FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 Before the Federal Communications Commission Washington, D.C. 20554 PP Docket No. 93-253 In the Matter of Implementation of Section 309(j) of the Communications Act - Competitive Bidding SECOND REPORT AND ORDER Adopted: March 8, 1994; Released: April 20, 1994 By the Commission: TABLE OF CONTENTS Paragraph I. INTRODUCTION 1 A. Policy Objectives 3 B. Summary 8 II. PRINCIPLES FOR DETERMINING WHETHER LICENSES MAY BE AUCTIONED 11 A. General Requirement for Mutual Exclusivity Among Applications for Initial Licenses or Construction Permits Accepted for Filing 12 1. Shared Spectrum 13 2. Licenses Awarded on a "First-Come. First-Served" Basis 15 3. Mutual Exclusivity Unknown 18 B. General Requirement of Subscribers 20 1. Broadcast Services Exclusion 21 2. "Private Services" Exclusion 23 C. Principal Use Requirement 30 D. Initial and Modification Applications 37 E. Intermediate Links 41 F. Services For Which Competitive Bidding Would Not Further Section 309(j)(3) Objectives 44 G. Specific Services Subject to Competitive Bidding 48 1. Interactive Video Data Service 49 2. Personal Communications Services 54 3. Common Carrier and Commercial Mobile Radio Services 59 III. COMPETITIVE BIDDING DESIGN 68 A. Introduction 68 B. Effect of Design on Policy Objectives 70 C. Alternative Competitive Bidding Designs 1. Multiple v. Single Round Bidding 2. Sequential v. Simultaneous Bidding 3. Combinatorial Bidding D. Preferred Competitive Bidding Designs 1. Primary Method: Simultaneous Multiple Round Bidding 2. Alternative Methods E. Bidding Procedures 1. Sequencing 2. Duration of Bidding Rounds 3. Bid Increments 4. Stopping Rules for Multiple Round Auctions 5. Activity Rules 6. Bid Withdrawal and Default 7. Releasing Bid Information 8. Delay, Suspension or Cancellation of Auction IV. PROCEDURAL, PAYMENT AND PENALTY ISSUES A. Pre-Auction Procedures and Bidder and Licensee Qualifications B. Upfront Payment C. Payment for Licenses Awarded by Competitive Bidding D. Default and Disqualification E. Minimum Bids and Reservation Prices F. Procedures in Other Auction Designs V. REGULATORY SAFEGUARDS A. Unjust Enrichment and Transfer Disclosure Requirements B. Performance Requirements C. Rules Prohibiting Collusion VI. TREATMENT OF DESIGNATED ENTITIES A. Introduction B. Overview and Objectives C. Specific Preferences 1. Installment Payments 2. Bidding Credits 3. Spectrum Set-asides 4. Tax Certificates 5. Royalty Payments 6. Innovator's Preference 7. Distress Sales to Designated Entities D. Preventing Unjust Enrichment 79 80 86 98 106 106 112 116 117 121 124 127 133 146 158 159 160 161 169 189 195 206 208 210 211 216 221 227 227 229 231 231 241 245 249 252 254 257 258 2348 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 E. Definitions 1. Small Business 2. Minority- and Female-Owned Businesses 3. Rural Telephone Companies 4. Designated Entities and Consortia F. Constitutional Issues 266 267 274 279 283 289 VII. CONCLUSION. PROCEDURAL MATTERS AND ORDERING CLAUSES 298 A. Final Regulatory Flexibility Analysis 299 B. Ordering Clauses 303 APPENDIX A - LIST OF COMMENTERS AND REPLY COMMENTERS APPENDIX B - FINAL RULES I. INTRODUCTION 1. On August 10, 1993, the Omnibus Budget Reconcili ation Act of 1993 (the "Budget Act") added Section 309(j) to the Communications Act of 1934. as amended, 47 U.S.C. §§ 151-713 (the "Communications Act"). Section 309(j) gives the Commission express authority to employ competi tive bidding procedures to choose among mutually exclu sive applications for initial licenses. The Budget Act also requires the Commission to prescribe regulations to imple ment Section 309(j) within 210 days after enactment (March 8. 1994). The Commission adopted its Notice of Proposed Rule Making in this proceeding on September 23, 1993.' This Second Report and Order complies with the Budget Act's requirements.2 2. Under Section 309(j)(2)(B) of the Communications Act. the Commission must determine that use of a system of competitive bidding will promote the objectives de scribed in Section 309(j)(3). which, in addition to those in Section 1 of the Communications Act. 1 are (A) the development and rapid deployment of new technologies, products, and services for the benefit of the public, including those residing in rural areas, without administrative or judicial delays; (B) promoting economic opportunity and competi tion and ensuring that new and innovative technol ogies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses, rural tele phone companies, and businesses owned by members of minority groups and women; (C) recovery for the public of a portion of the value of the public spectrum made available for commer cial use and avoidance of unjust enrichment through the methods employed to award uses of that resource; and (D) efficient and intensive use of the electromagnetic spectrum. A. Policy Objectives 3. Our purpose in this Second Report and Order is to promulgate competitive bidding rules that, in conjunction with our spectrum allocation rules, promote the public policy objectives set forth by Congress. We believe these objectives are embodied in two broad, basic Commission policy goals: promoting economic growth and enhancing access to telecommunications service offerings for consum ers, producers, and new entrants. Structuring our rules to promote opportunity and competition should result in the rapid implementation of new and innovative services and encourage efficient spectrum use. thus fostering economic growth. We also can help to ensure access to new tele communications offerings by ensuring that all customer segments are served, that there is not an excessive con centration of licenses, and that small businesses, rural tele phone companies, and businesses owned by women and minorities will have genuine opportunities to participate in the provision of service. Providing new and innovative services on spectrum acquired via auction will offer li censees the opportunity to earn substantial.,revenues. We therefore anticipate that our auctions will recover a portion of the value of the public spectrum. 4. Promoting Economic Growth. The new wireless ser vices that will be licensed by competitive bidding, such as Personal Communications Services ("PCS"), have great po tential to stimulate economic growth and create thousands of jobs for Americans. To advance our statutory goals and to realize this potential, we seek to design a competitive bidding system that will: 1) award licenses through a pro cess that will promote competition among a diverse group of service providers: 2) award licenses to the parties who will provide service and use spectrum most efficiently; and 3) award licenses expeditiously. We seek to implement a licensing system that maximizes the competitiveness of ser vice provision among new licensees and existing providers and avoids creating barriers to efficient license aggrega tions. Achieving procompetitive economies is particularly important where new entrants (such as broadband PCS providers) will have to compete with existing services (such as cellular telephone providers). 5. Awarding licenses to those who value them most highly, while maintaining safeguards against anti competitive concentration, will likely encourage growth and competition for wireless services and result in the 1 Notice of Proposed Rule Making in PP Docket No. 93-253. 8 FCC Red 7635 (1993) (hereinafter "NPRM" or "Notice"). The Commission received 222 comments, 169 reply comments and numerous ex pane presentations relating to this proceeding. A list of commenters and reply commenters is attached as Appen dix A to this Second Report and Order. Commenters may be referred to herein by the abbreviations noted in Appendix A. 2 To comply with the requirements of new Section 3(W(i)(4)(C) of the Communications Act, the Commission prescribed trans fer disclosure requirements with respect to licenses awarded by random selection. See First Report and Order in PP Docket No. 93-253, FCC 94-32, released February 4, 1994 ("First Report and Order"), petitions for reconsideration pending. s Section 1 of the Communications Act established the Com mission, inter alia, "so as to make available, so far as possible, to all the people of the United States a rapid, efficient, Nation wide, and world-wide wire and radio communications service with adequate facilities at reasonable charges . . . ." 47 U.S.C. § 151. 2349 FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 rapid deployment of new technologies and services. Be cause firms have different views of the value of the licenses to be awarded, a firm that expects to be able to offer new or much lower cost services might be willing to pay more for a license than another firm that does not believe it can offer services as competitively. Under other licensing mechanisms, licenses may be more likely to change hands in the post-licensing market (as was true in past cases of cellular licenses).4 Such secondary market transactions, however, often involve substantial additional costs. In gen eral, competitive bidding is a licensing scheme that should place licenses in the hands of the parties able to use them most efficiently. 6. Enhancing Access. The competitive bidding rules we adopt are designed to enhance access to telecommunica tions services by encouraging broad participation in the provision of spectrum-based services and ensuring that spectrum-based services are available to a wide range of consumers. In order to encourage participation in the com petitive bidding process by all qualified bidders, we have adopted a set of open competitive bidding processes and a menu of preferences for certain groups who might other wise face entry barriers. We will use these preferences to promote the participation of small businesses, rural tele phone companies and women- and minority-owned firms (collectively referred to as "designated entities") when we adopt service-specific competitive bidding rules, thereby meeting Congress's mandate by ensuring diversity in the ownership and management of telecommunications facili ties, which in turn will increase the diversity of service offerings and better meet the needs of more consumers. 7. By establishing an efficient licensing mechanism that will promote the rapid deployment of a wide range of new products and services in all areas of the country, we seek to increase residential consumer and large user access to new technologies and services. Efficient provision of wireless service may also create alternatives for those not served by traditional wireline providers and should create competi tion for existing wireline and wireless services. B. Summary 8. The following five sections of this Report and Order establish general rules and procedures to govern the com petitive bidding process. In each of these sections we have selected the rules or procedures that should best serve our basic policy goals and therefore achieve Congress's objec tives. Among other things, we are amending Part 1 of our Rules to add a new Subpart Q that would apply to com petitive bidding generally. The new rules are set forth in Appendix B. 9. Section II of this Report and Order establishes rules governing the basic requirements for the types of services and licenses that may be subject to auctions. In Section III. we establish a range of competitive bidding methods and auction procedures from which we will choose for auctionable services. Because as yet the Commission has no actual experience with auctions, we will retain the ability to select among the procedures deemed appropriate for each service. This course also complies with the Congres sional directive that we "design and test multiple alter native methodologies under appropriate circumstances." See Section 309(j)(3). In Section IV, we address procedural and payment issues regarding announcement of auctions and the filing of applications, bidder and licensee qualifica tions, pre-auction upfront payment and post-auction down payment, and penalties in the event of default or disquali fication. These rules are intended to ensure that the com petitive bidding process is limited to serious, qualified applicants. Section V establishes specific licensing safe guards, including anti-collusion and unjust enrichment provisions, that will deter possible abuses of the bidding and licensing processes. In Section VI, we identify pref erences available for small businesses, rural telephone com panies and businesses owned by members of minority groups and women to enhance their participation in the competitive bidding process and in the provision of spec trum-based services. 