Last week the National Association of Broadcasters (NAB) filed a letter with the Federal Communications Commission urging the agency to bless the merger of MetroPCS and T-Mobile. NAB’s president and chief executive officer Gordon H. Smith made some strong free market arguments in support of NAB’s position. Mr. Smith said that the remarkable power of the free market was enabling wireless companies to address spectrum concerns.

Mr. Smith opined that, “[t]his merger is part of an essential transformation that the wireless industry has undergone over the past year alone. Wireless carriers have responded to the initially surprising surge in demand for data by restructuring to rationalize their considerable spectrum holdings.”

Mr. Smith goes on further to say that the merger will help wireless companies use spectrum more efficiently and that “the transaction will address major spectrum constraints facing both T-Mobile USA and MetroPCS by combining their highly complementary spectrum portfolios.”

If anything the merger speeds up the transfer of spectrum from one spectrum holder to the next. It is a lot faster than the voluntary auctions slated to start later this year that would send spectrum from television broadcasters to wireless communications providers. It would make sense that NAB is pulling for T-Mobile and MetroPCS to pass muster. It would probably put less pressure on its member stations to dip their toes into the auction soup.

A post in the Motley Fool describes AT&T management as “bullish” when it comes to spectrum. The post uses AT&T’s attempts at acquiring T-Mobile last year (Wow, has it been a year?) as an example. Another example includes buying smaller companies in order to obtain more spectrum. AT&T’s two-year data plan package for 3G and 4G tablets is expected to eat into Sprint’s reputation as the cheapest provider of data, according to Motley Fool.

The bullishness appears like the appropriate strategy in my opinion. Sprint has made 70% of itself available for purchase by Japan’s Softbank and is also considering buying out the remaining investors in Clearwire. While Sprint’s pending moves won’t be enough to knock AT&T or Sprint from their industry leading positions, Sprint can become a stiffer competitor in the wireless market.

Hopefully the Federal Communications Commission continues to play observer this time around. A facilitating regulator the FCC was not as it signaled to the industry and the U.S. Department of Justice its lack of support for last year’s proposed takeover of T-Mobile by AT&T. By rule, the FCC must approve the transfer of licenses from Clearwire to Sprint assuming Clearwire no longer operates as a separate entity if Sprint goes ahead with a buy. I would not be surprised if Sprint goes ahead with a complete acquisition that sends Clearwire into spectrum heaven. It would probably make the company more valuable to Softbank if Sprint actually has its name on those licenses.

Either way, the FCC should, to use a sports term, let them play. If any regulatory approvals are needed, they should be granted with haste. A minimalist regulatory approach is what’s needed right now.

Yesterday the U.S. Court of Appeals for the District of Columbia Circuit held that the Federal Communications Commission was empowered under Title III of the Communications Act to promulgate its data roaming rule. The rule, however, does not impose any common carrier obligations on mobile Internet providers.

In 2007, the FCC mandated that mobile voice carriers offer roaming agreements to other carriers on a just, reasonable, and non-discriminatory basis. The FCC invoked Title II of the Communications Act reasoning that mobile voice providers have a common carrier obligation to provide roaming.

The 2007 mandate did not extend to mobile Internet or mobile data carriers that entered voluntarily into roaming agreements with other carriers for mobile data.

The FCC’s rationale for its rule was:

1. The mandate would promote access to seamless mobile data coverage nationwide;
2. The mandate balances incentives for new entrants and incumbents to deploy advanced networks across the country; and
3. The mandate would foster competition among multiple wireless providers

Verizon and AT&T opposed the rule, arguing that the rule was unnecessary given that carriers were already entering voluntary agreements for data roaming and that smaller carriers would have reduced incentive to build their own networks.

On the surface, investors in large carriers such as AT&T and Sprint should not see any additional losses from the ruling. The data roaming rule has been in place from 2007 and given that no new rules or divestitures resulted from the ruling, I see no additional costs of compliance to AT&T or Verizon due to this legal proceeding.

