, are the tens of millions of over-
the-air television viewers.
It was not that long ago--less than five years, in fact--that
Congress was so alarmed about the impact of the digital television
(DTV) transition on viewers, it extended the transition deadline and
put significant resources into ensuring that viewers could still
receive their invaluable free television services. Congress recognized
that millions of consumers could lose access to channels that were
critical to their everyday lives. Even with the delay and a renewed
emphasis on informing every consumer, I am sure those of you on this
Committee who served in Congress at the time are well aware of the many
challenges your constituents nevertheless faced.
Unfortunately, the DTV transition will be a walk in the park
compared to the repacking process that is part and parcel of this
auction. The final channel changes of the DTV transition involved the
FCC repacking only about 100 stations. Both viewers and broadcasters
had more than five years to prepare for the change, and each station
had a second channel on which to ensure a smooth transition. In the
post-auction repacking, it is likely that many more stations will be
repacked--perhaps in excess of 500--and stations will be required to
``flash cut'' to their new channel--meaning there is no second channel,
and stations will have to quickly move from one frequency to another,
resulting in a bumpy ride for consumers.
It must be the FCC's job to minimize the negative impact of the
auction on the tens of millions of Americans who rely on free, over-
the-air TV--especially those who are most vulnerable, such as senior
citizens, lower-income viewers and the underserved. This entails
preserving the service areas and people served by stations that remain
on the air. And despite representing broadcast companies, I recommend
that the FCC view this process through the eyes of the consumer, not
just the station owner. If a full-power or Class A station remains on
the air--and the vast majority of them will--a consumer should continue
to receive that station. Some of the FCC's proposals, however, suggest
that viewers are fungible--meaning that as long as the station retains
the same net number of viewers, everything is fine. But it's the
viewers that matter most, and consumers should have access to the
stations they receive today after the auction, provided those stations
remain on the air.
Under another proposal currently being developed, the Commission
would use a ``proxy'' channel to calculate a station's service area
during the auction process, instead of the station's actual channel.
Thus, rather than measuring the actual interference a station will
receive from another station on the channel it will operate on after
repacking, the FCC will choose a different ``proxy'' channel to measure
interference. This kind of approximation, however, cuts corners, and
could result in a service loss or gain in a significantly large number
of instances.
As it moves toward this auction and repacking, the Commission
should not forget what has been, and will continue to be, the backbone
of our communications system for local news and emergency information.
Broadcast television has been there every step of the way to support
your constituents, and survey after survey demonstrates that broadcast
television is still what they rely upon most. It is imperative to
protect viewers in this process. Let's think about it this way: Your
constituents will have no idea whether their wireless provider acquired
an extra 10 megahertz in the auction to add to its 135 megahertz in
their market; but I can guarantee they will start dialing your phone
numbers when they are suddenly no longer able to receive the broadcast
television stations they've relied upon for years, if not decades.
Getting It Right
A number of critical auction issues remain far from resolved. Each
of these must be dealt with fully, and before an auction order is
released by the FCC, for the auction to have a realistic chance to
succeed. If unresolved or unduly rushed, any one of these issues
threatens the success of the auction and, in turn, the quality of
broadcast and broadband services for the American people going forward.
Many members of this Committee and the Senate as a whole have
raised the question of how the auction will impact broadcast stations
along our borders with Canada and Mexico, and what spectrum for
wireless broadband will be foregone if the auction fails to account for
agreements with our neighbors. As a result of long-standing agreements
with Canada and Mexico, the U.S. cannot repack any stations along the
borders without undertaking a formal consultation process. If the
current agreements are left in place and new ones not reached, there
are at least two damaging outcomes for the auction. First, the
Commission will find it nearly impossible to reclaim sufficient
spectrum within 250 miles of the Canadian border and 150 miles of the
Mexican border, because it will be relying solely on buying out
stations, as it will be unable to move them through repacking. Second,
if the Commission approves an auction order without these agreements
and does not deal with the border areas at this time, it will almost
certainly never be able to repack stations there. Once the post-auction
repacking takes place, there will be few, if any channels in the future
to which border stations can be moved. The television band will already
be tightly packed, essentially guaranteeing different band plans in the
north and south as well as the center of the country for decades. The
result would undeniably be a jigsaw, suboptimal approach.
The reality here is that without the ability to repack stations
along the border, the Commission would be foregoing hundreds of
millions, if not more than a billion dollars of potential revenue. So
it makes little sense to forge ahead with an order, without first
coming to an agreement with our neighbors. An agreement allows for a
coherent repacking of television stations throughout the country,
including the border regions, and, consequently, for money to flow to
FirstNet and the U.S. Treasury for deficit reduction.
The impact of the auction on rural America is another important
concern. We all know this auction is designed to ameliorate the alleged
spectrum challenges in a handful of heavily urban markets, such as New
York, Los Angeles and Chicago. No one claims, however, that rural
America is facing a spectrum crunch. But what's at stake in this
auction for rural America is the elimination of television translators
and low-power television stations (LPTVs) that provide service to areas
otherwise unreached. In a number of markets, especially in the West, if
the FCC elects to reclaim 120 megahertz of television spectrum, rather
than 60 or 84 megahertz, hundreds of translators and LPTVs will be
forced to go off the air. This is a serious issue that deserves serious
study and consideration before the FCC makes its various policy
choices.
There is one final thought I would like to offer. When Congress
authorized the FCC to conduct a voluntary broadcast incentive auction
in the Spectrum Act, it grounded that process in market-based
principles. The authors of the National Broadband Plan believed that,
in many cases, television spectrum would be more valuable in the hands
of wireless carriers than broadcasters. The FCC's job in the upcoming
auction is to see if this claim is true. If the auction is truly
market-based, the FCC will do this on a voluntary, non-coercive basis.
Some, however, have encouraged the Commission to twist its authority to
try to force broadcasters off the air. They see no problem with
decimating an industry that accounts directly and indirectly for well
more than a million jobs and helps drive the local and national
economies, but that also is the lone communications service statutorily
designed to serve the public. The Commission does not have the
authority to do this under the Spectrum Act; such actions also would be
unwise and severely harm the American people. To be clear: The
Commission's directive is not to push broadcasters to participate in
the auction; but rather, to make it as easy as possible for them to
participate if the economics make sense. That is the auction Congress
intended, and that is the auction NAB will work tirelessly to help come
to fruition.
We thank the Committee for assuming its oversight function in this
process. This role is essential to ensuring that the Commission
faithfully adheres to the statute this body crafted so carefully to
achieve a balance between broadcast and broadband. I urge this
Committee to continue to hold such hearings, as it sheds a much needed
light on the auction process and will ultimately lead to a better
result. Thank you again for inviting me here today. NAB is anxious to
see a successful incentive auction and will play an active role in
ensuring that happens. I look forward to answering your questions.
Senator Pryor. Thank you.
Mr. Feld?
STATEMENT OF HAROLD FELD, SENIOR VICE PRESIDENT, PUBLIC
KNOWLEDGE
Mr. Feld. Thank you for inviting me to testify.
I have repeatedly urged that a well-structured incentive
auction could be a rare policy trifecta, a win-win-win that
provided more licensed spectrum and more efficient access to
unlicensed spectrum in this extremely useful set of
frequencies. In addition to raising revenue for an
interoperable public safety network, now called FirstNet, the
auction of licenses in this band for mobile broadband could
also enhance competition to the benefit of consumers.
The last 2 years have proved the importance of unlicensed
access, especially in the TV bands. In particular, TV white
spaces has seen rapid growth and development in the last year.
The Gigabit Libraries Network is using TV white spaces in 10
pilot programs to extend free public Wi-Fi into the local
community. Gig.U is using TV white spaces in partnership with
the University of West Virginia to bring high-speed broadband
access to homes and businesses around their campus. It seems
that nearly every month brings announcement of another new
product or new investment both here and abroad.
The last 2 years have also shown the value of regulatory
steps to promote competition. Regulatory intervention to make
spectrum available to competitors has led directly to billions
of dollars in new investment and a resurgence of competition.
No longer starved for spectrum, rival carriers have forced what
had become a complacent duopoly to upgrade their networks. And
for the first time in years, consumers are seeing real
innovation in pricing plans, such as Sprint's lifetime
unlimited and T-Mobile's international roaming and equipment
upgrade plans.
All of this highlights the importance of getting the rules
for this incentive auction right. The Department of Justice has
identified access to low-band spectrum as critical for
competition. This spectrum is highly valued for its ability to
travel long distances and penetrate buildings and trees.
Companies looking to invest in unlicensed, such as Comcast,
Google, and Microsoft, have likewise identified the broadcast
band as critical for developing the next generation of
unlicensed services.
What does getting it right mean? First, we must stop
creating false choices and pushing the FCC to choose sides.
Congress passed a compromise bill that gave the FCC authority
to use the auction to enhance unlicensed and promote
competition but within limits. We should collectively embrace
this compromise rather than re-fighting old battles. The
priorities of this auction must work together, not push against
each other and fly apart.
We should recognize that well-structured guard bands will
both provide adequate spectrum for unlicensed use and increase
the value of the service as a whole.
Finally, we need to make sure that we have enough
participation in the auction to make it worth holding. The best
way to ensure that enough bidders show up is what I call a no-
piggies rule. Don't ban anyone from the auction, but limit the
number of licenses that any one company can win.
Opponents of a no-piggies rule argue that we need to have
AT&T and Verizon in the auction. I agree. But the beauty of the
no-piggies rule is it lets AT&T and Verizon participate and I
believe it is consistent with what Senator Thune suggested and
what I am now hearing from AT&T. It just makes sure that there
are enough licenses to make it worthwhile for competitors like
Sprint and T-Mobile and DISH to show up as well. An auction
with only AT&T and Verizon will be just as much a failure as an
auction that banned AT&T and Verizon.
To conclude, key to a successful incentive auction is a
balanced approach, and we get there by continuing our current
deliberative process. We can still achieve a public policy
trifecta, a win-win-win for mobile broadband competition,
unlicensed access, and public safety. It would be a shame to
miss this chance by fighting old battles instead of working
together.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Feld follows:]
Prepared Statement of Harold Feld, Senior Vice President,
Public Knowledge
Good morning, Chairman Rockefeller, Ranking Member Thune, and
members of the Committee. I am Harold Feld, Senior Vice President at
Public Knowledge, a public interest nonprofit dedicated to the openness
of the Internet and open access for consumers to lawful content and
innovative technology. I am pleased to have the opportunity to appear
before you once again to discuss the implementation of the FCC's first
ever spectrum incentive auction.
Executive Summary
A little over 2 years ago, I testified before the House Energy and
Commerce Subcommittee on Communications and Technology about what was
then a proposal to consider giving the FCC authority to conduct
incentive auctions. As I said at the time, the incentive auction
provides a rare case for a `win-win-win' in public policy. Done
thoughtfully, the incentive auction could provide new low-band spectrum
licenses for wireless carriers to meet expanding demand and enhance
competition, provide revenue to pay for a national wireless network for
first responders, and enhance the efficiency of the unlicensed TV white
spaces service while preserving free over-the-air television.
I still believe we can do this. But we cannot succeed if we rush
heedlessly forward out of impatience to hold an auction however ill-
designed. Nor will we achieve this by forcing false choices between
licensed and unlicensed spectrum, or between enhancing competition and
paying for FirstNet. To the contrary, efforts to follow what seems like
the straightforward path to maximizing revenue by minimizing guard
bands or refusing to adopt rational spectrum aggregation limits are
likely to make this auction a failure rather than a success.
Background
Congress' inclusion of Title VI in the Middle Class Tax Relief and
Job Creation Act of 2012 was a groundbreaking and critical step forward
for U.S. communications policy and the advancement of new and
innovative technology in the 21st century. It was groundbreaking
because of the creation of the FCC's authority to create and execute a
two-sided incentive auction for the first time in history. This
mechanism for fairly repurposing spectrum that is already allocated
uses market based principles to encourage more efficient use of this
valuable public resource and make room on the spectrum allocation for
new uses and technologies to develop. The legislation was a critical
step because it opened up spectrum to allow for greater growth and
competition in the licensed wireless broadband market, while preserving
a commitment to unlicensed spectrum to be used for new innovative
services, some of which may not even have been invented yet. The
legislation also balances the priorities of repurposing spectrum for
new uses with the goals of funding an interoperable public safety
wireless network in accordance with the recommendations of the 9/11
Commission.
I continue to believe that all these goals remain possible.
Certainly it takes patience and a well developed record to find the way
to balance these competing goals. I commend the FCC for working so
diligently to get the numerous details right so that all these working
parts will mesh together, rather than fly apart. Chairman Wheeler's
recent blog post \1\ outlining a schedule for how the FCC will make its
decisions and a target date for the auction is realistic, and provides
important transparency for the industry.
---------------------------------------------------------------------------
\1\ Tom Wheeler, ``The Path To A Successful Incentive Auction,''
FCC Blog (December 6, 2012), available at: http://www.fcc.gov/blog/
path-successful-incentive-auction-0
---------------------------------------------------------------------------
Conversely, I find it very unfortunate that some continue to try to
create artificial choices among the goals Congress created. We are well
aware that the final language of the Act represented a compromise
between Members and stakeholders with very strongly held opinions on
the appropriate policy to follow. Rather than refight these battles
again and again, we should embrace the compromise. Rules that ignore
the compromise struck by Congress, pretending that one faction
triumphed over the other when it did not, do more than violate the
language of law. Such efforts threaten to unbalance the complex
machinery Congress dictated for running the auction, potentially
dooming all these efforts.
Allow the FCC to do its job
Perhaps most importantly, Congress should remember that every
economist that testified on incentive auctions--regardless of political
affiliation--urged that the FCC must have maximum discretion to design
and run the auction. Certainly Congress must maintain oversight. But
Members should also recognize both the tremendous skill and experience
the FCC has brought to bear on this complex problem and the FCC's
history of success since Congress authorized spectrum auctions 20 years
ago. It is entirely appropriate to require the FCC to explain its
choices. It is counter-productive to tell the FCC before it even makes
choices that it has chosen wrong.
Since passage of the Act, the FCC has moved quickly to design this
first-ever incentive auction to reflect the several goals of the
legislation and with the input of all critical stakeholders. In order
for the incentive auction to be successful two things are necessary.
First, all stakeholders and FCC staff need to work in a transparent,
participatory way to determine the various aspects of auction design,
band plan options, and repacking processes. Second, the FCC must enact
rules that respect and balance the various goals of the legislation
rather than bowing to pressure from one interest in favor of another.
Most importantly for those following from outside, the structure
created by Congress depends on maximizing the difference between what
it has to pay broadcasters and what it can persuade wireless carriers
to pay. If the FCC recovers 120 MHz of spectrum, but ends up giving 90
percent of the proceeds to broadcasters to facilitate recovering that
much spectrum, the auction cannot pay for FirstNet. By contrast, an
auction that recovered somewhat less spectrum, but where the Federal
Government kept much more of the revenue, would potentially produce far
more revenue for the government. As a result, the FCC must strike a
balance between providing real incentive to broadcasters to return some
or all of their spectrum use rights--particularly in constrained
markets--while not proving so generous that the government fails to
meet its revenue goals.
This means that, invariably, some stakeholders will not get the
rules they want. Furthermore, because the interest of the Federal
Government is somewhat at odds with the interest of both wireless
carriers (who would prefer to acquire licenses as cheaply as possible)
and broadcasters (who would prefer to sell for the highest value
possible), any so-called ``industry consensus'' requires very careful
examination.
At the same time, as the agency narrows its focus, all stakeholders
must begin to abandon their opening positions and seek real consensus
wherever possible. In particular, I am hopeful that unlicensed users
and secondary licensees such as wireless microphone operators and LPTV
operators can reach a consensus on how to coexist within the newly
reconfigured broadcast band. Clearly there is much to be gained by
finding a way to accommodate all the existing stakeholders rather than
forcing the FCC to choose among them, and I hope that policymakers
supportive of these interests will encourage the parties to work
together rather than against each other.
Balanced Goals
Returning to substance over process, we must likewise remain
focused on the statute as written. Since the Middle Class Tax Relief
Act was passed, many folks have worked to reframe the goals of the law.
The statute however is clear and provides for a variety of goals and
outcomes that, if implemented well, should all be attainable.
As an initial matter, the Middle Class Tax Relief Act preserved
existing FCC authority both generally, and specifically with regard to
implementation of the TV ``white spaces'' service, unless explicitly
altered by statute.\2\ The statute did nothing to alter the overall
goals of the FCC's auction authority to promote the public interest by
adopting rules that encourage innovation \3\ and that ``avoid excessive
concentration of licenses.'' \4\ Congress also retained the prohibition
on consideration of auction revenue as a public interest benefit.\5\
---------------------------------------------------------------------------
\2\ Sec. 6403(i)
\3\ 47 U.S.C. Sec. 309(j)(3)(A).
\4\ 47 U.S.C. Sec. 309(j)(3)(B).
\5\ 47 U.S.C. Sec. 309(j)(7)(B). By implication, Congress clearly
intended that the combination of revenue from the incentive auction and
the additional auctions required by Section 6401, but there is a
considerable difference between an expectation expressed in the statute
that a combination of spectrum auctions would raise $7 billion to cover
FirstNet's construction costs and a command to maximize auction revenue
for the incentive auction in direct violation of 47 U.S.C.
Sec. 309(j)(7)(B).
---------------------------------------------------------------------------
Congress did make several specific alterations with regard to both
unlicensed operation in spectrum recovered from broadcasters and with
regard to limits on participation in the incentive auction. These
explicit provisions provide the outlines of the balanced path the FCC
must follow to actualize the goals Congress included in the Middle
Class Tax Relief Act provisions on spectrum.
Funding for FirstNet
I recognize the importance of this auction for generating revenue
to establish a national, interoperable public safety broadband network,
as recommended by the 9/11 Commission. While I agree that funding
FirstNet is important, I also want to remind Senators that there are
multiple opportunities to raise revenue for FirstNet beyond the
incentive auction of the 600 band. The recently announced 1755 MHz/AWS-
3 auction alone could easily clear $10 billion and pay for FirstNet,
which needs to raise $7 billion in funding.\6\ Additionally, the H-
block auction scheduled for January 2014 is estimated to automatically
clear at a minimum of $1.56 billion.\7\
---------------------------------------------------------------------------
\6\ This 1755 MHz/AWS-3 auction is one that while hoped for, was
uncertain. Furthermore, the 1755 band is not only in a decent bandwidth
range and compliments the AWS footprints of the larger national
carriers but this spectrum is also harmonized for LTE internationally.
The amount of money carriers would save in equipment costs for that
band is substantial. See FierceWireless, T-Mobile CTO: 1755-1780 MHz is
prime spectrum for LTE, February 27, 2013, http://
www.fiercewireless.com/tech/story/t-mobile-cto-1755-1780-mhz-prime-
spectrum-lte/2013-02-27.
\7\ FierceWireless, Analysts: Sprint, T-Mobile ditched H Block to
focus on other spectrum, avoid Dish complications, November 13, 2013,
http://www.fiercewireless.com/story/analysts-sprint-t-mobile-ditched-h-
block-focus-other-spectrum-avoid-dish-co/2013-11-13.
---------------------------------------------------------------------------
Finally, those concerned that adoption of a spectrum aggregation
limit will reduce auction revenue should consider that the Government
Accountability Office (GAO) estimated that the Incentive Auction could
raise $20 billion. Some private sector estimates placed the value even
higher. The H Block auction will raise approximately $1.5 Billion,
leaving only $5.5 billion to pay for FirstNet.
