May 25, 2011 12:37 PM

The Commission's Wireless Competition Conundrum: "Neutral" Is Not an Option

Since 1997, Congress has required the Federal Communications Commission to file annual reports that measure whether certain industries, such as mobile wireless services, are "effectively competitive."  Every report the FCC has issued since 1997 has found the wireless market "effectively competitive," until 2010, when the Commission failed to make any finding at all for calendar year 2009. See 2010 Report.

While it is not difficult to understand a bureaucracy's fear of commitment--making no judgment on one matter in the present seems to preserve all options for future matters.  There are now news reports, though, that the FCC might take the same "neutral" stance with respect to wireless competition that it took last year.  This time, though, that course destroys, rather than preserves, options, and the Commission must reconsider its fear of commitment.

The article notes that the Commission may be afraid of finding the wireless market to be "effectively competitive" for fear of limiting its options in reviewing the proposed AT&T/T-Mobile merger.  If this report is correct, the Commission's reasoning is both specious, and dangerous to its present agenda regarding spectrum policy and incentive auctions--an issue that Chairman Genachowski has been aggressively, and correctly, pursuing since the beginning of the year.  

 
The Chairman, once again, pressed his same argument for more spectrum in his speech at the TIA Summit last week.  The Chairman's argument is, essentially, that consumer demand for innovative, data-intensive products is outstripping the ability of the wireless networks to handle this additional data. 

A Failure to Find "Effective Competition" Could Foreclose New Spectrum Availability

It's a matter of (really basic) economics that competitive industries produce greater output than do monopolized industries (which restrict output).  Granted, there is a continuum between textbook "perfect competition", which only exists where there are many sellers of a homogenous product, and "monopoly" (where one seller can reduce output at will).  However, an industry with differentiated products where each firm is working to capacity looks a whole lot more like "perfect competition" than "monopoly."  

Nonetheless, an industry that is on the "restricting output" side of the continuum cannot possibly need more production inputs--like spectrum--because the industry is not producing at maximum capacity at present.  An opponent of "incentive auctions" will surely seize on this discrepancy to use the Commission's own "non-findings" to discredit the industry's very real need for more spectrum capacity.  

Finally, the Commission's own reasoning for not finding "effective competition" (according to the news report)--"[b]ecause the mobile marketplace is so incredibly diverse, an up-or-down determination on competition would be over-simplistic"--is too clever by half.  An industry whose regulators characterize as "incredibly diverse" is certainly on the "effectively competitive" end of the concentration continuum.  Monopolies and cartels are not "incredibly diverse", nor do they chew through inputs like M&Ms at an 8 year old's birthday party.

A Finding of "Effective Competition" Forecloses No Future Commission Action

The notion that, by not finding the wireless industry to be "effectively competitive" for calendar year 2010, the Commission is somehow preserving (or not foreclosing) its judgment with respect to the AT&T/T-Mobile merger is simply specious.  First, the report covers the Commission's findings for calendar year 2010--not 2011, or 2012.  Second, the record for the Commission's assessment of the AT&T/T-Mobile merger is not even complete.  No one could reasonably argue that the Commission's findings (based on data in its possession) regarding the state of wireless competition in 2010, could in any way bind its decision (on data not yet in its possession) regarding the effect of the proposed combination of two firms in 2011.

A Failure to Find the Wireless Industry to Be "Effectively Competitive" Has No Upside

It will be difficult for the Chairman to successfully argue, on the one hand that the pace of innovation and consumer demand is outstripping industry capacity, while failing to find that the same "incredibly diverse" industry that needs Congress to mandate the availability of more inputs is "effectively competitive."  The conclusion defeats the argument.

On the other hand, the Commission has already taken the position that the industry is facing a spectrum shortage.  If it sounds hard to believe that a single firm within a spectrum-constrained industry would be facing spectrum exhaust sooner than the industry as a whole, the Commission is already vulnerable to this criticism.
 
If the FCC wants to reject the proposed AT&T/T-Mobile merger, it certainly understands that it will have to do so in reliance on facts specific to that matter, and not some industry assessment from a year ago.  Thus, the Commission must also understand that a failure to act on its Congressional mandate to report on whether the wireless industry is "effectively competitive" only carries the potential to foreclose options from the public--while preserving no options for the agency.

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