Will net neutrality politics scuttle the FCC’s upcoming incentive auction?

Some time next year, the Federal Communications Commission (FCC) plans to hold a voluntary incentive auction in which it will attempt to entice broadcasters to relinquish some of their prime spectrum for mobile broadband use. Should the FCC allow the politics of net neutrality to interfere, however, the commission could blow one of the last great opportunities both to alleviate spectrum exhaust and to make a significant contribution toward deficit reduction without raising taxes.

By way of background, in 2012 Congress passed the Middle Class Tax Relief and Jobs Creation Act. Under this law, the commission now has the authority to hold a first-of–its kind voluntarily incentive auction to try to get broadcasters to relinquish their spectrum for mobile broadband use in exchange for a portion of the auction proceeds. At bottom, the key to making this incentive auction work is for the auction’s bids to be high enough to incent broadcasters to participate. If broadcasters don’t believe they will be adequately compensated, then broadcasters will withhold their valuable spectrum and the auction will be a dud. For this reason, FCC Chairman Tom Wheeler readily admits that “[r]obust participation by broadcasters will be critical to the success of the auction.”

{mosads}A lot depends on getting the broadcasters to participate: Not only is their spectrum highly needed to satiate American’s ever-growing demand for mobile broadband, but Congress anticipates (and has already spent in the budget) the auction’s revenue to pay for, among other things, the cost of the auction, the cost to “repack” the remaining broadcasters, an interoperable nationwide first responder network (FirstNet), and an enhanced e911 system. And, on top of that, Congress expects to use auction revenue to make a payment toward reducing our ballooning national debt. (After all, this auction was a central element of an overall budget deal.)

Politics almost doomed the auction from the start, with the Obama administration’s repeated attempts to impose revenue-curbing participation restrictions. Indeed, notwithstanding clear language in the statute to the contrary, the Obama administration wanted the FCC to impose stringent bidder exclusion rules on the two largest wireless carriers, AT&T and Verizon, in a naked attempt to bolster Sprint and T-Mobile. Considering what AT&T and Verizon have contributed to action proceeds in the past, imposing such rules would have been an extremely risky move by the commission. After AT&T threatened to boycott the auction, a general compromise was reached, and the auction appears on track (the recent suit by the National Association of Broadcasters notwithstanding).

Now, politics again threatens to doom the auction, but in an entirely new way.

In particular, both the White House and the FCC are threatening to subject the mobile broadband industry to stringent net neutrality rules — or, worse, to reclassify mobile broadband as a Title II common carrier telecommunications service. Should they make good on their threat, such heavy-handed regulation would make the broadcast spectrum less valuable and, in turn, depress much-needed auction revenues, once more throwing the success of the auction into doubt.

To grasp the gravity of the situation, one need only look back at the FCC’s auction of digital television spectrum back in 2007. In this auction, the agency imposed “network neutrality” encumbrances on the auction’s 20 MHz C-Block (the largest block in the auction). As a result, despite its high intrinsic value, almost no one was interested in the block. In the end, Verizon scooped it up for only $4.7 billion. Based on the other blocks sold in this auction and prior auction results, econometric models predicted that the C-Block would have sold for about $9 billion without the encumbrances. That’s a 40% loss in value attributable to network neutrality.

There’s a good argument to be made that the network neutrality rules being considered by the agency today are more onerous than those imposed on the C-Block. Certainly, reclassifying all broadband modalities, including mobile broadband, as a Title II common carrier telecommunications service would be a significant expansion of regulation in the sector. With more onerous regulations, a bigger reduction in auction revenues than that seen in the first broadcast spectrum auction should be expected. Such a massive loss in auction revenues would, no doubt, have a huge impact on the supply of spectrum to the auction. Broadcasters are only in it for the money, and if the money isn’t so good or isn’t expected to be so good, then I suspect many of the license holders will simply stay home.

Whether or not the FCC will extend the full weight of its network neutrality obligations on mobile wireless services or exercise the “nuclear” option of reclassification remains unclear — as do all aspects of the agency’s plans. (Of late, the agency has been entirely unpredictable.) Given the importance of the voluntary incentive auction, however, it is crucial that the commission weigh the uncertain benefits of net neutrality regulation against the near certain and substantial revenue loss in the auction from reclassification.

Ford is the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.