If dominant incumbent operators are punished for their success by having their access to additional spectrum restricted, the upshot may well be slower innovation rather than more competition, according to a new report from Robert Hahn and Peter Passell, economists specializing in regulation.
Hahn is director of economics at Oxford's Smith School, a professor of economics at Manchester and a senior fellow at the Georgetown Center for Business and Public Policy, while Passell is a senior fellow at the Milken Institute. I suspected their report would make for an intriguing read when I saw the first paragraph, which began with the statement, "Spectrum is the mother's milk of the smartphone revolution."
The main point of the report is that while economists agree on numerous points regarding spectrum policy, they butt heads when it comes to the best way to allocate scarce spectrum. This analysis is particularly timely giving the growing chorus calling for enactment of bidding restrictions on U.S. market leaders AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ) in upcoming FCC spectrum auctions.
In fact, many would agree that restricted bidding or even the implementation of spectrum caps appear to be logical approaches to encouraging marketplace competition. Everyone knows that if runt of the litter can't suckle when it needs to, it will die while the litter's biggest, baddest puppies (or kitties, bunnies, rats or whatever species you care to imagine) just keep getting stronger and healthier. A nation's telecommunications regulator can become a de facto wet nurse, making sure the runts of the telecom world get the spectrum they need to survive while preventing the most competitive operators from getting more than their fair share of that nourishing spectrum.
But Hahn and Passell found a glitch in that thinking: There is no empirical evidence to back up the idea that innovation would be faster (and, I would add, that competition would be fiercer) if there were easier wireless market entry for smaller competitors. I would add that the U.S. wireless landscape is littered with the carcasses of runts that were aided by spectrum policy but never, or barely, got off the ground before crashing and burning. Remember NextWave and General Wireless, whose abuse of bidding credits for PCS Designated Entities led to some long-running soap operas in the 1990s?
Further, some economists have theorized operators might warehouse spectrum in order to put their competitors at a disadvantage, but Hahn and Passell claim that is not borne out by operators' actions in the real world.
"Rather, incumbent providers are putting spectrum to use just about as fast as they can. In choosing between theory and facts, we agree with Professor John Mayo of Georgetown University, who argues that data on consumer impacts should trump arguments based on theory alone. In the U.S. wireless market, the facts are stark: an explosion in innovation and consumer welfare as well as sizeable investments by the two industry leaders--the opposite of what theorists typically ascribe to companies with market power," wrote Hann and Passell in a recent blog entry.
The two economists also note that the FCC's most recent report on the state of wireless competition states that the United States "had the least concentrated mobile market at the end of 2011" when compared with other selected markets. "This last statement is rather remarkable in light of widespread criticism of market structure in the U.S.," said Hahn and Passell.
When Ronald Coase (who is still a working economist at age 102) wrote about the benefits of spectrum license auctions in 1959, he was widely ridiculed and mocked. Nonetheless, his insights regarding how the marketplace would more efficiently allocate licenses than a board of bureaucrats reigning over a beauty contest were proved true when the FCC initiated auctions in July 1994. But Washington can find a way to muck up just about anything. As we saw in the 700 MHz auction, the FCC's regulatory rules and spectrum allocation procedures led to crazy pricing distortions between the A, B, C and D Blocks (not to mention the side effect of A Block interoperability issues).
Coase is known for having said, "If you torture the data long enough, it will confess." I think Hahn and Passell are making a good case for torturing, or at least meticulously assessing the data, rather than dabbling in theoretical outcomes, as the FCC sets rules for the next spectrum auction.--Tammy
P.S. Do you think AT&T and Verizon should have restrictions placed upon their bidding in upcoming FCC spectrum auctions? Vote now in this week's poll.