D.C.'s Special Interest Spectrum Policy

One of few things most everyone agrees on is the success of the U.S. mobile industry. America leads the world in 4G network coverage and in device, mobile operating system, and app innovation.  Yet the industry's very success creates an urgent need for a quantum boost in available wireless spectrum.

Instead of a simple policy of unleashing as much un- and under-used spectrum as quickly as possible, however, Washington is playing games. The Department of Justice is urging and the Federal Communications Commission is contemplating rules that would exclude disfavored companies from acquiring more spectrum. This could slow not only the process of injecting more spectrum into the marketplace but also the pace of broadband innovation for years to come.

In April, DOJ filed an unusual letter in the auction proceedings seeking to tilt the auction to a particular outcome. DOJ's arguments were not based on any general economic principle or facts but on a highly speculative, and unfounded, hunch that something bad might happen if an open auction were allowed to proceed. In particular, DOJ suggested that the companies it disfavors might attempt to "foreclose" the market for spectrum from rivals -- that is, bid for spectrum they don't really want or need merely to prevent other firms from getting it, and thus achieve a kind of world domination. So DOJ suggested a number of ways to rig the auctions to assure particular outcomes.

Then last week, speculation mounted that the FCC would exclude from its spectrum screens (tabulations of firm spectrum holdings) the massive new spectrum Sprint is getting through its Clearwire acquisition.* Why would the FCC do this? Well, the theory that the two largest mobile providers -- AT&T and Verizon -- might dominate the market depends on the notion that other mobile firms are pathetically lacking in spectrum. The theory doesn't work if the competitive firms actually own lots of spectrum.

Sprint was already an owner of substantial airwaves, but its recent Clearwire buy boosts its spectrum position to an astounding 178 MHz from 53 MHz. Yet some are suggesting the FCC might ignore this spectrum, which is valued at $7 billion, because it is located at the relatively high-frequency of 2.5 GHz. Never mind previous FCC actions where it was all too happy to count this spectrum as perfectly usable for mobile services. Last winter, for example, the FCC, in an international comparison of  total available commercial spectrum, included the Clearwire spectrum. Excluding this large spectrum swath would have made U.S. spectrum policy look even further behind the curve than we are. The FCC also counted the high-frequency holdings of AT&T and Verizon in other spectrum screen contexts because it wanted to show these firms were large spectrum holders.

But now, when this spectrum serves to undermine its newest arbitrary policy goal, it reverses course and excludes it? This is Washington picking winners and losers. This is technocratic arrogance, the rule of man, not the rule of law.

The DOJ's case similarly is based on an assertion of power and and presumption of knowledge it does not have. Four economists, led by Berkeley's Michael Katz, rebutted the DOJ letter in the strongest terms. They show that DOJ has not offered any real analysis and is flipping the burden of proof to the wrong parties. Quoting at length from the summary of Katz's response:

Long-held principles of American antitrust policy dictate that: (a) drastic market intervention (including restrictions on auction participation) be undertaken only when careful, fact-based economic analysis reveals substantial risk of significant competitive harm from inaction, and (b) any intervention be designed to protect competition rather than specific competitors. The [DOJ] Division’s letter departs from both principles. First, it fails to engage with the large body of evidence and analysis already submitted in these proceedings, instead offering little more than theoretical suppositions and unfounded speculation and then proceeding as if such speculation constituted sound evidentiary analysis. Indeed, rather than engaging with the facts of this market, the Division suggests that the burden is on AT&T and Verizon Wireless to demonstrate that their access to new spectrum should not be restricted. Second, the Division argues for a policy that manifestly favors some competitors over others.

And:

If implemented, the Division’s proposed policies would: inhibit the allocation of spectrum to its highest-value uses; make expansion more costly for the service providers that best meet consumer needs, thus raising the prices faced by consumers and undermining innovation incentives;25 and substantially reduce revenue in the 600 MHz forward auction.26 The last of these effects is of special concern in the incentive auctions due to the role of forward auction revenue in determining how much spectrum can be reallocated from broadcast television to mobile wireless uses.

Wireless spectrum policy is economic policy. Special interest favors and punishments should have no place here.

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* Update: In its screens, the FCC today counts just 55.5 MHz of Clearwire's approximately 140 MHz of spectrum. So around 60% of Clearwire's spectrum -- now fully owned by Sprint -- is ignored.