Here we go again. . . The upcoming 220MHz auction
System operators considering taking the plunge into the 220MHz auction in May need to learn exactly what they are bidding on and how the process will unfold_ahead of time. Here are some observations from the trenches.
Unlike many of you who were not involved, I’ve just about recovered from the 800MHz auction. The flurry of status reports have been removed from my in-box, I can say the words “click box” without wincing, and the phrase “minimum payment due” now refers only to my Mastercard account.
But now it’s time to get ready for the 220MHz auction, scheduled to begin May 19. Although that might seem like a long time away, it really isn’t. If the FCC had announced retail sales of spectrum, Kmart would already be running ads for the 220MHz summer specials.
Preparation work for an auction begins long before the opening round, and there are deadlines to meet before the auction begins. To bid in the auction, you have to file your application by April 20, and get your “upfront” money to the commission by May 4. But before you open your wallet, educate yourself about the auction; make sure you know what you might be buying and how to proceed.
What’s on the block The first inquiry to make before you even think about sending the FCC a nickel is to assure yourself that you know exactly what’s for sale. The commission will have 908 licenses of various sizes and types on the block. Three of them will be nationwide, 10-channel blocks. Thirty of them will be 15-channel Regional Economic Area licenses (six “Regional Economic Area Groupings” [REAG], with five frequency blocks each). The rest will be 10-channel Economic Area (EA) licenses, with five blocks of channels per EA.
Stated another way, the spectrum will be sold in blocks of five, 10 and 15. The geographic areas that each license will cover vary from the size of an EA (the standard for the last 800MHz auction) up to a nationwide “big boy.”
Remember, this is occupied spectrum. So the opportunity to use and meet construction requirements will depend on the level of existing use, including the present locations of the licensed systems. Only a fool buys “used” goods without checking out the extent of wear. Do your homework, checking the FCC license files to determine how used each block of spectrum is and what you will have to do to accommodate existing licensees.
The details of the auction are still being hammered out, and if the FCC’s past experience with 900MHz and 800MHz auctions is any guide, the commission will still be working on the rules while the auction is going on, continuing to hammer out the details until the last bid is entered.
As of the end of January, several issues remain unresolved: * Reserve price or minimum opening bid _ The commission is considering whether to set a reserve price for frequency blocks subject to auction. This means that the commission could set a “secret price” for each license. If the final bid doesn’t meet or exceed that price, the high bidder won’t get that license. The commission will keep the license on the shelf until the market improves.
It’s doubtful whether the commission would do this. First, you can pretty much bet that the poor schlemiel who’s the highest bidder when the commission announces a “do-over” is going to scream bloody murder. Second, the commission is charged to ensure that the spectrum is used for the “public interest, convenience and necessity.” Keeping a license on the shelf, waiting for a higher offer, means that spectrum is not working for the public interest.
It’s hard to imagine the commission overturning the results of an entire auction without the proverbial gun to its head. (Although, if it’s willing to overturn auctions, it should start with 800MHz.) If the commission doesn’t overturn an entire auction, that means that it would have to re-auction licenses on an individual basis, with even less certainty of getting the desired price. All in all, a reserve price is a bad idea.
The commission is also considering whether to set a “minimum opening bid” for each license in the auction. A minimum opening bid was used in the 800MHz auction and was equivalent to the amount of the upfront payment. For the 220MHz auction, the commission is considering minimum opening bids equivalent to $0.0175 MHz/POP for EA licenses, $0.015 MHz/POP for REAG licenses, and $0.02 MHz/POP for nationwide licenses.
It is almost certain that the commission will adopt at least one of the two options, and I’d guess that the commission will use a minimum opening bid, given its previous use at 800MHz. The function is already built into the commission’s auction software, and it involves less risk of litigation than using a reserve price.
* Exponential smoothing _ The commission is also considering using “exponential smoothing” as a means of calculating the next bid that it will accept on any given license. The bid increment is based on a weighted average of the activity received on each license throughout the auction (or by using about two pages of important-looking calculations).
Exponential smoothing was used and abandoned in the 800MHz auction because it was not raising the bids high enough, fast enough, for the commission’s taste. So, at certain points the FCC’s auction elves just stopped using it and figured out a minimum bid that better served their agenda of building bids high and fast.
Exponential smoothing, despite its cool name, is just an over-complicated way of making a simple decision. For all of its multinumeric calculations, it just didn’t work well. Based on actual experience, the commission may choose not to use it again.
* Click Box redux _ One thing the commission is keeping mum about is whether or not it will use “click box” bidding as it did at 800MHz. With the click box, the commission pre-set the next higher bid, mandating what you were going to bid on a license. There was no ability to change the bid amount_it was strictly a take-it-or-leave-it proposition. The high bidder in any given round was the entity that clicked fastest and got its bid in first. (My fastest time for submitting a bid was seven seconds. My parents are very proud.)
