Washington

Heck of a Job, Marty

4/05/2008 02:00:00 AM Eastern

The FCC recently raised a record $19 billion in an auction for rights to the nation's airwaves. While this sounds like another successful commission auction, it was not.

The rules written by the FCC Chairman, Kevin Martin, failed to achieve what previous auctions have: increased competition in the wireless industry. Rather, the results of this auction are that the nation's two biggest wireless companies—AT&T and Verizon, with half the current mobile phone market between them—purchased more than two-thirds of all the spectrum rights sold. That outcome will decrease competition going forward.

According to the FCC, the wireless licenses sold in the auction will provide the foundation for introducing new technologies—capable of providing broadband, video, gaming and other bandwidth-intensive services—for at least the next 10 years. That's why a broad range of firms lobbied the FCC to write rules favorable to them.

Verizon wanted large spectrum blocks and a blind auction with hidden bidder identities. AT&T advocated for experimental rules to allow nationwide bids. Google, which was never believed to be serious about winning spectrum itself, sought rules that would allow any comer to use the networks built by the auction winners.

Midsize and rural telecommunications firms, as well as cable companies, wanted the auction to include more licenses with smaller geographic coverage that would allow them to bid and compete with entrenched incumbents in individual markets, instead of being forced to buy multi-state or national licenses.

Last summer, Chairman Martin stated that spurring competition was one of his goals for this auction. But instead of the promised pro-competitive rules, he implemented a political compromise that favored select firms even before the auction began.

He chose to honor Verizon, AT&T and Google's requests, but ignore the other entrants and smaller incumbents that could have provided additional competition. In the end, FCC rules allowed the nation's two dominant wireless phone companies to advance their market position and starve smaller and newer wireless players of spectrum, which is essential to compete in this industry. This means that consumers won't benefit from the competitive pressures that new entrants would have brought, including price wars and the introduction of cutting-edge devices.

Proving that the past may indeed be prologue, the lasting effect of this auction will be the establishment of a next-generation wireless broadband market likely dominated by two familiar giants—AT&T and Verizon—with numerous smaller spectrum-constrained players unable to provide truly competitive alternatives.

Competition in the mobile phone industry is robust, with the U.S. leading the world in the usage of mobile phones by each subscriber, but the prospects for the mobile broadband future are not so rosy. With 85% of the auction revenues paid by Verizon and AT&T, they must now be considered the prohibitive favorites to dominate mobile broadband, largely to the exclusion of other competitors.

This is in stark contrast to the outcome of the FCC's earliest auctions, introduced as pro-market reforms that effectively increased competition in the wireless marketplace. In the mid-1990s, when faced with the task of distributing the last mother lode of new frequencies, the FCC used auctions to allow entrants to break open the then two-firm dominance in every U.S. city.

The predominant carriers in 1995 that gave up market share to those new entrants were the predecessors to today's AT&T and Verizon.

The frequencies that were distributed in this latest auction are often referred to as the U.S.'s Digital Dividend because they represent a bonus—channels 52 to 69, which will soon no longer be needed for over-the-air TV as the country transitions to all-digital broadcasts next February. Unlike other frequencies available for mobile communications, these former TV channels penetrate buildings well and have the added benefit of using battery power more efficiently.

For those technical reasons, these frequencies should have been fashioned for new entrants eager to break into the wireless marketplace. Instead, they were shut out. Firms that would willingly set up shop in rural America were priced out of the market because so few frequencies were made available in licenses that only covered smaller communities. More broadly, by purchasing the lion's share of the available bandwidth, the largest wireless incumbents have reduced the benefits that competition would bring—including new services and lower prices.

All said, the latest FCC auction is an inglorious end to what has been a bright spot in government regulatory policy. Auctions have been an effective way to distribute spectrum licenses to build a competitive wireless industry and at the same time generate a fair return to the public. Returning the wireless industry to the same firms that dominated the cellular market before the first FCC auctions will be one of Chairman Martin's sad legacies.

Bazelon is a principal with The Brattle Group. He has worked with cable companies in FCC auctions and represented Cox Communications in the recently concluded spectrum auction.

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