Archives For spectrum

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Kristian Stout is director of innovation policy for the International Center for Law & Economics.]

Ajit Pai will step down from his position as chairman of the Federal Communications Commission (FCC) effective Jan. 20. Beginning Jan. 15, Truth on the Market will host a symposium exploring Pai’s tenure, with contributions from a range of scholars and practitioners.

As we ponder the changes to FCC policy that may arise with the next administration, it’s also a timely opportunity to reflect on the chairman’s leadership at the agency and his influence on telecommunications policy more broadly. Indeed, the FCC has faced numerous challenges and opportunities over the past four years, with implications for a wide range of federal policy and law. Our symposium will offer insights into numerous legal, economic, and policy matters of ongoing importance.

Under Pai’s leadership, the FCC took on key telecommunications issues involving spectrum policy, net neutrality, 5G, broadband deployment, the digital divide, and media ownership and modernization. Broader issues faced by the commission include agency process reform, including a greater reliance on economic analysis; administrative law; federal preemption of state laws; national security; competition; consumer protection; and innovation, including the encouragement of burgeoning space industries.

This symposium asks contributors for their thoughts on these and related issues. We will explore a rich legacy, with many important improvements that will guide the FCC for some time to come.

Truth on the Market thanks all of these excellent authors for agreeing to participate in this interesting and timely symposium.

Look for the first posts starting Jan. 15.

FCC Commissioner Rosenworcel penned an article this week on the doublespeak coming out of the current administration with respect to trade and telecom policy. On one hand, she argues, the administration has proclaimed 5G to be an essential part of our future commercial and defense interests. But, she tells us, the administration has, on the other hand, imposed tariffs on Chinese products that are important for the development of 5G infrastructure, thereby raising the costs of roll-out. This is a sound critique: regardless where one stands on the reasonableness of tariffs, they unquestionably raise the prices of goods on which they are placed, and raising the price of inputs to the 5G ecosystem can only slow down the pace at which 5G technology is deployed.

Unfortunately, Commissioner Rosenworcel’s fervor for advocating the need to reduce the costs of 5G deployment seems animated by the courageous act of a Democratic commissioner decrying the policies of a Republican President and is limited to a context where her voice lacks any power to actually affect policy. Even as she decries trade barriers that would incrementally increase the costs of imported communications hardware, she staunchly opposes FCC proposals that would dramatically reduce the cost of deploying next generation networks.

Given the opportunity to reduce the costs of 5G deployment by a factor far more significant than that by which tariffs will increase them, her preferred role as Democratic commissioner is that of resistance fighter. She acknowledges that “we will need 800,000 of these small cells to stay competitive in 5G” — a number significantly above the “the roughly 280,000 traditional cell towers needed to blanket the nation with 4G”.  Yet, when she has had the opportunity to join the Commission on speeding deployment, she has instead dissented. Party over policy.

In this year’s “Historical Preservation” Order, for example, the Commission voted to expedite deployment on non-Tribal lands, and to exempt small cell deployments from certain onerous review processes under both the National Historic Preservation Act and the National Environmental Policy Act of 1969. Commissioner Rosenworcel dissented from the Order, claiming that that the FCC has “long-standing duties to consult with Tribes before implementing any regulation or policy that will significantly or uniquely affect Tribal governments, their land, or their resources.” Never mind that the FCC engaged in extensive consultation with Tribal governments prior to enacting this Order.

Indeed, in adopting the Order, the Commission found that the Order did nothing to disturb deployment on Tribal lands at all, and affected only the ability of Tribal authorities to reach beyond their borders to require fees and lengthy reviews for small cells on lands in which Tribes could claim merely an “interest.”

According to the Order, the average number of Tribal authorities seeking to review wireless deployments in a given geographic area nearly doubled between 2008 and 2017. During the same period, commenters consistently noted that the fees charged by Tribal authorities for review of deployments increased dramatically.

One environmental consultant noted that fees for projects that he was involved with increased from an average of $2,000.00 in 2011 to $11,450.00 in 2017. Verizon’s fees are $2,500.00 per small cell site just for Tribal review. Of the 8,100 requests that Verizon submitted for tribal review between 2012 and 2015, just 29 ( 0.3%) resulted in a finding that there would be an adverse effect on tribal historic properties. That means that Verizon paid over $20 million to Tribal authorities over that period for historic reviews that resulted in statistically nil action. Along the same lines, Sprint’s fees are so high that it estimates that “it could construct 13,408 new sites for what 10,000 sites currently cost.”

In other words, Tribal review practices — of deployments not on Tribal land — impose a substantial tariff upon 5G deployment, increasing its cost and slowing its pace.

