Spectrum Exhaust

Spectrum Exhaust

I read the press release headline titled spectrum exhaust and admittedly didn’t know what it meant. A web search showed nine of the first ten news results related to vehicles’ exhaust systems. The one result that did relate to RF spectrum was a press release in a PR newsroom.

However, broadcasters should really be concerned about spectrum exhaust because it will affect our future. Let’s look deeper into what spectrum exhaust is and how it could affect you (and your station’s) future.

Yesterday, Phoenix Center for advanced legal & economic public policy studies released an economic study called, “Wireless Competition Under Spectrum Exhaust”. While readable, portions of the report use math way over my head, so let me summarize the English portions for you.

A limited supply can be good

The study looks at how the constraint of spectrum totally changes the often predicted outcome with respect to product price. In my words, the study says that the conventional viewpoint

that having fewer mobile broadband suppliers (primarily cell phone companies) results in poorer service and higher prices is—bunk!

If the report is correct, Genachowski’s FCC is woefully misinterpreting (purposefully or not) what might happen if ATT and T-Mobile had been allowed to merge. The Phoenix Center’s simplified conclusion is, government policies that prevent incumbent carriers from acquiring more spectrum by auction or acquisition can actually do more harm rather than good.

For broadcasters this means, Obama’s plan to take away your spectrum to serve his planned greater good is based on phony science. Giving more spectrum to vendors like Verizon or Sprint and preventing these companies from merging to create efficiencies will not benefit the masses.

Bureaucratic bungling

The FCC and Obama’s WH continue to beat the need more spectrum drum. The WH repeats, the tired phrase, the spectrum crunch will hinder future innovation. The National Broadband Plan demands 500MHz be immediately identified stripped away from current users and sold to the highest bidder. Under this scheme, broadcasters’ role is to cough up much of that spectrum.

Anyone who has watched Congress, the WH, the FCC and Washington bureaucrats disagree on most everything won’t be surprised that little progress has been made on Obama’s grand plan. Even the FCC admits that clawing back spectrum and then relocating it could take years. As Martha Stewart would say, “And that’s a good thing.”

What the Phoenix Center report does discuss their research into the conventional wisdom of more competition always being better for pricing and service. Says the report, in an environment of constrained supply, the mere limitation of spectrum “turns the standard thinking on the relationship between prices and concentration on its head—i.e., in the case of spectrum exhaust, fewer firms lead to lower prices [emphasis added].

Said the report, “…our analysis finds that under a binding spectrum constraint, competition among few firms will produce lower prices and possibly increase sector investment and employment than [will] competition among many firms. As a result, spectrum exhaust policies that aggressively seek to engineer entry into the mobile market—such as efforts to impede incumbent carriers from acquiring more spectrum via either auction or acquisition—may do harm rather than good.

The result is that if broadband companies, see little to no spectrum in the auction pipeline, these providers will see mergers and acquisitions as the best way to acquire more spectrum. In simple terms, the ATT/T-Mobile merger was about spectrum. And, according to the report, such merges can result in better service and lower prices.

Even the FCC staff admitted as much in the agency’s own Fourteenth and Fifteenth Commercial Mobile Radio Services (CMRS) reports: “Shares of subscribers and measures of concentration are not synonymous with market power—the ability to charge prices above the competitive level for a sustained period of time.[M]arket concentration, by itself, is an imperfect indicator of market power [emphasis added].” (pdf here)

Continuing, FCC staff claimed that there was the presumption that any ATT/T-Mobile merger would “create or enhance market power of [the company] creating significant potential for competitive harm …to consumers”. But as the Phoenix indicated the FCC was merely parroting unproven business factors in an environment of constrained spectrum.

The Phoenix report goes into excruciating mathematical detail about Cournot models, equilibrium quantity, capacity constraint, HHI symmetry, complete with graphs. That section reminded me of college calculus. You can read it if you want. But, the report’s conclusion is summarized on page 16, Figure 1.

With a limited amount of spectrum, called binding constraint, “the more firms there are in the industry, the higher are prices [emphasis added]. The spectrum constraint turns the standard thinking on the relationship between prices and concentration on its head—i.e., in the case of spectrum exhaust, fewer firms lead to lower prices.”

The report concludes: “In the case of spectrum exhaust, too many sellers will reduce consumer welfare: prices are higher and quantities are lower than those arising from a more concentrated structure. As a result, policies that impede incumbent carriers from acquiring more spectrum—via either auction or acquisition—may do harm rather than good.”

Never mind the truth, my mind is made up says the FCC. The WH and the Genachowski’s crew are about to screw up a good thing for consumers.

What do you think? Respond on the link below or via email; editor@broadcastengineering.com