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IP: Comments on the FCC lifting spectrum caps
From: David Farber <dave () farber net>
Date: Fri, 09 Nov 2001 15:07:33 -0500
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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