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Running head: CAPS ON WIRELESS CARRIERS

Should the FCC impose caps on wireless carriers for the upcoming spectrum auction?
TaShaun Dorsey
John Carroll University
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Running head: CAPS ON WIRELESS CARRIERS

In recent decades spectrum auctions have been becoming more and more popular

between the FCC and wireless carriers. Emerging as a primary means of assigning licenses to

wireless carriers, the FCC has developed approximately 33 spectrum auctions since the year of

1994. Prior methods used by the FCC to assign spectrum to wireless carriers such as lotteries and

comparative hearings are inferior to the new spectrum auctions. Today, the FCC’s

implementation of these spectrum auctions has shown that these are far more successful than any

other process of assigning licenses of the spectrum. However, with every method there will be

issues. By looking further into the actual process it is easy to see why they use it, how it is

designed, if the FCC should or should not impose caps on the bidding by wireless carriers, and

what these caps will do to the auction procedure exactly.

In the past the FCC has used the design of simultaneous ascending bidding in their

auctions, the FCC will group related licenses and then auction them off in rounds. This allows

multiple bids to occur until the bidding ceases and the highest bidder wins the license they

desire. The advantage of having this type of bidding is that the bidders are able to move about

the licenses as the prices change. This design as a whole helps bidders create complementary

packages of licenses that they can bid on. The reason that bidders feel free to bid more

aggressively and safely on these licenses is because this process itself has been shown to be

successful. Being able to produce much more revenue than predicted by the government and the

industry. Other designs of bidding such as package bids are considered to be too complex by the

FCC. In this scenario the bidder gets to bid on a combination of licenses of a higher value to

them. The problem with this is that if the bidder does not win he/she does not get any part of the
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Running head: CAPS ON WIRELESS CARRIERS

package. As stated by Cramton (2001), “with individual bids, bidding for a synergistic

combination is risky. The bidder may fail to acquire key pieces of the desired combination, but

pay prices based on the synergistic gain” (pg. 7). Another main issue that remained with

simultaneous ascending auctions with no package bids was how much information was to be

provided to the bidders.

Under the information provided by Weber and Milgrom (1982) the FCC found that the

more information the better. Although, an exception of the bidder’s identity being withheld in the

nationwide auction, the FCC provided all information. The identities of the bidders, all bids, and

the current eligibility of the bidders is all provided by the FCC. According to Cramton (2001),

“so long as collusion and predatory bidding are not problems, revealing more information should

improve efficiency and increase revenues. It also makes for a more open process” (pg. 8). The

FCC also decided that having discrete rounds was best because it gave bidders a set deadline to

place bids rather than having continuous rounds where bidders could take advantage of the time

slots. The FCC controls the pace of the auction by controlling the frequency of the rounds, the

bidding increments, and an activity rule that sets a minimum amount of bidding activity in the

auction itself.

Even with all these rules and regulations of the auction it still has some issues, however,

this is the way it has been designed and the FCC has been able to issue licenses based off of

bidding results. The licenses for wireless carriers is the most interesting aspect of the spectrum

auction, these wireless carriers have an ongoing dilemma with the FCC. The FCC is making a
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Running head: CAPS ON WIRELESS CARRIERS

slight change to their auction for 2014-2015, deciding whether they should or should not place

bidding caps on wireless carriers.

The 2014-2015 TV spectrum auction is right around the corner and there has been heavy

debate as to what rules should be implemented in this year’s bidding war. Larger carriers are

pushing for a spectrum-shopping spree, while smaller carriers are working to put limits on how

much any one shopper will be able to walk away with. Both the larger wireless carriers and the

smaller wireless carriers propose valid points on how the auction should be ran, but ultimately it

is the Federal Communication Commission that delegates the rules and everybody is anxiously

awaiting their decision. Advocates of smaller wireless carriers believe that the FCC should limit

big carriers in the upcoming TV spectrum auctions by placing caps on these larger carriers.

According to representatives of consumer groups and smaller carriers, companies who

often dominate in their industry, for example AT&T and Verizon Wireless, should be limited on

the amount of the spectrum that they can purchase in the upcoming auction to allow smaller

companies for example, T-Mobile and Sprint, to remain competitive. Many people believe that if

big companies are limited in the amount of spectrum that they can purchase, then smaller

companies will purchase their part of the spectrum at minimal cost resulting in an unfair auction.

