The FCC’s Concern for Competitors, not Competition

Last week, the Senate Judiciary Antitrust Subcommittee held a hearing on Verizon Wireless’s proposed purchase of spectrum from Cox Wireless and SpectrumCo.

The spectrum at issue was purchased in the 2006 AWS spectrum auction, and has lain fallow ever since. Verizon Wireless seeks the spectrum to expand its capacity and meet growing consumer demand for mobile broadband. But federal law requires that the FCC approve the purchase before the deal can be consummated. (47 U.S.C. § 310(d))

Unfortunately, the FCC can grant or deny such applications on a whim, as the Act only requires the decision to be in the “public interest,” a standard former FCC Chairman Reed Hundt has criticized as “vague, general, [and] amorphous.”

Ryan Radia and I recently filed comments with the FCC urging it to make the public interest determination by considering consumer welfare, not the welfare of Verizon’s competitors.  While antitrust law “protects competition, not competitors,” the Commission has long measured a deal’s likely effects on the “public interest” by measuring market concentration – essentially counting the number of firms and their spectrum allocations, and assuming that the more firms, the better.

This reflects an outdated view of markets and consumer welfare, and ignores the realities of the wireless market. Hal Singer, Robert Hahn, and former FCC Chief Economist Gerald Faulhaber recently published an empirical study of the Commission’s Competition Reports, finding “no statistically significant relationship” between market concentration and consumer welfare, as measured through market prices. In fact, the Faulhaber-Singer-Hahn study showed that the Commission tended to ignore direct evidence of a highly competitive wireless market, such as “aggressive pricing behavior, robust entry, and continued long-term reduction in prices.”

Current thinking about competition in network industries emphasizes that increased concentration can greatly benefit consumers. Concentration is particularly beneficial to consumers in industries subject to intractable capacity constraints — such as the finite nature of the electromagnetic spectrum. As consumer demand for broadband spectrum grows, it’s essential that providers are as free as possible to innovate and develop new products. The resulting efficiencies benefit consumers.

If the Commission finds that Verizon Wireless’s purchase of this unused spectrum is not in the public interest, how else should the spectrum be used? We are aware of no evidence that another wireless provider is interested in, or able to purchase it. If Verizon Wireless isn’t permitted to buy the spectrum, surely AT&T won’t be permitted, either. (See, e.g., the AT&T/T-Mobile merger debacle.)

Sprint is a possible purchaser, but an unlikely one, as Sprint currently has the most free spectrum, and is already unable to utilize what it has without massive capital investments. T-Mobile, on the other hand, has the least amount of free spectrum, but is unlikely to bid much for more spectrum, since its parent (Deutsche-Telekom) has publicly stated that it wishes to sell off T-Mobile for its current spectrum licenses.

Instead of relying on outdated economic models based on concentration, the government should look to actual competitive effects felt by consumers.  With a proper focus, the Commission would see that this acquisition would be procompetitive and benefit consumers.