Do FCC's harsh penalties on defaults make sense?

SUNDAY OUTLOOK

August 21, 1994|By Michael Dresser

The Federal Communications Commission's recent auction of interactive television licenses brought in $215 million in winning bids, but nearly 30 winners have since defaulted on their down payments. Those companies say they were surprised to learn the technology to deliver such services is not available yet.

The FCC has taken a strict line, insisting the companies will lose their licenses and have to pay a penalty. It has shown no inclination to loosen the rules for the broadband wireless auctions that lie ahead.

Is the FCC being unreasonable? Do the defaults indicate any fundamental problem with the license auctions or the prospects for interactive television?

Reed Hundt

FCC Chairman

Absolutely not. In any auction, just as in any competitive industry, there are always some dropouts from the process.

Think of it this way: The auction is the starting gun that kicks off a race to the marketplace and the bidders compete with each other to bring new products to consumers at competitive prices. But, as in any race, some companies will stumble and fall and others will stride forward.

But the critical fact is this: The public is not harmed when someone defaults in our auction and drops out of the race to earn a place on the information highway. That license will simply be reauctioned, the FCC will keep the upfront payment and any other money collected and the defaulter is liable for the difference when we reauction that license.

There are two important things to note about the auctions we held during the week of July 25. First, 100 percent of all bidders in the narrow-band personal communications services and 85 percent of all bidders in the interactive video and data services auction made their required down payment. That means nearly everyone is still in the competitive race.

Second, we've already raised $137 million in upfront and down payments. That's $137 million more than the public has ever obtained for licenses to use the airwaves.

Herschel Shosteck

Market economist,

Herschel Shosteck Associates

There's still a lot of people in there who are trying to bid on licenses and then flip them before they have to pay. It just seems they couldn't do the flip in time.

The irrational people came in and thought they could speculate on it, but the rational price had already been bid.

Some got burned. I think that's marvelous and if they got burned on the penalties that'll teach the speculators that the government is serious about protecting the public wealth.

Thomas K. Crowe

Telecommunications attorney,

Irwin, Campbell & Crowe

I don't think the rules really came as a surprise to anybody or were in and of themselves unfair. You'll always have a certain percentage of bidders who would be unable to raise the money on deadline and that'll probably happen in broadband too.

The rules were intended to be in place regardless of the availability of equipment or not. If equipment's not available, the commission's theory is that that's one of the risks of this process.

There is something known in auction theory as "the winner's curse." Once that happens, it's very hard to build a profitable business around a winner's-cursed license.

August E. Grant

Associate professor

of mass communications,

University of Texas

In the past the FCC has given away spectrum via lottery. Many of the people who won those lotteries became millionaires through the lottery. Any time the FCC doles out spectrum, somebody expects to get rich. The great thing about the auction is this time the government gets the money.

Interactive TV will never be a huge market. There are three things you can do with interactivity -- data retrieval, transactions and communications.

Most interactive TV systems are built around information retrieval and transactions, but most people like communications.

They like e-mail, they like chat lines, and current interactivity doesn't bring this in. What is the killer application that will drive this technology? We don't have it.

My prediction is that this spectrum will eventually be extremely valuable for the owners but we have not seen that application. It will be some kind of interpersonal application.

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