The $10 Billion Poker Game Begins

Hugh Pickens writes "Monday was the deadline for potential bidders to file with the Federal Communications Commission over the auction of the 700-megahertz band, a useful swath of the electromagnetic spectrum that is being freed up by the move to digital television. Once bidders file they become subject to strict 'anticollusion' rules that in effect prohibit participants from discussing any aspect of their bidding until the auction is over. The next official word will be late December or mid-January, when the FCC announces who has been approved to bid. The auction will start on January 24. Participants will use an Internet system to enter bids on any of 1,099 separate licenses that are being offered (pdf). Most coveted seems to be the C block, 12 regional licenses that can be combined to create a national wireless network. This is the spectrum Google is presumed to be most interested in. The bidding will be conducted in a series of rounds (pdf)."

Re:I don't undertstand

[everphilski]

It is considered a natural resource ... just like land. Other countries do the same thing.

There are portions of the spectrum that are free to use for certain non-commercial uses. Amateur radio bands, family radio bands, bands that are open to experimenters, Citizen Band radio, etc. Each comes with certain restrictions as to use and power output. Most have commercial restrictions.

Re:I don't undertstand

[Diss Champ]

The FCC is a part of the government. The government has a monopoly on force. If it says you have to pay to do something, and it has a reasonable way to detect that you are doing it, then they usually get the money, either through official means like this auction, or unofficial means like officials being bribed to look the other way.

The government thinks it owns the air you breathe too. You might not have noticed, but there are all sorts of regulations regarding vehicle and industrial emissions. Most people think most of these are a good thing- but it does amount to the govt having a certain control over the air you breathe.

Pragmatic stuff like the above aside, the general argument for the FCC controlling access to the airwaves is that it is a scarce resource, so someone needs to apportion it fairly- and in this case "fairly" is defined as giving the govt as much money as possible for the govt to spend for the general welfare (i.e. to bribe constituents to vote in again the people in charge of spending the money, or special interests to contribute to campaigns to the same end).

Re:I don't undertstand

[Starfisher]

If anyone could use any frequency without having to check to make sure it wasn't already in use, you'd quickly run into some communications and quality issues. To prove this, take 1000 people, give them radios that can select between five frequencies, and have them try to have 500 private conversations. So the FCC exists in order to regulate the airwaves, ensuring that you don't get interference. Someone has to pay for the staffing and operation of the FCC, so they came up with the idea that if you want to use some part of the spectrum exclusively for your prodcut you have to pay the government to do so. In theory, this means you are leasing that spectrum from "the American people", as represented by the government, and some of that money then pays for the FCC. Technically, you are charging Verizon/Google/whoever for your airwaves through the government. Convoluted to be sure, but it fulfills its primary purpose - to avoid constant interference - and generates revenue from a national resource - air. You might argue that there are better ways to divy up the spectrum (maybe without the massive fees), but no matter what method you choose, you still need some regulation. Hell, if you buy one of those Motorola radios that can use the GMRS frequencies, you are supposed to pay a $75 licensing fee to do so, again under the basic logic above. I doubt anyone actually does, and since they only have 1 watt of transmission power it's usually not an issue in terms of interference, but they're not paying rent. Bastards! ;P

Re:so..

[Anonymous Coward]

You have that backwards - AT&T and Verizon have a significant portion of the Level 1 Internet backbone routes under their control - THEY could do what you suggest. Google is just an end-user of the system essentially. It's like the difference between a store on Main Street intercepting your mail to City Hall, and the US Postal Service doing it.

Redundant

[sexconker]

How many times does this need to be asked?

The government owns the airwaves.
Whether or not you like it, it's true.

You SHOULD like it, though, because it ensures things WORK.
It keeps people from stepping on each other's toes, and it keeps our communications working.

But hey - lets open up the spectrum. Information wants to be free. It's working great for the internet.

Can you imagine what would happen if airwaves were open?