Even those who believe that preventing AT&T and Verizon from
foreclosing competitors from these licenses would reduce auction
revenue, a claim I and others dispute, no one can seriously suggest
that adoption of a modest limit on how many licenses AT&T and Verizon
can win will deprive the incentive auction of over $15 Billion in
revenue. Assuming that the earlier estimates of how much an Incentive
Auction could earn are at all correct, the allegation that a ``No
Piggies Rule'' of the kind proposed below would jeopardize the ability
to pay for FirstNet flies in the face of reality. Given that those most
loudly claiming that any restriction on AT&T and Verizon's ability to
win all the licenses offered would put funding for FirstNet in danger
were among those claiming that the auction would earn in excess of $20
billion, these doomsday predictions should be viewed with considerable
skepticism.
Nurturing Continued Innovation In Unlicensed
As members of Congress and FCC Commissioners across the political
spectrum have repeatedly stated, unlicensed spectrum remains one of our
great spectrum innovations. The United States became the first country
in the world to authorize flexible access to spectrum through a simple
certification mechanism that dramatically lowered barriers to entry and
innovation. Simply try to imagine a world today without such everyday
devices such as garage door openers or free Wi-Fi in public buildings,
from coffee shops to the halls of Congress. Bluetooth technology which
operates over unlicensed spectrum has made phone conversations in cars
safer with hands free technology, and the automobile industry is
already testing the use of unlicensed spectrum to move the idea of auto
piloted cars from science fiction to reality.
In particular, authorization to use TV white spaces (TVWS) under
Republican FCC Chairman Kevin Martin, and subsequent modifications
under Democratic Chairman Julius Genachowski, have opened the door to
dramatic advances in hared spectrum technology. Earlier this year, West
Virginia University announced that it would utilize TVWS to provide
wireless broadband for its entire campus and surrounding neighborhoods,
including free Wi-Fi on public transit. In Cape Town, South Africa
Google is piloting wireless broadband connectivity using TVWS to rural
areas that lack electricity using solar powered devices. With the large
reserve of TVWS in rural areas of the U.S., many communities will look
to TVWS networks as a possible solution to the economic challenge of
rural broadband deployment. It is too early to know if this will
succeed, but initial projects on college campuses through Air U. and in
small cities like Wilmington, NC will help answer these questions over
the coming years.
Congress knew that the incentive auction could either enhance the
efficiency of TVWS and encourage new investment, or wipe out this
promising new technology altogether. Congress opted for the first
course, instructing the FCC to structure the incentive auction in a way
that compensated for the loss of spectrum in some markets by creating
the potential for meaningful use in all markets through unlicensed in
the 600 MHz guard bands.
The final version of the Act rejected both the initial House
approach of restricting TVWS use solely to the surviving broadcast
bands, and the Senate approach of authorizing a direct allocation for
exclusive unlicensed use if the FCC recovered more than 84 MHz of
spectrum from broadcasters. The compromise version explicitly preserved
the use of the remaining broadcast service for TVWS, while permitting
the FCC to authorize unlicensed use in the 600 MHz guard bands.\8\ At
the same time, the use of unlicensed spectrum should not undermine
licensed use of the 600 MHz band either by causing harmful interference
\9\ or by inflating the guard bands beyond what is ``technically
reasonable.'' \10\
---------------------------------------------------------------------------
\8\ See Sec. Sec. 6403(i); 6407.
\9\ Sec. 6407(e).
\10\ Sec. 6407(b). By adopting this language, Congress explicitly
rejected the alternative--and more restrictive--language that guard
bands be no bigger than `technically necessary.' The word `reasonable'
denotes discretion (albeit bounded discretion), especially when
combined with the Commission's responsibility (unaltered by the
statute) to encourage innovation and flexibility. See, 47 U.S.C.
Sec. Sec. 303(g); 309(j)(3)(A).
---------------------------------------------------------------------------
This compromise illustrates the necessary balance the Commission
should adopt. Congress clearly intended to foster the further
development of unlicensed technology and TVWS in particular. The FCC
may consider how to facilitate this development through the use of
guard bands, and may certainly take the impact of its decisions on the
development of the TVWS into account. At the same time, consideration
for unlicensed use alone cannot drive the Commission's decision making.
In short, according to the Middle Class Tax Relief Act, unlicensed
remains an important part of the wireless ecosystem. But it is only one
part. The size of guard bands can--and should--reflect, among other
things, a desire to ensure sufficient national access to unlicensed
spectrum to encourage investment and deployment in urban markets as
well as rural markets. At the same time, concerns over unlicensed use
cannot so dominate the Commission's thinking that they actively
undermine the viability of licensed services.
On November 8, the FCC held a workshop to highlight the important
role TVWS is already playing in providing needed broadband services in
rural areas and urban areas alike.\11\ Chairman Wheeler became the
latest FCC Chairman to reaffirm the importance of unlicensed spectrum
and TVWS stating, ``Unlicensed spectrum has been, and must continue to
be, the catalyst of innovation. Therefore, we must make sure that
unlicensed spectrum is a key part of whatever decisions that we make.''
\12\
---------------------------------------------------------------------------
\11\ A video archive of the event is available at http://
www.fcc.gov/events/learn-workshop-discuss-unlicensed-spectrum-issues.
\12\ Id. at 8:30-8:51.
---------------------------------------------------------------------------
Witnesses at the workshop included Elizabeth Bowles, president of a
WISP based in Little Rock Arkansas, who described how the availability
of unlicensed spectrum--and TVWS in particular--allowed her to bring
broadband to schools, small businesses, and others who could not
otherwise afford access. Others described use of the TVWS for higher
education projects, and to bring affordable broadband to poor urban
neighborhoods, and to create economic opportunity for women and
minority owned businesses. Witnesses described innovative new devices
already available from such retailers as Amazon.com, and how other
countries are actively looking to develop their own TVWS technology.
In short, the value of the TVWS is well established. Beyond the
contribution to the economy, unlicensed lowband spectrum empowers
traditionally marginalized communities to take part directly in the
emerging wireless future. The power of unlicensed to give these
communities new opportunities is a social good that cannot be measured
in dollars, but is utterly critical to the American spirit.
Public Knowledge believes the FCC should issue a further public
notice at the January meeting where, under Chairman Wheeler's recently
proposed schedule, key policy decisions will be outlined. This will
allow stakeholders to come together around a common sense, consensus
framework that promotes a robust TVWS on a national basis. Until
details can be filled in, Public Knowledge continues to support calls
from a broad range of stakeholders such as Comcast, Broadcom, The
Wireless ISP Association (WISPA), and Google--along with public
interest organizations such as Free Press, Consumer Federation of
America, and the New America Foundation--to create a 20 MHz contiguous
block of spectrum for unlicensed in the ``duplex gap'' between the
uplink and downlink paired spectrum. Based on previous experience with
duplex gaps, and in light of the propagation characteristics of the 600
MHz spectrum, this size would represent the optimum trade-off for
licensed services to build inexpensive handsets that minimize internal
filters and potential self-interference while providing adequate
spectrum on a national basis for broadband in both urban and rural
settings.
Critically, the 20 MHz duplex gap is not the only way to provide
adequate unlicensed spectrum to meet urban and rural needs. This is why
a further public notice is imperative. As Chairman Wheeler stressed at
the November 8 FCC Workshop, now is the time for parties to focus on
practical proposals rather than insist that ``the world will end'' if
they do not get exactly what they want.
Opportunity for Other Players to Come to the Table for a Deal
Since multiple users will operate in the spectrum between 470 MHz
and 796 MHz this presents an opportunity for other players besides the
wireless carriers and broadcasters to come to the table for a deal.
Potential stakeholders that could benefit from participating in these
auction discussions include owners of wireless microphone equipment.
Public Knowledge is part of the Public Interest Spectrum Coalition
(PISC) whose members believe the FCC has an opportunity to facilitate
innovation and investment in unlicensed technologies while still
preserving the use of wireless microphones. When the FCC adopted orders
allowing unlicensed use of TVWS it reserved two channels for the use of
wireless microphones. Because unlicensed devices cannot use channels
used by broadcasters in neighboring TV markets, even low-power
unlicensed devices are not allowed to operate in the majority of vacant
TV channels in each local market.
Conversely, wireless microphones have been successful in operating
on the same channel as broadcast stations in distant or neighboring
markets. The additional channels that are not available for use by
unlicensed devices include unoccupied TV channels below Channel 21 and
the larger category that includes channels where microphones have
historically operated co-channel to broadcast stations in distant media
markets. Incentive auction rule changes should include policies that
ensure both wireless microphone operators and unlicensed broadband
networks and devices have a sufficient amount of low-band spectrum
available nationwide.
PISC has also provided proposals that would protect LPTV operators
that provide service to their local community, while also accommodating
use of the TVWS for unlicensed users. I am pleased that in recent days
representatives from the LPTV community have begun to reach out to PISC
members to begin discussion for a possible way forward.
These negotiations will work best if policymakers urge all parties
to focus on coexistence and reasonable spectrum sharing. As
demonstrated by the recent agreement between the Department of Defense
and broadcasters to share the 2021-2110 MHz band,\13\ and the recent
voluntary agreement between the 700 MHz licensees and DISH to promote
interoperability,\14\ spectrum sharing must become the norm in an
increasingly crowded spectrum world. Parties that insist on standing on
what they believe is their due under the law should recall that the
Communications Act unequivocally states that no one has any right to
use spectrum. Accordingly, the best results can be achieved by genuine
consensus among stakeholders realistically assessing their needs,
rather than by forcing the FCC to chose among stakeholders.
---------------------------------------------------------------------------
\13\ Letter of Karl Nebbia, Associate Administrator, Office of
Spectrum Management, National Telecommunications Information
Administration (NTIA), to Julius Knap, Chief, Office of Engineering and
Technology, filed in GN Docket No. 13-185 (November 25, 2013),
available at http://apps.fcc.gov/ecfs/document/view?id=7520959441
\14\ See Promoting Interoperability in the 700 MHz Commercial
Spectrum, WT Docket No. 12-69; Request for Waiver and Extension of
Lower 700 MHz Band Interim Construction Benchmark Deadlines, WT Docket
No. 12-332, Report and Order and Order of Proposed Modifcation,
(October 29, 2013), available at http://transition.fcc.gov/
Daily_Releases/Daily_Business/2013/db1101/FCC-13-136A1.pdf.
---------------------------------------------------------------------------
The Myth of ``Inflated'' Guard bands
Opponents of unlicensed use have repeatedly stated that the law
prohibits the use of unlicensed in the guard bands. Some have even gone
so far as to argue that the law prohibits guard bands entirely, or
requires the FCC to confine them to some arbitrary minimum. As noted
above, this ludicrous claim violates the plain language of the statute,
which not only explicitly preserves FCC authority to create band plans
with guard bands but which rejected the more restrictive ``technically
necessary'' for the more flexible ``technically reasonable.''
The alternative argument of opponents of unlicensed use is the
effort to create a false choice between guard bands and auction
revenue. This ignores that well managed guard bands enhance the value
of licensed portions of the spectrum by lowering the cost of equipment
design. Similarly, the increasing synergistic use between licensed and
unlicensed spectrum, notably in the development of ``Wi-Fi offload''
and ``carrier grade Wi-Fi,'' show how permitting Wi-Fi in the guard
bands would actually enhance value and thus increase auction revenue.
To illustrate this point, consider the following analogy. The
development firm of Henry and Anna decide to develop some prime real
estate for residential use. They build houses with lawns and driveways
so that people can invite guests and hold parties while protecting the
neighbors from each other's noise. They leave some open common space
for playgrounds and to enhance the feeling of community. They use some
land for green space to set the houses back from the main road. They
end up building 20 houses.
Fred and Greg, rival developers who hold a similar plot of land,
can't believe how much money they think Henry and Anna are leaving on
the table with all this ``wasted'' space. They build townhouses jammed
up as close to each other as possible, with the bare minimum number of
parking spaces. By leaving no common space or open area, they cram in
30 houses.
But a funny thing happens. Henry and Anna can sell their houses for
$500,000 a house, because they have all this space and it makes a very
nice community. Fred and Greg can only get $150,000 for their houses,
because no one wants to pay as much for houses jammed on top of each
other, with everyone hearing their neighbor's business, no place for
friends or relatives to park when they visit, and houses flush against
the street.
At the end of the day, Henry and Anna make $10,000,000, while Fred
and Greg make only $4,500,000. Despite all the wasted ``green space,''
Henry and Anna end up making $5,500,000 more than Fred and Greg.
The same logic holds true with guard bands. Maximizing the number
of MHz auctioned by having licenses piled one on top of the next with
no guard bands does not mean more revenue from the auction any more
than maximizing the number of houses in a development automatically
means more money for the developer.
Competition: Spectrum Aggregation/Band Plan
Perhaps the most important goal to consumers in the construction of
a balanced incentive auction implementation is the assurance that the
rules will promote competition in the mobile broadband industry.
Following the dominance of the 700 MHz Auction in 2008 by AT&T and
Verizon, it became conventional wisdom that the overwhelming advantage
of AT&T and Verizon in low-band spectrum meant a long, slow slide to
duopoly. Only aggressive action by the Commission in 2011 and 2012--
adoption of data roaming rules, blocking AT&T's effort to acquire T-
Mobile, and pressure on Verizon to divest spectrum to T-Mobile as part
of the Spectrum Co. Review--created any expectation that competition
remained viable.
The benefits of competition have become increasingly visible since
the FCC and the Department of Justice Antitrust Division (DoJ) took
steps to ensure that the market would contain at least 4 national
firms. Billions of dollars of new investment flowed into the market as
both T-Mobile and Sprint attracted new interest. AT&T began a process
of ``refarming'' it's 2G spectrum for 4G use and, spurred by
competitive pressure, has moved rapidly to deploy LTE nationally. A
revitalized T-Mobile has offered major innovations in handset upgrades
and data plan pricing, forcing AT&T and Verizon to respond.
It is no coincidence that this dynamic market action follows
regulatory action to promote competition, whereas the market remained
virtually moribund from 2008-2012 when competition appeared dead. Only
competition forces companies to invest in network improvements and pass
along efficiencies of scale to customers rather than shareholders. By
contrast, when competition declines, the surviving dominant firms can
afford to decrease capital expenditures on network improvements because
frustrated customers have nowhere else to go.
AT&T and Verizon continue to enjoy dominance in part because of
their superior holding of spectrum below 1 GHZ, aka ``low band
spectrum.'' These companies acquired this advantage in substantial part
from free low band licenses distributed to the incumbent local exchange
carriers (ILECs) before the Commission began to auction spectrum in
1993. To pretend that this market distorting regulatory largess
constitutes a free market triumph that regulators should respect is
therefore quite disingenuous.
Likewise, the claim that AT&T and Verizon need additional spectrum
because of their large customer base profoundly misstates the facts. To
the contrary, as noted above, it is competition that forces companies
to become efficient and pass those efficiencies on to their customers.
As both the Department of Justice and the FCC transaction team found in
the AT&T/T-Mobile transaction, AT&T in particular has used spectrum
acquisitions to support a profoundly inefficient network architecture.
Indeed, the fact that Verizon supports more customers with less
spectrum demonstrates that the problem for AT&T is not a spectrum
shortage to meet demand, but a refusal to reengineer its network to
provide more efficient coverage.
The DOJ has emphasized the importance of getting low band spectrum
into the hands of competitors. Because the incentive auction represents
the last chance to put valuable low band spectrum in the hands of
competitors, the FCC should adopt rules of general applicability--as
permitted by the Middle Class Tax Relief Act of 2012--to prevent AT&T
and Verizon from capturing the lion's share of the licenses.
This Auction is about Future Spectrum Needs, and the Future of
Competition
My fellow witness Dr. Hal Singer has submitted a paper to the FCC
with David Balto arguing that T-Mobile's recent revitalization shows
that the DoJ is wrong in its concern that competitors require access to
lowband spectrum.\15\ Setting aside other objections to Balto &
Singer's analysis, and the irony that T-Mobile enjoys its current
success to from antitrust enforcement of the kind Balto & Singer object
to here, the paper misses a key point about the Incentive Auction.
Since its initial proposal as part of the National Broadband Plan, the
Incentive Auction has been about meeting the future demand for
spectrum, the so-called ``spectrum crunch.'' The relevant question is
therefore not merely whether T-Mobile and Sprint have sufficient
spectrum to compete today, but whether they will have sufficient
spectrum--particularly lowband spectrum--to remain competitive going
forward. Indeed, under the logic proposed by Singer and Balto, it does
no harm to AT&T and Verizon to be entirely excluded from the Incentive
Auction because they currently have the best performing 4G networks.
---------------------------------------------------------------------------
\15\ See David Balto and Hal Singer, ``The FCC's incentive Auction,
Getting Spectrum Policy Right,'' Progressive Policy Institute
(September 2013), available at http://www.progressivepoli
cy.org/wp-content/uploads/2013/09/09.2013-Balto-and-Singer_Getting-
Spectrum-Policy-Right
.pdf
---------------------------------------------------------------------------
Unlike the DoJ merger review, which looks to see whether a
transaction is likely to substantially reduce competition, the FCC is
required by law to consider how to use auctions to promote competition
and avoid excessive concentration of licenses.\16\ Even if Balto &
Singer were correct that T-Mobile's recent performance alleviates
competitive concerns in today's spectrum environment (a claim subject
to considerable dispute), the failure of Balto & Singer to address
adequately how foreclosure would impact future need leaves their
analysis fatally flawed.
---------------------------------------------------------------------------
\16\ See 47 U.S.C. Sec. 309(j)(3)(B).
---------------------------------------------------------------------------
The ``No Piggies'' Rule
The FCC can promote these competition goals in two ways. First, it
can adopt a total limit on the amount of spectrum, particularly low
band spectrum, a single company can hold. The Commission had such a
hard ``spectrum cap'' until 2003. Not coincidentally, elimination of
the spectrum cap initiated a period of steady consolidation and a
dramatic decline in competition to the detriment of consumers.
Alternatively, the Commission could adopt an auction specific rule
that would prohibit any one company from capturing too many licenses in
the 600 MHz auction. This ``No Piggies'' rule would permit AT&T and
Verizon to participate, while leaving significant spectrum on the table
to attract many smaller bidders.
No Piggies Means More Auction Revenue
Auction experts will tell you that maximizing revenue requires two
things. First, lots of bidders need to show up. Second, they cannot
collude to divide the licenses among each other.\17\ To achieve step
one requires creating a set of rules that encourages as many bidders as
possible that they can actually win enough licenses they need to make
showing up worth the expense of playing. Participating in an auction
costs a great deal of money. Companies go to capital markets to arrange
for both the large ``up fronts'' needed to participate and to be able
to pay for the licenses if they win. The companies set up huge ``war
rooms'' with auction experts to track and advise them. Failing to win
licenses, not only means the vast expenditure of money and resources is
wasted. Publicly traded firms will lose significant stock value if they
fail to win licenses deemed critical to their future growth, or if they
are deemed to have been forced by AT&T and Verizon to significantly
overpay.
---------------------------------------------------------------------------
\17\ See, e.g., Paul Klemperer, ``Using and Abusing Economic
Theory,'' Journal of the European Economic Association, 2003, 1, 272-
300.
---------------------------------------------------------------------------
Unless a firm believes it has some chance of success in the auction
that will justify the cost and the potential risk of market backlash
for a failed auction attempt, it will do better to sit on the
sidelines.
Without the No Piggies Rule, there is every reason to believe that
AT&T and Verizon will repeat their success from 2008 700 MHz auction.
No matter how much T-Mobile or Sprint (or other competitors) may need
the spectrum in absolute terms, it is not worth the risk if they cannot
win.
