May 8, 2014 2:48 PM
On Monday, 16 Republicans on the House Energy and Commerce Committee sent a letter
to FCC Chairman Wheeler, complaining that the Chairman's proposal (described in his blog
) to restrict bidding on at least 30MHz of the available spectrum in the upcoming incentive auction "is not how a market-based auction should function; it is how a cartel controls price." The House Republicans hit closer to the mark than you might.
Ironically, the purported reason for the restrictions is to prevent "one or two firms from running away with the auction.
" Such a result would be only be bad if it led to these "one or two firms" controlling enough spectrum to be able, at a later point in time, to exploit consumers through cartel behavior.
We know that cartels restrict output. If bidding restrictions, likewise, reduce output, then whose cartel tactics are likely to cost the consumer more? The FCC's Theory on the Competitive Significance of Low-Band Spectrum
In his blog
, the Chairman states that spectrum below 1Ghz is really important for commercial success in wireless. He believes this, presumably, because AT&T and Verizon (the two wireless companies with the most customers) also have more low-band spectrum than anyone else. However, correlation is not the same as causation.
Presently, here is how much total "low band" spectrum is available for commercial service:
Note that the chart above does not account for the broadcast spectrum to be auctioned in the upcoming incentive auctions. The FCC had originally speculated that the amount of 600MHz broadcast spectrum tendered for auction could be anywhere from 80MHz to 120MHz. The House Republicans speculated that only 60MHz would be tendered, due to the Chairman's decision to limit auction participation, and the value to broadcasters of surrendering spectrum.
If you want to see how the Chairman's plan will affect specific companies, the table below will give you an idea. This information is based on Table 18 from the FCC's 16th Wireless Competition Report (adjusted to reflect mergers), and it assumes that broadcasters will tender 84MHz to be auctioned. We also assume that the FCC wants to limit the amount of spectrum below 1GHz that any carrier can acquire; here, we use 1/3 of the post-auction total (73 MHz) as the limit.
Note, also, that in the above chart, neither AT&T nor Verizon's low-band spectrum comprises a majority of either company's total spectrum.
How Does the Chairman's Plan to Redistribute Low-Band Spectrum Effect Consumers?
The Chairman's plan is not just
to limit the amount of
low-band spectrum held by AT&T and Verizon. No, the plan also is
designed to promote a more "equitable" distribution of low-band
spectrum--at the lowest possible price to competitors
of AT&T and Verizon.
These distortions are the primary reason no one expects the auction to recruit 120MHz of new low-band
. The result of Chairman's bidding restrictions will be a 50% reduction
in spectrum capacity available in this
auction, and a total post-auction capacity restriction of almost 20%
less total low-band spectrum available for U.S. consumers.
last point is incredibly important. Restricting output is what
monopolies do when they want to increase prices. Because consumer
demand is fairly steady in the short term, the only way producers can
move prices quickly is to restrict supply, which changes the equilibrium
price to a point higher up the demand curve.
The Chairman of
the FCC is unmistakably urging the Commission to adopt a plan that he
knows will restrict output. The justification for this output
restriction is ostensibly to prevent the top two firms from restricting
output in some future time period. What's the Worst That Could Happen?
If we assume the auction takes place with no bidding restrictions
, reasonable spectrum screens, and we get active (but not maximum) broadcaster participation, then it seems possible that somewhere around 100MHz-110MHz in broadcast spectrum gets tendered. Moreover, let's assume AT&T and Verizon are allowed to buy as much as 60MHz-70MHz of the 100MHz.
