The Obama administration’s infamous struggle with the online insurance exchanges should serve as a lesson to regulators everywhere that complex systems cannot be rushed. In part because of the website fiasco, the Federal Communications Commission recently delayed the uniquely complex auction of spectrum—the medium through which our wireless transmissions pass—by one year. Despite this attempt to get it right, the FCC may still undermine the auction’s purposes by penalizing some wireless phone companies to favor others.
The 2012 Middle Class Tax Relief and Job Creation Act required the FCC to raise roughly $30 billion through spectrum auctions to fund a nationwide public safety network and to reduce the deficit. Now, however, the FCC is considering partially restricting AT&T and Verizon Wireless in the first major auction since 2008, putting those ambitious revenue goals at risk and potentially delaying mobile broadband expansion.
In 2015, the FCC will conduct the so-called “incentive auction,” which involves television broadcasters selling some of their airwaves to the FCC, who will then auction it for mobile broadband use. As smartphone and tablet penetration increases, consumers are demanding more data services like streaming video from YouTube, Netflix, and ESPN. Wireless phone carriers see these trends and—in order to improve their 4G LTE capacity and their national footprints—will likely be the top bidders at auction.
However, FCC chairman Tom Wheeler recently indicated that the FCC will intervene in the spectrum auctions to help smaller carriers. Sprint and T-Mobile, in particular, are pressuring the FCC to restrict bidders who already possess an arbitrary amount of desirable spectrum—a unique burden that affects only AT&T and Verizon.
FCC meddling in the auction is not necessary to make the industry competitive. Two years ago the FCC and the antitrust lawyers at the Department of Justice prevented AT&T, the second largest carrier, from acquiring the fourth largest carrier, T-Mobile. The FCC and DOJ expressly cited T-Mobile’s competitive strength for blocking the deal. T-Mobile is even stronger since the failed merger because of an infusion of billions in cash and spectrum—yet the FCC now asks us believe the implausible: The company is too strong to be absorbed by a larger carrier but too feeble to acquire spectrum at auction.
In reality, auction restrictions would only serve as corporate welfare. Sprint’s lobbying for auction restrictions likely arises because of some questionable business decisions. Notably, Sprint’s merger with Nextel in 2005 led to losses approaching $30 billion and delayed Sprint’s network rollout. Japan’s telecommunications giant SoftBank has since acquired most of Sprint’s stock and improved Sprint’s outlook as the third largest carrier. Auction restrictions may mean Sprint can get spectrum at discounted prices.
Sprint and T-Mobile have access to capital markets and are backed by large, international telecommunications companies. Deutsche Telekom—T-Mobile’s parent company—and SoftBank both pledged to spend billions in the next few years, and there is no reason to believe these carriers will be scared away from the incentive auctions. These firms do not require an FCC handout to compete.
The incentive auction is already complicated. The FCC should not add to the auction’s complexity by placing asymmetric restrictions on the largest two carriers. Doing so, as this month’s Senate hearing on the incentive auction made clear, could jeopardize the entire auction. As a representative for the television stations explained at the hearing, the broadcasters need certainty and high auction prices to convince them to turn over their spectrum. If some broadcasters don’t show up, it would be a disaster akin to the Affordable Care Act rollout.
The FCC has promoted competition and liberalized rules since auctions were authorized in the 1990s. Today, as a result of market-friendly policies from Democratic and Republican administrations, American wireless networks and 4G LTE access are the envy of Europe and elsewhere. The FCC should continue promoting competitive spectrum auctions to benefit consumers and reduce the deficit. Micromanaging the wireless industry through auction distortions would be a step backwards.