On August 9, the FCC will auction prime spectrum cleared of government users last year by act of Congress. This “advanced wireless services” (AWS) auction will distribute licenses in the much coveted range below 3 GHz (two paired bands, 1.710-1.755 and 2.110-2.155) and, as the name implies, the FCC will permit licensees to offer any advanced service over wireless. Mobile broadband, fixed point-to-point broadband, enhanced “4G” mobile cellular services, and just about anything else.
The auction has generated a lot of interest. It's been about 10 years since the FCC made such a good chunk of spectrum available, and it won't come up again until the FCC gets ahold of the returned television spectrum after the DTV conversion. Over 200 bidders have applied (although about 170 applications were somehow incomplete and need to be redone ASAP) and the FCC estimates the auction could make as much as $15 Billion.
I'll skip the rather dramatic and bumpy road it has taken for the FCC to get to this point. Media Access Project got heavily involved in some of the issues. You can read about them on my professional blog
here, but they don't impact much what I want to say here.
I should also add that while normally a proponent of unlicensed over licensed (and a read through of this report from the Center for American Progress will provide some enlightenment as to why), I do think that if we must have auctions (and we are stuck with them for the foreseeable future), we should at least make every effort to hold them in a way that promotes competition and discourages collusion and manipulation of the rules.
Hence my concern with the news that, in addition to the usual wireless operators like T-Mobile, the major cable operators have also applied to bid for licenses.
Why concern? Isn't this good? After all, the Center for American Progress Report linked to above points out that the mobile phone industry has become increasingly consolidated and that incumbent wireless companies use auctions to keep out competitors. Isn't getting giant companies like Comcast that can go toe-to-toe with the T-Mobile's of the world a good thing? Other than Microsoft or some other tech company, who else can outbid the incumbents on licenses?
That's the traditional FCC analysis. You look at a specific market and don't worry about any related markets. Cable companies don't offer mobile phone service. They would be a new entrant in mobile telephony. Sure, they have total dominance in pay video services (what the FCC calls “multichannel video programming distributors,” or MVPDS) and are the largest residential broadband providers, but so what? This isn't a competing video service, it's a spectrum license.
The problem with this analysis is that it ignores the dark side of convergence. The Commission expects AWS licensees to potentially compete in broadband and video as well as (mobile) voice, the same markets that, thanks to convergence, cable now occupies as either the dominant incumbent (video), the largest provider in an emerging duopoly (residential broadband) or the top competitor (voice, where cable has about 50% of the total VOIP market). Even on a simple level, every license acquired by an incumbent cable operator (in its franchise areas) is one less potential competitor in video, broadband and voice.
The situation is somewhat reminiscent of when the FCC distributed the first cellular licenses in the 1980s. Every region had two licenses, one of which went to the incumbent local telephone company on a theory that this would ensure survival of the cellular service. The FCC reasoned that if the new entrant failed, the “expert” telco incumbent would still be around and keep cellular going (the notion that telcos might want to throttle the potentially competing service being dismissed as mere speculation). Instead, in no small part because there were only two competitors and one was the incumbent voice provider with every incentive to undercut a market that cannabilized its main business, mobile telephony remained stunted as a luxury service until the Commission sold off more licenses to create competition in the mid-1990s.
On this basis alone — fear of eliminating a potential MVPD, broadband and voice competititor — allowing cable operators to bid on spectrum that provides competing services should give the FCC pause. But it gets worse. Allowing cable operators to get into mobile telephony could have serious bad consequences for competition in video services (and possibly the related markets of residential broadband and voice).
This part gets a bit complicated. If you want the theoretical basis, I recommend an excellent paper by Paul Klemperer and Joseph Farrell called Coordination and Lock In: Competition With Switching Costs and Network Effects.
Briefly, the more cost and hassle it takes for a subscriber to switch services, the less likely it becomes the subscriber will switch. Economists call this a switching cost. In addition, network environments create disincentives to switch through a phenomena called network effect — where the value of the network grows because of the number of people connected to it.
These phenomena create
“lock in.” A user can theoretically switch to a competing service, but the cost is so high, and loss of utility due to exclusion from the more popular network so severe, that it is practically impossible to switch. The triumph of the Windows operating system is often sited as a classic example of user lock-in from a combination of switching costs and network effects.
As I have written elsewhere, incumbent cable operators enjoy significant switching cost advantages already, making it very hard to get customers away from them in the video market. They can also leverage this market power to make it harder for competitors, further eliminating the the threat of potential competition.
Allowing incumbent cable operators to layer additional wireless and mobile services on top of their existing video, voice, and broadband offerings may introduce competition to mobile wireless, but it dramatically increases the lock in to subscribers and thus aggravates the cable incumbent dominance in video and residential broadband (and gives it a huge advantage on VOIP against competing VOIP providers). Any subscriber that opts for bundled cable “quadrupple play” service will almost never switch — particularly if the cable operator creates network synergies between the products.
Policymakers and regulators keep thinking of convergence and integration as an unqualified good thing. They imagine deregulation and cross ownership of facilities producing a cornucopia of competition in which consumers gaily hop from service to service among facilities based providers, neatly casting aside inferior offerings, until downright Darwinian competition ensues to the benefit of all.
Sadly, this happy world has as much to do with reality as the physics problems you get in high school that begin “assume a world of zero friction, now calculate the speed of a rocket with X thrust over Y time.” It's a nice basic problem that teaches some important principles. But no rocket scientist would ever assume that he or she lives in a “world with no friction” when designing a rocket to go from Earth to space, no matter how much that would simplify design. Nor would they propose launching a few rockets until we determined if friction was “a real problem” or just “conjectural” on the grounds that since we can measure a variance in friction between what we find at the bottom of Death Valley and what we find at the top of Pike's Peak, the friction at Cape Canaveral may be different, or not exist at all.
Here too, policymakers ignore switching cost, network effects and the resulting lock in at their (and our) peril. Whatever benefits incumbent cable companies bring to the mobile telephone market, we should not assume they offset the harms to competition in related video, voice and residential broadband markets. At the very least, it would be nice to imagine that the FCC thought about it before holding the auction.