Why spectrum caps matter

The invisible highways that carry the video, e-mail and data we access on our mobile phones – known as wireless spectrum – are becoming more and more crowded, and without new spectrum becoming available, wireless roadways will be like the Washington beltway at rush hour. A dearth of wireless spectrum would limit economic expansion, squash innovation and damage job growth. Thankfully, relief is on the way.

Sometime in 2015, the Federal Communications Commission (FCC) will hold an auction of some exceptionally valuable spectrum in the 600 MHz band.  The auction – approved by Congress two years ago – is expected to raise billions of dollars that, in part, will help fund a nationwide public safety communications system and pay down the national debt. The FCC is working hard to craft the rules for the auction, with a goal of supporting future competition in the mobile broadband marketplace, while also raising revenue. Auction revenues play a more prominent role in this auction, because the revenues are needed to motivate TV broadcasters to relinquish the 600 MHz spectrum. Fortunately both the revenue and competition goals can be met with the right auction rules in place.

{mosads}Today, the U.S. mobile broadband industry is highly concentrated. The Big Two of AT&T and Verizon serve 67 percent of the subscriber market and hold roughly 80 percent of the spectrum below 1 GHz. The upcoming 600 MHz auction is a critical opportunity to check these high levels of market power.

There won’t be a scarcity of bidders for this valuable spectrum if the auction is structured properly. 600 MHz, or low-band spectrum, is prized for its capacity to penetrate inside buildings and travel over long distances – making it cheaper to deploy and ideal for mobile broadband in both urban and rural areas. The future of a competitive and innovative wireless industry rests on the ability for every mobile carrier – urban and rural, large and small – to have a fair opportunity to acquire low-band spectrum.

I am an economist who specializes in the design of complex auctions and I have advised twelve governments and thirty-six bidders on spectrum auctions, including some of the largest and highest-grossing auctions in history. A well-calibrated limit on the amount of spectrum that dominant providers can acquire at auction is an effective tool to ensure that mobile markets remain competitive. Placing a limit on the amount of spectrum the Big Two can acquire will help to foster a competitive wireless marketplace, while potentially increasing auction revenue. In contrast, an auction where those with the deepest pockets can outbid everyone else would result in higher prices for consumers and potentially lower auction revenue.

For members of Congress, the debate surrounding the auction boils down to one simple question: Is there enough competition in the national wireless market?

Giving AT&T and Verizon the limitless ability to acquire as much low-band spectrum as possible could very easily allow the Big Two to purchase the spectrum with the intent of keeping it out of the hands of their competitors, not to develop new products and services for customers. Allowing them to exclude their competitors from the market might help to increase the Big Two’s profits, but would cost consumers dearly for many years to come.

Every company should be able to participate in the upcoming auction. No company – not even AT&T and Verizon – should be barred. But if we want to put consumers first, the FCC has to take measured steps to prevent the Big Two from wielding their market power to create a nationwide wireless duopoly.

Opportunity attracts investment, and more competitive auctions yield higher revenues. With smart limits on the Big Two in place, smaller bidders will stand a better chance of winning spectrum and will increase their auction participation accordingly. An improved opportunity to win licenses can motivate other bidders to bring larger budgets to the auction, and encourage participation from providers that otherwise might sit the auction out. Heightened participation by smaller carriers promises to result in substantial revenue in the auction – more than enough to compensate TV broadcasters and meet public safety’s funding requirements.

But, frankly, the auction is not about revenues. The success of the 600 MHz auction will be measured by whether we have faster broadband connections, increased innovation and consumer choice, better service, more jobs and greater economic investment. No companies, least of all dominant ones with market power, ever willingly cede market share to their competitors. But increasing the opportunity and ability of smaller carriers to compete more aggressively with the Big Two represents the best path to ensuring continued innovation, investment, and deployment of wireless broadband in the United States.

Cramton is a professor of Economics at the University of Maryland and chairman of Market Design, Inc.