10. The five sections of this Report and Order summa rized above establish general rules and regulations for competitive bidding that will apply to a variety of spec trum-based services licensed by the Commission. In the future, specific rules within the scope of these general rules will be adopted in a Report and Order for each service subject to competitive bidding. These subsequent Reports and Orders will set forth specific competitive bidding rules for each service that meets the criteria in Section 309(j)(2). II. PRINCIPLES FOR DETERMINING WHETHER LICENSES MAY BE AUCTIONED 11. We discuss below the general statutory criteria that must be met before we may use competitive bidding to award licenses in a particular service. In particular, we also establish the tests we will use to determine whether services or classes of services are excluded from competitive bidding and make determinations with respect to some of these services. Our determinations as to whether specific services are subject to competitive bidding may be found in new Section 1.2102 of the Commission's Rules (see Appendix B). A. General Requirement for Mutual Exclusivity Among Applications for Initial Licenses or Construction Permits Accepted for Filing 12. In the Notice, we observed that Section 309(j)(l) only permits use of competitive bidding if mutual exclusivity exists among applications that have been accepted for fil ing. 5 Therefore, we concluded, if mutual exclusivity does not exist, a license or class of service would not be subject to competitive bidding. In addition, we noted that Section 309(j)(l) expressly limits our authority to use competitive bidding to the award of "initial" licenses or construction permits. See also H.R. Rep. No. 111. 103d Cong., 1st Sess. 253 (1993) ("H.R. Rep. No. 103-111"). Of those commenters that address these issues, none expresses sig nificant disagreement with these conclusions. See, e.g., 4 With respect to licenses obtained through random selection (lottery) proceedings, the First Report and Order in this docket addressed this issue by relying on existing build-out require ments and by imposing new transfer disclosure requirements. 5 In general, the Commission considers two or more applica tions to be "mutually exclusive" if their conflicts are such that the grant of one application would effectively preclude, by reason of harmful electrical interference, the grant of one or more of the other applications. 2350 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 comments of the Utilities Telecommunications Council. Accordingly, we incorporate these requirements in our rules as follows. 1. Shared Spectrum 13. We will exclude from competitive bidding those classes of services where mutual exclusivity between ap plications cannot exist because channels must be shared by multiple licensees.6 In H H 145-146 and n.3 of the NPRM, we proposed to exclude these services from competitive bidding because there can be no mutual exclusivity. The comments generally agree that shared spectrum is inappro priate for competitive bidding for that reason. See, e.g., comments of ITA and AAR. 14. For this reason, the General Mobile Radio Service, any private land mobile radio service below 470 MHz (with the possible exception of the 220 MHz service (see f ^ 27-29)). the 800 MHz air-ground radiotelephone service, and the Amateur Radio services, for example, will not be subject to competitive bidding. For the same reason, we also exclude several other services from competitive bid ding. The comments broadly support our determinations with respect to mutual exclusivity. See, e.g., comments of UTC. 2. Licenses Awarded on a "First-Come, First-Served" Ba sis 15. In some services currently regulated by the Common Carrier and Private Radio Bureaus, some licensing occurs on a "first-come, first-served" basis. At n.132 of the NPRM, we noted that the use of "first-come, first-served" proce dures and waiting lists in the 800 MHz Specialized Mobile Radio (SMR) service has generally enabled us to avoid mutual exclusivity among 800 MHz SMR applications.' In addition, we have recently adopted rules for 929-930 MHz paging that rely on first-come, first-served procedures for licensing of channels on an "earned exclusivity" basis. See Report and Order, PR Docket No. 93-35, 8 FCC Red 8318 (1993) (PCP Exclusivity Report and Order). 16. The Notice tentatively concluded that if mutually exclusive applications for SMR8 or Private Carrier Paging (PCP) frequencies occurred, they should be resolved by competitive bidding. See NPRM at f 138 and at n.152. Several commenters favored the auctioning of some or all SMR frequencies. See, e.g., comments of Geotek, GTE, E. F. Johnson. McCaw and Southwestern Bell. Others cau tioned the Commission to not create mutual exclusivity inadvertently. See, e.g., comments of NABER. Those commenters who argue that frequencies allocated to the SMR service should be exempted from competitive bidding generally base their arguments on the existing or future lack of mutual exclusivity. See, e.g., comments of AMTA and Cencall. The comments confirm that under some of our existing first-come, first-served procedures for these services, mutual exclusivity will generally not occur be cause applications are processed in sequence based on fil ing date and, in some cases, file number. Commenters argue that this process serves the public interest and should be retained. See, e.g., comments of NABER. We agree. Thus, we will not depart from existing first-come, first- served practices which work to avoid mutual exclusivity at this time. See Section 309(j)(6)(E) and comments of AMTA. 17. With respect to certain services regulated by the Common Carrier Bureau, however, "first-come, first- served" application procedures can, under the rules for those services, still result in mutual exclusivity. See, e.g., Section 22.31(b) (filing of application opens up 60-day filing window during which competing applications may be filed). Mutual exclusivity in common carrier services gen erally, and in the Public Mobile Services specifically, will be resolved through the use of competitive bidding. See f D 59-62, infra. We recognize that our existing first-come, first-served procedures for certain services currently regu lated by the Private Radio Bureau are not necessarily con sistent with the way similar services are regulated by the Common Carrier Bureau. As we make clear in our de cision in GN Docket No. 93-252, see n.15, infra, we intend in future proceeding to reconcile the regulatory treatment of these services. Such reconciliation may involve modi fication of existing SMR wait list procedures, as is currently proposed in PR Docket No. 93-144, 8 FCC Red 3950, 3958 (1993), and the use of auctions to resolve mutual exclusiv ity among initial applications for licenses in the Commer cial Mobile Radio Services. 18. Similarly, the comments make clear that under our rules, mutual exclusivity among Community Antenna Re lay Service (CARS) applicants does not arise because of a de facto "first-come, first-served" policy and that therefore, the CARS should not be subject to competitive bidding. See comments of Cablevision, el al. We agree, and will not subject CARS spectrum to competitive bidding. 3. Mutual Exclusivity Unknown 19. There are a number of other pending proceedings to establish rules for new or recently authorized services in which the likelihood of mutually exclusive applications is unknown or is debated by the commenters. See, e.g., PR Docket No. 92-235. 7 FCC Red 8105 (1992) ("refarming" of private radio spectrum below 512 MHz): PR Docket No. 93-61, 8 FCC Red 2502 (1993) (Automated Vehicle Moni toring (AVM) in the 902-928 MHz band). Similarly, we do not currently know whether mutual exclusivity will exist in the Digital Audio Radio Service (DARS), or in the Low Earth Orbiting Satellite (LEOs) and the Mobile Satellite/ Radiodetermination Satellite Services (MSS/RDSS). At this time it is premature to determine whether mutual exclusiv ity will or will not occur in the DARS, the AVM service, or the LEO and MSS/RDSS offerings. With respect to pending or future services and any others that are either 6 In this context, the term "shared" means a spectrum alloca tion scheme where each licensee has equal right to use the spectrum and no user has the right to exclusive use of an entire spectrum allocation for that service. ' "First-come, first-served" and wait list procedures apply only to 800 MHz SMRs and have not applied when multiple mutu ally exclusive applications were received when the Commission opened a filing window inviting the submission of applications for licenses to operate on new SMR spectrum. Cf. 1 63. infra. We do not currently accept new 900 MHz SMR applications and we are currently considering proposals to restructure licensing of this service. 8 As indicated in the NPRM at 1 138, we mean the 200 channel pairs at 900 MHz and the 280 channel pairs at 800 MHz avail able to SMRs under Section 90.617(d) of the Commission's Rules. We do not include those channels from other frequency pools which may be licensed to SMRs through our iruercaiegory sharing rules or to General Category channels. Sec H 47. infra. 2351 FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 experimental or interim in nature, the Commission cannot at this time presume that the prerequisites for competitive bidding will exist when we award initial licenses. We will, however, continue to monitor developments in these areas to determine, at a later date, whether competitive bidding for such spectrum might ultimately be appropriate.9 B. General Requirement of Subscribers 20. Section 309(j)(2)(A) requires that, to be subject to competitive bidding, the licensee must receive compensa tion in exchange for providing transmission or reception capabilities to subscribers. Thus, we will exclude from competitive bidding those services or classes of services in which licensees do not receive compensation from sub scribers and, hence, are outside the scope of Section 309(j)(2)(A). 1. Broadcast Services Exclusion 21. Section 309's legislative history makes clear that ap plications for licenses to provide traditional over-the-air broadcast services should not be subject to competitive bidding. See H.R. Rep. No. 103-111 at 253. Consistent with the clear legislative intent, we proposed in the NPRM to exclude from the competitive bidding process broadcast television (VHP, UHF, LPTV) and broadcast radio (AM and FM).' Those commenters who address this issue gen erally agree with the Notice. See, e.g., comments of AMTA and MSTV/NAB. One commenter, however, argues that traditional broadcast spectrum should be auctioned. See comments of Brown and Schwaninger. 22. Under the plain language of the statute, traditional broadcast services are excluded from competitive bidding because licensees do not receive compensation from sub scribers. Moreover, the legislative history confirms Con gress's clear intent to exclude these licenses and construction permits. We therefore exclude from the com petitive bidding process the broadcast television (VHP, UHF, LPTV) and broadcast radio (AM and FM) as well as the ITFS services." The for-profit subsidiary communica tions services transmitted by broadcast licensees on subcarrier frequencies that are indivisible from the main broadcast signal and similar services will also be excluded from the competitive bidding process given Congress's ex press intent to this effect. See H.R. Rep No. 103-111 at 253. 2. "Private Services" Exclusion 23. As we pointed out in the NPRM, the legislative history also refers to "private services" as those that do not involve the receipt of compensation from subscribers and thus are not to be subject to competitive bidding. In accor dance with the plain language of the statute, we exclude from competitive bidding those services or classes of ser vices in which licensees do not receive compensation from subscribers and, hence, are outside the scope of Section 309(j)(2)(A). 24. The House Report states that the enactment of com petitive bidding authority should not affect the manner in which the Commission issues licenses for virtually all pri vate services, including frequencies utilized by Public Safe ty Services, the Broadcast Auxiliary Service, and for subcarriers and other services where the signal is indivis ible from the main channel signal. H.R. Rep. No. 103-111 at 253. In the context of determining eligibility for com petitive bidding, however, the term "private services" was not intended to have the same meaning that the Commis sion has ascribed to private services in other contexts. See, e.g., comments of AT&T and of NYNEX. 