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World’s Biggest Auction Winner

In 1995 Lynnea Bylund became the first female in the world to be awarded a Broadband PCS operating permit – she was one of only 17 winners, along with Sprint, AT&T, Pacific Bell, etc., in the biggest cash auction in world history raising a whopping $8 billion – her company was awarded licenses to operate wireless systems in Hawaii and American Samoa – South Seas Satellite Communications Corporation and Proteus, Inc.

FCC CONGRATULATORY LETTER FROM CHAIRMAN (PDF)

Telecom Giants Win Auction & Meet Clinton

PCS WINNERS COMMENCE SERVICE FCC PRESS RELEASE (PDF)

MacNeil Lehrer

MR. SOLMAN: And speaking of American Samoa, Lynnea Bylund is president of the South Seas Satellite Communications Corporation, bidding on one of the two PCS licenses for that remote outpost of the American market. Somewhat less secretive than Sprint, she shared her strategy with NewsHour reporter Ron Dunsky.

The MacNeil/Lehrer NewsHour – Lynnea Bylund (in bold)

February 3, 1995, Friday Transcript #5156

MR. MAC NEIL: Next, a novel approach to some novel technology. The Federal Communications Commission is nearing the end of a long and complicated auction the government hopes will yield big bucks. Business Correspondent Paul Solman reports.

Lynnea Bylund Interviewed on MacNiel-Leher

MR. SOLMAN: The right to use our airwaves.

SPOKESMAN: Let the auctions begin.

MR. SOLMAN: Now the government used to give these rights away on an exclusive basis to the radio and TV frequencies in different areas of the country, for example. And even as much lower frequencies began to be used, the so-called cellular telephone, the government was still giving away our airwaves by lottery. MIT economist Jerry Hausman thought that was sort of foolish.

JERRY HAUSMAN, Economist: They did the cellular lottery for Cape Cod, a dentist won sold it a week later for $40 million. Now, I’ve never really thought the dentists are the truly needy in this country, and so it’s much better for taxpayers to get the money than the truly needy dentist who won the Cape Cod cellular franchise.

MR. SOLMAN: This is actually going to make a difference to the two of us as taxpayers?

JERRY HAUSMAN: Yes. In fact, it’s going to lower the deficit. The government’s going to get the money, and let’s say it’s twenty to forty billion dollars, that’s real money even in Washington nowadays.

MR. SOLMAN: And, remember, it’s your real money and mine. Even Hausman’s low estimate, $20 billion, would work out to about $200 per American household for the PCS licenses. Okay. Time out for a brief moment of science here on the NewsHour. This some of you may recall from physics class is the electromagnetic spectrum, cosmic rays up here at the highest frequencies and shortest wave lengths down through X-rays, visible light, that’s those colors you see, radar, TV, that’s about there, radio, and down here at the lowest frequencies and longest wave lengths, cellular telephone right about there maybe, and now personal communications services, or PCS, down even lower. Now, let’s cut through the actual science part of this because the business person simply needs to know that way down in the PCS band you need to put up more transmitters to give the phones a reasonable range. And that costs money. But the payoff could be tremendous, according to Reed Hundt, chairman of the Federal Communications Commission, which is running the PCS auction.

REED HUNDT, Chairman, FCC: We will see about 1 percent added to the Gross National Product of this country through the development of a mobile communications interest, about 300,000 new jobs in mobile communications alone, and another 700,000 jobs that are jump-started into being because of the global communications business.

MR. SOLMAN: In short, this could be a boom industry, and at a pre-auction press conference featuring, by the way, not one but two FCC officials who bore a startling resemblance to the Vice President, we were given a sampling of the world beyond cellular, so-called personal communications services, or PCS, featuring Dick Tracy wrist phones, wireless computers, and the latest in mobile phones made by Motorola.

UNIDENTIFIED WOMAN: It’s a handset that you can use to walk through the streets of Washington, D.C., and communicate. MR.

SOLMAN: So I can just make my little calls here — this is just like a cellular phone?

UNIDENTIFIED WOMAN: Sure, but it has total quality which is comparable to your wire line service that we’re accustomed to using in our offices, except for you’ll have that capability walking through the streets.

MR. SOLMAN: Because this is digital?

UNIDENTIFIED WOMAN: Yes, completely digital.

MR. SOLMAN: So bottom line, how much is a license for PCS worth, considering there will be two licenses per region? Well, consider the current value of the more powerful cellular band, where there are also two licenses per region.