There is a similar story in the Commission’s adoption of, and Commissioner Rosenworcel’s partial dissent from, the recent Wireless Infrastructure Order.  Although Commissioner Rosenworcel offered many helpful suggestions (for instance, endorsing the OTARD proposal that Brent Skorup has championed) and nodded to the power of the market to solve many problems, she also dissented on central parts of the Order. Her dissent shows an unfortunate concern for provincial, political interests and places those interests above the Commission’s mission of ensuring timely deployment of advanced wireless communication capabilities to all Americans.

Commissioner Rosenworcel’s concern about the Wireless Infrastructure Order is that it would prevent state and local governments from imposing fees sufficient to recover costs incurred by the government to support wireless deployments by private enterprise, or from imposing aesthetic requirements on those deployments. Stated this way, her objections seem almost reasonable: surely local government should be able to recover the costs they incur in facilitating private enterprise; and surely local government has an interest in ensuring that private actors respect the aesthetic interests of the communities in which they build infrastructure.

The problem for Commissioner Rosenworcel is that the Order explicitly takes these concerns into account:

[W]e provide guidance on whether and in what circumstances aesthetic requirements violate the Act. This will help localities develop and implement lawful rules, enable providers to comply with these requirements, and facilitate the resolution of disputes. We conclude that aesthetics requirements are not preempted if they are (1) reasonable, (2) no more burdensome than those applied to other types of infrastructure deployments, and (3) objective and published in advance

It neither prohibits localities from recovering costs nor imposing aesthetic requirements. Rather, it requires merely that those costs and requirements be reasonable. The purpose of the Order isn’t to restrict localities from engaging in reasonable conduct; it is to prohibit them from engaging in unreasonable, costly conduct, while providing guidance as to what cost recovery and aesthetic considerations are reasonable (and therefore permissible).

The reality is that localities have a long history of using cost recovery — and especially “soft” or subjective requirements such as aesthetics — to extract significant rents from communications providers. In the 1980s this slowed the deployment and increased the costs of cable television. In the 2000s this slowed the deployment and increase the cost of of fiber-based Internet service. Today this is slowing the deployment and increasing the costs of advanced wireless services. And like any tax — or tariff — the cost is ultimately borne by consumers.

Although we are broadly sympathetic to arguments about local control (and other 10th Amendment-related concerns), the FCC’s goal in the Wireless Infrastructure Order was not to trample upon the autonomy of small municipalities; it was to implement a reasonably predictable permitting process that would facilitate 5G deployment. Those affected would not be the small, local towns attempting to maintain a desirable aesthetic for their downtowns, but large and politically powerful cities like New York City, where the fees per small cell site can be more than $5,000.00 per installation. Such extortionate fees are effectively a tax on smartphone users and others who will utilize 5G for communications. According to the Order, it is estimated that capping these fees would stimulate over $2.4 billion in additional infrastructure buildout, with widespread benefits to consumers and the economy.

Meanwhile, Commissioner Rosenworcel cries “overreach!” “I do not believe the law permits Washington to run roughshod over state and local authority like this,” she said. Her federalist bent is welcome — or it would be, if it weren’t in such stark contrast to her anti-federalist preference for preempting states from establishing rules governing their own internal political institutions when it suits her preferred political objective. We are referring, of course, to Rosenworcel’s support for the previous administration’s FCC’s decision to preempt state laws prohibiting the extension of municipal governments’ broadband systems. The order doing so was plainly illegal from the moment it was passed, as every court that has looked at it has held. That she was ok with. But imposing reasonable federal limits on states’ and localities’ ability to extract political rents by abusing their franchising process is apparently beyond the pale.

Commissioner Rosenworcel is right that the FCC should try to promote market solutions like Brent’s OTARD proposal. And she is also correct in opposing dangerous and destructive tariffs that will increase the cost of telecommunications equipment. Unfortunately, she gets it dead wrong when she supports a stifling regulatory status quo that will surely make it unduly difficult and expensive to deploy next generation networks — not least for those most in need of them. As Chairman Pai noted in his Statement on the Order: “When you raise the cost of deploying wireless infrastructure, it is those who live in areas where the investment case is the most marginal — rural areas or lower-income urban areas — who are most at risk of losing out.”

Reconciling those two positions entails nothing more than pointing to the time-honored Washington tradition of Politics Over Policy. The point is not (entirely) to call out Commissioner Rosenworcel; she’s far from the only person in Washington to make this kind of crass political calculation. In fact, she’s far from the only FCC Commissioner ever to have done so.

One need look no further than the previous FCC Chairman, Tom Wheeler, to see the hypocritical politics of telecommunications policy in action. (And one need look no further than Tom Hazlett’s masterful book, The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone to find a catalogue of its long, sordid history).