Now, at some point in the future, the concern is that AT&T and Verizon will realize that demand is strong, every other competitor is capacity-constrained, and their opportunity to restrict output has finally arrived. If this day comes, and AT&T and Verizon decide, notwithstanding antitrust laws, that they want to maximize their opportunity, then they might look to the early 1970's OPEC
As cartels go, early 1970's OPEC wrote the book on cartel coordination meeting exactly the right opportunity. As the world was already producing at maximum capacity, OPEC's 25% output reduction in November of 1973 changed the world
So, for a worst case, let's assume that AT&T/Verizon will want to cut output by 25%. A 25% output restriction translates into somewhere between 40.5MHz and 43MHz, depending on whether you assume the two companies bought 60MHz or 70MHz of spectrum in this auction (25% of their combined new low-band total of 162MHz-172MHz). What Does It Cost to Prevent?
This "worst case" outcome is, obviously, more than a little improbable. For the worst to happen, we have to assume: 1) AT&T/VZ would capture most of the profits from an output restriction, 2) both firms would/could disregard/circumvent the antitrust laws, 3) that such a steep restriction makes sense (25% is a lot), and 4) that the firms could effectively monitor and police their levels of capacity in service. Moreover, output "quotas" do not tend to work for very long (even OPEC members cheat
on output quotas).
Nonetheless, the "worst case" does serve a purpose. In this case, it gives us some way of valuing the worst harm the Chairman's proposed bidding restrictions are supposed to protect us from.
If we know the economic costs of the worst case, we can assess the probabilities of that worst case, and get an idea of what preventing it is worth. So, here, the worst case is that consumers will face the higher prices that would result from an output restriction of about 40MHz of premium-grade, low-band spectrum.
But this is only a "risk"--it's not a certainty. But, even if you think there's as high as a 30% chance of the worst case happening, then we can assign a value on the worst case. In rough terms, it would be rational to engage in rules/regulations that "cost" up to 12MHz (in spectrum that will never reach the market) in order to prevent the worst outcome (i.e., a 30% chance of the economy losing the benefit of 40MHz of spectrum capacity).Worth the Cost?
On the other hand, there seems to be a consensus among observers (both for and against the bidding restrictions) that the Chairman's proposed bidding restrictions will result in broadcasters bringing up to 40MHz less spectrum to the auction. But, even if the Chairman's restrictions "only" cause broadcasters to offer 20MHz less spectrum for auction, the loss is real and it is 100% certain.
Insurance is what the Chairman is selling with his proposed bidding restrictions. But, even at a Vegas blackjack table, insurance pays 2:1. At a guaranteed cost to the public of up to 40MHz, the Chairman owes taxpayers an explanation of why his bidding restrictions aren't the bad bet they look like.
July 12, 2013 11:39 AM
So I take my eyes off the spectrum auction debate for a couple months, and what happens? Well, for the most part, absolutely nothing . . . or so it seems. Actually, it's worse than nothing happening, because parties have refused to wisely ignore the DoJ's substance-less April ex parte submission
. Instead, a "tire fire" of a debate (toxic, polluting, and burning for far too long) has rather predictably broken out; a fact that confirms the darkest suspicions of many--that one can never underestimate the FCBA
crowd's appetite for mindless bickering.
She obviously read the DoJ ex parte
The putative beneficiaries of DoJ's casual musings--Sprint and T-Mobile
--are struggling to animate this theory by adding their own piece parts, like the "Dr. Frankensteins" of economic policy creation. Others, who oppose these efforts, are also exaggerating the substance (or lack thereof) of the Department's submission so that they can then "slay" the paper tiger of their own creation.
Fortunately, and finally, one "grownup" expert has, admirably, refused to reflexively engage in the "yea or nay" foreclosure debate, choosing instead to simply, and elegantly, point out that the DoJ submission lacks sufficient substance to even be worthy of discussion. This expert calmly explains that the DoJ never contends that the likelihood of the auction being subverted by a bidder pursuing an "input foreclosure" strategy is high enough to merit any exceptional analytical framework, or specific prophylactic rules.
Before I reveal the identity of our helpful expert, I'll give you one hint. This expert understands, possibly through experience, that the Antitrust Division is well aware of the level of detail and documentation that must accompany a regulatory policy proposal if it is to be taken seriously by the regulator.When DoJ Is Serious About An Economic Framework
When you think about it, this realization becomes a little more powerful. The Antitrust Division knows full well how to provide a regulatory agency with enough factual and theoretical support for its theories to give the agency that adopts its proposals a good chance of surviving appellate review.