JERRY HAUSMAN: The way that the world has typically done it, it’s all — it’s called a “per pop” basis.

MR. SOLMAN: Per op?

JERRY HAUSMAN: It’s per population. So the prices vary anywhere between 95 dollars if you go into the South and Alabama per pop, and if you look at New York or San Francisco or Los Angeles, the value is probably about $300 or even more per pop.

MR. SOLMAN: That’s per head, per person.

JERRY HAUSMAN: Per person.

MR. SOLMAN: In other words, say a billion dollars for a cellular license in San Francisco to a half billion for LA, maybe three billion for New York. Moreover, this business has been growing at a mouthwatering 35 to 40 percent a year. Add in the greater clarity and privacy of a digital signal, and you begin to see why PCS is going like gangbusters wherever it’s already available, like England. If they’d had PCS sooner, those sizzling cellular calls of the chatty royals wouldn’t have been picked up by nosey scanners. Barely a year old in England, PCS is already getting major use and has been signing up 25 percent of all new mobile phone customers. Hong Kong has four competing PCS companies, and they’re all growing, and Australia has decided to ditch cellular altogether in favor of PCS. But PCS also has certain disadvantages. It requires more transmitters, more money, to buy out everyone from police and fire departments to ambulance and oil companies who currently have rights to this part of the spectrum. And, remember, cellular has a big head start. So what are the new PCS licenses going to go for per member of the population?

MR. SOLMAN: What’s the range you can get in LA, for example?

JERRY HAUSMAN: You could get a range of between let’s say $25 and $125.

MR. SOLMAN: That’s a heck of a range for an auction.

JERRY HAUSMAN: Yes.

MR. SOLMAN: A heck of a range and for the companies involved a heck of a high-stakes game. In fact, this auction could be a matter of life and death for today’s phone companies.

JERRY HAUSMAN: It’s a really tough decision for these large companies who have been regulated monopolies for the last fifty, sixty years, and now all at once face a new technology, face decisions, you know, like we saw in computers 30 years ago, should IBM be a tabulating company forever, or should IBM go into computers? IBM did and have 30 years of being a great company. Other companies who were way ahead of IBM in electronics at the end of World War II decided not to go into computers. Sperry Rand – – do we know who they are anymore?

MR. SOLMAN: Thus, the bidders are under intense pressure which the government is trying to exploit to maximize its take. So the FCC has created an elaborate auction, simultaneously selling off two PCS licenses in each of the country’s 51 calling areas, in a process that could take weeks even months. There are booths on site where you can log in your bid, or, if you prefer, the FCC has operators standing by to take your call. Finally, you can log into the FCC computer from any location, no matter how remote.

COMMERCIAL SPOKESPERSON: Remember when Sprint’s fiberoptic network just meant a great phone call?

MR. SOLMAN: Sprint is not only using fiberoptic lines but according to the New York Times is submitting encrypted bids over them, “from a sealed war room at a secret location somewhere in Kansas City. Security is so tight that visitors are blindfolded when to the site.” But everybody, no matter where they are, plays by the same rules as Gina Kenney of the FCC explained.

GINA KENNEY, FCC: The first week we bid once a day. The second week we’ll have two rounds. And the bidding stays open on all the markets until each one is closed. In other words, New York, the bidding on New York won’t close until the bidding on American Samoa closes, for example.

MR. SOLMAN: And speaking of American Samoa, Lynnea Bylund is president of the South Seas Satellite Communications Corporation, bidding on one of the two PCS licenses for that remote outpost of the American market. Somewhat less secretive than Sprint, she shared her strategy with NewsHour reporter Ron Dunsky.

RON DUNSKY: How much did you bid?

LYNNEA BYLUND: South Seas Satellite Communications Corp.: We started very low. We started at $6.

RON DUNSKY: $6, 6 American dollars, are you serious? Why so low?

LYNNEA BYLUND: We really don’t know what these licenses are going for. We don’t know what this particular license will be going for, so we wanted to start low. That’s part of our strategy. We’ve been working with game theorists to put a strategy together, and we felt that coming in, opening with a very low bid was the way to go, and then we can see how others bid.

