So why should the Federal Communications Commission keep conduct a least restrictive spectrum auction for broadcast spectrum? Because, according to the Free State Foundation, tying conditions to an auction negatively impacts the outcome in terms of pricing and the number of firms that leave the auction with any spectrum at all.
In a recent blog post, the Foundation shares a couple examples of how interference by the FCC, in the form of aiding what the agency deemed as financially weak competitors, resulted in less spectrum being released. In describing the PCS C Block and 700 MHz auctions, the Foundation stated that:
“In the PCS auction, the FCC extended long-term credit to financially weak bidders, with the apparent intention of encouraging small businesses and rural bidders. This manipulation of the auction resulted in a decade of bankruptcy litigation, delayed the availability of spectrum, and cost consumers over $65 billion according to some estimates. In the 700 MHz C block auction, the FCC required the winner of the 22 MHz C license to provide non-discriminatory network access for all devices and applications. This vague “open access” mandate lacked detail on the freedom of a new licensee to set prices or innovate and disincentivized bidding. This condition-encumbered C block sold for 29% of the price as comparable or even less valuable blocks. Additionally, in auctioning the D block in the same 700 MHz auction, the FCC imposed significant conditions on the use of the spectrum and imposed eligibility rules on bidding. The results of this auction were also unsuccessful, since the D license failed to sell even for a reserve price that was one-third of the average obtained for other comparable licenses. As Tom Hazlett, Professor of Law & Economics at George Mason School of Law stated, “this is evidence that regulatory rules and spectrum allocation procedures continue to distort markets.”
This time, the FCC is considering providing help to smaller wireless carriers by either keeping larger carriers out of the auction, or limiting the amount of spectrum larger carriers can walk away with. Rules have yet to be promulgated for the reverse television spectrum auction so there is still time to consider this: if a carrier is financially weak, what is the likelihood that carrier is able to stay in the market long enough to acquire the customers necessary to be successful?
Whether credit is extended, larger carriers excluded from the auctions, or the amount of spectrum garnered is subjective to caps, why should the FCC spread the small carriers’ risks to taxpayers? The FCC seems dead set on getting into market scuffles between investors. The FCC, like any regulator, manages to maintain too much focus on the companies (the investor facade) versus the investors themselves. This is a result of the FCC not including in its mandate the balance between consumer and investor. The FCC can easily pursue the hands off approach to regulation overall and the spectrum auctions in particular if it remembers that investors in these wireless carriers, whether publicly or privately held, accepted risk when they purchased their shares. The risk investors in smaller companies took on was the chance that larger carriers would continue, through marketing and quality of service, to widen their lead by better serving their customers.
Should larger carriers be punished for leveraging their historical advantages? I hope not.