In January, the FCC plans to conduct an auction of "C Block" PCS spectrum licenses, which were returned to the Commission as a result of the now-infamous NextWave bankruptcy. Nearly half of these licenses will be available through closed bidding to "designated entities," in furtherance of meeting congessional objectives to distribute spectrum to small businesses.
Recently, I filed reply comments to the FCC supporting a waiver of the closed bidding rules for this auction or, in the alternative, for a rulemaking to drop them altogether. Due to exceptions in the FCC's rules, large regional or national carriers can back DEs in these auctions through careful construction of affiliate relationships. In the end, the DE set asides create a perverse set of incentives by creating a layer of "middlemen" who obtain valuable spectrum licenses, meet their first construction benchmark, and then (if they don't go bankrupt first) flip the spectrum to larger regional or national carriers for a hefty profit. By keeping valuable spectrum out of the hands of those firms who value it the most, the rules make little sense where, as here, the market for wireless services is predominantly national in scope.
In an article on the subject in today's issue of Wireless Week, FCC Wireless Bureau Chief John Muleta responded to the "middleman" concern by stating that "the market will sort it out." Which is true, just as the market does with liquor wholesalers, car dealers, and other intermediaries who are paid a ransom for no reason. Here, the possibility of further delay in getting rid of the DE rules and adopting an open bidding approach, with the use of bidding credits, likely outweighs the harm to consumer welfare.