A good example of the DoJ at its best is the Department's Evaluation
of the Bell Atlantic (Verizon) Application to provide "long distance" service in New York. The Division filed over 200 pages of advocacy, including 2 economist declarations. The DoJ's evaluation contains 8 single-spaced pages of citation sources. In contrast, the DoJ probably devoted twice as many words to cataloguing the sources it used in its New York 271 analysis than it did in its "police sketch" of a foreclosure theory in the April ex parte.
An even better comparison is the analysis the Antitrust Division provided in its 1992 Comments
on rules for the PCS auction, which was the FCC's very first spectrum auction. The DoJ filed 41 pages of very thorough analysis in November of 1992, which it followed with an equally-thorough 28 pages of Reply Comments
in January of 1993.
Interestingly, the content of the DoJ's rigorous PCS auction comments could not be more different from the more "casual" reasoning in its April ex parte. Even though there were only 2 mobile wireless providers at the time of the PCS auction, the Division opposed a any flat prohibition on wireless mergers (which the Commission was considering adopting). While mergers between the new PCS entrants would certainly result in increased concentration, the Division was unwilling to "foreclose" from consideration mergers that would result in enhanced efficiency of spectrum use, because such mergers could benefit consumers. See 1992 Comments, pp. 23-28. When DoJ Wants To Be "Supportive" Without Providing Support
So, I know you're probably wondering which expert rationally declined to join the melee of parties jousting against the DoJ's "windmill" chimera of input foreclosure. Somewhat ironically, and yet not surprisingly, the expert is former Deputy Assistant Attorney General for Economics of the Antitrust Division, Michael "it's cool for" Katz. Katz, and some other economists, submitted a declaration
(at pp. 5-13) on behalf of AT&T last month.
So how did Katz, et al
., cut through the noise surrounding the DoJ ex parte? Take a look for yourself
(pp. 5-13). The first clue is that it's 8 double spaced pages long, and the first two pages summarize the DoJ filing. The brevity of the Katz, et al., Declaration is its elegance.
The Katz Declaration uniquely approaches the DoJ filing from a generously analytical perspective. Accepting the DoJ's threshold premise--that there could be circumstances in which the largest firms might profitably pursue a foreclosure strategy--Katz, et al., explain essential elements of the theory, as well as factual predicates (i.e., "evidence"), that the DoJ would have discussed if the Department reasonably expected the FCC to adopt such a justification for bidder exclusion.
Professor Katz, of course, is a classy dude, so he never actually says "if the Division was serious . . . ." That's way too vulgar, and--as far as I can tell--it's the only reason AT&T chose him to make this point instead of me. Thankfully, Professor Katz and his colleagues have advanced this docket by demonstrating for all participants that there is no risk of the Commission adopting any part of the Division's ex parte.
Given that the DoJ fails to present their "theory" in an economically correct manner, or to even recklessly
--much less accurately--assert factual predicates that would require the FCC to consider the DoJ's ex parte, it is safe to assume that the Antitrust Division has no intention of providing the FCC with the requisite legal, factual, and economic testimonial support that would give the FCC even the barest excuse to exclude auction bidders on an "input foreclosure" theory. Hopefully, all parties, including the FCC, will soon appreciate this reality, and stop wasting valuable time arguing over an ex parte that not even the DoJ expects the FCC to take seriously.
May 1, 2013 11:12 AM
Has anyone else noticed how nutty the news stories have become about the FCC and DoJ fight to promote wireless competition? Here are some examples: this
, but I'll summarize for you. First we have the DoJ "letter" to the FCC; a letter which I think
the FCC probably sent the DoJ along with a self-addressed, stamped envelope a few months ago.
