Are Industrial Policy Failures Looming in the Incentive Auction?

By Gregory J. Vogt

It seems like this frigid winter may be contributing to some ill political winds blowing in Washington “competition” policy circles. This is a distressing sign given that the current FCC Chairman’s proclaimed mantra is “competition, competition, competition.”

The ill winds are blowing in the form of calls for further changes to the incentive auction that would steer volunteered broadcaster spectrum toward particular mobile broadband bidders. Engineering competition to satisfy government whims is not “competition,” but only an example of failed industrial policy. History is littered with industrial policy disasters, from 1970s price controls to crony capitalism, and, yes, even infiltrating communications markets such as failed UNE policies and other competition-skewing policies.

For those not steeped in FCC-speak, the incentive auction is a legislatively mandated two-part auction where over-the-air broadcasters volunteer to give up their spectrum in exchange for a portion of the “reverse auction” price. The freed-up volunteered spectrum is to then be auctioned in the forward auction for mobile broadband use. The main aspects of the auction process were decided last summer, with details being hashed out in comments filed at the FCC last week.

A recent blog by John Legere, CEO of T-Mobile, calls the recent AWS-3 auction (that raked in over $44 billion) as a “disaster” for wireless users. If “the results” are the same in the incentive auction, he claims it would represent an “epic failure.” He argues that the FCC must establish auction rules that reserve for participants other than AT&T and Verizon at least 40 MHz of spectrum in every geographic market. All the while Legere claims that he is not seeking a government “handout . . . like the Twin Bells got.” Some Democrats on the Hill echo these sentiments in a less exaggerated fashion, but they nonetheless call for the FCC to “adjust” the auction procedures for competitive reasons.

These renewed calls for government control of mobile broadband markets are in sharp contrast to some relatively encouraging news of broadcasters’ increased interest in the incentive auction. These broadcasters recently projected that incentive auction revenues could exceed $80 billion. This eye-popping claim is remarkable, although it may not be outlandish given the surprise success of the AWS-3 auction. This interest, if it actually leads to greater volunteered spectrum, would indeed be good news for mobile broadband customers.

These same broadcasters warn, however, that incentive auction procedures should not further impede the market-oriented auction process by complicated procedures and artificial controls on bid prices, a predictable consequence of recent proposed bidding procedures, as I outlined here.

And as I indicated in detail here, the Commission has already too closely heeded smaller carrier pleas for auction favoritism by establishing complicated “reserve spectrum” rules that steer spectrum to other than the top two potential bidders. Unsatisfied with the enormously favorable “reserve” set-aside, T-Mobile is pressing for still more favoritism in a petition for reconsideration of the incentive auction rules filed last summer.

Make no mistake about it, skewing auction results will not produce more competition. It will only lower auction prices, and thus give smaller carriers an artificial cost advantage, a result which, as I noted here, actually occurred in Canada. Such a result if repeated here would not be good news for the incentive auction because it will suppress broadcaster’s expected revenues, and thus deter participation in the first place. Given that both Congress and the FCC have already decided that maximizing the amount of spectrum volunteered by broadcasters to be the most important feature of the incentive auction (despite what individuals in Congress now say), government should resist individual competitor requests that the auction should focus instead on “promoting competition.”

Steering more spectrum to smaller carriers, and giving them exclusive access to unencumbered spectrum as proposed in the recent procedures public notice, is not real competition produced by markets, but only another form of a government subsidy. Contrary to Legere’s over-the-top rhetoric, AT&T and Verizon have paid for the vast majority of their spectrum, including buying and selling spectrum on the open market, for example in this transaction.

It should be remembered that smaller mobile carriers do not argue that they cannot compete for customers because they need more below-1 GHz spectrum. Such an argument would never hold water. Smaller mobile providers can only gain market share by convincing customers that they offer a superior product. If capacity and market “reach” were really the driving motivation of their arguments, these smaller carriers could have more actively participated in the many after-auction market sales of spectrum that continue to this day. Rather, the more obvious focus on skewing the incentive auction is to gain below-market priced spectrum.

Competition has been a bi-partisan policy goal for decades, particularly in the communications sector. Although the FCC too often dabbles in industrial policy because of the misguided notion that it can produce “better” consumer results than the market, there is no justification for interfering with the wireless market, which has been a raging success story. Recent T-Mobile revenue and customer gains attest to that proposition. The FCC should reject calls to “fix” competition in a market that is not broken.

Although T-Mobile’s John Legere says the AWS-3 auction results should “scare the hell out of” wireless consumers, I think consumers instead should all be jumping for joy that market forces actually work. Industrial policy does not work because government is incompetent in running markets. Now let’s hope that the FCC learns from the recent AWS-3 history lesson.