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FCC Spectrum Auctions

In 1993 Paul Milgrom, Robert Wilson, and Preston McAfee of MDI invented the simultaneous ascending auction (SAA) adopted in the United States by the Federal Communications Commission (FCC) as its primary auction method and used for the sale of more than $20 billion of radioelectronic spectrum licenses. In addition, John McMillan and Peter Cramton of MDI advised the FCC in several of its early spectrum auctions.

In 1997, the FCC retained MDI to develop alternative and advanced auction designs for its future auctions. The designs and recommended implementations will allow very large and combinatorial auctions to be run efficiently and competitively, and will ensure that the objectives of the auctioneer (FCC) are achieved. Three reports describing the auction designs are available online. These auction designs will enable the FCC to choose the best auction format for each of its auctions.

MDI principals Larry Ausubel, Peter Cramton, and Paul Milgrom continue to play an important role in the FCC's development of rules for combinatorial auctions.

MDI principals Larry Ausubel, Peter Cramton, and Paul Milgrom formed Spectrum Exchange to promote the efficient exchange of spectrum rights. The venture's first major project is working with incumbent broadcasters, wireless operators, and the FCC to clear the 700 MHz spectrum band.

Combinatorial Auction for the FCC

MDI was retained by the FCC to develop prototype software for running advanced, combinatorial auctions.

Australia’s 500 MHz Spectrum Auction

For the Spectrum Management Agency (SMA) of Australia, MDI prepared a report to suggest improvements in the rules of SMA’s 500 MHz spectrum auction and to advise the SMA on implementation issues. Beginning with the 500 MHz band auction, the SMA offered a new kind of broad-use spectrum license with significant flexibility. Spectrum users (license winners) are not limited to a single, fixed use as specified by traditional licenses. These fully tradable licenses, called “spectrum licenses,” confer the right to use the spectrum for any purpose. License holders can divide, combine, and resell spectrum as they see fit. This flexibility in licensing reduces bureaucratic barriers and allows the marketplace to determine the highest value assignment and allocation of spectrum resources.

Along with offering innovative licenses, the SMA ran an innovative auction. It auctioned over 900 separate licenses concurrently, using MDI’s pioneering simultaneous ascending auction (SAA) design. The 500 MHz auction generated over A$1 million in revenue, exceeding expectations consistent with many other spectrum auctions. Using the SAA design in the subsequent and much larger 800 MHz and 1.8 GHz (PCS) auction generated over A$350 million in revenue.

Spectrum Auctions in Mexico

The Comisión Federal de Telecomunicaciones (COFETEL), the Mexican telecommunications agency of the Secretaridad de Comunicaciones y Transportes (SCT), hired MDI to assist in Mexico’s spectrum auctions. Beginning with the first auction of paging spectrum, the SCT’s primary concerns were that the auction design, rules, and software be understandable by the auction administrators and bidders; that the auction be transparent and able to withstand public scrutiny; that the auction be completed in a short time period; and that licenses be assigned efficiently and on a non-discriminatory basis.

For the paging auction MDI provided auction design, auction rules, auction software, documentation, bidder training, and auction execution. MDI customized the SAA format to account for the particular characteristics of the Mexican telecommunications industry. The Mexican paging auction was considered an important success and precedent by the Mexican government as well as by the participants. MDI assisted the Mexican government in subsequent auctions, including PCS and wireless access, MMDS, and microwave point-to-point auctions. These spectrum auctions have raised about 9.7 billion pesos, or more than US$1.1 billion.

