Spectrum Auction Gives Billions to Billionaires

Federal Communications Commission (FCC) Chairman Tom Wheeler
Federal Communications Commission (FCC) Chairman Tom Wheeler

This article originally appeared at The American Prospect. Subscribe here.

Imagine you own a house that stands in the way of a huge interstate highway that the government desperately wants to build. If you are an ordinary citizen, the government will use eminent domain to seize your land, because otherwise you might block the highway’s development and use your leverage to bargain for a huge premium over your property’s worth.

Now imagine you’re a powerful special interest—say, a TV broadcasting company—that also has something that the government wants. But instead of seizing your valuable asset, as it would do if you were a homeowner, the government grants you something economists call “holdout power.” This allows you to block the highway and then negotiate a huge windfall for yourself.

That is exactly what Congress did starting in 2010, when it orchestrated the federal government’s ongoing “auction” to transition public airwaves allocated for broadcast TV service to mobile broadband service. The players granted the holdout power were deep-pocketed TV broadcast licensees, such as FOX (owned by News Corp.) and NBC (owned by Comcast). The upshot is that the federal government is now giving away public assets worth tens of billions of dollars to these holdouts, which include a relatively small number of billionaires who own media conglomerates. The auction began on March 29 of this year, and is expected to end after the congressional and presidential elections on November 8.

Both Hillary Clinton and Donald Trump have in principle condemned such corporate welfare for billionaires. As Clinton has put it: “There’s a myth out there that [Donald Trump] will stick it to the rich and powerful because, at heart, he’s really on the side of the little guy. Don’t believe it.” Trump, for his part, has said, “[O]ur nation's most powerful special interests … have rigged our political and economic system for their exclusive benefit. Believe me. It is for their benefit. For their benefit.” But if we are really to test the seriousness of the presidential candidates’ claims to champion the little guy, we should ask them to both acknowledge and denounce the unfair giveaway of the nation’s airwaves rights to broadcast industry billionaires.

Let’s start with some background on airwaves and airwaves policy. The airwaves (also known as “spectrum”) that your smartphone, laptop, and TV use for wireless communications have become one of America’s most valuable natural resources. America’s last auction for airwaves licenses, which took place in 2015, raised more than $40 billion for the U.S. Treasury.

Especially valuable are the relatively scarce low-frequency airwaves—the so-called “beachfront” airwaves—that make mobile communications possible because they can transmit signals through such solid objects as trees and walls. Communications on higher-frequency airwaves, such as those used for satellite TV, cannot penetrate such obstacles.

Different frequency bands of airwaves are allocated to specific services such as TV broadcasting. Within those bands, some of the airwaves are licensed and some are left empty. The latter, euphemistically called “guard bands,” surround the licensed airwaves and protect against interference caused by the broadcast licensees. The government gave the TV broadcast licenses away for free, and specified that the licenses were for fixed terms and could only be used to provide TV broadcasting service, a declining and arguably doomed business in an age of on-demand video. Regardless of who possesses a license, the airwaves are owned by the public; hence the term, “public airwaves.”

The auction now under way will transition our beachfront airwaves from fixed TV broadcasting (channels 2 to 49 on your TV dial) to mobile broadband service (what your smartphone provides). This transition is desirable, as using beachfront airwaves to deliver conventional TV broadcasting service is rapidly becoming about as wasteful as paving streets with gold.

But there’s a problem. Congress and the FCC are implementing that transition in a way that delivers an unfair windfall to a handful of TV broadcast licensees and their billionaire owners.

Consider what your reaction would be if the government gave away tens of billions of dollars’ worth of oil extraction rights located on public lands, and the recipients were the largest and most powerful oil companies in America. The government could rationalize the giveaway by asserting that the giveaway benefits consumers by increasing the supply of oil, lowering oil prices, and spurring economic activity. But even if all that were true, you would immediately recognize that the government had negotiated a bad deal on your behalf—a deal that doesn’t provide a fair return on public assets.

That’s exactly the kind of unfair deal our government has struck in its ongoing auction to reallocate public airwaves from broadcasting to broadband service. The auction seeks to transition to broadband service up to 43 percent of the airwaves (21 of the current 49 TV channels) currently allocated to TV broadcasting service, while minimizing any loss of existing service provided by TV broadcast licensees.

The auction is incredibly complex—arguably the most complex auction in human history. In the words of Stanford University auction expert Paul Milgrom, who advised the government on the auction’s design: “This is by far the most complicated resource reallocation ever attempted, anywhere in the world.”

Despite the auction’s overall complexity, one simple factor largely determines U.S. Treasury receipts: how broadcasters’ bids on what the government must pay them to give up their airwaves compare with mobile broadband providers’ bids to purchase those same airwaves back from the government. If broadband providers’ bids (also known as the auction’s forward phase) don’t substantially exceed those of broadcasters (the auction’s reverse phase), then taxpayers will ultimately only get crumbs. Unfortunately for taxpayers, this is exactly what happened when the auction’s first stage ended on August 30.