12 25. The comments strongly support our "private ser vices" analysis, including our tentative conclusion that the term "private services" referred to services that did not involve the payment of compensation to the licensee by subscribers, i.e., that were for internal use. See, e.g., com ments of the American Petroleum Institute. We affirm our tentative conclusion. Consistent with the express intent of Congress, we also affirm that frequencies allocated to the Public Safety Services, or the Broadcast Auxiliary Services under Subparts D, E, F and H of Part 74 and shared with the Cable Television Relay Service under Part 78 of our Rules, will be exempt from competitive bidding. We also hold that subcarrier-based and similar services, such as those provided via the Vertical Blanking Interval, and for- profit subsidiary communications services transmitted on subcarriers within the FM baseband signal (see Section 73.295). will be exempt from competitive bidding where the underlying service is exempt. See H.R. Rep. No. 103-111 at 253. Accord, comments of MSTV/NAB.' 3 26. As we proposed in the NPRM at H ^ 27 and 145-146, and at nn. 123, and 157, application of the private services test leads us to conclude that certain additional services and classes of services should be excluded from competitive bidding as well. These include the 220 MHz channels " We note that a number of commenters advance additional reasons why competitive bidding for these services at s time appears to be premature. See, e.g., comments of TRW. Further more, given the pendency of PR Docket Nos. 92-235 and 93-61, it would be speculative for us to decide on the auctionability of frequencies that may or may not become available as a result of those proceedings. C/. comments of AAA. 10 Although some television licensees may receive compensa tion from cable television operators under the "retransmission consent" provisions of the Cable Television Consumer Protec tion and Competition Act of 1992, these licensees will not be subject to competitive bidding. H.R. Rep. No 103-111 at 254. Similarly, Instructional Television Fixed Service (ITFS) will not be subject to competitive bidding even if ITFS licensees receive payments from Multichannel Multipoint Distribution Service licensees for use of ITFS spectrum because ITFS licensees do not receive compensation from "subscribers" as that term is used in Section 309(j)(2). See H.R. Rep. No. 213, 103d Cong., 1st Sess. (1993) (Conference Report) at 481-82. " We defer consideration of whether licenses to provide Direct Broadcast Satellite (DBS) service should be subjected to com petitive bidding until the nature of that service becomes clearer. We thus affirm the difference between the meaning of "private service" in the Section 309(j) auction context and "private mobile service" as that term has been defined in new Section 332(d)(3) as added by Section 6002 of the Budget Act. Private mobile radio services are distinguished from commercial mobile radio services in Section 332 on the basis of several criteria that are not relevant to Section 309(j), e.g., whether interconnected mobile service is provided for a profit to the public or a substantial portion of the public. See Section 332 Second Report and Order. Most commenters addressing this issue agree with this analysis. See, e.g., comments of AT&T, API and AAR. 13 See also subsection B.I., supra (Broadcast Services Exclu sion). 2352 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 reserved for private service (including public safety). 800 MHz trunked systems operated on a not-for-profit, coop erative sharing basis, or 800 or 900 MHz systems for inter nal use in non-SMR frequency pools. 14 Most of the com ments which address this issue support our proposal. See, e.g., comments of API. 27. We will also defer a decision on whether to auction 220 MHz "local" licenses should the Commission need to conduct additional licensing in that class of service. As we pointed out in the NPRM, the 220 MHz service is a new service and. with the exception of those 220 MHz fre quencies the Commission reserved for specific purposes (e.g., the 220 MHz nationwide "commercial" and "noncommercial" channels and the 220 MHz channels re served for public safety purposes), the 220 MHz "local" channels may be used for private service or for the provi sion of service to subscribers. Because the service was new, we asked commenters to submit information on the likely use of these frequencies. 28. Almost every commenter who addressed this issue argued that it is still too early to classify the 220 MHz local channels as likely to be used for the provision of service to subscribers or for private use. See, e.g., comments of AMTA, Roamer One, UTC and E.F. Johnson, reply com ments of TDS. Based on the record, we will temporarily defer any decision on whether to auction 220 MHz local channels, although our observations of the development of this service to this point lead us to tentatively conclude that it is likely to be a subscriber based service. 15 When the nature of this service becomes clearer, as we anticipate, we will decide whether future applications for 220 MHz local service should be subject to competitive bidding. 16 29. Future initial applications for 220 MHz Commercial Nationwide licenses will be auctioned if the Commission ever accepts mutually exclusive initial applications again for that service, as it is clear that they are within the ambit of Section 309(j). As we stated at U 135 of the NPRM. these frequencies have been designated for use principally to provide for-profit service to subscribers. Accord, comments of NABER. Future initial applications for 220 MHz Noncommercial Nationwide licenses will not be auctioned: as licenses limited to the provision of private service, they are outside the ambit of Section 309(j). See comments of UTC. C. Principal Use Requirement 30. Under Section 309(j)(2)(A), for spectrum to be sub ject to competitive bidding, the "principal use" of that spectrum must involve, or be reasonably likely to involve, the transmission or reception of communications signals to subscribers for compensation. The Commission has a num ber of service classifications where a licensee may provide service to itself only, offer communications service to sub scribers for compensation, or provide service both to itself and to subscribers. 1 ' By directing the Commission to iden tify the "principal use" of spectrum, Congress recognized the existence of such mixed use services. 18 31. To address these situations and to comply with the statutory intent, we proposed that, in order to be subject to auctions, at least a majority of the use of a Commission regulated service or class of service must be for service to subscribers for compensation. NPRM at ^ 31. We asked commenters to address the merits of measuring or estimat ing the extent of private or internal use by information throughput or by the amount of time or spectrum that is devoted to private use. Id. at f 32, n.14. We also sought comment on an alternative proposal, a so-called "contami nated band" proposal, under which a service or class of service could be subject to competitive bidding if there were any use. no matter how minimal, in which one or more licensees within a given service or classification of service used that spectrum for the provision of service to u The fact that SMRs might occasionally be able to access these frequencies through our intercategory sharing rules would not change this result inasmuch as the principal use of these frequencies is clearly for private services. See comments of API. It is also clear that the six frequency pairs in the 900 MHz band set aside for the Advanced Train Control Service meet the private service test and should be excluded from competitive bidding. See comments of AAR. 15 This decision is not inconsistent with our decision in GN Docket No. 93-252, Implementation of Sections 3(n) and 332 of the Communications Act. FCC 94-31, released March 7, 1994, ("Section 332 Report and Order") that some 220 MHz local licensees will be Commercial Mobile Radio Service (CMRS) and some will not, depending on whether they meet the statutory criteria for Commercial Mobile Radio Service. See Section 332 Report and Order at 1 95. Unlike the decision on whether 220 MHz local licensees are CMRS, which is made on a license by license basis, the decision on whether 220 MHz local channels will be subject to competitive bidding will depend on the prin cipal use of that entire class of service. Additional observation of the manner in which the 220 MHz local service develops will provide us with a firmer basis on which to decide whether competitive bidding is appropriate for this class of service. lh The Commission has already conducted a lottery for 220 MHz local licenses for the entire United States and granted every license it could from among the applications it received. Licensees are currently in the process of constructing their systems. It is unclear which, if any, of these licensees will have their licenses cancelled for failure to construct or for other reasons. As such, unlike other services, e.g. the Interactive Video Data Service (IVDS). there is no immediate need to decide whether future mutually exclusive applications in this service should be subject to competitive bidding before service can be made available to the public. 1 An example of such a service is the Private Operational Fixed Service ("POPS") licensed under Part 94 of the Commis sion's Rules. 1S See 47 U.S.C. § 309(j)(3) (Commission to identify "classes of licenses" to be issued by competitive bidding); H.R. Rep. No. 103-111 at 254 (Section 309(j)(2) determination to be made when a service or class of service is defined by Commission). 2353 FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 subscribers for compensation. 19 We received a range of suggestions from commenters on this issue. Compare com ments of AT&T. ITA and Domestic Automation (favoring principal use determinations on a service or class of service basis) with comments of AAA (suggesting a license-by- license approach) and comments of PacBell (supporting the "contaminated band" proposal). 32. As explained below, we will look to classes of li censes and permits to determine their "principal use." In order to determine the principal use in a service, we will compare the amount of non-subscription use made by the licensees in a service as a class with the amount of use rendered to eligible subscribers for compensation on the basis of information throughput, time, or spectrum. We also adopt our proposal that at least a majority of the use of a Commission regulated service or class of service must be for service to subscribers for compensation. We believe that the so-called "contaminated band" proposal is at odds with the express statutory language requiring that the prin cipal use, not any use. of the service or class of service in question be for subscription-based purposes before auctions are permitted. 33. We also reject the arguments by commenters such as AAA that the Commission must examine individual ap plications to determine each licensee's principal use of the spectrum. We do not agree that the Budget Act mandates that the "principal use" determination be made on a li cense-by-license basis. Although Section 309(j)(2)(A) of the Act does refer to licensees, it requires that the "principal use of the spectrum" be for compensation (emphasis added). Had Congress intended the principal use deter mination to be made on a license by license basis, the Budget Act would have specifically stated this requirement. Also, Section 309(j)(3) refers to "each class of licenses or permits that the Commission grants through the use of a competitive bidding system . . ." (emphasis added). More over, the House Report states that the principal use deter mination should be made when a service or class of service is created by the Commission and that the Commission should review existing services, not licenses, to see if they meet the principal use test. H.R. Rep. No. 103-111 at 8. 34. We therefore believe that the best course is to evalu ate classes of licenses and permits, rather than individual licenses, to determine the "principal use" of the spectrum, and further believe that approach is most consistent with Congressional intent.20 In order to determine the principal use in a service, we proposed to compare the amount of non-subscription use made by the licensees in a service as a class with the amount of use rendered to eligible subscrib ers for compensation on the basis of information through put, time, or spectrum. At least a majority of such use would have to be for service to subscribers for compensa tion in order for a service to be subject to competitive bidding. See NPRM at f 32, n.14. This approach found support in the comments (see, e.g., comments of AAR), and we adopt it.21 35. For existing services, our experience in regulating communications services will help us to accurately deter mine principal use. For example, in our experience and using any of the measurements that we proposed, the vast majority of use of the POFS as a class is for private or internal use by the licensee or its affiliates for which no compensation of any kind is paid. Our interpretation of the principal use test led us to propose that applications in the 470-512 MHz private land mobile services also should not be subject to competitive bidding.22 NPRM at nn.16 and 154. Most commenters agreed with our view of the principal use of these two classes of service. See, e.g., comments of APCO, AAR, UTC and API. We therefore adopt our proposal to exclude the 470-512 MHz private land mobile services and the POPS23 from competitive bidding.24 Finally, the few comments we received on the subject argue strongly that the MAS is principally used for private service and are unrebutted. See, e.g., comments of UTC, Fisher Wayland, and Domestic Automation. The comments comport with our own experience and the MAS will therefore be exempted from competitive bidding.25 We will make other determinations on principal use with re gard to other specific services in future Reports and Or ders. 36. We also decline at this time to adopt APCO's proposal to exempt from competitive bidding any radio service that has or is likely to have significant use by state and local government licensees. We have already exempted from competitive bidding the public safety services over which APCO expressed the most concern (see f 47, infra), and believe it would be premature and speculative to try to ascertain what other services are likely to be significantly used by state and local government licensees. 