How electromagnetic spectrum was reallocated with a Nobel Prize-winning theory : Planet Money A Nobel-Prize winner spent years designing an auction to sell off the airwaves, which are owned by the public. But Wall Street found a tiny flaw. | Subscribe to our weekly newsletter here.
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Hacking the Perfect Auction

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Hacking the Perfect Auction

Hacking the Perfect Auction

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Ron Bruno worked in TV his entire life.

RON BRUNO: I used to work at a CBS affiliate right here in our hometown, Pittsburgh.

ROMER: After that, he started his own production company, shooting TV shows and commercials.

BRUNO: And I looked around one day, and I had almost as much equipment as they had at the TV station that I worked for.


Which was when Ron decided he might as well start running his own TV station. He partnered with a woman named Debbie Goodworth (ph) and built 11 stations.

BRUNO: And hence we became the Bruno-Goodworth Network.

SMITH: (Singing) WBGN. Ron Bruno was the president. He prided himself on broadcasting local events.

BRUNO: Oh, my gosh. We did everything under the sun - I mean, football, basketball, parades, news. You name it, we were doing it.

ROMER: They showed reruns of "Cagney & Lacey" and a show called "U.S. Bounty Hunters." On Saturday nights, there was a horror movie show called "It's Alive." The local commercials were incredible.


UNIDENTIFIED PERSON #1: This portion of "It's Alive" is brought to you by Ralph's Army Surplus.

UNIDENTIFIED PERSON #2: Ralph's Army Surplus, located in the center of Monroeville, Pa. As soon as you enter the store, you'll be facing one of the area's largest selections of new and used Army apparel, including the new digital camo design.

SMITH: Oh, digital camo - is that all?


UNIDENTIFIED PERSON #2: But that's not all. Ralph's has camping equipment, tents, sleeping bags, knives. So much to choose from, you'll be blown away.

ROMER: Was it a fun job? Did you like the job?

BRUNO: Oh, yeah. TV is in my blood.

SMITH: But seven or eight years ago, Ron got a mysterious phone call. It was from a broker representing an unnamed buyer. The broker asked, was there any chance you might consider selling WBGN?

ROMER: Did they say why they wanted to buy your station?

BRUNO: No, no, no. Of course not.

SMITH: But Ron had heard rumors from other small TV station owners across the United States private equity firms, Wall Street guys were buying up mom and pop TV stations.

ROMER: Ron was not going to be low-balled on the price by some finance guy in a fancy suit. He haggled with the broker. They finally settled somewhere north of $7 million - Ron didn't want to tell me exactly how much - and that was it. Ron was done with WBGN.

SMITH: Normally, private equity firms specialize in buying up poorly run businesses, fixing them up and selling them again. But that is not why the buyer wanted Ron's station. They didn't want the high school football games and that sweet ad money from Ralph's Army Surplus.

ROMER: They wanted something much more valuable. They had spotted a hidden opportunity in the airwaves.


ROMER: Hello, and welcome to PLANET MONEY. I'm Keith Romer.

SMITH: And I'm Robert Smith. Who owns the air all around us? We do. We all do. It is a public resource that TV stations and radio stations and cellphone providers borrow from us.

ROMER: But for decades, the U.S. government has been struggling to figure out the best way to solve this incredibly complicated problem of how to share that resource between all the different kinds of companies who want to profit from it.

SMITH: Today on the show, the government finally comes up with a brilliant plan to divvy up the airwaves.


ROMER: But there was a tiny catch, a little back door in that plan which helped make a small group of very smart people hundreds of millions of dollars.

SMITH: Once upon a time, the airwaves around us were a simple place. Nature gave us visible lightwaves so we could see the blue skies and the yellow flowers and the green grass, each color on its own God-given frequency.

ROMER: Humans came along and said, we can make our own waves to fill up the air. We started sending out AM radio waves, FM radio waves, TV signals.