In the reverse phase, licensees bid on what the government must pay them to relinquish some or all of their licensed rights to use the airwaves. The government then reconfigures and adds new rights to the relinquished rights in the form of a totally new license designed for the efficient delivery of mobile broadband service. In the forward phase, mobile broadband providers then bid on those new licenses.

The auction’s reverse phase ended on June 29, with a subset of TV broadcast licensees bidding $86.4 billion to relinquish some of their license rights. The forward phase ended on August 30, with bids of $23.1 billion (including an estimated $685 million subsidy for small bidders). Since the reverse phase bids didn’t exceed those in the forward phase, the auction has now moved to stage two, which repeats the stage one process except with fewer airwaves up for auction.

The wireless industry players may have offered relatively low bids in the forward phase for strategic reasons, as many forward-phase bidders believed that the first stage would not reach the required clearing price of $88.4 billion (the $86.4 billion from the reverse phase plus $200 million to administer the auction, and $1.75 billion to reimburse broadcasters to move to new airwaves frequencies). As Roger Entner, lead telecom analyst at Recon Analytics, said of the reverse auction results: “They’re completely nuts; it’s inevitable that we will go back and lower the clearing target and lower the amount that will be raised.”

In each subsequent stage of the auction, fewer airwaves will be relinquished in the reverse phase, which will narrow the gap between the reverse and forward phase bids until eventually the forward phase bids exceed the reverse phase bids and the auction ends. Since in the final stage the forward bids will not greatly exceed the reverse bids, the lion’s share of the proceeds will go to the TV broadcast licensees, not the taxpayers.

On the day the auction launched on March 29, Preston Padden, who led the lobbying effort to get favorable auction terms for TV broadcast licensees, colorfully captured his clients’ expected payoff at the end of the auction: “I can assure you that there will be hundreds of broadcasters with smiles so big they will have to be surgically removed.”

It wasn’t supposed to happen this way. The FCC’s “incentive auction” champions originally claimed that forward phase bids would greatly exceed the reverse phase bids. Hence, no additional stages would be necessary, and this airwaves auction—like some previous airwaves auctions—would substantially reduce the U.S. debt. As House Majority Whip Steve Scalise, of Louisiana, assured at one congressional hearing, the auction “allows us an opportunity to have some real money to start paying down the debt.” Similarly, Tennessee Republican Marsha Blackburn testified that the auction would generate “billions in revenue to help pay down this massive debt that we are facing in this country.” And FCC Chairman Julius Genachowski predicted “very substantial revenues for the U.S. Treasury.” In a June 2010 report, the FCC even estimated that the value of the broadcasting rights auctioned in the auction’s forward phase would be anywhere between nine and 12 times greater than in the reverse phase.

Their reasoning was simple. It was based on the assumption that airwaves allocated for TV broadcasting service, a declining business, would be worth far more if reallocated for mobile broadband service, a booming business. And 83 percent of the airwaves allocated to TV broadcasting service were empty—serving as buffers between licensed stations. By contrast, airwaves allocated to mobile broadband service would only need to waste about 21 percent of those empty spaces.

These predictions, of course, did not come true, setting the stage for this massive government giveaway. And the windfall is landing in the pockets of some of the nation’s wealthiest corporate owners. The great majority of TV broadcast licenses are owned by 15 station groups, many of which are largely owned by such billionaires as Rupert Murdoch (Fox/News Corp.), Sumner Redstone (ABC/Viacom), and Brian Roberts (NBC/Comcast). In addition, airwaves speculators from Wall Street and Silicon Valley are expected to earn billions from the auction. The Wall Street Journal estimated that billionaire speculator Michael Dell (No. 23 on the Forbes 400 list of richest Americans) could receive an auction windfall of as much as $4 billion.

Of course, not all TV broadcast license holders are billionaires. Speculator Jim Messina, a former senior White House aide and campaign manager to President Barack Obama, co-founded HME Equity Fund II to invest in TV broadcast licenses that would cash in on the auction. Messina, co-chair of Priorities USA Action, a super PAC that supports Hillary Clinton, presumably benefited from his inside political knowledge that TV broadcast licensees would profit handsomely regardless of whether or not they participated in the auction.

All this begs the question: How did the original plan go so badly awry during the six years between when it was proposed and when it was implemented? The answer is that members of Congress, wanting to stay on good terms with their local media outlets, insisted that the broadband transition be purely voluntary for TV broadcast licensees, and that the auction take place as soon as possible regardless of how much the U.S. Treasury took in. Those two requirements gave the licensees holdout power—the power to hold the broadband transition hostage.

The licensees used their holdout power to ensure remarkably favorable terms for themselves, whether or not they participated in the auction. These included auction rules that managed to flip and drastically reduce the value gap between the auction’s reverse and forward phases.

Amazingly, the auction rules also allow licensees who both do and don’t participate in the auction to end up with more valuable license rights after than they had before the auction. Of course, this contradicts the common-sense notion of a government “auction,”—but a traditional auction design wouldn’t have required more than 1,000 pages of obscure explanatory rules, many of them written with input from industry lobbyists.