I mean, seriously, how could two separate agencies--both independently, and within six months of each other--come up with the same notion that the next available spectrum to be auctioned would be put to its best use by Sprint and T-Mobile (who had not even bid on spectrum the last time it was available) because of its radio frequency characteristics
? That last part was highlighted because it's like the peanuts on top of the walnuts on top of the almonds in this all-nut sundae of a theory.
Like most tin foil hat
theories, this one has a small kernel of logic. For a smaller carrier, especially a new entrant, low-frequency spectrum provides a lot more value per cell site--and requires a lot less cell sites--for a carrier to achieve adequate coverage. But do the FCC and DoJ want to promote smaller carriers or new entrants? Of course not; that might provide consumers with some value. And since the FCC/DOJ believe that only national firms count toward improving competition in the marketplace - new entrants as envisioned by these agencies would fail to meet that goal.
The DoJ and the FCC didn't have this theory of theirs until they also seemed to arrive at the conclusion--as near as I can tell, sometime during their analysis of the proposed AT&T/T-Mobile merger--that mobile wireless competition is best measured by market share on a national level. And, with a market artificially defined as "national", despite the fact that consumers make choices locally, a "market" could only be truly competitive if each firm's share (of customers, of spectrum, of cool new handsets, and crunchy nut confections) is roughly equal.
Does anybody recognize the problem with this raison d'etre
? Does the conclusion at the end of the last paragraph sound a little like the description of a commodity market? Yeah, it kind've does, doesn't it? Are wireless services a commodity market? Well, the AT&T iPhone crowd from 2007 didn't seem to think so; nor did the Verizon Droid evangelizers from 2009. So, let's just say no; wireless is not a commodity market. Like with cars, people seem to take a certain personal pride in their selected combination of network and handset.
Why would anyone expect that differentiated product markets would result in competitors having a roughly equal share of sales? After all, some people like (and can afford) fancy overpriced compact cars, while others need
pimped-out, baller SUVs because . . . that's just how they roll. So isn't it nice that we have BMWs and Escalades? Do they have the same market share? Yeah, probably, but that's beside the point.
The problem with the government's idea of what competition should look like is that it starts from a lot of flawed premises--all of which come from the same flawed premise: consumer preferences don't count
. The relevant geographic market is national, not because this is the way consumers actually purchase wireless service, but because this is the way the government likes to look at it.
To the government, market shares are only unequal because firms have unequal amounts of low frequency spectrum, and not the other way around. They don't seem to understand that AT&T and Verizon have customers that, for the most part, have chosen not to buy service
from at least 3 other firms. Now that's
Why doesn't the government just reconcile itself to the reality of consumer driven competition and "wreckanize" that the consequences of choice can produce distinct winners and losers? Yogi Berra told us a long time ago: "If the people don't want to come out to the ballpark, nobody's going to stop them." Why do the DoJ and the FCC keep trying?
April 17, 2013 5:13 PM
At the end of last week and in advance of Assistant Attorney General for Antitrust William Baer's appearance before the Senate Judiciary Committee yesterday, the DoJ's Antitrust Division filed an ex parte submission
with the FCC offering some serious advice on how to conduct (read: limit participation in) a spectrum auction--specifically, the next spectrum auction.
The Department's "advice" contained all the acuity, but none of the profanity (and occasional hilarity), of a drunken sports heckler (like Bud Light's Mr. Pro Sports Heckler Guy
). Until I read the DoJ ex parte, I had no idea as to what might be the regulatory equivalent of "catch the ball", "make the basket", or "play defense, you idiots." Now I know.
The Department's "advice," while generally a meandering discussion of points not in contention, such as the DoJ's horizontal merger analysis and the many benefits of competition, also included such "game changing" spectrum auction tips as "protect competition", "don't award spectrum to buyers that won't use it efficiently", and "spectrum below 1 GHz is cheaper for smaller competitors to use." If You're Not Low, You Must Be High
The one "point" the Department puts on its relatively general discourse is its belief that to be successful on a nationwide basis a carrier needs some low frequency spectrum in order to efficiently serve rural areas and to provide service that works inside of buildings. The DoJ notes that the two "leading" wireless carriers (AT&T and Verizon) have a large amount of low frequency spectrum, but Sprint and T-Mobile have little to none of this spectrum.
