Why the FCC Should Not “Tax” Efforts to Repurpose Spectrum…

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The mobile revolution is threatened today by the lack of sufficient commercial spectrum to satiate America’s ever-increasing appetite for wireless devices.  While efforts are underway to hold voluntary incentive auctions for broadcast spectrum and to free-up unused or underutilized government spectrum, most agree that these initiatives are years away from putting spectrum in the hands of commercial users and will be insufficient standing alone to resolve spectrum exhaust even if fully successful.  As a result, the spectrum community is now exploring ways to repurpose spectrum from lower- to higher-valued uses to satisfy the growing demand.  For example, we have recently seen activity involving the potential conversion of spectrum currently used for Mobile Satellite Service (“MSS”) to terrestrial use, an attempt to acquire and convert WCS spectrum to commercial use, and the transfer of idle spectrum licensed to the cable industry to a mobile broadband provider.

That said, efforts to repurpose spectrum (either using intra- or inter-firm transfers) face a number of significant hurdles, including primarily the need for government approval.  As history bears out, the regulatory approval process is far from streamlined.  Instead, the government, the applicants’ competitors, and political interest groups regularly use the regulatory process to garner concessions that they would not otherwise be able to obtain in the normal course of business.

In a recent Policy Paper entitled Taxation by Condition:  Spectrum Repurposing at the FCC and the Prolonging of Spectrum Exhaust, we discuss how the regulatory process often acts like a “tax” on private transactions in the form of value-extracting mandatory and voluntary conditions.  Conditions are a form of a tax (or operate in the same manner as a tax) in that they reduce the value of the transaction to the parties involved.  When viewed as a tax, the implications of the regulatory process become readily apparent.  When you tax something: (1) you get less of it; and (2) you can affect what types of transactions you get.  On the first point, basic economic logic tells us that taxes reduce the incentive to make transactions.  “Taxing” efforts to move spectrum to higher-valued uses is a particular bad policy when facing a spectrum shortage.  On the second point, the conditioning of spectrum repurposings can affect the evolution of and efficient functioning of a secondary market for commercial spectrum.  That is, while we may still observe many deals of a less material nature that attract less attention and thus fewer conditions, “taxation by condition” will discourage the larger scale transactions necessary to resolve spectrum exhaust.

Our paper also provides some insight on the role market power plays in the process.  We consider the influence of market power by evaluating how a monopolist and a benevolent regulator (i.e., welfare-maximizing social planner) differentially shift spectrum from lower- to higher-valued uses.  The theory reveals that a private monopolist will seek to reallocate an amount of spectrum less than or equal to that of a benevolent regulator (i.e., a welfare-maximizing social planner).  The difference is attributable to the fact that the social planner’s decisions are based on total surplus, while the monopolist is motivated only by profits.  Under some conditions, the monopolist and the social planner make the same decisions.  Accordingly, our analysis suggests that arguments to “tax” (or outright prohibit) efforts to repurpose spectrum based on simplistic “market power” concerns are misguided.  Market power does not provide an incentive to repurpose “too much” spectrum from a social perspective.

The policy implications of our work are clear:  If the FCC wants to alleviate spectrum exhaust and to encourage the facilitation of a secondary market, then “taxing” efforts to repurpose spectrum to higher-valued uses like mobile data in the form of license conditions is perhaps the worst of all policies.  Instead, barring legitimate competitive or interference concerns, efforts to repurpose spectrum from low- to high-value uses should be expeditiously approved without extraneous conditions.

Unfortunately, the FCC’s recent efforts in this regard are mixed.  While the agency has approved the Verizon/SpectrumCo deal and just announced that it intends to vote on AT&T’s plan to repurpose 30 MHz of WCS spectrum at the October 17th meeting, efforts to have the Commission repurpose 40 MHz of prime MSS spectrum for terrestrial use continue to languish.  Such regulatory delay can easily destroy potential new business opportunities.  That said, just this week, Commissioner Pai noted in his speech at CTIA’s MobileCON conference that while he is “disappointed we have not yet taken action” on the MSS spectrum reclassification, he is nonetheless “optimistic that we can issue final rules within the next month.”  Given the ever-mounting need for more usable commercial spectrum, we can only hope.