Telecom Regulation: The 600 MHz Auction in the United States

The Federal Communications Commission (FCC) chairman recently hinted at rules to restrict the spectrum ownership of big operators.

In the foreseeable future, the 600 MHz auction to be held next year will be the only one selling sub-1 GHz spectrum licenses. The Department of Justice (DOJ)'s proposal to restrict AT&T's and Verizon's participation is currently pitting the two big boys against the other operators, although, depending on the actual auction design, it may become a case of them versus Sprint and T-Mobile versus the small operators.

Arguments for:

  • As the New York Times put it, "it may be necessary to limit competition in order to promote it." To make things clear, we are looking at the input market where spectrum is, essentially, a factor of production in the first instance when "competition" is mentioned, and the output market where consumers purchase cellular services in the second. As T-Mobile mentioned, stiffer competition in the latter should, theoretically, "increase consumer choice, encourage innovation, and accelerate broadband deployment."
  • T-Mobile argued that, without such competition policy in place, there could be more spectrum concentration in the hands of AT&T and Verizon, and hence the need for further future regulatory intervention. Presumably, the argument rests on the premise that intervention is undesirable. However, the logic is rather curious because, in effect, they are arguing for intervention to be in place now to avoid future intervention.
  • T-Mobile also contended that allowing the big two to participate freely "threatens to lower auction revenues by robbing the auction of the large number of participants and unpredictable types of bidding that increase spectrum prices and raise auction revenues." The participation of AT&T and Verizon will, paradoxically, lower the number of participants only if other operators feel discouraged and choose not to take part in the auction as a consequence. This issue can be tackled by reducing the upfront down payment for small operators when they apply to partake in the auction so as to lower their barrier to entry and maintain the contestability of the input market. The multiple-round feature used by the FCC in past auctions will also give other operators the chance to outbid AT&T and Verizon if the two get complacent and offer low bids. ABI Research believes that auction revenues will be maximized when the two are allowed full participation.

Arguments against:

  • The big boys have accused the DOJ of trying to pick winners and losers by attempting to restrict their participation in the upcoming auction.
  • AT&T argued that the auction revenue would be lower if FCC limits competition in the auction, depriving First Responder Network Authority (FirstNet) of public safety communication tools. Although the auction proceeds would indeed likely be lower if the big two are restricted, as pointed out by a study conducted by Georgetown University and highlighted by T-Mobile, the revenue would still be more than sufficient to fund FirstNet.
  • AT&T maintained that "those that come in and bid the highest are those that are going to have the greatest need of the spectrum." The underlying assumption is that the spectrum will yield the highest marginal return when held by those most in need of it; thus, ensuring that the scarce resource ends up in their hands by not restricting competition in the auction will achieve productive efficiency. However, this is not necessarily true, because the bid an operator submits reflects both its willingness and ability to pay. The operator which can generate the most value out of a block of spectrum may be financially constrained due to capital market imperfections and not be able to make the highest bid. Having said that, while the highest bidder may not be the one most in need, at least it is best positioned to make full use of the spectrum as it has the financial resources to invest in and deploy a network quickly.

Let us first assume that the objective of auction is to maximize public welfare, perhaps by lowering mobile tariffs, expanding network coverage, or improving service quality.

Many observers of the wireless industry have rightly pointed out that, despite being dominated by two carriers which together capture nearly two thirds of the market share in terms of subscriptions, the sector is highly competitive, and that the big players do not display anti-competitive behaviors. Indeed, in the past 2 years, we saw tariffs falling by 5.3% for voice call, 12.1% for texting, and 55.6% for every Megabyte of mobile internet actually consumed. In addition, per subscription mobile capital expenditure was USD 92.3 in 2012, 40.9% higher than that in Western Europe; as a result, the United States has one of the widest LTE network coverage in the world with more than 95% of the population having access to the service at the end of the second quarter of 2013.

This assessment shows us that market structure alone does not dictate competition level. More specifically, oligopolies can also achieve relatively competitive equilibriums. However, the more relevant issue to look at is how that competitive landscape will change going forward, if AT&T and Verizon are allowed to use their financial might to get their hands on significantly more spectrum. Will other operators suffer poor network quality in the future?

When Verizon acquired AWS frequencies form SpectrumCo and Cox Communications, MetroPCS pointed out that Verizon will hold 20 MHz of undeveloped spectrum throughout most of the United States and even up to 40 MHz of unused spectrum in major markets. Verizon itself said that it will have sufficient spectrum for the next 3 to 4 years. Similarly, AT&T said its spectrum is enough for the next 2 to 4 years.

However, currently, for each cellular subscription on the network, AT&T and Verizon actually have lower population-weighted average spectrum holdings than T-Mobile and Sprint. If anything, it appears that AT&T's and Verizon's network quality will degrade first before the other operators. Therefore, if this measure is a fair reflection of the spectrum need of the operators, restricting the big two's participation would be counter-productive. It would be strange to sacrifice efficiency now to prevent possible future inefficiency arising from a possible lack of competition.

Having said that, the objective will not necessarily be achieved unless there continues to be competitive pressure to force profit-maximizing firms like AT&T and Verizon to lower prices and pass on the economies of scale they reap as they grow in size to consumers.

In any case, to prevent big players from using their financial might to hoard spectrum in the event that the FCC chooses not to limit their participation, as well as to prevent inefficient operators from wasting the scarce resource in the event that competition is limited, the FCC should set strict and aggressive roll-out obligations. However, there needs to be a balance, so that the obligations themselves will not end up deterring small carriers from participating.