Julius Genachowski’s Speech at CES Part 1…

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For those interested in spectrum policy, I would commend folks to read FCC Chairman Julius Genachowski’s speech at the Consumer Electronic Show (CES) last week.

The Chairman began his speech by acknowledging once again that because America is facing looming spectrum exhaust, Congress should quickly pass legislation authorizing the FCC to conduct voluntary spectrum auctions for the purpose of transferring television broadcast spectrum to mobile broadband providers.  Indeed, the Chairman noted that absent that ability for wireless carriers to access more spectrum, “American consumers will face slower speeds, more dropped connections, and higher prices.”  (To illustrate this point, see the recent article in Forbes reporting that AT&T is contemplating price increase to help control demand over its spectrum-constrained network.)

At present, there are two respective bills moving through both the Senate and the House to allow such voluntary incentive auctions to occur.  While the Chairman apparently likes the Senate version, he doesn’t like the House version.  According to Mr. Genachowski, there are two fundamental problems with the spectrum bill working its way through the House Energy & Commerce Committee that, in his view, “could significantly diminish the value of spectrum auctions, and mobile innovation.”  Specifically, (1) the provisions in the House bill that would prohibit the FCC from allocating any of the recovered spectrum for unlicensed use; and (2) the provisions in the House bill that would eliminate the FCC’s ability to set the terms for participation in the auction.

So, while Chairman Genachowski likes the general idea of more spectrum for mobile communications, his central complaint is that the House bill places limits on his agency’s ability to socially engineer the use of spectrum.  As I explain below, given both: (a) Mr. Genachowski’s longstanding appetite for regulatory intervention over the last several years (borne out by, paraphrasing Mr. Genachowski’s favorite maxim, ample “fact–based and data driven evidence”); and (b) the growing national deficit, the House’s efforts to limit the agency’s social planning proclivities as exercised via spectrum auctions certainly have merit.

To begin, the Chairman’s criticism of Congress are not only inappropriate as the head of the agency, but also expose the fact that Mr. Genachowski believes that his (or his successor’s) ideas for the future are far better at promoting innovation than are those of Congress.  The FCC is a creature of Congress and, as such, Congress has the total discretion to bestow exactly what powers the FCC should and should not have.  It is the Chairman’s role to implement the law as written, not to run the nation’s communications industry as his own fiefdom.  While the Chairman may offer his advice to Congress, it is unbecoming of the office to be so overtly political in his criticism.  Besides, given the average tenure of an FCC Chairman, and the demonstrated regulatory propensities of Mr. Genachowski, we should not be surprised that many in Congress are challenging the wisdom of handing over too much discretion to the agency, and particularly right now.

Just as important, not only does Mr. Genachowski claim to be wiser than his Congressional bosses, he likewise avers to be wiser than market forces.  The House spectrum bill sets forth a simple plan—get some spectrum from the broadcasters and sell it to the highest bidder.  Most assets in this country are sold in such fashion and it has served the U.S. economy very well.  Coase’s maxim holds that the winning bidder will put scarce spectrum to its best and most efficient use.  The Chairman’s resistance to such simple auctions is plain evidence of his socially engineering proclivities, not to mention a blatant disregard for the nation’s financial troubles for which the auction revenues will help mend.

The Chairman’s specific complaint about auction participant rules is particularly revealing.  Spectrum encumbrances, whether in the form of limits on use or participation, reduce the value of spectrum at auction, and do so without any apparent benefit to society (as least historically).  Yet, Chairman Genachowski has a proven penchant for incumbent exclusion rules. 

Take, for example, how the FCC approved the merger of the firm that is now known as “LightSquared.”  Specifically, the agency’s approval came with a curious “voluntary” (a.k.a. “mandatory”) commitment—LightSquared agreed that it would not resell any spectrum to the two largest commercial carriers without prior Commission approval.  Given that LightSquared’s stated business plan is to provide wholesale capacity to retail carriers, this seems odd indeed.  More troubling is the fact that this “voluntary” commitment was negotiated and adopted behind closed doors on the day the order was released (that’s the whole pet project thing), so that the public had no ability for notice and comment until three days after the order was released.  As a result of the shady process used to impose this de facto spectrum cap, some lawmakers are legitimately questioning the FCC’s perceived lack of transparency related to this proceeding.

Similarly, given the Chairman’s fixation on industry concentration, as revealed in his own CMRS Reports and the staff’s adverse treatment of the AT&T/T-Mobile merger, it’s not unreasonable to conclude, even by the Chairman’s own logic, that he would seek to limit the participation of larger wireless carriers in any future spectrum auction.  The reduction in auction revenue from such limits could be very, very large, diminishing the value of the auction both as a tool of efficient allocation and deficit reduction.

Finally, one other point about Mr. Genachowski’s displeasure over the House bill on the broadcast voluntary incentive auctions bears out discussion:  while not specifically mentioned by Mr. Genachowski in his CES speech, I think it would be reasonable to assume that he is equally displeased with the provisions in the House bill that would prohibit the FCC from encumbering the spectrum by forcing the auction winner to comply with Mr. Genachowski’s hallmark regulatory achievement—the FCC’s Open Internet Order.  (While it is true that the FCC did not mandate that wireless networks comply with its Open Internet Order, the FCC made it quite clear that this remains a very strong threat going forward. (See, e.g., Open Internet Order at paras. 133-135))

The House bill’s restrictions on imposing the FCC’s Open Internet Order have strong empirical backing.  In our paper entitled Using Auction Results to Forecast the Impact of Wireless Carterfone Regulation on Wireless Networks, we looked at the results from the 700 MHz auction in 2007 and found that the open platform requirements imposed by the FCC on the Upper C block cost the U.S. taxpayers approximately $3.1 billion in lost auction revenues, or nearly a 40% loss in revenues.

Accordingly, unless Mr. Genachowski is willing to take full responsibility for his stewardship of his agency, then perhaps he protests a bit too much about Congress’s rightful attempt to rein in the Commission.