A simple analogy illustrates the problem. My neighborhood
association sponsors a basketball tournament with a $10 entry fee and a
$500 prize. Should I enter? Well, if we pretend I am a decent amateur
player, then it would make sense. The entry fee is relatively small,
and even if I am not the best basketball player in the neighborhood, I
am close enough to my neighbors that I believe I have a chance to win.
Now pretend that instead of playing my neighbors, I have the option
to participate in a basketball tournament against the 1985-86 World
Champion Boston Celtics. The entry fee is $50,000, but the prize is $10
million! This is a much higher potential return on my investment than
the previous example, albeit for a much higher upfront cost and with a
much reduced (i.e., non-existent) chance of winning. Should I enter?
Unless I'm in the market for a divorce, the obvious answer is no.
This bet makes absolutely no sense despite the potential return on
investment. I would need to mortgage my house and go into crippling
debt simply to enter the competition, fully aware I would have no
chance of winning against Larry Bird today, never mind when he was at
the peak of his career.
Similarly, in the absence of a No Piggies Rule, it makes no sense
for T-Mobile or Sprint to spend millions of dollars to enter the
spectrum auction because they have virtually no chance of winning
enough licenses to justify participation. Sadly, spectrum auctions are
not Disney movies. Failure is always a (very painful) option, and the
need to win does not make winning any more likely than not really
needing to win. The fact that these companies really need the spectrum
does not, oddly enough, make it any more likely they will win or make
it cheaper for these companies to get the necessary capital. To the
contrary, the fact that they need the spectrum to remain competitive
but are unlikely to win it drives up the cost of capital and increases
the backlash when they lose.
Even without a No Piggies Rule to encourage smaller players to
participate, the number of potential bidders has dropped significantly
since the 700 MHz auction in 2008. Alltel and MetroPCS no longer exist.
Leap may not exist by the time the auction takes place.
Opponents of the No Piggies Rule like to paint a stark picture of
the auction failing if AT&T and Verizon do not participate. But an
auction limited to AT&T and Verizon is equally likely to fail. The FCC
must bring all potential bidders to the table, something only a No
Piggies Rule can hope to accomplish.
Band Plan, Bidding Rules and Other Factors
Numerous other factors impact the likely success of the auction.
With regard to bidding rules and other factors such as repacking, we
lack a good sense of the FCC's current thinking. These matters will,
hopefully, becomes the subject of future public notices to further
develop the record.
With regard to the band plan, the one thing agreed upon by nearly
all competitors agree upon is that the band plan should optimize paired
spectrum. Inclusion of supplemental downlink (SDL) spectrum below
Channel 37 appears more likely to increase competition problems in
light of the difficulties in integrating spectrum below Channel 37 with
other low band spectrum below 1 GHz. Furthermore, based on the current
experience with 700 MHz A & 700 MHz B block spectrum, it seems unlikely
that manufacturers will develop equipment for supplemental downlink
unless AT&T and/or Verizon capture significant SDL licenses.
Market Variability
Finally, the Wireless Bureau's May Band Plan Public Notice raised
the question of ``market variability.'' This would give the FCC
flexibility to recover more spectrum in some markets than in others.
Market variability potentially resolves the problem of holdouts in the
most constrained markets. Without such flexibility, the FCC is limited
in every market to the spectrum available in the most constrained
market. This could essentially starve the auction for spectrum.
At the same time, too much variability creates significant
problems. It is highly unlikely that equipment will be developed for
markets where large amounts of spectrum can be recovered given that the
largest markets are most likely to be constrained. Commenters have also
noted significant interference potential if there is too much
variability in the band plan caused by market variation.
To balance these concerns, the Commission needs a uniform core with
flexible edges. The Commission should establish a clear limit on the
potential variation from the uniform core set by the most constrained
market. This would reduce the value of holding out in the most
constrained markets, without introducing so much uncertainty in the
band plan as to undermine the ability of potential bidders to
adequately assess the value of the licenses.
Thank you to the members of the Committee for your time and I look
forward to the opportunity answer your questions.
Senator Pryor. Thank you.
We are going to do 5-minute rounds here and follow the
Committee's normal early bird rule.
Ms. Marsh, let me start with you. I would like to hear from
AT&T on this. I know that your company's preference is for no
restrictions, but you also talked about some possibilities in
your opening statement--I wrote it down. This approach would at
least ensure multiple winners.'' And it is a little bit of
follow up on what Mr. Feld was just talking about.
So are there any bidding limits, I guess I could say, or
parameters that might be imposed in a neutral fashion that you
think your company could support?
Ms. Marsh. Thank you, sir.
You are correct; we support an open and unrestricted
auction, because we think that is the format that will raise
the most revenue. And given the important revenue targets in
this auction, we think that that has to be taken into careful
consideration. What we have said, and no such proposal has been
put on the record to date: If there is to be a limit, we think
it has to be applied neutrally and fairly to all participants.
There has been discussion of what those limits might look
like. I think you have to take care, because if those limits
are too restrictive, you could undermine the efficiency of the
spectrum. For example, every bidder must be able to get to a
10-by-2 allocation to be able to do efficient LTE deployment.
And so you have to take care about how such limits are
expressed.
But, certainly, if the goal is to ensure multiple winners,
we think it should be a rule that applies to all bidders in a
very fair and neutral way.
Senator Pryor. OK.
Mr. Berry, let me dive in with you, if I can, and that is,
you know, we have all talked about the consequences of this
auction, both good and bad. And so, what are the consequences
for your members if they are not able to purchase any spectrum
in the auction?
Mr. Berry. Well, for our competitive carriers, I think it
would be disastrous.
We haven't had an auction since the launching of the
iPhone. And the data consumption by consumers, as Preston just
said, goes up like a hockey stick. Our carriers need access to
low-band spectrum. It propagates extremely well in rural
America but also reaches the inner sanctums of this hearing
room and other in-building penetration.
It is important to be able to serve the customers and the
consumers in the way in which they use your device. And the way
they use their device now is inside and outside. So it would be
extremely difficult for our members to build the 4G LTE network
and stay competitive without access to the spectrum.
And I am encouraged by AT&T's statement that Randall
Stephenson made today, that there may be some rules and
restrictions on how much spectrum any one carrier could acquire
at the auction. Maybe we are making some progress on finding
solutions that the entire wireless industry can benefit. We
need multiple winners for sure in the auction.
Senator Pryor. One little bit of housekeeping here is that
I said earlier that the rumor was we were going to have votes
around 4. Now it looks like they are going to be around 5. So
we do have a little bit more time.
Senator Thune?
Senator Thune. Does that mean they can give their full
statement now?
Senator Pryor. Yes, I will go back and give you another 2
minutes. Thank you.
[Laughter.]
Senator Thune. No. No.
Mr. Padden. I think you just proved we can do it in 3.
[Laughter.]
Senator Thune. Yes, that was impressive. This was a good
exercise for us.
Dr. Singer, like you, I do not believe anyone should be
restricted from bidding in the incentive auction. In your
testimony, however, you suggest, and I quote: ``If regulators
insist on going down the path of spectrum caps, that so-called
`symmetric spectrum caps' would protect against the remote
possibility that any single bidder acquired too much spectrum
at the auction.''
Now, knowing that is not the ideal outcome for a truly
market-based auction, can you explain why this idea may
nonetheless provide a sort of middle-ground resolution of the
competing perspectives of some of the other witnesses today?
Mr. Singer. Sure.
I have heard many arguments that have expressed a concern
that one single bidder would gobble up all the spectrum in the
auction. And if that is a concern, that could be addressed in
less restrictive ways than the proposals that have been put out
by T-Mobile and Sprint.
I actually don't think that one bidder has a very good
chance of gobbling up all of the spectrum, in light of a good
and fair competition. But if people are genuinely concerned
about that contingency, a cap that hit all bidders equally--
that is, that didn't treat bidders differently depending upon
their coming into the spectrum auction--would mitigate that
concern.
Senator Thune. OK. Thank you.
Mr. Berry, we both agree that smaller geographic spectrum
licenses can attract more bidders to an auction and may
increase revenue. And, indeed, you specifically mention in your
testimony the 700-megahertz Lower B Block sold for much more
than other blocks auctioned with larger license areas.
It is my understanding, however, that AT&T and Verizon
Wireless were both very active bidders for B Block licenses. So
my question is, could you explain why you expect their presence
in future auctions will reduce revenue when their presence in
the previous B Block auction instead resulted in very high
returns?
Mr. Berry. There was a lot of interest in the B Block in
the lower Band 12. Many of our members, as you know, the
smaller carriers, did come out and bid in very high ratios.
If you look at the C Block, which was the Verizon large
aggregated REAG area, it didn't receive as much revenue as the
lower block of spectrum. And I think what you see in that is,
with the smaller geographic areas and the desire to bid, one of
the larger carriers have already bought the C Block. And, as
you know, the lower Band 12 brought in over twice as much in
terms of revenue per pop per meg.
So I believe that this is unusual, in the sense that this
is the first opportunity for a greenfield 600-megahertz low-
band spectrum. It may be the last opportunity we have in over a
decade. And if the small carriers do not have access and if
they don't have an opportunity to bid without being sort of
purchased out from under them by the largest carriers, then I
think you are going to have a consolidation, further
consolidation, in the industry, because you will not be able to
compete as a small carrier without getting to a 4G LTE.
And remember, this spectrum is efficient in and of itself,
especially in rural areas. One cell site, one tower can cover
the distance of four or five towers in a higher--in a spectrum
band at 1-2.5. And it is critical that our smaller carriers and
literally every carrier has an opportunity to get access to
this.
You know, if you already own 80 percent of the low-band
spectrum, which Verizon and AT&T do, it is a lot easier to be
noncommittal about how much spectrum the small carriers should,
in fact, be able to bid on.
Senator Thune. But do you think, going back to the B Block
auction for just a moment, that the B Block would have sold for
more if AT&T and Verizon had not been bidding on those
licenses?
Mr. Berry. No, I don't think it would have sold for more
had AT&T not been bidding. But we are not suggesting that AT&T
and Verizon not bid. As a matter of fact, I want them to bid. I
want them to bid in every market and every opportunity, because
we get into the same ecosystem. We want handsets, we want
devices. We want partners, and we want partners that have the
same bands in their devices so that we can roam and we can
have, you know, partners to serve our customers.
So we want them to bid. I have never, ever said we didn't
want AT&T and Verizon to bid. I just don't want them to be able
to walk away with the entire pie, one, two, or three carriers.
Senator Thune. Mr. Chairman, my time has expired, and we
have other colleagues who want to ask questions. So, thank you.
Senator Pryor. Thank you.
Senator Booker?
STATEMENT OF HON. CORY BOOKER,
U.S. SENATOR FROM NEW JERSEY
Senator Booker. Thank you, Senator.
First of all, this is obviously very exciting to me. I
think there are a lot of wins we can be achieving here--added
wireless capacity, funding FirstNet, helping local broadcast
affiliates make some money, which is not a bad thing indeed,
and of course helping bring more revenue for deficit reduction
or other needs.
There is one area of all this, actually, that we are not
discussing that I just want to pull out a little bit. There are
television white spaces, or guard bands, that have just begun
to offer new exciting access and innovation opportunities for
our economy. It is unclear what is going to become of them
after this auction when it is all said and done.
And so, the unlicensed spectrum in higher ranges has
already brought us incredible innovations, from Wi-Fi,
Bluetooth, cordless phones, RFID, and wireless microphones, to
name a few. And now white spaces in and near this auction's
range offer greater reach and penetration that some have even
dubbed ``super Wi-Fi.''
These characteristics promise, again, new innovations and
access potential that really excites me, as I am concerned with
disadvantaged populations. And we are just beginning to see the
research in this space and how it is really offering real great
opportunities for increased investment in new technology.
But this is going to be hampered if there is uncertainty.
So I want to see these spaces protected as we repack the
spectrum, and predictability, which is so important for
investment, is provided to innovators and investors.
So, really, to start out, to Harold Feld, I was Mayor of
Newark and became really concerned about the digital divide.
And there is this powerful democratizing force going through
our society that is allowing poor folks, disadvantaged folks to
connect into, using the Internet, opportunities that we never
once even imagined, from Kickstarter and Kiva, access to
capital, to many other things.
And so I am really concerned about this phenomenon of the
digital divide really hampering us in education and social
mobility and other things. It was interesting; the Wall Street
Journal ran an article about children actually even needing to
go to McDonald's just to get access to do what they need for
education.
Your testimony talked about a pilot program by libraries to
extend their Wi-Fi into communities using these TV white
spaces, which really excites me. Assuming the E-Rate statute
would allow it, could public schools use TV white spaces to
provide access to schoolchildren when schools are closed?
And, more importantly, are there other ways this technology
could make Wi-Fi connectivity abundant instead of scarce? What
are your concerns regarding the potential impacts of this
incentive auction on those TV white spaces?
Mr. Feld. Thank you.
And, yes, one of the most exciting things about the TV
white spaces, as we have seen with other forms of unlicensed,
is once you make this available and start making this an
equipment purchase rather than a multibillion dollar license
purchase, it really frees the potential in innovation. There
are many people who have commented, this is the innovation
band. And that means down at every level of society.
We are looking at a world where, through TV white spaces,
schools would be able to extend their connectivity from the
school out into the neighborhood. The propagation
characteristics allow you to set up line-of-sight and even non-
line-of-sight links connecting to people's homes so that Wi-Fi
could follow your kid home so that you could actually do your
homework at home and not at McDonald's.
I also need to add that the FCC had a workshop in which we
had representatives from a number of communities who pointed
out that one of the biggest issues is getting knowledge of this
resource out to minority entrepreneurs, having them be informed
of what is available, have that reliability to invest, and that
they have discovered that once people make this discovery of
what is available, it is really just phenomenal to see how
access to the resource and imagination allows for much greater
participation for both economic opportunities and educational
opportunities.
Senator Booker. Great. And I would just add that that
entrepreneurialism is not going to happen if people are
uncertain about what is going to happen in this space.
And so, in the little bit of time I have remaining, to Joan
Marsh, what is AT&T's position on protecting unlicensed
spectrum in TV white spaces through this process?
Ms. Marsh. So, certainly, sir, there would be a lot of
white spaces left in the 500-megahertz band because only the
upper part of the TV broadcast bands are likely to be
reclaimed. And given the distances that are necessary to
separate broadcasters, to protect them from each other, you
will see the continuation of white space availability through
500.
We also think unlicensed can live in the 600-megahertz
band, consistent with statutory direction. And that direction
was to build the guard bands as technically necessary, and
then, once those guard bands are built consistent with
technology requirements, at that point there is the possibility
that unlicensed uses could live in a guard band.
Of course, we would want to make sure it doesn't create
interference for the neighboring wireless allocations. Because
introducing interference into the band, once built, would be a
big negative. But, certainly, we would be happy to consider any
unlicensed uses that do not create interference.
Senator Booker. Thank you.
Thank you, Mr. Chairman.
Senator Pryor. Thank you.
Senator Markey?
STATEMENT OF HON. EDWARD MARKEY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Markey. Thank you, Mr. Chairman, very much.
You know, spectrum is the oxygen of the wireless system,
and parts of it are now gasping for air. So we are obviously
having a discussion now, as this whole phenomenon unfolds, to
make sure that we do provide more spectrum. But at the same
time, you know, we have to balance the various interests that
we have here.
So back in 1993, when I was the chairman of the
telecommunications committee in the House, what we did as part
of the deficit-reduction package of President Clinton, on a
bipartisan basis, we added in an auction of 200 megahertz of
spectrum that created the third, fourth, fifth, and sixth
license in each market. Because the two incumbents were both
analog--names going unmentioned right now--and they were
charging 50 cents a minute, and no one had a cell phone in
their pocket because it was the size of a brick.
By 1996, with the third, fourth, fifth, and sixth license,
it had dropped to under 10 cents a minute; everyone started to
buy a device in their pocket. That is the year you bought your
device. And all of a sudden we had a revolution that has
everyone here today with one device in their pocket but many
people have two. You know, so that is a tremendous change that
took place.
And what we said at that time was, while we wanted to
maximize the revenues in the auction for deficit reduction in
1993, we didn't want to do it at the expense of innovation and
consumer protection. Because think of it from a consumer
perspective, the difference between 50 cents a minute and 10
cents a minute. So it is not just deficit reduction; it is also
what are the benefits for consumers and saving money and having
more services.
So we have to think that part of it through, as well, in
terms of who can bid for which part of this new spectrum that
is going to be out there to make sure we get it right, to
balance everything that we are trying to achieve, including
innovation.
So let's go to white spaces, if we can, in terms of what
that means. And maybe, Mr. Feld, briefly you can talk about
what white spaces can mean economically. We might not make as
much money in the short term, but what could happen in the long
term, in terms of devices, applications, and other new economic
investment?
Mr. Feld. Thank you.
I would like to say first, I don't think there is a
conflict between maximizing auction revenue and being
reasonable. And I must correct Ms. Marsh. The statute speaks
not of guard bands that are only technically necessary but
technically reasonable. Congress actually looked at, if you
need to trade a couple of megahertz over here----
Senator Markey. Can you deal with my question, please----
Mr. Feld. But, yes. But your----
Senator Markey.--deal with my question, please, sir?
Mr. Feld. Yes.
Senator Markey. Thank you.
Mr. Feld. Unlicensed, as we have seen, is generating
enormous amounts of income throughout the value chain. We are
seeing it is a device generator which generates both retail
sales and other sales of new devices for a variety of new
purposes. It creates wholly new services. It allows for the
expansion of existing services.
In rural communities and in some urban communities, it is
the method by which cheap broadband access is available and
customized to terrestrial use as opposed to what is available
for mobile use. It is essentially the glue that binds together
wireline and wireless.
Senator Markey. Mr. Epstein, do you agree with that, in
terms of the economic benefits that could flow from having
licensed and unlicensed spectrum out there?
Mr. Epstein. Yes, the Commission is on record as agreeing
with the tremendous benefits of the use of unlicensed spectrum.
And, you know, we are implementing I think as Chairman
Pryor and Ranking Member Thune said is the bipartisan
compromise between licensed and unlicensed spectrum in this
particular proceeding. And it is quite clear that, given under
the statutory constraints that Congress put before us, which
have to do with guard bands, the Commission clearly does
believe in the benefits of unlicensed spectrum.
Senator Markey. OK.
And let me ask you this. We have heard concerns that as a
result of repacking and the TV stations then potentially have
to upgrade their transmitters or towers, that a number of FM
radio stations, including WBUR in Boston, that currently
collocate their transmitters with TV stations may be negatively
impacted.
What is the FCC going to do to deal with that issue for
that station but for others all across the country?
Mr. Epstein. The issue of broadcaster transition, Senator,
is one which is pretty complex. We have spent a lot of time on
it already. We have had a workshop, we have hired an outside
consultant, we have had a number of different studies, because
we are very concerned about viewer disruption and the ability
of stations actually to make the transition with respect to
collocation of towers and other matters.
The transition will be complex, will take some period of
time. And it is one we know we have to take into account in the
transition. So we are concerned about it. And that station, I
can assure you, ``Wait, Wait, Don't Tell Me,'' we will make
every effort----
[Laughter.]
Senator Markey. Well, we are trying to tell you, though----
[Laughter.]
Senator Markey [continuing]. So that you get it right. And
it is really an important issue for us.
Mr. Epstein. Yes, sir.
Senator Markey. And we want to deal--I think we all want to
deal with all of the legitimate issues that each of you have
raised. We have been able to do that in the past. And I think
that as long as we listen to each of you and we understand the
engineering issues and we are respectful of them simultaneously
while also trying to create a robust marketplace with many
participants, then I think we will get the right answer.
Thank you, Mr. Chairman.
Senator Pryor. Thank you.
