Yet another spectrum auction is soon wrapping up at the Federal Communications Commission. This particular auction, known as Auction 110, has emerged as a surprise success, garnering estimated revenues of around $21 billion.
But this success was not guaranteed. In fact, in many ways, Auction 110 seemed almost purposefully engineered to fail.
In all, Auction 110 faced six main headwinds:
First, Auction 110 was held less than one year after the largest spectrum auction in history: Auction 107, which raked in more than $81 billion. The same four wireless carriers that drove high auction prices in Auction 107—AT&T, Verizon, T-Mobile, and Dish—would have needed to replenish depleted lines of credit and other debt facilities to participate in Auction 110. Burdened with additional debt from Auction 107, the share prices for these companies generally have not kept pace over the past year with broad market indexes such as the S&P 500. As a result, these companies likely faced some difficulties arranging large new credit facilities for yet another costly auction.
Second, the spectrum for Auction 110 is still being reclaimed from, and shared with, the U.S. military—in particular, the U.S. Navy. While the Department of Defense has generally been forthcoming about timelines for making spectrum available for the auction, uncertainties remain about clearance dates and continued military operations in the band. Sharing and coordination arrangements are complex. Rational bidders would reasonably discount such encumbrances on spectrum relative to cleared spectrum.
Third, to enable the military to clear most of its operations in the band, the FCC would have to compensate it approximately $15 billion. That would prove to be a substantial hurdle, and one that at various times during the auction was in doubt.
Fourth, the FCC chose to limit bidders to no more than 40% of licenses in a particular geographic area. This means that at least three different bidders would win licenses in a geographic area, and at least four different bidders would have to compete to ensure a price above a minimum level. Otherwise, with only three or fewer bidders, licenses would fetch no more than the minimum bidding price. With only four major wireless companies, the prospects of a failed auction were substantial. To ensure higher bidding prices, the FCC could instead have allowed 50% or more of licenses to be assigned to a single bidder; but it didn’t.
Fifth, the Commission largely left unresolved potential out-of-band interference concerns both with the Citizens Band Radio Service (CBRS) and with federal users. The uncertainty associated with these interference issues again likely reduced the value of spectrum at auction. The Commission could have adopted elegant new technologies with spectrum coordination techniques to mitigate interference concerns, as it has in CBRS, to make full use of available spectrum. But the Commission chose not to pursue these technological coordination solutions, likely because the spectrum auction had to be completed in a short period of time.
Sixth, the entire process for Auction 110 was rushed, doubtlessly leading to lower bids than would have been obtained with a more deliberate proceeding. In the dubiously titled “Beat CHINA for 5G Act of 2020,” Congress required licenses to be assigned by December 31, 2021. Only a hasty auction, with reduced auction values, could reach that goal.
Despite these challenges, Auction 110 succeeded, at least as measured by auction receipts. Skeptics may point to the prices in Auction 110 as being only about 70% of those in Auction 107, but Auction 107 did not have to content with the liabilities discussed above. The surprise, frankly, is that Auction 110 prices were as high as they were.
The clearest takeaway one can glean from Auction 110 is that licensed spectrum has substantial value. Even when a rushed FCC auction depresses prices, licensed spectrum is so scarce that wireless companies will pay substantial sums for licenses. American consumers have a wide range of alternatives to receive broadband: fiber and cable; unlicensed fixed and mobile services; satellite; and mobile licensed spectrum networks, including 5G. Even with many competing alternatives, mobile licensed spectrum networks have substantial and increasing value.
If a rushed auction filled with uncertainties can yield strong valuations of new spectrum licenses, the value of existing spectrum licenses must be substantial as well. Thus, in addition to the success of Auction 110, businesses with large existing portfolios of licensed spectrum—AT&T, Verizon, T-Mobile, and Dish—should see the value of existing licenses also increase, as a direct result of Auction 110.
