Don't Hate the Players, Hate the Game

Policymakers and regulators often talk about looking out for the little guy. Our rules and regulations are replete with provisions to advance diversity, inclusion and opportunity for minority, women and disadvantaged businesses.

Nowhere is this more evident than in the communications laws, where key sections outline incentives to help the little guys compete with the big boys in obtaining government licenses and contracts. What often confounds well-intentioned policy, however, is the sheer scale of doing business in these areas, where the price of entry typically runs into the hundreds of millions of dollars, especially for mobile, wireless and spectrum licenses at auction.

In Title 47 of the Code of Federal Regulations, designated entities (DEs) are defined as small businesses, businesses owned by members of minority groups and/or women, or rural telephone companies. The code details the rules for DE licenses, permits, financial ownership, control, bidding credits and applications. These rules are complex, dense and cumbersome — with enough gray area to entice adroit lawyering and legal legerdemain. And that, apparently, is what happened when two DEs won licenses in the FCC’s $41 billion AWS-3 wireless auction, the richest and most successful in history.

Dish Network made an 85% investment in two minority-owned DEs (one Alaskan Native, the other African- American) and entered into an express joint bidding agreement in hopes of competing with the leading telcos for wireless spectrum. The FCC has an anti-collusion rule, but a provision in the Communications Act allows an exemption for these arrangements to promote competition in its auctions, provided, among other things, they are publicly disclosed. In upholding the validity of these arrangements, the FCC noted in a 2010 Opinion and Order: “The Commission has recognized that one way of promoting competition is to permit entities to enhance their ability to win licenses in auctions by combining their resources and that small businesses in particular may need to pool financial and other resources in order to compete in auctions.”

So if that’s the policy and those are the rules, what is all the controversy about?

Before and during the auction, Dish coordinated its own strategy with the two minority-owned DEs. This coordination gave the Dish entities more flexibility and control over their bids and ultimately led to the capture of a whole lot of spectrum by the Alaskan Native and African-American DEs — an outcome no one but Dish had envisioned. And therein lies the problem. Dish’s adept use of the DE rules resulted not only in its own benefit, but also in the instant creation of the largest minority owners of spectrum in history. Whether these firms are classic “fronts” in old-school parlance, is doubtful, but whatever they are, the FCC’s rules allowed them to survive, exist and thrive in this auction.

Although the subject of much scrutiny and criticism, the DE rules have been around for more than 15 years. In fact, the FCC has opted more than once not to change the rules or limit how much spectrum DEs could acquire. In their recent deliberation on the rules for the AWS-3 auction, all five commissioners voted not to impose any caps on the amount of bidding credits that could be used. This set the stage for Dish’s coup.

Much is being made about DE discounts being leveraged to enrich wealthy individuals — a veiled reference to the licenses acquired by David Grain, CEO of Grain Management, a wealthy, well-connected African-American investor who gets a deep discount buying spectrum, and makes a nice profit by leasing to incumbent carriers at full price. Nice work if you can get it, but some say Grain’s deal enriches only himself, whereas the Alaskan Native deal will have a multiplier effect providing jobs and opportunity for a larger community. Leaving that discussion for another day, let’s just say Grain’s arrangement remains under a cloud and the FCC’s rules are at the heart of the problem.

We have learned a few things from the auction. First, there seems to be a lot of enmity towards Charlie Ergen, Dish’s chairman. Maybe that’s is because he has amassed huge amounts of spectrum, or because he reportedly is rough around the edges and does not play well with others. Whatever the reason, Dish has not gotten the benefit of the doubt — and that seems unfair and un-American. Also, this is not a simple issue. The bar to entry in the auction game is so high, very few DEs can qualify on their own. But when they partner with a big player and win, someone cries foul. If Dish played by the rules at the time of the auction — and was more innovative than others — it should not be penalized by the referee after the game.

As Congress and the FCC debate the DE rules, let’s hope the revisions will level the field for qualified DEs to participate in meaningful ways. If that is the outcome of the post-game rules change, then it might somehow further the public interest. If not, we can always dial up the legendary Frank Washington and venerable Dick Wiley to help revive the highly successful tax credit program. Wouldn’t that be something?

In the meantime, as they say in the stands, “Don’t hate the players, hate the game.”

Adonis Hoffman is founder and chairman of Business in the Public Interest and adjunct professor at Georgetown University. He is a former chief of staff and senior legal adviser at the Federal Communications Commission.