19 We noted, however, that such an approach seemed inconsis tent with the "principal use" standard. NPRM at H 33. 20 NYNEX's comments suggested three other tests: (1) a service would be presumed "private" based on majority use of the spectrum but parties would have an opportunity to rebut that presumption; (2) any license issued by the Commission in a service classified as "private" should be conditioned on the licensee's principal use of that spectrum for that purpose: viola tion of this condition would result in license forfeiture or a penalty; and (3) a service that might be considered private based upon majority use should nevertheless be subject to auction if more than $100,000 is received as compensation from subscrib ers. We reject NYNEX's last suggestion as essentially equivalent to the "contaminated band" proposal rejected above. NYNEX's first two suggestions appear to be variants of the classification by license scheme we have rejected for the reasons previously stated. 21 As pointed out by AT&T in its comments, there is no way to anticipate today all of the possible uses of the electromagnetic spectrum. Thus, with respect to the measures to be used in making the principal use determination, we will, as AT&T suggests, retain the ability to use any of the measurement methods described above, as proposed at n.14 of the NPRM. 22 Most of these frequencies are shared, and therefore applica tions will not be mutually exclusive with one another. See comments of UTC. 23 We do not adopt API's suggestion that the 18 GHz POFS Video Entertainment stations be treated separately from the rest of the POFS inasmuch as it is speculative whether these stations will function as private carriers as API asserts. 24 Because the principal use of these classes of services is for private service, in the event that mutual exclusivity should occur among applicants for initial licenses, we are permitted to use lotteries to resolve that mutual exclusivity. See Section Since we have found the principal use of MAS to be for private service. Section 309(j) does not authorize us to use competitive bidding to award licenses for mutually exclusive pre-July 26, 1993 MAS applications pending before the Commis sion. We will therefore lottery these applications. 2354 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 D. Initial and Modification Applications 37. As we pointed out in the NPRM, Congress appar ently expected that applications to modify existing licenses would not be subject to competitive bidding.2" While the commenters generally agree that modification applications should not be so subject, several commenters ask that the Commission clarify that certain types of mutually exclusive applications to modify existing licenses (e.g., to add radio channels to an existing system), may be so different in kind or so large in scope and scale as to warrant competitive bidding if mutual exclusivity exists. Cf. comments of RAM and NABER.27 Where a modification would be so major as to dwarf the licensee's currently authorized facilities and the application is mutually exclusive with other major modification or initial applications, the Commission will consider whether these applications are in substance more akin to initial applications and treat them accordingly for purposes of competitive bidding. 38. We believe that there is merit in this course. It comports with our objectives of increasing competition and awarding spectrum to those who value it most highly. Accordingly, though as a general rule the Commission will regard mutually exclusive applications to modify existing licenses as not subject to competitive bidding, we may, on our own motion or in response to a petition from an interested party, determine that a major modification ap plication in a particular service, if it is mutually exclusive with other applications, should be treated as an initial application and be subject to competitive bidding. 39. Similar questions of auctionability arise when ap plicant A files an application to modify its existing license, which in turn opens a window for another applicant, B. to file a competing initial application which is mutually ex clusive with that of A. See, e.g., Maxcell Telecom Plus, Inc. v. FCC, 815 F.2d 1551 (D.C. Cir. 1987).28 The statute requires the existence of "mutually exclusive applications [that are] accepted for filing for any initial license or construction permit," 47 C.F.R. § 309(j)(l) (emphasis sup plied), but the legislative history makes clear that competi tive bidding is not permitted "in the case of a renewal or modification of the license." H.R. Rep. No. 103-111 at 253 (emphasis supplied). Were we to read the statute literally, since one of the two applications in the example above is an initial applications, competitive bidding is arguably ap plicable. But such a result would also lead to competitive bidding by a modification applicant. 40. Given this apparent lack of clarity, we intend to deal with these situations on a case-by-case basis as it is impos sible to know the factual context within which such mu tual exclusivity might occur. We retain the authority to use comparative hearings to resolve mutual exclusivity between initial and modification applications, but also believe that competitive bidding may be appropriate in some of these cases as well.29 E. Intermediate Links 41. In the NPRM, we proposed that a license for fre quencies used in a service as an "intermediate link" in the provision of a continuous, end-to-end service, i.e., one used by a licensee as part of a service offering to subscribers, but not one on which subscribers directly send or receive communications signals, would be subject to competitive bidding. NPRM at H 29.30 We believed that such a result would be administratively efficient because it would elimi nate the necessity of determining the exact nature of the use to be made of a particular license by a particular applicant. 42. As noted, in order for a license to be subject to competitive bidding, Section 309(j)(2)(A) requires that the subject spectrum enable subscribers to "receive commu nications signals" or to "transmit directly communications signals." The comments strenuously and almost unani mously opposed the Commission's proposal, in part on the basis that by definition, an intermediate link cannot trans mit communications signals directly. See, e.g., comments of AT&T. Other commenters believe that auctions would not promote the objectives of Section 309(j)(3). 43. We have decided not to adopt the NPRM's proposal. Before employing competitive bidding for intermediate links, we are still required to determine that mutual exclu sivity exists and that such bidding would promote the objectives of Section 309(j)(3)(A) through (D). As to mu tual exclusivity, we note that on those types of frequencies most often utilized as intermediate links, mutual exclusivity is very rare because of frequency coordination efforts made prior to the time an application is filed. See, e.g., reply comments of Alcatel. We are also concerned that auction ing intermediate links might lead to significant delays in 2(1 See NPRM at 1 22; sec also H. R. Rep. No. 103-111 at 253. Cf. Maxcell Telecom Plus, Inc. v. FCC, 815 F.2d 1551 (D.C. Cir. 1987). 17 The May 14, 1992 Public Notice (Mimeo No. 23115) referenced by Alcatel in its reply comments was not issued for the purpose of determining what constitutes a "modification" of a microwave license. Therefore, its comment is inapposite. Cf. 47 C.F.R. Sec. 94.45. 2S This scenario was raised by AllCity Paging in Us comments. AllCity noted that under Section 22.33(c)(l) of our Rules, when a common carrier public mobile service applicant seeks to add one or more transmitters and which meets certain criteria is faced with a mutually exclusive initial applicant, the first ap plicant is entitled to request a comparative hearing to determine which application should be granted. AllCity requests the reten tion of this procedure notwithstanding that the Commission has proposed elimination of this rule in CC Docket No. 92-115, 7 FCC Red 3658 (1992). Telocator, however, suggested that such mutual exclusivity be resolved through competitive bidding. 2g In the specific hypothetical raised by AllCity Paging, for example, we are inclined to believe that if the modification application that is filed by the first applicant is substantial enough to require prior permission from the Commission, see, e.g., Section 22.9(d) of our Rules, it is the equivalent of a new or initial application and we are thus permitted to use auctions to resolve the mutual exclusivity. !0 Examples of such intermediate links include cellular car riers transmitting subscriber traffic between cell sites and its Mobile Telephone Switching Office, or a local exchange tele phone company using microwave links as one means of trans mitting local exchange telephone service. Similarly, point-to-point microwave frequencies in the CARS are often used by cable television companies to transmit television pro gramming to different points within or among systems although not directly to their subscribers. Another type of intermediate link is the so-called "MSS feederlink" discussed by several of the commenters. See reply comments of Loral Qualcomm. 2355 FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 the provision of services thus hindering the development and rapid deployment of new technologies, products and services for the benefit of the public. See, e.g., comments of Southwestern Bell. Further, such auctions would impose significant administrative costs on licensees and on the Commission, particularly relative to the likely value of these licenses. It is thus unclear whether using auctions to award licenses for intermediate links would promote the objectives in Section 309(j)(3)(C). Therefore, intermediate links, including MSS feederlinks, CARS frequencies,31 and point-to-point microwave frequencies regulated under Parts 21 32 and 9433 of the Commission's rules will not be subject to competitive bidding. 34 F. Services For Which Competitive Bidding Would Not Further Section 309(j)(3) Objectives 44. As exemplified above in our consideration of wheth er intermediate links should be auctioned, a system of competitive bidding may only be used if it would promote the objectives of Section 309(j)(3), even if the principal use of the spectrum otherwise satisfies the requirements for competitive bidding. Based on the comments, we have identified a number of circumstances where auctions do not appear to be consistent with these statutory objectives or are otherwise inconsistent with Congressional intent. 45. In response to n.174 of the NPRM, a number of commenters noted that the Basic Exchange Telephone Ra dio Service (BETRS) and certain paging services use the same spectrum and that mutual exclusivity between them was possible. See, e.g., comments of Interdigital. The Rural Radio Service, including the BETRS, is a fixed service regulated under Subpart H of Part 22 of our Rules. The frequencies in these services are most commonly used in the provision of telephone service to remote locations where it is impractical or uneconomic to provide such service via landline. See comments of GTE. Because rural radio, including BETRS. frequencies are co-primary with certain common carrier mobile services, it is possible that mutual exclusivity may occur between BETRS applications and other common carrier applications. 35 46. The commenters argue that it would not serve the public interest to subject rural radio frequencies to com petitive bidding because doing so would frustrate the im portant goals of universal service embodied in Section 1 of the Communications Act, which are incorporated by refer ence in Section 309(j)(3). See comments of NTCA. We agree. It would not serve the public interest for the Com mission to establish services such as the BETRS as a poten tial less costly alternative to landline service36 and then require a BETRS applicant to bid against a radio common carrier applicant for those frequencies. Accord, reply com ments of Southwestern Bell. Therefore, we will not con duct auctions to resolve mutual exclusivity between initial BETRS or rural radio applications and common carrier mobile service applications.3 ' We note that this is consistent with our decision on General Category frequencies dis cussed below. 