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Finger on the Trigger: The FCC Needs to Get Spectrum Auction Rules Right

· August 5, 2015

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The FCC is set to vote on the final rules for the upcoming 600 MHz incentive spectrum auction tomorrow, in accordance with the goals of the National Broadband Plan that were reiterated by Congress. Chairman Wheeler and the rest of the FCC’s commissioners are about to take a very important step to free up valuable low-band spectrum, a necessary input for the provision of wireless broadband coverage.  As the FCC has repeatedly said, this auction is a “once-in-a-generation” opportunity to feed the fast-growing demand for high-quality spectrum.

Given that these auctions are rare, the 600 MHz incentive auction presents the FCC with a unique opportunity to foster competition and innovation in wireless markets.  As the FCC’s decision to block the T-Mobile-AT&T merger and the FCC’s most recent “Mobile Wireless Competition Report” illustrate, the mobile broadband marketplace faces key competitive challenges.  The two biggest network providers, AT&T and Verizon, command nearly 70% of the industry profits and control nearly three-fourths of the high-quality, low-band spectrum.  To his credit, the FCC Chairman acknowledges these issues.  In a 2014 blog post on the 600 Mhz spectrum auction, Chairman Wheeler stated:

Today, however, two national carriers control the vast majority of that low-band spectrum.  This disparity makes it difficult for rural consumers to have access to the competition and choice that would be available if more wireless competitors also had access to low-band spectrum.  It also creates challenges for consumers in urban environments who sometimes have difficulty using their mobile phones at home or in their offices.

This is why the Commission has proposed creating a 30 MHz block of “reserve spectrum”, eligible only to non-dominant carriers.  According to the Chairman, the point of the reserve is to prevent the dominant carriers from sweeping the auction and to maintain a “vibrant and competitive” auction.

Why is this important?  Verizon and AT&T enjoy heightened profits on account of their dominant positions.  It is also not surprising that they are the most well-resourced participants in the auction.  As a result, they have incentives to bid up the price of the spectrum beyond its pure economic value in order to ensure that they minimize competitive threats of more capable competitors coming out of the auction.  In economics, this is known as a “blocking premium.”  If Verizon and AT&T emerge from the auction with the vast majority of the available spectrum, the FCC has lost its once-in-a-generation chance to foster a more competitive wireless marketplace.  Not surprisingly, the chief antitrust lawyer at the Department of Justice also shares concerns about the incentives of the dominant firms in the upcoming auction.

This is where getting the rules right matters.  Although I would have liked to have seen a bigger spectrum reserve, it is now vitally important that the FCC ensure the reserve spectrum actually serves its intended purpose.  Under the current proposed rules, the reserve only comes into being when certain “triggers” are met.  Although the design is complicated, these triggers are associated with a minimum average price and an overall revenue target which is tied to the FCC’s break even point for cost incurred by the auction. Once the triggers are met, those non-dominant companies still bidding are eligible to bid on the reserve spectrum.

Unfortunately, the proposed rules leave open the possibility of gaming.  Essentially, Verizon and AT&T can target early bidding in a small number of key areas, driving up prices and forcing non-dominant carriers out of the auction before the triggers kick-in.  Therefore, by the time the spectrum reserve is created, many of the competitive providers will be ineligible to bid on the reserve chunks of spectrum.  Luckily, a couple of easy fixes have already been proposed.  Not fixing this design would be akin to a shipping a product with a known defect in the name of expediency.

Given the increasing importance of the wireless broadband market, the FCC cannot afford to miss this rare opportunity to encourage a more competitive broadband market.  Increased competition among mobile network operators would be a boon to both competition and innovation.  Remember, it was competitive carriers who first took a chance on Android phones, drastically cut prices, and even did away with two-year contracts.  Minimizing competitive chokepoints in the wireless market means more room for new business models, lower prices, and more innovation in the periphery of the marketplace.  Chairman Wheeler has made encouraging competition the defining theme of his tenure at the FCC.  It would be a shame if one of his Commission’s biggest accomplishments, a successful incentive auction, was tarnished by a small defect in the auction design.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.