Indeed, Larry Downes has characterized Wheeler’s reign at the FCC (following a lengthy recounting of all its misadventures) as having left the agency “more partisan than ever”:

The lesson of the spectrum auctions—one right, one wrong, one hanging in the balance—is the lesson writ large for Tom Wheeler’s tenure at the helm of the FCC. While repeating, with decreasing credibility, that his lodestone as Chairman was simply to encourage “competition, competition, completion” and let market forces do the agency’s work for it, the reality, as these examples demonstrate, has been something quite different.

The Wheeler FCC has instead been driven by a dangerous combination of traditional rent-seeking behavior by favored industry clients, potent pressure from radical advocacy groups and their friends in the White House, and a sincere if misguided desire by Wheeler to father the next generation of network technologies, which quickly mutated from sound policy to empty populism even as technology continued on its own unpredictable path.

* * *

And the Chairman’s increasingly autocratic management style has left the agency more political and more partisan than ever, quick to abandon policies based on sound legal, economic and engineering principles in favor of bait-and-switch proceedings almost certain to do more harm than good, if only unintentionally.

The great irony is that, while Commissioner Rosenworcel’s complaints are backed by a legitimate concern that the Commission has waited far too long to take action on spectrum issues, the criticism should properly fall not upon the current Chair, but — you guessed it — his predecessor, Chairman Wheeler (and his predecessor, Julius Genachowski). Of course, in true partisan fashion, Rosenworcel was fawning in her praise for her political ally’s spectrum agenda, lauding it on more than one occasion as going “to infinity and beyond!”

Meanwhile, Rosenworcel has taken virtually every opportunity to chide and castigate Chairman Pai’s efforts to get more spectrum into the marketplace, most often criticizing them as too little, too slow, and too late. Yet from any objective perspective, the current FCC has been addressing spectrum issues at a breakneck pace, as fast, or faster than any prior Commission. As with spectrum, there is an upper limit to the speed at which federal bureaucracy can work, and Chairman Pai has kept the Commission pushed right up against that limit.

It’s a shame Commissioner Rosenworcel prefers to blame Chairman Pai for the problems she had a hand in creating, and President Trump for problems she has no ability to correct. It’s even more a shame that, having an opportunity to address the problems she so often decries — by working to get more spectrum deployed and put into service more quickly and at lower cost to industry and consumers alike — she prefers to dutifully wear the hat of resistance, instead.

But that’s just politics, we suppose. And like any tariff, it makes us all poorer.

The debates over mobile spectrum aggregation and the auction rules for the FCC’s upcoming incentive auction — like all regulatory rent-seeking — can be farcical. One aspect of the debate in particular is worth highlighting, as it puts into stark relief the tendentiousness of self-interested companies making claims about the public interestedness of their preferred policies: The debate over how and whether to limit the buying and aggregating of lower frequency (in this case 600 MHz) spectrum.

A little technical background is in order. At its most basic, a signal carried in higher frequency spectrum doesn’t travel as well as a signal carried in lower frequency spectrum. The higher the frequency, the closer together cell towers need to be to maintain a good signal.

600MHz is relatively low frequency for wireless communications. In rural areas it is helpful in reducing infrastructure costs for wide area coverage because cell towers can be placed further apart and thus fewer towers must be built. But in cities, population density trumps frequency, and propagation range is essentially irrelevant for infrastructure costs. In other words, it doesn’t matter how far your signal will travel if congestion alleviation demands you build cell towers closer together than even the highest frequency spectrum requires anyway. The optimal — nay, the largest usable — cell radius in urban and suburban areas is considerably smaller than the sort of cell radius that low frequency spectrum allows for.

It is important to note, of course, that signal distance isn’t the only propagation characteristic imparting value to lower frequency spectrum; in particular, it is also valuable even in densely populated settings for its ability to travel through building walls. That said, however, the primary arguments made in favor of spreading the 600 MHz wealth — of effectively subsidizing its purchase by smaller carriers — are rooted in its value in offering more efficient coverage in less-populated areas. Thus the FCC has noted that while there may be significant infrastructure cost savings associated with deploying lower frequency networks in rural areas, this lower frequency spectrum provides little cost advantage in urban or suburban areas (even though, as noted, it has building-penetrating value there).

It is primarily because of these possible rural network cost advantages that certain entities (the Department of Justice, Free Press, the Competitive Carriers Association, e.g.) have proposed that AT&T and Verizon (both of whom have significant lower frequency spectrum holdings) should be restricted from winning “too much” spectrum in the FCC’s upcoming 600 MHz incentive auctions. The argument goes that, in order to ensure national competition — that is, to give other companies financial incentive to build out their networks into rural areas — the auction should be structured to favor Sprint and T-Mobile (both of whose spectrum holdings are mostly in the upper frequency bands) as awardees of this low-frequency spectrum, at commensurately lower cost.

