IP: Comments on the FCC lifting spectrum caps

[David Farber <dave () farber net>]

> X-Sybari-Space: 00000000 00000000 00000000
> From: "Gerry Faulhaber" <gerry-faulhaber () home com>
> To: "David Farber" <dave () farber net>
>
> Before we get our undies in a bunch on this issue, take a careful look at
> why the caps were there, what problem they were trying to solve, and if we
> still have that problem.
>
> Spectrum caps were put in place at the time of the first PCS (digital)
> auctions in the early 1990s.  At that time, we had only analog service, and
> in each metro area we had a duopoly: one "wireline" (telco) cellular carrier
> and one "non-wireline" cellular carrier.  Prices were high, rollout was
> slow.  The FCC hoped that making 180 Mhz available for digital wireless
> would break that duopoly and bring real competition.  To ensure that the
> analog duopoly wouldn't carry forward into digital by the analog incumbents
> outbidding competitors, the FCC imposed a cap of 45 Mhz that any one firm
> could control in any metro market (altho waivers could be requested).  This
> ensured that in large metro areas (where market demand could support it),
> there would be at least four digital wireless carriers.
>
> The strategy worked.  In the major metro areas, there are actually five or
> six carriers and by any measure these markets are highly competitive.  Firms
> have dropped prices way, way below the bad old duopoly prices, service has
> improved, and firms are truly rivalrous.  Did this occur because the FCC
> placed the 45 Mhz ownership cap back in the early 1990s?  In my view, I
> think it had a very beneficial effect.
>
> But now, the facts on the ground are very different than they were a decade
> ago.  By any measure, wireless is the most competitive telecommunications
> market in the country, certainly more so than wireline local exchange, more
> so than cable TV, more so than long distance.  In major metro markets, there
> are more wireless carriers than there are department stores, major
> hospitals, or waste haulage firms, all of which seem to remain competitve
> without an ownership cap or the FCC's help.  All of which raised the
> question: is the cap still serving a useful purpose, or is it a legacy
> regulation, with its own special interest group lobbying to maintain it?
>
> Chairman Powell has sought to change the burden of proof re: keeping rules:
> if you can't show you need a rule, get rid of it.  To my mind, a very
> healthy change.  The FCC has a huge overhang of legacy rules that we have no
> idea are actually helping anything at all, but will not disappear if the
> burden of proof is to show a rule is bad (which will never happen).  In this
> case, can anyone show (other than fevered declarations that the end is nigh)
> that removing this ownership cap will result in bad things happening?  Can
> anyone bring economic theory or evidence to the table that would positively
> support retaining the caps?  Well, no.
>
> But suppose the doomsayers are right and the Big Guys will use this
> opportunity to gobble up the spectrum and monopolize the markets.  Will it
> happen?  Remember, each proposed merger must be reviewed by both the
> Department of Justice and the FCC, and explicit approval must be given for
> such "gobbling up" to be permitted.  Justice in particular has shown in the
> big telecoms mergers that it is no pushover and will turn down mergers it
> can show (to a court of law) reduce competition.  That's its job, and in
> telecoms the record shows it has done this job well (e.g., look at the facts
> and the outcome in the Worldcom-Sprint merger).  Back in the early 1990s,
> Justice had no competition to protect, so a cap made sense.  Now there is
> competition to protect, and I'm sure Justice can do its job.  In other
> words, the "gobbling up" risk of removing the caps is low; we have perfectly
> good
> systems in place to handle the problem.  Why do we need an extra rule?
>
> One might say, "an extra rule can't hurt anything," to which I would
> respond, Not true; extra rules do hurt things, and it is bad government to
> "pile on" a patchwork of rules.  I believe that rules ought to have
> demonstrable social benefits, and if we can't show that they do we should
> not have them.  I also believe that if you don't follow principle, tyranny
> follows.
>
> Now, what will be the effect of lifting the 45 Mhz cap?  Opponents point to
> monopolization from consolidation, proponents point to the extra spectrum
> needed for advanced services (e.g., 3G).  In my view, neither will happen;
> the effect of removing the cap will be a big fat nothing.  Let's look at the
> arguments:
>
> 1- Lifting the caps will result in consolidation.  I argue above that
> antitrust merger review is plenty good enough to prevent this from
> happening.  But it is unlikely to occur anyway.  This is a mature and
> competitive market in which the players are skilled and aggressive; there
> are few cases of such markets ever becoming monopolized.  There is simply no
> empirical evidence to suggest this will actually happen [N.B. fevered
> imaginings of the chattering classes don't count as empirical evidence].
>
> 2- Removing the ownership cap result in the more rapid deployment of
> advanced services.  If firms were currently constrained by the cap, the
> answer could perhaps be "yes."  However, in most metro markets, no firm is
> actually at the cap.  This suggests the cap really isn't binding in most
> markets, although in New York and Los Angeles apparently it is (and maybe
> a few more).  Firmswishing to expand their capacity in a metro area have
> other options: there
> are technical means to use the existing spectrum more efficiently, and for
> those who own analog spectrum (now largely under-utilized), the FCC permits
> them to use that spectrum for digital if they so choose (of course, this
> would mean deploying new phones to use this bandwidth...but that is a cost
> issue).  I leave aside the issue of whether there is a market for 3G
> services at all.
>
> Despite the hoo-ha about lifting the spectrum ownership caps, my prediction
> is that it will have no effect whatsoever on the wireless market.  This is a
> rule without a rationale, and we are well rid of it.
>
> Gerald Faulhaber
> Co-Director, Penn Initiative for Markets, Technology and Policy
> Business and Public Policy Department
> Wharton School, University of Pennsylvania
> Philadephia, PA 19104


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