31 December 2007

Inside the spectrum auction

This article in Forbes provides an interesting insight into the workings of the upcoming 700 MHz auction. Since Forbes doesn't do permalinks, I will quote from the article more liberally than I prefer to:

If you're a 150-person start-up going up against the likes of AT&T, Verizon and Google in the upcoming auction of wireless spectrum, you look for any advantage possible.

Towerstream, a tiny Middletown, R.I.-based fixed-wireless Internet provider, is hoping telecom lawyer Dee Herman will give it a leg up against the competition. Herman, a principal at Bennet & Bennet, is part of a cottage industry of lawyers, consultants, engineers and economists that companies are hiring to boost their chances in the closely watched Federal Communications Commission auction that could redefine the telecommunications industry.


Experts say larger companies are more likely to have in-house teams that assess the value of particular slices of spectrum and come up with different bidding scenarios Those with fewer resources are hiring outside consultants and lawyers, who may, in turn, work with bankers or economists to devise strategies. Even Google, which has set up a war room at its Mountain View, Calif., headquarters, is consulting with auction experts and game theorists to gain an edge over the competition.

Consultants and lawyers usually file the applications on behalf of companies. They also get tapped for a multitude of other tasks, including supervising auction deposits and payments and deymystifying FCC regulations, such as the FCC's anti-collusion rule. Consultants and lawyers also may help craft business plans, determining, for instance, how particular licenses complement a firm's projects or other spectrum holdings, how much a particular slice of spectrum is worth and what an appropriate bidding strategy would be.

These outside consultants describe their role as streamlining a somewhat Byzantine process. "The process of bidding, looking at results and strategizing with our clients to figure out their next move can be constant, consuming and all-encompassing," says Herman, Towerstream's outside legal counsel, who is also representing several other bidders interested in different geographic areas. Some clients, he says, enjoy the frenzy and get intimately involved in the details; others prefer to have updates e-mailed to them.

Experts differ on the advantages of outside help but agree that the real payoff may simply be saving time in what can be a weeks-long process. In spectrum auctions, bidding stays open until no new bids are received, at which point the entire auction ends. That helps ensure no one cuts in and outbids someone at the last minute. It also means serious competitors must keep a close eye on the auction until the end.

Compounding the complexity, FCC auctions tend to begin slowly, with two to three rounds per day, then ramp up to as many as eight to 14 rounds. A smaller spectrum auction held last fall with 168 bidders went 161 rounds over 29 days. The 700 MHz auction is expected to last longer, given thee greater number of participants and the higher perceived value of the spectrum.

Despite the plethora of options, many players will probably go it alone. The FCC says it has taken pains to make the auction process easy to navigate. A Jan. 22 mock auction is scheduled to familiarize participants with the bidding software, which has been fine-tuned over the past two years and includes a section of frequently asked questions. Like the real auction, the mock auction will have anonymous bidding, which means companies will know the amount of the highest bid and whether they submitted it, but not who they're bidding against. Limiting information in this way could help level the playing field, experts say.

While I believe that auctions are the most efficient way to do spectrum assignment, I think this article highlights some of the shortcomings of this mechanism. It seems clear that smaller participants stand at a relative disadvantage. Can you imagine how it might go if governmental agencies (eg., police and fire departments) had to enter this auction for their spectrum needs as well?

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