“Do I hear $3 billion for 20MHz? Going once, going twice …”

As amusing as it might be to imagine a bunch of stressed telecom CEOs judiciously raising their hands in a crowded auction room, in point of fact, the U.S. Federal Communications Commission (FCC) regularly conducts auctions anonymously over the Internet. Since 1994, the FCC has used online auctions to license rights to parts of the electromagnetic spectrum. Bidders can place bids from the comfort of their homes or offices. Also, anyone with Internet access can follow the auction progress, even non-bidders.

 How FCC Auctions Work

The FCC uses an auction format called simultaneous multi-round to grant spectrum rights. With this structure, licenses in different geographic regions are auctioned simultaneously, however, bidders can choose to bid several licenses at the same time using what the FCC calls package bidding.

FCC auctions have multiple rounds with rest periods in between. Bidders are required to bid each round, although they can choose to waive bidding a round up to three times during the course of the auction. The auction ends when all waivers are exhausted and no bidders remain, a process that can take days or weeks. At the start of an auction, rounds may last an hour each, but rounds eventually are cut to 30 or 15 minutes to accelerate the end of the auction.

How Bidders Qualify for an Auction

Given certain foreign ownership limits, any person or entity can qualify to bid in an FCC auction. Application is a two-step process in which applicants must first complete a short form with basic information. Second, applicants make a monetary deposit that varies based on the number of licenses sought. The FCC initially assigns bidding units to each license. Each bidding unit typically corresponds to a dollar.

Accordingly, if the FCC assigns 10,000 bidding units to a given license, applicants must deposit $10,000 to qualify to bid on that license. Deposits are made to an FCC-designated holding bank account. As the auction progresses, participants bid an increasing number of bidding units for a given license, however, bidders are not required to deposit any additional money. At the conclusion of the auction, winning bidders have 30 days to pay the difference of the winning amount over and above the initial deposit. Losing bidders are refunded their initial deposit.

Limitations in an Auction

There is significant transparency before, during and after an auction. The identity of the bidders is public knowledge; so is the value in bidding units for each license after each round. What is not public is who has bid for what license. At any given time during an auction, anyone can determine the current value of each license, but they will not know which of the bidders holds that winning bid. To prevent collusion, bidders are not allowed to communicate during the course of the auction.

To level the competitive field, the FCC offers discounts to small businesses should they win a license. For instance, an entity with reported three-year revenues below a given threshold might receive a 25 percent discount on the winning bid. However, any partnerships or contracts must be disclosed prior to auction start. This prevents an entity from participating in an auction as a small business when it has arranged for large financial backing “should it win the license.” Essentially, revenues for the participating entity and the investing entity are then combined to determine eligibility for discounts, if any.

Conclusion

Since 1994, the FCC has conducted nearly 100 auctions. This now seems to be the prevailing method of granting spectrum rights, largely replacing comparative hearings and lotteries. Other methods still remain, such as straight-forward applications for Earth station licenses and first-come, first-serve for space station licenses. Auctions have proven not only to be a lucrative endeavor for the FCC but also an efficient and expeditious way to assign spectrum rights. Next time there is an online FCC auction, make sure to sit by the computer with your favorite soft drink and some popcorn by your side.

Raul Magallanes runs a Houston-based law firm focusing on telecommunications law. He may be reached at +1 (281) 317-1397 or by email at raul@ rmtelecomlaw.com.