june 22, 2021 marlene h. dortch secretary federal

uscellular.com <8410 W. Bryn Mawr Avenue> P <(202) 290-0233> <Chicago, IL 60631> E <[email protected]>

June 22, 2021 Marlene H. Dortch, Secretary

Federal Communications Commission 445 12th Street, S.W. Washington, DC 20554 Re: Facilitating Shared Use in the 3100-3550 MHz Band, WT Docket NO. 19-348

Auction of Flexible-Use Service Licenses in the 3.45-3.55 GHz Band (Auction 110) AU Docket No. 21-62

Auction of Flexible-Use Licenses in the 2.5 GHz Band for Next-Generation Wireless Services Comment Sought on Competitive Bidding Procedures for Auction 108 AU Docket No. 20-429

Dear Ms. Dortch: In accordance with Section 1.1206 of the Commission’s rules, 47 C.F.R. § 1.1206, we hereby provide you with notice of an oral ex parte presentation in connection with the above-captioned proceedings. On June 21, 2021, Laurent “LT” Therivel, President & CEO of U.S. Cellular and the undersigned, met via video conference with Commissioner Nathan Simington, as well as Carolyn Roddy, Erin Boone, and Adam Cassady of his staff. In regard to the upcoming auction 110, we stressed our ongoing concerns over the lack of detailed information from the Department of Defense in regard to coordination, encumbrances and the available auction products. We stressed concerns about the impact of this lack of information on the potential success of the auction and urged the Commission to take further steps to increase the amount of information forthcoming in advance of the auction. For Auction 108, consistent with our prior comments in the proceeding, we advocated for the adoption of a SMR auction format as opposed to a sealed bid auction format. A copy of our prior comments and an economic analysis from the record are attached.

uscellular.com <8410 W. Bryn Mawr Avenue> P <(123) 456 7890> <Chicago, IL 60631> E <[email protected]>

Sincerely, Grant B Spellmeyer Vice President – Government Affairs

Grant Spellmeyer

Before the FEDERAL COMMUNICATIONS COMMISSION

Washington, DC 20554

In the Matter of ) )

Auction of Flexible-Use Licenses in the ) AU Docket No. 20-429 2.5 GHz Band for Next-Generation ) Wireless Services ) ) Comment Sought on Competitive Bidding ) Procedures for Auction 108 )

COMMENTS OF UNITED STATES CELLULAR CORPORATION

United States Cellular Corporation (“UScellular”) submits these comments in response to

the Public Notice released January 13, 2021 in the above-captioned proceeding.1 In the Public

Notice, the Commission seeks comment on the procedures to be used for Auction 108, which

will offer geographic overlay licenses for unassigned spectrum in the 2.5 GHz (2496-2690 MHz)

band. UScellular commends the Commission for its ongoing work to facilitate more intensive

use of the 2.5 GHz band, and thereby make this critical mid-band spectrum more readily

available for the deployment of fifth-generation (5G) wireless services. UScellular focuses these

comments on strongly urging the Commission to conduct Auction 108 using a simultaneous

multiple-round (“SMR”) auction format, rather than a single-round auction format. As discussed

below, and as demonstrated in greater detail in the attached report by NERA Economic

Consulting (the “NERA Report”),2 as compared to a single-round auction, an SMR auction

1 See Auction of Flexible-Use Service Licenses in the 2.5 GHz Band for Next-Generation Wireless Services; Comment Sought on Competitive Bidding Procedures for Auction 108, Public Notice, 36 FCC Rcd 645, 646 (2021) (“Public Notice”). 2 See Attachment, Supporting an efficient allocation of 2.5 GHz licenses using a Simultaneous Multiple-Round Auction, Hector Lopez, NERA Economic Consulting (April 2021) (“NERA Report”).

2

would promote increased participation and result in a far more efficient auction, to the benefit of

the public.

As the Commission notes, because it “has predominantly used an SMR format for

spectrum auctions,” this format is “familiar to potential bidders that have participated in past

Commission spectrum auctions,”3 including the many smaller bidders who have successfully

participated in past SMR auctions.4 As a result of this familiarity, a large number of prospective

bidders undoubtedly would be more comfortable participating in Auction 108 if the Commission

adopts an SMR format, leading to increased participation in the auction. In stark contrast to an

SMR auction format, prospective bidders lack any familiarity with the “novel”5 single-round

auction procedures discussed in the Public Notice, which the Commission acknowledges

“depart[] from the multiple-round procedures that the Commission typically has used in

auctioning spectrum licenses…”6 This lack of familiarity, as well as the complicated package

bidding and “either/or” procedures the Commission proposes to use if it adopts a single-round

auction format, will deter auction participation, including by the smaller bidders the Commission

believes may benefit from a single-round auction format.

Perhaps the most important advantage of a multiple-round auction is bidders’ ability to

engage in price discovery. By permitting bidders to “adjust their demand every round in

response to tentative prices,”7 price discovery allows all bidders to “reduce their aggregation

3 Public Notice, 36 FCC Rcd at 663-64. 4 See Letter from Alexi Maltas, SVP & General Counsel, Competitive Carriers Association, to Marlene H. Dortch, Secretary, FCC, p. 2 (Mar. 3, 2021) (advocating for an SMR auction in part because it “would employ procedures that smaller carriers are comfortable with from prior auctions”). 5 Public Notice, 36 FCC Rcd at 663. 6 Id. at 656. 7 NERA Report at 7.

