FCC Bidding Credits and Digital Inclusion

For the forseeable future, we’re stuck with spectrum auctions, so we may as well try to get them to work as well as possible. Contrary to what some folks argue, I don’t think that means just jacking up one-time revenue to the government. It means trying to get licenses to folks who don’t usually get ’em (like women-owned businesses, minority-owned businesses, and small businesses generally), trying to get services deployed to underserved communities, and trying to foster real competition.

So last week, MAP submitted a lengthy set of comments (including a 30-page econ analysis from my economist friend Greg Rose) on reforming the FCC’s designated entity “bidding credit” for the upcomming AWS auction.

What does all this mean, and why should the guy who says “spectrum auctions are the crack cocaine of public policy” care? See below . . .

When Congress passed the statute authorizing (later requiring) the FCC to do spectrum auctions, it recognized that a pure auction would price most small businesses (and women-owned and minority-owned businesses in particular) out of the market. So they instructed the FCC to construct auction rules that would make it possible for small businesses to win spectrum licenses.

The FCC’s solution is the “designated entity” (DE) bidding credit. To simplify, if you meet the requirements as a “small business,” you get a 25% discount on your bids. The FCC also used to allow women-owned and minority-owned businesses to become DEs regardless of size, but stopped after the Supreme Court’s decision in Adarand Contractors v. Pena made it difficult to impossible for federal or state programs to use sex or race as a determining factor in awarding contracts.

Over the years, however, the large wireless carriers increasingly have partnered with DEs to get the benefit of the discount while locking out possible competition. Since the FCC generally doesn’t do anything about people exploiting loopholes to rip off the government, the general public, and block real competition, the problem has has gotten quite scandalous.

For the last year or so, a venture finance company that backs competing wireless bidders called Council Tree has been pushing the FCC to prohibit any DE from having a “material relationship” with a major “in region” wireless carrier. Last month, the FCC issued a Notice of Proposed Rulemaking tentatively adopting that proposal.

Intriguingly, Martin wanted to go further. He wanted to prevent a DE from having a material relationship with any large communications company: wireless, wireline, or other.

Now those who know my views on spectrum auctions may ask why I would want to spend time filing in this proceeding. I had two reasons. First, if we are going to have auctions (and we are for the forseeable future), then we should at least try to do them in the best possible way. Allowing multi-billion dollar incumbents to get spectrum at a 25% discount by exploiting loopholes in the rules rips off the public and the government at the same time.

Second, and more importantly, it is time to get the FCC thinking about how it can encourage ownership and deployment of advanced wireless services to minority communities. These communities are traditionally underserved and, as a consequence, become increasingly marginalized in the digital age. Significant legal and economic developments have occured since the FCC concluded that Aderand made it illegal to have race-conscious remedies or incentives. Most notably, the FCC should consider how its 2003 Bollinger decision (permitting Michigan University Law School to consider race as one factor in its overall goal of creating a diverse student body) impacts its authority to fashion auction rules that encourage minority ownership or deployment to minority communities.

It’s too late to get the second change done in time for the upcomming advanced wireless services auction. But we can do something for the auction of the returned “analog” television spectrum in 2007-08.

Leaving aside any considerations of social justice, creating permanently marginilazied and technologically isolated pockets spread throughout our rural and urban areas is recipe for disaster. It imposes huge social and economic costs and creates a permanent underclass disconnected from the broader society — a ripe breading ground for domestic terrorism and crime. But we should not leave aside concerns of social justice, which speak to facilitating the ability of traditionally underserved communities to speak in their own voices and enjoy opportunities hitherto denied.

More positively, expanding the range of people with access to advanced wireless capabilities creates a potential for economic growth and innovation. The “knowledge economy” really does benefit by having new people look at old problems in different ways or bring in wholly new considerations, ideas and tastes. In other words, digital inclusion is not about averting social catastrophe, or noblese oblige to the underprivileged, or charity. It is a calculated investment to promote our national self-interest, as sensible as any Sillicon Valley VC investing in a start up.

I think that the FCC can find that furthering these ends is as important a government purpose as Bollinger’s injecting diversity in education.

Stay tuned . . . .

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