FCC puts funding for public safety network and debt reduction in jeopardy

American consumers love their mobile devices, so much so that the capacity of the nation’s mobile networks are stretched to the limit.  To help, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012 (the “Spectrum Act”), directing the FCC to implement a voluntary incentive auction to entice television broadcasters to relinquish their spectrum for a cut of the auction proceeds.  Given that a broadcaster’s decision to participate is voluntary, high auction revenues are needed to promote the spectrum transfer.  But maximizing auction revenues is not just about incenting broadcasters; Congress has already budgeted anticipated auction revenues to modernize public safety communications and to tame the deficit. 

Yet, urged on by the Department of Justice and the White House, the Federal Communications Commission has recently floated a plan to risk the auction’s success in an effort to prop up well-funded carriers like Sprint and T-Mobile by handicapping AT&T and Verizon.  The agency knows full well that minimizing what the two largest providers can bid on would slash auction proceeds so it got clever, proposing to let everyone bid until a to-be-determined revenue threshold is reached, after which AT&T and Verizon can’t touch a huge chunk of the available licenses.  In effect, the plan uses AT&T and Verizon to bid up prices early, and then leaves them to fight over scraps. 

So if all goes well with the administration’s plan, spectrum will go to the government’s chosen victors, with only a (hopefully) moderated reduction in auction revenues.  It’s not clear, however, that all will go according to plan.  Last week AT&T filed a notice with the Commission that the proposal places it “in an untenable and unacceptable position” and may sit the auction out.  No word yet from Verizon. 

If AT&T stays home rather than act as the agency’s shill bidder, the administration’s plan could spell disaster for auction revenues and efficient spectrum reallocation.  While some claim that restricting AT&T would actually result in higher auction revenue, there’s no evidence to support the claim, and plenty to negate it. 

Do smaller providers consider it futile to compete with the larger, “deep pocketed” carriers?  No.  A recent study of the 2006 AWS-1 auction reveals that AT&T and Verizon had no effect on the number of bidders.  The last two large-scale auctions have had about 200 bidders and over 100 winners each.  Participation is plainly not futile. 

More to the point, evidence suggests that AT&T and Verizon have a significant positive effect on auction revenues.  In the AWS-1 auction, AT&T was, by far, the most influential bidder.  While only paying 10 percent of AWS-1 auction proceeds, the company’s bidding activity accounted for 37 percent of total auction revenue.  In fact, AT&T’s participation generated a 21 percent premium above and beyond the revenue effects of the typical bidder.  Exclusions impacting larger firms like AT&T have been estimated to reduce auction proceeds by 50 percent. 

Does the FCC have the legal authority to impose restrictions?  Probably so, but as both the statute and the case law make clear, not only must these bidding restrictions be of a general, industry-wide nature, but the FCC better come up with a good analytical story for imposing them (complete with a factual predicate and sound economic theory) to survive the appellate review.  Such a review of the FCC’s plan seems inevitable and will tie up the broadcast spectrum in legal wrangling for years.

Despite what FCC Chairman Tom Wheeler says, the current allocation of spectrum and customers among wireless carriers is not a “historical accident.”  The truth is that not only did T-Mobile and Sprint consciously chose not participate in the last large scale auction, but they also chose not to acquire spectrum aggressively in the secondary market.  While using the upcoming voluntary incentive auction to manipulate market outcomes to “level the playing field” may be enticing, what the FCC is proposing to do is to punish investment-driven success.  Doing so will reduce the expected payoff to leadership in the provision of new, high-quality services in the future with the likely effect of discouraging innovation in mobile wireless communications.

Ford is the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.   

Correction: This piece had been wrongly edited to read "Exclusions impacting larger firms like AT&T have been estimated to reduce auction proceeds by 5 percent," when it should have read "by 50 percent," as it now does.