Tales of the Sausage Factory

FCC “WiMAX Auction” Already Over — Not a Surprise, But Still Impressive.

Some of you may recall that last month fellower Wetmachiner Greg Rose and I published our first industry report on the FCC’s Auction 86. We dubbed this the “WIMAX Auction” because the band at issue, the 2.5 GHz band, is the focus of major WIMAX activity in the U.S. and the report described the current state of the industry (including coverage maps for Clearwire and Sprint and the most extensive private database yet of who holds what in the band), likely outcomes in the auction, and what the behavior of bidders in the auction would tell us.

One prediction we made, that the auction itself would attract very little interest because it was an “ash and trash” auction of the leaving in the band, held up pretty well. The auction opened on October 27, and closed Friday, November 6. In other words, the entire auction lasted a week (4 bidding days) — which in FCC terms is greased lightning (the 700 MHz auction last year, for example, went on for 38 bidding days covering over 2 months). Total haul was $20 million, which will hopefully serve as a reminder to folks that spectrum auctions are not all multi-billion dollar gold mines.

As promised, we will release a post auction analysis available with the spectrum maps and databases for $799 within the next few months, once we (meaning Greg) have a chance to crunch the numbers and the round by round results. (Those who pre-ordered at the reduced rate when they bought the earlier report do not need to re-order). If you order now (the report is available through Muniwreless.com and through BroadbandCensus.com), you will not only pre-order the post-auction updates, but will get a copy of the original report with its industry analysis and coverage maps.

Stay tuned . . . .

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Econoklastic

Verizon's “Perfect Storm”: A Reason Why 700 MHz Band's C Block Cleared On the Cheap

Some critics of the 700 MHz Band Auction (Auction 73) attribute the failure of C Block — which consisted of large Regional Economic Grouping (REAG) licenses — to clear at the kinds of premium over the licenses in the AWS-1 auction that the Economic Area (EA) and Cellular Marketing Area (CMA) in the A, B, and E Blocks did to the fact that C Block had wireless Carterfone service rules attached.

However, careful analysis of the dynamics of the auction suggest that interaction of the auction’s combinatorial bidding, eligibility and activity rules, and the way in which minimum acceptable bids were calculated created a “perfect storm” in which Verizon was able to scoop up the two most populous REAGs for nearly half a billion dollars less than bidders were willing to pay earlier in the auction. This had a seriously depressing effect on the price at which C Block cleared and had nothing to do with the wireless Carterfone service rules.

More below…

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Tales of the Sausage Factory

It's Nice When the FCC Listens Part II — The Cyren Call Investigation Is Out.

When it rains, it positively pours. The FCC just released its Inspector General Report on whether Cyren Call screwed up the D Block. As readers may recall, I and my friends from the Public Interest Spectrum Coalition (PISC) sent a letter to the FCC as soon as the auction ended, asking the FCC to investigate the allegations over whether Cyren Call scared away D Block bidders. To his credit, Martin referred our letter to the FCC’s inspector general. The IG did a quick and thorough job, which you can read here. I shall add that it always gives one pause to find oneself as a subject heading in an IG report.

Generally, I’m satisfied with the report, which confirms my own suppositions after the anticollusion rules lifted and Cyren Call started yapping. Critically:

1) The meetings took place;

2) They were understood by all participants to be business negotiations, not “take it or leave it” demands;

3) The lease payment itself was not a deal breaker, but the potential bidders interviewed said that so many questions about potential financial liability and business model remained — aggravated in part by the uncertain role of Cyren Call — that they opted to stay away (or, as the IG concludes “this was just one drop in many different buckets”);

4) No FCC rules were broken and no one acted in bad faith, therefore there is no need for a referral for any criminal investigation.

Personal reflections below . . . .

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Tales of the Sausage Factory

So What Did Cyren Call Have To Say Now That The Curtain Is Lifted? Turns Out We Agree On A Lot.

Last night at 6 p.m., the anticollusion rules finally lifted and everyone in the universe started blabbing about the auction. Google confirmed that the conventional wisdom was right and I was wrong about their motives for bidding (ah well). AT&T and Verizon talked about their upcoming 4G Networks, and AT&T confirmed it places enormous value on its ability to squeeze monopsony rents out of its customers and vendors and therefore avoided the C Block. But most interesting, and not terribly well reported, was Morgan O’Brien’s response to the allegations around D Block, and subsequent interview with Jeff Silva at RCRWireless. While denying that Cyren call “killed” Frontline or “demanded” $50 million/yr for ten years, O’Brien does say that yes, a meeting took place, and yes, O’Brien asked for $50 million/yr as a lease payment in his opening negotiation positions.

One will pardon me for regarding this as a complete vindication of the story I broke back in January, thank you very much. I have always been careful to observe that I don’t think Morgan O’Brien meant to drive Frontline out of the auction or scare off other bidders, or even necessarily did anything wrong. But whatever O’Brien’s intent, it seems pretty clear that this was the straw that broke Frontline’s back and may have scared away other bidders as well (that still remains to be seen based on the FCC’s processes and investigations, and what turns up at the House Telecom Subcommittee Hearing on the 15th).

Critically, however, I agree with Morgan O’Brien’s bottom line. This should not be about finding a “fall guy” or assigning blame if it turns out no FCC rules were broken. What’s important is to figure out how to make the D Block public/private partnership work (or find some other productive solution for this spectrum). PSST will be an important part of that process going forward, and no one should imagine that I am suggesting otherwise.

