Industry debates FCC auction rules for AT&T and Verizon

There's no question that wireless carriers large and small want to get their hands on more wireless spectrum. But deciding which carriers should get how much spectrum was the subject of intense debate on Capitol Hill on Tuesday.

The topic was front and center during a Senate subcommittee hearing in which representatives from the two main trade associations and other industry experts testified on the State of the Wireless Market.

Each of the experts called to testify reiterated a familiar request that the government make more wireless spectrum available for wireless broadband services. Without more spectrum, Steve Largent, head of the industry group CTIA, Steve Berry, who represents the Competitive Carrier Association, Doug Webster, a vice president at Cisco Systems, Thomas Nagel, who heads up wireless efforts at cable provider Comcast, and George Ford, chief economist for the Phoenix Center, said the industry would not be able to keep up with demand for more data hungry services.

Largent and Berry each applauded Congress and the FCC for authorizing the upcoming incentive auction, which will free up wireless spectrum in the 600MHz band from TV broadcasters. The auction, which calls on TV broadcasters to voluntarily give up spectrum for a split of the proceeds from the auction, is slated to begin sometime next year. The FCC is currently drafting rules for the upcoming auction.

While both the heads of CTIA and CCA, as well as other industry experts, acknowledge that more spectrum is needed, they do not agree on how to divvy up the new spectrum that will eventually come to market via this upcoming auction as well as through other auctions.

The debate centers around whether or not the nation's two largest wireless operators, AT&T and Verizon Wireless should be limited by the rules of the auction in terms of how much spectrum they are allowed to acquire.

Largent and Ford, who's Phoenix Center is known for supporting policies friendly to the biggest wireless carriers, argued against imposing rules on the bigger carriers. They believe the government will earn more revenue in the auction without restrictive rules. And they think consumers will benefit. But Berry, head of a group that represents smaller rural and regional carriers as well as the nation's two smallest nationwide carriers, Sprint and T-Mobile USA, strongly supports some restrictions to ensure that competitive operators have access to spectrum so that they can compete.

The argument for rules
Specifically, Berry argued that AT&T and Verizon already account for roughly 70 percent of the revenue in the wireless industry, a figure that is far higher than other companies competing in other consolidated markets. By comparison, he said "the top two firms in the auto industry hold a 35 percent share of total revenue; the top two firms in the oil industry hold a 24 percent share; and the top two firms in the banking industry hold a 20 percent share."

As such, he argued that the FCC needs to design the auction in such a way that the two largest operators in the U.S. don't walk away with most of the spectrum in the upcoming auction.

"The FCC must adopt a spectrum auction process which ensures all carriers have a real opportunity to participate," he said. "No one or two carriers should be able to walk away with the entire pie."

He cited estimates from the FCC which conclude that Verizon Wireless already owns 45 percent of the spectrum in the two major wireless bands below 1GHz, while AT&T holds 39 percent of the spectrum licenses in those bands.

"The more of this spectrum the Twin Bells stockpile for themselves, the less is available to competitive carriers," he said.

Berry's view is consistent with that of the antitrust division of the Justice Department, which recently laid out its argument in a filing to the FCC. The Justice Department said in its filing that allowing AT&T and Verizon to buy as much as they want in the upcoming auction would result in inefficient use of the spectrum resource and would ultimately lead to less competition in the market.

"The more concentrated a wireless market is, the more likely a carrier will find it profitable to acquire spectrum with the aim of raising competitors' costs," the Justice Department said in its filing. "This could take the shape, for example, of pursuing spectrum in order to prevent its use by a competitor, independent of how efficiently the carrier uses the spectrum."

Defending AT&T and Verizon's position
CTIA's Largent disagreed that additional restrictions are needed. But it was the Phoenix Center's Ford, who argued most aggressively on behalf of AT&T and Verizon.

