Cell Phone Companies Give the Government an Unexpected Gift: $44 Billion

Bidding for mobile spectrum has exceeded expectations
Photographer: Scott Hailstone

Tom Wheeler, the chairman of the Federal Communications Commission, doesn’t normally have much to crow about, but he could scarcely contain his glee at a press conference in mid-December as he reported that the agency had unexpectedly earned billions of dollars for the federal government. The money comes from the FCC’s public auction of licenses for access to radio-frequency spectrum, the airwaves used to transmit wireless data to cell phones. Before the auction opened in November, the FCC set the reserve price at $10.6 billion. By Dec. 17 the bidding had passed $44 billion. “I think it is pretty safe to say that the auction is a success,” Wheeler said.

The bidding busted the previous $19 billion record for a spectrum auction, set in 2008. AT&T, T-Mobile US, and Verizon are among the 70 companies that qualified to take part in the current auction. Smaller bidders—such as the city of Ketchikan, Alaska, and the Southeastern Indiana Rural Telephone Cooperative—signed up, too. Bids are anonymous, and the FCC won’t say which companies have taken the lead in the bidding until the auction ends in the coming weeks. “They’re duking it out,” says Walter Piecyk, an analyst with BTIG, a telecom research firm.

Earlier in 2014, Piecyk estimated the auctions would bring in $12 billion to $14 billion. He says he was surprised when the bidding leapfrogged pre-auction estimates. Normally, the two largest carriers—AT&T and Verizon—find a way to avoid bidding each other up. “They stick to their corners,” Piecyk says. “They don’t pop the price that high.”

There are two reasons to bid high: to stop competitors or new entrants from getting spectrum, or to offer new services. In 2012, T-Mobile and others complained to the FCC that Verizon was hoarding spectrum to keep competitors out of the market. Verizon officials replied that they’d been “good stewards” of spectrum. High auction prices also help reinforce the barriers to entry for smaller wireless companies.

Expectations for this auction were low, because the spectrum being sold isn’t in the lower frequencies that can carry farther and penetrate walls easily. (On the low end of the spectrum, calls are more likely to drop in elevators.) But wireless coverage in most U.S. cities has reached a saturation point. The higher-frequency spectrum being sold gives wireless carriers raw bandwidth they can use to offer faster data services, such as streaming video to phones. In Chicago, says Dennis Roberson, a professor at the Illinois Institute of Technology, most available frequencies are being used. The auction block covering the city has drawn higher bids than those for any other part of the country.

It’s also not clear when the government will hold its next spectrum auction. The frequencies being licensed in the current auction had been in use by the U.S. Department of Defense and other government agencies. The FCC planned to hold an auction for the lower-frequency spectrum now used by television broadcasters in 2015, but the sale has been delayed at least until 2016 because of a legal challenge from the National Association of Broadcasters. The FCC has also signaled that it will limit the amount of spectrum large players such as Verizon and AT&T will be allowed to buy in that sale, whenever it proceeds. “Could be there’s one or two guys saying, ‘You know what, this is our last chance to get the spectrum we need,’ ” Piecyk says.

It doesn’t matter to the FCC why the bidding has reached stratospheric levels. Before it began auctioning licenses in the mid-1990s, the FCC assigned spectrum licenses for free based on its understanding of the public interest. Auction proceeds have allowed it to claim that it self-funds its own priorities. About $7 billion from this auction will go to pay for a nationwide emergency communications network, something recommended a decade ago by the 9/11 Commission. The rest will be deposited with the Treasury to help pay off the government’s $13 trillion in public debt.

    BOTTOM LINE -

    The bottom line: Mobile phone carriers are bidding up the price of wireless spectrum, more than doubling the previous auction record.

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