Novel-Infrastructure Bidders' Impact on Cost-Based Subsidy Auctions: Evidence from RDOF Phase I

Abstract

FCC Auction 904 (“RDOF Phase I”), a reverse-subsidy auction for broadband ISPs, determined its reserve subsidy amounts using the Connect America Cost Model (CAM). The CAM estimates the incremental cost needed to provision broadband service at a location, based in part on fixed-line infrastructure models such as fibre-optic or cable networks. The auction rules also included clear preferences for higher quality services, but incorporated other aspects of technology neutrality. In the end, three of the top four winning bidders, who collectively received over one-third of awarded subsidies, were not fixed-wireline incumbent ISPs. One of these bidders, SpaceX, committed to provide broadband internet service using a constellation of low-earth-orbit (LEO) satellites, and was awarded about 10% of total subsidies in the auction. Since the cost structure of deploying broadband using LEO satellite constellations likely differs greatly from the cost structure underlying the CAM model (and therefore RDOF Phase I’s reserve subsidies), we use the RDOF Phase I results to address a series of questions. First, did LEO satellite ISP participation in RDOF Phase I affect awarded subsidy amounts in areas where their cost structure was advantaged relative to the CAM model? Second, did LEO ISPs win by out-bidding lower-quality competitors (reflecting a local demand-side advantage) or by out-bidding high-cost incumbents (representing a supply-side advantage)? We conclude with a discussion of the implications of the auction’s structure for promoting cost-reducing innovations in broadband provision technology.