Spectrum Auction Design and Software for Canada

For Industry Canada, MDI developed the auction design and software implementation to be used for spectrum auctions. Our report to IC evaluated alternative auction forms, addressed auction issues related to license definition and restrictions (namely, the license terms and renewal conditions, the transferability of licenses, spectrum cap and eligibility rules, and the size of the auction blocks), and recommended specific auction procedures, including details of auction design as well as payment options. Our report also included recommendations for some major improvements to the simultaneous ascending auction (SAA) design for spectrum licenses. The rules of the SAA were customized to meet the objectives of Industry Canada and to reflect the particular characteristics of the spectrum and industry. Our Auction Management System (AMS) and Bid Tracking System (BTS) have been customized to provide flexibility for the auctions and to ensure that the objectives of the auctions will be realized. Documentation included the AMS Administrator’s Manual, AMS User’s Manual, and BTS User’s Manual.

Canada’s 24 GHz and 38 GHz Spectrum Auction

MDI recently was selected to assist Industry Canada in its first spectrum auction. The tasks include: (1) Assist in preparing materials for pre-auction bidder information sessions, participate in the first information session, and participate in a mock auction; (2) Provide advice during the auction including recommendations on round scheduling, activity rules, stage changes, and minimum-bid increments; (3) Monitor and interpret bidding activity and provide recommendations on the communications and other operational activities of the auction; and (3) Deliver a post-auction critical assessment of the planning, design, and operation of the auction. Overall our role is to help ensure a highly successful auction and to ensure that future auctions will benefit from the experiences of the first auction.

Design for Universal Service Auctions

For a major telecommunications company, MDI personnel collaborated with other economists to develop an auction design to govern the allocation of universal telephone service obligations. The design objectives were to determine telephone rates adequate to cover the cost of service while simultaneously encouraging competition in local exchange. Paul Milgrom’s theoretical work on this design was described in a Nobel Prize economics lecture in 1996 (published in Le Prix Nobel, 1996).

Spectrum Auction Design in Austria

MDI has advised Austria's Telekom Control on the design of its spectrum auctions. For one auction, as a result of differing complementarities across bidders, package bidding was proposed. As of August 1999, Telekom Control is waiting for legislative authority to conduct auctions.

Spectrum Auction Design Issues in New Zealand

New Zealand Telecom retained MDI to help develop its position on the ongoing development of regulatory policy and spectrum auctions in New Zealand. The issues included market power effects and the role of a dominant player, how property rights can be defined to allow multiple users now and a single user in the future, and the method of sale of the property rights. We evaluated five options for licensing: multiple short-term licenses, later to be re-auctioned; multiple long-term licenses; a single long-term license, allowing the holder to function as a spectrum manager; multiple variable term licenses; and multiple band-plan auctions.

C-Block Auction Seminar

MDI conducted a pre-auction seminar for bidders in the FCC’s C-block PCS auction. MDI speakers discussed the auction design and rules, and provided a bidding strategy tutorial and mock auction. A demonstration of the bid tracking tool was also given. Seminar attendees were presented with notebooks documenting the auction process, rules, and bidding procedures.

Strategic Advice to Bidders in Spectrum Auctions

MDI has a wealth of experience advising bidders in spectrum auctions. Individually and in teams, we have provided expert auction advice to several US and international telecommunications companies. Our clients have successfully won spectrum licenses worth billions of dollars. The success of the bidding strategies is reflected not only in the companies winning their desired licenses, but in the fact that the companies often won at prices less than what competitors paid for comparable licenses.

Spectrum License Valuations

MDI was retained by a bidder considering participation in an FCC spectrum auction. The scope of work included two tasks: assistance on developing a model to estimate license valuations, and customization of our Bid Tracking System (BTS) to facilitate the determination and submission of optimal bids. The valuation model used industry, marketing, financial, socioeconomic, macroeconomic, and geographic databases to generate optimal node build-out plans and estimates of license valuations. The model was run under various sets of assumptions reflecting uncertainties to conduct sensitivity analyses. The output of the model was used to rank the licenses and the BTS was used to select the optimal set of licenses and bid amounts subject to minimum bid requirements and budget constraints. The BTS also was customized to generate a conforming bid submission file to be uploaded to the FCC’s auction system.

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