Assessing the 700 MHz Order Part III — Anonymous Bidding Alone Makes This a Big Win

Regular readers will know that, as far as I am concerned, getting anonymous bidding automatically makes this Order a big win. I pushed hard on this in the lead up to the AWS auction a year and a half ago. Sadly, I lost. As a result, the cable companies were able to block the DBS guys from winning any new licenses, and the incumbents generally succeeded in keeping out any potentially disruptive new entrants (the cable guys having made it clear they would not compete with the cellular guys).

Fortunately, Greg Rose spent a year crunching the data and demonstrated that if the incumbents hadn’t rigged the auction, it sure looked like it from a statistical analysis/game theory perspective. With this “smoking gun” evidence in hand (utterly dickish footnotes by the Wireless Bureau staff to the contrary), we were able to persuade the Commission that adopting anonymous bidding rules would make the auction more competitive, give new entrants a better chance, and as a result probably increase the auction revenue overall.

So, having lost this last time around, I consider it a real coup to get it now. As both Google and Frontline supported anonymous bidding as necessary to encourage new entrants, I am hopeful that we may still get our “third pipe” provider even without wholesale open access.

Analysis below . . . .

While Greg Rose and I have been pushing this issue for a year and a half, most people don’t understand it, don’t get it, and haven’t weighted it into their competitive calculations. But the plain fact is that anonymous bidding guarantees the first genuinely competitive auction for the FCC. Why? Because it eliminates the ability to do all manner of collusive and anticompetitive fun and games. No more targeting new entrants. No more statements to the press about your business plans to reassure friends or intimidate potential competitors. (Since no one can see you, no one can avoid you; nor can you retaliate against anyone for going after “your” licenses.) Everyone will have to bid based on what they think a licenses is actually worth to them as a license, without the additional bonus of knowing that you are blocking a new entrant.

Go back to the discussion about the “blocking premium.” An incumbent will bid more against a new entrant than against a fellow incumbent because a new entrant means that all incumbents will face more competition — thus forcing everyone to lower prices they charge to subscribers. Lets say a license is worth $1 billion to me in expected return to a new entrant, based on that new entrant’s calculations about its proposed business model. That goes up to $1.5 billion in value from keeping it out of the hands of an existing competitor, because I deny my competitor an edge. But the value of the license goes even higher if I keep a new competitor entirely out, since keeping out a new competitor means less competition for everyone.

With anonymous bidding, I can’t tell if the high bid belongs to an existing competitor (which makes me unhappy, but I can live with) or if the high bid belongs to a new entrant (whom I would try to outbid). Now suppose it’s a license I don’t really want, but I would buy to keep out of the hands of a new entrant. What do I do? Furthermore, there are over 1,000 licenses in the auction. I can’t bid on every license Nor can I coordinate with my fellow incumbents to make sure that all the desirable licenses are covered and that a potential new entrant is denied a substantial footprint. If my objective is to block and collude, anonymous bidding makes that practically impossible.

Once people figure that out, you will see a lot more interest in bidding. As I and others have argued, the number of players that come to the table is proportionate to the perceived chance of winning. Silicon Valley VCs like risk, but they aren’t stupid. Unlike the gambling addict who keeps coming back to the rigged game because “it’s the only game in town,” investors looking to get into the very lucrative area of wireless will not spend millions to play just so they can lose — even if the same investors will spend billions if they think they can actually win.

So we may get our “third pipe” after all, despite not getting wholesale open access. At least, so Martin appears to hope. With Sprint filing for divorce from SpectrumCo and hooking up with Google, it seems a lot more likely that Google will bid even without the wholesale open access provision. Note, however, I say may. It is still a risk, and even at the end of it, we still only get one new provider. The beauty of wholesale was that it made it absolutely certain that we would have dozens of new providers after the auction. Without wholesale, it becomes a question whether we will get even a third provider to compete with cable and DSL. But without anonymous bidding, we wouldn’t even have the chance of a new provider — it would have been last summer’s AWS auction all over again.

We could still lose anonymous bidding, but I hope not. I expect opponents of anonymous bidding to file Petitions for Reconsideration and possibly a federal lawsuit to try to get the decision reversed. Fortunately, while the handmaidens of industry in the Wireless Bureau would no doubt love to help their buddies by getting rid of it, Martin and the other Commissioners seem pretty comfortable with it. And while a lawsuit is always possible, it strikes me as unlikely to delay the auction or prevail in the end. No court in recent years has issued a stay of an auction, even where the court ultimately held the auction invalid as a violation of federal statutes. And on matters like anonymous bidding, the courts (even the activists on the DC Circuit) generally give the FCC broad discretion. So, barring unforeseen circumstances (famous last words!) I expect the FCC to use anonymous bidding for the 700 MHz auction.

When we started back in April, I would have considered this auction fight a huge win if the only victory we got had been anonymous bidding, because I think it will truly revolutionize how bidders behave in the FCC auction. Because it’s technical and subtle, and because so much else captured people’s attention, the value and magnitude of this as a win has gotten lost in the shuffle. Only as parties gear up for bidding and start gaming out their auction simulations will they see how competitive this makes the auction, and therefore how attractive to new bidders such as Google and Frontline.

Stay tuned . . . .

Next: Assessing the 700 MHz Order Part IV: Lingering Doubts and Details.

Previous:
Part I: Puting This In Context
Part II: Why The “C Block” Conditions Matter

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3 Comments

  1. John says:

    You and Greg deserve tons of credit and thanks for all your good, and hard, work on this.

    I’m proud to be associated with y’all, and as a citizen, I thank you.

  2. Skeptic-al says:

    Well there’s another school of thought that says anonymous bidding gives (another) advantage for the incumbents because they (can afford to hire) high-dollar auction consultants who are quite skilled at predicting which bids correspond to which parties. The anti-collusion rules make the bidding pool known to all bidders beforehand. It’s just not disclosed to the general public. That’s my understanding anyway.

    Now if you can get a whole bunch of “faux new entrants” to pony up the escrow and file all the papers, to muddy the waters for the auction consultants (even though the faux new entrants have no intention or desire to win), then you might have some level of anonymity of value.

    Just my 2 cents worth.

  3. Harold says:

    This issue was raised during the proceeding. If we assume even a minimally active auction of 5+ major bidders and dozens of minor bidders, then the mathematics in question simply becomes too hard. As the Quant Fund guys recently demonstrated — sophisticated modeling is no match for reality.

    In addition, these auction experts ALREADY exist. How does giving even <i><b>more</i></b> information to the well funded players with their expensive consultants and sophisticated war rooms and pre-auction research level the playing field against the “little guys.” Your argument is like saying we should permit steroids because that lets less athletic people compete against more athletic people. It’s not just contrary to the theory of the game, its factually inaccurate.

    But hey, we’ll see in January. In the meantime, I’d like to invite you and other friends who believe the same thing to play poker at my place. But while I will get to see your cards (open bidding), you won’t get to see mine. After all, since you know that I am trying to get a royal flush, you don’t really need to see my cards to block me, do you?

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