3

risk, their exposure to the winner’s curse, and their bid preparation costs.”8 Importantly,

“[s]maller bidders can particularly benefit from the price discovery possible in SMR auctions.”9

For instance, smaller bidders are less likely to have the resources to accurately formulate

valuations for both themselves and potential competitors, smaller bidders are less able to absorb

any excess expenditures related to the winner’s curse and, given that smaller bidders may have

less concrete business cases, they can rely on “price and demand discovery as indicators of

potential resale value of spectrum if their own business case is unsuccessful.”10

In contrast, as the Commission recognizes, “a single-round auction precludes the price

discovery across licenses that is possible in a multiple-round auction.”11 As a result, if the

Commission were to adopt a single-round auction format, bidders would receive “no information

at all about the level of demand and willingness to pay of other parties, making bidding risky,

especially for smaller bidders.”12 While bidders can garner some publicly-available valuation

information prior to an auction, this limited information cannot serve as a reasonable substitute

for the valuation information bidders acquire during the price discovery process. For instance,

the attached NERA Report details how recent auctions have demonstrated how “pre-auction

price estimations, while useful when devising bid strategy, are ultimately poor price discovery

substitutes” because it is “remarkably hard to predict discrete decisions that have an

overwhelming impact on outcomes and prices.”13 In addition, only limited information can be

gleaned from past secondary market transactions involving similar spectrum because the price

8 Id. at 5. 9 Id. at 9. 10 Id. 11 Public Notice, 36 FCC Rcd at 658. 12 NERA Report at 9. 13 Id. at 8.

4

terms of such transactions often are confidential. Moreover, even to the extent such pricing

information is available, it would not shed any light on how other bidders may value the

spectrum in Auction 108, and with a single-round auction, bidders would have no opportunity to

adjust their bids to remedy initial valuations based on unrepresentative secondary market pricing.

Notably, as a result of the lack of price discovery, a single-round auction would

“predictably generate efficiency losses” – i.e., result in a less efficient allocation of this critical

mid-band spectrum.14 For instance, “because bidders are likely to take different approaches to

[the] bid shading” made necessary by a single-round auction, the “relative bid levels across

bidders may not reflect valuation differences,” leading to “spectrum being awarded to bidders

who are not the highest value users.”15 Thus, while in certain limited situations a small bidder

conceivably could win a license in a single-round auction that it would have been outbid for in a

multiple-round auction,16 the reason for this would be “the misallocation of licenses” due to

asymmetric bid shading,17 and it would come at the cost of a less efficient overall auction

process. Significantly, even a conservative estimate of the potential efficiency loss in Auction

108 resulting from the use of a single-round auction format would translate into a welfare loss of

$500 million to $1 billion.18

The participation costs of a single-round auction likely also would be greater than in an

SMR auction. In particular, while a single-round auction “may appear to have low participation

costs because the auction is over in a single round,” in reality, for bidders to be successful in a

single-round auction, they need to invest a significant amount of time and resources prior to the

14 Id. at 6. 15 Id. 16 See Public Notice, 36 FCC Rcd at 658. 17 NERA Report at 6. 18 See id. at 6-7.

5

auction in order to “reduce the gap between the information they need and the information they

have.”19 For instance, “[c]ollecting information, estimating valuations, developing software to

solve the winner determination problem, and developing software to find the best strategies will

likely take months of preparation.”20 In contrast, participation in an SMR auction requires

“modest preparation” because the myriad “estimates, guesses, and computations carried out over

months before the [single-round] auction can be substituted by the real-time pricing information

provided by the SMR auction over many rounds of bidding.”21 The Commission also has a long

history of efficiently-run SMR auctions, even where the auctions have involved a large number

of licenses. Further, if concerns arise regarding the pace of Auction 108 during the course of

bidding, the Commission could use one of its traditional auction management tools (e.g.,

increasing the size of the bid increment) to bring bidding to a close more quickly.

Finally, UScellular notes that a basic single-round auction format creates a significant

exposure risk for bidders seeking to acquire a minimum amount of either bandwidth or

geographic coverage in an auction. In contrast, “in a multiple-round auction, a bidder has greater

ability to shape the combination of licenses that it is assigned,”22 which significantly reduces any

exposure risk. To try to address the exposure risk inherent in single-round auctions, the

Commission proposes to allow a flexible form package bidding.23 Permitting any form of

package bidding, however, would disadvantage the small bidders that the Commission hopes to

benefit through the use of a single-round auction because package bidding would introduce the

“threshold problem” into Auction 108. The threshold problem arises in an auction because, in

19 Id. at 10-11. 20 Id. at 11. 21 Id. 22 Public Notice, 36 FCC Rcd at 661, n. 79. 23 See id. at 661.

6

order to defeat a package bid, individual bidders not only must bid on all of the licenses that

make up the package bid, but the sum total of their individual bids must exceed the price

expressed in the package bid. Absent satisfaction of both of these conditions, “the smaller

bidders will fail to win against the package bid even if they have a total greater value for the

licenses – a loss in efficiency.”24 Consequently, any form of package bidding would “reduce[]

the probability of smaller bidders to win owing to their inability to coordinate on the set of

licenses and prices required to compete against package bids.”25 Further, the Commission’s

proposed limits on package bidding – i.e., only metropolitan counties that lie within the same

Major Economic Area (“MEA”)26 – would fail to remedy the deleterious effects of package

bidding for smaller bidders given the sheer scope of even these “limited” package bids.

Specifically, 1,307 of the 3,233 counties – or about 40% of the total – are located within a Partial

Economic Area with a population greater than 500,000, and thus could be included within a

package bid, and on average, each MEA encompasses approximately 62 different counties.27

Clearly, any potential benefits of a single-round auction format would be far outweighed

by the various public interest harms discussed above. UScellular therefore strongly urges the

Commission to build on its past successes and instead conduct Auction 108 using an SMR

auction format.

24 NERA Report at 10 (emphasis added). 25 Id. 26 See Public Notice, 36 FCC Rcd at 661. 27 See Auction of Priority Access Licenses for the 3550-3650 MHz Band; Comment Sought on Competitive Bidding Procedures for Auction 105, Public Notice, 34 FCC Rcd 9215, 9222, n. 49 (2019).

