Spectrum auction restrictions are a bailout of T-Mobile and Sprint

by on December 12, 2013 · 0 comments

Call it what you want: a bailout, a thumb on the scales, bidder restrictions–the FCC might conspicuously intervene in the 2015 incentive auctions at the behest of smaller carriers and public interest advocates.

Chairman Wheeler’s recent comments indicate the FCC may devise a way to prevent the largest two carriers–AT&T and Verizon–from purchasing “too much” of the television broadcasters’ spectrum at auction. AT&T likely sees the writing on the wall and argues that if there are auction limits, the restrictions should apply only to the auction, rather than more extreme restrictions that would penalize AT&T and Verizon, the largest carriers, for previously-acquired spectrum. As The Switch’s Brian Fung put it,

the small carriers favor what are called “asymmetric” spectrum caps that affect various carriers differently, while opponents prefer “symmetric” caps that don’t account for existing market positions.

While I wish AT&T put up more of a fight to auction interventions, they (and staff at the FCC) are handicapped in pursuing an unrestricted auction. The blame lies mostly with Congress who gave the FCC vague (thus ripe for abuse) and conflicting mandates spanning decades. The 1993 law authorizing auctions, for instance, requires the FCC to “avoid[] excessive concentration of licenses” and to “disseminat[e] licenses among a wide variety of applicants” among other regulatory carve-outs for smaller competitors. These latter requirements, if implemented as rigorously as smaller carriers would like, directly undermine the purpose of the 2012 American Taxpayer Relief Act that requires the upcoming spectrum auctions raise $7 billion for a public safety broadband network and $20 billion for deficit reduction.

By asymmetrically penalizing AT&T and Verizon, the FCC increases the probability the auction fails to raise the tens of billions of dollars needed (see Fred Campbell’s recent paper). I haven’t heard a policymaker speak about the incentive auction without remarking how extraordinarily complex it is. That complexity–as was made clear in this week’s Senate hearing on the subject–means no one knows how much spectrum will be auctioned off or how much money will be raised. I was doubtful the FCC would secure the called-for 120 MHz for auction in the first place, but the Senate hearing convinced me that they might not get even 60 MHz. If the FCC meddles too much and the broadcasters aren’t assured they’ll get top dollar for their spectrum, the broadcasters might not show up to sell.

For many reasons, the FCC should ignore the pressures to restrict the large carriers in bidding. Smaller carriers argue the large carriers will outbid them only to preclude competition and hoard the spectrum. Every major carrier is spending billions to expand its footprint and capacity rapidly so the hoarding argument is hard to accept (not to mention, carriers face FCC build out requirements). The hoarding argument also confounds me because AT&T and Verizon are at the forefront arguing for more spectrum auctions, particularly spectrum from federal agencies. Would they want the market flooded with new spectrum only so they could spend billions to hoard it?

Asymmetric auction restrictions also resemble a bailout for smaller carriers. T-Mobile and Sprint–who most actively lobby for auction restrictions–are not mom-and-pop establishments. Each is a sophisticated, powerful corporation with access to capital markets and backed by larger international telecoms–Germany’s Deutsche Telekom for T-Mobile and Japan’s SoftBank for Sprint. DT and SoftBank have both pledged to spend billions in the next few years to improve their American carrier’s competitive position. Such carriers do not need an FCC handout.

The bailout resemblance is more apparent when you realize Sprint has been hamstrung for nearly a decade with damaging business decisions. Three come immediately to mind: 1) the dreadful merger with Nextel in 2005; 2) the ill-fated bet in 2008 to forgo LTE rollout in favor of WiMax, a competing 4G standard; and 3) the loss of over one million customers when it discontinued its push-to-talk iDEN service for network upgrades. The losses from the Nextel merger alone approach $30 billion.

To be clear, I don’t second-guess Sprint’s decisions. They did what innovative firms are supposed to do in attempting big, risky investments. However, it should not be the job of the FCC to favor some firms through spectrum auctions because some carriers’ business decisions did not pan out. That is not a competitive wireless auction–that is an FCC-orchestrated bailout. Granted, the FCC has been handed conflicting mandates. The Commission has ample discretion, however, to conduct a competitive auction that both complies with the law and improves chances of reaching the ambitious revenue goals. Intense meddling with auction results could prove disastrous.

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