I Thought the FCC Liked it by the Numbers

I Thought the FCC Liked it by the Numbers

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I admit, while I respected their passion for consumers and telecommunications, I didn’t agree much with former Federal Communications Commissioners Michael J. Copps and Jonathan Adelstein.  They had no problem keeping the screws on the broadband industry.  If a phrase started with the word “regulation” they were probably all for it.  One thing I did appreciate them for, especially Mr. Copps, was their call for better data collection by an agency allegedly driven by data.

Mr. Copps called for better data collection by the FCC back in 2009 as the agency addressed broadband adoption, determining competition in the video marketplace, and diversity in the ownership of broadcast media.

I never see progressive advocates for net neutrality or restrictive access to the reverse broadcast spectrum auctions make quantitative arguments for their positions.  It’s as if mere assertions about how large broadband providers, such as Verizon and AT&T, would foreclose the ability for smaller national or regional carriers, like T-Mobile and Sprint, from getting licenses necessary to access airwaves and provide service.

Last week, Verizon gave the FCC what it allegedly wants: data and quantitative analysis, this time in support of the New York-based broadband provider’s position that its participation in upcoming spectrum reverse auctions should be capped or otherwise restricted in any way. The study was conducted by Duke University professor Leslie M. Marx.  Ms. Marx knows a little about telecommunications having served as the FCC’s chief economist.  Here are some of her major findings:

1. Proposals to restrict the participation of Verizon and AT&T in the Incentive Auction do not address any real world problem.  The assertion that some smaller wireless operators are at risk of  being foreclosed from the spectrum necessary for them to compete is inconsistent with those firms’ own behavior, including their repeated decisions to forego opportunities to acquire low frequency spectrum.  Other evidence, including Sprint’s and T-Mobile’s marketing of unlimited usage plans, further belies the assertion that those operators face capacity constraints that could be exploited though a foreclosure strategy.

2.  Even if a strategy by Verizon and AT&T to attempt to foreclose rivals was rational, implementing it would be difficult. A foreclosure strategy is particularly difficult to implement in the context of the Incentive Auction because higher bids on the part of buyers result in a greater quantity of spectrum being made available from sellers, thus increasing the costs of foreclosure. In addition, says Professor Marx, in an auction with anonymous bidding, it would be difficult for AT&T and Verizon to know whether they are bidding against the foreclosure targets or against one another. Furthermore, even if a foreclosure strategy were feasible, Verizon and AT&T would each have an incentive to “free ride” on the other’s willingness to pay supra-competitive prices for spectrum.

3. Based on the economics literature, empirical data from past FCC auctions, and a model of a two-sided auction mechanism, Professor Marx concluded that restricting Verizon and AT&T in the Incentive Auction would put at risk its twin priorities of raising significant revenue and reallocating a substantial amount of spectrum from broadcast to mobile wireless services.  Her simulations of past auctions showed that, without Verizon and AT&T, revenue in the 700 MHz auction would have been 45% lower and revenue in the AWS-1 auction would have been 16% lower.

4. Professor Marx also analyzed bidding restrictions that would not fully exclude Verizon or AT&T, such as spectrum aggregation caps. According to her findings there are indications that any restriction that causes a material reduction in the participation of Verizon and AT&T risks a significant reduction in auction revenue and a failure of the auction.

In short, Sprint and T-Mobile don’t act like they are hurting for spectrum and have ample access to it given their recent mergers with SoftBank and MetroPCS respectively.  Good old fashioned economics doesn’t support their policy position either given that the more bidders participating in an auction, the greater the bids and the revenues that come along with it.

Rather than listen to David vs. Goliath assertions as espoused by the U.S. Department of Justice, the FCC should pay attention to the numbers and admit to the conclusion at which everyone else has arrived: capping access to spectrum is bad public policy.

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