More below . . . .

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Econoklastic

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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Econoklastic

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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Tales of the Sausage Factory

Chutzpah, Thy Name Is Wireless Incumbent.

So here we are in the middle of the most intensely competitive auction ever. As you can tell looking at the recent postings by fellow Wetmachiner Greg Rose this auction has dramatically pushed up the amount of money paid by bidders for licenses and has created more intense competition for a broader group of licenses than previous auctions, strongly suggesting that — as Greg and I predicted when we first started pushing anonymous bidding in March 2006 — anonymous bidding eliminates all kinds of targeting, collusion and retaliation that typically held back smaller bidders and allowed larger bidders to pick up licenses for a song. An utter smashing success (at least from the perspective of those who favor using auctions for distribution of licenses), right? Who could have a bad word to say about it?

Answer: All the people who hate anonymous bidding BECAUSE it eliminates the ability to signal, retaliate, and collude and thus makes the auction more competitive. i.e. The incumbent wireless licensees (other than Verizon, which wanted anonymous bidding to avoid being targeted).

More below . . . .

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Tales of the Sausage Factory

700 MHz: Notes From The Spectrum New Hampshire Primary, C Block Not Dead Yet

Everyone remember how Clinton was dead after Iowa? Now who remembers two weeks ago, or even last week, when analysts wrote off the 700 MHz auction as doomed due to credit crunch? But, other than D Block’s utter failure to move (and regular readers will know my opinion of why that happened), the auction has proven a success by every measure we can obtain so far. Sadly, however, the key measures are not yet in, and won’t be until after the auction is over. Which is why, despite C Block exceeding it’s reserve price, I caution folks that we are still at the equivalent of just after the New Hampshire primaries and that any speculation about the important points of the outcome remain unresolved.

Here’s what we know for sure now:

1) The current take now stands at over $14 b. This not only exceeds the $10 b that the Congressional Budget Office (CBO) estimated, it will exceed the “wildly successful” 2006 AWS auction (which grossed about 13.9 b). A, B, and C blocks have all met their reserve prices, with the most contentious fighting in certain high value markets B block.

2) Because C Block has met its reserve price, it will not be reauctioned and the open device conditions will go into effect.

So the auction is clearly a success from Kevin Martin’s perspective (again, with the exception of D Block, which is a special case). While those like Commissioner McDowell can argue that C block might have fetched more without conditions, $4.7 billion is nothing to sneeze at. And it is clear that the aggressive build out conditions did not scare bidders away from A and B block, so (assuming the FCC is serious about enforcement) we should see increased deployment of services into rural regions.

What we still don’t know is whether the new auction rules gave new entrants a real chance to win spectrum, or (as the conventional wisdom had it) will incumbents Verizon and AT&T end up capturing the lion’s share of the spectrum (albeit at higher prices, owing to the introduction of anonymous bidding). That we cannot know until after the anonymity lifts when the auction ends (which, if the FCC chooses to reauction D Block under the rules proposed for reauctioning the other blocks, might not be for several months yet). Much depends on the identity of the current C Block holder. Is it Google? Verizon? Some other deep pockets like AT&T or Echostar, or perhaps the mysterious Vavasi NexGen Inc.? And is C Block settled? If the package bidder in round 17 knocked off the previous high bidder, then the previous high bidder will need to respond fairly soon or it will start losing its eligibility (bidding chips) and no longer be able to challenge.

If it turns out the incumbents capture most of the spectrum, I will need to eat a huge plate of crow and tip my hat to Commissioner Adelstein and Publius at Obsidian Wings, both of whom fretted that only Verizon could win a huge block like C Block and that we would get more new entrants by slitting the spectrum up. OTOH, if the Great Google Prophecy comes true, I will become insufferably pleased with myself for at least a month.

But, rather than pull a Tweety Bird and start treating my own speculation in the absence of data as fact, I will simply say —

Stay tuned . . . .

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Econoklastic

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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Tales of the Sausage Factory

Not Giving Up On The Great Google Prophecy

You can read a far more brilliant analysis by Greg Rose on why the punditry on the trickle of data from the 700 MHz auction is all wrong here. Briefly, Greg maintains that this slow convergence on the reserve price over several weeks of bidding is what to expect from a serious auction, and that the failure of parties to bid heavily on C or D Block in the early rounds with so much activity going on in the smaller blocks is a sign of a strong auction to come. Little players on the side are active for the specific licenses that they want, while the large bidders slowly stalk each other up to the reserve price on the major block.

For me, having stacked much on the Great Google Prophecy, I will cheerfully admit to being too close to things to judge objectively. But here are two tidbits of food for thought.

1) Google CEO Eric Schmidt made the evolution of the wireless net a centerpiece of his speech at Davos. How likely is it that Google CEO would hype the importance of wireless if they were not planing to win licenses?

2) Most analysts predicted Google would come in, bid the reserve price for C Block, and leave. They haven’t. So far, no one has bid the reserve price for C Block. Instead, the price has crept up gradually. Now it could be that Google will only bid high if it must, for fear of getting stuck with licenses it doesn’t want. But if that is the case, why show up at all? “To save face with the FCC?” Yes, but we will know after the auction when the identities of bidders and round by round information is revealed if Google never bid. So the “save face” excuse doesn’t really hold water. Rather, it seems likely that they are bidding like everyone else, i.e., like bidders that want to win.

Straws in the wind, perhaps. But no worse than the straws of data everyone else is trying to spin into gold.

Stay tuned . . . .

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