Senator Klobuchar?
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you, Mr. Chairman, for holding
this hearing.
And I guess, Mr. Epstein, if Senator Markey gets ``Wait,
Wait, Don't Tell Me,'' I get the Garrison Keillor Lake Wobegon
show, right?
[Laughter.]
Senator Klobuchar. OK.
I did want to thank Senator Markey for his years of
leadership in this area. Actually, when I was practicing
regulatory law and involved in very complicated rate hearings,
a telecommunications one, I remember Senator Markey has been
doing this for a long time. So I am glad he is in the Senate.
I just wanted to lead with one of the rural questions. Mr.
Berry, thank you so much for your support of the bill I
introduced with Senator Fischer, the Rural Spectrum
Accessibility Act. I think you know that rural carriers need to
be part of any solution to make sure that consumers, no matter
where they live or work, are able to connect to their families.
How do you view this bill as complementing what your
members would like to see from the auction?
Mr. Berry. Thank you.
And, yes, we do appreciate and support what you are trying
to do. I think you are going to allow smaller carriers,
especially in rural areas of service, provide service to the
consumers in that area with high-speed LTE service by being
able to reclaim some of the spectrum that heretofore is not
accessible.
You know, the build-out restrictions in the rules that are
currently in place, if we could increase the flexibility, which
your bill provides for, I think we can squeeze out more
capability in the rural areas for spectrum that is desperately
needed.
And I think your bill and Senator Fischer's bill is a great
way to approach a real problem in a very practical fashion. And
I am hoping that our members will deliver results for you.
Senator Klobuchar. Thank you very much.
I want to thank, Ms. Marsh, AT&T for helping us in a rural
area. The Governor and Senator Franken and I were down in
Hills, Minnesota, probably not the first town on your mind
right now, during an ice storm where they lost all their trees.
And all they wanted to talk about was how they didn't have cell
phone service. And I got involved, and you guys have been very
helpful in building out down there. They literally couldn't use
cell phones in the middle of an emergency. So I thank you for
that.
I had some questions that I will actually put on the record
about AT&T's work on making sure that rural customers have--
that spectrum is effectively utilized to reach them in an
auction.
I wanted to move to something else that, actually, Mr.
Kaplan raised with you, Mr. Epstein, which is some of the
concerns regarding spectrum coordination along the northern and
southern borders and that the FCC is handling in advance of the
auction.
Where is the FCC in the process of its coordination efforts
with Canada and Mexico?
Mr. Epstein. The commission has recognized since day 1 the
act's requirement to coordinate with Canada and Mexico. We have
had more than over the last 6 months a series of technical
meetings with Canada and more recently with Mexico, who has
recently had a substantial change in both its constitutional
and statutory foundation for its regulator.
We are really pleased to report that both countries have
publicly recognized the significant advantages of a common band
plan with the U.S., both from the Canada standpoint and Mexico
in a recent conference has stated that.
We have placed hugely high priority upon these meetings
about achieving some sort of, you know, technical solution with
respect to Canada and Mexico's border. Acting Chairwoman
Clyburn made this such a high priority that she traveled----
Senator Klobuchar. I know that.
Mr. Epstein.--to Canada, helped make a great breakthrough.
Chairman Wheeler has already met with both Canadian and Mexican
representatives.
We have a strong charge to the International Bureau to push
as quickly as we can because we recognize the need for
certainty with respect to both the Canadian and Mexican
borders. So it is extremely high on our----
Senator Klobuchar. OK.
Mr. Epstein.--list for the----
Senator Klobuchar. Thank you.
Mr. Epstein.--reasons that Mr. Kaplan stated.
Senator Klobuchar. Appreciate that. Thank you.
And then, Mr. Padden, I know the broadcasters are very
concerned about the method that the FCC is going to use to
place monetary value on the spectrum. How will the calculation
method that the FCC uses impact the potential revenues of the
auction as a whole, and how will it impact the decisions of
broadcasters who are interested in participating?
Mr. Padden. Well, thank you very much for that question.
The FCC is buying 6 megahertz of spectrum; they are not
buying broadcasting businesses. And in their notice, they
propose to score stations based on some characteristic of their
broadcasting operation. We think that doesn't have anything to
do with what the FCC is buying. It is creating distrust among
broadcasters and driving them away from the auction.
And as Professor Cramton discussed with the FCC just last
week, the scoring is not going to improve the efficiency unless
somehow the FCC knows the secret bottom line in the mind of
every broadcaster, which is clearly impossible, and unless they
dynamically change their scoring weights between each round,
which would add enormous complexity to what is already going to
be the most complex procedure in the world.
So we think they should not score the stations; they should
hold a straight-up auction. And we think that is what the
statute provides for.
Senator Klobuchar. OK. Thank you.
I am out of time, but, Mr. Kaplan, I will follow up on the
record with some questions about the eligible expenses issue,
which I know is important, as well as, in general, Mr. Epstein,
about some antitrust--I am head of the Antitrust Subcommittee
in the Judiciary Committee--and on some of the competition
issues.
So thank you very much. And thank you all for your work on
this important topic.
Thank you, Mr. Chairman.
Senator Pryor. Thank you.
Senator Blunt?
STATEMENT OF HON. ROY BLUNT,
U.S. SENATOR FROM MISSOURI
Senator Blunt. Thank you, Mr. Chairman.
Mr. Padden, will eligibility in the auction have any impact
on your coalition members? Is that an area that----
Mr. Padden. Are you talking about bidding restrictions in--
--
Senator Blunt. Yes.
Mr. Padden.--the forward auction?
Senator Blunt. Yes.
Mr. Padden. Yes. We--and I want to be clear--we talk money
from no carriers at all. We are entirely funded by
broadcasters. We are as pure as the driven snow.
[Laughter.]
Senator Blunt. At least somebody in here can say that. That
is good.
[Laughter.]
Mr. Padden. All we care about is maximizing the revenues
generated by the forward auctions so that there is money to get
the spectrum in the first place.
I would note that most of the questions here have been
about how to divide up this spectrum.
Senator Blunt. Right.
Mr. Padden. But unless enough broadcasters come forward,
there is not going to be any spectrum to divide up. You won't
have to have fights over bidding restrictions because there
won't be anything to bid on.
And we think the FCC needs to get very serious about
sharing information with stations like what the prices are
going to be. I have a house that has been on the market for
quite a while. The broker just called me and said, ``Good news,
we have a contract.'' The first question I asked is, How
much?'' And the FCC needs to start telling broadcasters what
kind of price range they are going to be looking at, or else
they are not going to get the participation and all these folks
won't need to fight with each other because there won't be
anything to fight over.
Senator Blunt. And how is that price range going to be
determined, as best you understand it?
And then I will ask Mr. Epstein to weigh in.
Mr. Padden. Well, the statute calls for an auction, and the
question is where the auctioneer begins. And at the moment, we
have no information about that.
Senator Blunt. And would the amount of the auction then go
to the broadcaster that released that spectrum in total? Or how
would that be determined?
Mr. Padden. The broadcasters can either release their
spectrum in total or they can bid to release their spectrum and
share a station with another station or they can offer to move
from a UHF to a VHF channel.
Senator Blunt. All right. Mr.----
Mr. Padden. But one important fact: the FCC is only going
to be buying spectrum in a limited number of markets, but they
are going to be getting the forward auction revenue from every
market in the country, which is going to give the FCC plenty of
financial leverage to pay what they need to pay to get the
broadcast stations in the few markets where they need to buy
them.
Senator Blunt. And is there any understanding between the
broadcasters and the FCC as to how that price is going to be
arrived at?
Mr. Padden. At the moment, no, sir.
Senator Blunt. Mr. Epstein?
Mr. Epstein. Yes, Senator, thank you.
The construct that Congress set up and that we are
implementing is a reverse auction, OK? So that means you start
high and you say, how many are in, how many will sell your
station or share your station or move from U to V at a very
high price. OK? And then it will tick down.
And we established this proposed mechanism--the Commission
ultimately must rule on it--to make it easy for broadcasters.
All they have to know is when they want to stop out.
The key thing that Mr. Padden is talking about, and I agree
with him, is: what price do we start at? What is the price that
we first offer to broadcasters to make this attractive? And my
instructions from the Chairman, the prior Chairman, and the
Commissioners are exactly as he stated. We won't have an
auction unless the broadcasters participate.
So we are looking at mechanisms to start with a very high
reserve price, not based upon the fair-market value of
broadcast stations but based upon potentially a number of
different factors which the Commission will have to determine,
including things like the per-pop price of spectrum in an
auction.
So the key is to attract broadcasters, the key is
potentially to have an auction which is simple for broadcasters
to use, and to start at an attractive price to make the auction
a success.
Senator Blunt. Well, it obviously is the key element to all
of this working.
Mr. Berry, are there things besides spectrum that are going
to relieve some of the crunch--better towers, fast siting,
other things I don't understand? Are we going to constantly
need to look for more space rather than better use of the space
we have?
Mr. Berry. Thank you for the question.
I would say, over the past few decades, the capacity has
been increased by technology. And I fully expect technology to
continue to move us forward. But I think we are going to need
additional spectrum throughout the United States.
But, yes, we are getting new technologies. The LTE, long-
term evolution, technology is going to increase speeds. Sprint
just rolled out the Spark product, which is advanced LTE, and
they are going to get speeds, you know, maybe as much as 10
times higher.
So there is always that evolutionary impact to bring more
speed and more capability to the network on the spectrum you
currently have. I mean, Verizon just announced an opportunity
to compress, you know, video over wireless broadband which is
five times greater than what was available last month.
So we are going to see both, but we definitely need
spectrum, and especially in rural areas, if we are going to
stay up with the demand that consumers expect.
Senator Blunt. I thank the Chairman.
Senator Pryor. Thank you.
Senator Blumenthal?
STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
Senator Blumenthal. Thank you, Mr. Chairman.
Thank you all for being here today and for all your good
work on this very complex, profoundly significant, and fast-
changing area. And I know I share the frustration of many of my
colleagues that our questioning is limited to 5 minutes. It
could easily take 5 hours or longer, although you may not
welcome that opportunity.
[Laughter.]
Senator Blumenthal. I speak with some humility in the
presence of Senator Markey, who has a longstanding involvement
in this area, and thank him for his very important work.
I would analogize the spectrum and the entire service that
you provide not so much to oxygen as to the blood supply,
because it is the blood supply that carries oxygen to parts of
the body, it carries nutrients and everything that is essential
to our body working. And I think more and more the spectrum is
that blood supply, and the American public ought to understand
how important it is.
I have endorsed measures that would provide more access to
spectrum. I believe strongly and I have written and used the
oversight hearings of the Judiciary Committee, where I serve,
to encourage the Department of Justice to continue policies and
to encourage the FCC to adopt policies that ensure that smaller
carriers have access to spectrum so that they can provide
competition and competitive discipline, not for the sake of
competition but for the sake of consumers, not for the sake of
any companies but for the sake of the people, ultimately, who
benefit.
And I appreciate, Ms. Marsh, your concern about producing
the best fiscal result for the Federal Government, but there is
a larger interest here, in my view, that is really among the
core, profound interests that this committee can help serve.
And so my hope is that Chairman Wheeler's recent comments,
which seem to signal that he agreed with the Antitrust Division
of the Department of Justice, are an indication of his
willingness to entertain some auction eligibility directives. I
don't like the word restrictions'' as much as ``directives.'' I
understand they should be neutral and fair, but they have to
adopt policy approaches that really encourage the public
interest, and that may not be neutral to everybody who is
involved. That is the name of this process. But they should be
fair.
And so I am hoping, and I am going to ask this question of
Mr. Epstein, that the FCC will pursue a spectrum policy that
best enables competitive forces to benefit consumers and will
adopt the Department of Justice recommendations or the kinds of
screens or caps that limit the amount of spectrum that any one
company can have, simply so that there can be more competition.
Is that the direction that you see Chairman Wheeler going?
Mr. Epstein. Senator, I do know that Chairman Wheeler has
stated in the one month he has been here that his mantra is
competition, competition, competition. And he has stated it
numerous times----
Senator Blumenthal. I know that he has stated it a lot
because I have heard him say it. Can you commit to us that he
is moving in that direction with screens or caps or specific
measures that will promote greater access and more competition?
Mr. Epstein. I can't commit to either what Chairman Wheeler
will do in the future or what any of my commissioners will do.
I do know that they take these arguments quite seriously.
They looked at with interest the recent statements of AT&T, as
stated by Ms. Marsh here. And I know that they also--I know
that the chairman has stated that the letter filed by the
Department of Justice, because it is part of the
administration, is something that they give persuasive weight
to, but they also give persuasive weight to the multiple other
filings. There have been more filings, I think, on this issue
in the proceeding than, I think, anything else.
Senator Blumenthal. Ms. Marsh, is that the kind of policy
that you think AT&T could accept?
Ms. Marsh. Well, the FCC currently has policies in place
that do look at spectrum aggregation for the specific purpose
you identified: to make sure no one carrier is aggregating more
spectrum or that aggregation wouldn't create a competitive
impact.
And we think that tool can be a very effective tool here.
It has been effective in all the mergers and acquisitions the
FCC has reviewed. And it needs to be updated, and everybody
needs to understand the rules of the road very clearly, but we
think that tool, in and of itself, could be a very effective
tool if it is used in connection with the auction.
Senator Blumenthal. My time has expired. I thank you, Mr.
Chairman. And I may have some additional questions, as well,
for the record.
Thank you.
Senator Pryor. Thank you.
We have been joined by Senator Warner, the only member of
the Wireless Hall of Fame that is on this committee.
[Laughter.]
Senator Pryor. So thank you for joining us today.
STATEMENT OF HON. MARK WARNER,
U.S. SENATOR FROM VIRGINIA
Senator Warner. Well, thank you, Mr. Chairman. Thank you
for that courtesy.
I apologize for not being here for most of this hearing.
This is an area of more than some interest to me. We had our
final housing finance committee hearing today on a piece of
legislation that Senator Corker and I have been working on for
some time. So, my apologies.
And also my apologies to my colleagues and the witnesses,
because nothing worse than a member dropping in at the last
moment and asking questions that have already been asked.
And it is true, I am a member of the Wireless Hall of
Fame--the only hall of fame I will ever be inducted into.
[Laughter.]
Senator Warner. I was hoping for the Old White Guy
Basketball Hall of Fame designation, as well, but I am not sure
that is going to come by.
Senator Booker. Somehow they gave that to me.
[Laughter.]
Senator Warner. There are a lot of directions we could go
with that.
[Laughter.]
Senator Warner. Mr. Chairman, you know, I know we have
probably exhausted the topic already about, you know, spectrum
caps and allocations, and I am sure that has been thoroughly
discussed with the Committee. What I wanted to, you know, start
with is actually digging in a little bit with Mr. Epstein on
some of the questions about how we get these auctions right.
And I--you know, editorial comment--believe that Chairman
Wheeler is probably right to go ahead and move this to 2015,
trying to get this process set up the right way. You know, we
have one crack at this. And as we hear, going forward, not
knowing completely what the budget deal may be, but there may
be even more interest in seeing how we can obtain additional
spectrum going forward, which we all desperately need, or the
industry and the American public desperately needs, there may
even be more budgetary constraints on it.
So, you know, as we think about the reverse auctions, based
on audience size, population, other factors, one of the things
that I wanted to talk about was market variation. And I
understand at the Commission there has been an idea which would
allow for a common downlink band nationwide but would provide
variation for uplink bands. And, clearly, this would recognize
the difference between markets and volume and what have you.
Broadcasters, obviously, worry about interference issues
here, which I know has also been probably dealt with.
So, Mr. Epstein, if you could spend a couple minutes
talking about market variation, the market variation approach,
as you think about these auctions. You know, we will get at
markets in different ways. Is this a way, rather than trying to
have a one-size-fits-all rule, is this a way that we might be
able to maximize spectrum but at the same time give, you know,
the overall marketplace some level of predictability?
And if you have any specific comments about some of the
performance issues and interference issues, I would love to
hear them.
Mr. Epstein. Yes, Senator. Thank you very much. I think you
have touched on an extremely important issue.
You know, what the Commission would very much like to do is
to have a nationwide reasonable amount of spectrum, the entire
nation, which would be a good, solid amount.
We recognize that in certain parts of the country, perhaps
because of the international issues that we have talked about
before, perhaps because of some of the inability to repack in
the crowded northeast part of the United States, that we may
not be able to recover the core amount of spectrum in those
areas.
Therefore, we felt it very important from day one not to go
to a least common denominator--in other words, not to take the
least amount of spectrum in every market that we can get in the
least market. And I think there has been some consensus--it has
been a controversial issue, but we are, I think, narrowing to a
band plan which will take that into account, the issue of
market variation.
But that raises certain complications, and important
complications, and complications which the NAB appropriately
has brought to our attention. That means in some markets where
you have more spectrum next to adjacent markets where there is
less spectrum, you have the potential of a broadcast station
operating on the same channel as you do a base station in
another market. We can't have that, OK? There would be a
statutory violation one way and also, potentially, an
interference with the wireless operation in another.
So what we are working on is establishing so-called co-
channel interference standards and protections. And so it is,
again, a balance. We don't want to be driven to the least
common denominator, but at the same time we know we have
obligations, both to the public interest and under the statute,
to protect, you know, the different services operating in
different areas. And that is the direction that we are looking
toward going in the recommendations to the Commission.
Senator Warner. My time has expired. I would simply say
that I know an issue that I am sure has also been raised, Mr.
Chairman, is, you know--this also kind of backs us back into
the definition of, all right, what is the geographic definition
of the marketplace here? You know, MSA, RSA, other geographic
definition. How we take into account particularly some of the
midsize carriers who provide very good quality service but in a
number of very limited, specific markets, that they don't end
up getting completely pushed out.
So there is a lot on your plate.
And I really appreciate the courtesy of the Chair to let me
slip in a little bit late.
Senator Pryor. Thank you.
And we are going to actually do a second round for all the
senators who want to stick around if they are able to, if their
schedule permits.
Senator Nelson?
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. As a matter of fact, we ought to put you up
there.
[Laughter.]
Senator Nelson. Because you know as much about this as any
one of them.
Senator Warner. I was very current circa 2000.
[Laughter.]
Senator Nelson. Mr. Epstein, this is going to be a
sophisticated auction. You are going to have to put together a
very sophisticated bidding platform to maximize the
participation and protect the integrity of the information.
So can you tell us about the FCC, where it is in the
auction information technology process?
Mr. Epstein. Yes, Senator.
This was one of the key issues that Chairman Wheeler
focused on from the day he walked in the door. We have been
focusing on it for a long time, but because of his background
in venture capital, he immediately focused on it. And we have
some of the best auction design and software people in the
world working both on the inside and outside as contractors
with us.
But that is not sufficient in either our mind or in the
chairman's mind. And that is one of the reasons that he thought
a more realistic schedule for the auction was mid-2015 instead
of beginning 2015. And it was for the very reason of adequately
testing the software that we are developing with respect to the
auction.
Some of the software we are using in the forward auction
are things that we have been doing for 10 or 20 years already.
I mean, we have had multiple forward auctions. In the reverse
auction, we are doing something which hasn't been done before.
And the combination of both the reverse auction and the
forward auction, it is a challenge but one which we know that
we have to meet and we have to make it right. We have to have
both inside testing, we have to have outside testing, and we
have to have testing by the participants before we are willing
to go ahead.
Senator Nelson. Well, you also have to have confidence by
all stakeholders in the process. And so, what are you all doing
to maintain the transparency?
Mr. Epstein. We will have, as we go forward with respect to
the implementation of all of the software that is involved, the
bidding platforms, the interference platforms--we have already
released a lot of data. We had a so-called data public notice.
