An overview of spectrum auctions: The Devil’s due
Selective application of auction authority to the land mobile community raises serious questions about the legal extent of that authority and the motivations for its use.
Over the past six months, the Federal Communications Commission (FCC) has:
* announced its plans to auction licenses for “white space” (areas outside the service contours of already-licensed trunked systems) for 220MHz-222MHz. * adopted rules for refarming private radio spectrum. * adopted rules for auction of most of the paging spectrum. * completed auctions for much of the PCS spectrum. * picked up some small change on auctions of unserved cellular areas and wireless communications services (WCS).
The agency is also toying with rules to auction additional spectrum that might become available from the federal inventory.
Meanwhile, the National Association of Broadcasters (NAB) is still using references to the First Amendment to forestall any auction of broadcast spectrum; Craig McCaw is set to cut a deal to obtain valuable “free” satellite spectrum in the Teledesic deal that includes a 400MHz allocation to a single company, Associated Communications; Internet providers are posting record revenues borne from too much demand for services; and manufacturers are readying themselves for a boom in sales brought by the delivery of the new services and technologies that come to the fore daily.
It may be my imagination, but does it appear to anyone else that the land mobile community of our industry is taking it in the shorts? Does it also appear to you that the FCC cannot seem to switch its focus to other market segments to collect its tribute, giving the land mobile community a much needed breather?
Do you feel like screaming, “Enough, already!”?
Why just land mobile? In the parlance of law, the term “selective enforcement” is used to negate governmental policies that are not meted out in an even-handed fashion. If a traffic cop gives tickets only to people driving red, but not blue, cars, then the cop’s actions are nullified by courts, which will not countenance this type of behavior. Another example would be the FCC’s use of its new auction authority almost exclusively for denying revenue to a single segment of our industry: land mobile carriers. These red cars are paying the tolls, getting the tickets, being subjected to new laws and being hauled into court with impunity by the FCC, while the blue sedans of wireline, satellite, cable TV and other segments of our industry are happily cruising down the road.
Consider the ramifications of the 1996 Telecom Act, which allows regional Bell operating companies (RBOCs) and local exchange carriers (LECs) to go head-to-head in their markets. Some hail this statutory right to compete as a step toward greater use of competition in the marketplace, and good for consumers. But if the FCC is not using its auction authority, selectively, then where’s the auction?
There is no real difference between use of spectrum and use of other means of communications, such as wireline or cable. Each is fully regulated and made possible only by a grant of authority from the agency. So, why not auction the right to compete in arenas employing this type of communications? Add to that the use of microwave channels for backbone systems, cable television’s rights-of-way and satellite links, AM and FM broadcast channels, use of Global Positioning System (GPS) satellite communications, satellite “slots,” old local area network (LAN) channels and more. None of these telecommunications services is facing a serious threat from the FCC’s auction authority.
As long as I am spouting heresy here, I might as well go for a double slice of damnation. How about federal franchises to sell equipment, including telephones, cellphones, two-way equipment, microwave transmitters, baby monitors, GPS receivers, amateur radio sets, cable, broadcast receivers, pagers, switches, computers, and more? No one can logically argue that each sale is not dependent on the use of the federal inventory of spectrum that is being parceled out and sold in chunks to the land mobile community. So why do the equipment manufacturers get a free pass, while the land mobile carrier has to buy the hardware and buy the use of the spectrum?
Okay, we’ve pushed the edge of the envelope of political correctness, so let’s keep marching on through. Recently, the administration announced plans to open global markets by allowing greater levels of foreign investment in domestic companies in exchange for reciprocal opportunities for investment in foreign telecommunications services.
Where’s the auction? Personally, I would love to see an auction between British Telecom and Nippon Telephone and Telegraph for market entrance rights. We might be able to solve the deficit in the course of an afternoon and use foreign dollars to do it. (Would Sri Lanka be entitled to bidding credits?)
The point is that there isn’t any auction of these extremely valuable, non-land mobile rights to compete in the marketplace, and no one is planning to hold such auctions. Imagine the political uproar if Motorola had to either bid on the right to produce pagers and end-user equipment, or else get out of the market. How about if MCI won an auction for the right to provide long-distance service that kept AT&T from expanding its services in the St. Louis basic trading area (BTA)? Or, what would happen if Digital and IBM were going head-to-head to obtain the right to produce new computing equipment? The halls of Congress would be so filled with lobbyists, the scene would resemble the Russian Revolution.