Shockingly, T-Mobile and Sprint are on board with this plan.

So, to recap: 600MHz spectrum confers cost savings when used in rural areas. It has much less effect on infrastructure costs in urban and suburban areas. T-Mobile and Sprint don’t have much of it; AT&T and Verizon have lots. If we want T-Mobile and Sprint to create the competing national networks that the government seems dead set on engineering, we need to put a thumb on the scale in the 600MHz auctions. So they can compete in rural areas. Because that’s where 600MHz spectrum offers cost advantages. In rural areas.

So what does T-Mobile plan to do if it wins the spectrum lottery? Certainly not build in rural areas. As Craig Moffett notes, currently “T-Mobile’s U.S. network is fast…but coverage is not its strong suit, particularly outside of metro areas.” And for the future? T-mobile’s breakneck LTE coverage ramp up since the failed merger with AT&T is expected to top out at 225 million people, or the 71% of consumers living in the most-populated areas (it’s currently somewhere over 200 million). “Although sticking to a smaller network, T-Mobile plans to keep increasing the depth of its LTE coverage” (emphasis added). Depth. That means more bandwidth in high-density areas. It does not mean broader coverage. Obviously.

Sprint, meanwhile, is devoting all of its resources to playing LTE catch-up in the most-populated areas; it isn’t going to waste valuable spectrum resources on expanded rural build out anytime soon.

The kicker is that T-Mobile relies on AT&T’s network to provide its urban and suburban customers with coverage (3G) when they do roam into rural areas, taking advantage of a merger break-up provision that gives it roaming access to AT&T’s 3G network. In other words, T-Mobile’s national network is truly “national” only insofar as it piggybacks on AT&T’s broader coverage. And because AT&T will get the blame for congestion when T-Mobile’s customers roam onto its network, the cost to T-Mobile of hamstringing AT&T’s network is low.

The upshot is that T-Mobile seems not to need, nor does it intend to deploy, lower frequency spectrum to build out its network in less-populated areas. Defenders say that rigging the auction rules to benefit T-Mobile and Sprint will allow them to build out in rural areas to compete with AT&T’s and Verizon’s broader networks. But this is a red herring. They may get the spectrum, but they won’t use it to extend their coverage in rural areas; they’ll use it to add “depth” to their overloaded urban and suburban networks.

But for AT&T the need for additional spectrum is made more acute by the roaming deal, which requires it to serve its own customers and those of T-Mobile.

This makes clear the reason underlying T‑Mobile’s advocacy for rigging the 600 MHz auction – it is simply so that T‑Mobile can acquire this spectrum on the cheap to use in urban and suburban areas, not so that it can deploy a wide rural network. And the beauty of it is that by hamstringing AT&T’s ability to acquire this spectrum, it becomes more expensive for AT&T to serve T‑Mobile’s own customers!

Two birds, one stone: lower your costs, raise your competitor’s costs.

The lesson is this: If we want 600 MHz spectrum to be used efficiently to provide rural LTE service, we should assume that the highest bidder will make the most valuable use of the spectrum. The experience of the relatively unrestricted 700 MHz auction in 2008 confirms this. The purchase of 700 MHz spectrum by AT&T and Verizon led to the US becoming the world leader in LTE. Why mess with success?

[Cross-posted at RedState]

At today’s Open Commission Meeting, the FCC is set to consider two apparently forthcoming Notices of Proposed Rulemaking that will shape the mobile broadband sector for years to come.  It’s not hyperbole to say that the FCC’s approach to the two issues at hand — the design of spectrum auctions and the definition of the FCC’s spectrum screen — can make or break wireless broadband in this country.  The FCC stands at a crossroads with respect to its role in this future, and it’s not clear that it will choose wisely.

Chairman Genachowski has recently jumped on the “psychology of abundance” bandwagon, suggesting that the firms that provide broadband service must (be forced by the FCC to) act as if spectrum and bandwidth were abundant (they aren’t), and not to engage in activities that are sensible responses to broadband scarcity.  According to Genachowski, “Anything that depresses broadband usage is something that we need to be really concerned about. . . . We should all be concerned with anything that is incompatible with the psychology of abundance.”  This is the idea — popularized by non-economists and ideologues like Susan Crawford — that we should require networks to act as if we have “abundant” capacity, and enact regulations and restraints that prevent network operators from responding to actual scarcity with business structures, rational pricing or usage rules that could in any way deviate from this imaginary Nirvana.

