No Competitive Magic in Spectrum Caps

by on July 29, 2013 · 0 comments

The 600 MHz spectrum auction “represents the last best chance to promote competition” among mobile wireless service providers, according to the written testimony of T-Mobile executive who appeared before a congressional subcommittee Jul. 23 and testified in rhetoric that is reminiscent of a bygone era.

The idea that an activist Federal Communications Commission is necessary to preserve and promote competition is a throwback to the government-sanctioned Ma Bell monopoly era.  Sprint still uses the term “Twin Bells” in its FCC pleadings to refer to AT&T and Verizon Wireless in the hope that, for those who can remember the Bell System, the incantation will elicit a visceral response.  The fact is most of the FCC’s efforts to preserve and promote competition have failed, entailed serious collateral damage, or both.

Unless Congress and the FCC get the details right, the implementation of an innovative auction that will free up spectrum that is currently underutilized for broadcasting and make it available for mobile communications could fail to raise in excess of $7 billion for building a nationwide public safety network and making a down payment on the national debt.  Aside from ensuring that broadcasting is not disrupted in the process, one important detail concerns whether the auctioning will be open to every qualified bidder, or whether government officials will, in effect, pick winners and losers before the auctioning begins.

Wireless carriers T-Mobile and Sprint, both of which freely chose to load up on above-1 GHz spectrum in the past, now want to improve their access to low-frequency spectrum by capping the amount of spectrum below 1 GHz that any one carrier can hold.  T-Mobile proposes that no carrier be permitted to hold more than one-third of the spectrum below 1 GHz.  A cap would hit AT&T and Verizon Wireless. A lawyer for T-Mobile has even suggested the possibility that if regulators don’t ambush AT&T and Verizon Wireless going into the 600 MHz auction, then T-Mobile and perhaps others may not participate at all.

Fewer bidders could lead to lower auction proceeds, and the idea of T-Mobile and perhaps others sitting out the auction is intended to moot the objection that excluding AT&T and Verizon Wireless would depress bidding by suggesting that government and taxpayers can’t have it both ways. Either AT&T and Verizon Wireless are allowed to bid; OR, if the coast is clear, T-Mobile, Sprint and perhaps others will bid.  An auction in which all qualified bidders participate, apparently, may be out of the question.

Meanwhile, Sprint wants the FCC to classify, for regulatory purposes, the massive spectrum available to Sprint and its wholly-owned subsidiary Clearwire above 1 GHz as of inferior marketplace value and therefore not subject to any cap whatsoever—a policy that would let Sprint off the hook when it seeks to acquire more spectrum for itself in the future.

The implication of the T-Mobile and Sprint advocacy is that AT&T’s and Verizon Wireless’ low-frequency spectrum holdings confer a decisive competitive advantage; and that both T-Mobile and Sprint, through no fault of their own, could be irretrievably crippled if policymakers don’t intervene to ensure that they can immediately acquire significant amounts of low-frequency spectrum.

Ideally, any carrier would prefer to offer mobile wireless services using a combination of low- and high-frequency spectrum (see, e.g., the FCC’s Sixteenth Wireless Competition Report at page 17).  In the long run, T-Mobile and Sprint/Clearwire could theoretically improve operational flexibility by acquiring more of the low-frequency spectrum—although the competitive significance of this added flexibility is becoming less obvious as a result of changes in technology and consumer demand.

On the other hand, given that the upcoming 600 MHz auction comprises the only source of new spectrum on the horizon, were a cap to be imposed now it could inflict a severe hardship on AT&T and Verizon Wireless in the short- to medium-term.

That’s because in terms of network congestion, T-Mobile and Sprint currently have the competitive advantage.  Their networks are less congested.  Earlier this month, Sprint announced unlimited voice, text and data plans, something that would not be possible on a congested network.  And T-Mobile’s current advertising claims that T-Mobile’s network “delivers 50% more bandwidth than AT&T for significantly less congestion.”

What T-Mobile and Sprint actually fear is not the possibility that they will be unfairly foreclosed from acquiring more spectrum, but the possibility that AT&T and Verizon Wireless will be able to obtain additional spectrum for relieving network congestion, and that as a result there will be fewer dissatisfied AT&T and Verizon Wireless customers for Sprint and T-Mobile to poach.

The U.S. Department of Justice, which has warned of a possibility that AT&T or Verizon Wireless could try to act anticompetitively to “foreclose” a competitor from acquiring needed spectrum, is oblivious to the reality of network congestion as it relates in particular to AT&T and Verizon Wireless.

An obvious example of anticompetitive foreclosure occurs when a firm acquires an essential input for no other purpose but to keep it out of the hands of a competitor, not because the acquiring firm needs or intends to use the input itself.  Not only does the FCC have rules that prohibit stockpiling, or “warehousing”; but AT&T and Verizon Wireless have valid commercial purpose for acquiring more spectrum to alleviate network congestion.  If anything, AT&T and Verizon Wireless are the most likely victims of a foreclosure strategy.

Depriving the two most popular wireless service providers of additional spectrum by operation of regulation is a foreclosure strategy in which government is the bad actor.  If the FCC aids and abets Sprint’s  and T-Mobile’s invitation to foreclose on their competitors in the hope of forcing customers of AT&T and Verizon Wireless to jump ship without the need for offering them lower prices or other inducements to switch, then it will be an egregious example of government picking winners and losers.

Until recently, both Sprint and T-Mobile were losing customers and struggling to attract investment capital.  Whatever justification there might have been for government intervention a short time ago has been overtaken by events.

The FCC has approved an acquisition of Sprint by Softbank, a deal which provides $5 billion for Sprint to invest in network and service improvements, as well as Sprint’s acquisition of 100 percent of the stock of Clearwire.

T-Mobile is reinventing itself with innovative pricing and service plans, a network upgrade and the iPhone.  Company officials expect to halt the defection of contract customers that began in 2009 by the end of this year, and begin adding customers in 2014.

“T-Mobile’s innovative moves are putting pressure on our competitors, forcing other carriers – including AT&T and Verizon – to follow suit and start treating their own customers differently,” according to the Congressional testimony of the T-Mobile executive who testified Jul. 23.  “That’s what healthy competition achieves.”

T-Mobile’s recent success in the marketplace vindicates the U.S. Department of Justice’s assertion that “each of the Big Four nationwide carriers is especially well-positioned to drive competition” when it sued to block a proposed merger between T-Mobile and AT&T in 2011—unless the price of an independent T-Mobile is a continuing need for special treatment conferred by regulators at the expense of competitors.

The FCC and the Antitrust Division have successfully justified ongoing Congressional appropriations for years arguing that they are responsible for competition in telecommunications, and that they can play a continuing vital role in preserving and promoting competition.  In reality, technological development has made it possible for telephone companies, cable operators and wireless providers to compete with one another and  develop broadband Internet  services.  The only useful role the agencies have played is peeling back regulatory barriers that prevent competition or discourage private investment—later rather than sooner.

But as long as the agencies manage to hold themselves out, illogically, as indispensable protectors and promoters of competition, special interests are going to exploit the possibilities.  Competition was supposed to substitute for and not supplement regulation, and the proposals for spectrum aggregation provide yet another example of why it is time for Congress to complete the deregulation of telecommunications, a process that has been going on for, oh, about 30 years.

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