FCC Chairman Reed Hundt’s plan is disingenuous in the extreme when one views the totality of the marketplace. Instead of moving the political agenda toward a new world of auctions, he has chosen only a small segment of the entire industry, specifically designed to be the most politically palatable to lawmakers. The land mobile community is quite diverse, and it comprises many smaller companies that are not wealthy enough to shake the halls of Congress. The spectrum used for land mobile is, by and large, logically licensed, and a blueprint of white space is easily (though often incorrectly) determined for the purpose of sale.
The political rhetoric is also skewed toward selective use of the FCC’s auction authority. Lawmakers refer to the “public resource” of the nation’s airwaves, but they give a free easement across those airwaves to the majority of the carriers. None of this wrangling focuses on rights-of-way, like those used for burying cable or construction of telephone poles, but there is no doubt that these activities also consume public resources. The precious airwaves are only seen as auction fodder when used by a specific class of carrier: land mobile companies.
Further lost in the planned agenda of auctions is the effect of being the first victims of the FCC’s efforts. By subjecting land mobile carriers to the first auctions, during a period where spectrum is still viewed as “scarce” (a modifier that is quickly losing its cachet), the prices paid at auction are higher than those that will be visited upon the telecommunications industry for other uses of spectrum blocks. By the time the FCC and Congress get around to selling microwave rights, the companies participating will be paying pennies compared to the cost of starting a personal communications services (PCS) company.
Getting here Is all of this auction activity and the timing of each new “gavel-a-thon” an accident? Yes_and no. When auction authority was provided to the FCC, Congress had decided that the federal government had more spectrum than it needed and was looking for a way to choose among competing commercial companies to use the spectrum. At the same time, PCS, the “next-generation cellular systems,” were ready for market, with a lot of well-heeled companies ready to jump into the fray, even if they had to pay dearly for that leap. Speculation was rampant, and administrative costs ran high to process “lottery ticket” applications such as those received by the thousands for rural service area (RSA) cellular licenses. The same political party controlled Congress and the Presidency, so the money raised would lower the U.S. deficit during their tenure, and they would reap the political benefits. The antitrust lawyer who assumed the chairmanship of the FCC viewed the telecommunications market as a single, amorphous conduit, without true segmentation for the purpose of ever finding market domination by any one entity. Competition was defined as an activity that goes on only among the largest, deserving entities.
The test laboratory for the FCC’s new authority was decidedly small. The first auction was for interactive video data services (IVDS), which were to be a strange hybrid of home shopping and LAN use. With much ballyhoo, the FCC held its first auction, testing its systems and theories on something smaller than wideband PCS.
The result was a disaster.
The auction was over-hyped and over-sold, it was more circus than business, and Hundt looked more like a barker than a bureaucrat. More than 400 suckers were fleeced that day, many of them later to default on payments for licenses that are worth less with each passing day because equipment to serve the market is unavailable. Fortunately for the FCC, the total effect of its bamboozling of the IVDS auction participants was not fully recognized until lately, and the agency is justifying its actions by balancing its later successes against its former failure.
Like a ball player who gets another turn at bat, the FCC stepped up to the plate with PCS wideband licenses and opened the bidding for some of the largest players in the market. Calmly, the businesslike atmosphere of the next auction proceeded until commitments for more than $7 billion were earmarked for the U.S. Treasury. Hundt took his bows for the first PCS auctions and announced that “FCC” now stood for the “federal cash cow.” Congress was impressed, the administration was impressed, and every person involved in creating auction authority felt vindicated.
Although the FCC “hit it out of the park” with the first PCS auctions, its record for the remainder of the present auction agenda has not qualified it for the federal agencies’ Hall of Fame. The agency is a straight-pull-hitter, socking the ball to only one side of the field: the land mobile side of the diamond. The FCC has spent way too much time looking at curve balls, like 800MHz and 220MHz SMRs, usually whiffing badly. It has pounded one to the warning track in the PCS C-block auctions, but the number of likely defaults caused that one to be snared before going over the wall_impressive, but a long out. It has rapped out a few hits at 900MHz specialized mobile radio (SMR) and narrowband PCS, but without any distinction. In the cellular unserved areas, it bunted.