7

Respectfully submitted,

UNITED STATES CELLULAR CORPORATION By: /s/ .

Grant B. Spellmeyer Vice President Federal Affairs and Public Policy United States Cellular Corporation 500 N. Capitol Street, N.W., Suite 210 Washington, DC 20001 Phone: 202-290-0233 Email: [email protected]

UNITED STATES CELLULAR CORPORATION By: /s/ .

Leighton T. Brown Peter M. Connolly Holland & Knight LLP 800 17th Street, N.W., Suite 1100 Washington, DC 20006 Phone: 202-955-3000 E-mail: [email protected] Its Attorneys

May 3, 2021

The views expressed herein are those of the author and do not necessarily reflect the views of NERA Economic Consulting or its affiliated entities, or of any other entities with which the authors are associated. The author wishes to thank his colleagues for helpful comments and United States Cellular Corporation for financial support.

Supporting an efficient allocation of 2.5 GHz licenses using a Simultaneous Multiple-Round Auction A NERA report for United States Cellular Corporation Hector Lopez

April 2021

© NERA Economic Consulting

Qualifications, assumptions, and limiting conditions NERA Economic Consulting was commissioned by United States Cellular Corporation to explore the advantages and disadvantages of two alternative formats for allocating overlay licenses in the 2.5 GHz band: either a Sealed-Bid or a Simultaneous Multiple-Round Auction. The primary audience for this report is the Federal Communications Commission and other parties interested in the design of this Auction.

This report was prepared exclusively for United States Cellular Corporation on the understanding that it would be submitted by them to the FCC. There are no intended third‑party beneficiaries with respect to this report, and NERA Economic Consulting does not accept any liability to any third party.

Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources I deem to be reliable; however, I make no representation as to the accuracy or completeness of such information. The findings contained in this report may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. NERA Economic Consulting accepts no responsibility for actual results or future events.

The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligation is assumed to revise this report to reflect changes, events, or conditions, which occur subsequent to the date hereof.

All decisions in connection with the implementation or use of advice or recommendations contained in this report are the sole responsibility of the client. This report does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties. In addition, this report does not represent legal, medical, accounting, safety, or other specialized advice. For any such advice, NERA Economic Consulting recommends seeking and obtaining advice from a qualified professional.

CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. NERA Economic Consulting rigorously applies internal confidentiality practices to protect the confidentiality of all client information.

Similarly, our industry is very competitive. I view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies, and analytical techniques.

© NERA Economic Consulting

© NERA Economic Consulting 1

Executive Summary The Federal Communications Commission (FCC or Commission) will offer approximately 8,300 geographic overlay licenses in the 2.5 GHz band using either a first-price single-round auction format with user-defined package bidding, or a simultaneous multiple-round auction format.1

According to the Commission, the band is characterized by an asymmetric competitive landscape with a ‘strong’ bidder (T-Mobile) competing against ‘weaker’ bidders seeking only a limited number of licenses.2

In its assessment of the sealed-bid format, the Commission argues that:

1. The sealed-bid auction will provide weaker bidders with a greater probability of winning licenses than the simultaneous multiple-round auction;

2. Package bidding will protect bidders from winning undesirable combinations of licenses; and

3. The sealed-bid auction will have lower participation costs than the simultaneous multiple-round format.

In this paper, I argue that:

1. Weaker bidders’ additional probability of winning is likely to result in efficiency losses owing to asymmetric bid shading;

2. Package bidding will make it difficult for small bidders to win against large packages – even if they have the greatest value for the licenses owing to coordination problems; and

3. Even modest efficiency losses are likely to dwarf any difference in participation costs between the two formats.

In summary, compared to the simultaneous multiple-round auction, the first-price single-round auction format with user-defined package bidding will introduce two sources of inefficiency, with an ambiguous effect on small bidders’ probability of winning. Some (small) bidders will likely win even if they don’t have the greatest value due to asymmetric bid shading, and some small bidders will likely lose even if they have the greatest value owing to coordination problems.

I therefore conclude that the Commission should not use a sealed bid for this award. Instead, it should continue its track record of favoring auction formats with the greatest likelihood of allocating the licenses to those who value them the most: in this case, the simultaneous multiple-round auction.

1 COMMENT SOUGHT ON COMPETITIVE BIDDING PROCEDURES FOR AUCTION 108. AUCTION OF FLEXIBLE-

USE SERVICE LICENSES IN THE 2.5 GHz BAND FOR NEXT-GENERATION WIRELESS SERVICES. FCC 21-14 (Auction 108 Comment Public Notice).

2 Auction 108 Comment Public Notice ¶3.


1. The 2.5 GHz band The 2.5 GHz band, which extends from 2496 to 2690 MHz, is comprised of 20 channels designated for Educational Broadband Service (EBS), 13 channels designated for commercial Broadband Radio Service (BRS), and a number of small guard band channels.

Auction 108 will offer approximately 8,300 county-based overlay licenses in the EBS channels of the band.3 In each county, the Commission will offer up to three blocks of three different bandwidths: 49.5 MHz, 50.5 MHz, and 17.5 MHz.4 Licensees obtain the rights to geographic area licenses “overlaid” on top of the existing incumbent licenses. If an incumbent licensee in a county cancels or terminates its license, then the overlay licensee obtains the rights to operate in the geographic area and on the channel of the canceled license. Figure 1 shows the Auction 108 band plan.

