Senator Pryror Angry At Right Problem, But Picks Wrong Solution.

UPDATE: On reflection, I’ve decided to modify the tone of this considerably. After all, when someone basically agrees with you (the incumbents have too much market power), slapping them around for relying on the press is a pretty stupid and counterproductive move. Besides, my real frustration is with the press for offering up speculation as if it were fact, not Pryor for reading the press and getting upset about the supposed failure of the auction to produce a new competitor. So with apologies to Pryor for needless snark the first time around, here we go again.

Senator Mark Pryor (D-Ark) is upset with reports that AT&T or Verizon probably won C Block. More specifically, he is angry that we don’t have more wireless competition. That’s good. But he accusses Kevin Martin of fixing the 700 MHz auction to benefit the telcos. That’s where he goes wrong, in my opinion. As I’ve said before, I don’t think Martin rigged this for the telcos, especially in light of Verizon’s persistent efforts to get the C Block conditions “clarified” away and Martin’s telling them to go take a hike. Further, adoption of the anonymous bidding rules means that we don’t know yet who won the licenses. We may very well be surprised when we see the results.

But if it turns out that, as predicted, the incumbents did win the lion’s share of the licenses, that doesn’t make the outcome Martin’s fault. Rather, Senator Pryor should direct his anger where it belongs — at the statutory requirement for the FCC to auction licenses for use of the public airwaves. As I explain below, and as many of us explained before the auction, incumbents enjoy real advantages even under the best of conditions because they don’t have additional costs new entrants have — like building the network from scratch or pulling customers away from a service they already use. To make matters worse, Senator Pryor’s Republican colleagues are constantly haranguing the FCC to “not pick winners” and objecting to any kind of mechanism that could neutralize these incumbent advantages.

We can’t have it both ways, and Congress makes the call. Either Congress eliminates auctions, or allows the FCC to exclude incumbents from the auction, or gives up on auctions as a way of generating competition and goes back to regulating market power directly. But blaming Kevin Martin and the FCC for the fact that incumbents keep winning auctions makes as much sense as blaming Bud Selig for the fact that the Yankees and the Red Sox always make the playoffs and the Nationals haven’t gotten to the World Series.

More below . . . .

First, as an aside, I continue to be astounded at the effort by the press to make this auction a failure — especially in contrast to the AWS auction in 2006. Back then, the press couldn’t contain itself in rushing to declare the auction a success. First announcing the introduction of DBS competition, then shrugging it off when they got blocked by Spectrum Co., then declaring the nearly $14 Billion take a windfall (even though the MHz/pop value was a serious drop compared to previous auctions). By contrast, folks have wanted to declare the current auction a failure from before the opening bell, announcing that incumbents will clean up and win all the good spectrum dirt cheap. Neither the ridiculous MHz/Pop values for A & B block (and C block hitting its target) nor the fact that we don’t have a bleeding clue who actually has potentially winning bids on licenses has stopped an endless stream of speculation and declarations of doom.

It is worthy of a post of its own to discuss why there is such a huge drive to get the failure narrative so firmly in place. But let it go for the moment to observe that anybody who makes a claim about who won what is either (a) in possession of illegal information, (b) engaging in complete speculation, or (c) reading people engaging in complete speculation and not understanding that no one can possibly know who won what yet. Personally, I think Senator Pryor falls into category (c) (although I suppose being a member of Congress he may have better sources). I can feel a certain amount of sympathy for his falling into the trap of taking the consistently repeated speculation coming out of the herd beast that is the industry press as if it had an underlying factual basis. Indeed, it says positive things about Pryor that he is actually following the auction and is getting riled up over incumbents winning. And who knows? All the speculation may be right in the end. But before rushing to any conclusions, we need to remember that all this is speculation no matter how many press reports or experts assert it as fact.

But lets assume the incumbents do win the lion’s share of licenses. Who should we blame for the failure to produce new competitors and a “third pipe” broadband provider? Pryor blames Martin for colluding to throw the licenses to AT&T and Verizon. It is, of course, fashionable these days to blame Martin and his evil secret agenda for anything that goes wrong in telecom-land these days. And, leaving aside the “secret agenda” aspect, it is the prerogative of office that Martin will claim credit for the successes and will get blamed for the failures in telecom-land. That goes with the job.

Now back in the spring and summer, when the FCC was considering what rules to impose, we at the Public Interest Spectrum Coalition (PISC) pushed hard to keep incumbents out of the auction, either with an outright ban or with a “spectrum cap” that would exclude companies that already held a fair amount of spectrum from bidding. And Martin, under heavy pressure from Republican members of Congress, refused. So if it turns out that the incumbents did win all the licenses, we in PISC will get to have a big, fat “told ya so” because Martin rejected our proposals to exclude incumbents or subsidize new entrants with a “new entrant credit.”

