Private Property, Economic Efficiency, and Spectrum Policy in the Wake of the C Block Auction

But if some of the consequences of his action are outside of the sphere of the benefits he is entitled to reap and of the drawbacks that are put to his debit, he will not bother in his planning about all the effects of his action. He will disregard those benefits which do not increase his own satisfaction and those costs which do not burden him. His conduct will deviate from the line which it would have followed if the laws were better adjusted to the economic objectives of private ownership.(1) I. INTRODUCTION The most efficient means of distribution of scarce goods is private ownership. When private ownership is either expressly allowed or government-use rules closely resemble private property, the good is put to its most highly valued use. Rules of private property are especially necessary when valuation of the commodity is unclear. When the efficiency of private property exists, holders of goods must account for the goods' costs. The failure to create efficient rules by financing outside of private capital markets and the failure to properly institute property rights in spectrum created the current problems with the C block spectrum auctioned off by the Federal Communications Commission (FCC or Commission). As part of the 1993 Budget Act, the FCC was given the power to use auctions in awarding licenses for spectrum use.(2) The original C block spectrum auctions began December 18, 1995, and concluded May 6, 1996.(3) The C block auction was for a designated portion of the spectrum called Personal Communications Services (PCS). Personal Communications Services networks provide users with wireless data transmissions, voice transmissions, and electronic mail. Personal Communications Services is expected to offer less expensive services with stronger connections.(4) Unlike the previous A and B block auction, reserved and dominated by large bidders such as PrimeCo, Sprint Corporation, and AT&T Corporation, the C block auction was unique because it targeted smaller businesses that, in some cases, outbid large bidders by up to three times the A and B block amount.(5) In the short term, the C block auction appeared a resounding success. By offering favorable terms to those companies qualifying under FCC guidelines as a small business, the bidding resulted in a frenzy that drove up auction revenue. By the time the C block auction concluded, the total amount bid for the C block was $10.2 billion.(6) This was more than double the revenue of the A and B blocks combined.(7) For reasons explained in this Note, the A and B block licensees paid an average price of $16 per person covered in a territory (POP), while C block licensees bid more than $40 per POP for a winning spectrum bid.(8) While C block participants bid higher prices for spectrum., big bidders who entered the market first achieved greater economies of scale than newer companies. For instance, it was estimated that Sprint may have a 30 percent cost advantage over smaller companies.(9) This advantage is accomplished because a company like Sprint can use national advertising at 50 percent the cost per viewer than a smaller company using local advertising.(10) Economies of scale are not the sole problem for small bidders. Even though conditions in the capital markets have been favorable, there was a 70 percent plunge in values of comparable debt and equity issuers.(11) Wall Street analysts have estimated the fair market value of the C block at $10 per POP, making it difficult for small bidders to raise the funds needed to build the necessary infrastructure for their networks.(12) This led to the current problem. The C block rules required only a 10 percent down payment and then allowed payments to be made over ten years.(13) When those payments came due, C block licensees had trouble meeting their obligations. In fact, three bidders filed for Chapter 11 bankruptcy protection. General Wireless, which sought Chapter 11 protection, still owes the FCC over $953. …