Despite my having the fastest mouse east of the Pecos, I would hope that the commission does not use click box bidding at 220MHz. But if the commissions does use click box bidding, I would hope that it modifies its use so that you can opt to bid multiples of the bid increment. [This option is to be offered in the LMDS auction, which at press time is scheduled to start February 18.] Click box bidding, more than anything, was responsible for the 800MHz auction lasting forever. The click box was developed as the commission’s response to charges of “bid signaling” that allegedly occurred in the PCS C-block auction. The theory is this: A company would use the last few digits of a bid to try to “warn off” competition for that license. “If you bid on this license of ours, we’ll bid on that license of yours.” The commission frowned upon this type of behavior and developed the “click box” to prevent future bid signaling. The click box is part of the agency’s campaign to make participation in an FCC auction collusion-proof, and it was a darling of former Chairman Reed Hundt, whose own software-writers in the auction division told him that it was problematic. As he had advised in one of his own speeches, Hundt listened patiently to his staff and then rejected their advice. It seems the staff understood that if people are going to cheat, the click box probably wasn’t going to stop them.
The result of the click box method was an interminable 800MHz auction that dragged on for 235 rounds to its inevitable conclusion. Instead of fulfilling the alleged goal of selling the channels to the party that valued the spectrum the highest, the value was pre-set by the agency, one round at a time. Instead of being market-driven the auction was, in part, software-driven. After 235 rounds, it’s not an auction, it’s an endurance test.
* Activity rule waivers and reducing eligibility _ A few procedures in previous auctions will almost assuredly stay the same in the 220MHz auction. The commission will again provide each bidder with five activity rule waivers to be used throughout the auction. A bidder with insufficient activity in any round of the auction will lose a rule waiver. If all of the bidder’s rule waivers have been exhausted, and that bidder does not have sufficient activity in a round, the commission will reduce the bidder’s eligibility to participate in the auction. Or, the bidder may choose to reduce eligibility at any time to comply with the activity rules. In the 220MHz auction, as in others, a bidder may use a proactive waiver to keep the auction open if a bidding period passes without a bid having been submitted.
* Bid withdrawal and bid removal _ In past auctions, certain companies have placed bids that they have later regretted ($125 million for 10 channels at 900MHz in Atlanta?). The commission has addressed this and has provided a way to “remove” a bid from consideration after it has been submitted. Bid removal can only be done during the round in which it was placed. To get rid of a bid after the round has closed requires bid withdrawal. A withdrawal can result in a penalty if a higher bid is not received by the commission prior to the end of the auction. Bid withdrawal has been used in some auctions to preserve eligibility and for other purposes. To reduce the amount of “gaming” done in an auction, the commission chose to limit the number of bid withdrawals per bidder to two.
* Stopping rules _ Once the commission begins the auction at 220MHz, it also has to figure out how to end it. The FCC’s past use of “simultaneous stopping rules” has been one of the most contended of all of its auction decisions. In sum, the agency’s use of this method allows the auction to remain open, with all licenses available for bidding, until one round passes in which no new bid is placed, and in which no proactive waiver is used.
With the simultaneous stopping rule, a high bidder on a license must remain ever-vigilant until the end of the auction because of the threat of a new bid on the desired frequency block. So even if no one has bid against you for 40 rounds, you cannot claim your prize until the auction closes for all of the licenses.
The FCC can, of course, just limit the number of rounds or stop the remainder of the auction while it takes remaining bids on the few licenses that appear to still be in contention. But this doesn’t happen until the auction has gone on for so long that participating in the auction begins to feel like a permanent occupation.
The long odds are that the commission will never voluntarily act to end an auction as long as some additional money is dribbling into the federal coffers. After all, it did not invoke this rule in the 900MHz auction, which lasted five months (December 1995 through April 1996), or in the 800MHz auction, which lasted 235 mind-numbing rounds.
To its credit, the commission does try to speed up an auction when it starts dragging. It can and always does set stages for bidding, causing bidders to pony up more money per round per bid. The agency will also increase the number of rounds held per day. The 900MHz auction was fast-approaching nine rounds per day when the last bidder cried “Uncle!” The 800MHz auction was scheduled to increase to 24 rounds per day_the next day_when it ended. That’s a round every 20 minutes.
Not only does a bidder have to monitor every single round result, but the bidder still has to be vigilant for “announcements” regarding changes in the bidding schedule and increases in the bid increment.
Missing and wanted Missing from the commission’s request for comments is any discussion of installment payments, which were available in the 900MHz auction for any company that qualified as a small business under the rules. This option helped some companies to bid for, and win, licenses through that auction that they would not have had the resources to purchase otherwise.
After the PCS C-block auction (wherein Wall Street-backed, unproved, start-up companies bid billions of dollars for licenses that no one could afford), the FCC shied away from offering installment payments. The resulting litigation soured the commission on installment payments.
The problem was not installment payments or the ability of designated entities, such as minorities and small businesses, to effectively participate in the auctions. The problem was that the commission was caught with a conflict of interest. On one hand, politicians were clamoring for headlines about astronomical payoffs from frequency auctions. On the other hand, the Telecommunications Act says that designated entities must be allowed to play. The result was that the FCC let its processes and rules be abused by a handful of Craig McCaw-“wannabes” who don’t know a combiner from a power amplifier. The solution is not to eliminate installment payments. The solution is to own up to the problem and to deal with the abuses and the abusers.
Go for it Participation in an FCC auction can be harrowing, complex and frustrating. The rewards are obvious, even though the path to the rewards is fraught with rules and policies that sound like the assembly instructions for a 1,000-piece kid’s toy. But if you are considering a plunge at 220MHz, start now by researching the frequency blocks, areas and the licenses. The best bidders are those that know exactly what’s for sale and how to buy it.
Kaercher is an associate with the law firm of Brown and Schwaninger, Washington, DC. She has served as a bidder’s representative in previous FCC spectrum auctions.