47. In the NPRM, we proposed to exclude from competi tive bidding procedures certain private radio channels known as the General Category38 channels as well as other classes of frequencies subject to intercategory sharing. See NPRM at H H 139-141. These frequencies can be used by both SMRs, who are commercial mobile radio service pro viders, as well as for internal private service. Subjecting the General Category or non-SMR intercategory shared fre quency pools to competitive bidding, however, might force police departments, for example, to bid against SMRs for spectrum. This would be contrary to Congressional intent and disserve the public interest. The comments strongly support this conclusion. See comments of APCO, AMTA, and AAA. Therefore, we will exclude from competitive bidding General Category channels and other intercategory classes of frequencies. G. Specific Services Subject to Competitive Bidding 48. In H H 114-166 of the NPRM, we identified a number of services and classes of services that appeared to fall within the ambit of the competitive bidding provisions of the Budget Act if mutually exclusive initial applications were accepted for filing. Most spectrum-based common carrier services, some private mobile radio services,4" some 31 As we pointed out earlier at 1 18, CARS applications are not subject to mutual exclusivity and are therefore exempt from competitive bidding for this reason as well. 3~ In the event that we receive mutually exclusive applications for common carrier point-to-point microwave facilities that would provide service to subscribers, we might conduct com parative hearings to resolve such mutual exclusivity. See Sec tion 309(i)(l)(B). We expect such instances to be rare, however. 33 As noted elsewhere. Part 94 point-to-point microwave users are exempt from competitive bidding because the principal use of these frequencies is for private service. See, e.g., comments of APCO. 34 In view of our intent not to auction any point-to-point microwave licenses, whether private or common carrier, our proposal to exempt from competitive bidding those entities forcibly relocated by our orders in ET Docket No. 92-9 is moot. See NPRM at f 128. n.118. 35 Because local exchange carriers generally operate under exclusive franchises, we do not anticipate mutual exclusivity between BETRS applications. 3h See Basic Exchange Telecommunications Radio Service, 3 FCC Red 214 (1988). 3 Because the principal use of both of these services is for the provision of service to subscribers for compensation, the Com mission would have to resolve such mutual exclusivity through a comparative hearing. See Section 309(i)(l). We are confident, however, that applicants can negotiate to resolve such mutual exclusivity. 38 General Category channels are frequencies at 800 MHz that have been allocated to eligibles for conventional operations. See 47 C.F.R. § 90.615. Some of the General Category channels may be licensed for commercial use by Specialized Mobile Radio licensees. Jq In addition, it also appears that General Category channels are not subject to competitive bidding because they are not principally used for subscriber based services. See comments of UTC. Similarly, channels in non-SMR frequency pools may in some cases be accessed by SMRs, but only if SMR frequencies are unavailable. See, e.g.. Section 90.62l(g) of our rules. The principal and primary use of these non-SMR frequencies is for the services to which they have been allocated. See, e.g.. Section 90.617. 40 A licensee could be classified as a provider of private mobile radio service for purposes of Section 332 and still be subject to competitive bidding under Section 309(j). An SMR that pro vides only dispatch service and is not interconnected with the public switched network, for example, would be regulated as a private mobile radio service under Section 332, yet still be 2356 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 private fixed services,41 and commercial mobile radio ser vices will be subject to competitive bidding, assuming the other statutory criteria are met. We have determined that several of those services and classes of services should be auctioned, and discuss them further below. 1. Interactive Video Data Service 49. In U | 142-144 of the NPRM, we proposed to auction any future mutually exclusive applications for the Inter active Video Data Service (IVDS) for we believed that this new service fulfilled all of the statutory prerequisites for competitive bidding. A number of commenters speculate that IVDS will have no subscribers on the basis that the service will be provided free to consumers and supported by advertising revenues or revenues from transactions con ducted using the interactive features of IVDS. They there fore urge that the Commission not utilize auctions to award IVDS licenses in the future. See, e.g., comments of Quentin L. Breen. Independent Cellular Consultants, Pro fessor Andrea Johnson, and Richard L. Vega Group and reply comments of America 52 East, Kingswood Associates and Harry Stevens, Jr.42 50. We disagree. While it may be true that the business plans of some would-be IVDS applicants contemplate that the consumer of the IVDS service will pay nothing for the response transmitter units (RTUs). we remain convinced that IVDS will primarily "provide information, products, or services to individual subscribers."43 We note, for exam ple, that Radio Telecom and Technology. Inc. (RTT), a developer of IVDS equipment and a longtime participant in the Commission's proceedings which created IVDS, ar gues that IVDS licenses should be awarded pursuant to competitive bidding.44 Moreover, the Commission recently received an ex pane presentation from Eon Corporation (formerly TV Answer, Inc.). Eon is a developer of IVDS equipment and a longtime participant in our proceedings creating IVDS, and has obtained FCC certification for its equipment. Eon indicates that IVDS will include a substan tial number of services that are compensated by subscrib ers. Eon further believes that in order to be successful, IVDS cannot be supported on a non-subscription, free to the consumer basis. 51. Based on the record, we must try to predict whether the principal use of IVDS will be "reasonably likely to involve" the receipt of compensation from subscribers. The record indicates that it will. We accord great weight to the views of RTT and Eon because these parties have been associated with IVDS since its early days. They have in vested substantial amounts of time and money in develop ing the service and are in a position to understand the likely use of IVDS. 52. We also believe that the use of competitive bidding will promote the objectives of Section 309(j)(2)(B) as fol lows. First, the use of auctions for IVDS is likely to contri bute to the rapid deployment of this new technology and will promote the efficient and intensive use of the elec tromagnetic spectrum. When we established the IVDS, we prescribed an application fee of $1400 and still received hundreds of applications for the first nine IVDS markets. Since we have lowered the IVDS application fee from $1400 to $35,45 we anticipate being inundated with thou sands of applications. Given the length and expense of comparative hearings, we do not believe that such hearings are a realistic alternative means of resolving mutual exclu sivity among-IVDS applicants. Without auctions, we fear that licenses would not quickly be awarded to parties able to efficiently use them, which, combined with the admin istrative burdens of processing thousands of applications and the associated litigation that is likely to ensue, will unreasonably delay deployment of this new service. Sec ond, under the rules we shall establish for designated en tities, use of auctions to award IVDS licenses should also fulfill the Congressional objective of promoting economic opportunity and competition as well as dissemination of licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women. Finally, auctions will also recover for the public a portion of the value of the public spectrum. 53. We note in addition that the use of auctions for IVDS is fully consistent with the intent of Congress. Con gress clearly envisioned that the IVDS would be subject to competitive bidding, for the Budget Act's legislative history states that the exception permitting the Commission to conduct lotteries for pre-July 26, 1993 applications would "permit the Commission to conduct lotteries for the nine Interactive Video Data Service markets for which applica tions have already been accepted. . . ."4A Had the Congress not expected that the Commission would auction IVDS applications generally, it seems that there would have been no need for this statement. We therefore hold that auction ing of mutually exclusive IVDS applications will further the objectives of Section 309(j)(3).47 2. Personal Communications Services subject to competitive bidding if mutual exclusivity existed inasmuch as we have generally classified all frequencies al located to SMRs as subject to competitive bidding. Compare H 63, infra, with Section 332 Report and Order at f 90. 41 See. e.g., the discussion concerning the Interactive Video Data Service, infra. 42 Others, however, urge that future mutually exclusive IVDS applications be auctioned. See comments of the Chase McNulty Group, NYNEX, and Radio Telecom and Technology. Inc. 4J See Amendment of Parts 0, 1. 2, and 95 of the Commission's Rules to Provide Interactive Video Data Service, 7 FCC Red (630, 1637 (1992). 44 We discount America 52 East's speculation in its reply comments that RTT's comments are unworthy of consideration because they are based solely on the latter's pecuniary interest. America 52 East's assurances that to receive IVDS service a customer need only go to any electronics store and purchase the necessary equipment and that there will be no subscription fee are similarly unconvincing since IVDS is not yet available. 45 See Second Reconsideration in PR Docket No. 91-2, 8 FCC Red 2787 (1993). 46 See Conference Report at 498. The Commission held lotter ies on September 15, 1993, for licenses in first nine IVDS markets, applications for which were filed prior to July 26, 1993. 47 Because we classify IVDS as a whole as subject to competi tive bidding, we disagree with the comment of Professor Andrea Johnson, who seems to argue for a license-by-license classifica tion of IVDS, an approach we reject. 2357 FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 54. We proposed in §U 115-130 of the NPRM to award both narrowband and broadband PCS licenses by competi tive bidding in case of mutual exclusivity and tentatively concluded that PCS would meet all of the prerequisites for such bidding, including the requirement of subscribers. We noted our expectation, judging from the nature of the comments and the myriad ex pane presentations that we have received in the various PCS proceedings, as well as the identity of the commenters, that many PCS licensees will operate in the manner contemplated by new Section 309(j)(2)(A). See NPRM at 1f H 115-119. The vast majority of the commenters who addressed this issue either agreed that mutually exclusive PCS applications should or must be subject to the competitive bidding process, or simply as sumed that such applications will be auctioned. See, e.g., comments of Arch Communications. BellSouth, Bell At lantic, IDS, Time Warner, and UTC, reply comments of Telocator. 55. Only one commenter seriously disputed the Commis sion's tentative conclusion that PCS licenses should be awarded by competitive bidding. Millin Publications, a publisher of specialized information services, intends to file PCS applications to provide service in a manner akin to the broadcast industry, i.e., without subscribers. Millin's PCS network would allow purchasers of goods to pay for their items electronically using hand-held personal digital assistants free of charge except for the cost of hardware. Compensation would be paid by the vendor. It argues that, given that PCS does not yet exist and the very flexible regulations proposed for the service, the Commission should not find that PCS is reasonably likely to be a primarily subscription service technology. 