DOJ Files Political Screed Asking FCC to Rig Spectrum Incentive Auction

by on April 23, 2013 · 1 comment

The DOJ’s recommendation would likely reduce the amount of revenue produced by the incentive auction and risk leaving the public safety network unfunded (as the economist who led the design of the most successful auction in FCC history will explain in this webinar on Thursday). The unsubstantiated, speculative increase in commercial competition the DOJ says could occur if the FCC picks winners and losers in the incentive auction is a poor justification for continuing to deny our nation’s first responders the network they need to protect the safety of every American.

Beyond enforcing the antitrust laws, the Antitrust Division of the Department of Justice (DOJ) advocates for competition policy in regulatory proceedings initiated by Executive Branch and independent agencies, including the Federal Communications Commission (FCC). In this role, the DOJ works with the FCC on mergers involving communications companies and occasionally provides input in other FCC proceedings. The historical reputation of the DOJ in this area has been one of impartial engagement and deliberate analysis based on empirical data. The DOJ’s recent filing (DOJ filing) on mobile spectrum aggregation jeopardizes that reputation, however, by recommending that the FCC “ensure” Sprint Nextel and T-Mobile obtain a nationwide block of mobile spectrum in the upcoming broadcast incentive auction.

The new “findings” in the DOJ filing fail to cite any factual record and are inconsistent with the DOJ’s factual findings in recent merger proceedings that contain extensive factual records. The DOJ filing blithely relies on a discriminatory evidentiary presumption to insinuate that Verizon and AT&T are “warehousing” spectrum, and then uses that presumption to support a proposed remedy that bears no rational relationship to factual findings that the DOJ has actually made. The absence of any empirical evidence supporting the relevant conclusions in the DOJ filing gives it the appearance of a political document rather than a deliberative work product crafted with the traditionally substantive and impartial standards of the Justice Department. The FCC, the independent agency that prides itself on being fact-based and data-driven, should give this screed no weight.

DOJ Flip-Flops on Competition in the Mobile Market

The DOJ filing concludes – without citing any evidence – that Verizon and AT&T have “the ability and, in some cases, the incentive to exercise at least some degree of market power, particularly given that there is already significant nationwide concentration in the wireless industry.” This conclusion directly contradicts the representations of the DOJ in its federal court complaint to block the merger of AT&T and T-Mobile. The companies had argued that the absence of T-Mobile would not have a significant impact on the mobile marketplace because, as a standalone company, T-Mobile faced substantial commercial and spectrum challenges. The DOJ refuted this rationale by finding that, “Due to the advantages arising from their scale and scope of coverage, each of the Big Four nationwide carriers is especially well-positioned to drive competition, at both a national and local level, in this industry.” Now, however, the DOJ asserts that Verizon and AT&T are “dominant firms” in the mobile market and that Sprint Nextel and T-Mobile cannot compete in the upcoming incentive auction unless the FCC adopts laws granting them special privileges. “Each” of the “Big Four” could hardly have been “well-positioned” to “drive competition” if half of them require government subsidies to compete – something I expect the federal court judge would have been interested to hear.

DOJ Recommends a Discriminatory Evidentiary Presumption

After flip-flopping on competition, the DOJ theorizes that Verizon and AT&T could use their “dominant” positions in the mobile market to “foreclose” competition by aggregating excessive mobile spectrum. Rather than rely on actual evidence to support its foreclosure theory, the DOJ presumes that Verizon and AT&T are not using their spectrum “efficiently” while assuming that Sprint Nextel and T-Mobile could “effectively” make use of more spectrum. The filing concludes – again without citing any evidence – that Sprint Nextel and T-Mobile would make the “highest value use” of new spectrum “absent compelling evidence that the largest incumbent carriers are already using their existing spectrum licenses efficiently and their networks are still capacity-constrained.” The DOJ offered no explanation for its outrageous suggestion that the FCC should hold certain companies to a higher evidentiary standard (a presumption that must be rebutted by “compelling evidence”) than others (for which efficiency is assumed) when evaluating whether they are using their spectrum efficiently.

