DOJ Joins FCC in Picking Wireless Winners and Losers

Published April 17, 2013

The DOJ has joined the FCC in trying to pick market winners (Sprint/T-Mobile)  and losers (Verizon/AT&T) in the U.S. wireless market.

Recent public filings by the DOJ and the FCC spotlight their reticence for  wireless competition policy and market-driven spectrum auctions. They also show  a strong predilection for preemptive and interventionist wireless  regulation.

Specifically, the DOJ just sent an analysis to the FCC. It urges the FCC to  establish spectrum auction regulations that would effectively deny new scarce  radio spectrum to wireless market leaders, Verizon and AT&T, and effectively  steer it to the “smaller nationwide networks,” Sprint and T-Mobile.

Just a few weeks ago in its annual wireless competition report to Congress, the FCC could not bring itself to declare that effective wireless  competition exists.

Never mind the FCC’s own analysis shows the U.S. market is the most  competitive it has ever been. Never mind it’s more competitive than most any  other nation. And never mind, by most every competitive measure — pricing,  speed, investment, deployment, availability, innovation and consumer  satisfaction, competition is vibrant.

This tortured FCC decision to deny the obvious is a not-so-subtle signal that  the FCC is bent on implementing some form of preemptive spectrum cap regulations  that the FCC could not justify if it found the wireless market competitive.

What’s wrong with this FCC/DOJ approach?

First, such regulations will turn a competitive-market-based auction, driven  by market supply and demand, into a less-competitive, rigged “auction” where  everyone knows ahead of time to which companies the government wants to steer  the new available spectrum.

A free and fair auction is just like free and fair trade – the outcome is  based on competition, supply, demand, and price, not government pre-selections  and regulation.

Second, the DOJ is speculating that two larger players will buy spectrum that  they don’t really need in order to keep it from two smaller competitors.

If the DOJ is urging an auction policy grounded on DOJ speculation, why don’t  they also consider the more obvious potential anti-competitive effects of  preemptively and artificially limiting auction competition from four to two  bidders?

Wouldn’t their two chosen bidders have a greater incentive to collude to  foreclose the opportunity for the U.S. taxpayer to reap the benefit of being  paid the highest market value for the spectrum?

Third, such regulations could shortchange the American taxpayer billions of  dollars in foregone auction revenues, and not reduce the Federal budget deficit  and debt as much as a free and fair auction would.

That’s because specifically excluding the two bidders — with the most  subscriber demand for spectrum capacity and the most financial wherewithal to  bid — will substantially reduce the winning prices for spectrum.

Fourth, the FCC has an abysmal track record of picking market winners and  losers.

For example, the FCC’s heavy-handed implementation of the 1996 Telecom Act  overtly picked the CLECs as market winners and the Bells as market losers. The  FCC imposed one-sided uneconomic price regulations and terms, which predictably  fueled a CLEC market bubble and subsequent market crash. All of the FCC’s  chosen-winner-CLECs went bankrupt.

Another example, the FCC tried to steer the last 700 MHz public safety  auction so tightly that no one bid. The ignominious result is that twelve years  after 9-11, the FCC still has not been able to implement the 9-11 recommendation  to create an interoperable public safety wireless network.

Fifth, the DOJ’s central market analysis and assumption here are incorrect.  In a zealous attempt to lend support for FCC regulatory intervention, the DOJ  (on page 12) contrived a flawed market analysis  conclusion that Verizon and AT&T are “the dominant firms” in wireless.

The DOJ unnecessarily has created a credibility problem for itself here.

Legally, the word “dominant” is singular not plural. Dominant means first and  foremost, not the top two. Verizon and AT&T logically can’t both be  “dominant” at the same time; either one is dominant, or none is dominant.

Under the DOJ’s own guidelines, a firm is “dominant” with 50+% share —  meaning every other competitor by definition is non-dominant. Neither Verizon  nor AT&T have anywhere near 50+% share of the relevant market.

Language matters. If the DOJ meant to just imply the existence of market  power, they should stick to that legal term, not employ the pejorative term  “dominant,” for two wireless providers, when they know they can’t prove that  factually based on their antitrust expertise.

This assertion of two “dominant” wireless providers imagines incorrectly that  Verizon and AT&T somehow don’t compete against each other when they  obviously do.

Lastly and most importantly, if the DOJ and FCC truly believe that the supply  of spectrum is so important to wireless competition, why have they done so  little publicly to rectify the federal government’s hoarding,  waste and mismanagement of spectrum?

This huge and artificial governmental constriction of overall spectrum supply  is the overriding reason for scarcity of commercial spectrum — not Verizon or  AT&T speculated potential actions.

The federal government claims that it can’t spare any more of its spectrum  for auction when it controls ~85% of the nation’s radio spectrum suitable for wireless broadband, but only uses 1% of the nation’s energy; provides 8% of the nation’s employment; produces 12% of the nation’s GDP; and gets by with 30% of the nation’s land?

The facts expose an enormous public-private imbalance between the  Government’s unjustifiable and wasteful hoard of spectrum supply and the private  sector’s huge unmet demand for more spectrum supply over time.

Tellingly, the private sector has a wireless spectrum utilization rate as  much as ~80 times greater than the Government’s.

This spectrum hoarding and waste is only able to continue because spectrum is  the only federal asset that has no modern management system, no inventory or  utilization measurement, and no budget or accountability system.

It is the single biggest “good government” management scandal facing the  federal government today.

In sum, there is no long-term, private-sector, spectrum-competition problem  requiring FCC preemptive regulation. However, there is a deeply dysfunctional  federal spectrum management pipeline problem in dire need of attention that the  FCC, DOJ and the rest of the Government appear to be ignoring.

The longer the FCC and DOJ keep their head in the sand about the obvious  state of federal spectrum mismanagement, the more clear it becomes that they are  less interested in promoting wireless competition, and more interested in  promoting regulation of the wireless industry.

[First Published at The Daily Caller]