56. We disagree. An overwhelming number of the commenters either actively support or implicitly assume that the principal use of licensed PCS spectrum is likely to be for the provision of service to subscribers for compensa tion.48 Our own experience confirms this: of the scores of experimental PCS applications that the Commission has granted, a clear majority have proposed some variation of a charge on subscribers, whether for airtime or for the lease of subscriber equipment or both. Many of these licensees have submitted market studies on the effect of various pricing schemes on consumer demand.41* In view of this evidence, we believe that the principal use of narrowband and broadband PCS licenses is "reasonably likely to involve the licensee receiving compensation from subscribers."50 And, even assuming that some PCS licensees may ulti mately not provide a subscriber-based service to their cus tomers, the Commission must look to the likely principal use of spectrum in narrowband and broadband PCS when determining whether competitive bidding is applicable.51 57. We also confirm that the use of competitive bidding will speed the development and rapid deployment of PCS service to the public, including those residing in rural areas, with minimal administrative or judicial delays, as required by Section 309(j)(3)(A). Because we have con firmed that PCS would operate in the manner contem plated by Section 309(j)(2)(A), new Section 309(i)(l)(B) does not permit the Commission to utilize lotteries to choose from among mutually exclusive PCS applicants, leaving comparative hearings as our sole alternative. As we stated in the NPRM. our experience with the comparative hearing process has been less than satisfactory in terms of both administrative and judicial delay: competitive bidding should avoid this time consuming litigation.52 Likewise, in contrast with comparative hearings, auctions will promote the objectives of Section 309(j)(3)(C) by recovering for the public a portion of the value of the spectrum made avail able for commercial use. We have also promulgated gen eral rules, applicable to PCS, which are designed to avoid unjust enrichment as well as rules to ensure the opportu nity for participation in auctions by the entities designated by Congress. 58. Finally, in accordance with subsection (j)(3)(D), we believe competitive bidding will promote efficient and in tensive use of the spectrum in the case of PCS. We have defined PCS broadly as composed of a "wide array of mobile, portable and ancillary communications services to individuals and businesses." Narrowband PCS Order, ET Docket No. 92-100 and GEN Docket No. 90-314. FCC 93-329 (released July 23, 1993) at If f 13-14. Auctions are therefore likely to reinforce the desire of.licensees to make efficient and intensive use of PCS spectrum. Auctions make explicit what others are willing to pay to use the spectrum, and the licensees' need to recoup the out-of- pocket expenditure for a license should provide additional motivation to get the most value out of the spectrum. 3. Common Carrier and Commercial Mobile Radio Ser vices 59. Common carriers have subscribers; by definition, their services are offered indifferently to the public for hire53 and therefore satisfy the requirements of Section 309(j)(2)(A). The new CMRS providers, who are treated as common carriers under Section 332(c), also have subscrib ers and thus also satisfy SSection 309(j)(2)(A).54 We pro posed that spectrum-based common carrier services and commercial mobile radio services should be subject to auction if they met the other criteria for competitive bid ding. See NPRM at 1 26. We discuss below specific com mon carrier and commercial mobile radio services that will be subject to competitive bidding. 60. Public Mobile Services. The Public Mobile Services are regulated under Part 22 of the Commission's Rules and include the Public Land Mobile Service (Subpart G). the Rural Radio Service (Subpart H). the Domestic Public Cellular Radio Telecommunications Service (Subpart K), the Offshore Radio Telecommunications Service (Subpart 48 See, e.g., comments of UTC.M 4g See, e.g.. Amendment of the Commission's Rules to Estab lish New Personal Communications Services, Third Report and Order in GEN Docket No. 90-314, et al.. FCC 93-550. released February 3, 1994. 50 We anticipate that this would be the case with both "wideband" and "narrowband" PCS services. Our analysis, of course, does not apply to unlicensed PCS. 51 For purposes of this discussion, we need not resolve whether the service described by Millin is, in fact, a non-subscription service within the meaning of Section 30Q(j)(2). 52 See. e.g., Kwerel and Felker. "Using Auctions to Select FCC Licensees," OPP Working Paper Series No. 16, May 1985. In our experience, most comparative hearings for licenses in rural areas do not proceed appreciably faster than comparative hear ings for licenses in most urban areas. 53 Section 3(h). Communications Act, 47 U.S.C. § 153(h). 54 A commercial mobile radio service is a "for-profit" service and is treated as common carriage under Title II of the Act. 47 U.S.C. §§ 332(c)(l)(A) and (d)(l). The Commission has adopted rules governing the regulatory treatment of commercial mobile radio services. See Section 332 Second Report and Order, supra. 2358 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 L) and the 800 MHz Air-Ground Radiotelephone Service (Subpart M). In the NPRM, we asked whether each of these services should be subject to competitive bidding. The comments we received with respect to these services fo- cussed almost exclusively on two issues: the applicability of competitive bidding to certain cellular radio applications pending with the Commission on July 26, 1993," and the applicability of competitive bidding to the Basic Exchange Telecommunications Radio Service (BETRS) and the Rural Radio Service.56 61. Outside of the two issues mentioned above or where the statute was unclear,5 ' no commenter seriously disputed the applicability of auctions to mutually exclusive initial applications in the Public Mobile Services. Neither did any commenter seriously dispute our tentative finding in H 147 of the NPRM that competitive bidding would promote the objectives of Section 309(j). Unless specifically excluded,58 such applications will be subject to competitive bidding. 62. Multipoint Distribution Service (MDS) and the Multichannel Multipoint Distribution Service (MMDS). In the NPRM, we specifically proposed that future mutually ex clusive MDS and MMDS initial applications be subject to competitive bidding, believing that doing so would promote the objectives of Section 309(j). 59 Although we do not address in this Second Report and Order the applicability of competitive bidding to MDS and MMDS applications which were filed prior to July 26, 1993," we believe that new initial applications for these common carrier services are otherwise eligible for competitive bidding. Very few comments were filed on this subject, but those that ad dressed it did not oppose competitive bidding. See, e.g., comments of Wireless Cable Association International. No commenter seriously disputed the applicability of competi tive bidding to mutually exclusive initial applications in the MDS and MMDS or our tentative finding in ^[ 147 of the NPRM that competitive bidding would promote the objectives of Section 309(j). Therefore, at such time as the Commission accepts additional initial applications for MDS and MMDS licenses, we will resolve any mutual exclusivity between these channels by using competitive bidding. Be cause it is unclear when the existing freeze on new applica tions will be lifted, however, we defer promulgation of specific rules until that time. 63. SMR and Exclusive PCP Services. If multiple SMR initial applicants file for the same channels in the same location on the same day and if the Commission's existing procedures do not avoid mutual exclusivity, or if two or more PCP systems in the future file mutually exclusive initial applications, we intend to use competitive bidding to select from among competing applications.61 Our rules ex plicitly contemplate and expect that these licensees will provide service to eligible subscribers for compensation.62 We know from experience that this is the principal use of SMR and exclusive PCP spectrum, and the comments sup port our determination. See, e.g., comments of GTE and McCaw. 64. We also believe that the use of competitive bidding will speed the development and rapid deployment of SMR service, including those residing in rural areas, with mini mal administrative or judicial delays as required by Section 309(j)(3)(A). Because we have confirmed that SMR provid ers operate in the manner contemplated by Section 309(j)(2)(A), new section 309(i)(l)(B) does not permit the Commission to utilize lotteries to choose from among mu tually exclusive initial SMR applicants, leaving comparative hearings as our sole alternative to resolve such mutual exclusivity. Such hearings are likely to be lengthy, conten tious, and complex. Given this prospect, we believe that competitive bidding is likely to be a faster means of delivering service to the public. With respect to promoting the objectives of Section 309(j)(3)(C). we also believe that competitive bidding will recover for the public a portion of 55 See, e.g.. comments of John G. Andrikopoulos, el al., Abby Dilley, various partners in The Quick Call Group, John Dudinsky, Jr., M. Kathleen O' Connor, and James F. Stern. As noted, we will address the applicability of competitive bidding to certain cellular radio applications filed prior to July 26, 1993, in a separate order. These applications present unique issues because of the special rule that Congress adopted in Section A002(e) of the Budget Act that is applicable only to mutually exclusive applications filed prior to that date. The status of the applications at issue in McElroy Electronics v. FCC, 990 F.2d 1351 (D.C. Cir. 1993), will likewise be decided at that time since they present similar issues. 56 See, e.g.. comments of Interdigital. The applicability of com petitive bidding to the BETRS and the Rural Radio Service is discussed in subsection F. supra. 57 See, e.g., comments and reply comments of AllCity Paging. 58 See, e.g., the discussion at f t 45-46 excluding the BETRS from competitive bidding on grounds that auctioning licenses in these services would not further the objectives in Section 309(j)(3). In some cases. Public Mobile Service licenses are avail able to end users as well as common carriers. See, e.g.. Section 22.100 (Offshore Radio Service may be licensed to end users) and Section 22.600 (Rural subscriber stations may be licensed to individual users of the service). We defer resolution of the issue of mutually exclusive applications between common carriers and end users to a later date inasmuch as mutual exclusivity in these classes of services is extremely rare; should it occur, we will decide the appropriate course at that time. The 800 MHz air-ground radiotelephone service (although not the 450 MHz air-ground radiotelephone service, which has exclusive frequen cies) will be excluded from competitive bidding because those frequencies are shared. See Section 22.31(h) of our Rules. 5" See NPRM at 1 1 147-151. No MDS or MMDS applications are currently being accepted, due to a freeze which the Com mission has placed on the filing of such applications. See Public Notice, "MDS/MMDS Applications Filing Freeze," released July 28, 1993. 1)0 See, e.g., comments of MW TV. We will address this issue in a separate order. fi! In light of our past experiences with the release of new SMR spectrum, we believe that mutual exclusivity is highly likely if we were to release new SMR spectrum at the conclusion of PR Docket Nos. 93-144 and 89-553, the R(M) MHz and 900 MHz SMR proceedings. See PR Docket No. 93-144. 8 FCC Red 3950 (1993); PR Docket No. 89-553, 8 FCC Red 1469 (1993). Due to the uncertainty over the outcome of these proceedings, however, we decline to confirm, as requested by AMTA and Cencall, that the licenses which may be issued as a result of those proceedings will not be the result of "initial" applications. See H 66. infra. If at the conclusion of those proceedings we decide that 800 or 900 MHz SMR applications may fairly be characterized as modifica tion applications, then we will not subject them to competitive bidding. AMTA's argument that the Congressional objective of effective and intensive use of the spectrum is unlikely to be satisfied if the Commission employs auctions to award 900 MHz licenses outside the Designated Filing Areas (the largest 50 markets in the U.S.) is speculative. 62 See NPRM at f 136 and n.129; PCP Exclusivity Report and Order, supra. 2359 FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 the value of SMR and exclusive PCP spectrum made avail able for commercial use and avoid unjust enrichment for the same reasons explained in conjunction with PCS ser vice. 65. In the NPRM, we requested specific comments on how we should treat mutually exclusive finder's prefer ences which are currently governed by Section 90.611(d) of our Rules. Under that rule, members of the public may submit to the Commission information that results in the takeback of SMR and other categories of channels. Above, we have determined generally that frequencies allocated to the SMR service should, in the event of mutual exclusivity, be awarded pursuant to competitive bidding. We see no reason to treat mutually exclusive finder's preference re quests for SMR frequencies differently from mutually ex clusive applications for SMR frequencies. Therefore, we hold that in such event, the licenses should be awarded pursuant to competitive bidding. Accord, reply comments of Southwestern Bell. Conversely, if mutually exclusive finder's preference requests target General Category or non-SMR frequencies, they would not be subject to com petitive bidding. 