The DOJ also failed to offer any actual evidence supporting the notion, reiterated in testimony before the Senate Judiciary Committee, that the FCC “take a close look at whether some of the spectrum already available to some providers is being warehoused and not being used.” The FCC established “build out” requirements to ensure spectrum is not being “warehoused” and has previously found that a “single objective metric” of spectrum efficiency is “neither possible nor appropriate.” If the FCC now intends to consider the efficiency of current spectrum use as a factor in developing its spectrum aggregation and auction rules, fundamental principles of justice require that it establish an open and transparent process for defining spectrum efficiency and apply the new metric equally to all mobile providers after a full factual investigation of their actual spectrum use. Among all agencies, one would expect the Justice Department to understand that without a reminder.

DOJ Recommends an Irrational Remedy

The DOJ’s factual flip-flop on competition in the mobile market and its proposed adoption of a discriminatory evidentiary presumption merely lay the predicate for its ultimate policy recommendation: That the FCC distinguish between “low” and “high” frequencies in its spectrum aggregation rules in order to “ensure” Sprint Nextel and T-Mobile obtain a nationwide block of spectrum in the upcoming broadcast incentive auction. In the past, the FCC could simply decree that only Sprint Nextel and T-Mobile are eligible to bid on certain spectrum blocks or to participate in the auction at all. But, based on the disastrous results of previous spectrum auctions that limited the eligibility of certain types of companies to participate, Congress prohibited the FCC from imposing eligibility restrictions on the broadcast incentive auction.

So how does the DOJ propose that the FCC “ensure” Sprint Nextel and T-Mobile are “winners”? Although it cannot directly limit the participation of Verizon and AT&T, the FCC retains jurisdiction to limit the overall amount of mobile spectrum any one provider can hold. Most economists agree that, if a single provider were able to aggregate a significant amount of the total available mobile spectrum, that provider could use its spectrum holdings to engage in anticompetitive behavior. The potential for excessive aggregation of mobile spectrum would not normally be relevant to a particular spectrum auction because the FCC has traditionally treated all spectrum bands the same in this respect. Now, however, the FCC has proposed to apply different rules to “low” frequency spectrum (i.e., frequencies less than 1 GHz) on a nationwide basis – even though the only new mobile spectrum the FCC has proposed to auction in the last five years happens to be the broadcast spectrum, which, coincidentally of course, is below 1 GHz.

In its recent FCC filing, the DOJ is, also coincidentally, recommending this new approach as well, even though its own factual findings don’t support that outcome. Unlike the FCC, the DOJ has traditionally distinguished among mobile spectrum bands below and above 1 GHz, but only in rural areas. After conducting detailed market-by-market analyses in merger proceedings with voluminous factual records, the DOJ found that mobile providers that lack access to spectrum below 1 GHz “generally have found it less attractive to build out in rural areas.” After expressly considering the question in multiple merger proceedings, the DOJ has never considered the distinction between “lower” and “higher” frequency mobile spectrum competitively relevant in urban areas. As it admits in its filing with the FCC, the DOJ considers spectrum above 1 GHz “just as effective as low-frequency spectrum” when a provider “is attempting to augment the capacity of its network in dense urban areas.”

If mobile providers required spectrum below 1 GHz to compete successfully in non-rural areas, the DOJ could not have truthfully told the federal court that T-Mobile was “well-positioned” to “drive competition” in the mobile market, because T-Mobile has never held substantial “low” frequency spectrum. Despite the fact that T-Mobile has always relied on mobile spectrum above 1 GHz, the DOJ found that T-Mobile managed to build a mobile network covering 90% of the US population and is using that network to compete successfully in the mobile market on a nationwide basis. The DOJ’s factual findings have repeatedly affirmed that, to the extent spectrum below 1 GHz is competitively relevant, its relevance is limited to sparsely populated rural areas where capacity is not a substantial issue. The “spectrum crunch” the incentive auction is intended to ameliorate is a capacity issue caused by the massive growth in data traffic, not a coverage issue, and capacity issues primarily impact areas with high population densities.

