White House Stands Behind DOJ Filing on Spectrum Aggregation and Incentive Auction, Power Says

"The bottom line is essentially that the FCC needs to balance the economies of scale against the risk of a foreclosure strategy,” Power said. “It’s a little more complex than that, but that’s the way I see it, easier said that done, of course, but I think that’s the way forward if we want to promote competition and consumer welfare.”

Power noted that one of the issues raised by New America in its invitation for the event was “does the administration fully support the DOJ’s finding?” “I had always thought DOJ was [part of] the administration and it turns out it is, I looked it up,” Power said. “So we can put that one to bed."

"DOJ recognized that the four largest carriers compete nationwide on a variety of levels, whether it’s coverage or network speed or price, and we want to sustain that, with carriers having to reposition and react to each other in a dynamic, competitive marketplace,” Power said. “Obviously spectrum is a key input in this marketplace and DOJ recognized that auctions are generally … the best way to maximize the chances of spectrum being put into the best use for consumers.”

When spectrum auctions were first launched “the goal was not raising revenue, the goal was efficient allocation of spectrum,” Power said. The big carriers aren’t “bad guys,” he said. “If you talk to the big carriers they will tell you that they welcome competition and it makes them better. But they're not in it to promote their competitors. Their legal obligation is to promote shareholder value. That’s their job and so that creates incentives. … DOJ and the Antitrust Division were created in part to make sure things stay on the right track.” The administration recognizes that it’s important the auction raises enough to pay for FirstNet and otherwise bring in money for deficit reduction, he said. “That’s important, but competition is important too and the folks at DOJ and at the Antitrust Division I think have a pretty good track record on making these calls."

Wheeler and FCC commissioners were offered plenty of advice from speakers at the forum. Mark Cooper, research director at the Consumer Federation of America, said the FCC should use the incentive auction to get lower band spectrum in the hands of competitors and “deconcentrate” the wireless sector. The wireless industry is “highly concentrated” even by the “ridiculously lax” standards in the Justice Department’s and FTC’s recently modified merger guidelines, he said. A rule of economics is “four is few and six is many,” Cooper said. “We've got barely four not-very-equally-sized competitors.”

"The dominant incumbent wireless carriers, the Baby Bells, charge higher prices and have lower [usage] caps in spite of the fact that they have a huge advantage in holdings of high quality spectrum,” Cooper said. Cooper said the record shows that not only do Verizon Wireless and AT&T charge higher prices, they earn higher profits. “If they had higher profits and lower prices, they would be seen to be earning their rents through efficiency,” he said. “But when you charge higher prices to get higher profits there’s a really good suspicion that you're using market power. Their market power is evident in their huge market shares and the growing trends of concentration and exit from the industry."

The evidence of market power by the dominant carriers is easy to see, Cooper said. “Incumbency, ownership of local, middle-mile bottleneck facilities, integration with the local communications network, control of high-quality spectrum, brand recognition, deep pockets, political connections. That’s the basis for this economic power that has persisted.”

Peter Cramton, auction expert and University of Maryland economist, said spectrum caps have a demonstrated history of promoting competition worldwide. Low-band spectrum like the 600 MHz spectrum to be offered in the incentive auction is special, he said. “Low-band spectrum caps have been adopted in nearly all recent major spectrum auctions around the world, auctions in the U.K., Germany, Canada, Australia -- the U.S. 700 MHz auction is the lone exception.” The record shows that smaller bidders are unlikely to participate in an auction “if they think they're just setting themselves up for defeat,” he said. The record also shows “we do have a problem here” with Verizon and AT&T having 67 percent of the market share by subscriber and 80 percent of low-band spectrum. “The big two have a strong incentive to weaken competition by maintaining the dominant position in the low-band spectrum and that is the concern."

But Cramton also said the policies adopted by the FCC shouldn’t freeze AT&T and Verizon out of the auction entirely, but should limit how much spectrum any carrier can buy in a single market. Moderate caps, limiting the big two from buying more than one or two paired blocks in every market, would likely work best, Cramton said. If the FCC manages to sell seven paired blocks per market, a limit of two each on Verizon and AT&T would open up at least three blocks for smaller carriers in every market, he said. “That’s going to motivate participation.” He noted that similar caps have worked well in the recent AWS auction in Canada and the 4G auction in Thailand.

The FCC should “avoid the extremes,” Cramton said. “No cap, laissez faire” is “a bad idea” and “could likely lead to an outcome of dominance in the 600 MHz spectrum cementing the dominant position in the low-band spectrum and undermining competition in the industry.” Cramton said freezing out AT&T and Verizon would mean more competition but also is not a good idea. “I believe that we've reached a point now where that would take too much money from the auction,” he said. “The capital of Verizon and AT&T is needed in this auction in order to generate sufficient revenues and there are some other advantages to having AT&T and Verizon’s participation because that would enable an interoperable band to roll out sooner across the country and have all the market participants enjoy greater economies of scale with equipment manufacturers."

AT&T Vice President Joan Marsh rebuked arguments for how AT&T got the spectrum portfolio it has. “How did we get here?” she asked. One theory is “we dominated the 700 MHz auction. We did not. Of the six blocks available at auction AT&T bid on one, one block and only one block. We won less than a nationwide footprint. We lost to other bidders in major markets. We lost to suburban bidders. We lost to other bidders in rural markets.” There were more than 200 applicants for spectrum in the 700 MHz auction and more than 100 bidders, she said. “With open auctions you can see full participation from carriers of all size and multiplicity of bidders."

Sprint and T-Mobile elected not to participate in the 700 MHz auction, Marsh said. “You cannot win spectrum when you do not come to auction to do so,” she said. “I don’t criticize. That is a legitimate business judgment … but you must bear the consequences of those decisions and not seek to have the government address them later on.” Marsh also noted that many small carriers that won 700 MHz licenses have subsequently sold them on the secondary market. “I will take issue with a carrier who chose to sell their low-band holdings on the secondary market and then comes to the government and says, ‘We don’t have low-band holdings, therefore, you should provide us advantages in the next low-band auction.'” Marsh also questioned whether carriers really need low-band spectrum to compete. “I would point as evidence most recently to T-Mobile’s last two quarters of performance,” she said. “They are competing aggressively in the marketplace and successfully in the marketplace. In the third quarter they had more adds than did AT&T."

George Ford, economist at the Phoenix Center, was sharply critical of DOJ’s April filing. “The DOJ’s filing was explicit,” he said. “We're going to rig [the auction] so that T-Mobile and Sprint win. It was just as plain as day.” If the FCC adopts caps it will move the agency back to the old way of allocating spectrum, through a “beauty contest” rather than an auction, Ford said. “'We're not going to surrender to the auction anymore'” would be the message, he said. “'We're going to use the auction to manipulate market share. We're going to change market structure.'"

"Spectrum matters,” said Sprint Vice President Larry Krevor, also on the program. “Frequencies matter. What kind of spectrum you have matters a lot.” Carriers without low-band spectrum on average cover half the territory as those that have sub-1 GHz frequencies, Krevor said. “Low-band spectrum goes further,” he explained. “It goes inside buildings better and that means your capital costs, the costs to build the network, are lower."

C Spire Vice President Eric Graham agreed with Krevor. “Our industry, just given the nature of the capital that’s required to enter, given the fairly easy ability to restrict access to the inputs of the business, is one that is particularly prone to those with the largest and the greatest market power being able to stamp out competition,” he said. “It can be done through refusal of roaming agreements, it can be done through handset exclusivity, it can be done through the foreclosure value of purchasing all the spectrum licenses that are available."