Wetmachine Blog: Econoklastic

And Now for D Block

It’s apparent to anyone who has been following the 700 MHz auction that the plan to allocate spectrum for a nationwide public safety network which would allow a private company to deploy the infrastructure and sell access to the network to private users, who could be preempted by public safety users in an emergency, isn’t going to happen. D Block has miserably failed to reach its reserve price for a number of reasons, not the least of which was the apparent bullying of Frontline by the Public Safety Spectrum Trust’s agent Morgan O’Brien which led to Frontline’s withdrawal from the auction.

Fellow Wetmachiner Harold Feld’s trenchant analysis lays out the options for D Block. I have a few things to say on the matter as well.

A national public safety broadband system is a vital national security interest of the United States. The notion of handing vital national security infrastructure over to private enterprise is one of the worst ideas the Bush administration has ever had. It hasn’t worked well in Iraq and it’s a non-starter for D Block. Let’s drive a stake through the heart of the idea that private providers can more efficiently deliver a vital public good than government can. The FCC should simply shelve the D Block proposal until the new Congress is elected.

The new Congress should definitively decide whether a national public safety network is, as the 911 Commission opined, a vital national security need. If so, it should appropriate the funds for the federal government to build and deploy the necessary infrastructure. It’s what Dwight Eisenhower did with the interstate highway system. The 700 MHz auction has already raised nearly twice the projected revenue. Either a national public safety is needed or it isn’t.

Such a federally-built public safety network offers an additional benefit. There is little additional marginal cost to building a network which allows capacity to be used by others while allowing public safety to preempt them during emergencies. Such capacity could be offered at cost to municipalities for community wireless broadband networks. The presence of such a government-owned network would force the major wireless broadband providers to cease redlining rural and inner-city America, closing the digital divide, as well as provide partial reimbursal to the Treasury for the costs of building the network. We would have our third broadband pipe, and it would be a joint federal-state-local asset.

If a national public safety broadband network is needed, we should do it right and the government should build it, or the Democrats and Republicans in Congress should publicly admit that there is no compelling national security need. And if it is built, it should be built with the benefit of all Americans in mind, not just the profits of the corporate greed machine.

Probably won’t happen, for all the reasons Harold cited. But it makes me nostalgic for a visionary like Dwight Eisenhower (and those are words I don’t often utter).

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McCain and the Dirty Deed

John Sundman wants sexy details on John McCain, Vicky Iseman, and Paxson Communications. I’ll tell all I know.

Cornerstone TeleVision had sought to obtain the noncommercial license for WQEX, owned by Pittsburgh public broadcaster WQED, and then to transfer the license to Paxson Communications with Cornerstone and WQED splitting the $35 million Paxson was putting up for the sale. The proposal was virtually unprecedented since it involved transfer of noncommercial license held by a public broadcaster to a commercial enterprise. The complicated plan was an attempt to end-run a 1996 FCC ruling that WQEX could not be “dereserved,” i.e., commercialised, by a direct sale to a commercial broadcaster.

The Republican minority on the FCC supported the plan, the Democrats opposed… until John McCain weighed in via his December 10, 1999 letter to the FCC, demanding that the FCC Commissioners ”advise me, in writing, no later than close of business on Tuesday, Dec. 14, 1999, whether you have already acted upon these applications…. If your answer to the latter question is no, please state further whether you will, or will not, be prepared to act on these applications at the open meeting on Dec. 15. If your answer to both of the preceding questions is no, please explain why“ (the full text of McCain’s letter to FCC Chairman William Kennard may be found here).

McCain had held up confirmation of Democrat Susan Ness’ reappointment to the FCC since the previous July. Apprised of McCain’s adamant support for Paxson on this issue, Ness voted against her fellow Democrats to approve the deal. As far as I know, the only ones getting screwed in all this were the Democrats by Ness (who caved to pressure from McCain — and despite repeated gutlessness in dealing with the Republican Congress Ness is frequently mooted as the next FCC Chairman if Clinton is elected).

And even then the well-laid plan of Paxson fell apart over a condition placed by the FCC on the deal, prohibiting Cornerstone from ”proselytising,” an important issue, since the transfer involved a religious broadcaster taking over an educational TV station.

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The Pity Is That It's True

Commenting on a piece by The Financial Times columnist Clive Crook on Barak Obama’s likely economy policies if elected, The Economist manages to interject a point desperately depressing, but spot on: “His voting record suggests that, if elected, Mr Obama would be the most economically left-wing American president since … well, it’s hard to say. Richard Nixon?”

