Spectrum bailout is regulatory malpractice

The Federal Communications Commission (FCC) appears to have decided that the upcoming broadband spectrum auctions should favor some competitors over others.  To accomplish this, the FCC will set some revenue targets that, if met, would exclude bidding by AT&T and Verizon Communications, as well as potentially shutting out bidding by several regional carriers, such as U.S. Cellular and C Spire Wireless.  This is a concession that Sprint and T-Mobile has been lobbying to get for some time.  What it shows is that, when it comes to industry players asking for favors, the FCC is still open for business. 

As study after study have shown (not to mention another study or two), policies that help competitors do not advance competition, and they lead to very bad economic consequences for consumers and taxpayers, as will be discussed. 

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“Competitive” spectrum auctions require open bidding by all potential wireless providers.  That solution maximizes the payment to the U.S. Treasury for scarce wireless resources, and it assures that spectrum is allocated to its highest and best use for consumer services.  If auctions are open to all for bidding, then tilting the rules becomes unnecessary.

On the other hand, establishing rules that take the “competition” out of spectrum auctions creates an “opportunity cost” that must be paid for by the Federal government from lost auction proceeds, which are ultimately borne by taxpayers.  It is also blatant favoritism between government and a few of the private firms it regulates.  In effect, the FCC is picking winners and losers, and leaving taxpayers on the hook to cover the costs.  What ever happened to the FCC’s mission in preserving the public interest?

T-Mobile and Sprint may have more underutilized spectrum than some other wireless providers and they could have more in the last auction but opted not to bid for low-band spectrum.  That was their business decision and one that should not require a taxpayer bailout. 

These new FCC rules give some bidders a strategic advantage.  Now, favored bidders need only raise the bids to meet the FCC’s revenue target and that will shut out competition.  The irony is that AT&T and VZ are the most popular service providers, which means that consumers are voting with their dollars for these services.  Instead of allowing more spectrum to go where it is in greatest demand, these tilted rules could reserve spectrum where it is least needed.  That would be a misallocation of scarce resources.

As the agency considers trials that would allow telecommunications providers to transition from its 100-year old copper legacy network to an all Internet Protocol (IP) network, the FCC’s new rules could have detrimental effects on investment and innovation.  An all IP network would provide consumers with superfast Internet services and advanced applications, while maintaining the traditional services that some consumers have grown to expect.  However, some potential solutions to achieve that transition may require wireless broadband spectrum, particularly in lower density markets.  By limiting some telecommunications firms from full participation in the auctions, achieving an all IP network becomes nearly impossible.  This means that some telecommunication firms must invest in two networks – the old copper network and an IP network, which will add costs, choke off investment, impede innovation, and potentially raise consumer prices.  It will also mean spectrum shortages for some providers, which will reinforce their reliance on bandwidth caps, raise prices to ration demand, and increase congestion on the network.  These are exactly the distortions that a truly competitive auction is designed to prevent.

In other words, the FCC’s decision to misallocate spectrum will mean that taxpayers and consumers will pay more and get less.  It’s a bailout and it also means that Congresses’ authorization for competitive auctions will remain unfulfilled.  

Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.  Although he is a member of the FCC’s Consumer Advisory Committee (CAC), his comments on this topic are his own and do not represent the views of the CAC.  For more information about the Institute, visit www.theamericanconsumer.org.

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