T-Mobile USA says it has the answer on how to make the upcoming spectrum auction fair for all participants without sacrificing potential revenue for the government, as larger carriers have suggested will happen if restrictive rules are imposed.
In a filing with the Federal Communications Commission on Monday regarding the 600MHz spectrum auction, T-Mobile described what it is calling "dynamic spectrum rules" that it claims will help preserve competition in the wireless market by not allowing the biggest wireless carriers with the deepest pockets to walk away with the bulk of the new spectrum, without sacrificing revenue that is necessary to deem the auction a success.
"This proposal allows the FCC to put auction restrictions to a market test," Gregory Rosston, deputy director of the Stanford Institute for Economic Policy Research and former FCC deputy chief economist, said during a conference call with reporters explaining T-Mobile's proposal.
How the 'dynamic market rule' works
T-Mobile and Rosston say that they are not suggesting that the FCC preclude AT&T and T-Mobile from participating at all in the auction. In fact, under the proposal every carrier participating in the auction would be able to bid on at least 10MHz of spectrum. But there would also be a limit in terms of how much wireless spectrum in total an operator could own below 1GHz.
If the FCC's revenue target is met in the initial round of bidding with the restrictions in place, then bidding concludes when all participants stop bidding, and the licenses are awarded to the highest bidder. This would essentially confirm T-Mobile's argument about auction limits, which is that such limits won't adversely affect revenue outcomes.
If the revenue target is not met, the rules will have a safety net in place to ensure the auction continues and is successful. In this case, the limit on how much spectrum could be owned would be gradually relaxed for all bidders. For example, say that three bidders are all close to their limit with three separate licenses. All three would be allowed to continue bidding on a fourth license. But only one bidder would win that additional license.
The relaxation of the rules would be done one at a time on a market-by-market basis. And by taking this step-by-step approach in loosening the bidding restrictions, Rosston said that competition is created for the right to buy additional licenses of spectrum until the revenue target is hit. As a result, he said prices for the licenses should increase.
And as prices increase, demand for licenses will drop, because carriers will not be able to afford to bid on so many licenses. Eventually, an equilibrium will be met, and the bidding will cease, Rosston surmised.
A complicated auction design
Something that makes this auction more complicated than others conducted by the FCC in the past is the fact that the FCC will also be conducting a reverse auction at the same time. TV broadcasters are being asked to offer up spectrum that wireless operators will bid on in the forward auction.
This complicates things because TV broadcasters must be given ample incentives to give up spectrum. And it might also mean that those bidding on spectrum in the forward auction may not know exactly which licenses they will end up with.
Adding to the complexity is the fact that in the law authorizing the FCC to conduct this auction, Congress stipulated that proceeds from the auction would not only go to compensate TV broadcasters giving up spectrum, but it would also pay for broadcasters not participating in the auction to be relocated in other spectrum.
And it also requires that some of the proceeds go toward paying for a nationwide first responder wireless network called FirstNet, which uses spectrum left over from the 700MHz wireless auction.
Revenue is essential for auction success
So it comes as little surprise that maximizing revenue potential in this auction is a high priority for the FCC in designing this auction.
AT&T and Verizon have argued that putting any restrictions on the forward auction will deter bigger players from bidding. AT&T has also said they would discourage broadcasters giving up spectrum, which means there would be less spectrum to bid on.
All in all, AT&T said in a blog post earlier this month that an auction with restrictions will result in a failure to raise the necessary revenue to pay for FirstNet and the other auction obligations.
If the incentive auction rules are manipulated to essentially set aside spectrum for these or other providers, less revenue will be generated. Broadcasters, fearing they will not receive top dollar for their spectrum due to that set aside, will contribute less spectrum to the auction. This will, in turn, jeopardize the entirety of the auction including the critical goal of raising the billions of dollars necessary to fund FirstNet.
Indeed, the set asides and restrictions proposed specifically by Deutsche Telekom's U.S subsidiary, T-Mobile, would drastically limit the amount of spectrum AT&T and Verizon could bid upon at auction thereby effectively guaranteeing T-Mobile the ability to obtain substantial amounts of spectrum at an artificially low cost subsidized by US taxpayers.
T-Mobile disagree with this assertion. But it says in its filing with the FCC that the new market-driven proposal it has submitted should allay those fears.
T-Mobile is confident that the limit on low-band spectrum that it has proposed will have no adverse effect on auction revenue, and should in fact increase revenue while helping increase the amount of spectrum cleared at auction. By relying on actual bids rather than predictions of bidder behavior, the dynamic market rule helps remove any risk that revenue targets for clearing broadcasters and funding the FirstNet public safety network will not be met.
T-Mobile says that rules are necessary to ensure that all providers have access to this valuable spectrum. Otherwise, it believes that competition will suffer.
DOJ wants competition too
The Department of Justice has sided with T-Mobile on this issue. In a filing with the FCC in April, the antitrust division of the agency asked the FCC to consider rules that would "ensure the smaller nationwide networks, which currently lack substantial low-frequency spectrum, have an opportunity to acquire such such spectrum." The agency went on to say that this could improve the competitive dynamic among nationwide carriers and benefit consumers.
It is still too early to say whether the FCC will incorporate any of T-Mobile's ideas into the rules for the upcoming auction. Rosston said that he and others from T-Mobile have met with the FCC to discuss their ideas. But he couldn't comment on whether the FCC seemed to think it was a good idea or not.
AT&T and Verizon have yet to comment on T-Mobile's latest proposal.
The FCC is in the middle of drafting its proposal for rules to the auction. The agency says it is still on target to publish its proposal publicly by the end of the year. And it plans to hold the auction sometime next year.
But it's also unclear if this timetable is really doable, considering the agency does not have a permanent chairman right now. Chairman Julius Genachowski stepped down earlier this spring, replaced by FCC Commissioner Mignon Clyburn, who is acting chairwoman. President Obama has nominated Tom Wheeler as the next FCC chairman, but he has not yet been confirmed. The president must also replace Republican Commissioner Robert McDowell, who also left this spring.