Figure 1: Auction 108 band plan

There are three characteristics that make these licenses and this auction unique:

1. There are a significant number of incumbent EBS licenses already in the band;

2. T-Mobile already has leases involving a majority of the incumbent EBS licenses; and

3. Many overlay licenses are ‘linked’ in frequency and geography by existing licenses.

There are 2,193 active EBS licenses covering 50% of the territory and almost 85% of the population of the United States.5 Approximately 93% of these EBS licenses are leased to commercial providers under the Commission’s long-term de facto lease transfer model.6 T-Mobile has leases involving approximately 67% of the incumbent EBS licenses.7

Figure 2 shows how overlay licenses are ‘linked’ in frequency and geography by the underlaying EBS licenses. In general, EBS licenses were assigned based on channel groups A, B, C, D, and G

3 The specific inventory of overlay licenses available in Auction 108 will be determined by the results of the Rural Tribal Priority

Window, as described in the Rural Tribal Window Procedures Public Notice. See Auction 108 Comment Public Notice at ¶3. 4 The Auction 108 Comment Public Notice at ¶2 describes the third block as a 16.5 MHz block of contiguous spectrum plus 1

MHz. 5 REPORT AND ORDER. In the Matter of Transforming the 2.5 GHz Band. FCC 19-62 (2.5 GHz R&O) at ¶4, ¶78, and ¶79 6 See 2.5 GHz R&O at ¶79. 7 T-Mobile merged with Sprint in 2020. In 2018, Sprint had leases involving over 67% of all EBS licenses in the 2.5 GHz band.

See COMMENTS OF SPRINT CORPORATION. In the Matter of Transforming the 2.5 GHz Band at ¶4.


based on a circular Geographic Service Area (GSA) with a 35-mile radius (with an area of approximately 3,850 square miles).8

Figure 2: Frequency and Geographic relationship between EBS licenses and Auction 108 licenses

Illustrative GSA in Colorado

Illustrative GSA in New York

Overlay licenses provide two distinct sources of value:

1. The right to use the spectrum within the areas and channels without incumbents; and

2. The right to use the spectrum when an EBS license is terminated.

Bidders may consider one or both sources of value when preparing their business plans and strategies for the auction.

8 There are many licenses with a subset of channels in the group or channels on multiple groups. Also, there are many irregular

GSAs owing to modification process the Commission adopted in 2005 known as “splitting-the-football.” See 2.5 GHz R&O at ¶10.


2. Auction Formats The two formats considered by the Commission are best described by their common names:

1. the combinatorial first-price sealed-bid (CFPSB) auction; and

2. the simultaneous multiple-round (SMR) auction.

In the following two sections, I describe the main features of these two auction formats and highlight the steps and information that bidders would need to consider when formulating their bidding strategy.

2.1. Combinatorial First-Price Sealed-Bid Auction The Commission is considering a CFPSB auction with the following main characteristics:9

• Single round: Bidders submit all of their bids in a single round.

• First-price: Bidders pay the amount of their winning bids minus bidding credits, if any

• Package bidding: A package bid consists of a group of licenses and a single price that would apply to the entire group. Bidders can submit two types of packages:

• County packages for two or three licenses in a single county; and

• Metropolitan packages for licenses in multiple metropolitan counties within the same Major Economic Area (MEA).10

• Either / Or indicator: A bidder can indicate that it wants to win only one of the bids in a group of bids it specifies.11

• Winner Determination: The value-maximizing combination of bids will be declared winning bids.12

In a CFPSB, bidders must shade their values: bidders must bid less than their valuations for the licenses to realize a positive surplus (valuation minus bid amount) if they win. To maximize their expected surplus, bidders need to analyze the trade-off between increasing the probability of

9 See Auction 108 Comment Public Notice for an exhaustive description of the proposed CFPSB procedures. 10 Metropolitan counties are those located within any PEA with a population greater than 500,000. There are 51 MEAs

nationwide. The total number of package and/or individual bids that a bidder may submit involving metropolitan counties in an MEA is limited to 250.

11 Either all of the bids in the group must involve the same non- metropolitan county or all of the bids in the group must involve only metropolitan counties in the same MEA.

12 If the optimization software does not yield an exact solution within 48 hours, then the winning set of bids would be determined by the best solution identified to that point.


winning and decreasing the expected surplus conditional on winning. At a minimum, this exercise involves each bidder taking the following steps:

1. Estimating their own valuation for all (relevant) combinations of licenses;

2. Estimating their competitors’ valuations for all (relevant) combinations of licenses;

3. Computing a bidding model that translates valuations into bids;

4. Solving the winner determination problem; and

5. Optimizing a set of bids to maximize their expected surplus.

All of these steps grow exponentially in complexity as the number of licenses increases. Furthermore, steps 2 and 3 require bidders to assess the business and bidding strategies, needs, and plans of their competitors. It is impossible to do this accurately, given limited information about rivals. In essence, in a first-price sealed bid setting, bidders are required to guess their competitor’s bids.13

2.2. Simultaneous Multiple-Round Auction The Commission is also considering the SMR auction format that it has used many times in the past.

The Commission’s proposed SMR auction format has the following main characteristics:14

• Multiple Round: Bidders submit bids in a sequence of rounds. All licenses are offered in all rounds.

• Provisionally Winning Bids: After each round, the maximum bid for each license is declared a provisionally winning bid. Ties are broken randomly.

• Activity Rule: Prior to the auction, each license is assigned a static number of bidding units, and each bidder is assigned its initial bidding eligibility based on the amount of its upfront payment. A bidder’s activity in a round is the sum of the bidding units associated with the licenses on which it bids in the round and the bidding units associated with any licenses for which it holds provisionally winning bids. A bidder’s activity in a round cannot be greater than its current bidding eligibility. Bidders are required to be active on a specific percentage of their current eligibility to maintain it; otherwise, their eligibility is reduced. Bidders are usually provided with a limited number of “activity waivers” that can be used to prevent a reduction in eligibility in a given round.