We are encouraged by the fact that the broadcasters and other
participants have looked at it carefully, given us feedback.
And we will continue to be transparent there.
Before we have this auction, you know, we will have a mock
auction, and we will have the participants actually in there
trying to stress-test the actual software that gets developed
before we go to actual market.
Senator Nelson. Mr. Chairman, as you know, the newspapers
have speculated on the fact that maybe spectrum sold would be a
part of the revenues that would be produced for a budget
agreement. We haven't had the budget agreement announced yet,
but--so would this be, in that 10-year period that they are
looking, would this be the source of that revenue?
Senator Pryor. Well, again, we don't know exactly what the
budget deal is they are contemplating, but certainly in this
budget environment that we are in, there are a lot of people
looking for revenue. And they are looking for it anyplace they
can get it. So it is very possible.
And this may not be the last spectrum auction. You guys are
working on this one feverishly and working triple-time on this
one, but, you know, in all likelihood, there are more to come.
Do you have any other questions?
Senator Nelson. No.
Senator Pryor. OK. Thank you.
Senator Ayotte?
STATEMENT OF HON. KELLY AYOTTE,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Ayotte. Thank you, Mr. Chairman.
I want to thank all the witnesses for being here.
Mr. Kaplan, first of all, let me just thank the
broadcasters for their ongoing role. It has been very
constructive, in the spectrum-clearing process, so thank you
very much for that.
I have a follow-up to a question Senator Klobuchar had
asked and that is really about New Hampshire as a border state.
We are in a unique position and I can understand Minnesota
being in a similar situation. When it comes to the incentive
auction, because of the need to coordinate channel assignments
with Canada, we are in a position similar to Minnesota in that
regard.
Beyond the impact to New Hampshire television stations and
viewers, which I have already weighed in on with the FCC, what
are the potential consequences to the repacking process and,
ultimately, auction revenues if international coordination is
delayed in substantial part until after the auction?
Mr. Kaplan. Thank you, Senator, especially for your
leadership on this issue. And this actually gets back to, I
think, even a conversation before about auction revenues.
One of the key things along the borders--and we are not
just talking about the most northern or southern border. We are
talking about, for example, the entire state of New Hampshire,
within 250 miles of the Canadian border and within 150 miles of
the Mexican border. Those stations cannot be repacked without
an agreement with Mexico and Canada. Otherwise, you would have
to go through some sort of--the current process is 30 to 45
days at a minimum to get through that process.
Senator Ayotte. Right.
Mr. Kaplan. So some agreement needs to be reached.
And, in our view, both from a broadcasters' standpoint but
from an auction revenue standpoint, from a creating-the-best-
possible-wireless-band standpoint, so that it is not a separate
New Hampshire band but you are actually part of the United
States with the rest of us----
Senator Ayotte. We think we are unique, but we----
Mr. Kaplan. Yes. Right. Not that unique.
Senator Ayotte.--don't want a separate New Hampshire band.
Mr. Kaplan. Exactly, right--that the FCC needs to take the
time to get those agreements done. Because that solves a lot of
technical problems, as you point out, but it also allows you to
auction off the band as a whole.
The other thing that many people don't talk about is it is
very hard to have two repackings. So some people might say,
repack now and then repack New Hampshire and Minnesota later.
That, actually, is very, very difficult to effectuate, because
once you take us and the rest of the country's broadcasters and
squeeze us together, there is no way for the stations in
Concord or elsewhere to come down--there is no space for you
anymore. So once we do the repacking, it doesn't work.
So it has to be a holistic repacking solution. And it could
be one that lasts over 10 years and expects that New Hampshire
may repack later. But it has to be done at once, because you
can't do it twice, which is why we are happy Chairman Wheeler
created some more time and space here to try and get that
agreement done.
Senator Ayotte. Thank you so much for that answer.
And, Ms. Marsh, certainly I was very pleased last month
that DOD, NTIA, and the FCC announced an agreement to get the
1755 to 1780 megahertz band ready for auction. I have behind
the scenes, also serving on the Armed Services Committee,
urging the parties to get together to really take action to
protect DOD's interests, but we know that we need to get this
band in particular out to auction.
What is your perspective on this process? And are you
confident that commercializing this spectrum is moving in the
right direction? Are we seeing a moving-forward process here
that is going to get us to a result that we need?
Ms. Marsh. So this work is really important. This band, in
and of itself, could free up 25 megahertz of paired spectrum,
which would also be very useful and welcome by the wireless
industry.
The process itself has been a challenging one just because
of the number of different services that are in 1755 and 1780.
We have been encouraged by some of the recent successes and the
progress that is being made.
And I think all of the agencies, the NTIA as well as FCC,
DOD, and the wireless industry are all working together I think
very productively on this band right now to try to bring it to
auction within the statutory requirements, which does require
that it be allocated by I think 2015, February of 2015.
Senator Ayotte. OK.
Ms. Marsh. So, yes, we are encouraged by the progress being
made.
Senator Ayotte. Good, because I think it sat around here
for a long time. We all knew that it needed to be done, and
there wasn't the impetus to move it forward. So I am encouraged
to hear this.
And, Mr. Feld, I wanted to get your perspective on Chairman
Wheeler's announcement of the delay. What I have heard from the
panel is that no one has been critical of the decision and I
certainly agree that we need to get it right and make sure we
go forward, get these issues resolved, and are constructive.
Do you believe the FCC has the tools and the expertise it
needs to design the auction in a way that can both maximize
revenue and, obviously, promote ample competition in the
marketplace?
Mr. Feld. I do believe that--first, I applaud Chairman
Wheeler for taking a step back and saying, you know, we are
going to do this right.
What we need is transparency around scheduling the process
and certainty with regard to when we think it is likely to
happen. Industry needs that with regard to, like, getting
capital and being prepared. The TV white spaces also will need
to know when the resolution of their uncertainty is likely to
be resolved. So I think the announcement does all that.
With regard to FCC resources, I think that, yes, the FCC
has led the way in developing auction software in the world. I
think this has attracted a lot of interest from experts who are
eager to work on the first-ever incentive auction. I think that
the one thing we need to be sensitive to is whether the FCC has
the money that it needs to buy the equipment and expertise that
it needs.
And in this regard, I think that we ought to encourage the
agency not to be shy. I know we are in a time of sequester, but
the auction revenue can, in part, be used after the fact to
help defer the costs of running the auction itself. But you
need to actually build software and hardware that works to have
a good auction. So we just need to be sensitive about that, as
well.
Senator Ayotte. Thank you.
I want to thank you all. I know my time is up, but I just
have to thank Mr. Berry for mentioning my legislation on the
reform of the Universal Service Fund in his written testimony.
And I look forward to continuing to work with you on this
important issue. I thank you all for being here.
Senator Pryor. Thank you.
Mr. Padden, let me start with you. We will do a second
round here; we will do another 5-minute round.
Let me first ask a little bit of a followup. You said
earlier that broadcasters weren't sure about the price, about
how much money they might get. Is that the biggest impediment,
or is it just kind of the complexity and just, you know, from
their perspective, perhaps, the lack of clarity about how all
this is going to work?
Mr. Padden. I think the price is far and away the most
important fact that broadcasters need to know.
And Senator Nelson asked a question about transparency.
Although the FCC has not yet given us information about
pricing--I think that is in part because they haven't made up
their mind yet--those things that they have decided, they have
been tremendously transparent and open. It has been a great
experience. They grant you meetings time after time. So the
process has been very open.
But in answer to your question, nothing is more important
to attracting broadcasters than to give them some idea of how
much money they are going to get paid if they give up their
spectrum.
Senator Pryor. Yes.
And let me ask, just kind of a one-minute tutorial on the
channel-sharing concept that you mentioned earlier. And just
tell the Committee how that works. How do two stations share a
channel?
Mr. Padden. Sure. In digital, two stations can share a 6-
megahertz channel, both broadcast on the same channel. And so
one of the options in this auction is for--let's say Rick and I
each have a station in the same city. We might agree that I
will turn in my spectrum and get a check from the Government
that I will then share with Rick, and we will both broadcast
out of his tower.
Now, in the FCC's Notice of Proposed Rulemaking, they said
that if we do that, I need to be able to cover every inch of my
City of license from Rick's tower or else I can't share with
him. And it is kind of weird, they are quite fine if I turn off
my transmitter completely and spend the rest of my life serving
no one. That is fine. But if I can only serve 85 percent of my
current audience from the sharing tower, that is a problem. So
we have urged the FCC to be much more flexible in these sharing
arrangements.
And there is an engineering fact that could provide
tremendous leverage for the Commission here, and that is, all
the stations that are on a central antenna farm in a city will
each occupy only one channel in the repack. But stations
scattered around the perimeter of the market can each take up
to three channels in the repack. So if you let some of those
perimeter channels move into the central antenna farm, you
dramatically reduce the number of channels you need in the
repack, and it makes reallocating this spectrum much better.
I should say, in our informal conversations, the FCC has
shown considerable interest in these arguments. And while no
final decisions have been made, we are encouraged that they are
listening to us.
Senator Pryor. Thank you.
And let me ask Mr. Epstein--I am going to change gears on
you. And here again, I would love just kind of a 1-minute-or-
less answer. And that is, some of the broadcasters have
expressed concerns about translator and booster stations. How
does FCC intend to address those concerns?
Mr. Epstein. The translators and boosters and low-power
television are really important, particularly in rural areas,
and we recognize that. And one of those balances, in the Act,
Congress did not determine that they would not be protected and
were not eligible for compensation. But we still, nevertheless,
recognize their importance, and there are two ways we are
attempting to address it.
One of them is to make it clear that in rural areas we are
seeking this core amount of spectrum; we are not seeking the
maximum amount of spectrum. So that potentially could be more
difficult, but we are not seeking to take all the spectrum.
And, number two, we are talking to the industry about
technical solutions, such as multicasting from a single tower,
alternate programming distribution, and even favorable rule
modifications to allow them to apply more quickly.
Senator Pryor. OK.
Mr. Kaplan, let me ask you a question, as well. The
legislation that we are all working under here says the FCC is
to make all reasonable efforts to protect TV stations in the
repacking process. From your standpoint, is the FCC committed
to complying with that?
Mr. Kaplan. We are working very closely with the FCC staff
on this and have met with them a number of times, and our hope
is that we get to that place. There are some ideas out there
now that we think don't meet that standard, but they are not
the final ideas, they haven't been the things voted on by the
Commission yet.
But we want to make sure the Commission understands that,
you know, as would concern members of this committee, again, it
is the viewers that matter. The people today who get the
stations should get them afterwards. So any proposal that
treats viewers as fungible--you may gain 50,000 here, lose
25,000 here. Each viewer that relies on those stations that
still remain on the air should get them. And we are working
closely with the Commission to try and get to that point.
Senator Pryor. And does the FCC, from your standpoint, have
sufficient flexibility to do the repacking?
Mr. Kaplan. They absolutely do. And they do to both the
repacking to preserve white spaces, which is very important, as
well as to get the amount of megahertz that the wireless
industry says it needs.
Senator Pryor. Senator Booker?
Senator Booker. Thank you very much.
So, you know, first of all, again, I think this is a
wonderful situation that presents many opportunities. But what
sort of worries me is that we are just dealing with still table
scraps compared to what the growing and mushrooming demand is
going to be. And seeing the incredible growth of the
information that is being transmitted wirelessly, the demand is
going up, I am really wondering, looking ahead, if maybe you
guys could help me understand how we in government could do
things more efficiently and more effectively.
And, specifically, the Government is sitting on a
tremendous treasure trove of spectrum right now. And I believe
we should be doing everything possible to free up what we can
for both licensed and unlicensed usages. It could really fuel
our economy and have a ripple effect in tremendous ways--in
democratizing forces, in closing the digital divide, and
promoting entrepreneurialism, innovation, economic growth, and
more.
And so, while government spectrum is vital and we obviously
need to preserve that, with technology obviously coming--I
think that even for the Government it is going to become more
and more important, and I have seen the urgencies that are
often needed in crisis situations. But I am wondering if there
are ways that we could be doing a better job to identify those
inefficiencies and convert available spectrum to
nongovernmental applications with a greater sense of urgency
and, frankly, predictability.
And so, really, for the entire panel, and I would love
maybe to start with Mr. Feld, followed by Ms. Marsh, Senator
Ayotte pointed it out, that we are about to free up DOD's 1755.
But from what I am reading, it has taken us about a decade to
get that out there, which seems remarkably inefficient in this
time that we are moving not in the speed of decades or years,
but month to month there are growing demands.
And so I am just curious what you all believe in an
informative way, what should we be doing for our next steps to
meet this urgency and to provide that predictability?
Mr. Feld. Thank you very much.
I will say that Public Knowledge, we have issued some white
papers on this going back to 2010. We believe that there is a
lot that can be done to promote this efficiency.
We think that spectrum sharing is the beginning. It is
allowing broadcasters and the military to now begin to share
their spectrum to clear for auction. It can also be used to
allow for access in commercial use. The FCC is looking at the
next stage of this in its 3.5-gigahertz proceeding.
But I will suggest that one of the things that we need to
do is invest in more efficient spectrum equipment for
government and to have a better, more comprehensive government
plan. We have suggested a spectrum budget for the Government,
where agencies would zero-base their spectrum needs, and that
they would use these more advanced flexible technologies.
And I will just leave it at that and let others take that
up from there.
Senator Booker. Thank you.
Ms. Marsh. So thank you for this question. It is such an
important area because, as you observed, there is so much
spectrum that the Government has, and the government hasn't had
the same incentives as the industry to use it efficiently. But
there are also very important Government uses that we have to
protect.
So I agree with Mr. Feld, spectrum sharing is going to be a
piece of this. And we are very active in the 3.5-gigahertz
proceeding, as well, to determine how we can protect government
uses while freeing up spectrum for the commercial industry.
But I also think that there are opportunities here to get
exclusive licenses for the wireless industry, and I think the
answer is around incentives. And Mr. Feld mentioned a couple
things, in terms of aligning incentives for the Government to
actually try to remodel its spectrum use and drive toward a
more efficient use. I know there is some legislation that is
also being considered as well as incentives. It has been a
difficult challenge, but ultimately I think that is how we are
going to break through, is make sure incentives align with use
within the Government bands.
Senator Booker. Yes?
Mr. Kaplan. Thank you, Senator. I do want to point out--
nothing replaces smart spectrum policy. That is clear. But I do
want to point out this is not just a Federal Government issue.
There is a lot of commercial wireless spectrum that is not in
use today. DISH has 40 megahertz of spectrum, it will likely be
50 soon, sitting on the sidelines. There are a lot of other
companies--and Harold's organization has many times come to the
FCC with a proposal of ``use it or share it.''
So when we talk inventory, you know, the Federal Government
is obviously one place to look, but the wireless industry, too,
sits on a lot of spectrum it doesn't use, some in certain
areas. Tribal areas, another great example, where tribes try
and get access to the spectrum, can't get calls back, wireless
and otherwise.
But the bottom line is that I think a spectrum inventory
about how everyone is using their spectrum, broadcasters
included, is really important. Then we will really understand.
Because you are asking a very central question. It applies
both, though, to Federal and commercial. And we would be happy
to participate in that.
Senator Booker. And you are saying tribes cannot get
their----
Mr. Kaplan. So when a large license is purchased and it is
purchased, let's say, in New Mexico over an area where there is
an Indian reservation, when I was at the FCC not that long ago,
there was a proceeding that is laying dormant now, but I
remember in the proceeding there were a number of tribes who
came to us and said, we are trying to get access but we can't
get a call back from carrier X, who has that license. We would
like to pay for it, we would be happy to. But it is not really
worth the time of a major carrier to do that.
But there needs to be something--and this is maybe a place
where the Government could step in--to make sure that the
commercial industry is using their spectrum across the country
as effectively as possible.
Senator Booker. I think I am out of time, Mr. Padden.
Senator Pryor. Go ahead.
Senator Booker. I am sorry, go ahead, please.
Mr. Padden. I would just say, in the quest to get more
spectrum, I would start in this proceeding. The National
Broadband Plan calls for this auction to reallocate 120
megahertz of spectrum. There are some people in the process
suggesting the FCC should settle for a lesser number, 84
megahertz or something lower. Given the demand and the dearth
of other supplies, I think it would be almost unthinkable for
the FCC to do anything other than go for 120 in this
proceeding.
Senator Booker. Mr. Epstein, do you agree?
Mr. Epstein. The ultimate amount of spectrum that will be
available will be determined by market forces, by the auction,
OK? And we certainly would rather have more than less.
Senator Booker. Thank you.
Senator Pryor. Senator Nelson?
Senator Nelson. This is unprecedented, so what do you think
is the most challenging thing on this incentive to have this
auction be successful?
Mr. Padden. I think it is real clear and real simple. The
FCC has to figure out how to incentivize enough broadcasters to
walk through the front door of this auction and tender their
spectrum. If they don't do that, nothing else matters. They
won't need a band plan, they won't need bidding restrictions.
And the number one factor to influence the broadcasters'
decision, like anybody else considering selling something they
have, is what is the price. And somehow the government has to
get some pricing information out to the stations.
Mr. Kaplan. To me, that is an important factor but somewhat
narrow and only focuses on the buy side. To me, the most
important thing for this auction--the Chairman mentioned it,
Gary Epstein mentioned it--is getting the software right to
make the entire thing work.
It is not just an auction; it is a repacking of
broadcasters that has never been done before. So we can even
have a great auction that divides up the licenses perfectly,
but at the end of the day, if all the stations of your
constituents are all messed up and interfering with one
another, interfering with unlicensed, interfering with
licensed, it doesn't do anyone any good.
So the one point I want to make that differs from where Mr.
Epstein is is I think that software needs to be done and tested
before the order, not the auction. We shouldn't be sitting here
in the middle of June, about to press the button on the
auction, and then realize the software doesn't work. We need to
know in advance that it can actually do the gymnastics we need
it to do, which is very unique.
Repacking every station, every station in the country, or
500 more stations in the country, which has never been done
before, during an auction, in 30 minutes, that is pretty
incredible. So let's make sure we get that right.
Senator Nelson. Mr. Epstein, I want to ask you a very
sensitive question. If this thing doesn't go swimmingly and if
we were, Lord forbid, to have another major terrorist disaster
and we had to get spectrum to the Government for purposes of
national security, does the FCC have eminent domain power, that
they could go and get spectrum for national security?
Mr. Epstein. Senator Nelson, that is really a tough
question, one I don't think I am really competent to answer.
Maybe I could, you know, respond to you.
The Commission does have strong war powers under the
Communications Act, but there is not a lot of precedent for,
you know, actually utilizing them and the conditions under
which it would utilize them. But there are strong powers in
certain parts of the Communications Act.
I am not aware of situations where the Commission had done
it. And you, indeed, are talking about an extraordinary
situation.
Senator Nelson. Thank you, Mr. Chairman.
Senator Pryor. Thank you.
Senator Booker, do you have any other questions?
Senator Booker. Not for this panel, sir, but I have many
questions.
[Laughter.]
Senator Pryor. I understand. Me, too. Thank you.
Well, listen, I want to say again thank you to the panel,
and I will need to thank Senator Rockefeller for allowing me to
chair this and for organizing this hearing today. I want to
thank all of our witnesses for coming. Again, I know some had
to rearrange schedules because of the ice and snow and whatnot.
The record for this hearing is going to stay open for an
additional 2 weeks. I know we had a couple of Senators who
could not remain to ask their questions; I am sure we will have
some submitted for the record.
And if you could work with us to try to get your answers
back as quickly as possible, it would be very much appreciated.
So, again, I want to thank everyone, thank all the Senators
for participating, thank Senator Rockefeller.
