700 MHz Aftermath: Assessing A Rather Complicated Result — But Not A Disaster As Some Maintain.

The intervention of the Jewish holiday of Purim, which is celebrated by getting drunk until you cannot tell the difference between Verizon winning the C Block and Google winning the C Block, kept me from posting sooner. I would have held off until I could give more details, but there are so many people rushing to call it a disaster that a few words need to be said here.

O.K., Google didn’t win, but Echostar did, giving me a .500 batting average in prophecy against the conventional wisdom. I’m not covinced that Echostar winning gives us a third pipe (Martin’s suggestions about combining this with other spectrum assets to the contrary). But even if not, it is important for keeping Echostar competitive with cable and with DIRECTV (which will have an advantage in programming assests). I shall try to do a more detailed analysis of Echostar and what the E Block does for them in a future post.

It is also interesting to note that some non-incumbents like Cavtel picked up licenses, although I am not as enthusaistic about this for competition as Martin was at the press release.

That said, I do not see how the rules could have been structured any better without barring Verizon and AT&T from playing. While we might have done better for new entrants after all with smalled licenses rather than REAGs, as demonstrted by Echostar doing an end run to assemble a near national footprint after they begged and pleaded to have the FCC offer a national license, I can’t say for sure (I’ll have a longer discussion on this later, and I expect Greg Rose will have some things to say on his blog once he has crunched the numbers). My preliminary conclusion is that Verizon (and to a lesser degree AT&T) was simply determined to get the spectrum it wanted and did not let anything stand in its why. The fact that Verizon paid $9 MHz/Pop for a B block license for Chicago, and that Verizon and AT&T spent over $16 billion of the approximately $19 billion raised should tell anyone who cares about the reality all they need to know. Verizon and AT&T were not “bargain hunting.” They were at each other’s throats and cutting out anyone who dared to get in their way. The only way to stop them was to keep them out entirely, and there was not a heck of a lot of support for that from the Hill or at the FCC beyond the Dems.

I think Commissioner Adelstein gives a fair assesment when he says we won on revenue and openness and lost on diversity and competition. But again, the only way we could have done any better was by adopting auction rules that banned Verizon and AT&T from playing and by using aggressive means to address minority and women ownership (as MAP requested as early as March 2006). Perhaps now Congressional Democrats will add their voices to those of Commissioners Adelstein and Copps on restoring the minority bidding credit and supporting incumbent exclusions or — at a minimum — restoring the spectrum cap.

As it was, thanks to anonymous bidding, Echostar was able to do an end run and acquire a national footprint — something previously denied to it in the AWS Auction in 2006. And, while AT&T and Verizon got most of the licenses, they had to pay through the nose to get them — rather than sopping them up dirt cheap as happened in the AWS auction (where licenses equivalent to the A & B block licenses went for 45 cents MHZ/pop not $9 MHZ/pop). This auction attracted more new bidders and more minority bidders than previous auctions, so the field was ripe for a success on these fronts. But they were simply outspent by Verizon and AT&T.

To conclude, unlike the utter failure of the AWS auction (which everyone else hailed as a success — despite the incumbents winning more licenses for less money), this auction produced some very positive results. But it also shows us the limit of what purely competitive auctions will do. Neither this auction nor freeing more spectrum for future auctions, on their own, will provide us with a third pipe or introduce new competitiors in wireless. The advanatges enjoyed by incumbents in a relatively mature industry (as opposed to back in the early/mid-1990s when the first auctions were conducted) are simply too great to overcome just by “leveling the playing field.”

Finally, one last question remains: Why didn’t Qualcom drop their bid on D Block? Why did they tie up all that eligibility, instead of using it to go after more E Block licenses? For us spectrum geeks, this is the equivalent of asking Why did the Minbari surrender at the Battle of the Line (best answer from a friend of mine: “turns out Echostar bidders have Qualcom souls”). Did Qualcom hope they could keep the D Block for such a low price? Did they wish to avoid a penalty for dropped bids by the time they realized no one would bid on D Block? Hopefully, we will find out.

Stay tuned . . . .

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5 Comments

  1. Mark S says:

    Why AT&T and Verizon?

    Because a fair process, with unequal competitors, gives the best-competitors a fair win.

    AT&T and Verizon have larger budgets, and more incentive to preserve their oligopolies. A fair system does not strip their advantage, but makes them pay as much in cash as their desires dictate. Which makes this auction a success over AWS.

    An auction is not a tool for anyone’s political fairness, or a redress of market inequities. (One might argue that in fact it magnifies or distills market inequities.)

    “The race is not always to the swift, nor the battle to the strong: but if you are making book, that’s the way to bet.”

    (What confuses me the most, so far, is Google. They grabbed a lot of headlines, they invested a lot of effort, the placed a lot of “pre-race” focus on the bidding. Why did this auction not reflect their means and their seemingly expressed desires?)

  2. Ben Byrne says:

    Might it no be worth examining the FCC’s requirements for how quickly networks needed to be deployed on this spectrum? Might that have had an impact on Google’s and/or other potential news entrant’s willingness to bid to win?

  3. Best telecommunications regulatory joke ever.

    At least if you are Jewish, and understand the spirit of Purim.

  4. Harold says:

    Mark S: You need to factor in the cost of building and operating the network. These costs are significantly lower for an existing operator (like Verizon) than for a new operator (like Google). faced with a market that would punish it for such capital expenditures (don’t forget, Google has lost about half its value since the auction started), it made sense for Google to back off in the face of Verizon — especially if it can rationalize to itself that the FCC will enforce the C Block conditions (although I will observe the last company that counted on unbundling regs to compete against Verizon was MCI).

    Ben: Build out is a trade off. Do we want to ignore rural America/“fly over” country or not. The C Block is actually less aggressive on build out than A and B as a matter of rules language, but the size of the licenses makes the burden potantially heavier.

  5. Fred Goldstein says:

    My guess is that Qualcomm parked the bid on the D block in order to keep the bidding eligibility alive, without deciding where to really bid. Below-reserve bids strike me as a tool for that part of the game.

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