Verizon, AT&T, and the Gentleman's Triple

Remember that old joke told about George W. Bush and other scions of the rich and famous who later find success on their own - that "he was born on third base and thinks he hit a triple"?  That's what came to mind as I read of today's decision favoring Verizon and AT&T by the Federal Communications Commission. The FCC serves as both an umpire and a manager in the telecommunications game, and it should know a Gentleman's Triple when it sees one.  

As I wrote in an Inquirer column last month, the FCC essentially gave away high-value radio spectrum three decades ago to two licensees in each major market as the United States sought to seed a new cellular phone industry. One went to the incumbent Baby Bell, such as Verizon. Another was offered via a lottery, and most of the winners were rolled up into McCaw Cellular, which later become AT&T. It's no disrespect to Craig McCaw, himself the son of a less successful broadcasting and cable entrepreneur, to say that the wireless business he sold for $12.6 billion in 1993 to AT&T got a huge head start in its industry - just like the Baby Bell systems that were eventually rolled up into Verizon. 

Today, the FCC set final rules for next year's "wireless incentive auction," a complicated procedure that should help to further competition among wireless carriiers. But in its effort to balance competing interests, it missed an opportunity: It rejected pleas from consumer advocates and smaller carriers such as T-Mobile, which urged a tweak to auction rules aimed at creating a more level playing field among the four national carriers that have survived - sometimes just barely - as the market has evolved.

Rather than go into details again here, I'd like to share some of the reactions by various players in this process, in which FCC Chairman Tom Wheeler was openly compromising - including with Verizon and AT&T, which would have preferred that the FCC not set aside any of the high-quality, low-band spectrum ithe FCC plans to to auction next year. Instead, Wheeler held a majority that stuck to a smaller set-aside: 30 megahertz in each market where TV broadcasters offer to give up enough unneeded spectrum.

Let's start with the partial dissent by Democratic Commissioner Mignon L. Clyburn, often a voice of reason in FCC debates that turn on ideological tropes. She recognizes - as Wheeler undoubtedly does, too - that almost no question before the commission is a question of whether or not regulators should intervene in a pristinely free market. Debates over wireless rules are all about how the FCC should manage a market it essentially created when it licensed out radio spectrum, a quintessential scarce public resource, under varying terms..

Clyburn wrote:

Since the 1980s, the Commission has often adopted policies designed to prevent undue concentration of spectrum licenses necessary to provide those servicesso I am pleased to commend Chairman Wheeler for reaffirming that the forward auction will have reserve spectrum for those entities who hold less than 45 megahertz of below 1 gigahertz spectrum in local areas. However, I am disappointed that we did not circulate an Order that adopts the Public Knowledge proposal which asked the Commission to change the amount of reserve spectrum from 30 to 40 MHz when we recover 114 or more MHz from broadcasters....  Increasing the amount of spectrum in the reserve in this manner would have also been consistent with the market based principles the Commission has adopted for the incentive auction. This, I feel, would have been a huge victory for mobile wireless consumers, because other wireless carriers would have the spectrum they need to compete against the two nationwide carriers who, together, hold more than 73 percent of spectrum below 1 GHz. 

Said Public Knowledge counsel Phillip Berenbroick: 

We are disappointed that the Commission failed to increase the size of the spectrum reserve for competitive carriers and address problems with the spectrum reserve trigger. The existence of the spectrum reserve is an important step towards promoting wireless competition; however, we remain concerned that the FCC's failure to increase the size of the reserve and to prevent anti-competitive bidding practices will undermine the Commission's efforts to increase auction participation and competition. We urge the Commission to be vigilant during the incentive auction to ensure carriers do not engage in anti-competitive conduct.

The opposite point of view - that *any* set-aside was a foolish violation of free-market principles - was on display in dissents by the FCC's two Republican commissioners.

Wrote Commissioner Michael O'Rielly:

I have been vocal in my opposition to the underlying action establishing reserve spectrum in the
incentive auction for a privileged subset of wireless carriers, and therefore fervently oppose T-Mobile’s
petition to increase the reserve’s size. Similarly, I disagree with Sprint’s petition to weigh spectrum
bands differently when imposing the secondary market spectrum screen. Therefore, I support the item
before us denying these petitions.

The petition by T-Mobile embodies what happens when the government believes it is smarter
than the free market. Some people think that if we just turn a knob over here or tighten a screw over
there, as if in a social policy experiment, the market will provide their dream utopia. In reality, it is just
the opposite: a non-manipulated market produces the most efficient and just outcome – even if it may not
seem so at the exact moment it happens.

Clearly, the unnecessary and improper interference of reserve spectrum will unfairly skew the
auction outcome, thereby producing less revenue for the American people who entrust the Commission to
protect and maximize the value of their spectrum assets. Yet, such interference is still not enough to
satisfy the unrighteous demand for special treatment by some. Requesting that the government “rectify”
self-inflicted spectrum mistakes of the past represents an amazing amount of gall. I won’t be a party to
this – not now, not ever.

His colleague Ajit Pai also voiced opposition to set-asides, but backed Wheeler's decision not to yield to the smaller carriers' pleas:

Fifteen months ago, I dissented from the Commission’s decision to set aside spectrum for certain 
preferred bidders. Our record in the proceeding, as well domestic and international experience, shows
that spectrum reserves do not produce long-term benefits for wireless competition. Set-asides also 
impose severe costs, including significant delays in the deployment of spectrum for consumers’ benefit
and substantially less revenue for critical national priorities. Canada’s recent AWS-3 auction is a case in 
point. The set-aside spectrum in that auction sold for less than 4% of the price of the unreserved spectrum 
($0.11 per MHz-pop compared to $3.02 per MHz-pop).

Given this context, I do not support expanding the FCC’s spectrum reserves. Accordingly, I 
agree with the outcome of this Order and will concur in the result.

I don't claim to be clairvoyant, so I won't predict how this auction will play out financially. And I don't know enough to speak knowledgeably about most of the technical issues - for that, I recommend the Wetmachine blog by Harold Feld at Public Knowledge, who recently explained here how the "duplex gap," to be set aside for the growing body of need for unlicensed spectrum, also played a key role in these internal debates.

But I know enough to say this to O'Rielly: You can theorize all you want that "a non-manipulated market produces the most efficient and just outcome," but you can't deny that this market was manipulated from the start, when high-quality low-band spectrum was essentially gifted to the predecessors of Verizon and AT&T.  

T-Mobile, Sprint and other long-gone carriers got their starts a decade later in the so-called PCS auctions, which offered higher-band spectrum for "Personal Communication Services" - spectrum that travels less far, so it costs more to provide, and travels less reliably through walls and other dense materials. Anytime someone says to you, "I'd like to try T-Mobile, or someone other than the Big Two, but those other carriers just don't work as well," it's a fair bet that this historical discrepancy in spectrum quality bears a lot of the blame.

Maybe Verizon and AT&T didn't start with a Gentleman's Triple.  But this has never been a pristinely level playing field - markets rarely are.

So congratulations to Wheeler for protecting for the set-asides he won. But let's acknowledge a missed opportunity when we see one.

Americans consumers have benefited greatly in the last two years as T-Mobile CEO John Legere has turned an also-ran carrier, almost swallowed by AT&T, into an aggressive, disruptive competitor.  If smaller carriers can win more high-quality spectrum, we might have a real shot at the true "four-firm competition" that regulators like to say they want. Without it - if AT&T and Verizon can bid what economists call "foreclosure prices" and monopolize more of the 600-megahertz spectrum up for grabs - we may be stuck with the lopsided market we started with.