The Economist has had Nixon in their sights ever since he briefly introduced wage and price controls in August 1971, violating a core tenet of Chicago School orthodoxy, but on reflection they have a point. Nixon was the last president who was willing to seriously entertain the use of government to fundamentally regulate the economy not solely at the behest of Wall Street and corporate interests. The Friedmanite orthodoxy which was religiously embraced by so many around Reagan and which has subsequently stripped government of the will to regulate the unchecked greed machine of the market was viewed as a sectarian movement, very nearly a cult, by Nixon and his principal economic advisors.

But it says a great deal about how much the progressive movement in the Democratic Party has surrendered that the principal organ of neoliberalism, The Economist, finds that the worst thing it can say about Barak Obama is that he might pursue Nixonian economic policies. Lyndon Johnson and the Great Society are beyond the realm of possibility, much less Roosevelt and the policies which underlay the New Deal. And they are almost certainly right. Obama is as much a captive of the corporate-worshipping wing of the Democratic Party as Billary (the principal reason that Hillary Clinton won’t release her joint income tax returns is that they would reveal that husband Bill has been openly a wholly-owned subsidiary of major U.S. and foreign corporate interests since leaving the White House, just as he was more clandestinely since his first days in Arkansas politics).

With Edwards and Kucinch out of the race there’s very little to enthuse me about a contest between a product of the Daley machine in Chicago and the Democratic Leadership Council’s anointed one. I suspect strongly that Obama will be just another case of “run to the left, govern to the right.” I only wish The Who’s lyrics were right: We won’t get fooled again. But I wouldn’t make book on it.

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700 MHz: When Will it End

E Block reached its reserve price in round 44 on Thursday and the FCC announced that it was going to six bidding rounds per day beginning on Friday, Feb. 8.

However, while D Block is probably permanently stalled below its reserve price for Auction 73 and will likely have to be reauctioned, there is still sufficient activity in the auction to expect that it will continue for as much as two more weeks, depending on whether the FCC decides to further accelerate the number of rounds per day. The following table shows the rates of convergence to full clearance over the past six and the past three rounds. These rates are consistent with an auction conclusion in the last week of February or the first week of March if previous auctions are a reasonable guide. However, there have been sufficient anomalies in auction performance in Auction 73, notably high amounts by which A and B Blocks have exceeded their reserve prices and the speed with which these prices have been obtained, which caution us not to rely too much on previous auction behaviour. The FCC has been gradually upping the number of bidding rounds per day and I expect further increases, as the agency seems inclined to press the auction to conclusion.

On the basis of these facts I would estimate at least two, perhaps three more weeks of bidding, primarily in E Block, before we see the end of Auction 73.

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700 MHz: Oops

The last round of the day for Auction 73, Round 31, was postponed until tomorrow by the FCC late today. The announcement on the Integrated Spectrum Auction System read:

“2/4/2008 04:11:42 PM
Round 31 Postponed
Due to a delay in the availability of complete downloadable reports, Round 31 will be postponed until 9:30 a.m. ET tomorrow, February 5, 2008.

”We will continue with the previously announced five round bidding schedule until further notice. Bidders are reminded to monitor auction announcements for further changes in the bidding schedule.”

Sources at the FCC indicate that the system glitched on producing the end-of-round reports from Round 30 and there was insufficient time to locate and correct the bug before Round 31 was scheduled to commence at 4:30 p.m. EST. Round 30 still hasn’t been posted on the Integrated Spectrum Auction System as of 4:40 p.m. EST, and it was due at 3:40, which suggests that the bug hunt is a bit more complicated than the FCC initially anticipated, but there’s no reason to think the auction won’t recommence tomorrow as scheduled.

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700 MHz: More Evidence for Success of Anonymous Bidding Rules

I’d like to reiterate what fellow Wetmachiner Harold Feld wrote yesterday: the telecoms incumbents’ claims of problems arising from anonymous bidding are nonsense, part of a campaign to sow disinformation lest Auction 73 (700 MHz) and its success persuade the FCC to permanently adopt anonymous bidding rules for its auctions.

