The Curious Case of the FCC’s Spectrum Screen NPRM…

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With the ever-present specter of spectrum exhaust hanging over the wireless industry, policymakers are constantly faced with the corresponding question of how to allocate spectrum among competing providers to ensure that market does not devolve into one with “excessive” concentration under Section 309(j)(3)(B) of the Communications Act.  Since the 1990’s, the FCC has tried a variety of approaches—from outright spectrum caps to the current and more flexible case-by-case “spectrum screen”—to try to manage its statutory charge.  As to be expected given the huge stakes at hand, stakeholders vehemently disagree as to the best approach moving forward (particularly with the new voluntary incentive auctions for broadcast spectrum on the horizon).

To try to bring some certainty to the process, the agency recently issued a Notice of Proposed Rulemaking (“NPRM”) in order to “seek comment on retaining or modifying the current case-by-case analysis used to evaluate mobile spectrum holdings in the context of transactions and auctions, as well as on bright-line limits advocated by some providers and public interest groups.”  While we should applaud the agency whenever it seeks to bring increased regulatory certainty to a complex and indeed crucial matter of public policy, there is just one small problem with the Commission’s new NPRMAs Commissioner Pai astutely noted, the agency’s NPRM

contains no notice of proposed rules.  In fact, the word “propose” does not appear in the document.  Nor do we reach any tentative conclusions.  We simply ask a lot of questions about where things stand, which is typically what we would do in a Notice of Inquiry.  (Emphasis supplied)

Needless to say, issuing a Notice of Proposed Rulemaking without proposing any definitive rules raises some serious concerns.

As an initial matter, the fact that the FCC is issuing a NPRM without providing any actual proposed rules upon which the public may review and comment is just bad government and violates basic notions of due process.  Indeed, this is exactly what happened when the FCC issued its Open Internet Rules and should not be repeated.  Instead, as Commissioner Pai observed, if the agency does not have any definite rule changes but is only seeking input upon which it can better inform public policy, then the appropriate vehicle is a Notice of Inquiry (which, by the way, is exactly the approach mandated by the FCC Process Reform Act passed by the House of Representatives earlier this year).

More to the point, given the importance and complexity of the issue at hand, the fact that the FCC does not propose a definite policy approach but instead, as Commissioner Pai observed, simply “ask[s] a lot of questions”, sends a clear message that the agency’s current leadership does not know how to tackle the problem.  Indeed, as the expert agency tasked by Congress to allocate and manage spectrum, it is disconcerting to say the least that the agency is issuing a NPRM where the prime inquiry seems to be “so, waddya think?”

Of particular concern is the agency’s continuing failure to consider the complex relationship between spectrum exhaust and optimal industry structure.  While several stakeholders continue to beat the drum to warn against a purported “spectrum gap” between the largest CMRS providers and the rest of the industry, this purported “gap” does not a fortiori mean that we should, as Greg Rosston, former FCC Deputy Chief Economist and, more recently, Senior Economist for Transitions at the FCC argues, prevent any new spectrum “to go into the hands of the two incumbent landline telephone companies that also have by far the most valuable wireless spectrum.”

As we have demonstrated repeatedly both in this blog and in our formal research, using some form of spectrum caps to create “more” competitors is likely to fail because the approach is based on two flawed but related assumptions, including (1) the equilibrium number of firms serving the wireless industry is determined solely by spectrum holdings; and (2) the quality of services offered by firms does not depend on spectrum holdings.  Like it or not, spectrum is but one input into the production of wireless services—given 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, and you can see George’s summary of the paper at this blog post.  Accordingly, imposing some form of spectrum cap to increase the number of wireless competitors by limiting how much spectrum any one firm can use makes little sense.

As we have further explained, 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 (which is about to be published in the Federal Communications Law Journal and is summarized in our blog here), 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.

But did the FCC consider these factors in its NPRM?  Absolutely not.  Instead, the NPRM simply meanders from one point to another, giving acknowledgement to all views but providing substantive guidance to no one.  Just last week, FCC Chairman Julius Genachowski argued that “the next generation spectrum crunch requires next-generation spectrum policy innovations.”  We wholeheartedly agree.  Accordingly, perhaps the Chairman should take heed of the admonition offered by noted economists Carl Shapiro and Hal Varian who observe in their terrific book Information Rules:  “Technology changes.  Economic laws do not.”