• Withdrawals: Bidders are usually permitted to withdraw provisionally winning bids in a limited number of rounds. Bidders are subject to a penalty equal to the difference

13 Ausubel and Milgrom. Ascending Proxy Auction. Combinatorial Auctions. MIT Press. 2005. 14 See Auction 108 Comment Public Notice for an exhaustive description of the proposed SMR procedures.


between the withdrawn bid and the winning bid, in case another bidder does not acquire the license at the same or higher price.15

• Stopping Rule: Bidding would close on all licenses after the first round in which no bidder submits any new bids or withdraws any provisionally winning bids.16

In contrast to a CFPSB auction format, in a SMR auction, bidders can focus on their own valuations and rely on the information provided by the bidding activity during the course of the auction to guide their actions. Furthermore, under the SMR format, bidders do not need to shade their bids. Instead, bidders can focus on maximizing the probability of winning because prices are set by the highest losing bid. Generally, bidders only need to estimate their own valuations to formulate a bidding strategy.17 Complex bidding or optimization models are not required.

3. Auction Formats Evaluation In its evaluation of the advantages and disadvantages of these formats, the Commission seems to believe that the competitive landscape in the 2.5 GHz band is characterized by two features:

1. A ‘strong’ bidder facing multiple ‘weak’ bidders;18 and

2. A majority of (small) bidders with specific local or regional interests.19

Under these circumstances, I conclude that the SMR auction is the better format for this award, for the following reasons:

a) Efficiency. The SMR can be expected to produce a more efficient outcome, whereas the CFPSB can be expected to suffer efficiency loses with an ambiguous effect on revenue and prices.

b) Price discovery. In a CFPSB, there is no price discovery. In a SMR, price discovery provides information about both absolute and relative prices that allows bidders to reduce their aggregation risk, their exposure to the winner’s curse, and their bid preparation costs.

c) Package bidding. Bidders facing high aggregation risks may benefit from package bidding. However, small bidders may find it difficult to win against large packages even if they have the highest values owing to a coordination problem, which is denoted in the literature on combinatorial auctions as the ‘threshold problem’.

15 There are provisions to include cases in which the license is sold in a later auction. See Auction 108 Comment Public Notice at

¶96. 16 The Commission is considering some variant stopping rules. See Auction 108 Comment Public Notice at ¶70. 17 Bidders who believe they can set their own prices may still consider estimating their competitors’ valuations. However,

complex bidding or optimization models are not required. 18 Auction 108 Comment Public Notice at ¶36, ¶37, ¶42. 19 Auction 108 Comment Public Notice at ¶37.


d) Participation costs. The administrative cost of bidding in a CFPSB is likely to be greater than in a SMR owing to the large number of licenses and competitors that bidders need to consider when preparing their bids.

e) Welfare losses. I calculate that the efficiency losses associated with using a CFPSB format are likely to translate into billions of dollars in welfare losses; sums that will dwarf any (unlikely) savings in participation costs.

I elaborate on each of these points in the following sub-sections.

3.1. Efficiency The efficiency properties of the SMR auction are well-known and have been recognized multiple times by the Commission.20 The Commission used the SMR format in nearly all auctions prior to the Auction 1002 and recently again used it in Auction 101.21 The SMR can be expected to work well whenever bidders are able to manage aggregation risk.22 In section 3.5, I argue that this is the case for both strong and weak bidders.

In contrast, the CFBSB will predictably generate efficiency losses. This is because bidders are likely to take different approaches to bid shading, meaning that relative bid levels across bidders may not reflect valuation differences, and this may lead to spectrum being awarded to bidders who are not the highest value users.

As the Commission recognizes, in an asymmetric first-price sealed-bid auction, weak bidders have a greater probability of winning than in a SMR.23 Where does this extra probability come from? The extra probability of winning by weak bidders comes from the misallocation of licenses.24 The intuition behind this is relatively straightforward. In a SMR, the bidder with the highest valuation typically wins. Thus, the probability that a weak bidder wins is equal to the probability that it has the highest valuation. Any extra probability of winning involves an allocation in which the weak bidder wins but does not have the greatest valuation for the license – an efficiency loss.25

Experimental evidence in first-price sealed-bid auctions with asymmetric bidders and unit demand shows that the loss in efficiency is typically between 2% and 4%.26 On this basis, I

20 Paul Milgrom. Putting Auction Theory to Work: The Simultaneous Ascending Auction. Journal of Political Economy. Volume

108, Number 2. 21 Auction 108 Comment Public Notice at ¶64. 22 A bidder would face aggregation risk if it ends up winning less spectrum than it intended to at the price at which it became a

winning bidder. This can occur when licenses show strong complementarities. 23 Auction 108 Comment Public Notice at ¶36. 24 Vijay Krishna. Auction Theory. Second Edition. p. 53. 25 The formal argument is simple and general. See proposition 4.5 in Vijay Krishna. Auction Theory. Second Edition. p. 53. 26 See Pezanis-Christou, P. 2002. On the impact of low-balling: Experimental results in asymmetric auctions. International

Journal of Game Theory 31:69-89. Güth, W., R. Ivanova-Stenzel, and E. Wolfstetter. 2005. Bidding behavior in asymmetric auctions: An experimental study. European Economic Review 49:1891-1913.


estimate that the loss in consumer welfare from using a CFBSB for this award would be between five hundred million and one billion dollars (see calculations below). In practice, I believe this to be a conservative estimate of the potential for efficiency loss in Auction 108, as the multi-unit set up with many regions is significantly more complex than the experimental settings in the literature.