This is rhetorical bunk.  The culprit here, if there is one, isn’t the firms that plow billions into expanding scarce capacity to meet abundant demand and struggle to manage their networks to maximize capacity within these constraints (dubbed “investment heroes” by the more reasonable lefties at the Progressive Policy Institute).  Firms act like there is scarcity because there is — and the FCC is largely to blame.  What we should be concerned about is not the psychology of abundance, but rather the sources of actual scarcity.

The FCC faces a stark choice—starting with tomorrow’s meeting.  The Commission can choose to continue to be the agency that micromanages scarcity as an activist intervenor in the market — screening-out some market participants as “too big,” and scrutinizing every scarcity-induced merger, deal, spectrum transfer, usage cap, pricing decision and content restriction for how much it deviates from a fanciful ideal.  Or it can position itself as the creator of true abundance and simply open the spectrum spigot that it has negligently blocked for years, delivering more bandwidth into the hands of everyone who wants it.

If the FCC chooses the latter course — if it designs effective auctions that attract sellers, permitting participation by all willing buyers — everyone benefits.  Firms won’t act like there is scarcity if there is no scarcity.  Investment in networks and the technology that maximizes their capacity will continue as long as those investments are secure and firms are allowed to realize a return — not lambasted every time they try to do so.

If, instead, the Commission remains in thrall to self-proclaimed consumer advocates (in truth, regulatory activists) who believe against all evidence that they can and should design industry’s structure (“big is bad!”) and second-guess every business decision (“psychology of abundance!”), everyone loses (except the activists, I suppose).  Firms won’t stop acting like there’s scarcity until there is no scarcity.  And investment will take a backseat to unpopular network management decisions that represent the only sensible responses to uncertain, over-regulated market conditions.

By Geoffrey Manne, Matt StarrBerin Szoka

“Real lawyers read the footnotes!”—thus did Harold Feld chastise Geoff and Berin in a recent blog post about our CNET piece on the Verizon/SpectrumCo transaction. We argued, as did Commissioner Pai in his concurrence, that the FCC provided no legal basis for its claims of authority to review the Commercial Agreements that accompanied Verizon’s purchase of spectrum licenses—and that these agreements for joint marketing, etc. were properly subject only to DOJ review (under antitrust).

Harold insists that the FCC provided “actual analysis of its authority” in footnote 349 of its Order. But real lawyers read the footnotes carefully. That footnote doesn’t provide any legal basis for the FTC to review agreements beyond a license transfer; indeed, the footnote doesn’t even assert such authority. In short, we didn’t cite the footnote because it is irrelevant, not because we forgot to read it.

First, a reminder of what we said:

The FCC’s review of the Commercial Agreements accompanying the spectrum deal exceeded the limits of Section 310(d) of the Communications Act. As Commissioner Pai noted in his concurring statement, “Congress limited the scope of our review to the proposed transfer of spectrum licenses, not to other business agreements that may involve the same parties.” We (and others) raised this concern in public comments filed with the Commission. Here’s the agency’s own legal analysis — in full: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” There’s not even an accompanying footnote.

Even if Harold were correct that footnote 349 provides citations to possible sources of authority for the FCC to review the Commercial Agreements, it remains irrelevant to our claim: The FCC exceeded its authority under 310(d) and asserted its authority under 310(d) without any analysis or citation. Footnote 349 begins with the phrase, “[a]side from Section 310(d)….” It is no surprise, then, that the footnote contains no analysis of the agency’s authority under that section.

The FCC’s authority under 310(d) is precisely what is at issue here. The question was raised and argued in several submissions to the Commission (including ours), and the Commission is clearly aware of this. In paragraph 142 of the Order, the agency notes the parties’ objection to its review of the Agreements: “Verizon Wireless and the Cable Companies respond that the Commission should not review the Commercial Agreements because… the Commission does not have authority to review the agreements.” That objection, rooted in 310(d), is to the Commission extending its transaction review authority (unquestionably arising under only 310(d)) beyond that section’s limits. The Commission then answers the parties’ claim in the next paragraph with the language we quoted: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” By doing so without reference to other statutory language, it seems clear that the FCC’s unequivocal, unsupported statement of authority is a statement of authority under 310(d).

This is as it should be. The FCC’s transaction review authority is limited to Section 310(d). Thus if the agency were going to review the Commercial Agreements as part of the transfer, the authority to do so must come from 310(d) alone. But 310(d) on its face provides no authority to review anything beyond the transfer of spectrum. If the Commission wanted to review the Commercial Agreements, it needed to provide analysis on how exactly 310(d), despite appearances, gives it the authority to do so. But the Commission does nothing of the sort.

