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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8 Comments

  1. Interested Observer says:

    Sorry for the really basic question, but what’s the point in bidding under the reserve price?

  2. JohnMc says:

    Greg, in general the press is lazy. They will take the press release over doing their own analysis every time.

    IO, a lower than reserve price may actually be accepted. A reserve price is based on what an auction ‘should’ bring. Sometimes the auctioneer over compensates or conditions on the ground deteriorate. Auctions generally reflect valid pricing. So if the FCC sees that a particular EA only garnered X they may actually accept the bid.

  3. Greg says:

    There are two primary factors involved here: the first is that the dominant strategy is to converge on reserve price slowly so that the winning bid exceeds reserve price by as little as possible; the second is that the FCC has a history of reducing reserve price if it looks like the bidding on a license isn’t going to reach the initial reserve price.

  4. Greg Rosston says:

    Where is the “history of reducing reserve price if it looks like the bidding on a license isn’t going to reach the initial reserve price.” That is likely to get the FCC sued, especially in this case (although I am not a lawyer.) Check out my piece in CNET dicsussing that.(http://www.news.com/Quit-fo…)

  5. Greg says:

    Greg, it has happened repeatedly when a license has gone 20-30 rounds without any bid. It has happened in at least 14 FCC auctions. Furthermore, in the boilerplate of most FCC auctions the Wireless Bureau specifically reserves the right to change the rules of the auction, including reserve prices, even while it is in progress, in the case of Auction 73 even “on a license-by-license or package-by-package” basis.

  6. Greg Rosston says:

    I think that you are confusing reserve prices with minimum acceptable bids. The FCC’s system does change the minimum acceptable bid depending on activity, but it has NEVER changed the reserve prices during an auction (and only rarely had reserve prices). Understanding the rules is critical to analyzing the auction.

  7. Greg says:

    Actually, I am not confusing reserve prices with minimum acceptable bids. I did not state my point clearly above. I am suggesting that the rules for Auction 73 authorise the Wireless Bureau to do as it has done numerous times with minimum acceptable bids (in a minimum of 14 auctions, I recall) with the reserve prices. I, too, am not a lawyer, but I’ve consulted an attorney who is intimately familiar with the rules and he concurs in my judgment on this.

  8. Brett says:

    The Bureau certainly has the authority to reduce reserves and minimum opening bids – the key is that they haven’t exercised that authority in the past. With regard to adjusting bid increments, this auction is the first time the FCC is controlling all of the variables on a license specific level. They often adjust the increments during the auction, and it is much less major than adjusting either minimum opening bids or reserve prices.

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