The FCC's $19 Billion Baby

Senior Fellow
Robert W. Hahn

The Federal Communications Commission has completed its auction for a big swath of electromagnetic spectrum in the 700 megahertz frequency range that was recently reclaimed from television broadcasters. Who cares, you say? Some heavy corporate hitters including Google, AT&T, and Verizon certainly do. And so should you.

The allocation of this techno-friendly "beachfront property" spectrum is expected to usher in a new era of innovation in wireless communications, making it cheaper and faster to download movies, surf the internet, send instant messages, or do anything else you can imagine on a mobile device. And then there's the money: bidders paid $19 billion to the U.S. Treasury for the rights--a record for a U.S. airwaves auction, and a nice chunk of change even in an era of 10-digit federal budgets.

C-BLOCK

But the auction was not without controversy. The biggest concerned a new "open-platform" requirement imposed on the C-block, a particularly prized 22-megahertz slice of the pie. This requirement would allow third parties with wireless applications--for example, Google Maps--to piggyback on the spectrum owner's wireless network at no charge, which explains why Google supported the open-platform mandate. But the open-platform idea also has fans with financial interests in spectrum policy. The requirement, they argue, would make the wireless network market more competitive by making it more difficult for the big wireless providers to squeeze out potential competitors that need a network platform on which to operate.

By most assessments the 700-megahertz auction was a success: private networks got room to expand wireless services, and Uncle Sam got the gravy.

It is far from clear, though, whether consumers will reap the benefits because the mandate will leave the owners of the C-block less inclined to offer a full menu of services and pricing plans. Consider, for example, wireless networks that offer data-only services at discounts from full-service offerings. With the open-access requirement, consumers would be able to use free voice applications like Skype and thus get full-service access for the price of data-only service. The result: C-block owners would have a powerful incentive to eliminate this shortcut by dropping the option of data-only service.

One measure of the size of the costs imposed by an open-platform requirement is provided by the auction itself. Bidders offered less for the C-block than for other, roughly comparable spectrum. Indeed, one other block went for almost triple the price per potential customer. Spectrum in the A block sold for about $0.40 per "megahertz-pop" (a measure of spectrum quantity adjusted for the potential population it can serve) more than spectrum in the C-block. Similarly, B-block spectrum sold for an average of $1.91 more. Multiplying those price differences by the population in the United States (286 million) and the size of the C-block (22 megahertz), we can infer that bidders estimated that the openness requirement would reduce the value of the C-block by between $2.5 billion and $12 billion.

Customers' gains from new wireless applications from third parties, moreover, are unlikely to exceed the C-block owners' losses calculated above. That is because the wireless market is already highly competitive, making it difficult for network owners to use market power to gouge consumers. Between 2000 and 2007, the price of wireless service fell by almost two-thirds, even as objective measures of service quality--coverage, dropped calls, etc.--showed improvements.

Furthermore, some customers may actually be hurt by an openness requirement. If the revenues that a provider receives from applications are reduced, the provider may be forced to increase the price charged for basic cell phone service. That could, in turn, reduce the number of cell phone subscribers and reduce cell phone use among existing subscribers.

D-BLOCK

Bidders on the D-block (10 megahertz of spectrum) faced a different restriction. The FCC required the winner to share its network with police and firefighters in ways to be negotiated directly with public safety officials. That sounds good, but it apparently made the block almost unsalable. Only a single bid was placed (by Qualcomm, the big wireless-software maker), and it was far below the $1.3 billion minimum set by the commission. In light of the tepid bidding--and the fact that Congress was more than happy with the unexpectedly high proceeds from the sales of the other spectrum blocks--some expect the FCC to re-offer the D-block for sale with a reserve price that is significantly lower than $1.3 billion.

We think that the reserve price is less important than auctioning off the D-block without restrictions. If auctioned without restrictions, the D-block could fetch a considerable price. And that price is a measure of the value lost by leaving the spectrum fallow. Of course, public safety uses of spectrum are a high priority, and no one wants private spectrum users to degrade the quality of communications among firefighter and police. But a far more economical way to meet both public and private needs would be to set aside revenues from the auction to modernize existing public safety networks to increase their capacity and reliability.

By most assessments (including ours), the 700-megahertz auction was a success: private networks got room to expand wireless services, and Uncle Sam got the gravy. It is a pity, though, that the FCC could not resist the political impulse to attach strings to the sales. Free markets in spectrum are most valuable when they are truly free.

Robert Hahn is executive director of the Center for Regulatory and Market Studies and a senior fellow at AEI. Allan Ingraham is president of Criterion Auctions.

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