As a native Washingtonian, I always become suspicious when Democrats and Republicans jointly embrace anything. My suspicions heighten when the executive and legislative branches-and the “independent” Federal Communications Commission-all rush to claim credit for their particular contributions to the field of communications. In this context, despite (and because of) its bipartisan embrace, the concept of wireless auctions warrants a closer look.
From the outset, the design of mechanisms to award coveted licenses proved the old adage that the simplest things in life often are the most complicated. First, the commission attempted to license only the “most qualified” members of the cellular applicant pool by conducting comparative hearings. This led to such excesses as awarding the cellular rights to Los Angeles to an applicant because it proposed 24 cells in its system, rather than 23.
Then the commission decided to license by lottery. The problem here was the commission was so intent on guarding against one form of abuse, i.e., parties obtaining multiple chances in lotteries, that it inadvertently encouraged other forms of abuse, including “greenmail,” thereby complicating and prolonging the entire licensing process. (Some litigation remains pending to this very day.)
Concern also was expressed about “speculators” receiving enormous windfalls from lotteries-as if lotteries do not by their nature invite speculators and produce windfalls for the winners. Nevertheless, concern over “speculators” generated rabid support of auctions.
As the theory goes, auctions are the best mechanism for awarding licenses because they should result in awards to those who can use them best and value them most. What’s more, the U.S. Treasury reaps billions of dollars!
Auction shortcomings
But auctions, like lotteries and comparative hearings before them, look better from afar than up close. While auctions may be an effective selection strategy in certain instances, like all other selection methodologies, they also may not be the panacea that many folks predicted and certainly are not the best selection mechanism in every instance.
Since virtually all components of the government and many within the industry have by now climbed onto the auction bandwagon, in the spirit of reasoned debate it appears healthy to ventilate some auction shortcomings.
First, no one has ever demonstrated that even the most informed bidders really know what spectrum is worth and thus, that auctions result in license awards to those persons for whom they are most valuable because they can be best used. For example, how can bidders accurately predict what spectrum is worth when they don’t know who they will be competing against, don’t know how much capacity that spectrum will ultimately be able to carry (and how many competitors they will ultimately face), can’t foresee the nature and number of technical and business applications available in the future, and can’t predict what (possibly retroactive) changes in governing laws and regulations they will encounter-not the least of which is how much spectrum will be available, and when? As a result, questions arise as to whether licenses are awarded to those who truly can best use them, those who merely thought they could best use them, those who simply erred the most on valuing them, or those who simply have the most money to pay for them.
The DE dilemma
The auction concept instantly became complicated on the day Congress passed auction authority because Congress tasked the commission with disseminating licenses among a wide variety of applicants, including designated entities. The commission strived mightily to promulgate rules to implement congressional equal opportunity directives.
In so doing, the commission started by releasing 54 single-spaced pages of rules and policies addressing just this issue, then supplemented these pronouncements with hundreds of pages of clarification and revision, including orders on reconsideration, public notices and private letter opinions. Although it now appears that the rules will have weathered two court-imposed stays and an undermining-but not unexpected-Supreme Court decision, the surviving rules are now race- and gender-neutral and provide benefit only to “small businesses” as uniquely defined by the FCC. Under such circumstances, genuine questions exist as to whether the commission’s auction rules will provide the type of licensee diversity Congress sought when it conveyed auction authority to the commission.
A concentration of power
The congressional directive to avoid excessive concentration of licenses has proven equally difficult to implement. In the A- and B-band auctions, three entities walked away with 63 percent of the licenses awarded, covering roughly 67 percent of the U.S. population, and the top six applicants obtained 77 percent of the licenses covering approximately 82 percent of the U.S. population. Virtually all of the top selectees have a considerable wireless presence through cellular.
This unprecedented concentration was inevitable on the very day the auction started: there were very few “new” faces at the auction, and even the most casual observer could predict with a fair degree of accuracy who would “win” many of the auctions. Moreover, the “per pop” price paid by competing bidders varied so widely when compared to the narrowband auctions that legitimate questions remain concerning whether there was not at least some “cartel” effect at the auction.
Finally, there is the issue of whether government revenues can themselves justify auctions. The $7 billion received in the A-and B-band auctions is so large a sum that it can be fully appreciated only if viewed relatively. Compared with other government auctions and past FCC budgets, it is staggering.
In the context of the federal budget, or even the expense associated with certain special benefits included therein, it is not. For example, $7 billion constitutes less than one-half the annual cost of a single, special interest tax privilege made available to certain pharmaceutical companies that relocate in Puerto Rico. Clearly there are hundreds of other examples of government waste and one wonders why such emphasis has been devoted to selling wireless (but not broadcast) spectrum.
