Path to a successful spectrum auction requires focus

Although the federal government has auctioned spectrum for mobile wireless services several times in the past, it has never attempted a “reverse auction” in which broadcast license-holders submit bids to voluntarily relinquish their spectrum rights in exchange for a share of the anticipated proceeds from a subsequent “forward auction” of the newly available spectrum for wireless broadband services.

Adding to the complexity, the auctions must generate significant proceeds for funding a national first responder network and for national deficit reduction.

Citing the challenges inherent in determining the policies and procedures that will guide the Broadcast Television Spectrum Incentive Auction, not to mention developing operating systems and software that work, Chairman Tom Wheeler of the Federal Communications Commission announced just in time for a Senate Commerce Committee oversight hearing this week that the agency will give itself more time to prepare. 

Aside from more time, the FCC needs to focus on the critical issues.

As if the interdependent reverse- and forward-auctions aren’t already freighted with enough complexity and uncertainty, the FCC is contemplating an invitation to impose limits on how much new spectrum AT&T and Verizon Wireless can acquire—in effect, reducing the number of bidders.

The Competitive Enterprise Institute’s Fred Campbell recently concluded that restrictions on the participation of large firms in previous FCC spectrum auctions have delayed the provision of new wireless services, reduced auction revenue and have failed to substantially benefit wireless competition.  And Professor Leslie M. Marx of Duke University warns that “any restriction that causes a material reduction in the participation of Verizon and AT&T risks a significant reduction in auction revenue and a failure of the auction.”

The principal purpose of the auction is to meet the rapidly growing demand for wireless broadband services.  Mobile data traffic in 2012 was approximately 73 times higher than what it was in 2007, according to Cisco. 

Sprint and T-Mobile covet the spectrum to be auctioned because it is in the lower frequency bands.  Although mobile wireless services are provided today over both high and low frequencies, the spectrum portfolios of AT&T and Verizon Wireless already have higher proportions of low-band spectrum.  In part, this is because Sprint and T-Mobile have passed up opportunities to bid on low-frequency spectrum in the past.

Focusing on uniform proportionality in spectrum portfolios ignores a much more serious threat to competition: Two of the nation’s largest wireless service providers face an acute shortage of spectrum.  The other two do not.

Sprint controls almost as much spectrum as AT&T and Verizon Wireless combined.  T-Mobile boasts it's network capacity is  “like having extra lanes on the highway.”  That’s why both Sprint and T-Mobile can offer unlimited talk, text and data plans, while spectrum limitations have already forced AT&T and Verizon Wireless to offer usage-based data pricing in an effort to maintain superior network performance.

Matters will only get worse, since Cisco is  projecting a 13-fold increase in mobile data traffic between 2012 and 2017. 

Congress should challenge the FCC to prove both that the competitive benefits of new spectrum aggregation limits would outweigh the competitive harm of increased network congestion for the customers of AT&T and Verizon Wireless,  and that it would not translate into lower auction revenues. 

The FCC tends to believe that everything it does promotes competition, but sometimes it’s only picking winners and losers.  The deregulation of mobile wireless services in 1993 and auctions of spectrum to the highest bidder were inherently pro-competitive.  When the FCC dictates wholesale prices, imposes arbitrary limits on how big companies can get or chooses who can get spectrum, the results have usually not been pro-competitive.

The incentive auction will be one of the greatest challenges the FCC has ever faced.  Limiting AT&T’s and Verizon Wireless’s access to new spectrum not only mis-diagnoses the principal competitive challenge the industry faces, but threatens to depress bidding and reduce auction proceeds needed for a public safety network and deficit reduction.

Haney is a senior fellow at the Seattle-based Discovery Institute.