UNIDENTIFIED ACTOR: (As character) Oh, Lucy, you sure are sensible.

LUCILLE BALL: (As Lucy, whining.)


ROMER: All of these signals broadcast from giant metal towers.

SMITH: We humans didn't want all these frequencies interfering with each other. So in the United States at least, we created the FCC, the Federal Communications Commission, to serve as a kind of traffic cop, policing the superhighway of the sky, making sure that everyone stayed in their own lane. You didn't want 93.9, songs of the '80s, '90s and beyond, to crash into Big Country 94.1.

ROMER: Now, figuring out who actually got a lane - that was a tougher problem. At first, the government just took applications from anybody and said, OK, this one looks good. Economist Peter Cramton says that original process was called a beauty contest.

PETER CRAMTON: Where everybody would argue that the spectrum should be given to them because they were the most attractive. That's why it's called a beauty contest.

SMITH: But soon, there were way more beauty contestants for frequencies than a beauty contest could handle. And the FCC wanted to be fair to everyone, so they decided to assign them at random. They started a lottery.

CRAMTON: You'd apply for a license in Boston, and the FCC would have a pingpong ball with your name. They would put all the Boston license applications - each would have a pingpong ball, put it in a cage. They would spin the cage, and they would pull out one of the pingpong balls. And if it had your name on it, then you got the license in Boston.

ROMER: But you didn't have to know anything about running a TV station or a telecom company to enter the lottery.

CRAMTON: You know, some dentist in Boston might win the license. And then, of course, he has no ability to implement mobile communications.

SMITH: And that dentist who won the license would then turn around and sell it to the highest bidder for millions and millions of dollars. It was not ideal.

ROMER: Then, an even bigger problem starts to crop up for the FCC because the airwaves, the superhighway in the sky - it was becoming more and more crowded. They were running out of lanes.

SMITH: The reason was the object you might be holding in your hand at this very moment - the cellphone. The cellphone uses the same frequencies as TV stations. And for years, the cellphone sort of squeezed between other people's frequencies like a motorcycle through a traffic jam.

ROMER: But cellphones, as you may have noticed, started to demand more and more bandwidth - 1G, then 2G.

SMITH: 3G, 4G, LTE, 5G.

ROMER: Oh, 5G. Is 5G going to come?

SMITH: (Laughter) Where were all the cellphone signals going to go when the airwaves were crowded with "Cagney & Lacey" reruns and high school football games? There wasn't room for everything.

ROMER: Eventually, the problem got so bad that the FCC decided they had to figure out a way to basically tear down the superhighway with all the TV stations and all those lanes and just build a new one from scratch.

SMITH: This is a classic problem in economics - how to reallocate a scarce resource to the people who will make the best use of it. Ladies and gentlemen, may I introduce you to the solution? An auction. For decades, the FCC had been playing around with auctions to sell the TV frequencies instead of just giving them away to dentists. But in order to really free up a lot of room in the air for the cellphones, they were going to need the mother of all auctions.

ROMER: And there is this branch of economics called auction theory, and they have all these cool little variations on the basic auction format. Some auctions are blind. You don't know who's bidding what. Some auctions are not for buyers, where the price goes up and up and up, but actually reverse auctions for sellers, where the price goes down and down and down until there's only one seller left.

SMITH: This new auction would need to be a mashup of all of these - an auction that would coordinate between hundreds of TV stations who had frequencies they might consider selling and all these cellphone companies that might just want to buy - so many different transactions.

GLEN WEYL: It was a complicated problem to solve because they decided they wanted to do everything all at once.

ROMER: This is Glen Weyl, former professor at the University of Chicago, big-time auction enthusiast.

SMITH: Glen says that this new auction needed to completely reimagine the spectrum superhighway.

WEYL: And that requires writing some, like, enormously complicated computer code to, like, do all of that Rubik's Cube solving.

