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FCC Votes 5-0 to Propose Incentive Auction

September 28, 2012

“This is a big deal.” With those words, FCC Chairman Julius Genachowski introduced the FCC’s latest initiative to develop a wireless information superhighway for US businesses and consumers. The Commissioners voted 5-0 to propose a system that would encourage U.S. television broadcasters to turn in their spectrum licenses in exchange for a portion of the proceeds from reselling those licenses. The notice of proposed rulemaking that the FCC adopted included the auction design proposed by a Milgrom-led team. Other team members included Professors Lawrence Ausubel, Jon Levin and Ilya Segal.

Milgrom has been involved in developing the original US auctions as well. As Chairman Genachowski explained, “due to the incredible work of FCC staffers like Evan Kwerel and Greg Rosston and outside experts like Paul Milgrom, the auction turned out to be a major success. Fortunately, Evan and Greg and Paul are engaged in this proceeding as well.”

The Incentive Auction is exciting for both commercial and scholarly reasons. Commercially, the the sums involved in the auctions to buy spectrum from broadcasters and sell it for flexible use are expected to be in the tens of billions of dollars. And, the U.S. government considers the development of broadband networks now to be comparable to the development of the highway system in the mid-20th century, calling it “the infrastructure project of the 21st century.”

For scholars, there is additional excitement because the Incentive Auctions raise design issues that have not been previously encountered or studied. Milgrom and Segal plan to issue an academic paper soon explaining the novel theory underlying the design.

Brazilian Auction Success

June 13, 2012

On June 12, the Brazilian regulator, Anatel, conducted its first 4G spectrum auction, selling spectrum in the 2500MHz band. By far the most valuable spectrum licenses sold in this auction were the paired bands optimized for use with LTE-FDD. These bands, however, were packaged with obligations to supply service to rural populations, using the 450MHz bands and an older technology known as CDMA.

Paul’s client in the auction - Telefonica-Vivo - acquired the most valuable band in the auction, paying R$1.05 billion. This band included 40MHz of paired spectrum.

The bidding strategy challenge in this auction was to develop a plan that would be robust. It needed to be able to win sufficient spectrum in case the bidding competition was fiercer than expected, but also able to take advantage of low competition if that occurred.

The auction rules made this challenging by its combination of sealed bid and outcry stages. Sealed bids for all licenses were submitted on June 5 - a week before the outcry bidding began. The bids for each lot were opened on auction day (June 12) just before the outcry bidding began for that lot. Only the two highest sealed bidders for each license plus any bidder whose sealed bid was within 70% of the highest bid would qualify for the outcry stage. However, bidders were capped to win no more than 40MHz, and the four licenses for sale in the auction (labeled as W,X,V1,V2) had bandwidths of 40, 40, 20 and 20 MHz. So, if a bidder were to win the W license, it could not compete for X and its sealed bid for X would never be opened.

Vivo’s sealed bid for the first license - the W license - was made at the reserve. This bid positioned Vivo to win the license cheaply in case other strong bidders bid only for the more valuable X license. When two other competitors - Claro and Oi - also bid the reserve for that license, Vivo immediately passed.

This pass left Claro, the second largest competitor, with a choice between winning the W license by bidding against Oi or trying for the X, where it would have to outbid Vivo to win. This is no choice at all. As expected, Claro bid for and won the W license, paying R$845 million.

The W outcome positioned Vivo to bid against only weaker bidders to acquire its preferred X license. Vivo’s sealed bid for the X license had been calibrated to be lower than the expected final price of that license but high enough to eliminate almost completely the danger of being excluded from the outcry. For the X license, TIM joined Oi and Vivo in submitting a sealed bid, but only Vivo and Oi raised prices during the outcry stage. Oi’s final bid was at R$1 billion, and Vivo bid the minimum 5% increment to win the license. This premium over the cost of the W license represented very good value for Vivo.

With little competition remaining, TIM and Oi subsequently bid for won the smaller V1 and V2 licenses at prices just 5% above the reserve. This seems to reflect good planning by TIM in convincing Anatel to change its original plan to offer three 40MHz licenses and instead offer these four particular license sizes in this sequence. Unable to bid to win the larger licenses, TIM found itself able to acquire smaller licenses at a low price that had been made almost inevitable by the auction rules.