DOJ’s Spectrum ‘Winners’ Undercut Big Money Auction
Policy + Politics

DOJ’s Spectrum ‘Winners’ Undercut Big Money Auction


A high-stakes power struggle over control of a large swath of the nation’s airwaves is quietly playing out in Washington – one that has huge financial and budget implications for the federal government, broadcasters and the cellular phone industry.

The Federal Communications Commission for the past 20 years has regulated and auctioned off licenses for radio frequencies essential to the operation of television and radio stations and wireless communications giants like AT&T and Verizon Wireless.

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Those auctions have produced tens of billions of dollars that Congress has repeatedly used to reduce the deficit or plug large holes in the federal budget. Another big auction is in the planning stages – one that could net nearly $25 billion in receipts over the coming decade, according to one estimate.

That rosy forecast is predicated on the success of the FCC’s proposed “incentive auctions,” a novel scheme in which local television stations and other private firms are induced to sell their low-frequency air waves to the FCC, which in turn auctions them off to major players in the wireless industry for top dollar.

Those companies are locked in a bruising battle to acquire much coveted, lower frequency radio waves that provide a better quality of communications than other higher frequency spectrum bands.  Those airwaves are critical to providing quality indoor wireless service in heavily urban areas and sending signals long distances between transmitters in rural areas. 

AT&T and Verizon Wireless currently control nearly 80 percent of the low-frequency spectrum band. In a no-hands-barred fight, AT&T and Verizon Wireless would crush their smaller competitors and pick off most of the new licenses by paying a high premium.

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But the anti-trust division of the Department of Justice has intervened in the case and is trying to stack the deck in favor of the two smaller wireless companies, T-Mobile US Inc. and Sprint, in an effort to alter the contours of the wireless phone industry and increase competition.

“A carrier's position in low-frequency spectrum may determine its ability to compete in offering a broad service area, including its ability to provide coverage efficiently in rural areas,” the Justice Department stated in its filing with the FCC in April. “Therefore, the  Department concludes that rules that ensure the smaller nationwide networks, which  currently lack substantial low-frequency spectrum, have an opportunity to acquire such spectrum could improve the competitive dynamic among nationwide carriers and benefit consumers.” 

Tom Wheeler, the new FCC chairman, signaled in a speech earlier this month that he might support limiting big carriers like AT&T and Verizon Wireless from amassing huge amounts of high-quality airwaves at the next spectrum auction.

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The Justice Department has a long history of reviewing wireless mergers and transaction to assess their anti-trust implications. In March 2011, the DOJ joined with the FCC in blocking AT&T’s effort to acquire T-Mobile from Deutsche Telekom for $39 billion.

If DOJ prevails again, T-Mobile and Sprint are likely to capture the lion’s share of as much as 120 megahertz of low-frequency spectrum. Currently, they use higher-band spectrum which has a greater data carrying capacity   but can’t penetrate buildings and is more expensive to build out in rural areas.

Such a move could seriously undercut the FCC’s potential for generating new revenues by discouraging a true bidding process. Congress and the federal government are counting on the additional revenue in coming years to help reduce the deficit and underwrite the $7 billion cost of developing a nationwide emergency communications network that was first proposed by the congressional 9/11 commission.

“It is surprising that the antitrust division of the Department of Justice would even propose measures that are so nakedly designed to help specific companies,” Wayne Watts, a senior executive vice president and general counsel at AT&T, wrote in a filing with the FCC. “Picking winners and losers in this fashion would be patently unlawful.”

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Kenneth Baer, a former senior official in the Obama Administration’s Office of Management and Budget and now a consultant for ATT, said that the federal government should do all that it can to maximize its return on the sale of precious government assets.  “From a budget perspective, selling spectrum is like manna from heaven -- because you’re able to get $10 billion or $20 billion of deficit reduction or money to use to spend on things you care about for free, which is hard to come by,” Baer said earlier this week.

The lobbying around this issue has been fierce. And the costs and benefits of imposing such limits are the subject of competing academic studies. One, conducted through the Center for Business and Public Policy at Georgetown University’s McDonough School of Business, estimated that DOJ’s proposed participation restrictions could reduce auction revenue by about 40 percent – lowering federal auction proceeds from as much as $31 billion to about $19 billion. This in turn would likely reduce the amount of spectrum acquired from broadcasters and made available for wireless broadband services.

In another study, Jonathan B. Baker, a former FCC chief economist and now a law professor at American University, wrote that spectrum caps in auctions can encourage, rather than limit, participation – and in that way increase auction proceeds. His study was commissioned by T-Mobile.

The Justice Department and other advocates of auction limits say that if AT&T and Verizon are allowed to increase significantly their holdings of that prime spectrum, T-Mobile and Sprint will be unable to continue expanding their networks.  

However, Hal J. Singer, a senior fellow at the Progressive Policy Institute, testified during a recent Senate hearing that the Justice Department has failed to make a compelling case that carriers like T-Mobile are constrained from competing effectively for market share.

“If access to low-frequency spectrum were essential to compete effectively, as the DOJ implies in its comments, then AT&T and Verizon would be running away with the wireless prize,” he testified.  “But U.S. wireless concentration as measured by the FCC has held steady since 2008.”  

The debate over the sale of the low-frequency spectrum is highly technical and arcane, and yet it has critically important real world consequences for the federal government and taxpayers. Estimates of potential auction revenues vary, but the Congressional Budget Office back in 2011 pegged net proceeds at nearly $25 billion over the coming decade.  

The FCC seemed poised to launch the experimental auction strategy sometime in 2014, but Wheeler announced Dec. 6 that the auction would be postponed until 2015. The chairman said the delay was necessary to give his agency more time to work out the details of the most complex proceeding ever undertaken by his the FCC.  

Implicit in his decision was a desire to avoid another technological screw-up, like the Obama administration’s disastrous online rollout of the Affordable Care Act.  "I am . . . confident that the policy challenges are only part of the picture; we must also get the enabling technology right," Wheeler wrote on his blog.

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