And, with that, we will adjourn the hearing. Thank you.
[Whereupon, at 4:24 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. John D. (Jay) Rockefeller IV,
U.S. Senator from West Virginia
Almost two years ago, I authored legislation with Kay Bailey
Hutchison to give the FCC a new tool, voluntary incentive auctions, to
make sure the Nation's limited spectrum resources are used smartly. Our
legislation reflected widespread agreement from both sides of the aisle
that we must continue to lead the way with innovative spectrum policies
that generate real benefits for all Americans and help strengthen the
United States' global leadership in mobile broadband.
Critical to that bipartisan legislation was the directive that
those incentive auctions would, in turn, provide an important means to
help fund a pressing national need--creation of a nationwide,
interoperable wireless broadband network for our first responders,
FirstNet.
There is no doubt that the FCC's incentive auction proceeding is
one of the most important undertakings in the agency's history. That is
why we are here today. To hear from the FCC and from various
stakeholders as to how we can make sure that the upcoming incentive
auction is a success.
There is too much at stake to be complacent:
A successful incentive auction will set a new model for
international spectrum policy, just as we did 20 years ago with
the first spectrum auctions. It also will pave the way for
future incentive auctions in the United States.
A successful incentive auction will mean more robust
wireless communications networks both for voice and data in
rural and urban areas around the country. It will make sure the
United States continues its global leadership in wireless and
preserves room for the innovation brought about by unlicensed
spectrum use.
A successful incentive auction will offer broadcasters an
opportunity to relinquish some or all of their current spectrum
usage rights for an incentive payment.
A successful incentive auction will minimize disruptions and
expense to those broadcasters who choose to remain in the
business.
Finally, a successful incentive auction will raise
significant revenue for FirstNet. As I have said before, this
auction must be driven by one simple principle--it must raise
the resources needed for the FirstNet network.
This is a complicated proceeding that affects whole industries. As
Congress has always done, we deferred the intricacies of auction design
and development to the expert agency. Having generated approximately
$50 billion for the U.S. Treasury and awarded tens of thousands of
licenses through spectrum auctions, the FCC is the undisputed expert on
spectrum actions.
The FCC also must be afforded the flexibility necessary to make
sure that all of the tools it uses as part of the auction are as
accurate as possible.
FCC Chairman Tom Wheeler has analogized the challenging and
interlocking nature of the various parts of the incentive auction to a
type of Rubik's cube. That is apt. Getting these auctions right and
making them simple enough to encourage sufficient broadcaster
participation will be an incredibly complex process. But I know that
Chairman Wheeler understands better than anyone that, unlike a Rubik's
cube, this auction is no game. By his own account, he has spent more
time on the incentive auction than any other issue in his first month
as chair of the agency.
Given the stakes, I look forward to a constructive dialogue from
the witnesses today about their perspectives on how the FCC can craft a
successful incentive auction. Thank you.
______
Writers Guild of America, West; Public Knowledge;
New American Foundation; Free Press
December 10, 2013
Hon. John D. Rockefeller IV,
Chairman,
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
Hon. John R Thune,
Ranking Member,
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Chairman Rockefeller and Ranking Member Thune:
In a wireless industry increasingly dominated by just two
providers, the United States faces the very real prospect that in the
months and years to come wireless investment will stall, prices will
rise, and our Nation's economy will never fully realize the economic
growth that wireless broadband can enable. For this reason, we urge you
to protect consumers, content creators, and wireless competition by
supporting reasonable spectrum-aggregation limits on spectrum below 1
GHz.
As you know, low-band frequencies such as the 600 MHz band
penetrate buildings better and travel farther than other frequencies
can, and represent a critical building block for any carrier hoping to
reach consumers where they live, work, and play.\1\ Unfortunately, AT&T
and Verizon currently control nearly 80 percent of all available low-
band spectrum.\2\ These two dominant incumbents also control more than
80 percent of the wireless industry's profits and two-thirds of its
subscribers--up from just 43 percent of wireless subscribers in
2001.\3\
---------------------------------------------------------------------------
\1\ See, e.g., Martin Cave & William Webb, Spectrum Limits and
Auction Revenue: the European Experience, attached to Ex Parte
Presentation of Sprint Corporation, GN Docket No. 12-268 & WT Docket
No. 12-269 (July 29, 2013); Competitive Carriers Association Notice of
Ex Parte, GN Docket No. 12-268 & WT Docket No. 12-269 (Sept. 4, 2013).
\2\ Sprint Nextel Comments, WT Docket No. 12-269, at 5-6 (filed
Nov. 28, 2012).
\3\ Comments of Free Press, WT Docket No. 12-269, at 5 (filed Nov.
28, 2012) (citing Petition to Deny of Free Press, In the Matter of
Applications of AT&T, Inc. and Deutsche Telekom AG For Consent to
Assign or Transfer Control of Licenses and Authorizations, WT Docket
No. 11-65, at Figure 2 and SNL Kagan Wireless Industry Benchmarks (May
31, 2011)); Letter from Rebecca Thompson, General Counsel, CCA, et al.,
to Acting Chairwoman Mignon Clyburn et al., Docket No. WT 12-269, at 2
(May 20, 2013).
---------------------------------------------------------------------------
Given their commanding share of the market, AT&T and Verizon have
an incentive to acquire the remaining low-band spectrum they do not
already control to prevent competitors from undercutting them by
offering consumers superior service, pricing, terms, or technology. The
United States Department of Justice has grown concerned enough about
this anti-competitive outcome to have urged the Federal Communications
Commission to adopt rules ensuring non-dominant carriers have a fair
opportunity to access low-frequency spectrum resources.\4\ Protecting
competitors' access to low-band spectrum, the Department of Justice has
noted, is essential to ``serv[ing] the dual goals of putting spectrum
to use quickly and promoting competition in wireless markets.'' \5\ The
Small Business Administration recently voiced its support for
reasonable spectrum-aggregation limits as well because reasonable
aggregation limits have the potential to enhance competition,
accelerate deployment, and increase auction revenues.\6\
---------------------------------------------------------------------------
\4\ Ex Parte Submission of the United States Department of Justice,
WT Docket No. 12-269 (Apr. 11, 2013).
\5\ Id. at 23.
\6\ See Letter from Winslow L. Sargeant, Ph.D., Chief Counsel and
Jamie Belcore Saloom, Assistant Chief Counsel for Telecommunications,
U.S. Small Business Administration Office of Advocacy, to Thomas E.
Wheeler, Chairman, Federal Communications Commission, 3 (Nov. 22,
2013), available at http://www.sba.gov/advocacy/816/766951 (last
accessed Dec. 2, 2013) (asking the FCC to ``consider seriously the
possibility that imposing a cap on the amount of sub-1 Ghz spectrum any
one carrier may acquire will increase participation in the auction,
drive greater auction revenues, and provide further opportunities for
competition to flourish in mobile broadband'').
---------------------------------------------------------------------------
We agree. Vigorous, sustainable wireless broadband competition
means more innovation and enhanced economic growth as well as increases
in hiring and investment. The Commission should design its rules in a
manner that gives bidders of all sizes in the upcoming 600 MHz auction
a meaningful opportunity to acquire spectrum where needed, rather than
simply allowing AT&T and Verizon to dominate the auction and continue
to foreclose competitors' access to vital low-band spectrum.
Even the two dominant carriers agree that spectrum-aggregation
limits should exist with respect to low-band spectrum. The only
question is when and how those limits should apply. In this case, AT&T
and Verizon prefer post-auction divestitures to clear, upfront rules.
But after-thefact spectrum aggregation review by the FCC would involve
more process, delay, and uncertainty than putting clear, upfront
spectrum-aggregation limits on spectrum below 1 GHz. Worse, an after-
the-fact limit on spectrum concentration would allow the two dominant
carriers to pick and choose which competitors will have access to low-
band spectrum, thereby blocking or delaying the emergence of meaningful
competition. An after-the-fact regulation would increase the power of
the two dominant incumbents, with consumers paying the price.
Competitive markets are best for the public interest. With the
upcoming 600 MHz auction, the FCC has a unique opportunity to promote
competition in the wireless marketplace. We urge you not to let this
opportunity pass and, on behalf of consumers everywhere, ask you to
support transparent, well-crafted spectrum-aggregation limits.
Respectfully submitted,
Ellen Stutzman
Director of Research & Public Policy
Writers Guild of America, West
Harold Feld
Senior Vice President
Public Knowledge
Michael Calabrese
Director, Wireless Future Project
Open Technology Institute
New America Foundation
Matt Wood
Policy Director
Free Press
______
December 10, 2013
Hon. John D. Rockefeller IV,
Chairman,
U.S. Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Hon. John R. Thune,
Ranking Member,
U.S. Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Chairman Rockefeller and Ranking Member Thune:
Many times in many different forums our companies have recommended
that the Federal Communications Commission adopt reasonable spectrum-
aggregation limits on critical, low-band spectrum. The Department of
Justice, the Small Business Administration, public interest groups,
consumer advocates, and consumers across the country have joined us in
support of reasonable limits. Most recently, our chief executive
officers wrote FCC Chairman Tom Wheeler asking him to encourage
investment, accelerate deployment and protect consumer choice by
adopting modest, well-crafted spectrum-aggregation limits. A copy of
this letter is attached.
Throughout our advocacy, no one has ever suggested that the two
dominant incumbents be excluded from the upcoming incentive auction.
But, they already control nearly 80 percent of all available low-
frequency spectrum. As a result, AT&T and Verizon have a powerful
economic incentive to acquire the remaining low-band spectrum they do
not already control to prevent competitors from undercutting them with
superior service, pricing, terms, or technology. Reasonable spectrum-
aggregation limits can prevent this outcome and help trigger new
competition that can reduce prices, increase consumer choice, encourage
investment and innovation, and accelerate next generation mobile
deployment.
Reasonable spectrum-aggregation limits also have the potential to
increase--not decrease--revenue from the incentive auction. They will
encourage robust auction participation from the non-dominant carriers
because these companies will no longer risk incurring the substantial
costs of participation without having any realistic possibility of
acquiring the spectrum they need. Without spectrum-aggregation limits,
however, the non-dominant carriers may either avoid the 600 MHz auction
or may curtail their bidding because they know they cannot outbid the
dominant carriers. This is especially true among some smaller and rural
carriers that may struggle to finance auction participation absent
clear rules that allow them a meaningful opportunity to participate. In
this scenario, the dominant incumbents--far from paying a premium to
achieve an anti-competitive result--may take the licenses for far less
than they are worth.
Competitive markets are best for the public interest. With the
upcoming 600 MHz auction, the Commission has a unique opportunity to
promote competition in the wireless marketplace. We urge you not to let
this opportunity pass and, on behalf of consumers everywhere, ask you
to support reasonable spectrum-aggregation limits.
Respectfully submitted,
Kathleen Ham
Vice President, Federal Regulatory
T-Mobile USA, Inc.
Lawrence R. Krevor
Vice President, Legal and Government Affairs
Sprint Corporation
Eric B. Graham
Senior Vice President--Strategic Relations
C Spire Wireless
Tim Donovan
Vice President--Legislative Affairs
Competitive Carriers Association
Jeffrey Blum
Senior Vice-President and
Deputy General Counsel
DISH Network LLC
Grant Spellmeyer
Vice President, Federal Affairs
& Public Policy
US Cellular
Cathy Sloan
Vice President, Government Relations
Computer & Communications Industry Association
______
November 14, 2013
Hon. Thomas Wheeler,
Chairman,
Federal Communications Commission,
Washington, DC.
Re: Ex Parte Notice
Expanding the Economic and Innovation Opportunities of Spectrum Through
Incentive Auctions, GN Docket No. 12-268;
Policies Regarding Mobile Spectrum Holdings, WT Docket No. 12-269
Dear Chairman Wheeler:
Congratulations on your confirmation as Chairman of the Federal
Communications Commission. Your leadership of the FCC comes at a
critical time for the wireless industry. Preserving a framework for
effective competition is as important as ever.
Taken together, the companies and industry groups represented on
this letter employ more than 100,000 Americans, provide service to more
than 100 million subscribers, and generate greater than $75 billion in
annual revenue. Beyond the sheer numbers, however, our companies play
an outsized role in accelerating innovation, investing in new
technologies, and deploying broadband services throughout the United
States.
None of us fears competition. Consumers benefit from the give-and-
take of the competitive market. But to ensure those benefits keep
flowing, it is vitally important that the two dominant wireless
incumbents not be allowed to lock competitive carriers out of acquiring
low-band spectrum in the upcoming 600 MHz auction. That result would
disserve the public interest by fundamentally undermining the wireless
industry competition that has served our Nation so well.
AT&T and Verizon already hold licenses for nearly 80 percent of the
low-band spectrum available for commercial broadband use. They have
economic incentives to acquire the remaining low-band spectrum in the
600 MHz band to stop our companies--their competitors--from offering
truly sustainable, competitive wireless broadband service across
America. Low-band spectrum, with its excellent propagation and building
penetration properties, is an essential element of the spectrum mix
wireless carriers must have to offer wireless customers spectrally-
efficient competitive pricing, terms, features, and technology.
Recognizing a real risk to competition, the United States
Department of Justice has urged the Commission to adopt rules ensuring
that all wireless carriers have a fair opportunity to acquire low-band
spectrum at auction. Protecting competitors' access to low-band
spectrum, the Department of Justice has noted, is essential to
protecting consumers' interest in continued innovation and investment
in wireless broadband in the United States.
We agree with the Department of Justice on this critical topic. To
be clear, none of us has ever suggested excluding the largest two
carriers from the 600 MHz auction. Reasonable spectrum-aggregation
limits, however, will help ensure that carriers of all sizes have a
meaningful opportunity to acquire the low-band spectrum they need to
sustain effective and efficient competition. More competition, in turn,
means more jobs, more investment, faster innovation, and more economic
growth in America. Competition will also enable the Commission to
maintain its ``light-touch'' regulatory approach to the wireless
industry, rather than the aggressive regulation that duopoly tends to
engender.
In the upcoming 600 MHz auction, the Commission has a unique
opportunity to take an important step to promote competition in the
wireless marketplace. We urge you not to let this opportunity pass.
Respectfully submitted,
Charlie Ergen
Chairman
DISH Network Corp.
John J. Legere
President and Chief Executive Officer
T-Mobile US, Inc.
Daniel R. Hesse
President and Chief Executive Officer
Sprint Corporation
Hu Meena
President and Chief Executive Officer
C Spire Wireless
Edward Black
President and Chief Executive Officer
Computer & Communications Industry Association
Steven K. Berry
President and Chief Executive Officer
Competitive Carriers Association
Kenneth R. Meyers
President and Chief Executive Officer
U.S. Cellular
Jonathan Foxman
President and Chief Executive Officer
MTPCS, LLC d/b/a Cellular One
Ronald Smith
President and Chief Executive Officer
Bluegrass Cellular
______
Response to Written Questions Submitted by Hon. Mark Warner to
Gary Epstein
Question 1. The Federal Communication Commission's (FCC) Broadcast
Television Spectrum Incentive Auction Notice of Proposed Rulemaking
(NPRM), released in December 2012, requested comments about the process
of scoring bids in the reverse/broadcaster auction based on factors
such as ``population coverage, geographic contour, or other relevant
measurable factors.'' I am glad to see the FCC is exploring innovative
new concepts as we try to overcome barriers to clearing spectrum in
major markets. I would like to know more about the scoring bids
concept. How is the FCC evaluating the potential use of scoring bids?
Answer. As you note, the Incentive Auction Notice of Proposed
Rulemaking (NPRM) sought comment on whether and how the Commission
should recognize the heterogeneous nature of the television spectrum
that different broadcasters might contribute to the auction. In
particular, the Commission introduced the possibility of ``scoring''
broadcaster bids, to reflect the differences between the spectrum
contributions of different bidders. We are not considering taking into
account a station's value as an ongoing broadcasting concern. We are
currently considering whether scoring bids could lower the cost of
clearing spectrum in the auction by improving how the auction selects
the stations that are assigned a channel and those that are paid to
relinquish spectrum rights. The record currently is under review, and
there have not been any final recommendations made to the full
Commission.
Question 1a. Is it possible that such a model could be applied in
larger markets (i.e., markets where spectrum is in demand, expected to
be competitive)?
Answer. If the Commission adopts a scoring process, it could be
applied in larger markets.
Question 1b. Do you have a sense of whether such a valuation
process may yield more spectrum than the more traditional options--
single round or multiple round?
Answer. Staff is currently considering whether scoring bids could
lower the cost of clearing spectrum in the auction by improving how the
auction selects the stations that are assigned a channel and those that
are paid to relinquish spectrum rights. Regardless of auction type,
lowering these costs could increase the likelihood of a successful
auction that clears the maximum amount of spectrum.
Question 1c. Should the FCC focus most of its attention on
overcoming barriers to clearing spectrum in major markets?
Answer. Staff expects that clearing spectrum in major markets will
be a key Commission priority, and has focused significant attention to
those markets to date. However, given the potential for market
variation due to border and other potential constraints, and the
resulting potential for inter-service interference to adjacent markets,
staff has not limited its analysis to major markets.
Question 2. During the hearing, I asked you about a proposal that
would allow for a common downlink band nationwide, and would provide
for variation in the uplink band. Do you have any additional
information you would like to provide, to expand upon your answer?
Answer. In the NPRM the Commission identified the ability to
accommodate market variation (i.e., the varying amounts of spectrum
that the auction could recover in different geographic areas) as an
important objective. In order to accommodate market variation, the NPRM
proposed implementing a band plan that keeps the downlink spectrum
consistent nationwide while varying the amount of uplink spectrum in
more spectrally constrained markets. The Commission has examined
approaches to accommodating market variation through a thorough and
transparent comment and reply comment process, band plan workshop, and
public notice. We continue to explore how the 600 MHz band plan can
accommodate different levels of spectrum recovery and have made this a
central factor in our band plan consideration.
Question 3. In their December 2012 Broadcast Television Spectrum
Incentive Auction Notice of Proposed Rulemaking (NPRM), the Federal
Communications Commission (FCC) sought comment on the use of spectrum
aggregation limits in the forward auction. There is a wide range of
opinions on this issue. What is the most equitable way for the FCC to
administer a spectrum screen? Should the FCC require carriers to divest
comparable spectrum below 1 GHz in order to meet limits? Why or why
not?
Question 3a. Given the fact that it is less expensive to build
networks using lower-band spectrum, should the FCC consider these costs
in its evaluation of competition? Why or why not?
Question 3b. Has the FCC considered applying a market-by-market
review of spectrum assets limited to major markets, since these are the
areas which have the greatest demand for spectrum? Why or why not?
Answer. The longstanding directives of Section 309(j) of the
Communications Act require that, with respect to spectrum auctions, the
Commission ``shall include safeguards to protect the public interest in
the use of the spectrum,'' and seek to ``promot[e] economic opportunity
and competition and ensur[e] that new and innovative technologies are
readily accessible to the American people by avoiding excessive
concentration of licenses and by disseminating licenses among a wide
variety of applicants . . .'' The relationship between spectrum policy,
competition and consumer choice was reinforced in a filing submitted to
the Commission by the Antitrust Division of the Department of Justice
in April 2013. Commission staff also recognizes that under Section 6404
of the Middle Class Tax Relief and Job Promotion Act of 2012, no
qualified bidder may be excluded from the auction, but that Section
6404 affirms the Commission's authority ``to adopt and enforce rules of
general applicability, including rules concerning spectrum aggregation
that promote competition.''