The DOJ’s factual findings regarding the competitive relevance of spectrum below 1 GHz would, at best, support a rule limiting the amount of “low” frequency spectrum that a particular mobile provider could hold in low-density rural areas where the distinction between higher and lower frequencies may actually have competitive relevance. Suggesting that the FCC should nevertheless apply such a distinction on a nationwide basis is an irrationally overbroad remedy for potential competition issues that are limited to sparsely populated rural areas when the “spectrum crunch” harms areas with the densest population the most.

It’s also too clever by half in this context. When Congress enacted legislation prohibiting the FCC from imposing eligibility restrictions on the incentive auction, it did so with knowledge that the FCC had not traditionally distinguished among spectrum bands suitable for mobile use. Although the DOJ has recognized a distinction in rural areas during its case-by-case merger reviews, the FCC’s chosen remedy for rural coverage issues has been to mandate by rule that Verizon and AT&T enter into roaming agreements that allow other providers to use their networks, in part because it is often uneconomic for more than one or two providers to build separate networks in areas with low population densities. If the FCC’s findings supporting its roaming orders remain valid, it would presumably be uneconomic for T-Mobile to substantially increase its current rural coverage even if it held spectrum below 1 GHz on a nationwide basis.

DOJ Contradicts Congressional Priorities

Even if “ensuring” Sprint Nextel and T-Mobile “win” spectrum in the incentive auction would prompt those companies to spend the capital necessary to substantially improve their mobile coverage in rural areas (a particularly unlikely outcome for Sprint Nextel, which already holds a nationwide block of spectrum below 1 GHz), picking winners in the incentive auction is inconsistent with Congressional priorities. Among other things, Congress intended that the incentive auction raise $7 billion for the construction of an interoperable public safety network first recommended by the 9/11 Commission Report over a decade ago. The DOJ’s recommendation would likely reduce the amount of revenue produced by the incentive auction and risk leaving the public safety network unfunded (as the economist who led the design of the most successful auction in FCC history will explain in this webinar on Thursday). The unsubstantiated, speculative increase in commercial competition the DOJ says could occur if the FCC picks winners and losers in the incentive auction is a poor justification for continuing to deny our nation’s first responders the network they need to protect the safety of every American. For that reason alone, I expect a thoughtful and independent FCC to reject the politically motivated recommendations of a DOJ that considers itself unaccountable to Congress.

  • Steve Crowley

    This makes a lot of sense to me, and I appreciate the helpful history and perspective. It addresses nagging concerns I’ve had about whether Sprint and T-Mobile really want to build nationwide 600 MHz networks, and the role roaming agreements could play. A few comments and questions, some rhetorical:

    – Will free market think tanks support such roaming agreements and, if not, what alternative would they propose?

    – Regarding the effectiveness of above/below 1GHz spectrum in urban areas, it could be argued that spectrum above 1 GHz is more effective. Interference travels further at lower frequencies than it does at higher frequencies, all else equal, and can outweigh improvements in coverage at lower frequencies. Also, antennas are smaller and easier to place at higher frequencies. 600 MHz antennas are quite large. 600 MHz can be made to work in urban areas but operators are increasingly finding they’d rather not if there is a higher-frequency alternative.

    – The preference Sprint and T-Mobile might get is characterized as a “government subsidy.” Could one say that AT&T and Verizon benefit what was 20 MHz of spectrum given to each of their predecessor companies at the start of the cellular era? Should that spectrum be put up for auction similar to how spectrum the broadcasters were “given” is to be auctioned?

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