Are Spectrum Caps Back?

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As the old saying goes, “be careful what you wish for.”  Well, in the case of spectrum policy, we got our wish this month when President Obama signed into law the Payroll Tax Extension bill which contained sweeping provisions to free up much-needed new commercial spectrum.

While the implementation of the specific provisions of such ambitious legislation will no doubt be complex and arduous, I would like to touch on two general themes in this particular post.

First, we at the Phoenix Center are very proud that our research helped contribute to get the D Block assigned to public safety so that our first responders can finally have the nationwide, interoperable broadband network they deserve.  (For example, a video of House Committee on Homeland Security Chairman Peter King introducing our research as the lead pieced of evidence into the record may be viewed here:  Indeed, not only did we demonstrate that giving the D Block to public safety would save taxpayers money over the long run, but that many of the parochial arguments made to deny our first responders this crucial spectrum made little legal or economic sense.  While spectrum policy can, at times, become quite cynical, we salute both the Congress and President Obama for resisting the temptation to auction off the D Block and doing what our research indicated was the right thing.

Our second observation about the new legislation is that the fight over who gets any new spectrum will remain front and center for the foreseeable future.  Indeed, while Section 6404 of the new legislation specifically states that while the Commission cannot prevent a person from bidding so long as that person meets all of the general eligibility requirements, “Nothing … affects any authority the Commission has to adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition.’’

Stated another way, spectrum caps may be back.  The big policy question, however, is whether this is a good thing?

The argument for spectrum caps is as straight forward as it is naïve:  spectrum caps can be used to increase the number of wireless competitors by limiting how much spectrum any one firm can use.  As stated by Greg Rosston, former FCC Deputy Chief Economist and, more recently, Senior Economist for Transitions at the FCC:

… the FCC has tools to make facilities-based competition more likely and more viable.  First and foremost, the FCC should get even more spectrum out into the marketplace.  And it is probably important that the spectrum not continue to go into the hands of the two incumbent landline telephone companies that also have by far the most valuable wireless spectrum.

If only it were that simple.  The problem with such arguments is that they rest on the assumption that the equilibrium number of firms serving the wireless industry is determined solely by spectrum holdings, and that the quality of services does not depend on spectrum holdings.  Obviously, neither assumption is true.  Spectrum is but one input into the production of wireless services—giving a firm spectrum does not ensure its financial success (as we have seen, repeatedly).   Moreover, the more spectrum a firm has the more advanced services it can provide.  The tradeoffs in regard to spectrum allocation are described in our recent paper A Policy Framework for Spectrum Allocation in Mobile Communications, published in the Federal Communications Law Journal.  You can see George’s summary of the paper at this blog post.

It is also interesting to look at the history of spectrum allocation and market shares.  As demonstrated by the figure from our Spectrum Allocation paper below, the amount of spectrum has risen, yet industry concentration, as measured by the concentration ratio, has not declined.  Thus, historical evidence does not support the notion that “more spectrum” automatically means “more firms.”  Second, while concentration has risen over this interval, the price of mobile telephony has fallen consistently over the period.  Therefore, historical evidence also does not support the notion that higher concentration leads to higher prices.

The issue of spectrum allocation becomes even gnarlier when you incorporate the problem of spectrum exhaust.  As we show in our recent paper Wireless Competition Under Spectrum Exhaust, if, as the FCC argues, wireless firms face a binding spectrum constraint, then increasing the number of competitors will actually increase prices, increase congestion and reduce quality.  With spectrum exhaust, the standard view that more competitors leads to lower prices is turned on it head.  George summarizes the analytics of this paper here.

We have done much research on the issue of spectrum allocation, and these studies are highly relevant to the efficacy of spectrum caps.  We hope that our efforts are helpful to conscientious policy makers, and will continue to address the issue of spectrum allocation in future research.  Certainly, spectrum caps are on the table, and likely as a main course.  We shall see how this debate plays out over the coming months and years.