New White Paper: Right-sizing Spectrum Auction Licenses: The Case for Smaller Geographic License Areas in the TV Broadcast Incentive Auction

Summit Ridge Group, LCC  just completed a white paper covering a significant issue related to the upcoming FCC Broadcast Incentive Auction. The paper, Right-sizing Spectrum Auction Licenses: The Case for Smaller Geographic License Areas in the TV Broadcast Incentive Auction was sponsored by the Competitive Carriers Association.  The Executive Summary is below.

Executive Summary

The wireless sector is a key contributor to economic activity and growth. Over the next several
years, wireless service providers are expected to invest $25 to $53 billion upgrading and expanding
their networks to deploy 4G mobile broadband across the nation. All told, wireless broadband
investment and the services and innovation supported by such investment are expected to add
between $259 and $355 billion to US GDP each year through 2017.
The Federal Communications Commission (“Commission” or “FCC”) is currently designing the
largest ever auction of terrestrial wireless spectrum, currently planned for late 2014 (the “Incentive
Auction”).

The purpose is to free up to 120 MHz of prime spectrum in the 600 MHz band,
currently licensed to over-the-air TV broadcasting, to be repurposed for licensing for mobile
broadband and other higher value wireless services. To accomplish this goal, the FCC proposes to
use a two-part auction process in which broadcast television license holders submit bids for
relinquishing their licenses (“Reverse Auction”); and commercial broadband providers bid to
acquire licenses to the spectrum freed up (“Forward Auction”). The FCC is currently evaluating
various auction design elements to promote competition in the auction. To best ensure this
important goal, the FCC is considering a number of auction design features, including spectrum
aggregation limits, constraints on the types of bidding allowed, and the appropriate framework to
use for the license territories to be used in the Forward Auction. This paper focuses solely on this
last issue. We explain here how adopting appropriately small-sized geographic territories is
necessary to promote competition and other important economic and social goals, while noting that
right-sizing the license territories may not by itself be sufficient to ensure adequate competition
and participation in the Forward Auction. For example, the Commission could adopt smaller
license sizes and still end with an auction where the two largest wireless carriers aggregate all of
the offered spectrum. Such an outcome would be inconsistent with the goal of promoting
competition in wireless services.

The territory size used for spectrum licenses is as important for valuing spectrum as the parcel size
is to real estate value. If all plots were 50 acres, parcels in Manhattan would be too expensive and
too large for most; this might compel buyers interested in a small parcel in Manhattan or a parcel
in New Jersey adjacent to Manhattan to bid for land they don’t want. Alternatively, otherwise
qualified buyers might be prevented from buying land altogether. Analogously, wrong-sizing
spectrum license territories to be used in future spectrum auctions, and in particular the Incentive
Auction, is likely to result in significant and unnecessary inefficiencies in the allocation of scarce
radio frequency spectrum resources. For carriers who are compelled to bid for wrong-sized
spectrum license packages, the added cost may be sufficient to discourage their participation; or if
they do participate, they are less likely to offer successful bids; or if they are successful, they will
have fewer resources available to deploy services using the spectrum. In each case, the efficiency
of the auction and the larger goals of the process suffer.

This paper explains why sufficiently small geographic areas, such as Cellular Market Areas
(“CMAs”), are the correct license territory framework to use to ensure that licenses are right-sized
in the Forward Auction. Industry participants and the FCC have successfully used smaller
geographic license sizes to auction spectrum in the past, and doing so in the Forward Auction
offers important advantages. Using smaller territories is better than using the larger Economic
Areas (“EAs”) because smaller areas efficiently match the needs of bidders to the spectrum they
seek. Their use ensures that the planned auction will reallocate spectrum resources efficiently
while promoting competition, economic growth, and universal broadband service.

Smaller license areas are better than EAs because smaller areas will help to maximize the amount
of spectrum that is repurposed for the Forward Auction. Specifically, smaller areas should increase
the ability to allow for market variation in areas where limited amounts of spectrum are procured
through the Reverse Auction, while reducing the amount of spectrum lost due to international
border coordination with Canada and Mexico or other encumbrances. Smaller geographic license
sizes should also maximize opportunities for efficient participation by both large and small
wireless service providers, and promote efficient build out of spectrum acquired through the
Forward Auction. Looking at past auctions, evidence suggests that auction proceeds would be
optimized through the use of smaller areas as opposed to EAs. Moreover, using smaller territories
is more consistent with the long-term direction of efficient spectrum management reform and
future wireless markets, including access to spectrum through secondary market transactions.
Finally, this paper rebuts some of the arguments made to date against the use of smaller geographic
license areas.