For those who participate in the auction but retain rights to provide the same or an increased level of broadcast service after the auction, it can arguably be said that what they’re really selling is not only rights to airwaves that they never used or possessed (the empty bands adjacent to their licenses) but also service rights (broadband as opposed to broadcast) that they were never licensed to provide in the first place. In short, this is an extraordinary example of the extent to which holdout power can be abused at the public’s expense.

For TV broadcast licensees who don’t sell their licenses, perhaps their biggest windfall is that they are poised to win the right to upgrade their licenses from the current fixed broadcast service (known in technical parlance as ATSC 1.0) to mobile broadband service (technically ATSC 3.0). The broadband standard will allow licensees to provide up to four times as much information on the same airwaves; to provide internet service, which is a far richer and more flexible platform for providing information services; and to provide mobile service, which increases the value of a “bit” of information by a factor of as much as 200. Notably, the new standard will allow licensees to seamlessly provide the downlink portion of a mobile broadband service, and then sublease their enhanced licenses to mobile broadband providers for hefty fees.

If licensees don’t eventually drop their reverse-phase bids to match forward-phase bids, it will be because they are confident that the broadband standard will offer them a roughly equivalent windfall.

After the auction, licensees will get still more public goodies. A tax-free government subsidy of $1.75 billion will help licensees pay for the dual-purpose equipment they will need to make the transition both to new airwaves frequencies (from the UHF to the VHF band, for example) and to the new broadband from the old broadcast standard. A bipartisan coalition of senators has already introduced legislation to increase that subsidy to $2.75 billion.

One reason the auction hasn’t been as competitive as initially envisioned for the auction’s reverse phase is that an obscure loophole in the rules allowed broadcasters to engage in channel-sharing agreements that essentially permit them to set up legally enforceable cartels—free not only to fix prices, but to keep those prices hidden from the public.

The average local TV market only has 8.5 high-power TV station licensees, but which, according to economic theory, should have been enough to ensure competitive bidding in the reverse phase. Competitive bidding, in turn, should have ensured that final bids corresponded to the value of those licenses used only for existing broadcasting services.

But this level of competitiveness did not materialize, as evidenced by the unexpectedly high price of $86.4 billion in the auction’s reverse phase. One explanation is that broadcasters’ colluded via legally-sanctioned channel-sharing agreements.

The government’s auction rules included many pages of impressive-sounding anti-collusion rules. But for the reverse phase, this channel-sharing loophole made those rules a farce.

In the story of American democracy, this giveaway of tens of billions of dollars’ worth of rights to use the public airwaves marks a sad chapter. It also vividly illustrates why, according to a Marketplace-Edison Research poll, 71 percent of Americans believe our economy is rigged to favor special interests.

Under normal circumstances, the mass media might have served as the primary watchdog to prevent this type of special interest giveaway. But in this case, media companies were the primary beneficiaries, setting up a blatant conflict with their watchdog role. This conflict applies to coverage of both the giveaway and of the members of Congress who might want to oppose it, yet who are dependent on the broadcast industry to get their messages out. As a former aide to Democratic Senator Chuck Schumer, of New York, an incentive auction champion, put it: “Never pick a fight with someone who buys ink by the barrel or pixels by the freight car load … picking a fight with a multimedia giant, you can never win that fight.” (For more on this, see my book Speak Softly and Carry a Big Stick: How Local TV Broadcasters Exert Political Power.)

One glimmer of hope for the future is the promise that the general transition from broadcast to broadband service will be implemented according to network neutrality—the principle that broadband internet providers should enable access to all content regardless of the source (e.g., a competitor or someone who disagrees with the broadband internet provider). This broadband transition could significantly reduce the political sway of airwaves licensees. The broadcast model of communications gives airwaves licensees control of the information conduits that lawmakers depend on for their congressional news, debates, and ads. This gives bargaining power to those who control media conduits. This leverage would be substantially weakened under a broadband service model built on network neutrality.

The same reasoning also applies to other broadcast providers using public rights-of-way. This is especially important for cable TV licensees because of their immense control over wired conduits using public rights-of-way (public roads rather than public airwaves). Their broadband transition should ultimately include the elimination of TV broadcast licensees’ must-carry and retransmission consent rights, which perpetuate the harmful political linkage between information conduits and political content.

Meanwhile, the public should hold presidential candidates accountable for their claims that they are defenders of the interests of the common man against the interests of billionaires. If that is the case, the candidates should explain what they are going to do about this huge, ongoing corporate welfare program for billionaires. Of course, the auction won’t be finalized until after one of the candidates is elected. That, the extraordinary complexity of the auction, and media complicity make it easy for the candidates to sweep the giveaway under the rug. But make no mistake. This corporate giveaway won’t disappear just because politicians ignore it. Taxpayers deserve to know how and why the broadcast industry has taken them for a ride. The public airwaves belong to us. It’s time that our elected leaders from the president on down take that ownership seriously.