If the FCC had adopted the eligibility restrictions proposed by PISC in 2007, the United States would not have achieved the LTE leadership touted by current FCC Chairman Genachowski.
I was pleased to see FCC Chairman Genachowski praise the market-based policies of his predecessors in his remarks at Vox last week. He noted that the United States is currently leading the world in next generation mobile wireless services with 69 percent of the world’s LTE subscribers, which he attributes to “smart government policies.” He didn’t mention, however, that the “smart government policies” that led to America’s renewed mobile leadership were based on market principles adopted by the previous FCC.
Verizon built the world’s largest LTE network using 700 MHz spectrum it won in an open auction that ended in early 2008 (which also raised a record $19 billion for the U.S. Treasury). When the rules governing the 700 MHz band were developed, a coalition of so-called “public interest” groups (known as “PISC”) urged the FCC to prohibit any company with 45 MHz of spectrum from participating in the auction (the limit in the 1990s-era “spectrum cap”) as well as incumbent telephone and cable providers. The requested prohibition would have prevented the four largest nationwide wireless providers (Verizon, AT&T, Sprint, and T-Mobile), cable incumbents, and a host of other companies from participating in the auction – which also happen to be the companies that are in the best position to invest in our Nation’s infrastructure and help America win the global bandwidth race.
Though Genachowski and others are quick to praise the results of the 700 MHz auction today, when the auction was completed, many were “disappointed” that Verizon bought the largest block of spectrum in the band. They argued that Verizon “didn’t even need” the spectrum, and believed that Verizon intended to “warehouse” it. These concerns led to a delay in the grant of Verizon’s 700 MHz licenses. Commissioners Copps and Adelstein were concerned that Verizon would have too much spectrum as a result of the auction, and demanded the application of the FCC’s “spectrum screen” after the auction had already concluded. As a result, Verizon “voluntarily” agreed to divest spectrum to secure grant of its 700 MHz licenses, and the FCC stated that it would apply its spectrum screen to future auction winners.
Four years later, it’s obvious that Verizon didn’t pay nearly ten billion dollars for its 700 MHz spectrum merely to sit on it. If, as some previously believed, Verizon had purchased the spectrum for the purpose of foreclosing competition, it would not have aggressively deployed the world’s largest 4G LTE network in that spectrum. Verizon’s deployment accelerated AT&T’s LTE plans, and sent competitive ripples throughout the rest of the mobile market, leading to LTE deployments by Sprint, T-Mobile, U.S. Cellular, and others. The rapid deployment of LTE in the United States was thus enabled by the 700 MHz auction rules, which did not contain eligibility restrictions on Verizon or any other bidders.
If the FCC had adopted the eligibility restrictions proposed by PISC in 2007, the United States would not have achieved the LTE leadership touted by current FCC Chairman Genachowski. In 2005, the Congressional Budget Office found that the FCC’s imposition of similar eligibility restrictions on the Broadband PCS band in the 1990s caused spectrum to lie fallow for a decade in many markets due to financial and legal issues that prevented the auction winners from providing service. Winning bidders in the initial auctions (FCC Auctions 5 and 10) for C-block licenses in the Broadband PCS band returned to the FCC for re-auction licenses that accounted for one-third of the block’s potential wireless coverage, and another one-third in potential wireless coverage was contested in bankruptcy and other legal proceedings. The eligibility restrictions placed on Broadband PCS spectrum deprived the mobile industry of approximately 30 MHz of nationwide bandwidth for close to a decade at a cost to society of approximately $65 billion. In all auctions other than the market-based 700 MHz and AWS-1 auctions, the FCC has generated $45 billion in net winning bids, but transmitted only $19 billion to the U.S. Treasury. The other $26 billion was lost through defaults, bankruptcies, and other licensing debacles enabled by FCC auction policies designed to favor certain bidders.
If history is any guide, the imposition of the eligibility restrictions on the 700 MHz band spectrum requested by the PISC would have delayed LTE deployment in the United States, and our opportunity to gain global leadership would have been squandered. It’s ironic that, despite his recognition of “smart government policy” in the 700 MHz auction, Genachowski championed the imposition of eligibility restrictions on the broadcast spectrum that will be repurposed for mobile use through an incentive auction and argued that more of this spectrum should be made available on an unlicensed basis. Congress wisely prohibited eligibility restrictions in the broadcast incentive auction and limited the FCC’s discretion to allocate it on an unlicensed basis, but those Congressional restraints are limited to that particular auction. The FCC retains enormous discretion to engage in the failed interventionist policies of the past when it evaluates secondary market transactions and repurposes spectrum in other ways.
Genachowski’s tendency to try to “outsmart” the market is a cause for concern in the proceeding to examine spectrum aggregation launched last week. The proceeding presents an opportunity to establish guidelines that would enhance market-based transactions in spectrum. There is a danger, however, that the FCC will use the proceeding as an opportunity to disadvantage incumbents in an effort to create new wireless competition through “smart government policies” rather than fair market opportunities.
The last time Genachowski tried to create a new competitor resulted in the LightSquared debacle. We can only hope that Genachowski has since learned that market oriented spectrum policies are the key to a U.S. victory in the global bandwidth race.