I estimate these losses using the following approach:

• Empirical studies have found that the annual consumer surplus created by wireless broadband services using a particular spectrum allocation is roughly equal to the total market value of that spectrum allocation.27 To measure the loss in consumer welfare owing to misallocation over time, I estimate the market value of the spectrum and then multiply by twenty to approximate the net present value of the flow of annual consumer surplus using a discount rate of 5%.

• I adopt a conservative estimate of market value based on conservative estimates of both quantity and price:

o I adopt 117.5 MHz on the 15% of the population currently not covered by any EBS license. This method effectively assigns zero value to all of the spectrum in counties where there is at least one EBS license. Furthermore, this method also assigns zero value to the right to use the spectrum if an EBS license is canceled or terminated.

o I adopt a price of $0.24 MHz-Pop, which is equal to the C-Band spectrum price in the lowest-priced PEAs covering 15% of the population.

• Based on these estimates of price and quantity, the market value of the overlay licenses to be offered in Auction 108 is at least $1.3 billion, and the net present value of the consumer surplus is $26 billion. An efficiency loss between 2% and 4% equates to a loss in consumer welfare of between five hundred million and one billion dollars.

These efficiency losses associated with the first-price sealed-bid format are likely to materialize even if the competitive environment is not characterized by ‘strong’ and ‘weaker’ bidders. A first-price sealed-bid auction will produce an inefficient allocation of licenses with positive probability whenever bidders have asymmetric profiles.

3.2. Price Discovery The reason for the success of the SMR is its excellent price discovery: bidders can adjust their demand every round in response to tentative prices.28

The Commission seems to believe that price discovery is fundamentally about relative prices, and that bidders can replace their lack of information about their competitors with market

27 Coleman Bazelon and Giulia McHenry. Mobile Broadband Spectrum: A Vital Resource for the U.S. Economy. 2015 28 Peter Cramton. Simultaneous Ascending Auctions. Combinatorial Auctions. MIT Press.


information about prices and recent transactions.29 However, in theory and practice, price discovery is about both absolute and relative prices, and cannot be replaced by information about recent transactions.

Price discovery is a fundamental feature of ascending auctions, even with a single unit.30 Price discovery protects bidders from the winner’s curse. Furthermore, as recent experience shows, pre-auction price estimations, while useful when devising bid strategy, are ultimately poor price discovery substitutes.31 Table 1 shows predicted price ranges (blue bars) and actual prices (red line) for two of the most recent major auctions. As can be seen, analysts significantly underestimated C-band prices, having over-estimated 600 MHz prices.

Table 1: Estimated vs. Actual Prices in Recent Auctions

C-Band (Auction 107)

600 MHz (Auction 1002)

Sources for C-band auction: NERA and Evercore. C-Band Letter regarding Expanding Flexible Use of the 3.7 to 4.2 GHz Band, GN Docket No. 18-122 January 27, 2020; Kerrisdale Capital. Kerrisdale Capital, Intelsat S.A. & SES S.A. To The Moon, June 2018; American Action Forum. Analyzing Plans To Reallocate C-Band for 5G Deployment. October 2019; Brattle Group. Maximizing the Value of the C-Band. Comments on the FCC’s NPRM to Transition C-Band Spectrum to Terrestrial Uses. October 29, 2018.

29 Auction 108 Comment Public Notice at ¶37 30 Milgrom, P., & Weber, R. (1982). A Theory of Auctions and Competitive Bidding. Econometrica, 50(5), 1089-1122. 31 The fundamental reason that makes predicting spectrum prices in auctions very hard is that supply is perfectly inelastic.

Variations in the number or the strength of participants are completely reflected in prices.

$0.07 $0.00 $0.01

$0.50 $0.50 $0.50$0.20

$0.42$0.60 $0.60 $0.62

$0.90$1.10

Public InterestSpectrum Coalition

Brattle Group American AuctionForum

Northern Sky Research/ Kerrisdale Capital

Evercore NERA

$2.82

$1.18

$2.82

$3.77

$1.65 $1.50 $1.37

$0.92

Moody Kagan Media Appraisals J.P. Morgan FCC Brattle Group


Sources for 600 MHz auction: Public Interest Coalition. COMMENTS OF THE PUBLIC INTEREST SPECTRUM COALITION. GN Docket No. 18-122, October 29, 2018; Moody, Kagan Media Appraisals, and J.P. Morgan. https://www.fiercewireless.com/special-report/600-mhz-incentive-auction-primer-who-will-bid-when-it-will-happen-how-it-will-work; FCC. https://www.nexttv.com/news/fcc-pitches-38-billion-reasons-participate-incentive-auction-134449; Brattle Group. Bazelon, Jackson, McHenry. An Engineering and Economic Analysis of the Prospects of Reallocating Radio Spectrum from the Broadcast Band through the Use of Voluntary Incentive Auctions.

Smaller bidders can particularly benefit from the price discovery possible in SMR auctions. There are several reasons for this. Firstly, smaller bidders may lack the resources to undertake valuations for themselves and competitors to the level of detail that, say, is possible for a national MNO, so enter an auction with greater uncertainty about their willingness to pay. Such bidders and their investors may therefore gain confidence or be encouraged to rethink strategy based on observed bids not only for spectrum in their target regions but also for equivalent spectrum in other regions. Secondly, smaller bidders may have more fragile business cases and therefore benefit from price and demand discovery as indicators of potential resale value of spectrum if their own business case is unsuccessful.

In a CFPSB auction, bidders get no information at all about the level of demand and willingness to pay of other parties, making bidding risky, especially for smaller bidders. In particular, it is unrealistic to assume that bidders have the information and computational ability to substitute for good price discovery, or to compute a bidding strategy that resembles the equilibrium bidding strategies required to achieve modest efficiency.