I call your attention to this table, which compares the number of bids on each license in B Block in rounds 1-26 of Auction 73 to the number of bids on each comparable CMA in Auction 66 (AWS-1) in rounds 1-26 of that auction. Note that in general the smaller the CMA number, the larger the population of the CMA (e.g., CMA001 is New York City and its immediate environs, CMA002 is the Los Angeles area, etc.).

What is striking about the data presented in this table is threefold. First, significantly more bids are being placed in general in rounds 1-26 in Auction 73 than in Auction 66. Second, extraordinarily more bids are being placed on the smaller and intermediate-size CMAs in Auction 73 than in Auction 66. Third, a much smaller percentage of licenses are receiving no bids in the first 26 rounds in Auction 73 than in Auction 66.

I am hard put to find an explanation of this extraordinary increase in competition, particularly for the smaller and intermediate-size licenses, which does not involve the effects of anonymous bidding. I suggest that the data, even though they do not disclose bidder identities, are entirely consistent with a more vigorous presence of new entrant and non-incumbent bidders who are protected from retaliatory and blocking bidding by large incumbents by anonymous bidding and are, therefore, more willing to engage in strong competition.

The telcos and cablecos can wail and moan to Communications Daily about the “risks” of anonymous bidding to the FCC, but the principal risk of anonymous bidding seems thus far to be the risk that fat-cat telecoms incumbents won’t be able to get all the spectrum in this auction by their usual bullying and exclusionary tactics. There’s no risk at all to the treasury — revenue from the auction is already wildly exceeding pre-auction projections — and there’s no risk that competition will be wan, as the data presented here amply demonstrate.

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700 MHz: Indirect Evidence for More New Entrant/Non-Incumbent Activity

I can’t prove it, but the following table is suggestive that there is significant new entrant/non-incumbent activity over a wide range of licenses, most strikingly in B Block. This table tracks numbers of bids per license by block (and the licenses are further sorted by total number of bids per license) over rounds 1-26 (round 27 will open on Monday).

What is interesting is that there are large numbers of bids on a wide variety of licenses of differing population sizes. Since the incumbents traditionally focus on the higher population area licenses in each block, the relatively high levels of competition over licenses of significantly differing population size suggests that anonymous bidding has emboldened new entrants and non-incumbents to compete more intensely than in earlier auctions (which also accounts, in part, for the larger revenue stream indicated by the higher provisionally winning bids).

It’s not much evidence, but it is an interesting datum, and it appears to show a pattern consistent with higher levels of competition over a wider range of licenses.

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700 MHz: Beating the AWS-1 $/MHz/Pop

A, B, and C Blocks have exceeded their reserve prices as of round 17 in Auction 73, and E Block has reached 83.73% of its reserve price, while D Block has languished at 26.99% of reserve price since the first round. Unless a great deal of the activity in A and B Blocks is intended to preserve eligibility for later round intervention in C Block, the probable C Block winner has likely made its winning bid in round 17.

The rate at which A and B Blocks have exceeded their reserve prices by the end of round 21 today — 190.51% and 462.50%, respectively — seems unlikely to abate, which may push revenue from Auction 73 to $16-17 billion, perhaps as much as $20 billion, despite the fact that D Block will almost certainly have to be reauctioned if the current pattern holds.

How much better A, B, and C Blocks are doing at this point than even at the end of Auction 66 (AWS-1) is shown in this table, which compares the dollar per MHz per population price each license in those three blocks obtained with the provisionally winning bid as of the end of round 21 to the final dollar per MHz per population price comparable licenses received by the final round of Auction 66. Since the bandwidth is different in each auction, $/MHz/Pop standardises the data for comparison.

Clearly the majority of 700 MHz spectrum on offer in Auction 73 is much more highly valued than the spectrum on offer in Auction 66: the average $/MHz/Pop price of an A Block license at the end of round 21 in Auction 73 is 193.53% of the final $/MHz/Pop price of comparable spectrum in Auction 66; the average $/MHz/Pop price of a C Block license at the end of round 21 in Auction 73 is 623.06% of the final $/MHz/Pop price of comparable spectrum in Auction 66. For C Block, the 50-state package (REAGs 1-8) is reaching 102.65% of the final price of comparable spectrum in REAGs 1-8 in Auction 66, while REAGs 9-11 are averaging 134.10% of what they finally obtained in AWS-1.

From the point of view of the U.S. Treasury Auction 73 is already a hell of a success. What remains to be seen is how well new entrants and smaller competitors did, whether the incumbents ran the table again, and whether we got a national third broadband pipe. But we won’t know that until the FCC releases bidder identities and bids at the end of the auction.

