Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Auction of 800 MHz SMR ) Upper 10 MHz Band ) ) ) Minimum Opening Bids or ) Reserve Prices ) ) ORDER Adopted: October 6, 1997 Released: October 6, 1997 By the Chief, Wireless Telecommunications Bureau: Introduction 1. By this Order, the Wireless Telecommunications Bureau ("Bureau") establishes minimum opening bid requirements for the auction of 525 licenses in the upper 10 MHz of the 800 MHz Specialized Mobile Radio Service ("SMR") set to begin October 28, 1997. The Balanced Budget Act of 1997 creates a presumption that the use of minimum opening bids or reserve prices is in the public interest in FCC auctions. Commenters have failed to persuade us that the use of minimum opening bids or reserve prices is contrary to the public interest in this instance. Accordingly, as explained below, the Bureau:  Adopts minimum opening bids subject to reduction;  Sets minimum opening bids equal to the established upfront payments; and  Declines to adopt caps on minimum opening bids. Background 2. The recently enacted Balanced Budget Act of 1997 directs the Commission to prescribe methods by which to establish reasonable reserve prices or minimum opening bids for licenses subject to auction, unless the Commission determines that such reserve prices or minimum opening bids are not in the public interest. The Bureau recently announced the auction of 525 licenses in the upper 10 MHz of the 800 MHz SMR set to begin October 28, 1997. On September 5, 1997, the Bureau sought comment by Public Notice regarding the establishment of reserve prices or minimum opening bids. The Bureau received six sets of comments. 3. In the September 5 Public Notice, the Bureau proposed that the licenses in the 800 MHz auction not be sold for less than the amount of the upfront payment specified for the licenses in the Public Notice released August 6, 1997. The Bureau requested comment on whether the amount of the upfront payments should be considered reserve prices or minimum opening bids for this auction. Commenters were asked to address whether reserve prices or minimum opening bids should be capped to ensure that bidding is not deterred on high valuation markets. Assuming reserve prices were implemented, commenters were also asked to address whether these prices should be published. 4. Comments. On September 12, 1997, the Personal Communication Industry Association ("PCIA"), Nextel, the American Mobile Telecommunications Association ("AMTA") Tel/Logic and Pass Word, Inc. ("Pass Word") and Motorola submitted comments in response to the Public Notice. All commenting parties specifically opposed the establishment of reserve prices and more generally opposed minimum opening bids. 5. Commenters assert that minimum opening bids and reserve prices are inconsistent with the notion that market forces should determine the value of auctioned spectrum and are therefore contrary to the public interest. They believe that bidders--not the Commission--are in the best position to assess the value of the spectrum. Nextel posits that the spectrum's value should be determined by bidders' evaluations of each license on the basis of incumbency, not by what the Commission sees as the overall market for 800 MHz SMR spectrum. 6. AMTA contends that overvalued spectrum and, concomitantly, high reserve prices will preclude small businesses from participation in the auction. Pass Word cautions that reserve prices either will reduce small business participation or result in unsound economic decisions leading to a scenario similar to the one facing the Commission and the defaulting C-Block PCS winners. Nextel believes that a reserve price is justified where spectrum is plentiful and the price is therefore depressed, but that this is not true of the heavily encumbered 800 MHz spectrum. The variation in incumbent systems, according to Motorola, makes impossible the development of an arbitrary price floor with sufficient flexibility. Tel/Logic notes that neither the FCC nor bidders should be able to project demand or prices. 7. PCIA considers minimum bids to be "inappropriate" because incumbent licensees will be forced to pay substantial fees for spectrum on which they already have operating systems and for which there may be no competing bidders. Pass Word also believes that minimum opening bids are inappropriate and that the spectrum will be fairly valued by the bidders because, unlike the Wireless Communications Service auction, spectrum, technology and equipment usage is well-defined for 800 MHz SMR systems and potential bidders have received adequate notice of this auction. 8. Were the Commission to establish minimum opening bids, AMTA maintains that the Commission should reserve the right to lower them in the event it has overestimated the licenses' value. Tel/Logic adds that minimum opening bids should not be linked to upfront payment levels because the two are based on different policy objectives and, therefore, should be determined separately in order to maintain FCC policy and auction administration flexibility. It contends that the upfront payment amount is set in order to encourage the participation of smaller entities and to discourage frivolous bidders, whereas a minimum opening bid should be established in order to avoid selling licenses below value. Pass Word urges the Commission to find that setting an opening bid equal to the upfront payment is not in the public interest. Nextel supports the use of a cap on minimum opening bids and contends that a cap of $50,000 would be appropriate because a higher cap would deter broad participation in the auction. 9. Pass Word claims that a fair auction, one without minimum opening bids or reserve prices, may be the last chance for small businesses in this market to survive, particularly in the face of Nextel's accumulation of frequencies. Discussion 10. We will establish minimum opening bids that are subject to reduction, and set the initial amounts at the upfront payment levels specified in our Public Notice released August 6, 1997. We note that Congress has rejected the notion that minimum opening bids or reserve prices are inherently contrary to the public interest, as some commenters suggest. Moreover, the Bureau rejects commenters' assertions that minimum opening bids disserve the public interest in this instance. We do agree, however, that the market ultimately should determine the value of this spectrum. Indeed, due to the high level of incumbency of the 800 MHz spectrum, market valuation models are complex and may be subject to a higher degree of uncertainty than those for less encumbered spectrum. Therefore, we adopt reducible minimum opening bids initially set equal to the amounts of the upfront payments for this auction. 