In a CFPSB, bidders need, but fundamentally lack, an estimate of their competitors’ (distribution of) valuations for licenses. While some hard data can be used to estimate some ranges, it is remarkably hard to predict discrete decisions that have an overwhelming impact on outcomes and prices; for example, DISH’s bidding behavior in Auction 97 or AT&T’s sudden and massive change in bidding behavior in Auction 1002.32

It is unreasonable to believe that bidders can incorporate this kind of information into their equilibrium sealed-bid strategies, which means that each bidder will use different beliefs to rationalize their bidding strategies – fundamentally transforming an auction into a lottery.33

3.3. Package Bidding In the CFPSB format, package bidding eliminates aggregation risk but introduces the so-called ‘threshold problem.’ In the competitive environment described by the Commission, it is unlikely that the benefit of reducing aggregation risk – relative to the SMR – compensates for the introduction of the threshold problem.

The Commission motivates the introduction of package bidding as a way to ensure that bidders with larger networks do not “win an undesired patchwork of licenses”.34 However, neither large

32 See Ausubel, Aperjis, and Baranov. Initial Analysis of the FCC Incentive Auction. Power Auctions. 2017. 33 See Letter from Steve B. Sharkey Vice President, Government Affairs Technology and Engineering to Marlene H. Dortch,

Secretary, FCC, AU Docket No. 20-429 (filed Feb. 22, 2021). See also Pierpaolo Battigalli, Marciano Siniscalchi, Rationalizable bidding in first-price auctions. Games and Economic Behavior. Volume 45, Issue 1.

34 Auction 108 Comment Public Notice at ¶54.


nor small bidders may meaningfully benefit from package bidding in this auction because large bidders are likely to manage their aggregation risk well in a SMR, and small bidders may have a very modest aggregation risk.

There is scant evidence that the largest bidders have had significant problems managing their aggregation risk in past SMR auctions without package bidding run by the Commission. In addition, as the Commission acknowledges, one of the bidders with the largest networks, T-Mobile, has shown a preference for the SMR format in this auction.35

According to the Commission, weak bidders are likely to have specific local or regional interests. 36 These bidders are unlikely to face aggregation risk if their business plans rely on the vacant channels within each county.

Thus, package bidding may not meaningfully reduce aggregation risk for participants in Auction 108. However, package bidding will introduce a coordination problem known as the ‘threshold problem.’ The threshold problem arises when multiple small bidders need to coordinate to win against a package bid: the small bidders’ bids need to complete the ‘jigsaw puzzle’ that constitutes the package bid and the sum of their values must be as large as the package bid. If either condition fails, the smaller bidders will fail to win against the package bid even if they have a total greater value for the licenses – a loss in efficiency. Inefficiency may occur either because some smaller bidders bid too little, because they hope to ‘free ride’ on the bids of coalition partners37, or because larger bidders fail to submit bids for subsets of their preferred packages, even though they have value for those subsets, the so-called ‘missing bids’ problem. In an auction, such as this one, with many package bid options, missing bids are likely because it is often infeasible for bidders with larger demands to express all their preferences.38

Contrary to the Commission’s objective, it is likely that the introduction of package bidding reduces the probability of smaller bidders to win owing to their inability to coordinate on the set of licenses and prices required to compete against package bids.

3.4. Participation Costs Participation costs are likely to be lower in a SMR than in a CFPSB auction – even if the CFPSB auction lasts several months because the CFPSB requires intense and expensive preparations over many months prior to the auction start owing to the large number of licenses and asymmetries in the auction.

Superficially, the CFPSB may appear to have low participation costs because the auction is over in a single round. In practice, however, a well-prepared bidder needs to invest resources to

35 Auction 108 Comment Public Notice at ¶36. 36 Auction 108 Comment Public Notice at ¶37. 37 See, for example, Paul Milgrom. Putting Auction Theory to Work: The Simultaneous Ascending Auction. Journal of Political

Economy. Volume 108, Number 2. 38 This is a general issue with package bid formats with large numbers of lots and is discussed in the literature on combinatorial

clock auctions, for example: David J. Salant, ‘Auction Design, Management and Strategy’, p147. It is potentially worse in a sealed bid setting, as bidders cannot hone their selection of packages based on price discovery.


reduce the gap between the information they need and the information they have. As described in section 2.1, the first-price sealed-bid format ideally requires bidders to estimate their competitors’ (distribution of) valuations and bidding strategies, and then analyze bidding scenarios using optimization software similar to the software that will be used by the Commission to solve the winner-determination problem. Even with the correct information and computational resources, bidders may still struggle to find optimal and equilibrium bidding strategies because the problem is notoriously hard – even at the frontier of auctions research.39 Indeed, I note that depending on the bids, solving a single instance of the problem may be so complex that the Commission will have to invoke a “escape clause” in case its own software does not solve the problem in 48 hours or less.40

Collecting information, estimating valuations, developing software to solve the winner determination problem, and developing software to find the best strategies will likely take months of preparation. This is an advantage for large bidders, who may have the resources to do this, and a disadvantage for small bidders who likely lack such resources. The outcome may be that smaller bidders either decline to participate or opt to bid shade based on intuition, thereby increasing the likelihood of error and inefficiency.

In contrast, bidding in a SMR auction requires modest preparation. Many estimates, guesses, and computations carried out over months before the CFPSB auction can be substituted by the real-time pricing information provided by the SMR auction over many rounds of bidding. In a SMR, bidders can bid with no more preparation than their valuations for their most relevant combination of licenses. Further, participation costs can be reduced in SMR by allowing bidders to submit proxy-bids. The bidder enters its maximum bid, and the system bids on behalf of the bidder every round until the maximum value is reached. Proxy-bidding would reduce the cost of round-to-round management for small bidders.

