Spectrum Policy Collides with Competition Policy

Today’s Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights hearing on the proposed transfer of fallow spectrum from cable companies to Verizon sheds light on how poorly traditional competition policy fits the networking business. The essential fact of the hearing is this:

If the deal goes through, Verizon will have the second largest allocation of spectrum in the mobile broadband business, behind Sprint/Clearwire and ahead of AT&T. If the deal does not go through, Verizon will still have the second largest spectrum allocation. According to critic Tim Wu, this deal “affects the very competitive structure of the communications industry.”

Do you see the problem?

The spectrum transaction is complicated by a parallel co-marketing deal between the parties, but even without that feature the discourse is confused at best. Critics of the deal would like to use spectrum allocation policy as a lever to force increased competition in the mobile broadband space, and apparently in the wireline broadband market as well. Their reasoning seems to be that forcing artificial limits on spectrum will prevent the two large mobile networks – Verizon and AT&T – from growing any larger.

This argument has some superficial appeal (more on that later,) but it only makes sense if we also buy a parallel argument to the effect that over-allocating spectrum to the smaller carriers, chiefly T-Mobile and Sprint, will cause them to take customers away from the two biggies. This only makes sense if we believe that Sprint and T-M are presently suffering from a dearth of spectrum. This is clearly not the case with Sprint, as it controls the largest allocation of spectrum in the industry thanks to its majority stake in Clearwire, the Wi-Max play that’s turned out to be a bust as consumers turn to LTE for high speed mobile broadband thanks to its backward compatibility with traditional cellular technologies.

T-M is a different story, of course, and one could argue that while it’s not seriously constrained at present, it might hit spectrum constraints in the next two to three years depending on how serious its parent company Deutsche Telekom is about competing in the American market. T-M’s attempted merger with AT&T suggested that it’s not at all serious about developing this market, but this may change now that the merger is off the table.  The conventional wisdom is that Sprint and T-M have fallen behind Verizon and AT&T because of a series of bad technology bets and a general lack of investment in their networks and handsets.

Sprint offers a diverse set of excuses for its poor performance ranging from unfair backhaul costs to the more recent argument that the 2.5 GHz Clearwire spectrum doesn’t have the wall-penetrating properties of the cellular spectrum purchased by the big two at auction. While this is trivially true, it’s a non sequitur as most new tower deployments are going to be for small cells were these properties aren’t important; 700 MHz is no better than 2.5 GHz for small cells even if it’s better in rural areas. Sprint’s technically incorrect argument that Verizon’s and AT&T’s 700 MHz spectrum is “better” for LTE than its 2.5 GHz spectrum plays very strongly in the arguments that Prof. Wu and others have lodged against the deal. They don’t admit that Sprint/Clearwire has a stronger spectrum portfolio because they insist that 700 MHz is several times more valuable in all applications, which really isn’t the case.

Unlike Sprint, T-M isn’t backhaul constrained because it uses directional microwave in most cases and doesn’t have to pay anyone for the privilege. T-M uses 1700 MHz AWS frequencies for its 3G/4G services, once thought to be an inferior band (prior to the advent of small cells,) but very good in the modern context. T-M pursues a different strategy than the big two, focusing on a lower cost service with admittedly weaker coverage and lower capital investment. The low cost niche is a traditional way of co-existing with strong, aggressive competitors, of course, but it precludes intense capital investment.

If the spectrum transfer is squelched, what happens to the 20 MHz that cable wants to sell? If it’s transferred to Sprint, the nation’s number one holder of spectrum becomes richer, so competition isn’t improved. If it’s transferred to T-M, the number four carrier would have room to grow but would still lack the capital means to put the spectrum to use. The other options – distributing it to rural carriers or making it available on an unlicensed basis – are no better.

There’s a basic principle here that needs to be foremost in our thinking about spectrum: Consumer welfare is not increased by letting spectrum lie fallow. The U. S. is behind the rest of the world in total terrestrial spectrum available for commercial use because we’ve allocated too much for satellite services and government use. Rather than devising clever arguments against assigning spectrum to the networks that have the most customers, spectrum policy thinkers should turn their efforts to prying spectrum away from these historical allocations that no longer make sense and re-allocating it where we know demand exists.

Creating spectrum scarcity it not an appropriate lever for competition policy.

Image credit: Wikimedia Commons User Alexandre1409