Optimal Auctions Blog

Throttling AT&T and Verizon

Posted by Mike on May 7th, 2013
Throttling AT&T and Verizon

If the FCC were to limit the participation of the two heavyweight wireless providers in the US (AT&T and Verizon) in the upcoming incentive spectrum auction (planned for 2014), would it hurt the country, by missing out on potential revenue, or would it help the country, by promoting competition and allowing new participants into the US mobile phone market. Optimal Auctions discusses this issue, and weighs the pros and cons of both sides.

The FCC Incentive Spectrum Auction

The upcoming FCC Incentive Spectrum Auction is in the news recently, as a new paper has been published by the Georgetown Center for Business and Public Policy that claims if AT&T and Verizon were limited in their participation in the auction (through bid caps, or spectrum caps), that it would hurt the country by driving down prices in the auction, lowering overall revenue raised during the auction. The entire paper can be read Via The Georgetown Center Website. In full disclosure, the Georgetown Center has been funded in part by AT&T and Verizon.

To first get a little background information on what the FCC Incentive Auction is, and how it is designed to reallocate existing television spectrum into wireless phone spectrum, a great primer on the auction can be found at Fierce Wireless's Summary page and its follow-up article. A quick summary from their excellent articles explain:

"Under the law, the FCC will pay the broadcasters to relinquish their 6 MHz pieces of spectrum and the revenue raised from the auctions will be used to compensate the carriers. The auctions...were authorized in legislation Congress passed and President Obama signed in February. The auctions are expected to take place in 2014 and will be the first major auction of spectrum since the 700 MHz auction in 2008. The incentive auctions are a major piece of the FCC's goal of freeing up 300 MHz of spectrum by 2015 and 500 MHz by 2020 to meet increasing mobile data demands; the FCC's national broadband plan called up for up 120 MHz of broadcast spectrum to be auctioned. Under the FCC's proposed rules, broadcasters will submit bids to relinquish their 6 MHz pieces of spectrum in a reverse auction where the FCC will pay them. The FCC's band plan for the broadcast spectrum carriers would use calls for 5 MHz blocks. The process is voluntary for broadcasters...After broadcasters give up their spectrum, it will be repacked so that broadcasters that do not give up their spectrum can stay on the air. Then the FCC will conduct a traditional forward auction (Optimal - 'clock auction') in which carriers will bid for the freed spectrum."

Limiting Participation by AT&T and Verizon

The FCC has considered, but made no committment yet, limiting the participation of AT&T and Verizon in this auction, in order to allow smaller wireless providers (Sprint, T-Mobile) or even a start-up to bid on the spectrum bands. They could accomplish this by placing a limit on the number of spectrum bands each bidder can bid on (called "spectrum caps" or "bid caps"). This effectively limits the number of bands each bidder can win, and is used in spectrum auctions around the world to promote competition in mobile markets. Why would the FCC do this? To promote competition in the US market as well, where AT&T and Verizon have emerged as the 2 largest providers. It's a reasonable scenario to assume that AT&T and Verizon would bid on spectrum in this auction that they have no intention of using, simply to block other participants from acquiring it or entering the mobile market.

The Georgetown Center paper counters that the loss in potential overall revenue by limiting AT&T and Verizon will be higher than the net overall gain from increased competition in the market. You can read about all the take-aways from the Georgetown Center paper in this excellent summary by ITWorld. Some good points from the article:

"The auction could raise up to US $31 billion, according to the paper's authors. Using bidding results from past auctions, the authors estimated that completely barring Verizon and AT&T from the so-called incentive auctions could cost $12 billion. Restricting the bids of the two largest carriers could also mean a price hike for mobile service because it would mean that carriers who make less efficient use of the spectrum would control it... mobile service prices would rise by 9 percent if Verizon and AT&T were excluded from bidding."

Will It Help or Hurt?

It depends on your viewpoint. From the viewpoint of AT&T and Verizon, of course being limited in the auction will hurt their overall business. Being limited in the auction would potentially limit the amount of spectrum they can purchase, it would allow their competition an advantage in the market by letting them gain additional spectrum space at a discounted price, and it could potentially allow new participants into the market.

For the American consumer, more competition is probably a good thing. Having more choices in the market could lead to better wireless plans, better phones, and cheaper overall prices. Though the Georgetown Center paper argues that a 9% price increase would result from limiting AT&T and Verizon's participation in the auction, we find those claims dubious.

Finally, for the US government, it depends again on your perspective. By limiting AT&T and Verizon, the government is likely going to raise less revenue from the auction than they would with no restrictions in place. But, the people that the government serves, the US taxpayer, may end up paying lower prices for their own service as well. It's really the big question - will giving up $12 billion dollars in the auction be outweighed in savings by the American people.

Perhaps we'll never know the answer to this question, as the rules for the FCC incentive auction will be debated in closed door sessions and must be approved by Congress before the auction takes place.