How FCC Auctions Work

The Federal Communications Commission controls, manages and sells the air waves that radio and television stations use.
The Federal Communications Commission controls, manages and sells the air waves that radio and television stations use.
© Bryan Bedder/Getty Images

Air waves are filled with information. Ever since Guglielmo Marconi first successfully transmitted wireless signals over a small distance at the turn of the 20th century, physicists, engineers and inventors have figured out how to use radio waves to transmit voice, data and video signals.

Radio waves are what allow cell phones to communicate. They're also the key to wireless data networks, analog TV broadcasts, cordless phones, radar and microwave ovens.

Different types of radio waves travel across different frequencies of the electromagnetic spectrum or radio spectrum. A frequency is measured in Hertz, or cycles per second. One Hertz is one cycle per second. The most common radio frequencies -- those used for television, radio and cell phones -- are measured in megahertz (MHz), or 1 million cycles per second. Global positioning systems and satellite TV operate in the gigahertz (GHz) range, or billions of cycles per second.

How do all these airborne transmissions avoid interfering with each other? In the United States, every business or individual who wants to broadcast using radio waves must acquire a license from the Federal Communications Commission (FCC). The FCC allocates different frequency ranges for different types of radio technology (AM radio, cell phone signals, television broadcasts, et cetera).

If you want to start a local radio station, for example, you need to apply for and purchase a license from the FCC to operate on a certain radio frequency (illegal, unlicensed broadcasts are called pirate radio). Since radio signals can only travel relatively short distances, the FCC will grant licenses for the same radio frequency to stations in different geographical areas.

Since 1994, the FCC has auctioned off licenses for available frequencies of the electromagnetic spectrum. The agency decided that anonymous auctions were the best way to increase competition, raise more money and avoid unfair collusion or secret arrangements between multiple buyers.

In a world of huge multimedia and telecommunications conglomerates, critics of FCC auctions say that awarding licenses to the highest bidder unfairly excludes smaller third-party companies from entering the market. The FCC argues that the auction system saves time on lengthy hearings and lotteries and awards licenses to the organization that'll use them most effectively.

How exactly do these auctions work? Do all the bidders gather in the same room with one of those fast-talking auctioneers? Who qualifies as a bidder? And what are they bidding on exactly? Read on to find out more.

How are FCC Auctions Conducted?

Unlike traditional auctions, fcc auctions are conducted anonymously and online.
Unlike traditional auctions, fcc auctions are conducted anonymously and online.
© Spencer Platt/Getty Images

Although it's fun to picture the CEOs of America's biggest telecommunications companies sitting in an auction room waving little white sticks in the air ("Do I hear $15 billion? Going once, going twice…"), FCC auctions are completely electronic and online.

When the FCC first began auctioning radio spectrum in 1994, it used  the Automated Auction System (AAS) that required each bidder to use special software and dial into an FCC call center for actual bidding. With the Internet's growing popularity in the late 1990s, the FCC reintroduced the AAS as an online application [source: CompuTech]. The new Integrated Spectrum Auction System (ISAS) is the product of that effort, a fully online auction system available to anyone with an Internet connection.

The structure of an FCC spectrum auction is called a simultaneous multi-round (SMR) auction. This means that all of the available licenses are auctioned simultaneously. The bidding on these licenses is broken into rounds of set, predetermined length. There is no set limit of rounds, however. The auction only stops when there is a round with no new bids. This can take weeks, even months.

Since all licenses are available for bidding simultaneously, the FCC has built a function into the system called package bidding. This allows a bidder to select a group of licenses to bid on as a single "package." This is especially useful if a large telecommunications company is trying to establish a nationwide service using a specific radio frequency. In an early 2008 FCC auction, AT&T and Verizon both bought large, geographically diverse packages of 700MHz spectrum, ensuring a nationwide footprint of coverage.

Using the Web-based ISAS system is as easy as selecting the licenses you wish to bid on and choosing a maximum dollar amount for each one, kind of like eBay. Each license comes with a minimum bid amount and nine larger dollar amounts, each representing a 10 percent increase. Bidders check the box with their maximum bid amount and wait for the round to end.

Bidding during rounds is confidential, but at the end of the round, all bids are made public. Since this is a multi-round system, bidders use this information to adjust their maximum bids or reconsider which licenses are most important to them. At the start of the next round, the minimum bid is set at ten percent higher than the provisional winning bid (PWB), the highest bid from the previous round.

In the next section, we'll talk about what's actually sold at an FCC auction.

What's Sold at FCC Auctions?

FCC licenses for amateur radio operators typically only require an application.
FCC licenses for amateur radio operators typically only require an application.
© Tom Sloan/AFP/Getty Images

During spectrum auctions, the FCC sells individual licenses to use specific frequencies of available electromagnetic spectrum. Each license gives the license holder the right to use the spectrum freely, as long as they adhere to all FCC broadcaster and operator guidelines and standards. If not, a license can be revoked.

The FCC auction system is only used when two or more organizations want to buy the same piece of spectrum in the same geographical market. For example, if two new radio stations in Denver want the same 99.9 FM frequency, there'll have to be an auction. Since available spectrum is extremely limited, it's almost always the case that more than one organization wants the same spectrum license. Let the bidding war begin!

There are many different kinds of FCC licenses, most of which can be obtained through a simple application process rather than an auction. Amateur radio (Ham) licenses, for example, require only an application and a written exam. Other kinds of professional radio operators and service technicians also need to apply and qualify for lifetime FCC licenses. CB (Citizens Band) radio users don't need a license at all.

But for certain FCC licenses, particularly those in highly competitive markets (i.e. radio and television stations, cellular telephone service providers, et cetera), it's common for the FCC to receive multiple applications for the same spectrum frequencies in the same geographical area. When this happens, the FCC schedules a date for an auction to choose a single licensee from a group of applicants.