66. Although we believe that SMR services should be subject to competitive bidding, we note that we currently have before us proceedings that propose significant changes to our current 800 and 900 MHz SMR licensing policies. To attempt to promulgate competitive bidding rules gov erning mutually exclusive SMR licensing in the face of these licensing uncertainties is likely to be difficult, if not impossible.63 As we move closer to resolving these issues, however, we intend to promulgate rules detailing how competitive bidding would apply in these services. 67. Although we conclude that mutually exclusive 900 MHz PCP applications should be subject to competitive bidding, we recognize that exclusivity in the 900 MHz PCP service is a very recent phenomenon and it is not clear whether or how frequently mutual exclusivity will arise where first-come, first-served licensing is ongoing. In addi tion, we believe that alternative measures, such as fre quency coordination and private settlement among conflicting applicants, can resolve most, and perhaps all. potential conflicts among PCP applicants. See Section 309(j)(6)(E). Because these efforts may obviate the need for competitive bidding, we leave the promulgation of specific auction rules for this class of service to a time when we can be reasonably certain that they will be needed. III. COMPETITIVE BIDDING DESIGN A. Introduction 68. In this section, we adopt simultaneous multiple round auctions as our primary auction methodology. We believe that, for most licenses that the Commission intends to auction, this method will best meet the Congressional goals that we set forth in Section I. However, our analysis of the record in this proceeding has convinced us that there is no single competitive bidding design that is op timal for all auctionable services. Moreover, Congress has directed us to "design and test multiple alternative meth odologies under appropriate circumstances." See Section 309(j)(3). For these reasons, we shall not adopt a single auction design herein. Instead, we will identify a number of auction design options, indicating in general terms the service characteristics for which each option is appropriate. We will issue further Reports and Orders in this docket to adopt auction rules for each auctionable service or class of service. When we announce individual auctions to award licenses in specific services, a Public Notice will include detailed auction procedures. The choice of service specific rules and auction procedures will be governed by the cri teria set forth in this Report and Order. 69. This section will discuss the impact of bidding design on our policy objectives, discuss the choice of design cri teria to meet those objectives with respect to varying ser vice characteristics, and examine several important bidding procedure issues. As discussed in more detail in subsection B, we have concluded generally that awarding licenses to those parties that value them most highly will foster our policy objectives. Subsection C elaborates on our conclu sions regarding auction design: (1) licenses with strong value interdependencies should be auctioned simultaneous ly; (2) multiple round auctions, by providing bidders with information regarding other bidders' valuations of licenses, yield higher revenues and more efficient allocations of licenses, especially where there is substantial uncertainty as to value; and (3) because they are relatively expensive to implement and time-consuming, simultaneous and/or mul tiple round auctions become less cost-effective as the value of licenses decreases. Subsection D contains our discussion of preferred auction designs, and subsection E discusses various bidding procedure issues. B. Effect of Design on Policy Objectives 70. Awarding Licenses to the Parties that Value Them Most Highly. Our auction design choices are calculated to ad vance the goals set forth in Section I. Analysis of the record in this proceeding leads us to confirm our tentative view, advanced at H 34 of the Notice, that auction designs that award licenses to the parties that value them most highly will best achieve those goals.64 Those parties are most likely to deploy new technologies and services rap idly, promote the development of competition for the pro vision of those and other services (including, but not limited to cellular, SMR, paging, and other wireless ser vices), and thus foster economic growth. We note that this conclusion is subject to the provison that certain safeguards to prevent undue market concentration, spectrum warehousing, and to promote economic opportunity may be needed. In general, however, the market value assigned 63 In PR Docket No. 93-144, for example, we propose a two- step method of licensing proposed wide-area 800 MHz SMRs: in the first step, applicants would negotiate in the hopes of avoid ing mutual exclusivity; if they are unable to do so. we propose having lotteries or competitive bidding to resolve the remaining instances of mutual exclusivity.: Cencall proposes that if the Commission does auction SMR frequencies that will be licensed as a result of PR Docket Nos. 89-553 and 93-144, the Commis sion should auction those frequencies one by one and only for individual contested frequencies associated with mutually exclu sive applications. See comments of Cencall. This is but one example of the complexities that we would face were we to attempt to promulgate service-specific auction rules for SMRs at this time. 64 To the extent that the initial auction does not award li censes to those who value them most highly, after-market trans actions will perform this function to some degree, but not without delays and additional transaction costs. 2360 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 to licenses via the auction process can be expected to reflect the benefits to both consumers and producers, now and in the future. 71. The conclusion that licenses generally should be awarded to those who value them most highly received substantial support in the comments, particularly by the academic commenters. As stated by Professor Milgrom: Since a bidder's abilities to introduce valuable new services and to deploy them quickly, intensively, and efficiently increase the value of a license to a bidder, an auction design that awards licenses to those bid ders with the highest willingness to pay tends to promote the development and rapid deployment of new services in each area and the efficient and inten sive use of the spectrum.65 72. The Association for Independent Designated Entities (AIDE), however, disagrees with our presumption that li censes should be awarded to those who value them most highly.66 It also argues that the Commission cannot law fully design its competitive bidding system to maximize auction revenue, citing §§ 309(j)(7)(A) and (B) of the Act. but should base its decisions in this proceeding upon tradi tional public interest factors and the specific statutory ob jectives of competitive bidding. Likewise, PageMart argues that Congress has affirmatively directed the Commission to encourage a diverse and competitive marketplace even if the so-called allocative efficiency of the market is "some what" disturbed as a result."7 PageMart further argues that auction schemes that focus on efficiency alone must be rejected. 73. We disagree with AIDE'S implicit assumption that our purpose is to maximize auction revenue. While Con gress has charged us to recover a portion of the value of the public spectrum made available via competitive bid ding, this does not amount to maximizing revenue, nor is it our sole objective. To the contrary, our goals are to en courage the rapid deployment of service, efficient use of the spectrum, and the other goals enumerated in Section I. Pursuing these objectives is in full accordance with the statutory purpose of auctions as set forth in § 309(j)(3). And, we have concluded, based on our analysis of the record, that we can best achieve these objectives by gen erally awarding licenses to the parties that value them most highly. Moreover, this approach is permitted by § 309(j)(7)(C), which provides that §§ 309(j)(7)(A) and (B) do not prevent the Commission from considering "con sumer demand." such as by assigning licenses to those who would provide services most highly valued by the public. 74. In addition, contrary to PageMarfs contention, the development of a diverse and competitive marketplace is only one of the several goals that the Congress required the Commission to consider in designing systems of competi tive bidding. That objective must be balanced with other objectives of the Act. such as § 309(j)(3)(D)'s requirement that we promote efficient and intensive use of the spec trum. 75. While we believe that the overall presumption should be that those who are willing to pay the most for a spec trum license should receive it. we have established an extensive menu of programs to ensure that the entities designated by Congress have an equitable opportunity to participate in the competitive bidding process. Because of concerns over competition, we havealso created safeguards to prevent undue market concentration, such as placing limits on the amount of broadband PCS spectrum that cellular carriers may acquire and similarly limiting the amount of narrowband PCS spectrum that a single entity can acquire.6* Given these and other steps we have taken, we cannot agree with the proposition that our proposed auction designs promote efficiency to the exclusion or sub ordination of all other goals. 76. Facilitating Efficient Aggregation. In designing auc tions to best meet all our goals, we must take into account the value interdependency among many of the licenses that we propose to auction. As discussed in more detail below, when licenses are highly value-interdependent, i.e., when the value of a license to a bidder depends on the other licenses that the bidder acquires, it is particularly impor tant that we implement auction designs that facilitate effi cient (but not anticompetitive) aggregation of such licenses. 77. Awarding Licenses Rapidly. It is also important to award licenses to the appropriate parties rapidly, since the sooner the licenses are awarded to the parties that value them most, the sooner new service is likely to be available, and the sooner consumers will benefit from competition among new suppliers and between new suppliers and in cumbent firms. We therefore seek to employ bidding pro cedures that can be implemented efficiently and within a reasonable time period. 78. Avoiding Excessive Implementation Costs and Com plexity. Finally, in selecting auction methods the Commis sion must take into account the costs of implementation both for the Commission and potential bidders. We there fore intend to select bidding procedures that are not overly complex relative to the task that they are meant to accom plish and which ensure that the full range of qualied bidders have access to the process. C. Alternative Competitive Bidding Designs 79. There are several auction design elements which, in combination, produce many different auction types. The two most important design elements are: 1) the number of auction rounds (single or multiple); and 2) the order in which licenses are auctioned (sequentially or simultaneous- 65 Comments of PacBell, Attachment by Paul R. Milgrom and Robert B. Wilson at 7. Professors Harris and Katz agree: "Be cause its overall supply is limited, it is important to allocate spectrum to those license holders who will use it to generate the greatest social benefits. The overall presumption should be that those who are willing to pay the most for the spectrum are the ones who will put it to the most valuable use." Harris and Katz concur with us that safeguards against undue market power and measures to ensure appropriate participation of designated en tities may be needed. See comments of NYNEX, Attachment by Robert G. Harris and Michael L. Katz: "A Public Interest As sessment of Spectrum Auctions for Wireless Telecommunica tions Services" at 1-2. 66 Comments of AIDE at 4-5. 6/ Reply comments of PageMart at 4. 6S See, e.g., Second Report and Order in GEN Docket No. 90-314. 8 FCC Red 7700 (1993), recon. pending; First Report and Order in GEN Docket No. 90-314. 8 FCC Red 71(i2 (1993), recon. FCC No. 4-30, released March 4. 1994. 