In actuality this is not the case at all and overall it will just lead to more competition, which is

necessary in today’s market. Stanley Benson, a senior consultant at Charles River Associates, a

highly reputable economic consulting firm, feels that without caps on wireless carriers, smaller

carriers will be less likely to bid in fear of not having a chance to compete with the bigger

carriers and this opens up the door for disaster. Benson believes that without limits on bidding
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Running head: CAPS ON WIRELESS CARRIERS

the end result means the worst of both worlds. According to Benson, “you end up with a

situation where the dominant firms get a large amount of spectrum, and they pay too little for it,

because their presence discourages other, smaller firms” (Gross, 2013). Without the smaller

carriers taking part in the auction the demand for placement within the spectrum decreases,

meaning the prices for the spectrum are reduced and the larger companies have an opportunity to

monopolize. Chip Pickering, a former Republic congressman from Mississippi and a partner in

Capitol Resources believes that placing limitations on wireless carriers is crucial within our

marketplace. According to Pickering, “functioning, free, competitive markets give us greater

growth, greater investment, greater innovation, greater consumer benefits, and they cause our

economy to grow much more than monopoly…markets” (Gross, 2013). In order for the economy

to thrive, advocates believe it is of great importance that competition stay alive and without these

caps there is a good possibility that a large portion of that competition will diminish and the

smaller carriers will be out of business. Consumer groups and small carriers have been working

at getting the FCC to impose caps on wireless carriers, but the larger companies like AT&T and

Verizon are not giving the smaller carriers an easy fight. During the last TV spectrum auction,

smaller companies like Sprint and T-Mobile decided to sit out of the low frequency spectrum

bidding, which means in the 2014-2015 auctions they have the resources to place high bids and

gain a good portion of the spectrum. Larger wireless carriers feel that they are perfectly capable

of paying market value like everybody else and because of this larger carriers are against the idea

of caps on bidding. These larger companies bring up a valid point, but in reality they control

seventy- eight percent of the spectrum below 1GHz, which is the highest speed data service

available, so when looking at the numbers, no matter how much money these smaller carriers
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Running head: CAPS ON WIRELESS CARRIERS

may have, beating out these larger wireless carriers will definitely pose a battle. T-Mobile, in

their effort to convince the FCC to impose caps on the upcoming auction, proposed a rule, which

they call the “Dynamic Market Rule.”

This rule places a spectrum-aggregation limit on the auction and states:

If the Commission's revenue target is met while the limit is in place, then the

auction would be able to close once there is no longer any active bidding. Should

the bidding fail to clear the revenue target once the limit is completely removed,

the Commission would resume the process by starting at the next lower spectrum

target with the aggregation limit in place (Masteo, 2013).

Imposing restrictions on excessive low-band spectrum aggregation promotes competition,

increases consumer choice, encourages innovation, and accelerates broadband deployment,

which is ideal for the economy to prosper. It has not been decided on what exactly will be the

rules for the 2014-2015 TV spectrum auction, but one thing is for sure and that is that the smaller

carriers would benefit immensely if caps were imposed on wireless carries. Mark Cooper,

director of research for the Consumer Federation of America is pulling for the “little guy” when

he states that companies like AT&T and Verizon have got “the good stuff” and they ought to be

restricted where they’re already fat (Gross, 2013). Even though placing caps on the large

wireless carrier companies would benefit the smaller companies in the spectrum auction there are

some advocates that would say it is not the best solution.