I don’t see how in the long run the ruling would benefit smaller carriers. If anything they may see increases in whatever charges they are assessed by the larger carriers as a result of negotiations in for future agreements, and they can thank the FCC’s competition posture for this.

As spectrum becomes harder to come by, larger carriers may feel compelled to pass on higher costs of handling additional traffic from smaller carriers. Delays by the FCC in releasing spectrum compounded by burdensome and lengthy scrutiny of license transfers will make a scarce resource more expensive. Smaller carriers will not be able to have their cake and eat it too.

For example, smaller carriers will argue that they do not have the capital to expand their networks on the one hand while on the other criticize any attempts by the FCC to ensure that spectrum goes to the carriers with the greatest economies of scale and the larger client base that would be negative impacted by a lack of sufficient spectrum. Either way, smaller carriers are going to have to absorb the costs of expanding traffic on the network either through sucking it up and deploying their own networks or paying increasing costs for roaming.

Smaller carriers may find themselves being more of a price taker in negotiations for roaming because all a larger carrier has to show is that the roaming charge being negotiated is commercially reasonable, a lower standard than the classic just and reasonable standard.

In the immediate term, the ruling may be deemed by Verizon and AT&T as a loss, but in the longer term, smaller carriers may have simply delayed the inevitable.

Yesterday the Brookings Institution hosted a forum on broadband. What stood out to me was a discussion by the panelists on the role the Federal Communications Commission should play in the evolving broadband industry. One role mentioned was that of consumer protection.

I don’t have a problem with the FCC being a clearing house of information. Consumers tend to make mistakes when they are not armed with information about the carriers they are negotiating with for service. The FCC can be a resource for information on service quality and pricing. Any consumer services beyond that would be a waste of resources.

There are a number of state consumer agencies that can address consumer complaints about communications services. Also, state courts can address contractual disputes between communications companies and consumers. There is no need for the FCC to go granular on consumer protection.

The FCC should devote its resources to the role it plays in regulating commerce. As guardian of spectrum, the FCC’s primary mission should be to ensure that spectrum gets into the hands of firms that can put it to best use. This does not include trying to ensure every little company gets to sit at the table. It also does not mean redistributing rents (profits) to company A from company B because some grass roots groups believe that company B should divest itself of some of its holdings in order to expand into new markets.

The FCC typically pursues divestiture during its review of mergers, but has yet to show how forcing a company to give up market share has done anything to increase consumer welfare. I agree with the panelists to the extent that the FCC has never made a strong qualitative or quantitative argument showing the benefits to consumers of divestiture. Merger reviews should be left exclusively to the United States Department of Justice.

While I have abandoned the theory of market failure as a reason for government intervention into what should be free markets, I can’t see how the FCC can claim it’s protecting consumers without demonstrating how consumer value is being increased by its actions. The FCC should not be attempting to create competitive markets using a merger review process that has not demonstrated any value to either broadband firms, shareholders, consumers, or the process for distributing spectrum.

Yesterday Federal Communications Commission member Jessica Rosenworcel delivered a speech on spectrum policy. Overall I was not impressed with the speech, but two things stood out.

First, Ms. Rosenworcel coined the term, “spectrum cliff”, in reference to the shortage of spectrum the nation is facing. It’s obvious what influenced the creation of that moniker.

Second, Ms. Rosenworcel recommended a way to incentivize federal agencies to give up the spectrum they are using: cut them in for a piece of the action by giving them a share of the proceeds. I admit this is outside the box thinking on the part Commissioner Rosenworcel and shows her appreciation for profit as a motivator.

The other cliff, the fiscal cliff, may be motivation enough for taking a cut of spectrum auction proceeds. If an agency is about to lose funds as a result of budget cuts, Ms. Rosenworcel’s proposal may alleviate some fiscal pain, at least in the very short run. I say short run because an agency would only have so much spectrum to give up if it wants to carry out its primary mission.