People would set up towers in their yards and rent the bandwidth to advertisers.
You'll be getting spam on every tv channel, radio station, and phone call.
Your existing devices will cease to function.
Air traffic control will be screwed.
Fire and Police departments will essentially be DOSd.
The military will have HUGE problems.

Legally, it tends to fall under interstate commerce.
Practically, it tends to fall under really freaking important.

People who say we should open it up and just use multiplexing / packeting / encryption really don't understand what they're talking about. If you allow people to openly use these frequencies, they will openly compete by cranking up the power. No amount of tricky signal manipulation will save you from some jerk with a bigger tower than you. If you want to send something from A to B, and someone builds a tower right in the middle, you're screwed.
And worse than that is the fact that, when they're money involved, people will crack encryption and circumvent other controls. Just imagine being able to hijack a TV broadcast during the commercials. You can replace the ads broadcast by the tv station with ads you broadcast, supplied by the same sleazy scum sending spam.

Experimental mock auctions

[SaltTheFries]

I did a bunch of experimental mock auctions as part of a college experimental economics lab. The rules for the auction aren't too difficult or different from many of the auctions that I participated in.

Here's my opinion on some of the rules and their effects:
1) Package bidding (where someone can bid on a group of licenses and wins or loses all the licenses) -- this helps the large, national bidders that see synergy from owning a number of regional licenses. As the minimum required bid for individual licenses fluctuates due to other individual and package bids, a package spreads the cost over the whole set and makes individual breakthrough bids more expensive / challenging. Size and structure of packages allowed can change the dynamics of the bidding process quite dramatically.
2) Activity requirements -- makes sure everyone is bidding or dropping out. The amount you can bid in one round depends on the amount you bid (or were winning) in the previous round. Google can't snipe the whole auction with a $10 bln bid after not making a single bid beforehand. Activity can strongly favor the big players as they can push around smaller players with large package bids while the small bidders are only making very high single or small package bids. Nobody should stop bidding on anything until it becomes clearly unprofitable to do so--activity crucial to securing winning package bids. There was a 100% use-it-or-lose-it activity requirement in the auctions I participated in, but these rules are similar and gross bid oriented vs. license oriented.
3) Bid retraction -- creates a strange second phase of the auction where some bidders pull bids to get packages to shuffle in their favor. There was a penalty for doing so on winning bids, and I remember some people losing money on this or not making much at all due to it. No professional will make that mistake, but the FCC isn't being generous here.
4) Bid incrementing -- nobody can open or continue the bidding with a massive bid compared to the current minimum required bid. This is important as it prevents someone from throwing out a profitable but discouragingly large bid. I started doing this, particularly when I was a national or powerful regional bidder. There's a name to this strategy that I discovered after the fact.

My prediction on who wins:
The big players -- AT&T, Verizon, maybe Google
A few regional powerhouses might crop of here or there, particularly in more rural regions of the country -- Alltel
The FCC / US Government -- pulls in billions of dollars.

Who loses:
Smaller national players -- Sprint, T-Mobile (unless the Germans want to go for broke)
Cable companies -- their dreams of breaking into wireless data and telephony will die, unless they cut a deal with Google or one of the smaller and more desperate wireless carriers (above). I'm not sure if there's any way that syndicates can form to bid, but that or an after-the-fact deal with Google may be their only hope. If Sprint pulls a coup and wins a major bid, it'll be desperately strapped for cash that Cox, Comcast, et. al. has to offer, but Sprint's going to have trouble winning much spectrum.
          Ken Martin's a telco lobbyist, looking to exact revenge on the cable companies for their success in stealing phone and broadband customers from his patrons. I don't claim that it's why the auction is structured this way, but it's clear that nobody went out of the way to encourage diversity in the ownership of different regional licenses.

Unknown:
American wireless consumers? Somebody has to pay for these astronomical bids, and the auctions operate like a tax in some senses. You can see the difference between a spectrum-tax free environment and a taxed environment by comparing 2.4 ghz with 1.9 ghz cell phone service. A little of this range could allow some exceptional innovation to come about.
The EM spectrum in this country is the property of the general public, not the FCC, regardless of how the FCC behaves.