By not placing caps on spectrum the FCC is promoting competition within the market

and yielding the greatest revenue. The fear for many smaller companies is that if no restrictions
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Running head: CAPS ON WIRELESS CARRIERS

are placed, then larger companies such as Verizon and AT&T will gain a monopoly within the

market and essentially cause a foreclosure. This fear, however, is inconsistent with the smaller

company’s previous decisions to decline their opportunities to gain low frequency spectrum. It is

true that Verizon and AT&T currently control more than three-quarters of other, previously sold,

low-frequency airwaves, but when the smaller companies do not bid for their share it would be

unfair to limit the larger companies from gaining more spectrum. William J. Baer, assistant

attorney general for the Justice Department’s antitrust division, is convinced that the FCC “can

potentially improve the competitive landscape by preventing the leading carriers from

foreclosing their rivals from access to low-frequency spectrum” (Wyatt, 2013). The larger

companies feel however, that placing caps on spectrum favors the smaller companies, because it

is prohibiting them from gaining as much spectrum as possible. Wayne Watts, a senior executive

vice president and general counsel at AT&T wrote that “it is surprising that the antitrust division

of the Department of Justice would even propose measures that are so nakedly designed to help

specific companies” (Wyatt, 2013). Larger companies believe that by imposing caps the FCC is

essentially picking the smaller companies as the favorite in the auction and that “picking winners

and losers in this fashion [should] be patently unlawful”(Wyatt, 2013). The FCC currently

enforces rules limiting “spectrum aggression”, which prevents further gain once a company goes

above thirty-three percent of the licensed airwaves in one market area. The spectrum aggression

rule is on a case-by-case basis but it still discourages larger companies from gaining the entire

spectrum and leaves plenty of room for the smaller companies to compete.

The conclusion drawn from past FCC auctions is that putting restrictions on larger

companies would put at risk the amount of revenue gained. Much of the revenue from the
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Running head: CAPS ON WIRELESS CARRIERS

auction will go toward funding the planned nationwide interoperable public safety broadband

network, also known as FirstNet. The program needs seven billion from the auction to begin the

public safety network and about 2 billion to cover the costs of re-packing spectrum from

television broadcasters and making it available to wireless carriers. By placing caps on the larger

companies, such as Verizon and AT&T this goal may not be possible because there will not be

enough revenue. For example, in past years without Verizon and AT&T, “revenue in the 700

MHz auction would have been forty-five percent lower and revenue in the AWS-1 auction would

have been sixteen percent lower” (Marx, 2013). Basically, any kind of restriction put on larger

firm’s participation risks a significant reduction in the auction’s revenue and may lead to a

failure of the auction as a whole. Many supporters of auction restrictions argue that caps may

increase revenue because they will ensure that smaller companies are not being discouraged from

participating, but what they fail to recognize is that small firms have routinely competed

successfully in the past despite the unrestricted presence of large firms. The effects of putting

caps on the upcoming auction “could reduce auction revenue by up to forty percent, or twelve

billion dollars, and cost 118,000 jobs by 2017” (Wyatt, 2013). The decision whether to impose

caps rests with the commission, but Ajit Pai, Republican commissioner, recently stated that the

purpose of the auction is to maximize revenue, or in other words “letting all the wireless players

participate in the auction and letting market forces sort out who wins and who loses”(Wyatt,

2013).

Wyatt, E. (2013, June 3). A Dispute Over Restrictions in a U.S. Auction of Airwaves. Retrieved
November 29, 2013, from The New York Times website:
http://www.nytimes.com/2013/06/04/business/
media/fcc-spectrum-auction-brings-fight-over-rules.html?_r=0

Marx, L. M. (n.d.). Economic Analysis of Proposals that Would Restrict Particiipation in the
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Incentive Auction. FCC Documents, 1-45. Retrieved from http://apps.fcc.gov/ecfs/document/

view?id=7520944358
Gross, Grant. ​FCC should limit big carriers in spectrum auctions, advocates say​. 30 May 2013.
<http://www.pcworld.com/article/2040343/advocates-fcc-should-limit-big-carriers-in-spectrum-a
uctions.html>.

Masteo, Michelle. ​T-Mobile Proposes a Cover-All-Bases Spectrum Auction Rule ​. 24 June 2013.
<http://www.eweek.com/networking/t-mobile-proposes-a-cover-all-bases-spectrum-auction-rule/
>.

Cramton, P. (2001, February). ​Spectrum Auctions ​Retrieved from

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auctions.pdf&ei=1TeKUsTSGNKxsASD7oH4Cw&usg=AFQjCNFjcc2DdxH_8Qumx4PTgnAF
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