The auction price “per pop” also is stunningly low. The A- and B-band average price of less than $15 “per pop” is only a small fraction of that paid for rural service area systems that were sold within months of the auction. While the RSAs that sold included operating systems with cash-generating customers, they included no major cities and considerably less geographic area. In any event, the discrepancies in price “per pop” were so extreme that in many instances the government may well receive more monies on a “per pop” basis in federal taxes resulting from RSA sales than were raised in the auctions. That the prices at the auction were artificially low also is reflected by the fact that certain A- and B-band auction winners who are seeking to sell their authorization rights are seeking prices several times higher than those they paid in the auction.
Selling assets
The money “raised” by the auctions presents two further considerations. The first is whether this “one-shot” funding effort, which is uniformly referred to as “revenue-generating,” is really anything more than a sale of assets. Would such universal praise be appropriate if the government decided to “raise revenue” by selling off other national assets? Would taxpayers prefer that the federal government sell national parks outright, as opposed to charging licensing and user fees into perpetuity? Do ongoing entities routinely determine to sell scarce assets that have long-term revenue raising potential without first comparing such revenue with projected sales prices?
The second consideration is whether the funds “raised” through auctions justify risking damage to what has to date been a genuinely dynamic and successful industry whose
annual revenues dwarf those generated by the auctions. For example, will auction payment obligations reduce investment available in the industry directly? Will the extra competition introduced by additional auction licensees reduce anticipated return on investment to the point where potential new entrants and products may never arrive? And has the government placed itself in an unseemly position by first collecting auction payments for spectrum and then using its power to erode the value of that spectrum by allocating and licensing even more spectrum?
Auctions appear to be particularly inappropriate considering applications were filed long before the adoption of auction authority.
Licensing by lottery from among existing applicants, rather than by auction, is the only way the government can abide by its contract with applicants, and it also is the best way to achieve congressional goals.
A change of heart
Insofar as future licensing authority is concerned, although Congress sets the agenda that the FCC implements, Congress has no track record of helping any industry grow. Remember the House hearings on the Omnibus Budget Reconciliation Act of 1993, which gave the FCC auction authority, as well as that bill’s legislative history? In both word and print, Congress expressly prohibited the commission from designing auctions as a fund-raising tool or from even considering revenue potential when devising auction methodologies. Congress’ clear message was that the commission must base its judgment on the public good and focus on developing a vibrant industry.
How times change. Recently the House Commerce Committee approved auction legislation designed to fulfill its budgetary requirements. Without engaging in any reasoned consideration on the impact of its action on the wireless industry as a whole, the committee approved a deficit reduction measure, requiring the FCC to allocate and auction 120 megahertz of spectrum below 3 GHz- half by 2000 and the other half by 2002. Most troubling, Congress mandated that spectrum blocks be at least 25 megahertz, unless smaller blocks could be expected to raise more revenue.
This action is akin to mandating five new shopping malls in each city without analyzing what products the stores would sell and at what point artificial supply would seriously destabilize the retail industry. While the legislation has not yet passed, the overriding fact is clear: auctions provide money and Congress is at the trough.
Another way
In any event, Congress and the commission may do well to revisit alternative licensing techniques that will make licensee status available to a wider array of entities without causing many of the problems that plagued lotteries.
A licensing system that calls for payments over time, with the amount of payments dependent upon the value of the spectrum as measured over time rather than before licensing, appears to offer considerable promise. By limiting up-front payments, you avoid the problem of only truly large players being able to participate. The approach also would take the government out of the “no-win” situation of having to raise via auction amounts that, even with the benefit of hindsight, are not too low (which would raise cries of a giveaway) or too high (which would be detrimental to the industry and raise questions of the government overcharging). And if these payments over time proved still to be too low to prevent windfall profits, a special excise tax of some form could be charged upon sale.
As of August 1993, auctions have been the preferred method for licensee selection. They have been used successfully to license both broadband and narrowband PCS licensees nationwide and they have brought the government unprecedented revenues. But at the same time, their implementation has raised questions as to whether they can fulfill much of their promise. This should result not in condemnation of the auction concept or criticism of its implementation. Rather, it should open the door for objective assessment as to whether auctions are necessarily the best way to dole out each and every service the commission licenses.
Those services for which applications were filed before the award of auction authority to the commission appear to be particularly appropriate candidates for licensing by other means. And both the Congress and the commission should consider alternatives to auctions for future licensing.
Thomas Gutierrez is a senior partner with the law firm of Lukas, McGowan, Nace & Gutierrez, where he specializes in wireless communications and emerging technologies.
