Wednesday, April 17, 2013

Justice Department nails it with FCC filing about spectrum auctions

The US Department of Justice recently filed a brief with the FCC commenting on upcoming rules for spectrum auctions. The brief outlines reasons for why ensuring low frequency spectrum access to smaller carriers (in this case Sprint and T-Mobile) would be good for the competitiveness of the US wireless market and by extension, the American consumer and society at large. 

The brief does a great job of explaining why all spectrum is not created equal and why spectrum license auctions can incentivise anti-competitive behavior (during certain circumstances). The DoJ really does a great job outlining some of the major issues that has had problematic consequences on wireless competition in the US. You should read the brief!

1. All spectrum is not created equal

Low-frequency spectrum, like the cellular bands in the US, are generally viewed as prime spectrum real estate to carriers and tend to come with a hefty price tag at auctions. The reason for this is that because signals at these frequencies travel further and are not as easily blocked by buildings and geography it is less expensive to build a network with good coverage because fewer base stations are needed.

If a carrier lack access to this kind of spectrum it often times can not afford to build a network beyond densely populated metropolitan areas because it is simply too costly to build all the towers necessary and the market would not support this cost. In a metropolitan area this does not matter as much because of two reasons. First, while low frequency spectrum would be nice to build solid indoor coverage, the more densely populated areas with higher use usually require a much denser network for capacity reasons anyway. Second, the denser population and higher utilization of the network will pay for a more expensive build-out.

2. Spectrum license auctions can incentivise anti-competitive behavior

The Justice Department says that during certain circumstances (which happen to be very similar to the current wireless market structure in the US), with one or two dominant carriers, conditions exist for suboptimal spectrum allocation if only simple auctions are used. 

The reason for this is that during these conditions, it actually is economically efficient for the dominant players to buy spectrum, even if they don't need it, just to keep it out of the hands of their competitors. The anti-competitive effect of this action is worth much more to the dominant carrier than the auction price.

This kind of behavior is of course bad news for the American consumer because the lack of competition that occur as a result, drives up prices and result in lower quality services.

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