SMITH: So each owner of, let's say, a TV station had to decide if they wanted to sell it for how much, like a secret number. Is that right?

WEYL: Exactly - the minimum amount that they would require to sell it.

SMITH: OK. And then these telecommunications companies, the cellphone companies - they had to decide what frequencies they wanted and how much they were willing to pay.

WEYL: Exactly. That sort of creates a kind of supply and demand. And if those sort of intersect and leave enough money for the government, then you say that the auction is over, and it worked out.

ROMER: To pull this off, the FCC turned to a team led by maybe the greatest auction designer in the world, an economist named Paul Milgrom. It was so complicated that it took years to set up the rules and all these super-powerful computers to run the calculations.

SMITH: They called it a two-sided simultaneous incentive auction - two-sided because there was an entire market of players buying and selling, simultaneous because everyone was bidding at once and incentivized because it was designed to bring every last TV station to the table.

ROMER: And it was the most glorious thing anyone had ever seen.

SMITH: There were all these built-in incentives for both buyers and sellers to just set their prices based on how they actually valued their licenses. It was market efficiency, impossible to outsmart.

ROMER: Glen Weyl says he was at work when he figured out that was not, in fact, the case.

WEYL: I have a very, very clear memory. I was in a seminar at Microsoft Research, where I worked at the time. And there was a presentation by someone who was a colleague of mine and was involved in the auction design. And he was saying, oh, this auction can't be gamed in the following ways and so forth. And someone in the audience raised their hand and said, what do you mean it can't be gamed? One of my friends is making a bunch of money exploiting the auction. I said, that's interesting. And I realized that there was a major vulnerability in the auction.


SMITH: Those mysterious gentlemen who bought Ron Bruno's TV station, the private equity firms who bought dozens of similar TV stations - they were about to make their big move - after the break.


ROMER: Now, so far in this story, we've talked about four major players in the auction - one, the economists, like Paul Milgrom, who helped design the auction; two, the FCC, who ran the auction; three, cellphone companies who wanted to buy spectrum licenses; and, four, TV stations who wanted to sell licenses.

SMITH: But any time you have a big pile of cash trading hands, you can feel fairly confident that there will be at least one more player turning up - private equity and, of course, the people they have to hire to give them sage advice.

COLEMAN BAZELON: My name is Coleman Bazelon, and I'm an economic consultant with The Brattle Group.

SMITH: During the big spectrum auction...

ROMER: The two-sided simultaneous incentive auction.

SMITH: Let's just call it the Super Bowl of auctions. Coleman was advising one private equity firm, although he won't use that term and he won't say which one.

BAZELON: I worked for a bidder that was on the television station side that bought television stations to bid into the auction.

SMITH: Somebody who bought TV stations for the sole purpose of selling them into this auction.


ROMER: He may have been the one who advised the private equity firm that bought WBGN, Ron Bruno's station in Pittsburgh. Coleman didn't say. He's very discreet.

SMITH: He's worked all sides of all different kinds of auctions over the years. And he told us what a consultant normally does.

BAZELON: So I help them prepare for the auction, set up their war room and sit with them during the weeks of bidding through the spectrum auction.

SMITH: War room?

BAZELON: That's what we call them.

ROMER: When Coleman consults on an auction, he basically moves into a company's headquarters, commandeers a conference room, makes sure there's enough tables and chairs for everyone to fit, reliable Wi-Fi.

BAZELON: But on the list is also always - red string licorice is an absolute must. And a big bottle of Tums is also a must.

SMITH: Because an auction is not for the faint of heart or the faint of stomach.

ROMER: These auctions can take months - bidding and counterbidding and crunching the numbers on what happened in one round to figure out what to do in the next round.

SMITH: There are war rooms all around the country, each company with its own Coleman.

ROMER: Before the auction begins, there's this big public debate about what exactly the rules should be. All the economist consultants argue with each other to make it so that the other economist consultants can't use the rules to get an edge over them.