But let’s be charitable, and consider whether footnote 349 provides relevant analysis of its authority to review the Commercial Agreements under any statute.

The Commission did cite to several other sections of the Communications Act in the paragraph (145) that includes footnote 349. But that paragraph relates not to the review of the transaction itself (or even the ability of the parties to enter into the Commercial Agreements) but to the Commission’s authority to ensure that Verizon complies with the conditions imposed on the transaction, and to monitor the possible effects the Agreements have on the market after the fact. Three of the four statutes cited in the footnote (47 U.S.C. §§ 152, 316, & 548) don’t appear to give the Commission authority for anything related this transaction. Only 47 U.S.C. § 201 is relevant. But having authority to monitor a wireless provider’s post-transaction business practices is far different from having the authority to halt or condition the transaction itself before its completion because of concerns about ancillary agreements. The FCC cites no statutes to support this authority—because none exist.

This is not simply a semantic distinction. By claiming authority to review ancillary agreements in the course of reviewing license transfers, the Commission gains further leverage over companies seeking license transfer approvals, putting more of the companies’ economic interests at risk. This means companies will more likely make the “voluntary” concessions (with no opportunity for judicial scrutiny) that they would not otherwise have made—or they might not enter into deals in the first place. As we (Geoff and Berin) said in our CNET article, “the FCC has laid down its marker, letting all future comers know that its bargaining advantage extends well beyond the stack of chips Congress put in front of it.” In merger reviews, the house has a huge advantage, and it is magnified if the agency can expand the scope of activity under its review.

Thus Harold is particularly off-base when he writes that “[g]iven that there is no question that the FCC has authority to entertain complaints going forward, and certainly has authority to monitor how the markets under its jurisdiction are developing, it is hard to understand the jurisdictional argument even as the worship of empty formalism.” This misses the point entirely. The difference between the FCC reviewing the Commercial Agreements in deciding whether to permit the license transfer (or demand concessions) and regulating the Agreements after the fact is no mere “formalism.”

Regardless, if the FCC were actually trying to rely on these other sections of the Communications Act for authority to review the Commercial Agreements, it would have cited them in Paragraph 143, where it asserted that authority—not two paragraphs later in a footnote supporting the agency’s order assigning post-transaction monitoring tasks to the Wireline Competition Bureau. Moreover, none of these alleged assertions of authority amounts to an analysis of the FCC’s jurisdiction. Given the debate that took place in the record over the issue, a simple list of statutes purporting to confer jurisdiction would be utterly insufficient in response. Not as insufficient as an unadorned, conclusory statement of authority without even such a list of statutes (what the FCC actually did) — but awfully close.

We stand by our claim that the Commission failed to cite — let alone analyze — its authority to review the Commercial Agreements in this transaction. The FCC’s role in transaction reviews has been hotly contested, at least partially inspiring the FCC Process Reform Act that passed this spring in the House. Given the controversy around the issue, the Commission should have gone out of its way to justify its assertion of authority, citing precedent and making a coherent argument — in other words, engaging in legal analysis. At least, that’s what “real lawyers” would do.

But in real politik, perhaps it was naïve of us to expect more analysis from the agency that tried to justify net neutrality regulation by pointing to a deregulatory statute aimed at encouraging the deployment of broadband and claiming that somewhere in there, perhaps, hidden between the lines, was the authority the agency needed—but which Congress never actually gave it.

When the FCC plays fast and loose with the law in issuing regulations, someone will likely sue, thus forcing the FCC to justify itself to a court.  On net neutrality, the D.C. Circuit seems all but certain to strike down the FCC’s Open Internet Order for lacking any firm legal basis.  But when the FCC skirts legal limits on its authority in merger review, the parties to a merger have every incentive to settle and keep their legal qualms to themselves; even when the FCC blocks a merger, the parties usually calculate that t isn’t worth suing or trying to make a point about principle.  Thus, through merger review, the FCC gets away with regulation by stealth—footnotes about legal authority be damned.  Groups like the Electronic Frontier Foundation rightly worry about the FCC’s expansive claims of authority as a “Trojan Horse,” even when they applaud the FCC’s ends.  We know Harold doesn’t like this transaction, but why doesn’t he worry about where the FCC is taking us?

The pending wireless spectrum deal between Verizon Wireless and a group of cable companies (the SpectrumCo deal, for short) continues to attract opprobrium from self-proclaimed consumer advocates and policy scolds.  In the latest salvo, Public Knowledge’s Harold Feld (and other critics of the deal) aren’t happy that Verizon seems to be working to appease the regulators by selling off some of its spectrum in an effort to secure approval for its deal.  Critics are surely correct that appeasement is what’s going on here—but why this merits their derision is unclear.