He said that the bigger operators are actually more likely to use the spectrum efficiently than smaller carriers, if given unfettered access to it, because they are generally adding the resource to their existing network. And in a situation where a resource, such as spectrum, is scarce, the larger player is likely to use it the most effectively with the greatest benefit to the consumer.

"If you limit a firm's access to a resource, then the consumer doesn't realize the benefit of the efficiencies that the large firm can bring for that resource," he said.

He continued his argument by taking aim at smaller carriers that must rely on larger carriers for nationwide coverage as the most inefficient recipients of wireless spectrum.

"If you take roaming, for example... we have to force larger carriers with nationwide networks to allow smaller carriers to access their networks," he said. "To some extent, if we keep imposing these rules, we're forcing these things to fit" into a model that doesn't reflect the market."

He went on to ask, "If you're not big enough to serve the market, should you be in the market?"

CCA's Berry took issue with this argument and fired back.

"I don't agree with much of anything Mr. Ford just said," he said. "If you live in rural America and you'd like to have access, there are carriers out there that would like to provide it. That's their business model."

He said that larger carriers often build out rural areas last. And he called the markets where these rural and regional carriers operate, "a decimal on the (larger carriers') balance sheets."

That said, Berry emphasized that he doesn't want AT&T and Verizon to be completely restricted from participating in the auction. In fact, he said their participation is necessary.

"We want [AT&T and Verizon] in the same ecosystem as the smaller carriers," Berry said.

He explained that it's important for AT&T and Verizon to be bidders in the same chunks of spectrum because the smaller carriers need to be using network equipment and handsets that adhere to the same spectrum bands and wireless standards as larger operators to ensure interoperability. Smaller carriers benefit from having access to same handsets and mobile devices as bigger operators. Otherwise, these smaller operators have a difficult time finding device makers that will develop products for them, he said.

Still, Berry said that some rules are necessary. And he said that every spectrum auction since the FCC has been conducting auctions has had rules. He also said that rules alone won't provide balance to the bidding process. He also said the FCC needs to split licenses into smaller geographic areas. These so-called Cellular Market Areas are preferable to the nationwide licenses larger carriers and TV broadcasters are calling for.

He argued that licenses covering a smaller area could yield more auction revenue because more bidders will participate. He cited pricing information from the 700MHz auction to support his theory.

Ford disagreed with this assessment and argued that making licenses more appealing to larger wireless operators would generate the most revenue in the auction and make the most efficient use of the spectrum. But he acknowledged that targeting the auction toward the largest players was likely not the solution either.

"If you want to maximize auction revenues, you should sell one license," he said. "But I don't think that's what you want to do."

Government spectrum
Exactly how much spectrum will be available for auction is not yet known, since TV stations must voluntarily offer up their spectrum in exchange for some of the proceeds. Largent, Berry, and Ford were all in agreement that government spectrum should also be freed up for commercial use. CTIA's Largent estimates that the government likely controls 70 percent of all wireless spectrum. And he said that there needs to be a way to entice government agencies to give up some of their spectrum.

"We have to find a mechanism to coerce the government to give up spectrum," Largent said.

But Ford noted that this is likely to be a difficult task. He said lawmakers will likely have to "pry it from the present owners' hands, pry it from their cold dead hands, in some cases, I suspect." What will happen if wireless operators can't get their hands on more wireless spectrum?

Largent speculated that consumers will be hit in their wallets.

"My guess is, you'll see higher prices," he said. "That's how a carrier or a manufacturer deals with inefficiency in the marketplace."

At the end of the day, these experts all agree that failure in the upcoming auction as well as in future attempts to get more spectrum on the market is not an option, even as new technologies are developed to make the current spectrum holdings more efficient.

Doug Webster, vice president of Service Provider Routing, Mobility and Video Marketing for Cisco, said that there is a real urgency to get as much spectrum into the marketplace as soon as possible. And he said that it's up to the FCC to do what it can to educate TV broadcasters and others of how important it is to get additional wireless spectrum.