DOJ and AT&T Dispute Rules for Spectrum Auctions

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EI Vice President Henry B. McFarland has dealt extensively with antitrust and other issues involving communications. He also has analyzed foreclosure and other antitrust issues in a wide variety of industries.

The Federal Communications Commission (FCC) is considering whether it should restrict upcoming spectrum auctions to increase competition. The FCC recently began a rule making to determine how to auction blocks of low-frequency mobile spectrum. The Antitrust Division of the U.S. Department of Justice (DOJ) is urging the FCC to adopt auction rules that would ensure smaller mobile communications networks have a chance to acquire that spectrum. DOJ believes those networks might use the spectrum to increase competition and thus benefit consumers. AT&T, however, argues that DOJ’s proposal would violate the FCC’s mandate to promote competition rather than pick winners and losers.

DOJ contends that the goals for the FCC’s auctions should be to put spectrum to use quickly and to promote consumer welfare in wireless communications markets. These goals are best served by ensuring that spectrum is auctioned in a way that does not create or enhance market power. If there is no risk of anticompetitive behavior, a simple auction will realize these goals. DOJ, however, believes that risk is present in the upcoming auctions.

According to DOJ, the value of spectrum to a bidder may have two components: use value and foreclosure value. Use value is the value the spectrum has in a competitive market. Foreclosure value is the additional value a firm may realize by preventing other firms from acquiring the spectrum and thus forestalling a rival’s entry or expansion or raising a rival’s costs. If a firm can foreclose competition by acquiring a given block of spectrum, it will be willing to pay more for the spectrum and thus may be the higher bidder in the auction. DOJ argues, however, that the spectrum should not be sold to firms that will use it to foreclose rivals, because such sales will harm consumers.

DOJ believes that there is a significant risk that the two largest nationwide carriers, AT&T and Verizon, might buy large amounts of spectrum in the forthcoming auction to foreclose their competitors. In DOJ’s view, the risk of foreclosure increases in highly concentrated markets, and local mobile wireless markets are highly concentrated throughout the United States.

Moreover, DOJ contends that the spectrum that is soon to be auctioned is particularly competitively significant. The upcoming auction involves the 600 MHz band. DOJ believes that low-frequency spectrum, which it defines as any spectrum below 1 GHz (1000 MHz), has propagation characteristics that allow better coverage in rural areas and inside buildings. As a result, a carrier using this spectrum can serve rural areas with a smaller investment in facilities and equipment. Thus, carriers will be more competitive if they have a certain amount of low-frequency spectrum. Currently, the two largest mobile wireless companies have 78% of the low-frequency spectrum. The two smaller nationwide mobile wireless companies, Sprint and T-Mobile, have little such spectrum.

Thus, DOJ fears that AT&T and Verizon might try to acquire large amounts of the low-frequency spectrum that is coming up for auction to prevent smaller carriers from acquiring that spectrum and thus becoming more competitive. DOJ has asked the FCC to establish rules for its auctions that ensure that the smaller carriers have an opportunity to acquire low-frequency spectrum. A coalition that includes Sprint, T-Mobile and other smaller wireless carriers has sent the FCC a letter that supports the DOJ position.

AT&T is urging the FCC to reject what it calls DOJ’s “extraordinary suggestion” that the FCC should adopt rules to “help two specific providers, Sprint and T-Mobile.” AT&T contends that firms cannot acquire spectrum just to exclude rivals. It cites the statement of a former FCC Chairman that past allegations of spectrum hoarding were “illusory.” Moreover, it argues that the FCC will establish build-out requirements, requirements that the spectrum be put to use by a certain time, for any acquirer of the spectrum being auctioned. AT&T contends that such requirements prevent foreclosure.

AT&T argues that both Sprint and T-Mobile do not need help acquiring additional spectrum. Both firms already have a substantial amount of spectrum. In fact, Sprint has more spectrum than either AT&T or Verizon. Moreover, both firms have substantial financial resources.

Moreover, AT&T contends that low-frequency spectrum is not essential for a firm to compete effectively in mobile communications. Neither Sprint nor T-Mobile chose to bid in the FCC’s most recent auction of low-frequency spectrum. AT&T suggests their failure to bid is inconsistent with DOJ’s view of the importance of that spectrum.
Furthermore, AT&T argues that if the low-frequency spectrum has better propagation characteristics that make it less costly to use than other spectrum, then it also will have a higher price in a competitive market. While it may be cheaper to use, it will be more costly to acquire. Thus, in a competitive market, a firm may not be able to lower its total costs by buying and using that spectrum. But if a firm cannot lower its costs by acquiring that spectrum, then another firm cannot raise its rival’s costs by preventing that acquisition.

AT&T urges the FCC to hold an open auction and award all spectrum to the highest bidder. Such a policy would result in the greatest public revenues from the auction. Moreover, AT&T states that auction rules that favor certain bidders would be unlawful and inconsistent with the FCC’s statutory mandate “to protect competition not competitors.”

The 600 MHz auction likely will take place next year. The FCC has yet to decide whether it will adopt rules ensuring that smaller wireless companies have access to that spectrum, as advocated by DOJ, or whether it will simply award the spectrum to the highest bidder, as advocated by AT&T.