FCC Risks Getting Sidetracked on Spectrum Auctions

by on December 9, 2012 · 1 comment

On Wednesday, the Subcommittee on Communications and Technology will conduct an oversight hearing of the implementation of spectrum auctions by the Federal Communications Commission.

The subcommittee members ought to consider the fact that although the mobile wireless industry faces an acute shortage of spectrum (“broadband spectrum deficit is likely to approach 300 MHz by 2014”), the FCC risks getting distracted and mired in a pointless effort to leverage its spectrum auctioning authority to manipulate the structure of the mobile wireless industry.

In mid-2011, former Commissioner Michael J. Copps warned of “darkening clouds over the state of mobile competition … we find ongoing trends of industry consolidation.”  As Copps saw it, increasing concentration will lead to higher prices for consumers.  His solution was for the market to have more competitors that look and perform like AT&T and Verizon Wireless.

Since Congress failed to prevent the FCC from engaging in what the late Alfred Kahn once called “oxymoronic efforts to promote competition by regulation” when it adopted the Middle Class Tax Relief and Job Creation (JOBS) Act in February, the path was clear for the FCC to act on Mr. Copps’ pessimism.  The commission issued a Notice of Proposed Rulemaking in late September for establishing caps on mobile spectrum holdings.  The NPRM is designed to eliminate AT&T’s and Verizon Wireless’ access to additional spectrum they need in the short-term to meet growing demand for mobile broadband services.There is a serious possibility of unintended consequences, since no one at the FCC appears to realize that establishing spectrum caps – even if only applied to a subset of mobile wireless providers – would create artificial scarcity that would tend to raise (not lower) overall consumer prices for these services, and/or promote more network “management” that would curtail (not expand) consumer choice.  For example, when government imposes discriminatory regulatory obligations that force some firms but not others to raise prices, it creates a protective pricing “umbrella” that allows those firms’ competitors to successfully compete by offering a lower price even though that may be higher than the lowest price the competitors are capable of charging.  The competitors get to pocket the difference and consumers are left holding the bag.

The justification for a rulemaking is based on an outdated analysis of market conditions, and this too seems to have escaped the FCC’s notice.  As has so often been the case in the history of telecommunications, the best efforts of FCC planners have been completely overtaken by events, and competition has expanded not as a result of the FCC’s planning and policies, but in spite of them.

By mid-October, before the ink could dry on the NPRM, the mobile wireless industry was undergoing another transformation.  T-Mobile USA and MetroPCS announced plans to merge, Softbank announced that it is acquiring 70 percent of Sprint (and providing $8 billion in capital for Sprint to invest) and Sprint reacquired a controlling share in Clearwire.  “We went from what was becoming a duopoly to a market with potentially four strong, well capitalized competitors with differentiated value propositions,” according to analyst Mark Lowenstein.  Sprint CEO Dan Hesse, notes the same report, claims that the Softbank deal “creates a stronger No. 3 … it competes with the duopoly of AT&T and Verizon.”

The FCC is always looking for ways to expand it’s jurisdiction, and arguably this is no exception.  The NPRM (paragraph 21) claims that “band-specific spectrum limits generally applicable to all licensees would be consistent with Section 6404 of the Spectrum Act,” although surely the commission realizes that that provision did not create new jurisdiction nor even encourage the agency to do anything.  Sec. 6404 of what is more commonly known as the JOBS Act was merely for the purpose of preventing the commission from evading the Administrative Procedure Act and targeting individual firms for discriminatory treatment.  If clarification is needed, Wednesday’s hearing would be a good opportunity.

Otherwise, the commission is on track to justify micromanaging the mobile wireless market in the future based on variations in the propagation characteristics of various frequency bands – not the sort of subject that Congress is calculated to want to study in great detail for the purpose of fulfilling its oversight responsibilities.

Understanding the Basics of Spectrum Propagation Characteristics

The commission points out (paragraph 35) that, as a general matter, lower frequency spectrum “allows for better coverage across larger geographic areas and inside buildings,” and it has noted elsewhere (paragraph 296) that “higher-frequency spectrum may be just as effective, or more effective, for providing significant capacity, or increasing capacity, within smaller geographic areas,” such as high-traffic urban areas.  “Because the properties of lower and higher frequency spectrum are complementary,” observes the FCC (NPRM, paragraph 35), “both types of spectrum may be helpful for the development of an effective nationwide competitor that can address both coverage and capacity needs.”

Generally, bidders have offered to pay less for higher-frequency spectrum, because it required more investment in facilities.   Since fewer towers were necessary to provide coverage in the lower bands, they tended to be more valuable.  As firms struggle to meet growing demand for mobile broadband services, however, these assumptions are being tested.

Sprint-Clearwire, for example, conserved cash at the auction block by acquiring extensive high-frequency holdings.  The current regulatory fest arises from the fact that Sprint-Clearwire now wants more low frequency spectrum, but does not want to want to pay a fair market price for it (another explanation is that it wants to foreclose its rivals from acquiring the only spectrum resources that are likely to be available in the “short” term).  Excluding AT&T and Verizon Wireless from the auction would accomplish all of these goals.  And apparently the FCC is willing to carry Sprint-Clearwire’s water.  Otherwise, the solution would be to encourage firms to buy and sell spectrum from each other on a secondary market to round out their holdings.

Sprint-Clearwire’s combined spectrum holdings are almost twice as big as AT&T’s, Verizon Wireless’ or T-Mobile USA-MetroPCS’s.  Sprint-Clearwire can “maintain it’s unlimited, lower-cost data offering several years longer than any other competitor in the market” without buying new spectrum, according to analyst Roger Entner.  “While all the other carriers are feeling the sprectrum crunch to a varying degree, the New Sprint sits pretty.”

Hoping to not trigger the FCC’s attribution rules, Sprint-Clearwire is trying to downplay the significance of its massive spectrum inventory (“While we have a majority stake, we do not have control of [Clearwire] …” according to a spokesperson for Sprint) .  Sprint gave up direct control of Clearwire’s board of directors – mainly in an attempt to escape potential liability for Clearwire’s debts – but retains de facto control of company.  Now the company needs to convince the FCC to draft the final rules with it’s complicated relationship in mind.  Were Sprint to have “control” of Clearwire, it could potentially be disqualified from bidding for more spectrum in some cases.  Ironically, Congress might be doing Sprint-Clearwire a favor by shutting down this rulemaking proceeding.

Congress ought to help the FCC see that it’s current course is problematic on multiple levels.  First, it will distract the FCC from its primary objective (supplying more spectrum to the market to facilitate abundant mobile broadband services).  Second, it could have unintended consequences, i.e., it could harm consumers.  Third, the market can no longer be described as a “duopoly” in need of government intervention (arguably it never was).  Fourth, with the relentless evolution of technology, the significance of variations in spectrum propagation characteristics is likely to be difficult to predict.  It all adds up to a counterproductive waste of the FCC’s limited resources.

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