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700 MHz: The C Block Minuet

The fact that the C Block has dangled on the precipice of reaching its reserve price from round 13 to the close of today’s bidding action in round 16 has led to speculation that Google never intended to go seriously for the spectrum, but was merely trying to goad Verizon or ATT into committing on the Block. I grant that we have almost no intelligence on who the C Block bidders are, and it is very, very early to speculate on the auction’s ultimate outcome. However, I have a theory, grounded in an understanding of game theory and the auction rules, which calls this latest conventional wisdom into question.

There are at least two, and possibly three, current bidders for the bulk of C Block. Two have been trading off the lead for the 50 state package (REAGs 1-8), let’s call them A and B: A in the first round (1 new bid), B in the second (1 new bid), A in the third (1 new bid), B in the fourth (1 new bid), A in the fifth (1 new bid), B in the seventh (1 new bid), A in the eighth (1 new bid), B in the tenth (1 new bid), A in the twelfth (1 new bid), B in the thirteenth (1 new bid). B has been the high bidder since the thirteen round with no need to raise its bid. In the sixth round there were also mid-range bids placed individually on REAGs 1-8. Either the individual bids on REAGs 1-8 in round six were B’s response to A’s bid on the package in round 5 or another bidder, C, forayed at that point.

B can sit indefinitely on its current bid, waiting for the minimum acceptable bid (MAB) to converge on the reserve price of the Block without requiring activity waivers (the FCC historically reduces MABs in the presence of bidding inactivity). That would allow B to obtain the package for almost $122 million less than the current MAB for round 17. A must bid on REAGs 1-8 either on the package or individually in round 17 or lose eligibility, since it has had to expend three activity waivers to avoid bidding in rounds 14, 15, and 16. That is what we know.

I hypothesize that B is Google, that it is sitting just below the reserve price, and will continue to do so unless another actor bids, until just before the close of the auction, when it will bid the reserve price and save roughly $122 million. I grant that it is also possible that B is Verizon or ATT or some other bidder which I don’t know and haven’t mentioned. But game theory and the auction rules explain why B is sitting pat. A has to bid in round 17 (the MAB for the 50 state package in round 17 is over the reserve price of the Block, and the sum of MABs for REAGs 1-8 individually in round 17 is equal to the MAB for the 50 state package), or B’s strategy is likely to win.

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Definitely Not Smarter Than the Average Bear

Much of the press surrounding the first two days of the FCC’s 700 MHz auction has been like this Information Week story. I confess to being both amazed at the shallowness of the reporting and amused at its gloom and doom tone. To hear the press tell it, it’s time to be very bearish on this auction.

A look at historical precedent is salutory. The FCC’s Integrated Spectrum Auction System files for Auction 66 and Auction 73 are the places to start.

At the end of round four in Auction 66 (AWS-1), the high bids for the EAs, CMAs, and REAGs were, respectively, 4.15%, 7.09%, and 12.03% of the final net PWB prices with 47.84% of licenses receiving at least one bid. At the end of round 4 in Auction 73 (700 MHz Band) the high bids for EAs (A and E Blocks), CMAs (B Block), REAGs (C Block), and the nationwide D Block license were, respectively, 31.87%, 43.03%, 39.06%, and 26.99% of reserve price with 83.80% of licenses receiving at least one bid.

Auction 66 netted $13.7 billion. Auction 73 has a reserve price threshold of $10,386,011,520. By any objective criteria Auction 73 is off to a much better start generally than Auction 66 was. The fact that the D block has had only one bid in the first four rounds isn’t terribly unusual; several licenses which eventually went in Auction 66 for very substantial sums had very little early-round action. It’s important to point out that auctions with relatively high reserve prices tend to exhibit slow convergence bidding on reserve price and provide significant incentive to try to obtain the license for as little over reserve price as possible. When this tendency is coupled with the FCC’s bidding increment rules, it is rather obvious that the auction is going to take some serious time and that it’s rather impressive how close to reserve price the bidding is at so early a stage.

Auction 66 ran 161 rounds. I expect Auction 73 to run at least 100 rounds, and probably significantly longer. It is much too early to announce that the results of Auction 73 are disappointing… unless you appear to know as little about how FCC spectrum auctions actually work as much of the press does.

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