By making this assertion (I would guess?), the DoJ wants us to conclude that "low frequency spectrum" is the only thing
distinguishing the leaders from the laggards in wireless market share. The only reason AT&T and Verizon have the most low frequency spectrum is because, the DoJ explains, they pay a lot more for low frequency spectrum in order to prevent Sprint and T-Mobile from using it.
The DoJ warns that this trend should be expected to continue into the next spectrum auction as well. Why the next auction? Because the next auction is for LOW frequency spectrum
, and this is the kind that AT&T and Verizon only buy in order to keep away from Sprint and T-Mobile. A Low-Down Dirty Shame
If Sprint and T-Mobile did have some low frequency spectrum, they would totally be able to build it out and offer better service to rural areas and inside of buildings, and thereby steal share from AT&T and Verizon. But, even if they didn't actually use the spectrum, Sprint and T-Mobile should still be able to gain share because AT&T and Verizon would provide worse service without this spectrum, right? Either way . . . it's cool, says DoJ.
You see what they're doing here? First, you establish that a firm's "success" in terms of market share, or whatever other benchmark you like, is critically dependent on one specific input. Next, you pick an industry characterized by a shortage of this key input that affects all firms--like wireless--and you're almost home.
Then, postulate that some companies have greater access to the scarce input than their rivals, and the conclusion falls into place. You see? The input-favored companies can benefit even if they don't use all of their superior access to inputs to increase output. This is because they know that their competitors cannot increase output to steal customers from the input-favored firms. Stick to the basic format, and this argument always works. Cool, huh?
If the FCC adopts rules that exclude AT&T and Verizon from the next auction, you can bet that they'll be using an iteration of this same argument on their appeal. But, if DoJ's argument is that transparent, and that malleable, why are they using it now? The FCC Lobs . . . And DoJ Dunks!
First, let's dispel any lingering suspicion you may have that the DoJ is offering its theories based on any observable facts. If AT&T and Verizon were merely warehousing low frequency spectrum to keep their rivals down, the simple way to check would be to see if they're using it.
Let's just assume that both AT&T and Verizon have been using the 850-900 MHz spectrum since the FCC first handed it out to their predecessor companies in the 1980's. After all, they didn't get to be the two largest companies by not using
their "first mover" spectrum. So, what about all the other low frequency spectrum?
"All the other" low frequency spectrum would be the 700 MHz spectrum that AT&T and Verizon purchased in 2008. The companies claim to have needed the spectrum to accommodate the very predictable surge in demand for wireless data services. And, according to no less venerable a source than Wikipedia
, AT&T and Verizon are, in fact, using their 700 MHz spectrum to roll out their fancy LTE service, for their fancy data-loving, bandwidth-hogging LTE customers. So, why is the DoJ insinuating otherwise?
Well, as near as I can tell, low frequency spectrum just became a "thing" in the FCC's NPRM
from 6 months ago, where they solicited comments on whether the Commission should change its spectrum screen to account for the perceived greater value of low frequency spectrum. So, if I had to guess, I would say that the FCC's been waiting for 6 months for some big player to take the low frequency "lob" they put up with the NPRM and slam-dunk it home--and the DoJ is that big playa'.
DoJ . . . with no regard for human life!
So, do you think any Senators called out William Baer on this at the oversight hearing yesterday? According to the trade press, the ranking member of the Antitrust Subcommittee, Senator Mike Lee (R-UT), expressed concern
that the Department was suggesting to the FCC that AT&T and Verizon were warehousing spectrum. You bet he did--because us Lees just happen to know a f@$k-ton of stuff about telecom and antitrust.