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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4 Comments

  1. JohnMc says:

    B Winning? Ok. But the FCC does not have to accept if the reserve is not met. Now if B is Google would they want to have it disclosed having come so close they wimped out at the end? Then have to go thru the whole process again. In a economic sense $122m is a paltry sum for a band that could garner a 50m user base.

    B being AT&T? Possible but would it not be more likely they would want to fill in the pieces missing from their Aloha property acquisition? Which means they would be after the regional auctions.

  2. Greg says:

    I’m not certain that you understood my argument. I argued that B could sit on its current bid and wait until the MAB converged on the reserve price (since the FCC usually reduces MABs the longer a license goes without a new bid), then bid the reserve price untill A countered in round 17. It’s a moot point, though, since A bid above the reserve price in round 17, as I suggested it would have to.

    It’s just a SWAG, but I think A is Verizon.

  3. Greg says:

    Make that “unless A countered in round 17” rather than “until…”

  4. JohnMc says:

    My observation doing this in the corporate world is that sitting on a bid below the reserve price is not worth the effort. Unless your competitors are well far back in the pack price wise the offerer will reject. If one is close (say within 10%) the offerer might entertain a private discourse to close the gap.

    B was close by round 17. What I don’t know is whether govt. rules prevent such post auction discussions for the FCC.

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