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Spectrum and Net Neutrality Lessons from the FCC’s Recent Spectrum Auction

August 29, 2006 , , ,

As reported in yesterday's New York Times, although the AWS spectrum auction will not formally close for another month or so, the likely winners of the licenses will be the incumbent wireless companies and “SpectrumCo LLC,” a joint partnership with Comcast, Time Warner, and Sprint-Nextel (albeit with Comcast and Time Warner the dominant partners). The much ballyhooed hope that the AWS auction would produce a new, disruptive competitor for either mobile phone service or broadband service died when the DBS partnership of DIRECTV and Echostar exited the auction after getting systemically outbid by the incumbents and Spectrum Co.

Of course, this outcome was entirely predictable to anyone who (a) actually looks at the economics of bidding in open, ascending spectrum auctions and (b) has not drunk the intermodal competition cool-aid. Which is why I pushed the FCC for anonymous bidding rules back in the spring and have argued that we should not allow incumbent cable operators to bid on spectrum if we want competition.

The FCC has a chance to learn some lessons here for the upcomming auction of returned analog television spectrum, the so called “700 MHz Auction.” The FCC issued a Notice of Proposed Rulemaking soliciting comment on service rules and auction considerations. Unfortunately, it will be hard to convince the FCC that an auction with almost 170 bidders raising close to the maximum anticipated $15 Billion in revenue was a failure because it further entrenched the incumbents and failed to produce a meaningful new competitor. For those devoted to the dogma of the perfection of “the market” as the ultimate arbiter, the failure of a new competitor to emerge indicates that there is no need for another competitor or that another competitor is not economically viable (the notion of strategic behavior to preserve market dominance apparently being a heresy to be firmly rejected by orthodox free market theologians). Heaven forfend the government should “interfere with the market” by structuring an auction more likely to produce the emergence of new entrants.

It is also worth noting in passing that the triumph of the incumbents likewise has implications for the network neutrality debate. At the start of the AWS auction, the Wall St. Journal and other opponents of network neutrality as an evil government mandate and attempt to “socialize the internet” pointed to the AWS auction as proof that (a) we have more than enough competition in broadband to eliminate any need for “net neutrality” and (b)if tech companies like Google or Microsoft want to build their own pipe, they can get spectrum to do so.

Instead, as predicted by Greg Rose and Mark Lloyd in a paper for the Center for American Progress, the incumbents (including the incumbent residential broadband providers Comcast and Time Warner) acted to block potentially disruptive new entrants from getting licenses. As a result, we have exactly the same competitors and potential competitors in the broadband market today as we had before the auction started.

Sure, AWS licenses acquired by the wireless incumbents may eliminate some capacity constraints that wireless providers claim have hampered their deployment and required them to impose limits on users. But the fact that three of the four largest national mobile phone companies are owned or affiliated with incumbent wireline providers (Cingular with AT&T & Bell South, Verizon Wireless with Verizon, and SprintNextel with Comcast & Time Warner via their affiliation and resale agreements) makes it a lot less likely that these “competitors” will prove sufficiently aggressive and disruptive that the incmbents will not dare degrade user choice of where to go online or what applications to run over the network.

Worse, consider this exchange between Tod Cohen of Ebay and Carolyn Brandon of the Cellular Telecomunications and Internet Association (CTIA, the primary trade group for the incumbent wireless carriers). Apparently, the dominant wireless companies that won the AWS licenses and offer our best hope of broadband competition see no problem at all with exercising control over the user's choice of content and application, regardless of network capacity.

[Tod] Cohen [deputy general counsel for Ebay] said the wireless Internet
in the U.S. is already operating in a non-net neutrality environment when it
comes to EBay, an online auction service.

He said Cingular customers are not able to use text messages to make a
payment through eBay's online subsidiary, PayPal, because Cingular won't
agree to give PayPal access to necessary wireless codes on its network.
PayPal is available to customers of other wireless services.

Carolyn Brandon, vice president of policy for industry trade group
Cellular Telecommunications & Internet Association, responded that under a
capitalistic market Cingular has the right to strike a contract with another
online payment company and shouldn't be required to a cut a deal with PayPal.

“What's the market failure?” she asked.

Recent remarks by AT&T's Ed Whitacre show that the Bells have not given up their hopes of cutting such deals themselves.

Which, of course, is exactly the concern of folks who see positive social and economic benefit in an open internet. Absent regulation to the contrary, it makes perfect economic sense for the few broadband providers in the market to exploit their market position and extract additional rents from suppliers of content and services on one end and captive customers on the other. I just happen to think that allowing these providers to exercise their market power would be a disaster for democracy and a disaster for our economy.

Reasonable minds can differ, of course, on my economic analysis and whether network neutrality is a cure worse than the disease. Nor do I expect the paid shills and true believers to look at the AWS auction results and proclaim “how wrong we were to assume that competition exists or is likely to emerge absent some form of government intervention, given the power of incumbents to block new entrants!” But I do point to the recent AWS auction as proof of two central tenants in my analysis: the behavior of profit seeking firms is predictable using undergraduate level economics and a willingness to embrace empirical data over theory, incumbents will do what they can to block the emergence of potentially disruptive new entrants, and — absent some form of government action — they will succeed.

You may still decide this produces a better world than “government intervention in the market” does. But don't kid yourself about the world you're going to get as a result.


About Harold Feld

Harold Feld is Public Knowledge’s Senior Vice President and author of “The Case for the Digital Platform Act,” (Public Knowledge & Roosevelt Institute 2019) a guide on what government can do to preserve competition and empower individual users in the huge swath of our economy now referred to as “Big Tech.” Former FCC Chairman Tom Wheeler described this book as, “[...] a tour de force of the issues raised by the digital economy and internet capitalism.” For more than 20 years, Feld has practiced law at the intersection of technology, broadband, and media policy in both the private sector and in the public interest community. Feld has an undergraduate degree from Princeton University, a law degree from Boston University, and clerked for the D.C. Circuit Court of Appeals. Feld also writes “Tales of the Sausage Factory,” a progressive blog on media and telecom policy. In 2007, Illinois Senator Dick Durbin praised him and his blog for “[doing] a lot of great work helping people understand how FCC decisions affect people and communities on the ground.”