Was the US 600MHz Incentive Auction a Success and is it Ripe for Globalization? Close

February 2017: Was the US 600MHz Incentive Auction a Success and is it Ripe for Globalization?

Bottom Line: The 600MHz incentive auction was a success and is likely to be applied to auctions in other markets. While it offers tremendous appeal, it is complex and prone to failure. Regulators that use incentive auctions must apply them to auctions for spectrum assets that are well understood and have contingency plans if things go wrong.

In March 2015, Tolaga published an Article entitled “FCC’s innovative 600MHz auction scheme likely to go global”. In the Article it was concluded that if the incentive auction framework pioneered by the Federal Communications Commission (FCC) for the 600MHz spectrum was successful, it would likely be used by other regulators globally. The 600MHz incentive auction concluded in January 2017. The obvious question is whether it was a success.

To recap. The incentive auction essentially consisted of two key components. The first component was the reverse auction where incumbent broadcasters were given the opportunity to specify their price expectations for vacating the spectrum. For the second component, mobile operators were given the opportunity to bid on the licenses that were availed in the reverse auction. If the bids were insufficient to meet the expectations for the reverse auction, the process would repeat with reduced spectrum resources, until the “bid” and “ask” prices converged.

Some of the incumbent 600MHz broadcasters had lofty expectations for their spectrum licenses. We believe that the expectations were partly a result of the AWS-3 auction, which was completed in 2015 and yielded an average of USD 2.72 per MHzPOP for paired spectrum. This was more than twice what was expected, based on historical precedent (e.g. the 700MHz spectrum auction that completed in 2008). Arguably, heightened AWS-3 spectrum valuations were the result of aggressive bidding in key markets against Verizon and AT&T by Dish Networks, rather than structural changes in market prices.

The 600MHz incentive auction ultimately had four stages before it was complete. For the reverse auction in the first stage (Stage 1) the incumbent broadcasters asked for USD 86.4 billion to clear 124MHz of spectrum, placing it with comparable unit value to that of the AWS-3 auction. However, the mobile operator bids in the forward auction only garnered USD 23 billion, for 100MHz of spectrum. The incentive auction appeared to be off to a poor start. Although the reverse auction had successfully brought virtually all the spectrum into play, there was a massive spread between the ‘Ask’ and ‘Bid’ prices in the reverse and forward auction processes.

The FCC commenced through three subsequent stages of the incentive auction process, where it incrementally pared back the spectrum availed in the reverse auction to eliminate the higher Ask prices, see Exhibit 1. Ultimately after the fourth stage, USD 10 billion was required to clear 84MHz of spectrum from the reverse auction. This was cleared in a forward auction with USD 17.6 billion proceeds being raised for 70MHz of spectrum. The remaining 14MHz being reserved for guard-bands.

So was the 600MHz incentive auction successful? Yes.

It took years of lobby and debate before the FCC was able to clear the 700MHz broadcast spectrum and without the incentive auction, the 600MHz band would have likely seen a similar fate. Instead, the incentive auction achieved its objective to clear spectrum for mobile services within a short time-frame, with discussions and debates being primarily focused on how it should be implemented, rather than why it shouldn’t.

For some of the incumbent spectrum holders, the 600MHz auction results were disappointing. Yet, since the auction cleared 84MHz of spectrum, there were many incumbents who got what they asked for. The AWS-3 results skewed expectations for the 600MHz auction and is an illustration of how price comparatives can be problematic without sufficient context. This will be investigated in an upcoming Tolaga study, which will assess structural changes in spectrum value and a framework for conducting future valuations.

Exhibit 1: Bid/Ask conditions for the 600MHz spectrum auction
Source: Tolaga Research and Federal Communications Commission, 2017

Was the incentive auction risky and could the incentive auction have easily failed? Yes

For any auction with reserve prices, there is the potential that the prices are too high. The incentive auction structure is clever in the sense that it creates the opportunity for tiered reserve pricing in the reverse auction process. Yet even with the reverse auction process, incentive auctions are still risky, because they depend on a sufficient number of incumbent spectrum holders with acceptable price expectations. This is complicated by the need to accurately value radio spectrum assets. In addition, spectrum valuations are becoming more challenging, with advancements in radio technologies, network densification initiatives, increased unlicensed spectrum use, infrastructure and spectrum sharing and changes in mobile operator business models.

Should regulators in other markets use incentive auction schemes in the future? Maybe

For a regulator, the notion of a licensing scheme to accelerate the re-allocation of radio spectrum is appealing. However, this scheme has its challenges. Most notably:

  • Successful incentive auctions depend on reasonable price expectations from the reverse auction process. To reduce the risk of poor reverse auction pricing, incentive auctions should initially be applied to licenses that have clear historical pricing precedents. These precedents will guide incumbents in the reverse auction process.
  • When incentive auctions processes are used, spectrum re-farming tends to be both dynamic and complicated. In the 600MHz incentive auction, the FCC needed sophisticated modeling and analysis capabilities to identify the fair and optimum allocation of the spectrum and mitigate interference. Furthermore, during the early stages of the auction, the FCC had different license categories depending on the level of interference that the allocation scheme was expected to create (i.e. the so-called “broadcast impairment” factor). If a regulator in another country were to implement the FCC’s incentive auction structure, it would likely require modeling and analytics capabilities akin to FCC to manage the dynamics that emerge when coordinating allocations for both incumbent and new entrant systems, and;
  • Regulators that use incentive auctions must be prepared with contingencies in case the auctions fail. This might involve repeating the process at a later date, repackaging the licenses or changing their underlying rights and obligations.

Even though the 600MHz auction was a success, it has illustrated some challenges in the incentive licensing process. Most notability the risk of mismatched price expectations and the complexities in dynamically reallocating spectrum assets. In spite of the challenges, we believe that incentive auctions are here to stay and will be adopted by an growing number of regulators in the future.