FCC Spectrum Auctions Are a Failure

In June of 2006, the FCC will conduct its 83rd auction of wireless spectrum. After a hundred years of experimenting with managing the public spectrum, perhaps it’s time to admit that this particular experiment is a failure.

Back in the Gilded Age, private corporations such as British Marconi determined whether and for what purposes to use the spectrum, or ether, as it was then called. But reports of how “wireless” was used (or not) in the Titanic disaster of 1912 generated enough public pressure to convince legislators that laws needed to be established for the public good.

A dozen years later the budding commercial broadcast industry called for more regulation. These new media corporations convinced Secretary of Commerce Herbert Hoover that there was too much interference. They convinced him that the ether was scarce and that access needed to be limited to provide better service to the general public.

Since the early part of the last century, private citizens, corporations, and the federal, state, and local governments have been in a heated conversation over who should be able to access the spectrum. The ham radio operators and experimenters want their frequencies, national defense and air traffic control want theirs, the communications industry (from broadcasters to telecommunications companies) want, and generally get, theirs.

Congress divided responsibility for managing competing claims between the Federal Communications Commission and the National Telecommunications and Information Administration (NTIA) in the Department of Commerce. The NTIA is responsible for spectrum used by the federal government and the FCC provides licenses to the rest of us.

For roughly 50 years, when a new application of spectrum was developed, the FCC would determine who would be given a license by weighing one applicant against another in a hearing. For a short time, in the freewheeling Reagan years, the FCC shifted to giving out licenses based on a sort of “Powerball lottery.” In 1993 Congress gave the Commission authority to distribute a license to the spectrum through a competitive auction.

In the midst of the gargantuan Reagan-era budget deficits, auction fever quickly spread among Washington policy makers. Revenue projections in the hundreds of billions were counted in rosy budget predictions. Despite these heart-pounding possibilities, Congress made clear that it had multiple goals in mind when allowing the FCC to award licenses to spectrum through auction. These included “ensuring efficient use of the spectrum, promoting economic opportunity and competition, avoiding excessive concentration of licenses, preventing the unjust enrichment of any party, and fostering the rapid deployment of new service.”

The General Accounting Office and the FCC have declared the spectrum auctions successful because they are more efficient than either comparative hearings or lotteries, and they do raise revenue. The Center for American Progress, however, asked economist Dr. Gregory Rose, an expert in game theory, to examine the last 10 years of spectrum auctions to determine whether the FCC was meeting all Congressional goals.

According to Rose, “If a private auction house did as poor a job as the FCC in returning value to the sellers, that auction house would be out of business.” Rose demonstrates that considerably less revenue has been raised than might otherwise have been the case due to bidder collusion and large-scale mispricing by the FCC.

A recent Wall Street Journal editorial suggests the spectrum auctions are still not fast enough for big business. The editorial quotes Thomas Hazlett, a former FCC economist: “Congress is spending too much time looking at auction revenues and not enough time looking at the gains to the economy from having more productive use of spectrum.”

Even accepting the large assumption that FCC spectrum auctions have resulted in economic “gains,” we are left with the problems of excessive concentration. Even the rosy GAO report notes that “some industry stakeholders we interviewed stated that auctions limit participation to large companies.”

According to Rose, FCC spectrum auctions have resulted in an increase in market concentration and have permitted wealthy bidders to prevail in ways which increase their market power considerably. Rose’s analysis demonstrates that the FCC procedure of simultaneous, multi-stage auctions has been subject to collusion among bidders and avoidance of head-to-head competition by the best capitalized and most successful bidders. This results in a concentration of wealthy bidders winning valuable rights to spectrum at significantly lower prices than other bidders.

Concerned that “sham buyers” were taking unfair advantage of the so called designated entity, or DE rules, the Commission recently changed its auction rules by “eliminating the payoff for this ‘flipping’ of licenses,” according to Commissioner Michael Copps.

Still, the new rules do not prohibit DE players from having “material relationships” with larger corporations. Nor do they even address the problem of limited minority ownership or deployment of advanced services to minority communities. And according to Rose, the new auction rules don’t address the threat of big company retaliation against smaller firms that might compete in subsequent auctions.

Eli Noam, who teaches economics at Columbia University’s Business School, has argued that even if we accept that spectrum auctions work today, “It won’t be long, historically speaking, before spectrum auctions may become technologically obsolete, economically inefficient, and legally unconstitutional.”

While our age, like the age that brought us the Titanic, may put a premium on the prerogatives of big business, the pendulum will surely swing in the other direction. Concerns about public safety and equal opportunity will once again matter. Here’s hoping Rose’s hard facts and analysis will turn us around before we reach the iceberg.

Read the following for more analysis:

The Failure of FCC Spectrum Auctions (PDF), by Gregory F. Rose and Mark Lloyd, May 2006




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