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The Sotheby's Method

5:45 PM -- The FCC yesterday as expected tightened the rules for the spectrum auctions to be held June 29. It will sell off 1122 licenses for prime radio-frequency real estate in the 1710-1755MHz and 2110-2155MHz bands. Bidding in the auction, which the government hopes will bring in $15 billion or so, will now be "blind," or anonymous, so that the participating companies cannot collude to keep prices down or to punish competitive bidders. (See Industry Prepares For RF Auctions.)

The Commission approved a compromise solution proposed by T-Mobile US Inc. , in which bidding will be open if preliminary payments from participating companies indicate that the auction will be "reasonably competitive."

"Today's decision recognized that big companies have used spectrum auctions to keep out competitors and drive down auction revenues -- essentially stealing billions of dollars from U.S. citizens and depriving them of the benefits of competition," the Media Access Project said in response to the FCC move.

Well, it's actually not that simple. FCC spectrum auctions are not only supposed to plug holes in the leaky U.S. Treasury; they're supposed to allocate spectrum to service providers who will put it to its "highest use" -- a doctrine not necessarily served by blind bidding. And driving up prices for spectrum is not necessarily in the interest of taxpayers, who are also potential customers for future wireless services -- witness the spectacular flameouts of European companies that bought spectrum at astronomical prices in the 1990s.

Think of the upcoming NFL draft. The draft is completely transparent -- that is, all participants know exactly who's been drafted and by what teams. They even know, within a reasonable range, what the new players will likely be paid. Draft day is a frenzy of horse-trading, as teams respond to their opponents' maneuvers and move up, or down, to land the players they think will help most. "Punishing" uncooperative teams, in this model, is simply another form of competition. In theory, the players go to the teams that will put their abilities to the highest use, and they get paid the maximum according to their value in the eyes of NFL talent scouts. (In practice, of course, draft-day boners are the stuff of NFL legend.)

Spectrum auctions have been a bit like that -- because bidding companies could see how their competitors were acting, they could respond accordingly. A certain amount of horse-trading, to shift spectrum resources to those who could make the best use of them, is a given in this model. Making the auctions blind will eliminate that aspect of the auctions, in the name of "competition" and squeezing the maximum amount of dollars out of the bidders.

In fact, you could argue that the best format for spectrum auctions is the "second-price" auction, developed by Nobel Prize-winning economist William Vickrey. In a second-price auction, sealed bids are submitted and the highest bid wins the auction -- but the winner pays the next-highest price submitted. According to Vickrey's analysis, this format influences competitors to submit bids that reflect the value they actually place on the sale item -- and, surprisingly, they tend to bring in just as much money as blind, "first-price" auctions.

Spectrum is not like a Picasso, or a Van Gogh, which has some intrinsic value according to its beauty and desirability, and the state of the art market. Spectrum is only valuable if you can make money off it; and just because you're foolish enough to bid the highest amount to get it, doesn't mean you can actually profit from it.

— Richard Martin, Senior Editor, Unstrung

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