For starters, whatever the objections to the “divestiture,” the net effect is that Verizon will hold less spectrum than it would under the original terms of the deal and its competitors will hold more.  That this is precisely what Public Knowledge and other critics claim to want couldn’t be more clear—and thus neither is the hypocrisy of their criticism.

Note that “divestiture” is Feld’s term, and I think it’s apt, although he uses it derisively.  His derision seems to stem from his belief that it is a travesty that such a move could dare be undertaken by a party acting on its own instead of under direct diktat from the FCC (with Public Knowledge advising, of course).  Such a view—that condemns the private transfer of spectrum into the very hands Public Knowledge would most like to see holding it for the sake of securing approval for a deal that simultaneously improves Verizon’s spectrum position because it is better for the public to suffer (by Public Knowledge’s own standard) than for Verizon to benefit—seems to betray the organization’s decidedly non-public-interested motives.

But Feld amasses some more specific criticisms.  Each falls flat.

For starters, Feld claims that the spectrum licenses Verizon proposes to sell off (Lower (A and B block) 700 MHz band licenses) would just end up in AT&T’s hands—and that doesn’t further the scolds’ preferred vision of Utopia in which smaller providers end up with the spectrum (apparently “small” now includes T-Mobile and Sprint, presumably because they are fair-weather allies in this fight).  And why will the spectrum inevitably end up in AT&T’s hands?  Writes Feld:

AT&T just has too many advantages to reasonably expect someone else to get the licenses. For starters, AT&T has deeper pockets and can get more financing on better terms. But even more importantly, AT&T has a network plan based on the Lower 700 MHz A &B Block licenses it acquired in auction 2008 (and from Qualcomm more recently). It has towers, contracts for handsets, and everything else that would let it plug in Verizon’s licenses. Other providers would need to incur these expenses over and above the cost of winning the auction in the first place.

Allow me to summarize:  AT&T will win the licenses because it can make the most efficient, effective and timely use of the spectrum.  The horror!

Feld has in one paragraph seemingly undermined his whole case.  If approval of the deal turns on its effect on the public interest, stifling the deal in an explicit (and Quixotic) effort to ensure that the spectrum ends up in the hands of providers less capable of deploying it would seem manifestly to harm, not help, consumers.

And don’t forget that, whatever his preferred vision of the world, the most immediate effect of stopping the SpectrumCo deal will be that all of the spectrum that would have been transferred to—and deployed by—Verizon in the deal will instead remain in the hands of the cable companies where it now sits idly, helping no one relieve the spectrum crunch.

But let’s unpack the claims further.  First, a few factual matters.  AT&T holds no 700 MHz block A spectrum.  It bought block B spectrum in the 2008 auction and acquired spectrum in blocks D and E from Qualcomm.

Second, the claim that this spectrum is essentially worthless, especially  to any carrier except AT&T, is betrayed by reality.  First, despite the claimed interference problems from TV broadcasters for A block spectrum, carriers are in fact deploying on the A block and have obtained devices to facilitate doing so effectively.

Meanwhile, Verizon had already announced in November of last year that it planned to transfer 12 MHz of A block spectrum in Chicago to Leap (note for those keeping score at home: Leap is notAT&T) in exchange for other spectrum around the country, and Cox recently announced that it is selling its own A and B block 700 MHz licenses (yes, eight B block licenses would go to AT&T, but four A block licenses would go to US Cellular).

Pretty clearly these A and B block 700 MHz licenses have value, and not just to AT&T.

Feld does actually realize that his preferred course of action is harmful.  According to Feld, even though the transfer would increase spectrum holdings by companies that aren’t AT&T or Verizon, the fact that it might also facilitate the SpectrumCo deal and thus increase Verizon’s spectrum holdings is reason enough to object.  For Feld and other critics of the deal the concern is over concentrationin spectrum holdings, and thus Verizon’s proposed divestiture is insufficient because the net effect of the deal, even with the divestiture, would be to increase Verizon’s spectrum holdings.  Feld writes:

Verizon takes a giant leap forward in its spectrum holding and overall spectrum efficiency, whereas the competitors improve only marginally in absolute terms. Yes, compared to their current level of spectrum constraint, it would improve the ability of competitors [to compete] . . . [b]ut in absolute terms . . . the difference is so marginal it is not helpful.

Verizon has already said that they have no plans (assuming they get the AWS spectrum) to actually use the Lower MHz 700 A & B licenses, so selling those off does not reduce Verizon’s lead in the spectrum gap. So if we care about the spectrum gap, we need to take into account that this divestiture still does not alleviate the overall problem of spectrum concentration, even if it does improve spectrum efficiency.

