I Can “C” (Block) Clearly Now About Spectrum Auctions…

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The FCC, in its National Broadband Plan, concluded that U.S. commercial mobile carriers desperately need more spectrum, describing an industry operating with “just a fraction of the amount that will be necessary to match growing demand.”  Echoing the concern, FCC Chairman Julius Genachowski cautioned that “without action, demand for spectrum will soon outstrip supply. … If we don’t tackle the spectrum crunch now, network congestion will grow, and consumer frustration will grow with it.”

In response, Congress is working on a partial solution to the impending shortfall, including authorizing the FCC to conduct an auction in which broadcasters voluntarily transfer their spectrum to broadband service providers.  Chairman Genachowski, however, has expressed displeasure with the bill.  Why?  The Chairman has publicly stated he is not in favor of the bill because it would require the FCC to refrain from influencing auction outcomes by manipulating who can participate in the auction.

There are many, no doubt, that think the proposed limits on FCC discretion as reflected in the House bill are largely aimed at Mr. Genachowski, who plainly has strong regulatory proclivities.  I made a case for that view in an earlier blog.  In all fairness, however, the need for legislative limits on FCC discretion in auction participation rules need not rely solely on the agency’s recent regulatory activities.

To begin, let’s look at the record of Mr. Genachowski’s mentor:  former FCC Chairman Reed Hundt (particularly as Mr. Hundt has participated actively in the current legislative debate against any Congressional auction restrictions).  Mr. Hundt was responsible for the first “C Block” fiasco, where the FCC set aside valuable spectrum for “designated entities”, and excluded otherwise qualified companies from bidding.  As many of these “designated entitles” lacked the financial wherewithal to pay for the spectrum (much less have the additional cash necessary to build-out and manage a wireless network), over half of the 493 licenses from that auction were later returned to the government for non-payment, and the licenses of the largest winner, NextWave, were tied up in bankruptcy litigation for years.  In that case, the FCC’s use of its “discretion” ended up costing the U.S. Treasury billions, and left vitally needed spectrum unused for years.  Legislation blocking such social-engineering non-sense would clearly have been in the national interest.

Interestingly, there was also a second “C Block” fiasco.  When it came time for former FCC Chairman Kevin Martin to auction the prime spectrum freed up by the digital television transition, the Chairman encumbered (apparently at Google’s urging) a large block of spectrum with “open network” rules.  And guess what?  These open access obligations imposed upon on the Upper C block in the 700 MHz auction cost approximately $3.1 billion in lost auction revenues, or about a 40% loss in auction revenue relative to an unencumbered license.  What were the benefits of such encumbrances?  Zero (except for Verizon, who picked up the spectrum at a substantial discount).  Again, discretion was costly, and legislation impeding such activity would have been socially beneficial.

It doesn’t end here, sadly.  Past FCC manipulations of auctions have left spectrum assigned for public safety purposes fallow for years, and our nation’s first responders are still without a modern, interoperable public safety network.  And there’s the AWS-III debacle, where the FCC proposed that 25% of the capacity of this national license be devoted to a free broadband Internet access service, complete with a mandatory “’always on’ network-based filtering mechanism” for adult content.

So what can we learn from these examples?  At the most basic level, we can see that the FCC’s past meddling with spectrum auctions has produced a string of expensive failures.  As such, there is good reason to believe that when spectrum is auctioned off cleanly without any encumbrances, society is likely to be better off.  Without question, there is no affirmative case for meddling.  Accordingly, having Congress limit the FCC’s ability to impose its world view on the industry via the spectrum auction is sensible public policy.