The FCC’s AWS Auction

Client: Cox Communications

Cox Communications asked Arlington Economics principals Thomas Hazlett and David Porter to consult on their bidding strategy in the FCC’s 2006 AWS license auction.

Drs. Hazlett and Porter quickly assembled a team to advise Cox and to participate in SpectrumCo, a consortium of cable TV operators (including Comcast, Time Warner, Bright House and Cox) formed to bid jointly on licenses. Valuation models, bidding strategies, a playbook and software were developed, with mock auction sessions held to prepare the bidding team for procedures and real-time decision-making. In a multi-round auction such as those held by the FCC, numerous contingencies must be prepared in advance of the auction. Budgets must be established, along with clearly delineated lines of authority for altering budgets, should circumstances warrant, during the auction.

A straightforward strategic approach was crafted, with consultants for other SpectrumCo members, that focused on bidding to value while limiting aggregation risk. A forecasting model attempted to anticipate the price differentials in different license categories, permitting movements out of larger regional license bids (when those prices were projected to exceed budget targets) and into smaller licenses (where prices were lower). At one point early in the auction, a series of ambitious jump bids was entered by SpectrumCo, speeding up the auction but not ultimately raising price levels.

In the end, SpectrumCo’s coverage objectives were met and the prices paid were excellent. As reported by Optical Networks Daily, SpectrumCo paid just $0.45 per megahertz-pop for licenses yielding 20 MHz of spectrum covering more than 260 million people, “the lowest average price paid by all the major bidders in the auction.” This was substantially below the average overall price in the auction, 53¢ per MHz-pop. T-Mobile, winner of the most MHz-pops, paid 63¢ per MHz-pop; Verizon, the third largest winner, paid 73¢. If Cox, the second largest winner, had paid T-Mobile prices, Cox’ licenses would have cost not $2.38 billion, as they did, but $3.33 billion – $.95 billion more. At Verizon’s prices, Cox would have spent $3.86 billion – an extra $1.48 billion.