The recent bankruptcy decision on the avoidance of the Federal Communications Commission’s claim against General Wireless Inc. must be reversed on appeal or through legislation. Of the $1.06 billion GWI successfully bid for 14 personal communications services licenses, it can now avoid paying all but $166 million, an amount the bankruptcy court determined these licenses were worth at the time of issuance. But the harm is not the voided debt. The winning bids if these licenses had been re-auctioned also would have been well below a billion dollars. Rather, the real problem is that if the GWI decision is not reversed on appeal or through legislation, it could severely undermine the efficiency of future auctions.
The possible ill effects on auctions look daunting. It is likely that the GWI decision would inflate bids even if installment terms are not offered. This is because undercapitalized companies would have an incentive to make high-end bids with the hope that the actual price might be lower if the license value has fallen by the time of issuance. In that case, such companies could subsequently go bankrupt and seek a return of a substantial portion of the payment they made to the government. It is even possible that parties could be enticed to place winning bids that they have no intention of paying. This might be an attractive strategy because the auction winner would be assured of getting the license and would know that the ultimate price paid would be determined by a bankruptcy judge in a subsequent proceeding.
Such insincere bidding would undermine the efficiency of the auction process because the most qualified applicants would be less likely to win. In fact, they might not even enter the bidding. In that case, auctions would become the latest example of Gresham’s Law-“bad money drives out good.” To avoid these possibilities, the FCC could resort to requalification of bidders, but then many of the advantages of auctions would be lost.
The benefits of auctions have been greater than generally perceived. Auctions have assigned licenses far more efficiently than administrative hearings and lotteries; caused the FCC to make more spectrum available for more new services in a shorter time than ever before; and led the FCC to give licensees more leeway in deciding how they would offer these new services. It behooves the FCC to fight this decision on appeal and Congress to expeditiously enact pre-emptive legislation. Otherwise, many of these auction benefits will be put in jeopardy.
Peter K. Pitsch
Carriers will reap non-voice benefits