FCC Chairman Tom Wheeler recently signaled that his agency is considering certain bidding restrictions for the upcoming broadcast-spectrum auction that are specifically targeted at the two largest nationwide providers. At some ill-defined point in the auction, the restrictions reportedly would be imposed on any bidder that has more than one third of the available “low-band” spectrum in a market.
And guess who holds more than one-third of “low-band” spectrum in any particular market? AT&T and Verizon. As a result of the proposed restrictions, between 40 and 50 percent of the spectrum blocks in a given band plan would be off limits for the two mobile broadband companies best positioned to battle cable modem providers. Is this a good thing?
The best policy justification for bidding restrictions in an auction is the presence of monopoly power. The theory is that a monopolist is willing to pay more to cement its position than a rival is willing to pay to displace the monopolist. Although the auction might cause the monopolist to surrender a good portion of its profits to the auctioneer, at the end of the day, consumers are still beholden to monopoly prices. (The second best justification for a restriction is that there is something special about “low-band” spectrum—without it, smaller carriers cannot compete effectively. I have rebutted this justification here.)
A review of the evidence suggests that no wireless carrier is exercising monopoly power—that is, setting prices above competitive levels or restricting output.
Recent price cuts in response to T-Mobile’s “Uncarrier” initiatives and no-contract plans have put downward pressure on wireless margins. In February, AT&T cut its Mobile Share shared data plan prices (with 10 GB of data) to $160 per month for four phone lines; in response, Verizon matched that pricing in April. In March, AT&T also cut the price of its smaller shared data plan (with 2 GB of data) by $15 to $65 per month for one phone line. These pricing episodes are hardly consistent with the notion of monopoly power.
Perhaps these recent price cuts mask a longer trend of rising prices? Not so. According to the FCC’s 2013 Wireless Competition report, competition is robust:
- Monthly average revenue per unit (“ARPU”) for wireless service declined from $48.04 in 2006 to $46.63 in 2012; wireless voice revenue per minute has declined from $0.06 to $0.05 over the same period.
- Voice revenue per minute in the United States ($0.033) is less than one third of the European average.
- U.S. mobile subscribers talked an average of 945 minutes per month on their mobile phones in 2011, compared with 134 minutes in Japan and 170 minutes in Western Europe.
- And the United States has the second least concentrated market structure in a Bank of America survey of ten countries, behind only the United Kingdom.
After 408 pages of excruciating detail on the state of wireless competition, the FCC is hard-pressed to identify any data consistent with monopoly power. And without a showing of monopoly power, the social benefits of these bidder restrictions are likely insignificant.
On the other hand, unwarranted restrictions can inflict significant losses on society in three important ways.
First, assuming AT&T even shows up to the auction, prices on the restricted blocks will be significantly less than the prices in the non-restricted blocks. Although there is some chance that prices in the non-restricted blocks could be higher (due to the artificial scarcity created by the restrictions), the FCC is exposing itself and the taxpayer to a considerable risk of diminished auction revenues—revenues needed to fund deficit reduction, build-out of an interoperable public-safety network, and other priorities enumerated in The Middle Class Tax Relief and Job Creation Act of 2012. And auction revenues are needed to compensate broadcasters interested in giving up their spectrum. The amount of the broadcast spectrum that will be available for reallocation to wireless broadband will depend critically on the broadcasters’ perception of auction prices; the law of supply dictates that there will be less spectrum available for sale the lower the expected price.
Second, by setting aside valuable spectrum, the FCC is creating an attractive opportunity for firms to engage in regulatory arbitrage. Set asides will encourage firms not interested in building networks but instead buying spectrum to flip it later for a windfall. History has shown that set-aside spectrum sits fallow for years, staving off the sort of broadband deployment that Congress desires. Competition for the arbitrage opportunity leads to wasteful “rent seeking” activity, which represents another loss. Allowing the carrier that will ultimately deploy the spectrum to purchase it immediately and directly (rather than through a wasteful and superfluous middleman) is clearly the more efficient choice.
Third, efficiency dictates that spectrum goes to the wireless carriers that value it the most. If an incumbent carrier facing a spectrum crunch is willing to pay more for the next chunk of available spectrum than an entrant, assigning the spectrum to the entrant represents a misallocation of society’s resources. Relatedly, a significant challenge facing the FCC is injecting competition into the broadband marketplace. According to the FCC’s most recent data, a full 19 percent of U.S. homes were beholden to a single provider of broadband service (including wireless operators) capable of delivering download speeds of 10 Mbps. Wireless broadband could impose significant discipline on cable operators in these pockets if the FCC opens up the spectrum spigot to all firms, as opposed to parsing out thin slices to smaller companies.
In sum, the FCC has failed to meet its evidentiary burden for the use of bidding restrictions as currently proposed for the upcoming incentive auctions. There is no compelling evidence of monopoly power in the wireless sector. And there has been no attempt to prove that smaller carriers need access to “low-band” spectrum to compete effectively against their larger competitors. Until those burdens are met, the FCC should let the auction blocks fall where they may.
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