Time to End the FCC’s Designated Entity Program

Each maneuver [by the regulated party] generates a counter‐maneuver from the regulatory bureaucracy and Congress; every feint and dodge, a more complicated prophylactic for the next encounter. The result, over time, is a profusion of legislative and regulatory detail that confounds American business.

— Robert Reich, “The Miasma of Regulation,” 1987

In his essay “The Miasma of Regulation,” Robert Reich lays out the cat-and-mouse game played between the regulated and their regulators, exploring how industry pushes the boundaries of acceptable legal behavior and government pushes back, closing loopholes or filling in grey areas. This continual back and forth, he argues, generates more, and more complicated, rules. One might be hard-pressed to find a better example of this dynamic than the Federal Communications Commission’s (FCC) designated entity (DE) program.

With the FCC’s first authorization to conduct spectrum auctions in 1993, Congress mandated the commission promote participation of small businesses and businesses owned by minorities or women. The DE program devised by the FCC gives bidding credits to discount the price of the spectrum licenses sold at auction. The program leapt into the headlines this past winter with Dish’s controversial bidding in partnership with two small entities in the Advanced Wireless Services (AWS-3) auction. But longtime telecom followers know this was really nothing new. As James Murray describes in his book Wireless Nation the DE program has been plagued by industry gaming and exploitation of loopholes all the way back to the PCS C Block auction in 1996.

There was a great deal of consternation over Dish’s bidding with the designated entities, and understandably so—the 25 percent discount ended up saving the companies $3.3 billion, and the bidding tactics drove spectrum prices much higher than expected. The FCC ultimately chose to deny the discount to the two small businesses Dish worked with and tried to patch up the rules so the system could not be gamed again in the incentive auction. But whether you think the FCC called this one right or wrong, it should serve as a moment to reflect on the goals of the program in the context of the wireless market today.

The DE program has not been marked with tremendous success. A 2005 Congressional Budget Office report was quite critical of the program, outlining the large numbers of licenses that eventually flowed to larger companies and how the program, especially problems with the PCS C Block restricted to only DE bidding, ended up slowing deployment of spectrum and ultimately costing consumers. The Multicultural Media, Telecom and Internet Council (MMTC) has been equally critical, but from the other direction, arguing that it is a “failed program” that “undermines minority business enterprises.”

But do the goals of the program still even make sense in the rapidly maturing wireless market? The DE program is structured in such a way to encourage small businesses to build out actual network facilities. The discount is on a key input for a wireless network—spectrum—and there are restrictions on re-selling the spectrum won at discount. It may have been possible in the late 1990s, but today a small business would have a real challenge in standing up the type of network that would actually serve customers any better than the already competitive national carriers. And this is not just because spectrum is expensive.

Spectrum is just a small fraction of the cost of building a wireless network. Equipment costs, site rental fees, and electrical power drive what is ultimately a business best operated at scale. In a world where we have a nationwide carrier tempting a competitor’s subscribers to switch by offering a year of free cell service, I have a hard time seeing a small business breaking into this market in a meaningful way, even with steeply discounted spectrum. There is no evidence that we actually need additional competitors in the wireless market, especially not small ones that fragment the market and ultimately drive up costs for all.

New entrants to the broadband access business will be ones with radically disruptive technology, not a discount on one input. The DE program has a history of either being manipulated by large companies, or heaping largess on individual insiders who reap the upside with large profits and incomes.

This doesn’t even account for why public policy should favor small business in the first place. As ITIF has pointed out here and here, compared to medium and large business, small business pays lower wages, is less productive, patents less, does less R&D, and exports less and yet they are continually provided an array of distortionary benefits, including lower tax rates, less regulation and in the case of the FCC spectrum auctions, massive subsidies in the form of DE credits.

In short, we can expand the regulatory miasma, making ever more complicated rules to try to avoid these outcomes, or we can recognize this is no longer an arena for small businesses.