The Spectrum Gap Keeps Growing


Recently there have been a number of high-profile spectrum transactions. It is possible to describe them in a way that sounds beneficial. In the Verizon/SpectrumCO transaction, a lot of spectrum that was not being used will be sold to a company that will actually use it. In the AT&T/NextWave transaction a lot of spectrum that is not being used will be sold to a company that will actually use it. In a vacuum it is true that spectrum is better off used than not used, and as a legal matter it's also true that the FCC is generally not allowed to consider alternate buyers when deciding whether to approve a spectrum license transfer.

But this narrow view masks a large problem--a growing "spectrum gap" between Verizon and AT&T and the rest of the wireless industry, that is hobbling competition and harming consumers.

The problem isn't any one transaction. The problem is that the majority of spectrum that becomes available ends up in the hands of AT&T or Verizon. AT&T and Verizon are able to out-bid any other potential buyer, not merely because they have so much money. Apple has much more money than either of those companies and does not buy spectrum. So does Exxon. Rather, AT&T and Verizon are willing to pay more for spectrum, and do more to get it, because spectrum is more valuable to them. First, they already have large networks, so due to economies of scale they can put new spectrum to work more cheaply than their competitors. This makes them more willing to pay for spectrum than any competitor that would have to spend a lot more to get a network off the ground. And, of course, it's worth good money for them to corner the market for a basic input their competitors need to operate--imagine if McDonald's was able to buy up all of the hamburger buns in the country, or it Microsoft was able to corner the market on ones and zeros. As a given carrier has more and more spectrum the "foreclosure value" of buying up spectrum goes up.

But this is a problem. In the US we try to rely on competition rather than regulation to protect consumers. In a competitive market more evenly-matched competitors would scrap it out and offer better deals to consumers and wouldn't nickel and dime them with confusing or hidden fees. But while smaller carriers do offer better plans they can't match the scale of AT&T or Verizon. As a result, the two dominant carriers behave in similar, consumer-unfriendly ways. The confusing "pooled" data plans that AT&T and Verizon rolled out practically simultaneously are a case in point--when companies in a concentrated market don't face effective competition, they can find it more profitable to imitate each other than to compete with each other by offering plans that are better for the user.

It's true that markets with relatively few providers can be competitive--competition is correlated with, but not identical to, the number of competitors in a market. But one factor that keeps some concentrated markets disciplined is the possibility of new entry. But because spectrum is treated as a limited resource, to enter the wireless market you have to either change spectrum policy or buy an incumbent. This means that incumbents generally don't have to worry about some unpredictable upstart coming out of nowhere and eating their lunch. In any event, to look at the behavior of AT&T and Verizon and conclude that they are effectively disciplined by competition is to ignore the facts. For just one data point, compare the US wireless market to the more-competitive European one. While Europe is hardly a utopia for the wireless customer, the more competitive wireless markets across the Atlantic lead to lower prices and more generous plans.

If policymakers in the US want to protect consumers they need to promote wireless competition. And to do that, they need to adopt spectrum policies that put spectrum in the hands of the providers that need it most, not just the providers that can pay the most.

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