The United States has a long and successful history of spectrum
auctions that have promoted competition, facilitated profound benefits
for consumers, and generated substantial revenue for the U.S. Treasury
as a means of recovering for the public a portion of the value of the
public spectrum resource. Commission staff is committed to recommending
to the Commission an auction that fully meets all statutory obligations
and objectives, including freeing up a significant amount of spectrum
for commercial use in a manner that promotes competition and drives our
economy forward.
Commission staff is carefully reviewing the records in both the
Mobile Spectrum Holdings proceeding and the Incentive Auction
proceeding, including the record on the specific questions you raise,
and has not yet presented a recommendation to the Commission.
Question 4. The Middle Class Tax Relief and Job Creation Act of
2012 allows the Federal Communications Commission (FCC) to create new
guard bands in the 600 MHz band for unlicensed use. I am supportive of
white spaces, and I hope that the FCC will be successful in creating a
guard band that is adequate for unlicensed and licensed uses. According
to some estimates, the unlicensed ecosystem generates as much as $50 to
$100 billion per year for the U.S. economy. How important do you think
it is to maintain white spaces?
Answer. Unlicensed spectrum use has a powerful record of driving
innovation, investment, and economic growth, and the record in the
Incentive Auction proceeding demonstrates significant support for
unlicensed use. In the NPRM, the Commission proposed measures that,
taken together, would make a substantial amount of spectrum available
for unlicensed uses, including a significant portion that would be
available on a uniform nationwide basis for the first time.
Specifically, under the proposal:
Television white spaces would continue to be available for
unlicensed use in the repacked television band;
Guard band spectrum in the 600 MHz band plan would be
available for unlicensed use;
Channel 37 would be available for such use; and
Two channels currently designated for wireless microphone
use would be made available for white space devices.
The Commission also noted that proposed measures to promote
unlicensed spectrum use are limited by the bounds of the Commission's
statutory authority. Staff continues to carefully review the record
related to unlicensed use.
Question 5. In March 2010, the Federal Communications Commission
(FCC) released its National Broadband Plan (NBP). I was hopeful that we
could clear 120 MHz in the incentive auction, but now it looks like
there will not be more than 84MHz cleared in most markets. What do you
believe will happen to the band plan if less than 84MHz is made
available for the incentive auction? It's important to me that we
maintain room for innovative uses of spectrum, such as white spaces,
for instance.
Answer. We will not know the actual amount of spectrum we will
recover until we conduct the incentive auction, and we are not limiting
our plans to recovering 84 MHz. The amount of spectrum we recover will
depend on a range of factors, including broadcaster participation in
the reverse auction, the proceeds generated by the forward auction, the
600 MHz band plan, our ability to repack stations that will remain on
the air after the auction, and international coordination with Canada
and Mexico. Commission staff is diligently working to recommend an
auction design that will maximize the amount of 600 MHz spectrum
repurposed for flexible licensed use, while also promoting unlicensed
use.
______
Response to Written Question Submitted by Hon. Amy Klobuchar to
Gary Epstein
Question. Mr. Epstein, earlier this year, the DOJ weighed in with
the FCC on the spectrum auction rules emphasizing the importance of
competition in the wireless market and the need for smaller national
networks currently lacking in low-band spectrum have a chance to
acquire it. Chairman Wheeler has said that a major focus of his term
will be promoting competition. In a recent speech he said, ``We must
protect competition where it exists. We must promote competition where
it may not be fulsome.'' As Chairman of the Antitrust Subcommittee, I
have seen how strong competition in the wireless industry has been a
tremendous benefit to consumers. A competitive market is the best way
to ensure that consumers will benefit from low prices and quality
service and thus I'm pleased to see that the new Chairman is so focused
on competition. Do the amount and quality of spectrum held by a
wireless carrier impact its ability to compete? Is the FCC's current
method of measuring competition adequate or is it in need of upgrading?
Answer. The longstanding directives of Section 309(j) of the
Communications Act require that, with respect to spectrum auctions, the
Commission ``shall include safeguards to protect the public interest in
the use of the spectrum,'' and seek to ``promot[e] economic opportunity
and competition and ensur[e] that new and innovative technologies are
readily accessible to the American people by avoiding excessive
concentration of licenses and by disseminating licenses among a wide
variety of applicants . . .'' The relationship between spectrum policy,
competition and consumer choice was reinforced in a filing submitted to
the Commission by the Antitrust Division of the Department of Justice
in April 2013. Commission staff also recognizes that under Section 6404
of the Middle Class Tax Relief and Job Promotion Act of 2012, no
qualified bidder may be excluded from the auction, but that Section
6404 affirms the Commission's authority ``to adopt and enforce rules of
general applicability, including rules concerning spectrum aggregation
that promote competition.''
The United States has a long and successful history of spectrum
auctions that have promoted competition, facilitated profound benefits
for consumers, and generated substantial revenue for the U.S. Treasury
as a means of recovering for the public a portion of the value of the
public spectrum resource. Commission staff is committed to recommending
to the Commission an auction that fully meets all statutory obligations
and objectives, including freeing up a significant amount of spectrum
for commercial use in a manner that promotes competition and drives our
economy forward.
Commission staff is carefully reviewing the records in both the
Mobile Spectrum Holdings proceeding and the Incentive Auction
proceeding, including the record on the specific questions you raise,
and has not yet presented a recommendation to the Commission.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
Joan Marsh
Question 1. Ms. Marsh, in your written testimony you wrote that
``network deployment is based on network capacity needs, not
coverage.'' While I understand that this is in reference to the
spectrum crunch that exists in more urban markets, I would also like to
make sure that carriers continue to invest in those parts of America
where cell coverage is not what we would expect in the 21st century. Is
AT&T committed to making sure its investments and spectrum are
effectively utilized to reach consumers, even in rural areas?
Answer. Yes. Over the past five years (2008-2012), AT&T invested
nearly $98B into its wireless and wireline networks; investing more
capital into the U.S. economy than any other public company. The
investment in our wireless and wireline networks in 2013 was in the
range of $21B, with increased spending in wireless. In a September 2013
report, the Progressive Policy Institute (PPI) again ranked AT&T No. 1
on its list of U.S. ``Investment Heroes.'' \1\ In addition, through its
Project Velocity IP (Project VIP), AT&T plans to invest billions of
dollars over the next three years (2013-2015) to significantly expand
and enhance our wireless and wireline IP broadband networks. Project
VIP is a major commitment to invest in the 21st Century communications
infrastructure for the United States and bring high-speed IP
broadband--wireless and wireline--to millions more Americans. Through
this investment we plan to: expand our 4G LTE network to cover 300
million people by year-end 2014, more than 9 out of 10 Americans;
expand our wired IP broadband network to approximately 75 percent of
customer locations in our 22-state wireline service area by year-end
2015; deploy fiber to 1 million additional business customer locations
in AT&T's wireline service area by year-end 2015; bring high-speed IP
Internet access via IP wireline broadband and/or 4G LTE to 99 percent
of all customer locations within our 22-state wireline service area by
year-end 2015; and increase the density of our wireless network through
the deployment of small cell technology (40,000+), macro cells
(10,000+) and additional distributed antenna systems (1000+). This
densification will further improve network quality and increase
spectrum efficiency.
---------------------------------------------------------------------------
\1\ U.S. Investment Heroes of 2013: The Companies Betting on
America's Future, September 2013, http://www.progressivepolicy.org/wp-
content/uploads/2013/09/2013.09-Carew-Mandel_
US-Investment-Heroes-of-2013.pdf. AT&T ranked No. 1 in the PPI list
issued in July 2012. Investment Heroes: Who's Betting on America's
Future?, July 2012, http://progressivepolicy
.org/wp-content/uploads/2012/07/07.2012-Mandel_Carew_Investment-
Heroes_Whos-Betting-on-Americas-Future.pdf.
Question 1a. Is AT&T supportive of build-out requirements as a rule
for the auction?
Answer. Yes. 47 USC 309(j)(3) already requires the Federal
Communications Commission, in designing auction rules, to promote the
``development and rapid deployment of new technologies, products and
services for the benefit of the public, including those residing in
rural areas.'' Subparagraph 4 encourages the Commission to ``include
performance requirements . . . to ensure prompt delivery of service to
rural areas.'' This evidently is intended to encourage the Commission,
through performance requirements, auction rules or otherwise, to ensure
that whoever buys a license that includes ``hard to serve, unserved or
underserved areas'' would deploy there. Build out requirements on
spectrum auction winners ensure that spectrum is utilized quickly and
efficiently or is relinquished so that other entities may make use of
it.
______
Response to Written Questions Submitted by Hon. Mark Warner to
Joan Marsh
Question 1. In their December 2012 Broadcast Television Spectrum
Incentive Auction Notice of Proposed Rulemaking (NPRM), the Federal
Communications Commission (FCC) sought comment on the use of spectrum
aggregation limits in the forward auction. There is a wide range of
opinions on this issue. What is the most equitable way for the FCC to
administer a spectrum screen? Should the FCC require carriers to divest
comparable spectrum below 1 GHz in order to meet limits? Why or why
not?
Answer. In 2001, as mobile data services were being launched, the
Commission adopted a forward-looking spectrum policy framework that has
facilitated the growth of one of the most successful and competitive
marketplaces in the world. Recognizing that competitive bidding and
freely-functioning secondary markets allow spectrum to flow to its
highest-valued uses, the Commission abandoned rigid, ``bright-line''
spectrum aggregation caps and replaced them with a safe harbor screen
and flexible, case-by-case consideration of proposals to exceed the
screen. This basic framework--as originally conceived--strikes the
appropriate balance between regulatory certainty (by assuring licensees
that spectrum accumulations within the safe harbor will be approved)
and regulatory flexibility (by ensuring that the Commission's rules do
not punish success and innovation and can accommodate any spectrum
assignment that does not pose any true risk of foreclosing
competition).
The benefits of this balanced, consumer-focused policy are obvious
and dramatic. The U.S. wireless marketplace is the most dynamic and
innovative in the world. As a result, at present, only a few simple
adjustments are required to achieve ``the most equitable way for the
[Commission] to administer its spectrum screen'', including in the
context of the incentive auction.
First, the Commission should update the screen to include all of
the available spectrum that is ``suitable'' for mobile wireless
services. Most prominently, the Commission should correct the most
glaring omission by including the entire 194 MHz of BRS and EBS
spectrum held mostly by Sprint, rather than the mere 55.5 MHz the
Commission has included to date.
Second, the Commission should reaffirm that the ``safe harbor''
provided by the screen is truly safe--i.e., that the Commission will
not entertain spectrum aggregation-related challenges to any proposed
spectrum acquisition that does not exceed the safe harbor level. The
Commission should also make clear that its case-by-case analysis of
proposals to exceed the safe harbor level in any market will remain
tightly focused on whether the spectrum available to competitors and
potential competitors remains sufficient to enable robust facilities-
based competition to continue. This process should not result in
``conditions'' that have no link to any legitimate spectrum aggregation
concern.
The Commission's case-by-case analyses should also be informed by
the reality that today's screen, which is set at about one-third of
suitable and available spectrum, is almost certainly too low and
discourages transactions that would promote the public interest by
putting spectrum to its best and most valuable uses. The Commission's
screen threshold of roughly one third of the available spectrum dates
back to a time when the wireless industry was nascent and there were
only two facilities-based competitors in each market. Under those
circumstances, the Commission was concerned that it would be relatively
easy for the incumbent carriers to obtain new spectrum that became
available and thereby prevent new entry. But there is no basis upon
which the Commission could rationally equate the risk of foreclosure
today to the risk of foreclosure at the time of the initial PCS
auctions. In today's far more competitive wireless marketplace, a
foreclosure strategy would be virtually impossible to implement. There
are multiple facilities-based competitors with substantial spectrum
holdings. Those competitors, large and small, compete aggressively for
new spectrum when it is available at auction or in secondary markets.
Moreover, the high cost of new spectrum, coupled with strict Commission
build-out requirements, ensures that, even if it were theoretically
possible to cripple competition through spectrum acquisitions, it would
be prohibitively expensive to do so. In this environment, it is simply
not realistic to assume that any holding of more than a third of the
available spectrum in any market may create a risk of market
foreclosure.
One step the Commission should definitely not take is to
micromanage a carrier's spectrum divestiture choices upon a finding
that such a divestiture is necessary under the case-by-case screen
analysis. In particular, the Commission should not require carriers to
divest comparable spectrum below 1 GHz. As described in detail in
response to Question 1b below, there is no meaningful distinction
between spectrum above 1 GHz and spectrum below 1 GHz for competitive
purposes. More generally, the Commission has long recognized that the
acquiring carrier should be permitted discretion to address competitive
concerns by divesting sufficient spectrum to bring its holdings in the
affected markets below the level determined to be excessive. Allowing
the licensee maximum discretion to dispose of ``excess'' spectrum in
the secondary market is by far the most efficient way to ensure that
the spectrum will be allocated to its highest valued use; but those
public interest benefits can be obtained only if the Commission does
not place artificial limits on the provider's discretion. So long as
the divestiture solves the spectrum aggregation concern at issue, there
is no basis for the Commission to become involved in deciding the
particular band(s) of spectrum that the licensee must divest to come
into compliance. Allowing providers to rationalize their spectrum
holdings improves spectral efficiency and benefits large and small
providers alike, and the Commission's spectrum aggregation policies
should not prevent carriers from ``trading up'' through auction or
secondary market purchases to spectrum that is a better fit for their
networks or business plans.
Question 1a. Given the fact that it is less expensive to build
networks using lower-band spectrum, should the FCC consider these costs
in its evaluation of competition? Why or why not?
Answer. In its evaluation of competition in a particular market,
the Commission should not consider in isolation whether it is less
expensive to build networks using lower-band spectrum. While it is true
that, all else being equal, signals can propagate farther over low band
spectrum, there is no inherent network quality advantage in using low
frequency spectrum versus high frequency spectrum. As a matter of both
physics and engineering, a provider can achieve the same coverage with
either type of spectrum; it is merely a question of how the provider
builds out its network. Likewise, all providers can address in-building
penetration challenges with high frequency spectrum by increasing
network density and deploying femtocells, picocells, Wi-Fi offload, and
other means. To be sure, denser networks cost more to build, but to the
extent high band spectrum entails higher build out costs, the spectrum
itself will sell for lower prices in the marketplace. This is critical
because the cost of provisioning a service includes spectrum
acquisition costs as well as network build out costs.
Beyond that, and in all events, it is no longer the case that low
band spectrum permits significantly lower build out costs than high
band spectrum. To the contrary, the explosive growth of mobile
broadband services has dramatically diminished differences in the real
world costs of building out low band and high band spectrum, and that
trend will only accelerate in the coming years. As a result of this
dramatic growth, the industry faces what former FCC Chairman Julius
Genachowski referred to as a ``looming spectrum crisis,'' under which
the principal challenge facing wireless providers today is meeting
rapidly escalating demand for bandwidth. What that means is that in
today's broadband world, unlike the voice world of yesterday, network
deployments are driven by network capacity needs, not coverage.
Regardless of whether a carrier is using high band or low band
spectrum, it must build dense networks in all but the most rural areas
where network congestion is not an existing or looming challenge. And
to optimize building penetration, they must deploy small cells as well.
Indeed, the superior propagation of low band spectrum leads to certain
relative disadvantages in the form of increased interference between
cells, particularly in densely populated cities.
Question 1b. Has the FCC considered applying a market-by-market
review of spectrum assets limited to major markets, since these are the
areas which have the greatest demand for spectrum? Why or why not?
Answer. To AT&T's knowledge, the Commission has not considered
applying a market-by-market review of spectrum assets limited to major
markets. Perhaps this is because application of the spectrum screen
analysis already includes, among many other factors, assessment of the
degree of demand for spectrum in the market at issue.
Question 2. In March 2010, the Federal Communications Commission
(FCC) released its National Broadband Plan (NBP). I was hopeful that we
could clear 120 MHz in the incentive auction, but now it looks like
there will not be more than 84MHz cleared in most markets. What do you
believe will happen to the band plan if less than 84MHz is made
available for the incentive auction? It's important to me that we
maintain room for innovative uses of spectrum, such as white spaces,
for instance.
Answer. AT&T remains hopeful that the incentive auction will result
in the repurposing to commercial wireless use of at least 84 MHz of
spectrum, especially in non-border areas. Even if it does not, however,
there will likely be significant spectrum available in the duplex gap
and/or guard bands for innovative unlicensed uses, as long as such uses
do not harmfully interfere with licensed uses. For example, AT&T has
submitted to the Commission an exemplar ``2x25'' band plan (reproduced
below) addressing clearing scenarios ranging from as much as 114 MHz to
as little as 54 MHz. In every scenario, a material amount of spectrum
in a duplex gap and/or guard bands is potentially available for
unlicensed use, assuming no harmful interference. (See Comments of
AT&T, Inc., GN Docket No. 12-268 (filed June 14, 2013)). The same is
true of a ``2x35'' band plan submitted jointly by T-Mobile and Verizon
that AT&T has conditionally endorsed if certain circumstances exist.
(Letter from Joan Marsh, AT&T, to Ruth Milkman and Gary Epstein, FCC,
GN Docket No. 12-268 (Ex parte Oct. 21, 2013)).
Of course, the Commission will be guided by the statutory directive
that guard bands (of which a duplex gap is a form) be ``no larger than
is technically reasonable to prevent harmful interference between
licensed services.'' Spectrum Act Sec. 6407(b). Moreover, regardless of
what happens in the 600 MHz band, substantial white spaces will likely
remain in the 500 MHz band, because (i) only the upper parts of the TV
broadcast band are likely to be repurposed, and (ii) the distances that
separate broadcasters for interference mitigation purposes must remain
large.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
Response to Written Question Submitted by Hon. Mark Warner to
Hal J. Singer, Ph.D.
Question. In March 2010, the Federal Communications Commission
(FCC) released its National Broadband Plan (NBP). I was hopeful that we
could clear 120 MHz in the incentive auction, but now it looks like
there will not be more than 84MHz cleared in most markets. What do you
believe will happen to the band plan if less than 84MHz is made
available for the incentive auction? It's important to me that we
maintain room for innovative uses of spectrum, such as white spaces,
for instance.
Answer. At the FCC's recent conference on this subject, the
Commission stated that in geographic areas where insufficient spectrum
was cleared, they intended to first avoid clearing an uplink block.
This would allow the auction to move forward and still maintain the
integrity of the band plan overall. The feasibility of clearing certain
amounts of spectrum in different geographic areas, while it is a
subject under ongoing study both in the industry and by the FCC, will
depend significantly on how eager broadcasters are to show up to the
auction.
______
Response to Written Questions Submitted by Hon. Mark Warner to
Steven K. Berry
Question 1. In their December 2012 Broadcast Television Spectrum
Incentive Auction Notice of Proposed Rulemaking (NPRM), the Federal
Communications Commission (FCC) sought comment on the use of spectrum
aggregation limits in the forward auction. There is a wide range of
opinions on this issue. What is the most equitable way for the FCC to
administer a spectrum screen? Should the FCC require carriers to divest
comparable spectrum below 1 GHz in order to meet limits? Why or why
not?
Answer. CCA has called for completing the Mobile Spectrum Holdings
proceeding currently pending before the FCC in order to provide
certainty to the industry. This generally applicable rule will ensure
that all carriers have access to the finite spectrum needed to serve
consumers' increasing demand for mobile broadband services. In updating
the spectrum screen, the FCC should:
Replace the current, single-trigger approach with separate
thresholds for identifying competitive harms, including (1)
spectrum below 1 GHz in local markets, (2) aggregate spectrum
holdings in local markets, and (3) aggregate spectrum on a
nationwide basis;
Adopt clear rules including or removing spectrum from the
screen going forward; and,
Establish a rebuttable presumption that transactions
exceeding the screen thresholds are contrary to the public
interest and placing the burden of proof that the transaction
would benefit competition and the public interest on the
applicant.