Unsolved Problems Meanwhile, the agency is still wrestling with a number of problems, not the least of which is how to ensure that a game requiring substantial risk and investment from participants is open to smaller businesses. The FCC has tried bidding credits, allowing consortia, spectrum caps, installment payments and entrepreneur blocks. Still, its efforts have not truly opened the field. The FCC still has not figured out that it has the authority, under Sections 257 and 309 of the Telecommunications Act, to simply refrain from trying to force small business to participate in auctions and to employ other licensing methods. Instead, it trots out its meager victories in involving smaller companies and cites generalized statistics that mask the agency’s failure. The agency even has the chutzpah to claim that the PCS C-block auction winners were small businesses. NextWave’s bid, exceeding $4 billion, belies that characterization.
The fact is that small businesses, by and large, cannot afford to play in the auctions and afford to buy the equipment necessary to build the systems. To them, it is an either-or situation. Nothing the FCC has legislated to date will change that reality. Still, like a Cadillac dealer located next to a trailer park, the FCC still claims that with the right financing package each family in the park can afford the rent on their parking pad, the payment on the double-wide and the cost of a new Coupe DeVille.
The FCC’s attempt to oversell small business is obvious when you review the costs paid by the small businesses that have participated in auction. Small business pays more for spectrum than large business, even after all of the credits, time payments and the like are taken into consideration. The effects of the FCC’s actions have created a disincentive for small business growth, despite alleged best efforts.
Mothballed megahertz Another issue that is beginning to cause greater problems for the FCC is “spectrum warehousing.” While the FCC continues to put bigger blocks of spectrum on the auction block, the issue of when (and if) the winners will put that spectrum to use arises. For example, does a PCS operator with 30MHz of spectrum need all of it to provide service to the public? Probably not, at least for the foreseeable future. So, does the agency have the responsibility to limit the size of the allocations or to adopt rules to assure the spectrum’s future use? Many people who have witnessed the high-definition television (HDTV) mess have begun to adopt a “use it or lose it” attitude that is gaining momentum. The FCC is ducking this question by claiming that winners have an “economic incentive” to use that for which they have paid.
Reasonable persons may differ with this rosy view.
Droit du seigneur A huge, looming issue is the extent of the FCC’s authority in employing auctions. As the agency has moved to auction “white space,” the language of Section 309 of the Telecommunications Act has become ripe for judicial interpretation. The language of the Act says that the FCC is to use auction authority as a remedy to decide among mutually exclusive applications. The Act does not suggest that the agency has the right to cause the mutual exclusivity first (i.e., by announcing a bidding war) for the purpose of employing the remedy. The agency’s obvious bootstrapping of its auction authority is likely to come under fire, and the courts will decide if the FCC has the broad authority that it has claimed, unchallenged, to date.
Procedures So far, the FCC’s processes are obviously intended to wring the last dollar out of the bidders. Simultaneous, multimarket, multichannel, multimillion-dollar bidding procedures make participation expensive. These procedures invite speculation, bid parking and a host of ills that do not result in awarding licenses to sincere participants that desire to deliver a specific service within a specific market.
Finally, there are charges that the agency uses auctions solely for the purpose of raising revenue, and that this motivation controls decisions regarding when, where and how to hold an auction. The FCC was directed by Congress, within the specific language of the Telecommunications Act, not to use revenue collection as its primary motivation in creating and administering auctions. Few could seriously say that the “federal cash cow” has not either ignored or failed to take this statutory admonition seriously.
Progress and problems to date The short history of the FCC’s use of its auction authority has been a checkered one. The agency’s authority has netted some positive effects for the industry and the American public, but the greater number of examples demonstrate the agency’s inability to employ that authority in a manner that produces the effects visualized by Congress. The federal lawmakers wanted money to be raised, but not at the expense of small business opportunity. Congress wanted a return on its investment in regulating telecommunications, but the agency has limited that return by including only land mobile operators in the universe of auction participants.
The Chairman has flip-flopped on auction of broadcast spectrum, adding to the confusion; has ignored the issue of warehousing (or declared that it is not really so bad); has been willing to disrupt whole market segments simply to enjoy another auction; and has yet to articulate a realistic approach to rural telephone companies, small business, minority participation, manufacturers, private radio licensees, incumbent carriers or foreign involvement. Undeterred, the FCC has plunged forward into the icy auction waters, holding its breath and hoping the financial bottom is deep enough to forestall stricter guidelines from Congress.
The FCC’s greatest abuse of its auction authority is still the first one discussed_selectivity. The industry might take the FCC more seriously if a bid had been let for the right to provide the 1-900 service for conducting auctions. At least that would have demonstrated some fairness, which is sorely needed.
Schwaninger, MRT’s regulatory consultant, is a partner in the law firm of Brown and Schwaninger, Washington, DC. He is a member of the Radio Club of America.