MR. SOLMAN: Now, the South Seas Satellite strategy in American Samoa was fairly straightforward. As her game theorists advised her, even a measly $6 bid would keep Bylund in the game, and if no one countered, snag a license covering 50,000 people for the price of a pina colada. But the big players have a more complex bidding problem, not only how much to bid but also how many markets and which to bid, so they need more complex game theory, and to explain that, we need a few more moments of your time, plus two leading game theorists, Adam Brandenburger of Harvard and Barry Nalebuff of Yale, who agreed to show us the kinds of exercises they’ve been putting their multibillion dollar clients through to sharpen their bidding savvy. Again, they talk in dollars per person and the lingo “per pop.”

BARRY NALEBUFF, Economist: One question is: How aggressive should you bid? How many licenses should you bid for? Let’s take a specific case. Two markets, Boston and Philadelphia. Let me be AT&T. I’m the bidder who values licenses the most. I value them at $10 a pop.

MR. SOLMAN: And Adam.

ADAM BRANDENBURGER, Economist: I’ll be Sprint. I’m the smaller of the two players. Let’s say $9 a pop for me.

MR. SOLMAN: So the state of play at the moment, two bidders left, and in Boston, AT&T has the top bid $7 per pop and Philadelphia, it’s Sprint at $7 a pop. It plays to you, AT&T. What do you do?

BARRY NALEBUFF: What can I do? I’ve got to bid.

MR. SOLMAN: Now what happens next seems inevitable. Each player bids up to his limit, and the one with the higher limit, in this case Barry Nalebuff, representing AT&T, wins. And that’s the way it should be, right? Wrong, says the game theorist.

BARRY NALEBUFF: I won but not really. I got two licenses for $19, they’re worth $20. That’s only a profit of one. When we started out, I had one license at 7, it was worth 10. That was a profit of three. I lost $2 in the process.

MR. SOLMAN: So what would a game savvy player have done? Let’s roll back the clock. AT&T, what should you have done?

BARRY NALEBUFF: Do nothing. Sit on my hands, take advantage of the fact that I’ve got a great license at 7 and making $3 dollars and not try and raise the bids anymore.

MR. SOLMAN: And what should you have done, Sprint, had AT&T done nothing?

ADAM BRANDENBURGER: I certainly shouldn’t escalate the bidding. I’m in the weaker position anyway. If AT&T is going to stand pat, that’s the best thing for me too.

MR. SOLMAN: And this is just what these guys have been teaching their big clients, how and why to exercise restraint; that they could easily be better off with fewer licenses but for less money, a result of game theory’s basic technique; you put yourself in the other person’s shoes to anticipate his or reaction, and thus perhaps make a very different decision, in the auction, a different bid. Meanwhile, back at Samoa, round one was over, and the South Seas strategy had yielded some clues as to the license’s value. The $6 bid had been topped by one competitor at 10,000. The leader was up at 30,000. What lies ahead for South Seas Satellite.

RON DUNSKY: In the end, how much money do you think you’re going to have to spend?

LYNNEA BYLUND: I don’t want to give away my strategies.

MR. SOLMAN: In fact, virtually every bidding strategy had a game theorist or two behind it, partly a result of game theory being hot this year, having just won the Nobel Prize in economics. But the most significant game playing went on before the auction even began, as big corporations, the regional Bell companies, long distance carriers, cable TV, and cellular firms, formed alliances to build the national networks consumers presumably want. To Barry Nalebuff, that’s the real message of game theory in this case.

GARY NALEBUFF: It’s now about beating other people. It’s not even how you play the game. It’s what game you play. And if you’re not playing the right game, you’d better change it, and game theory helps you understand how.

MR. SOLMAN: Indeed, that’s just what the many bidders seemed to have done by building alliances which have exercised enormous restraint in the bidding so far. After the first round, bids totaled only $379 million, at the end of two months, now a mere $4 1/2 billion, only about 45 bucks per U.S household. But it’s still early. The promise of PCS remains. A Russian delegation was picking up pointers for its PCS auction. The bidding booths were full, and these days everywhere you look, it seems, there are new signs of the wireless bonanza.

RECAP MR. LEHRER: Again, the major stories of this Friday, President Clinton proposed raising the minimum wage 90 cents over the next two years to $5.15 an our, and the nation’s unemployment rate went up last month .3 of a percent to 5.7 percent. Good night, Robin.

MR. MAC NEIL: Good night, Jim. That’s the NewsHour for tonight, and we’ll see you again on Monday night. I’m Robert MacNeil. Good night.

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