11. The statutory mandate that we prescribe methods by which to establish a reserve price or a minimum opening bid, absent a finding that they are not in the public interest, creates a presumption that reserve prices or minimum bids are required. We do not find circumstances here that convince us that establishing minimum open bids for this auction is contrary to the public interest objectives embodied in Section 309(j) of the Communications Act of 1934, as amended. These objectives include: fostering the rapid development and deployment of new technologies, products, and services; promoting competition by avoiding excessive concentration and disseminating licenses among a wide variety of applicants; recovering for the public a portion of the value of the spectrum resource and avoidance of unjust enrichment; fostering efficient use of the electromagnetic spectrum; and scheduling auctions so that potential bidders have adequate time to develop business plans and assess the market. We believe the reserve price and minimum opening bid provision is intended to prevent licenses from being assigned via auction at nominal amounts. Such low prices might result, for example, from insufficient competition in the auction, which in turn might be due to the inability of potential bidders to assess the market adequately or develop business plans. Thus, the provision permits us to withhold those licenses so that they may be offered again in the future to be acquired by licensees under circumstances that will more effectively benefit the public. 12. We conclude that setting initial minimum opening bids equal to the amount of upfront payments will best further the objectives of our auction authority here. Because the reserve price and minimum opening bid provision is not a requirement to maximize the revenue earned in future auctions, but rather a protection against assigning licenses at unacceptably low prices and in noncompetitive markets, we must balance this revenue raising objective against our other public interest objectives when selecting the exact level of the minimum bids. No formula exists to accomplish this balancing, and we must inevitably rely on qualitative judgment. 13. In arriving at our decision here to set minimum opening bids equal to the amounts of upfront payments established for this auction, we find that establishing minimum opening bids in excess of these amounts may threaten the goals of wide and robust bidder participation. Further, as long as the amounts are not so high as to deter bidders from participation, the particular initial values are not critical because we have chosen to construe them as minimum opening bids, which may be reduced at our discretion. Conversely, setting the initial minimum opening bid below the upfront payments may threaten our revenue protection obligation, to recover for the public a portion of the value of the public spectrum resource, without materially enhancing our other auction objectives. We note that our minimum opening bids effectively function as reserve prices unless or until we decide to lower them in any particular instance to spur bidding. In this regard, our approach is consistent with our treatment of minimum accepted bids where we reduce prices in cases where there is a withdrawal and no subsequent bidding on a market. 14. Minimum opening bids that are subject to reduction will enable us to react to market conditions as bidding unfolds. Thus, reducible minimum opening bids will allay concerns about artificially inflated spectrum values and their effect on bidders, small or otherwise. In addition, as a procedural mechanism, minimum opening bids facilitate the expeditious conduct of an auction by starting the bidding at an amount compatible with the objectives discussed in paragraph 11, above. Consequently, we determine that establishing minimum opening bids initially set equal to the amounts of the upfront payments to be in the public interest. 15. We reject placing a cap on the amount of minimum opening bids. The absence of caps should not, as some commenters caution, significantly decrease bidder participation because minimum opening bids can be lowered if necessary. Further, any cap levels would be arbitrary and constitute an unfair benefit to those bidding for licenses serving densely populated areas, which may be viewed as more valuable. 16. Finally, we find that retaining authority to lower minimum opening bids, as suggested by commenters, serves the public interest and thus renders the imposition of reserve prices unnecessary for this auction. Reducible minimum opening bids better enable us to meet our revenue objectives while minimizing the possibility of retaining unsold licenses. Under a reserve price scenario we would lack the flexibility to reduce acceptable bids if we were to have seriously misjudged market conditions by overestimating the value of these licenses. 17. Accordingly, IT IS ORDERED that, under the authority contained in Sections 0.131(c), 0.331 and 1.2104 of the Commission's Rules, 47 C.F.R.  0.131(c), 0.331, and 1.2104, and pursuant to the authority of Sections 4(i), 303(r), 309(j), and 332(a)(2) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 303(r), and 332(a), minimum opening bids subject to reduction are established for this auction as specified in this Order. 18. IT IS FURTHER ORDERED that the amount of the minimum opening bid for each actionable license is set equal to the amount of the respective upfront payment for each license specified in the Appendix to this Order. FEDERAL COMMUNICATIONS COMMISSION Daniel Phythyon Chief, Wireless Telecommunications Bureau APPENDIX