Commissioner Ajit Pai is outraged! This in itself would not be news. Sadly, Commissioner Pai seems to spend most of his time these days outraged — usually while denouncing his Democratic colleagues on the supposed death of collegiality at the Federal Communications Commission (FCC) (we will pause to savor the irony). What is news is that Commissioner Pai has actually picked up an issue I've championed since 2006 — reform of the “designated entity” (DE) bidding credit. Unfortunately, as is too often the case IMO, Pai directs his outrage at the wrong target. Rather than seeking constructive solutions to the tension between auction theory (which favors the largest incumbents) and competition theory (which holds the need to make sure someone wins licenses other than the largest incumbents), Pai has decided to direct his wrath at DISH for finding a loophole in the auction structure stacked against them.
In doing so, Commissioner Pai misses the real outrage of the auction. For DISH to make even a quasi-decent showing in the auction, it needed to use a bidding credit AND still spend more than $10 billion. T-Mobile, the next highest bidder at almost $2 billion, walked away with a mere handful of licenses that will do nothing to overcome the spectrum dominance of the two largest carriers. The fact that the two most robust competitors participating in the auction could spend a combined $12 billion and not appreciably alter the market structure one iota ought to raise very real concern. Bluntly, the fact that DISH could “save” $3 billion is not so much a scandal as a flashing red-light indicator that without regulatory intervention we can forget about any kind of competition in the wireless industry.
It’s important to note that DISH also participated in the auction directly, as well as financing two designated entities. Under the rules, DISH has incentive to win the licenses directly because then it can use 100% of the capacity for itself, and DISH would not need to hold the licenses for 5 years before selling them. Using the two designated entities may save DISH $3 billion, but at a serious cost in flexibility.
That DISH accepted this trade off as the only way it could win licenses, and that no other competitor to AT&T or Verizon came close without this trade off, tells us what we need to know from a competition standpoint. In the last ten years, Public Knowledge has urged a range of structural reforms to address the competition problem such as our proposal for a new entrant/competition credit in 2007 (which is essentially how DISH used the DE credit) to more recent proposals to reserve enough spectrum for competing carriers to make it possible to make the industry structure genuinely more competitive.
By all means we need to fix the DE rules so that the credits are used for their true purpose of promoting diversity of ownership and small business participation. Nor is abuse of designated entities limited to auctions. AT&T and Verizon pulled a variation on this last year when they did an end-run around the spectrum concentration rules by transferring licenses to Grain Spectrum (also a DE) — and Grain then leased back the capacity to AT&T and Verizon. While not a violation of the designated entity auction credit, it falls into the same category of exploiting rules to promote diversity of ownership and competition, and real reform ought to address these issues regardless of whether it carries a $3 billion price tag.
But reform of the designated entity rules won’t address the real problem highlighted by DISH – the continued dominance of AT&T and Verizon and their ability to foreclose any potential competitor from getting needed spectrum. We have one more major auction on the horizon, the Incentive Auction of broadcast spectrum in 2016. If we want wireless competition, we need to make it possible for competing carriers to win without looking for loopholes.
Image from Wikimedia Commons