2361 FCC 94-61 Federal Communications Commission Record 9 FCC Red No. 11 ly). These two elements can be combined to create four basic auction designs: sequential single round, simultaneous single round, sequential multiple round, and simultaneous multiple round. A third element of auction design is whether to permit all or nothing bids for combinations of licenses, i.e., combinatorial bidding. Before addressing which of these auction designs will be our preferred design, it is useful to discuss the basic design elements and describe their advantages and disadvantages. 1. Multiple v. Single Round Bidding 80. Auctions may have either a single round or multiple rounds. Single round auctions are often referred to as sealed bid auctions (see NPRM at f 40). In a single round auction, a single bid is submitted and the license awarded to the high bidder. In multiple round auctions, bidders have the opportunity to top the high bids from the pre vious round. Typically such auctions end when no bidders are willing to top the bids from the previous round. A common form of a multiple round auction is the oral auction, also known as an open outcry or English auction (see NPRM at t 37) in which bids are submitted orally in an auction hall.69 81. Alternative Multiple Round Bidding Designs. Multiple round auctions may differ in both the interval between bidding rounds and the method of bid submission. In a traditional open outcry auction, bids are made continu ously, one after another, and items often sell within min utes. In other multiple round auctions, there are discrete intervals between the periods during which bids are sub mitted.70 With discrete rounds, the Commission can control the pace at which the auction proceeds. The method of bid submission depends in part on whether the auction rounds are continuous or discrete. In continuous auctions, bids may be submitted orally, by telephone, or computer. Tele phone bidding is currently used for auctioning financial instruments and the current high bids for these assets are made available to bidders on specially designed computer bulletin boards. If there are discrete bidding rounds bids could also be submitted on paper or computer disks. 82. Advantages of Multiple Round Bidding. The principal advantage of a multiple round auction is the information that it provides bidders regarding the value other bidders place on licenses. This information increases the likelihood that licenses are assigned to bidders that value them most highly and will generally yield more revenue in auctions where there is much uncertainty about common factors that affect the value of a license to all bidders (common value auctions).71 In a single round auction, bidders must guess about the value that other bidders place on a license in trying to submit a single bid that just exceeds the next highest bid. Thus the party who values the license most highly may not submit the highest bid. In a multiple round auction, bidders need not guess about the value the second highest bidder places on the license because bidders have the opportunity to raise their bids if they are willing to pay more than the current high bidder. Multiple round bidding is also more likely than single round bidding to be per ceived as open and fair. No bidder can argue that it did not have the opportunity to obtain a license if it was willing to pay enough. 83. Auction theory shows that multiple round bidding tends to increase revenue in common value auctions by reducing the incentive of bidders to shade down bids to avoid the winner's curse - the tendency for the winner to be the bidder who most overestimates the value of the item for sale.72 Common value aspects of spectrum licenses arise from common technological possibilities, common demand for the services, and the presence of a common aftermarket. Multiple round bidding provides information about other bidders' estimates of common values, allowing all bidders to improve their estimates of these common values. With better information, sophisticated bidders will have less incentive to bid cautiously so as to avoid falling victim to the winner's curse. 84. Several commenters stress the importance of provid ing bidders with information in common value auctions via multiple round bidding.73 For example. Professor McAfee states that "ascending bid auctions tend to produce more efficient outcomes and higher average prices" than first-price, single round sealed bid auctions, and, after noting sources of bidder uncertainty about the value of PCS licenses, asserts that "the auction should be designed to provide bidders with as much information as possible, which means providing information about other bidders' estimates of the licenses' value in the process of running the auction." 74 Multiple round bidding will maximize the provision of such information. 85. Advantages of Single Round Bidding. On the other hand, multiple round bidding does involve some increased administrative cost. Therefore, a single round (i.e., sealed bid) procedure may be an appropriate option for relatively low value licenses in which the costs of implementing a multiple round auction may outweigh the benefits. A sin- 69 Many commenters favored the use of oral auctions exclu^ sively. See, e.g., comments of McCaw, Quentin L. Breen, and U.S. Intelco Networks. Commenters favoring this method praise its openness, ease of administration, familiarity, and high degree of information dissemination. See also comments of BellSouth. Professor R. Mark Isaac, commenting on behalf of CTIA. as serted that auction theory predicts that oral sequential auctions for single units will be efficient, approximately demand reveal ing, and generate the same revenue as the other methods. 70 An example of such a procedure is the recently completed bidding for control of Paramount Communications, which was conducted in intervals over a five month period. 71 In a pure common value auction, the item up for auction has the same value to everyone, but bidders' valuations at the time of the auction differ because they have different estimates of that underlying true value. " John McMillan, Games, Strategies and Managers. (New York: Oxford University Press), at 142-143. When bidders are risk averse there is another effect on revenue opposite to that of the winner's curse -- risk aversion tends to raise bids more in single round bidding than multiple round bidding. John Riley and William Samuelson. "Optimal Auctions," American Economic Review. Vol. 71, No. 3 (June 1981) 73 Only when there are common value elements can bidders improve estimates of their own value of an item based on observing bids of others on that item. 74 Comments of PacTel Attachment by R. Preston McAfee: "Auction Design for Personal Communications Services" at 4-5. See also comments of Bell Atlantic, Attachment by Barry J. Nalebuff and Jeremy I. Bulow: "Designing the PCS Auction" at 12, 20-21, and comments of NYNEX, Attachment by Robert G. Harris and Michael L. Katz at 7-9. For a more detailed discus sion of common value models, see comments of NT1A, staff paper by Mark Bykowsky and Robert Cull: "Issues in Im plementing a Personal Communications Services Auction" at 20-28. 2362 9 FCC Red No. 11 Federal Communications Commission Record FCC 94-61 gle round of bidding may also be appropriate in certain auctions where eligibility requirements limit participation to very few bidders.'5 With a small number of bidders, bidding cartels are easier to organize and may reduce auc tion revenue below fair market value (although not nec essarily result in any efficiency loss). Using a single sealed bid could reduce the likelihood of such collusive behavior since it provides colluding bidders a greater incentive to defect. With a single sealed bid, retaliation must come in later auctions, if any, while with multiple round bidding, retaliation against a cartel defector can come immediately. In opting for single round over multiple round bidding, the Commission must weigh the benefits of deterring collu sion and lower administrative expenses against the costs of a lower likelihood of awarding licenses to the bidders who value them most highly and the loss in revenue associated with a stronger winner's curse. 2. Sequential v. Simultaneous Bidding 86. Licenses may be auctioned either sequentially or simultaneously. In a pure sequential auction, licenses are auctioned one at a time. That is, bidding ends on one item before bids are accepted for another item, as is typically the case in an open outcry auction. In a pure simultaneous auction, all licenses are put up for auction at the same time. That is, bidding is open on all licenses at once until no more bids are received on any license. There are inter mediate designs between pure sequential and pure simulta neous auctions. Related licenses may be placed into groups and all licenses within the group auctioned simultaneously, but the groups can be auctioned one after another, i.e., sequentially. In this case, a choice must be made as to how to group licenses and the sequence in which groups will be auctioned. 87. Simultaneous Bidding for Homogeneous Licenses. An important special type of simultaneous bidding, which we will refer to as a single combined auction (which could incorporate either one or multiple rounds of bidding). " may be useful when auctioning multiple homogeneous licenses." Under this approach, the Commission would combine bidding for two or more homogeneous licenses.' 8 Licenses would be awarded to the highest bidders until the available licenses are exhausted, e.g., four virtually identical licenses would be awarded to the four highest bids. Single combined auctions could also be used for licenses that are close, but not perfect, substitutes. Small differences among licenses could be accounted for by allowing winning bid ders to choose among the licenses in descending order of their bids, i.e., the party with the highest winning bid would pick first. Single combined auctions are used by the U.S. Department of the Treasury to sell (perfectly homogeneous) U.S. securities (see NPRM at H 43). In such Treasury auctions the sales price is generally the bid price. However. Treasury has recently experimented with single: price auctions in which all successful bidders pay the same price the highest losing bid. 88. Comments. Many of the comments and papers writ ten by academic auction theorists strongly favored the use of simultaneous multiple round bidding.' 9 Those favoring simultaneous multiple round bidding argue that it permits bidders to receive greater information during the bidding process and allows bidders back up strategies that take account of the value of interdependencies among licenses. Other academic papers, however, while incorporating a certain degree of simultaneity in their auction design, fa vored greater reliance on sequential bidding.80 89. Advantages of Simultaneous Multiple Round Bidding. Simultaneous multiple round bidding has a number of important advantages over sequential auctions for awarding interdependent licenses. First, they are more likely to award interdependent licenses efficiently to those who value them the most and aggregated in the way that is most valuable. This increased efficiency derives from the in formation about the value of interdependent licenses pro vided to bidders during the bidding process and the opportunity to use that information because all such li censes are available until the close of the auction. Second, simultaneous multiple round auctions are likely to raise more revenue than sequential auctions because they miti gate the effect of the winner's curse. Third, they avoid the need to choose the sequence of bidding.81 • 5 A minority of commenters strongly support sealed single round bidding. They argue that it is less subject to manipula tion than oral bidding and is easier to implement than oral bidding. See comments of Richard S. Myers. Others support using sealed bids only in limited circumstances, as when there are only two or three bidders. See comments of AT&T, Cellular Communications, Inc. and Calcell Wireless. 76 This is a special case of a simultaneous auction because bids are accepted on multiple (identical) items at the same time. 77 Two or more licenses are perfectly homogeneous if they are perfect substitutes, i.e., if bidders are indifferent about which one they acquire. Licenses in the same spectrum band, with the same amount of spectrum, and in the same geographic license area may. however, not be perfectly homogeneous for two rea sons. First, there may be differences in the amount and location (geographic and frequency) of spectrum occupied by incumbent users, as in the case of broadband PCS licenses. Second, a bidder seeking to operate in more than one license area may prefer that all the spectrum be on the same channel. Acquiring spec trum on the same channel tends to simplify coordination of interference at boundaries, thus lowering the cost of providing service. 78 This approach was proposed by Bell Atlantic, see comments of Bell Atlantic Personal Communications Inc., Attachment by Barry Nalebuff and Jeremy Bulow at 4-5. It can be used in conjunction with any auction type. 7