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Spectrum Auction Set-Asides Shortchange Consumers

The next tidal wave in mobile data is coming. Not only did traffic grow 70 percent last year on a global basis, it is on track to increase nearly tenfold by 2019, notes Cisco.  All carriers will need more spectrum to provide fast, reliable service. But spectrum is a limited resource, and purchasing and deploying it takes time. That’s why it’s critical to identify spectrum (especially holdings of government agencies, some 60-70% of useable spectrum) that could be repurposed for commercial mobile use. In the meantime, the next big opportunity to acquire spectrum will be the Federal Communications Commission’s (FCC) incentive auction next year. 

It took the FCC 60 years to hold its first spectrum auction, and the incentive auction will be by far the most complex yet.  Previous auctions have successfully repurposed needed spectrum for mobile broadband and raised billions of dollars to fund important societal needs, such as FirstNet, the long-awaited national broadband safety network.  If there is one takeaway from previous auctions that should be applied here, it is that rules that pick winners and losers before bidding begins compromise the auction.   

The FCC is expected to make an announcement about bidding rules this summer.  Among other things, the Commission will make a decision on how much spectrum will be set aside for certain favored bidders to acquire spectrum at below-market value.  The FCC already green-lighted setting aside 30 MHz of spectrum per market but is now being lobbied by T-Mobile to increase the set aside.   Sprint, DISH, and others are pushing for the increased set-aside too – both on their own and under the banner of Save Wireless Choice – their newly created advocacy group designed to mask their corporate interests  The set-aside is proffered under the old trope that the largest bidders should be restricted to give a leg up to the “little guys,” which in this case includes the likes of Sprint, T-Mobile, and DISH--hardly little or in need or subsidies.  But if we look more closely, strategies like this can backfire at significant costs that not only harms competition, but also shortchanges all Americans in failing to allocate spectrum efficiently.

One of the most egregious abuses in recent memory comes from DISH, worth more than $30 billion, which used two small companies it controlled as pawns to snatch up $3.3 billion in taxpayer subsidies from the FCC on spectrum purchased during the AWS-3 auction.  These subsidies are associated with a program that is supposed to help actual small business participate in spectrum auctions.  All told, DISH sits on a gargantuan 81 MHz of spectrum and has yet to put it to use.  In other words, DISH is hoarding spectrum, reducing the supply available to deliver critical mobile services to Americans.

T-Mobile and Sprint, rather than whining to regulators, need to take responsibility for their decisions. Sprint made a bet on the CDMA mobile standard when the world went with GSM/WCDMA/LTE; there were no cool phones to go on its CDMA network, so customers went with other carriers.  T-Mobile tried and failed to be all things to all people and companies.  Its turnaround strategy focusing on market segmentation and wholesale agreements (including an MVNO relationship with Wal-Mart Mobile) now brings it success. 

To get the truth, see what T-Mobile and Sprint say not to the FCC, but to Wall Street: Their competitive tactics are earning them customers, market share, and profits. T-Mobile just reported (opens in new tab) eight consecutive quarters of net new customers, its lowest rate of churn, and EBITDA up a quarter over the last year.  Meanwhile, Sprint touted net ads and network densification.  Its CEO recently boasted, “We are the operator with the largest spectrum holdings in the world," and are embarking on a "Next Generation Network" strategy funded by its parent, SoftBank of Japan.

In fact compared with AT&T and Verizon, T-Mobile and Sprint each have a greater amount of total spectrum when measured against their respective customer bases.  Instead of corporate cronyism, they should focus on building more infrastructure, which will make better use of their existing spectrum.

A spectrum set aside has the potential to make AT&T and Verizon pay more for a smaller share of spectrum while T-Mobile and Sprint pay less for a greater amount.  In effect this means that subscribers of AT&T and Verizon are being punished by the FCC for choosing a provider that makes more efficient use of its spectrum and network.

Competition means there are winners and losers. It’s not the job of the regulators to compensate for poor management.  Companies like Sprint, T-Mobile, and DISH doesn’t need subsidies. There’s enough cash flow to purchase spectrum and build infrastructure.

Spectrum set asides do more than hurt competition; they shortchange all Americans who entrust the FCC to maximize the value of auctions for everyone.  It’s time to draw the line: No more set asides for the FCC’s favorites.

Roslyn Layton is a PhD Fellow at the Center for Communication, Media and Information Studies at Aalborg University in Copenhagen and a Visiting Fellow at the American Enterprise Institute.