A Hybrid Spectrum Solution for the Current Marketplace

December 10, 2012

Spectrum is the lifeblood of a competitive wireless industry. There are a dozen more ways to say it, but the simple fact is that all wireless operators must have a meaningful opportunity to acquire additional spectrum if they want to continue participating in the U.S. mobile broadband marketplace. At the same time that consumer demand for mobile broadband services is accelerating at an unprecedented pace, the pool of potential sources of additional suitable spectrum has diminished considerably. This means that the Federal Communications Commission’s (FCC) current review of its mobile spectrum holdings policies is more critical than ever.
The FCC has always had rules to promote a pro-competitive distribution of spectrum among multiple carriers. Originally, it used hard “caps” that prohibited operators from obtaining more than a specified amount of spectrum in their service areas, but in 2001, it instituted a more flexible spectrum screen approach that relies on a case-by-case review of individual transactions.
The substitution of a soft screen for a cap made perfect sense a decade ago when the wireless market was still developing and spectrum was more plentiful. But, the world has changed dramatically since that time, and today there is significant risk that the most dominant carriers will obtain a lock on the spectrum market, particularly the valuable lower band frequencies. Absent a change in the rules to reflect the growing demand for spectrum and the different values of the wide array of bands that can meet that demand, the future vibrancy of the U.S. wireless marketplace is far from certain.
T-Mobile has proposed a sensible compromise between the “anything-goes” and the “bring-back-the-old-days” camps.  For spectrum up for auction, the FCC should re-adopt a cap on an entity’s overall spectrum holdings in a market, as well as determine whether a market and band-specific cap is appropriate for each new auction. For secondary market transactions, however, the Commission should continue to apply a case-by-case approach, including the use of a spectrum screen, which allows it to undertake a more particularized analysis of the acquirer’s spectrum holdings.  And, in both cases, the FCC’s policies should recognize that spectrum below 1 GHz is especially vital for mobile broadband services, and evaluate it accordingly through a separate cap in the auction context and a separate screen in transactions.
A bright-line limit on auction-acquired spectrum would remove much of the uncertainty that exists today. Conducting an auction and then, only when it is over, determining on a case-by-case basis whether winning bidders must divest spectrum introduces significant inefficiency and unfairness into the auction process itself.  It also potentially disadvantages other bidders in an auction who have to compete against entities that may be willing, for strategic reasons, to bid aggressively for licenses in excess of a screen.  In addition, pre-2001 auction history demonstrates that spectrum caps do not deter participation in, or the proceeds gained from, the auction. When the FCC imposed an auction-specific cap on personal communications service (PCS) spectrum, there was just as much bidding activity (adjusted for the number of licenses available) as there was with no auction-specific cap in the auction of advanced wireless service (AWS) spectrum, and the prices for which the spectrum sold, on MHz/pop basis, were the same for both auctions.
The considerations militating in favor of caps for auctions generally are not present in transactions.  In auctions, the inability to assess whether the FCC would permit spectrum aggregation beyond the screen affects other bidders, while in a transaction review, only the parties to the contract are directly affected by the FCC’s evaluation of spectrum holdings.  And, while post-auction divestitures are almost always messy, the FCC routinely approves mergers and acquisitions requiring post-transaction divestitures.  Indeed, if properly designed, such divestitures can be an effective remedy for anti-competitive spectrum accumulation by the acquiring party.
The FCC now has the perfect opportunity to better align its policies to reflect the current wireless landscape. T-Mobile’s proposed hybrid solution will give all carriers more equitable access to critical spectrum resources, with the added benefit of providing more efficiency and fairness in the FCC’s auction processes.  These modest rule changes will promote competition, helping to ensure continued strength and innovation in the U.S. wireless marketplace.