Is the FCC signaling political risk by not declaring wireless competitive?

Posted December 28th, 2015 in capital, Federal Communications Commission, wireless communications by Alton Drew

On 23 December 2015, the Federal Communications Commission issued a report analyzing the competitive environment of the wireless broadband market. Although the Commission found that 90% of American households have access to at least four wireless providers, the Commission failed to find that the market for wireless broadband access was effectively competitive. ┬áThe Commission’s failure to make a finding on whether the market is effectively competitive should raise some concern among investors about how far the Commission could go in creating a competitive marketplace in its own image.

For example, how restrictive would future auctions for spectrum be for incumbents should the Commission pursue policies that restrict rights by incumbents to bid on certain bands or portions of spectrum. Such restrictions may impact decisions to invest in additional base stations and other infrastructure used to deliver wireless calls. As the Commission’s report pointed out, the amount of investment a carrier makes in its network is a drawing card for subscribers.

In a report on Verizon, Morningstar strategist Michael Hodel cited concerns about the overall growth of the wireless market finding that the market for wireless services was a competitive one.[1] Pricing power of the incumbents was being squeezed by increased competition. Among analysts specific concerns was the price of spectrum:

“One of the biggest detriments to the competitive position, in our view, is U.S. spectrum policy. The AWS-3 spectrum auction demonstrates the extremely high prices spectrum can fetch given that the U.S. government ultimately determines how and when additional spectrum is made available to the industry.”

Mr. Hodel went on to say that spectrum purchases at high prices would constrain future returns on invested capital, returns that would modestly exceed the cost of capital.

If the Commission wants to see the wireless industry remain attractive to capital, a spectrum policy that creates lower prices for obtaining spectrum is a start. Unfortunately, the Commission failed to make that clear in this report.

1. Hodel, Michael. “We expect Verizon’s scale advantage will overcome a choppy wireless competitive environment.” Morningstar.


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