The dirty little secret is the $7 billion auction of broadband personal communications services licenses was not necessarily a big success.
Reed Hundt, chairman of the Federal Communications Commission, would probably disagree. He’s made a career of auctioning PCS licenses over the past year.
The FCC picked up a few extra dollars selling interactive TV licenses. Another $700 million was had from pioneer’s preference recipients. About $9 billion in all, with more auctions to go. Not bad, considering licenses have been handed out freely for a half century.
Hundt and his staff deserve credit for putting auction rules into action so soon after the Aug. 10, 1993, date when Clinton signed legislation making competitive bidding a licensing tool.
But talk to an economist here or there, and you might get a different story about the auction that ended March 13 after three months and 112 bidding rounds. Eighteen bidders spent $7 billion on 99 licenses to operate digital pocket telephone systems.
It has been pointed out that bidding activity, not counting the catalytic follies of Craig McCaw, was laggard for the most part. In the end, the big guys-AT&T Corp., Sprint Corp. (in concert with three top cable TV firms) and the Baby Bells-took home most of the prizes.
As Congress looks at spectrum reform it may want to go below the surface and beyond the fanfare of auctions to discern whether they are, in fact, the best means of distributing wireless licenses.
Listen to a few of the witnesses at last month’s Senate Commerce Committee hearing on spectrum reform.
“We do not have sufficient information to judge the success of recently completed auctions,” said Larry Darby, a former FCC official, economics and finance professor and Wall Street investor who, as you might guess, now consults in Washington, D.C. “While the process has been rightfully acclaimed as efficient, fair, expeditious and a revenue generator for the United States Treasury, the critical market performance data necessary to render final judgment on the success of auctions is simply not in evidence.”
Eli Noam, professor of finance and economics and director of the Columbia Institute for Tele-Information at Columbia University in New York City, is even more skeptical.
“Budget policy is the driver for the auction system,” said Noam. “But is it good telecom policy?”
“An auction is a tax, a tax on future usage of an advanced technology. It retards the spread of applications. It is a barrier to entry. It’s a double hit on consumers: first, as a tax on new entrants that will be partly passed on, and second, because it will leave the market price higher than otherwise, and therefore generate less of a competitive price reduction in the incumbent service.”
“It’s important,” added Noam, “to recognize that the highest bidders in an auction are most likely those who will be able to organize an oligopoly to keep prices up in order to recover the bid prices. This is done, first, by bidding `consortia’ of companies that would otherwise be each other’s natural competitors. Second, the high bidders, after some shake-out period, are likely to collaborate through some pricing parallelism. And third, with spectrum flexibility, they can consolidate much easier by absorbing competitors and rival services.”
Sound familiar?