But Feld is using a fantasy denominator to establish his concentration ratio.  The divestiture only increases concentration when compared to a hypothetical world in which self-proclaimed protectors of the public interest get to distribute spectrum according to their idealized notions of a preferred market structure.  But the relevant baseline for assessing the divestiture, even on Feld’s own concentration-centric terms, is the distribution of licenses under the deal without the divestiture—against which the divestiture manifestly reduces concentration, even if only “marginally.”

Moreover, critics commit the same inappropriate fantasizing when criticizing the SpectrumCo deal itself.  Again, even if Feld’s imaginary world would be preferable to the post-deal world (more on which below), that imaginary world simply isn’t on the table.  What is on the table if the deal falls through is the status quo—that is, the world in which Verizon is stuck with spectrum it is willing to sell and foreclosed from access to spectrum it wants to buy; US Cellular, AT&T and other carriers are left without access to Verizon’s lower-block 700 MHz spectrum; and the cable companies are saddled with spectrum they won’t use.

Perhaps, compared to this world, the deal does increase concentration.  More importantly, compared to this world the deal increases spectrum deployment.  Significantly.  But never mind:  The benefits of actual and immediate deployment of spectrum can never match up in the scolds’ minds to the speculative and theoretical harms from increased concentration, especially when judged against a hypothetical world that does not and will not ever exist.

But what is most appalling about critics’ efforts to withhold valuable spectrum from consumers for the sake of avoiding increased concentration is the reality that increased concentration doesn’t actually cause any harm.

In fact, it is simply inappropriate to assess the likely competitive effects of this or any other transaction in this industry by assessing concentration based on spectrum holdings.  Of key importance here is the reality that spectrum alone—though essential to effective competitiveness—is not enough to amass customers, let alone confer market power.  In this regard it is well worth noting that the very spectrum holdings at issue in the SpectrumCo deal, although significant in size, produce precisely zero market share for their current owners.

Even the FCC recognizes the weakness of reliance upon market structure as an indicator of market competitiveness in its most recent Wireless Competition Report, where the agency notes that highly concentrated markets may nevertheless be intensely competitive.

And the DOJ, in assessing “Economic Issues in Broadband Competition,” has likewise concluded both that these markets are likely to be concentrated and that such concentration does not raisecompetitive concerns.  In large-scale networks “with differentiated products subject to large economies of scale (relative to the size of the market), the Department does not expect to see a large number of suppliers.”  Rather, the DOJ cautions against “striving for broadband markets that look like textbook markets of perfect competition, with many price-taking firms.  That market structure is unsuitable for the provision of broadband services.”

Although commonly trotted out as a conclusion in support of monopolization, the fact that a market may be concentrated is simply not a reliable indicator of anticompetitive effect, and naked reliance on such conclusions is inconsistent with modern understandings of markets and competition.

As it happens, there is detailed evidence in the Fifteenth Wireless Competition Report on actual competitive dynamics; market share analysis is unlikely to provide any additional insight.  And the available evidence suggests that the tide toward concentration has resulted in considerable benefits and certainly doesn’t warrant a presumption of harm in the absence of compelling evidence to the contrary specific to this license transfer.  Instead, there is considerable evidence of rapidly falling prices, quality expansion, capital investment, and a host of other characteristics inconsistent with a monopoly assumption that might otherwise be erroneously inferred from a structural analysis like that employed by Feld and other critics.

In fact, as economists Gerald Faulhaber, Robert Hahn & Hal Singer point out, a simple plotting of cellular prices against market concentration shows a strong inverse relationship inconsistent with an inference of monopoly power from market shares:

Today’s wireless market is an arguably concentrated but remarkably competitive market.  Concentration of resources in the hands of the largest wireless providers has not slowed the growth of the market; rather the central problem is one of spectrum scarcity.  According to the Fifteenth Report, “mobile broadband growth is likely to outpace the ability of technology and network improvements to keep up by an estimated factor of three, leading to a spectrum deficit that is likely to approach 300 megahertz within the next five years.”

Feld and his friends can fret about the phantom problem of concentration all they like—it doesn’t change the reality that the real problem is the lack of available spectrum to meet consumer demand.  It’s bad enough that they are doing whatever they can to stop the SpectrumCo deal itself which would ensure that spectrum moves from the cable companies, where it sits unused, to Verizon, where it would be speedily deployed.  But when they contort themselves to criticize even the re-allocation of spectrum under the so-called divestiture, which would directly address the very issue they hold so dear, it is clear that these “protectors of consumer rights” are not really protecting consumers at all.

[Cross-posted at Forbes]