As we mentioned, radio frequencies are relatively short-range signals, allowing licenses for the same frequency to be held in different geographical areas. When the FCC plans an auction, it typically breaks the licenses down into regions that correspond to different economic or metropolitan areas. The largest regions are called Economic Area Groupings (EAG). In the most recent FCC auction, there were six EAGs covering all 50 states and territories. Smaller regions are called Major Economic Areas (MEA). At last count, there were 174 of those. Other important FCC license regions are Cellular Market Areas (CMA) and Regional Economic Area Groupings (REAG).

When planning an auction, the FCC sells licenses in blocks. Each block corresponds to two factors: the number of frequencies being licensed and the number of different regions in which they're being offered. In the most recent FCC auction, for example, block B corresponded to frequencies between 704-710 and 734-740MHz in each Cellular Market Area. Since there are over 700 CMAs, the FCC auctioned 734 licenses. As a comparison, the FCC was also selling a block D with only one license for a nationwide public service spectrum.

Now let's look at what it takes to be considered a qualified bidder in an FCC auction.

What Qualifies Bidders for FCC Auctions?

Bidders for FCC auctions need to be pre-qualified and meet specific criteria.
Bidders for FCC auctions need to be pre-qualified and meet specific criteria.
© Rollerball Productions/Getty Images

Any public or private organization, business or individual can apply to become a qualified bidder on an FCC spectrum auction. Of course, it helps to have a few hundred million dollars in cash on hand.

The FCC announces each spectrum auction four to six months in advance to give all potential bidders time to file their applications. All interested organizations or individuals must file an FCC Form 175 application electronically at least 45 days before the start date of the auction.

Form 175 asks for basic information about the applicant's business and financial structure, plus a list of which specific licenses will be bid upon. If the form isn't received in time, the application won't be considered. Over the course of several weeks, the FCC reviews each application and sends it back to the applicants as accepted, incomplete, or rejected.

All accepted bidders receive an information packet from the FCC with additonal details about the auction, including a list of the licenses that'll be auctioned. All bidders must then make an upfront payment that serves as a refundable deposit securing them a place in the auction.

The amount of the upfront payment depends on how many licenses the organization wants to bid upon. Each license is assigned a fixed number of bidding units. To be eligible to bid on the license, you must buy the required number of bidding units. If you want to bid on multiple units, your upfront payment must cover the total amount of bidding units for all of the licenses in which you are interested.

You'll only be considered a qualified bidder if your Form 175 application is accepted and you buy enough bidding units to make you eligible for each round of auctions.

Now let's look at how congressional legislation and FCC policy changes have affected spectrum auctions over the years.

Legislation Affecting FCC Auctions

The FCC is requiring all television stations to switch to high-definition by 2008. Some stations like CMT have already made the switch.
The FCC is requiring all television stations to switch to high-definition by 2008. Some stations like CMT have already made the switch.
© Kevin Mazur/Wire Image/Getty Images

The FCC spectrum auction system was authorized in 1993 by the Omnibus Budget Reconciliation Act. Before this act was passed, the FCC used to hold hearings so that each bidder on a spectrum license could plead its case. The FCC would choose a small group of qualified bidders from the entire pool and then run a lottery to see who would win the license. The entire process could take years and would result in relatively little revenue for the federal government.

The auction system, as the budget act envisioned it, would take less than a year from initial application to licensing. But perhaps the biggest advantage for the government was that auctions would create the incentive for companies to spend lots of money to win a highly competitive license. The recent 2008 auction of the 700MHz spectrum brought in $19.6 billion for the federal government [source: Wired].

The Balanced Budget Act of 1997 made spectrum auctions a requirement in all cases where multiple applications were received for the same initial FCC spectrum license.

Some very interesting policy changes were implemented for the recent FCC auction for the 700MHz spectrum. First of all, the 700MHz spectrum (an umbrella term for the entire frequency range from 698 to 806MHz) is a prime piece of radio wave real estate. These frequencies used to be occupied by analog television channels; remember the dark ages when you could pick up a dozen or so TV stations with some rabbit-ear antennas? Now the FCC has required all TV manufacturers and broadcasters to make the full switch to digital signals by 2009, leaving those old analog airwaves empty and available.

The cool thing about the 700MHz frequencies is that they have relatively long wavelengths, meaning signals can travel longer distances and can easily penetrate mountains, building and walls [source: Business Week]. It's widely believed that whoever gets the licenses for this spectrum will be able to develop powerful mobile broadband technologies. Imagine a huge, wireless, high-speed broadband network that doesn't rely on hundreds or thousands of hotspots or local access points.

When the 700MHz auction was announced, search engine giant Google began lobbying the FCC to require new open standards for license holders. As Google sees it, the current cellular and mobile Internet market is closed off to competition and innovation. For example, if you're a Verizon customer, you can only use certain phones with their service. Or if you buy an Apple iPhone, you must use AT&T as your cellular provider.

Google wanted the FCC to open up wireless telecommunications on four fronts: open applications, open devices, open services and open networks [source: ars technica]. The FCC agreed to impose rules requiring that the license holders of the new 700MHz spectrum would have to open up their networks to all devices and all applications. They would not, however, have to sell any of their network bandwidth to third-party providers.

The new rules are seen as a victory for open standards and increased competition. As it turned out, it was AT&T and Verizon -- not Google -- who walked away as the big winners of the 700MHz auction, buying enough licenses in enough regions to establish nationwide networks. But if they adhere to the FCC provisions, we might see a day in the near future where any Verizon or AT&T subscriber with any device can log onto a blazing fast, nationwide wireless network.

For even more information on FCC auctions, wireless technology and related topics, check out the links on the next page.

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