Where the screen is exceeded and the burden of proof that the
transaction would benefit competition and the public interest has not
been met in a transaction, divestitures of comparable spectrum may be
an appropriate remedy; however, the applicant should not be allowed to
use the divestiture process to foreclose competitors from accessing
needed spectrum resources. In the context of spectrum auctions, there
should be clear, ex ante rules regarding spectrum aggregation that
allow carriers of all sizes a meaningful opportunity to bid for
spectrum; no carrier should be allowed to aggregate all spectrum
available at auction. Divestitures should include spectrum below 1 GHz,
particularly when transactions or auctions involve spectrum below 1
GHz.
Question 1a. Given the fact that it is less expensive to build
networks using lower-band spectrum, should the FCC consider these costs
in its evaluation of competition? Why or why not?
Answer. Due to its unique propagation characteristics, which have
particular advantages for rural coverage and in-building penetration,
special consideration should be given to transactions and auctions
involving spectrum below 1 GHz. While it is less expensive to build-out
coverage using lower-band spectrum, particularly in rural areas, it is
also important to note that absent low-band spectrum it may not be
economical for a carrier to efficiently compete in a market.
Question 1b. Has the FCC considered applying a market-by-market
review of spectrum assets limited to major markets, since these are the
areas which have the greatest demand for spectrum? Why or why not?
Answer. The FCC should not consider limiting a market-by-market
review of spectrum assets to major metropolitan markets, as the
spectrum needed to continue to deploy mobile broadband services to meet
consumers' demands exists nationwide. Indeed, the benefits of mobile
broadband, particularly using low-band spectrum, may have an even
greater impact on education, employment, and safety in rural areas.
Question 2. In March 2010, the Federal Communications Commission
(FCC) released its National Broadband Plan (NBP). I was hopeful that we
could clear 120 MHz in the incentive auction, but now it looks like
there will not be more than 84MHz cleared in most markets. What do you
believe will happen to the band plan if less than 84MHz is made
available for the incentive auction? It's important to me that we
maintain room for innovative uses of spectrum, such as white spaces,
for instance.
Answer. Policymakers should continue efforts to ensure that as much
spectrum as possible is reallocated through the incentive auction for
mobile broadband use. In the unfortunate event that less than 84 MHz is
made available through the incentive auction, Congress should consider
if further policy efforts or incentives are necessary to ensure that
finite spectrum resources are being used efficiently, including both
licensed and unlicensed spectrum.
To ensure that as much spectrum is made available for auction
nationwide, the FCC should use sufficiently small geographic license
sizes, which provide opportunities for carriers of all sizes to
participate and create a greater number of unencumbered licenses that
can be available for auction. Using sufficiently small geographic
license sizes, there will likely be more areas with greater amounts of
cleared spectrum available in the incentive auction. Under this
approach, even if 120 MHz is not available nationwide, the auctioneers
are not left with a least common denominator amount of spectrum.
______
Response to Written Questions Submitted by Hon. Mark Warner to
Preston Padden
Question 1. In March 2010, the Federal Communications Commission
(FCC) released its National Broadband Plan (NBP). I was hopeful that we
could clear 120 MHz in the incentive auction, but now it looks like
there will not be more than 84MHz cleared in most markets. What do you
believe will happen to the band plan if less than 84MHz is made
available for the incentive auction? It's important to me that we
maintain room for innovative uses of spectrum, such as white spaces,
for instance.
Question 2. Do you have a sense of how much spectrum will be freed
up in major markets, based on what you have been hearing from the
broadcasters you work with?
Answer. Our Coalition continues to believe that reallocation of 120
MHz from broadcasting to wireless broadband is a critical public
interest goal. Given the skyrocketing consumer demand for wireless
services, and the dearth of other sources of spectrum, it would be
unthinkable for the FCC to settle for anything less than reallocating
120 MHz in the Incentive Auction.
Our Coalition also believes that 120 MHz is achievable if the FCC
permits market pricing to determine broadcaster participation. As a
test, one Member of our Coalition has undertaken a rigorous and
detailed repacking analysis of the television stations in the Los
Angeles market and was able to clear 120 MHz for reallocation. This
analysis took into consideration the ``daisy chain'' effect in adjacent
markets.
If the FCC interferes with market pricing and limits the payments
to particular stations based on some administrative scheme, then the
FCC will fail to attract a critical mass of broadcasters and the
auction will fail. The FCC can fulfill all of its financial
obligations, including funding FirstNet, if the FCC meets the market
price expectations of willing broadcast spectrum sellers and clears 120
MHz. On the other hand, if the FCC tries to interject administrative
pricing in a mistaken effort to achieve some pre-determined ``spread''
between the forward and reverse auctions, the result will be failure.
It is important to note that the FCC will be buying spectrum in
only a (currently unknown) limited number of markets. In most markets,
the FCC will be able to clear 120 MHz merely by repacking the existing
TV stations. In that majority of markets, the forward auction revenues
to the FCC will be essentially free. These ``free'' revenues are the
leverage that will enable the FCC to meet the prices expectations of
broadcasters where the FCC does need to buy spectrum and still fulfill
the FCC's other financial obligations.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
Rick Kaplan
Question 1. Mr. Kaplan, as broadcasters continue to discuss their
participation in the auction to help free up spectrum for mobile
wireless, what do you think should be included as ``eligible expenses''
for funds from the TV broadcaster reallocation fund?
Answer. Senator Klobuchar, thank you for this important question
and your leadership through this complex process. The Spectrum Act
includes two key requirements that inform consideration of which
expenses should be included as eligible for reimbursement. First, the
Spectrum Act requires that broadcasters not electing to participate in
the spectrum auction are to be held harmless for costs reasonably
related to repacking and channel reassignment. Second, the Spectrum Act
requires that service to the same coverage areas and populations of
viewers be preserved to the greatest extent possible following
repacking. Taken together, these provisions require that broadcasters
be reimbursed for all reasonable repacking expenses necessary to allow
them to continue to serve essentially the same coverage area and
population they served prior to repacking.
Precisely what costs will be required to ensure that a particular
station is able to serve the same coverage area and population
following repacking will depend on numerous factors specific to that
station. Many stations have highly customized transmission facilities
tailored to take a number of variables into account--such as tower
location, location of population centers, spectrum congestion, climate
and other considerations. Thus, relocation expenses resist
generalization and categorization. With this caveat, the following is
an illustrative, non-exhaustive list of expenses that should be
eligible for reimbursement from the fund.
Transmission-related expenses
New transmitter or retune existing transmitter
New auxiliary transmitter or retune existing auxiliary
transmitter (where existing auxiliary facility is licensed)
New antenna or modify existing antenna
New auxiliary antenna (where existing auxiliary facility is
licensed)
New mask and other filters
New combiner (for stations sharing feed line or antenna)
New exciter
New transmission line or wave guide
Temporary antenna
Temporary transmitter
Temporary transmission line
Temporary electrical power
New controllers and other equipment associated with above
when existing equipment is not compatible with new equipment
Equipment to change translator input channels
Proof of performance testing
Removal and disposal of old and/or temporary equipment
Installation for all of above, including third party and
internal labor costs (e.g., personnel time spent on
modifications and accounting/cost reconciliation, overtime,
etc.)
Tower and other facilities-related expenses
New tower or existing tower upgrade or modifications to main
and/or backup towers
New building or modifications to existing building to house
new transmitter and other equipment
Land (for new tower or new facility)
Contractual liability to current tower landlord if new tower
is necessary
Contractual liability to other site users when they are
directly impacted (e.g., service interruptions, temporary
facilities, shared antenna)
Difference in tower rent
New power plant equipment, including extension of
electricity to new site
New HVAC equipment
New STL and ICR to new site
Moving costs to haul equipment to new site
Removal and disposal of waste
Professional, legal, and other fees
Engineering fees (for designing new facility; for tower
loading evaluation; for site surveys; for building
modifications)
Fees for tower and RF compliance testing
Expenses and fees associated with obtaining FAA clearance
for a new or modified tower proposal
Permitting fees
Legal and expert fees (for applications; for zoning,
environmental, and historical preservation compliance issues;
for real estate (acquisition or leasehold); for tax advice on
how new/replacement equipment is taxed)
FCC filing fees for construction permits and new licenses
(if not waived by FCC)
Ancillary expenses necessitated by repacking process
Microwave, fiber, or other delivery expenses to ensure
delivery to cable headends or satellite local receive
facilities that are reached by existing facilities but are not
by new facilities or that are necessary on a temporary basis to
bridge any gap in full power operations (e.g., extended periods
of silence)
Replacement of wireless microphones, interruptible foldback
(IFB), and headsets that are displaced from now unused TV
channels
Additional or ``bridge'' insurance
Expenses associated with educating viewers about rescanning
Expenses associated with possible medical telemetry
interference notifications
Tax consequences (e.g., depreciation schedules rendered
inaccurate)
______
Response to Written Question Submitted by Hon. Mark Warner to
Rick Kaplan
Question. In March 2010, the Federal Communications Commission
(FCC) released its National Broadband Plan (NBP). I was hopeful that we
could clear 120 MHz in the incentive auction, but now it looks like
there will not be more than 84MHz cleared in most markets. What do you
believe will happen to the band plan if less than 84MHz is made
available for the incentive auction? It's important to me that we
maintain room for innovative uses of spectrum, such as white spaces,
for instance.
Answer. There are a number of productive band plan variations
should the Commission recover less than 84 megahertz of spectrum across
the country in the voluntary broadcast spectrum incentive auction. The
goal of these band plans should be to maximize licensed paired
spectrum, as that plan is most desirable for the vast majority of
potential bidders in the auction.
One of the most potentially problematic aspects of the auction
under almost any band plan is its threat to white spaces. As
broadcasters are repacked across the country, white spaces will
inevitably disappear. This presents a great challenge for the FCC,
since it pushed hard for a workable white spaces regime just a few
years ago, but now faces the real possibility of destroying their worth
in the broadcast band through repacking. The best way to limit the
damage to white spaces is to focus on creating a nationwide band plan
and not one that transfers more spectrum from white spaces to
commercial wireless operations in rural areas.
______
Response to Written Questions Submitted by Hon. Mark Warner to
Harold Feld
Question 1. In their December 2012 Broadcast Television Spectrum
Incentive Auction Notice of Proposed Rulemaking (NPRM), the Federal
Communications Commission (FCC) sought comment on the use of spectrum
aggregation limits in the forward auction. There is a wide range of
opinions on this issue. What is the most equitable way for the FCC to
administer a spectrum screen? Should the FCC require carriers to divest
comparable spectrum below 1 GHz in order to meet limits? Why or why
not?
Answer. Public Knowledge submitted comments to the FCC in its
pending proceeding reevaluating the spectrum screen urging the FCC to
adopt an across the board screen that weights spectrum based on
frequency and market. A copy of the comments, and the supporting
comments of Professor Jon Peha of Carnegie Mellon University, is
attached.
To summarize, Public Knowledge proposes that the FCC's spectrum
screen takes into account that physical reality that low-band spectrum
has the best set of physical characteristics in terms of propagation
characteristics for mobile broadband. Thus, the screen would weigh more
heavily low-band spectrum under 1 GHz. As the frequency increases, the
spectrum screen would decrease the weight assigned to frequency
holdings the higher frequency. Spectrum between 1 GHz and 2 GHZ would
thus count more toward the screen than spectrum between 2 GHz and 3
GHz, reflecting the higher energy cost, poorer penetration
characteristics, and other factors that make this spectrum less useful
and more expensive to deploy.
In addition, Public Knowledge proposes that the FCC recognize that
in rural markets the problem is not generally a shortage of spectrum
but that lower population density means a lower rate of return on
higher investment. The FCC should therefore weight the screen to
reflect this reality by having a higher screen in urban areas (to
promote competition among the many carriers trying to offer service)
and a lower screen in rural areas (to lower the cost to the few
carriers providing rural service by permitting greater aggregation of
rural low-band spectrum).
Finally, Public Knowledge proposes a specific penalty to discourage
warehousing spectrum by increasing the weight for unused spectrum over
time. With regard to divestiture, Public Knowledge believes that
providers should divest spectrum if they exceed the screen. Companies
that exceed the screen as a result of auction wins should be required
to divest spectrum post-auction before the FCC issues a license for the
new spectrum.
Question 1a. Given the fact that it is less expensive to build
networks using lower-band spectrum, should the FCC consider these costs
in its evaluation of competition? Why or why not?
Answer. The Commission absolutely must consider the realities of
spectrum deployment when evaluating competition policies. We rely upon
competition to replace regulation as the means of protecting consumers
in the marketplace. For competition to discipline the largest players
in the market, the competitive threat must be real.
If the largest providers can either deprive competitors of needed
spectrum, then there is no competitive threat. The lack of spectrum
means that competing carriers can only grow so far before their quality
of service degrades based on spectrum congestion.
Dominant carriers can achieve the same effect by driving up the
cost of spectrum to a point where competitors cannot offer service
profitably, or cannot afford to undercut the price offered by dominant
carriers. This is not a function of the ``true'' value of the spectrum,
but a result of the fact that spectrum is licensed by the Federal
Government. Unlike almost any other resource, licensed spectrum is a
true ``zero sum'' game, making it possible for dominant carriers to
foreclose competitors or artificially drive up cost.
Because low band spectrum is (a) unique in its physical
characteristics that lower the cost of deployment, (b) held almost
entirely by two dominant carriers and (c) limited to a small, set
number of licenses, it is logical for AT&T and Verizon to attempt to
foreclose rivals from acquiring it. The FCC must take this reality into
account.
Question 1b. Has the FCC considered applying a market-by-market
review of spectrum assets limited to major markets, since these are the
areas which have the greatest demand for spectrum? Why or why not?
Answer. The FCC does not currently distinguish between major urban
markets and other areas where demand for spectrum is not as great. This
is problematic, especially as licenses come in a variety of geographic
areas and there is no clear method for resolving questions of overlap
in an acquisition. As a result, a carrier may exceed the screen in
parts of a market post-acquisition without needing to divest.
Question 2. In March 2010, the Federal Communications Commission
(FCC) released its National Broadband Plan (NBP). I was hopeful that we
could clear 120 MHz in the incentive auction, but now it looks like
there will not be more than 84 MHz cleared in most markets. What do you
believe will happen to the band plan if less than 84 MHz is made
available for the incentive auction? It's important to me that we
maintain room for innovative uses of spectrum, such as white spaces,
for instance.
Answer. It is critical to maintain sufficient spectrum for the
TVWS. An auction that reclaims less than 84 MHz can successfully
achieve this by using a 12 MHz duplex gap and a 10 MHz guardband
between the surviving broadcast service and the new 600 MHz service.
Such a guard band could also include Channel 37, the channel set aside
for the Wireless Telemetry Medical Service (WMTS).
The auction will still succeed if it reclaims less than 84 MHz of
spectrum. In any auction that yields sufficient reclaimed spectrum to
succeed financially, careful planning can ensure access to the TV bands
for unlicensed use. It is imperative that the FCC recognize the
importance of this and structure the band plans accordingly. If
insufficient spectrum is made available in urban areas for unlicensed
use, then chip manufacturers cannot achieve the necessary economies of
scale for rural broadband or innovative urban uses, such as deployment
as part of the ``Internet of things.''
Some have proposed that existing vacant TV channels in rural areas
be auctioned off for supplementary downlink (SDL) regardless of the
amount of spectrum reclaimed in urban markets. This would be a huge
mistake. As noted above, the problem in rural areas is not generally a
shortage of spectrum, but a shortage of providers. In rural areas,
wireless ISPs (WISPs) using unlicensed spectrum--especially the TVWS--
are providing this service. To deprive these WISPs of needed spectrum
to auction SDL for trivial amounts to providers that do not need
additional spectrum for rural deployment would rob rural areas of
needed broadband services for no worthwhile return.
Question 3. The Middle Class Tax Relief and Job Creation Act of
2012 allows the Federal Communications Commission (FCC) to create new
guard bands in the 600 MHz band for unlicensed use. I am supportive of
white spaces, and I hope that the FCC will be successful in creating a
guard band that is adequate for unlicensed and licensed uses. According
to some estimates, the unlicensed ecosystem generates as much as $50 to
$100 billion per year for the U.S. economy. How important do you think
it is to maintain white spaces?
Answer. Unlicensed in the TVWS represent a unique public resource
and an enormous economic opportunity for the United States. Because of
the unique characteristics of the spectrum, availability of unlicensed
spectrum in the TV bands dramatically lowers the cost for providing
broadband services. In rural areas, this translates to enhanced
competition and deployment of quality broadband in unserved areas. In
urban areas, this translates into a means to extend access to fiber
through wireless ISPs and hot spots that permit deployment of low-cost
or even free broadband access to those who cannot afford cable or other
forms of high speed wireline broadband.
But more importantly, the TVWS represents the first generation of
cognitive radio devices. No single application, even the possibility of
vastly improved low-cost broadband, can adequately capture this value.
First, the development of this ``next generation'' unlicensed spectrum
technology provides new means of managing wireless networks that will
maximize efficiency of all wireless networks by enabling ``smart''
radios to use available blocks of spectrum. As with previous
innovations developed in the unlicensed space, these innovations will
ultimately be adapted and incorporated into the licensed space to the
benefit of all, creating a multiplier effect for the wireless economy
as a whole.\1\
---------------------------------------------------------------------------
\1\ It is important to understand that these innovations will take
place in the unlicensed space rather than the licensed space because
the open nature of the unlicensed space encourages ``innovation without
permission.'' In economic terms, the lower transaction cost associated
with developing devices and uses in the unlicensed space (because a
would-be innovator does not need to find a willing licensee and
negotiate for access) lowers barrier to entry and facilitates
innovation in a way wholly different from that of licensed spectrum
access. See Kevin Werbach and Aalok Mehta, ``The Spectrum Opportunity:
Sharing As the Solution To The Spectrum Crisis,'' 8 Int'l J. of
Communication 128 (2014) available at: http://ijoc.org/index.php/ijoc/
article/view/2239/1054 (copy attached).
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Additionally, the wealth of devices and new uses that will develop
using the superior propagation characteristics of the TVWS for
specialized purposes will create hundreds of billions of dollars in
revenue and economic surplus annually. A new study by Columbia School
of Business Professor Raul Katz shows that the availability of
unlicensed spectrum contributed over $220 billion dollars to the U.S.
economy in 2013, and directly contributed $6.7 billion to U.S. GDP.\2\
Access to the TVWS, because of the unique physical characteristics of
this spectrum, can be expected to increase this value exponentially
over time.
---------------------------------------------------------------------------
\2\ See Raul Katz, ``Assessment of Economic Value of Unlicensed
Spectrum In the United States,'' available at: http://
www.wififorward.org/wp-content/uploads/2014/01/Value-of-Unlicensed-
Spectrum-to-the-US-Economy-Full-Report.pdf (copy attached).
---------------------------------------------------------------------------
Finally, by enabling all Americans to directly access this valuable
spectrum, preservation of the TVWS permits entry for all Americans
rather than the handful of entities able to afford licenses at auction.
This is particularly important for small businesses, rural communities,
and women and minority owned businesses. Preserving the TV white spaces
allows these traditionally marginalized businesses and communities to
build their wireless future themselves, rather than wait passively as
consumers for licensed providers to recognize their worth. The
unlicensed TV spectrum makes the promise of American entrepreneurialism
a reality to those who would otherwise stand excluded on the sidelines,
and converts passive consumers into active creators. We should
recognize this value, so wholly consistent with our values as
Americans, despite the fact that it cannot be measured in mere dollars.