BAZELON: But once the rules are set, all of those same folks turn their attention to looking for holes and ways to exploit holes in the rules.

ROMER: Coleman wasn't in the war room with the private equity guys during the big spectrum auction, but he told us what their basic strategy was, the flaw they had spotted in the matrix.

SMITH: We've been using this metaphor of a superhighway in the sky. And you know how whenever someone wants to build a superhighway in the real world, there's always some run-down farmhouse in the way that the government has to pay way too much money for? The private equity firms had essentially bought all these key farmhouses blocking the new spectrum highway.

ROMER: But the plan was not to stop the highway, to block the auction altogether. It was just to make it more expensive. Private equity and their consultants figured out which frequencies the FCC's computers valued the most, the frequencies you really needed to make the whole reorganization work. Once you had those, you could drive up the prices for all the TV stations, which private equity happened to own a lot of.

SMITH: Would it be within the realm of possibility that you as a consultant would be like, hey, everybody, I found this piece-of-crap TV station; it's super cheap; we think we can use this as a way to increase these other prices? Is that fair play?

BAZELON: It is certainly - something like that certainly is within the rules of the auction. And if you're buying the station, I think that's certainly within how the FCC set it up, for sure.

SMITH: There had been rumblings for years about flaws in the auction, even academic papers written on the subject. Katja Seim is an economist at Yale who at one point worked as the chief economist for the FCC. She looked deep into the rules of the auction and found something curious. The auction design was only perfect as long as the companies that own TV stations only owned one TV station in each market.

KATJA SEIM: If the world looked like that and everybody just had their own property to bid in, then it would be strategy-proof because you just look after your own profitability, and off you go.

ROMER: Right, but the world doesn't look like that.

SEIM: I totally agree.

SMITH: When Katja publicly raised her concerns, the people running the auction basically told her, we have gone too far down this road to try to change things now.

SEIM: The sheer complexity of this auction has meant that the coding and the preparation for this auction was many years in the making. And I think making adjustments while something like this is ongoing is very hard.

ROMER: And even if the FCC had wanted to make a rule requiring private equity firms to not hold out any of the TV stations they had bought, it would've caused a massive legal fight if they tried to require them to sell their properties when they didn't want to.

SMITH: The game was on. March 29, 2016 - the start of the Super Bowl, the most complicated auction in the history of humanity and one of the longest. By the time all the buying and selling and bidding wrapped up, a year had gone by. So let's go through the players and see the final score. Starting with the TV stations, they agreed to sell 175 licenses for a total of $10 billion.

ROMER: The FCC repackaged those licenses into a form our next group, the cellphone providers, could use. They purchased all that freed-up spectrum for just under $20 billion.

SMITH: Ten billion, 20 billion - let's get to the government. After taking out some of the cost, the government ended up with a cool $7 billion in profit.

ROMER: Lastly, the money folks - as Katja had predicted, the private equity firms did pretty well for themselves by exploiting the flaw and buying up some TV stations just to hold them out of the auction.

SEIM: Our estimates suggest that overall payouts went up by something like 7%.

ROMER: But correct me if I'm wrong. We're talking about 7% of $10 billion.

SEIM: Oh, I totally agree. No, no. It's still a big number. It totally - it still is a big number.

SMITH: Seven percent of 10 billion is $700 million - a lot of money for sitting in a conference room eating licorice and Tums.

ROMER: Now, not all of that 700 million went to private equity firms, but a fair amount did. And Katja says there's pretty good evidence that those firms had, in fact, bought TV stations for the sole purpose of keeping them out of the auction to drive up prices.

SEIM: They did not sell, by far, all of the stations that they bought and, in fact, then ended up dumping quite a few of the stations right after the auction.

ROMER: So they were useful as sort of game pieces in this game. But once the game was over, they didn't have much value for them.

SEIM: Exactly.

