At a Technology Policy Institute breakfast this week, telecom geeks were treated to a robust exchange of ideas between Jim Cicconi, Senior Executive Vice President of AT&T, and Reed Hundt, former chairman of the FCC. When the conversation turned to the upcoming spectrum auction, Mr. Hundt defended ex ante rules for limiting the number of licenses that any single carrier could acquire, arguing that ex post enforcement of excessive concentration would deprive bidders of the certainty they needed when constructing bids. Although that position was consistent with his prior views, Mr. Hundt surprised this blogger when he declared (in response to my question from the peanut gallery) that market forces—and not regulators—should dictate the optimal number of wireless carriers.
Was Mr. Hundt channeling his inner Reagan? Even those who question the FCC’s role as “second antitrust cop on the beat” would be hesitant to permit consolidation among the largest two wireless carriers as market forces dictated. So that raised a follow-up question (which I did not get to ask): Can a regulator tasked with designing spectrum policy really be agnostic about the optimal number of wireless carriers?
It is hard to square Mr. Hundt’s prescription with the FCC’s approach to spectrum policy, including during Mr. Hundt’s tenure. When the FCC first started auctioning spectrum licenses, it decided to give companies the right to serve small, geographic areas rather than large, nationwide footprints. This resulted in myriad small carriers joining the fray to provide wireless services.
The country was cut into a Swiss-cheese board, which required at least a decade for carriers to cobble together enough local licenses to establish nationwide coverage. Given where we ended up—roughly four carriers per geographic area—one wonders whether it would have been more efficient (in terms of avoided transaction costs) to auction fewer licenses for more spectrum per geographic area right from the start.
Over the years, the FCC has gone even further in promoting its vision of an “optimal market structure” populated by several mom-and-pop companies—for example, by promulgating rules that encouraged entry by smaller carriers regardless of the strength of their business plan or qualifications to build and operate networks. Set asides, bidding credits, and bankruptcy ensued, stranding useable spectrum for decades and most certainly delaying some of the wireless innovations we’re all starting to experience. But for a fleeting moment, we had more carriers than before, and that made regulators feel better.
Not to be dissuaded in this quest to induce more entry for the sake of inducing more entry, the Genachowski-led FCC issued a series of reports decrying the market structure for wireless as being excessively concentrated. Adhering to this basic, flawed assumption, the current FCC appears set on designing an upcoming spectrum auction to limit the amount of spectrum that the two largest wireless broadband providers can acquire.
In sum, the FCC’s spectrum policy has been the opposite of the “let the market decide” approach to market structure suggested by Mr. Hundt. While laissez- faire may not be the best alternative to the FCC’s heavy-handed approach, it would behoove regulators tasked with implementing spectrum policy to consider (1) the current demands being placed on wireless networks from the explosion of bandwidth-intensive applications, and (2) the oncoming inter-modal competition between wireless and wireline networks. Both of those factors elevate the importance of economies of scale in wireless services, and thereby militate in favor of fewer, beefier carriers.
If the answer to my market-design question that Mr. Hundt politely brushed off is three or four wireless carriers, then the FCC should revisit its self-appointed mission to focus almost exclusively on the number of competitors at the expense of enabling wireless providers to bulk up and take on their wired brethren. Let the competition for all broadband customers (as opposed to wireless broadband customers) begin!
