Spectrum Auction Problems

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The New York Sun

In what some are calling the “auction of the century,” the Federal Communications Commission in January will auction off more than 60 MHz of spectrum in the last undeveloped band of spectrum for mobile application, the 700 MHz band.

By all accounts, this band has some of the best physical characteristics of all spectrum, with signals that can travel tens of miles, curve around mountains, and penetrate buildings. Because it can be used for all new mobile technologies as well as services that have not yet been imagined, some wireless companies plan to spend billions of dollars at the auction, and have built business plans around access to this spectrum band. Despite all of the potential of the band, though, the auction does come with challenges, including the recent credit crunch.

A year ago, most observers believed the January auction would fetch a king’s ransom of perhaps $20 billion or more. An auction held in 2006 for advanced wireless spectrum, physically less valuable than the spectrum in the January auction, brought strong prices. That auction was an economist’s dream: a simple auction with few complicating rules. No one had any special advantage; the highest bid won, and winners could use the spectrum as they saw fit.

But 12 months is a long time in spectrum policy. Congressional leadership changed last November, and some new committee chairmen began demanding that auction results have more subtle outcomes than merely awarding licenses to the highest bidder. Different businesses and new public safety services wanted accommodations. The only way to achieve different outcomes would be to add layers of rules about what could be done with licenses.

Reluctantly, the FCC obliged earlier this summer. To placate concerns regarding the cost of auction restrictions, the FCC placed minimum revenue thresholds of about $10 billion on the auction. If these thresholds are not met with restrictive rules, the licenses will be reauctioned without restrictions. Few if any businesses were entirely pleased with the rules — not that any set of rules would have pleased everyone. Just last week, Verizon Wireless filed suit in the D.C. Circuit Court of Appeals to challenge portions of the FCC auction rules. Other legal challenges are likely.

Ordinarily, the threat of serious litigation may delay an auction, but Congress has set a rigid timeline for this pending auction. It must be completed by January 2008, and the broadcast spectrum must be cleared by February 2009 (immediately after the first Super Bowl following the 2008 elections). Unless a court enjoins the auction, it will go forward in January under a possible legal cloud.

Such a cloud would lower the auction prices. Of course, the greatest value of the spectrum is measured not by how much the Treasury collects at auction but how much consumers and companies will benefit by having the spectrum put to good use. The sooner, the better.

The greatest threat to the success of the January auction is the current credit squeeze. Dozens of firms that planned to participate in the auction are doubtlessly being told by their banks that a large line of credit with favorable terms will not be available.

Moreover, although long-term spectrum valuations are always rising, volatility dominates in the short-run. In the past decade, 1997-98 and 2001–03 saw substantial downturns in spectrum valuations. Whether broader market problems will translate into lower spectrum prices in the 700 MHz auction remains to be seen.

Just two months ago, it seemed all but certain that the auction, despite the restrictive rules, would meet the revenue thresholds. Today, those thresholds look more daunting. This is not the first effort to auction 700 MHz wireless licenses. Beginning in 1997, Congress gave the FCC the authority to auction the spectrum band. In 1999, Congress instructed the FCC by statute to auction the 700 MHz band by September 30, 2000. The FCC simply ignored the statute. In the following years, the FCC declined many opportunities to auction the spectrum. For a few 700 MHz auction veterans, the possibility of something going wrong is all too familiar.

The 700 MHz auction may yet be a great success. The current FCC is clearly committed to the success of the auction of what is known as “beach front” spectrum. By January, we should know whether market conditions will cooperate.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.


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