SMITH: But Katja says focusing solely on the way the auction wasn't perfect might be missing the point. The $7 billion the government got to pocket for being the middleman - that's a nice perk. But the real value of the auction was in solving the problem of how to get spectrum out of the hands of TV stations playing repeats and into the hands of cellphone companies, who could meet this massive demand on the part of consumers.

ROMER: And I realize you're a college professor. This is something that you do all the time. If you were to give a letter grade to this spectrum auction, what grade?

SEIM: Oh, no. Don't make me do that. I would - what would I give it? I would give it an A-minus, maybe.

ROMER: And that's not grade inflation? That's a legitimate A-minus.

SEIM: (Laughter) I don't know. Probably. Yeah, I actually really do think, given the novelty of it, the fact that it ran very efficiently once it was off the ground and running and successfully repurposed spectrum, I actually do think that the FCC deserves a lot of credit for that. And so in that sense, I think they deserve a good grade.

SMITH: You know who else thought the auction deserved a good grade?



SMITH: The mother-freaking Nobel Prize Committee.


UNIDENTIFIED PERSON #3: (Non-English language spoken).

SMITH: Last month, the designer of the two-sided simultaneous incentive auction, Paul Milgrom, and his mentor, Robert Wilson, received the Nobel Prize in economics.


UNIDENTIFIED PERSON #3: For improvements to auction theory and invention of new auction formats.

ROMER: Now, Robert, you and I have been debating for weeks between ourselves what to make of this story because on the one hand, yes, the auction was the teensiest bit flawed, but on the other hand, it was still better than any solution that any human beings had ever come up with before to solve this kind of problem, even if it leaked hundreds of millions of dollars.

SMITH: My only sticking point, really, is something we've kind of forgotten through this whole story, which is that these are the public's airwaves. These are my airwaves, and I didn't get the chance to make a bunch of money out of that teensy flaw. That money went to insiders who hired the very few people in the world who understand how the auction works. So I guess my question is, if we were to do this all over again, would it be possible - Nobel Prize-winning, in fact - to make a solution that was slightly less brilliant and slightly more fair?

ROMER: I asked a version of that question to Ron Bruno, the owner of the long-departed and sorely missed WBGN.

And in retrospect, do you, like - knowing everything that you know now, would you still have made that deal?

BRUNO: You know, that's the magic question, and I ask myself that all the time because, you know, knowledge is everything. And, you know, sitting around in Pittsburgh and covering high school football games is a long way off from, you know, some real savvy Wall Street guys that do a good job at what they do, you know?

ROMER: By the way, we looked it up. Those Wall Street guys sold WBGN's frequency into the auction for $20 million.


SMITH: If you are a teacher or a parent playing teacher these days, PLANET MONEY has a tool for you. We make it easy to get our stories into the classroom with short stories, vocabulary lists and tests. That's at

ROMER: Today's episode was produced by James Sneed, with help from Nick Fountain and Gilly Moon.

SMITH: (Imitating announcer) And that's not all.

ROMER: (Imitating announcer) Our editor is Bryant Urstadt.

SMITH: (Imitating announcer) Yes.

ROMER: (Imitating announcer) On top of that, our supervising producer is Alex Goldmark.

SMITH: (Imitating announcer) And go to the NPR shop, where we have tchotchkes and books and patches and mugs and the PLANET MONEY T-shirt.

ROMER: (Imitating announcer) It's got a squirrel.

SMITH: (Imitating announcer) It's got a squirrel.

ROMER: I'm Keith Romer.


SMITH: And I'm Robert Smith. This is NPR. Thanks for listening.

ROMER: (Imitating announcer) Thanks for listening.

[POST-BROADCAST CLARIFICATION: A private equity firm purchased all eleven stations in the WBGN network, not just the flagship WBGN station, for just over $7 million. The flagship station was sold into the auction by the firm for $20.1 million. In total the firm sold five stations for $73.9 million. The audio has been updated to reflect this.]

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