By Aaron M. Schutt
March 2, 2016 at 5:00 am ET
This month’s broadcast spectrum incentive auction at the Federal Communications Commission (FCC) is attracting significant attention – for all the wrong reasons. The sale and repurposing of television broadcast spectrum for mobile wireless uses is a first, and an opportunity to increase competition in the wireless marketplace.
FCC Chairman Tom Wheeler predicts the upcoming broadcast auction will be a “spectrum extravaganza.”
But despite initial enthusiasm, the auction may actually not be a spectacular win for taxpayers or for wireless customers. A recent analysis by J.P. Morgan lowered auction revenue expectations from as much as $80 billion to as low as $25 billion. The bearish outlook stems in large part from “restrictions on designated entity bidding” – the result of changes to an FCC program designed to encourage competition in an industry dominated by the largest two carriers.
Historically, the designated entity program has provided an incentive for small and minority-owned businesses to enter the wireless space by providing discounts in the form of bidding credits. The successful program has created much-needed competition, and spurred the development of major players, including T-Mobile, MetroPCS and Leap.
In fact, last year’s wireless auction (Auction 97) attracted 37 designated entity bidders. Prior to the auction, the FCC and White House budget office expected the auction to attract about $18 billion in bids – even the most optimistic estimates put the number at no more than $25 billion. Instead, due in large part to the participation of designated entities, Auction 97 brought in nearly $42 billion – making it the most successful spectrum auction in history.
Why are analysts now predicting auction revenue to take a step backwards? Put simply, the FCC’s newly-imposed restrictions on the program are scaring off investors.
Alaska Native-owned corporation Doyon, through a subsidiary called Northstar Wireless, participated as a designated entity in Auction 97. Northstar was one of the most successful bidders in that auction, winning $5.9 billion in spectrum licenses covering markets across the United States.
After the auction, the FCC changed the rules of the game and penalized Northstar by denying Northstar’s designated entity bidding credits, even though it determined that Northstar did not violate FCC rules and found no grounds to render an adverse decision as to the basic qualifications of Northstar to hold FCC licenses.
As described by FCC Chairman Wheeler, the agency used a “totality of circumstances test” in a way that “had never been applied before” to deny Northstar bid credits, disavowing 20 years of precedent in the process.
In its decision, the FCC set out a new view of what was allowable under existing rules, and in doing so left potential participants in future auctions uncertain about whether they too could suffer an after-the-fact change to how FCC rules are applied. Northstar is a petitioner in a court challenge to the FCC’s decision to deny the bidding credits.
In a separate rulemaking after Auction 97, the FCC went even further, severely constraining the designated entity program for future auctions by capping bid credits at $150 million – a paltry sum compared to the billions often required to be competitive in a space dominated by large incumbents.
By restricting the designated entity program and leaving would-be auction participants fearful about post-auction interpretation of policy, the FCC is diminishing the potential amount of revenue that can be generated for the federal treasury by future spectrum auctions, and opening the way to further consolidation in an already highly-concentrated sector of the economy.
While the FCC appears determined to move on, the fight over the designated entity program is not over. Last week, the FCC filed its reply to Northstar’s court challenge. The FCC’s response is just one step in a long legal process that we feel confident will ultimately show the commission erred.
This week, all five FCC commissioners will have the opportunity to explain how the changes to the designated entity program will impact future wireless spectrum auctions when they make a joint appearance before the Senate Commerce, Science, and Transportation Committee.
Lack of competition in the wireless sector has long been a cause for concern, and barriers to new competitive entry remain high. The designated entity program successfully provided small and minority-owned companies like Doyon a chance to compete. For example, the program helped us build out the Chicago market in the 2000s, bringing new telecommunications infrastructure and competition to the community. Ultimately, this benefited the 19,000 Alaska Native shareholders that we have a mission to serve.
But few businesses – large or small – will be willing to undertake the necessary investments to enter the wireless market if they fear federal regulators can change the rules of the game after an auction is over. Unfortunately for wireless consumers and small and minority-owned businesses, the FCC’s actions with respect to Northstar and its changes to the designated entity program may already be stifling potential future choice and competition. And the U.S. Treasury is almost certain to forgo the tens of billions of dollars in revenue it would have received had the FCC left its longstanding designated entity rules in place.
Aaron M. Schutt is president and CEO of Doyon, Limited.