In response to the broadband stimulus notice of inquiry, several economists have submitted a proposal which advocates for ‘’ to distribute the $7.1 billion broadband stimulus funds. The economists argue “…procurement auctions offer NTIA/RUS the most promising method of maximizing broadband improvement while also creating some level of ‘temporary, timely, and targeted’ stimulus.” Procurement auctions, also sometimes referred to as reverse auctions, are a controversial approach to distributing telecom subsidies and grants. They’ve been proposed in the past for the current . This current proposal was signed off by seventy-one economists, including two Nobel Laureates.

Under a procurement auction, companies ‘bid’ for monies, in this case, stimulus funds, to provide broadband services in a given territory. The thinking is that telecompetitors will compete for the stimulus money by submitting bids to an auction process. The winning bid consists of the company willing to provide the service for the least amount of money. The economists provides this synopsis of their plan:

In procurement auctions for broadband, the government would specify its objective and ask firms to bid for the right to meet that objective. Consider, for example, a rural area with no broadband service. The government can ask firms to bid for a subsidy that would make it profitable for the firm to provide service. Firms and other organizations would compete against each other by bidding down the subsidy they need to offer service. The firm that commits to provide broadband in that area for the smallest subsidy would win the grant.

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Recognizing the controversy of procurement auctions and the departure from the status quo that they represent, the proposal suggests performing a ‘trial’ first. “This approach sets up a natural experiment allowing comparison of procurement auctions to the traditional approach. If the experiment is successful, the procurement auction mechanism can be expanded in scope to encompass other regions and stimulus dollars (potentially all remaining stimulus funds).” The proposal suggests breaking the U.S. into six regions, closely following the (REAG) system used by the FCC for spectrum auctions. An auction would take place for each region.

The proposal offers a very ‘simplified’ view of the auction process. As is the case with all issues relative to big government programs like this, the devil is in the details. While auctions may introduce some efficiencies, they’re no ‘silver bullet.’ Issues including the regional approach, as well as defining the fair selection criteria for such auctions are no simple tasks. For example, by taking a regional approach like the one suggested, you severely limit the number of companies who can participate. Only companies with considerable scale could take that type of regional approach. We’re skeptical that would solve the problem. You need smaller companies at the grass roots level to realistically address the rural broadband problem. Given the time constraints, coordinating a significant number of smaller companies to respond to a single regional auction seems unlikely. Perhaps such an approach at the state level could make sense, but even then, it would prove difficult

What do you think of the auctions approach? Share your view by using the comments tool below.

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8 thoughts on “Economists Argue for Broadband Stimulus Auctions

  1. Re-read the comments more closely…the comments do not say that the auction regions should be REAG, only that auctions be held in regions representing 1/3 of the country to set up a natural experiment.

  2. Whether it’s the six REAG regions or regions representing 1/3 of the country, I still question how this approach would reach down to the local level that I think you need to get broadband to unserved. Auctions are a blessing and a curse. They’re very efficient, but they favor scale (which is why a handful of large companies control the vast majority of wireless spectrum today). Part of the reason why broadband is lacking in certain rural territories is because the lack of scale makes it unattractive to all but those who are at the grass roots level. So unless these auctions focus on the thousands of small communities where broadband is lacking, it won’t fix the problem.

    Managing Editor, Telecompetitor

  3. Again, you are missing the point. The paper argues for an experiment to hold auctions for stimulus in 1/3 of the US but is agnostic on the size of the regions in the auction. The auction regions could be very small: county-level, perhaps, which would allow smaller bidders to compete for stimulus funds.

  4. Auctions like this lead to a short-term view of investment. Rather than a wireline solution which will likely be fiber-based, the winners of such reverse auctions will be those who deliver broadband wirelessly. Sure, they can do 3, 5, maybe 10 Mbps, but it’s shared access with limited growth potential.

    If the gov’t wants broadband for the future, it needs to be fiber in most areas and wireless where it’s prohibitively expensive (i.e. where there’s there’s a very low population density or rugged terrain).

  5. The “point” of the stimulus is to provide jobs by providing much needed broadband service to the un/under served markets…. and the time frame is NOW! Anyone that expects NTIA/RUS to manage an “experiment” is expecting too much.

    Let businesses that submit Business Plans that answer ALL of the critical questions get the funding. THEN hold them accountable for executing their Plans.

    Any more complicated than that and it’ll be 2014 before anything happens.

  6. It seems to me that the proponents of this auction proposal are suggesting that the country be broken up into 6 regions and one auction would be held in each of these regions. In my opinion this method would preclude all but the largest carriers from participating/bidding. And by the way I should mention that I do not have a PHD in economics, my only credential is that I have served rural communities for 30 years.
    I have to say that I don’t fully understand the rationale of requiring such a high level of efficiency. Efficiency in of itself is a worthy goal however the most highly efficient companies also employ the fewest people per customer served. A large highly efficient company will simple displace the smaller lower efficient companies already serving in a given area (Yes, there are a ton of small companies serving, at least in part, the very areas that would be auctioned). Profits end up in the bank accounts of a select few instead of staying and being reinvested in the community being served.
    Yes I understand that the end result could be broadband availability at higher speeds and lower prices but at the same time more people are unemployed and a ton of small players file for bankruptcy, taking the small towns and villages they serve further down the path of economic ruin. Oh and by the way unemployed people cannot afford broadband at any price.
    What is wrong with allowing the small companies with a long history of providing service in sparsely populated areas apply for and be awarded grant monies? These companies know what it takes to serve these areas, they live in the communities they serve and they can continue to provide long term and “sustainable” economic benefit to the areas they serve.
    My 2 cents, ELD

  7. I’m new to this discussion, and maybe it’s already considered, but “number of work hours created” seems like a useful metric. Like one of the other responders said, the most efficient companies (which may be based on short-sighted wireless limitations) won’t create many jobs- just profits that will be put in the bank.. and likely kept in t-bills or cash, given this economy.

    I don’t have a good feeling about the reverse auction as a result, but admittedly I don’t know what the alternatives are.

    -MJF

  8. The one part of this discussion that I think is being misrepresented is the level at which large providers would be interested in participating in this theoretical auction. Given the constraints already place on NTIA grants by the law–particularly the potential interpreation of open access–it’s highly unlikely the biggest operators would be active participants.
    Maybe this is too simplistic of a view but couldn’t the concern over large operators dominating be alleviated and a desire to achieve more competition be accomplished by disqualifying any operator from bidding on territory that falls into its “incumbent” serving territory.

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