3.5. Welfare Losses As discussed in Section 3.1, inefficient allocation of spectrum suitable for mobile use can be expected to translate into substantial welfare losses. Here, I show that use of the CFPSB format could result in billions of dollars in welfare losses. Given the scale of these losses, I submit that any arguments concerning participation costs are second order, as they cannot possibly be equivalent.

In section 3.1, I highlighted empirical evidence that the net present value of the consumer welfare generated by the allocation of mobile licenses is roughly equivalent to twenty times its market value. In the following, I use this calculation together with recent prices from the C-band award (auction 107) to calculate potential welfare losses associated with use of a CFPSB auction for this award.

39 Stefan Heidekrüger and Paul Sutterer and Nils Kohring and Maximilian Fichtl and Martin Bichler. quilibrium Learning in

Combinatorial Auctions: Computing Approximate Bayesian Nash Equilibria via Pseudogradient Dynamics. arXiv 2021 40 Auction 108 Comment Public Notice at ¶61.


The C-band spectrum is the only comparable spectrum among all the 5G bands offered to date in the United States, given that it is in a similar mid-band frequency range and is suitable for full power use (unlike CBRS). Consistent with the incumbent situation, I consider only 15% of the MHz-Pop in the 2.5 GHz band.

Figure 3 shows the rolling average price of the C-Band spectrum for Partial Economic Areas (PEAs) covering 15% of the population. The average price of the lowest-priced PEAs covering 15% of the population is $0.24 MHz-Pop and the average price of the highest-priced PEAs covering 15% of the population is $1.61 MHz-Pop.41

Figure 3: Rolling Average Price of C-Band Spectrum for PEAs covering 15% of the population

Notes: The rolling average is indexed at the top. The 15% of the population on the highest-priced PEAs, population from 85% - 100% is shown at 100%. The 15% of the population on the lowest-priced PEAs, population from 0% - 15% is shown at 15%.

Consistent with Auction 107 results, I use a range of prices between $0.24 and $0.92 MHz-Pop to calculate the net present value of the welfare loss induced by the implementation of the CFPSB auction. Table 2 contains the estimates.

41 The prices consider gross bids without re-location costs.

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

PriceMHz-Pop

Population Percentage


Table 2: Efficiency Loss induced by the CFPSB auction format considering exclusively 15% of the total MHz-Pop in the EBS Band

Population Percentile

C-Band Reference Price MHz-Pop

Market Value ($M)

Fully Efficient Consumer Welfare ($M)

Value of the Consumer Welfare Loss ($M) as a function of the inefficiency percentage

2% 4% 6% 8% 10%

15% $0.24 $1,318 $26,365 $527 $1,055 $1,582 $2,109 $2,636 20% $0.32 $1,741 $34,824 $696 $1,393 $2,089 $2,786 $3,482 25% $0.39 $2,126 $42,520 $850 $1,701 $2,551 $3,402 $4,252 30% $0.48 $2,647 $52,934 $1,059 $2,117 $3,176 $4,235 $5,293 35% $0.59 $3,270 $65,397 $1,308 $2,616 $3,924 $5,232 $6,540 40% $0.67 $3,706 $74,124 $1,482 $2,965 $4,447 $5,930 $7,412 45% $0.85 $4,705 $94,095 $1,882 $3,764 $5,646 $7,528 $9,410 50% $0.92 $5,048 $100,955 $2,019 $4,038 $6,057 $8,076 $10,095

Source: NERA Economic Consulting

For the reasons set out in section 3.3, I anticipate that the real participation costs for a properly prepared bidder in a CFPSB auction are likely to be higher than in an SMR auction. Nevertheless, assuming, without conceding, that the costs in the SMR would be higher, how large would they need to be to justify the selection of the CFPSB format? Table 3 shows the total participation costs in an SMR auction that would be required to justify the selection of the CFPSB on the grounds of costs and time savings assuming that the cost difference is 20%. Even with very conservative assumptions, the welfare losses are in the billions, sums that can reasonably be expected to dwarf any savings on participation costs, even if such savings were possible (which I dispute).

Table 3: Total participation costs in a SMR auction format to justify the implementation of the CFPSB auction

Population Percentile

C-Band Reference Price MHz-Pop

Market Value ($M)

Fully Efficiency Consumer Welfare ($M)

Total participation costs in a SMR format ($M) required to justify an inefficient allocation

2% 4% 6% 8% 10%

15% $0.24 $1,318 $26,365 $3,164 $6,327 $9,491 $12,655 $15,819 20% $0.32 $1,741 $34,824 $4,179 $8,358 $12,537 $16,716 $20,895 25% $0.39 $2,126 $42,520 $5,102 $10,205 $15,307 $20,410 $25,512 30% $0.48 $2,647 $52,934 $6,352 $12,704 $19,056 $25,408 $31,760 35% $0.59 $3,270 $65,397 $7,848 $15,695 $23,543 $31,391 $39,238 40% $0.67 $3,706 $74,124 $8,895 $17,790 $26,685 $35,580 $44,474 45% $0.85 $4,705 $94,095 $11,291 $22,583 $33,874 $45,166 $56,457 50% $0.92 $5,048 $100,955 $12,115 $24,229 $36,344 $48,458 $60,573

Notes: The calculation assumes a 20% cost difference in favor of the CFPSB. The participation cost in the SMR is 1.2 times the participation cost in a CFPSB auction.


4. Conclusion The Commission should favor the SMR format for Auction 108 given that the combination of ‘first-price,’ ‘sealed-bid,’ and ‘package bidding’ that constitute the CFBSB format is likely to cause predictable efficiency losses and disadvantage small bidders by introducing the threshold problem and likely increasing participation costs.

NERA Economic Consulting 1255 23rd Street, NW Suite 600 Washington, DC 20037 www.nera.com

june 22, 2021 marlene h. dortch secretary federal

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