But the refusal to adopt a spectrum cap, ban incumbents, or even provide a “new entrant credit” to subsidize new entrants is not the same as “throwing the auction to Verizon and AT&T.” None of the Republicans wanted spectrum caps, because this is all supposed to be about free market efficiencies and not picking winners and blah blah blah “the competition fairy will bring us competition without our having an industrial policy.” Further, our recommendation for a ban on incumbents or a spectrum cap rested not on AT&T and Verizon being bad, but on the rather straightforward economic proposition that incumbents enjoy a tremendous economic advantages even in a fair auction. A new entrant definitionally has a boatload of expenses above and beyond the cost of the license — to build the network, compete with the incumbent, and so forth. Those costs factor into the evaluation of the value of the license to the potential new entrant. If the possible return on a license if $5 billion, but it will cost $2 billion to build the network, the rational new entrant will only bid $3 billion (since anything more would not be profitable). But the incumbent, with its lower costs, can bid more and still make a profit.

This is a structural problem of auctions as a distribution mechanism. All the neocons relying on Coase et al. for the principle that an auction will result in the most efficient result either (a) make theoretical assumptions that wave this away or (b) accept this as a natural consequence of the value equation. When my opposite numbers laud the efficiency of auctions and market mechanisms, they accept the advantage of the incumbents against new entrants as a naturally occurring market efficiency. Indeed, they would (and are) horror struck when I suggest that the government intervene to neutralize this efficiency to encourage entry by new players. What enshrine an inefficiency? If the competitor is genuinely more efficient, it will derive greater profit from the license even with the additional cost. If it can’t meet that hurdle, too bad for it. And besides, the incumbents will pass along their cost savings to consumers, so subsidizing new entrants (either directly or by keeping incumbents out) ultimately costs consumers more than they gain. etc., etc.

As always, I’m up for a simple game of “accept your arguments, accept the consequences of the argument.” But is MArtin and the FCC are not to blame, than who is? Ultimately Congress, which mandated the use of auctions to distribute licenses, must bear the responsibility of using auctions as the means to distribute licenses. Furthermore (with a few notable exceptions such as Rep. Mike Doyle (D-PA), who championed wholesale open access right up until the very end), Congressional Democrats declined to support the PISC proposal and preferred not to make this an issue. So while the Republicans were in full spate and screaming at Martin to reject the PISC proposals because “the government should not pick winners” and “the wireless market is highly competitive,” and giving Martin serious Hell for even his modest open device condition, the Senate Democrats took a “wait and see” attitude.

So while I’m glad Senator Pryor now realizes that having the incumbents win most of the licenses is a bad result, I don’t think it’s fair to blame Kevin Martin. Instead, I would hope that Senator Pryor (and others concerned with concentration in the wireless industry) start thinking about what to do next. Congress can still do its job and start setting a wireless policy designed either to introduce new competition or regulate the practices of the wireless oligopoly to secure to the American people, as promised by Section 1 of the Communications Act of 1934 as amended, “a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges.” Representatives Markey, Harmon, and Waxman have the right idea when they talk about careful oversight and investigation to find out exactly what happened and thoughtfully consider what to do about it. Senator Pryor is on the Senate Commerce Committee, and can request that the Senate likewise hold hearings and take an interest in pushing pro-competitive policies like spectrum caps.

In addition, I would urge Pryor to drop his proposed wireless bill preempting state consumer protection standards and support the superior Klobuchar-Rockefeller Bill. Because if Congress doesn’t take action to introduce new competitors, then it needs to take action to protect consumers from the power of the wireless oligopoly. Because in a field of players this small, with no possibility of new entrants, the ability and incentive of all the major industry players to adopt anti-consumer policies (such as early termination fees) is simply too great to go unregulated.

But jumping on the Martin-bashing bandwagon does not address the real problem, or relieve Congress of the responsibility to act. The current auction rules are as good as it is gonna get in terms of putting new entrants and on equal footing with incumbents. If Congress wants free market auctions that maximize government revenue, then it must accept that the incumbents will win most of the licenses. If Congress wants new entrants, it needs to abandon the idea that government shouldn’t “pick winners or losers.” Because saying “this auction failed because Verizon and AT&T won” is picking winners and losers — but not in a way that does anybody any good.

Until a critical mass in Congress decides that their job goes beyond pleading with industry to play nicely and extends to actually setting industrial policy, then incumbents will keep being incumbents — and will keep winning spectrum auctions. I’m glad Pryor sees a problem and that his heart seems to be in the right place. But now he — and his colleagues — need to stop blaming others and step up to the plate.

Stay tuned . . . .

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