Wednesday, September 19, 2012

Pro-Investment Spectrum Policy Requires Open Eligibility and Flexibility

This fall promises to be a critical season for spectrum. At its September 28 meeting, the FCC is set to consider proposed rules for the broadcast TV spectrum incentive auction and for the spectrum screen the agency uses in evaluating spectrum license transfers. The FCC is also considering AT&T's proposed acquisition of several spectrum licenses from Comcast, Horizon, and NextWave.

The name NextWave should ring a bell at the FCC. In particular, it should call to mind the debacle of the agency's mid-1990s spectrum auctions conducted according to a restrictive, protectionist approach instead of a truly free market approach. A decade of messy legal battles between botched auction winner NextWave and the FCC kept valuable spectrum from being put into use for wireless services.

The FCC will hopefully show it has learned the lessons of NextWave in implementing spectrum incentive auctions and in reviewing spectrum secondary market transactions. For the FCC, this means ensuring there is open eligibility for those entities offering the highest bids to obtain spectrum licenses. It also means auctioning spectrum licenses free from encumbrances that could depress their value. A pro-investment policy for spectrum, so vital to job growth and economic expansion, requires reliance on free market forces for ensuring spectrum licenses obtain their highest value.

Spectrum is a critical input for accommodating surging wireless data traffic and for facilitating deployment of next generation wireless services. According to data compiled by CTIA, wireless data traffic totaled more than 865 billion megabytes in 2011, a 123% increase in annual traffic from 2010. The FCC has repeatedly acknowledged the urgency of making more spectrum available to accommodate future wireless data traffic demands. AT&T's proposed acquisition of spectrum licenses from Comcast, Horizon, and NextWave – dubbed "AT&T/WCS Licensees" by the FCC – fits with plans to retire its legacy service operations. The carrier is positioning itself to migrate those customers to more advanced wireless networks, including its expanding 4G network. As one analyst report puts it, next-generation IP networks offer the benefits of "increased throughput, lower latency, and stronger security. One result is a reduced cost per megabit."

Due to this combination of increasing demand for wireless services and network capacity constraints, in recent years spectrum has become increasingly valuable. This is evidenced by the high prices being offered by wireless carriers for additional licenses. For instance, Verizon Wireless acquired 20MHz of Advanced Wireless Services (AWS) spectrum from a consortium of cable companies (SpectrumCo) for a reported $3.9 billion. It is reported that AT&T is paying NextWave $600 million for its spectrum licenses, with the carrier said to be spending some $2.6 billion to acquire spectrum through several other transactions.

Given the innovative and competitive state of today's wireless marketplace, a pro-investment policy that puts primacy on market forces will best ensure the rapid rollout of the next generation of wireless services. Market-based decision-making by the private sector offers the most efficient means for ensuring that spectrum licenses are put to their best use. Those entities that are willing to invest the most in spectrum will invariably have the strongest incentive to make good on their investments. And as research by economists Robert Shapiro and Kevin Hassett indicates, "every 10 percent increase in the adoption of 3G and 4G wireless technologies could add more than 231,000 new jobs to the U.S. economy in less than a year."

But the full benefits of future wireless innovation, investment, and jobs might not be realized if the FCC takes a restrictive, protectionist, and otherwise pro-regulatory approach to spectrum policy.

Earlier this year, FSF President Randolph May raised serious concerns that the FCC might invoke its vague and indeterminate "public interest standard" in order to impose restrictions on eligibility for the incentive auctions. Similar concerns were expressed that the FCC might impose restrictions on the use of licensed spectrum once it is auctioned. FSF scholars have criticized the FCC's process for reviewing mergers and acquisitions, including those involving the transfer of spectrum licenses. For example, FCC merger review orders regarding AT&T/T-Mobile and AT&T/Qualcomm have relied on seemingly arbitrary and ad hoc rationalizations for blocking deals or subjecting them to burdensome regulatory restrictions.

Given the vibrancy of the wireless market in an economy otherwise experiencing an intractably slow recovery, these concerns about FCC-imposed regulatory restrictions on spectrum auction eligibility and flexible license usage remain in full force. There are agency precedents in this regard that the FCC should not repeat. As mentioned earlier, the FCC's ill-conceived auction in the mid-1990s that restricted bidding eligibility and transferability put valuable spectrum licenses into the hands of NextWave and other entities that proved unable to pay for those licenses or put them to use. And in 2007, the FCC's 700 MHz C Block Order imposed "open access" or network neutrality restrictions on the use of the auctioned spectrum licenses. A 2010 paper by economists Gerald Faulhaber and David Farber concludes those encumbrances "decreased the value of the spectrum asset by 60%...reduc[ing] the affected telecommunication asset and thus reduc[ing] the incentive to invest in such assets." 

Going forward, the FCC must pursue a pro-investment spectrum policy that seeks to obtain the highest value that wireless carriers are willing to put up. Such investment is the lifeblood of the innovation, competition, and job growth that next-generation IP wireless services promise for consumers and for our economy. Open eligibility and flexible use, not protectionist or competitor welfare restrictions, should be the rule for the FCC's upcoming incentive auctions and for future reviews of spectrum license transfers.