Open Spectrum Auction Benefits All, Including Small Businesses

By SBE Council at 7 October, 2013, 12:26 pm

Open spectrum auctions maximize revenues to the federal government, and ensure efficient use of this critical resource.

by Raymond J. Keating-

Let’s be clear: government rigging an auction against large market players does not help the little guy.

The FCC will soon be auctioning off low frequency spectrum used by television broadcasters to wireless firms. This incentive auction would have the TV broadcasters getting a split of the proceeds from the auction. But some, like the Justice Department’s Antitrust Division in a filing with the FCC, argue that the auction rules should be set to provide an advantage for smaller carriers – such as Sprint and T-Mobile – over the largest mobile service providers, i.e., AT&T and Verizon.

Unfortunately, some fail to understand the competitive market process and how businesses gain market share. Others more cynically are attempting to use government to manipulate the rules of the game in their own favor.

Numerous problems are at work with such an effort. Broadly, an open, competitive auction, whereby the highest bidder wins, closes no one out of the bidding, and ensures that the entity placing the greatest value of that spectrum gains that spectrum. The incentive and goal of using spectrum most efficiently naturally results.

The ills of placing restrictions on this broadcast spectrum auction are spelled out in greater detail in a new study by economist Leslie Marx from Duke University and the former chief economist at the FCC.

Marx found, for example:

• No evidence exists that smaller carriers are somehow foreclosed from acquiring low-frequency spectrum under competitive auctions. As Marx reported, “There is no basis for assertions that Sprint or T-Mobile has been foreclosed from acquiring low-frequency spectrum. The evidence points instead to a choice by Sprint and T-Mobile not to compete for low-frequency spectrum, rather than foreclosure from access to it. These carriers have not purchased it in the secondary market, where there were 2,153 licenses available since 2007: Sprint bought none and T-Mobile bought only one.”

• No evidence exists that, as some assert, the large carriers would simply bid to keep spectrum out of the hands of smaller competitors. Marx noted, “Head-to-head competition between AT&T and Verizon where no other bidders were present accounted for more than $4.2 billion in revenue during the 700 MHz auction. Those dollars would not have been spent by Verizon and AT&T if the purpose of their bidding had been simply to keep spectrum out of the hands of other operators.”

• Limiting bidders has a negative impact on auction revenues, and would have negatives for the broader economy. Marx explained that “the literature indicates that regulators should expect reductions in revenue and the quantity transacted as a result of restrictions on bidders at the Incentive Auction. In addition, a reduction in the amount of spectrum transacted in the Incentive Auction means that less spectrum will be reallocated from broadcast use to mobile wireless services. This potentially has broader economic consequences given that there appears to be a consensus that the wireless industry as a whole is likely to suffer from a spectrum shortage as data usage continues to increase.”

• If bidding had been limited in previous spectrum auctions, revenues would have been far lower. Marx found: “The simulation results show that bidding restrictions at these past FCC auctions would have lowered revenues and prices and negatively affected efficiency. The results show that, in the absence of Verizon and AT&T, auction revenues would have been 16% lower in the FCC’s 2006 AWS spectrum auction and 45% lower in the 2008 700 MHz spectrum auction.”

Among Marx’s conclusions, she pointed out, “Proposals to restrict the participation of Verizon and AT&T in the Incentive Auction do not address any real world problem.” And later: “Based on the economics literature, empirical data from past FCC auctions, and a model of a two-sided auction mechanism, I conclude that restricting Verizon and AT&T in the Incentive Auction would put at risk its twin priorities of raising significant revenue and reallocating a substantial amount of spectrum from broadcast to mobile wireless services.”

Therefore, the Marx study points to why government rigging the auction process against large providers would only wind up hurting small businesses. How so? Entrepreneurs, small businesses and their employees have benefited enormously from the investments and innovations made in the wireless arena. That has been the result of market competition. If government gets involved spectrum allocation schemes, the inevitable results are less efficient use of spectrum, which translates into increased costs, in various forms, for wireless consumers – again, with small businesses ranking prominently among those consumers.

Limiting participation in spectrum auctions would be another example of government unnecessarily, clumsily and destructively interfering in a market process, not in response to a real world problem, but instead in response to an assortment of special interests seeking to manipulate the process.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s new book, published by SBE Council, is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship. It’s available from Amazon.com here.