FCC Should Allow Verizon, AT&T a Fair Bid for Wireless Spectrum

When it comes to the development of high speed wireless Internet, big is not necessarily bad.

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Robert Hahn is director of economics at Oxford's Smith School, chief economist at the Legatum Institute, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute in Santa Monica and the editor of its quarterly economic policy journal, The Milken Institute Review. They co-founded Regulation2point0.org, a web portal on economic regulation.

The world is an amazing place. You can sit in a Starbucks in Malibu while I'm sipping tomato soup at a Pret a Manger in London, and we chat for free using Skype or Viber or Rebtel. Or how ‘bout this one: You can pull a smartphone out of your parka on the slopes of a mountain in Colorado and use it to remind your DVR back home in Miami to record a rerun of Homeland.

But the fact that we astonish ourselves everyday with the latest jaw-dropper in wireless telecommunication doesn't mean it will always be thus. Nobody has a crystal ball when it comes to predicting how wireless media will be used down the road.

But we do know that legislators and regulators in Washington will have a big impact on the pace and direction of wireless innovation through their management of electromagnetic spectrum—what was called the "airwaves" long before Apple or Google or Verizon were on the scene.

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Spectrum is scarce—that is, the amount of information that can be pushed through those metaphoric airwaves is limited by economics and the state of technology. So most economists support auctioning spectrum to the highest bidder in order to make sure it ends up in the hands of those who value it most. Indeed, many have favored it ever since Nobel laureate economist Ronald Coase came up with the idea a half-century ago.  

But the market for wireless networks, while competitive, has two clear industry leaders—Verizon and AT&T. And some telecom analysts argue that consumers would be better off if the auctions were set up to favor smaller companies, perhaps keeping the two industry leaders out of the game entirely.

We think the potential costs of such discrimination against the giants outweigh any plausible benefits. In fact, it's hard to think of a market in which the old saw—don't fix it if it ain't broke—fits better. Usage on wireless networks has been exploding—including usage by low-income groups and minorities. At the same time, charges for both voice and data use have been falling even as reliability and geographic coverage have been improving.  

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The risk here is that freezing the industry leaders in place while giving competitors indirect subsidies (in the form of less-than-competitive prices for spectrum) would slow innovation. Indeed, both of the industry leaders are racing to acquire the spectrum to broaden access to "4G" service—the sort needed to watch video without hiccups and to seamlessly manage a host of other sophisticated smartphone and tablet functions.  

But the Federal Communications Commission, which has the last word on most mobile regulation (unless Congress pulls rank), has other priorities. It is apparently inclined to throw sand in the gears of Verizon and AT&T in the name of increasing competition.

In response, the House Republicans have introduced a bill that would limit the FCC's discretion on spectrum auctions, giving everybody equal opportunity to participate in any auction. That strikes us as a reasonable place to start, since it makes sense to place the burden of proof on those who think discrimination against large firms in spectrum auctions would do more good than harm. Moreover, the "proof" in question should be practical, not theoretical—actual experience in which discrimination in auctions of government resources has served the interests of consumers.

Spectrum allocation—like so many issues that falls under the rubric of economic regulation in Washington—is excruciatingly boring for almost everybody except the policy wonks who toil in the blogosphere and the lawyers/lobbyists/consultants who build country homes on the proceedings. But ignorance here is not bliss. We've all had a great ride on wireless technology over the past few decades. Some bad decisions now, though, could take much of the wind out of its sails.

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