Earmarked Airwaves?

Hal Singer and
Hal Singer Managing Director and Principal - Navigant Economics
Robert Hahn
Robert Hahn
Robert Hahn Director of Economics - Smith School of Enterprise and the Environment at the University of Oxford, Former Brookings Expert

June 27, 2007

The Federal Communications Commission is poised to auction another big chunk of electromagnetic spectrum. This is one of Uncle Sam’s most valuable assets — the airwave equivalent of a square mile of prime Manhattan real estate. And an army of lobbyists is combining hardball influence-peddling with appeals to ideology in search of a way to gain the turf for less than market value.

The idea of auctioning spectrum (rather than giving it away to the “worthiest” applicant) was a stroke of genius. Open auctions make it likely that the spectrum will end up with the users who value it most — and in the process maximize the cash flowing into the U.S. Treasury.

The catch is that Congress gave the FCC considerable discretion in setting the rules for auctions. As a result, the agency has wiggle room to rig the bidding as long as it has plausible public-interest justifications.

This potential for playing favorites can cast a shadow on FCC auctions. In this case, the size of the prize — the spectrum in question could serve as a keystone for another nationwide wireless network — has led lobbyists to outdo themselves in suggesting ways to tailor the license to favor specific interests.

The front-runner in this high-stakes tournament is aptly named Frontline Wireless. Backed by deep pockets (notably, Google’s) and aided by such luminaries as former FCC chairman Reed Hundt, Frontline is close to persuading the FCC to attach four strings to the license that would effectively insulate Frontline from serious competition in the auction.

The first would prohibit the winner from selling wireless services directly to end-users. Instead, the licensee would have to work through resellers, who would retail services to consumers. The second would bar all incumbent wireless carriers, including industry leaders Verizon Wireless and AT&T, from competing in the auction. Some proponents of Frontline’s plan have advocated an even tougher rule that would disqualify cable providers, too. The third would oblige the licensee to meet public-safety demands. The fourth would require the licensee to support any legal application that could be transmitted over the network.

Each of these strings can be rationalized as serving the public interest. But as a practical matter, they add up to a solution in search of a problem. The first two address nonexistent failures in market efficiency. There is no good reason to believe that the integration of wholesaling and retailing in wireless communications has led to higher prices or restricted production. By the same token, there is little evidence that incumbent carriers could use the extra spectrum to exercise monopoly power.

The requirement to create an emergency network for first responders hits a nerve in light of the communications problems exposed by Sept. 11, 2001, and Hurricane Katrina. But spectrum for such a network has already been set aside. Ironically, money to assemble the network is slated to come from the proceeds of this auction.

The fourth requirement, the “net neutrality” provisions, would oblige the licensee to carry all applications, prohibiting it, say, from blocking Internet phone calls on a wireless data connection. That’s a bad idea — one that could even threaten the existence of low-cost wireless data plans. But however one views it, the debate should be settled openly in Congress, not with rules sneaked into law via a spectrum auction.

The obvious consequence of tailoring the license to the interests of Frontline, or any other entity, is a loss of revenue in the auction. Arguably the greater cost, though, is the risk that the spectrum will lie dormant for years as Frontline maneuvers to wriggle free of the license restrictions.

In Senate hearings, James Barksdale, a partner in Frontline, was asked how the FCC would be able to reclaim the spectrum for re-auction if the Frontline proposal “doesn’t achieve its goal.” Barksdale replied that that “would have to be ironed out.” Just so. And if the 2004 NextWave saga — in which the winning spectrum bidder declared bankruptcy and creditors used its plight to justify a quick flip at a multibillion-dollar profit — is any guide, the property rights would be “ironed out” in Frontline’s favor.

We don’t fault Frontline for trying to grab a few golden eggs if the FCC leaves the coop door open. But we can’t help thinking it is time that Congress learned from its mistakes and removed the temptation. Unless regulators are stripped of their discretion to effectively earmark spectrum to well-connected businesses, taxpayers and consumers are sure to end up shortchanged.

Robert Hahn is executive director of the American Enterprise Institute-Brookings Joint Center. Hal Singer is president of Criterion Economics. Both have advised CTIA, a trade association that represents the wireless industry, on spectrum issues.