Should the FCC Depart from More than a Decade of Market-Oriented Spectrum Policy? Reply to Skrzypacz and Wilson

In this report, we reply to the comments of Andzeg Skrzypacz and Robert Wilson on behalf of Frontline Wireless in the Federal Communications Commission's 700 MHz Auction proceeding. Frontline's economists primarily advocate two restrictions on the auction that would significantly limit the number of bidders for the E Block license, one of several blocks for sale in the auction. One restriction would exclude all incumbent wireless operators and cable operators from participating in the E Block auction. A second restriction would require that the winning bidder employ a wholesale-only business model. We examine the likely costs and benefits of these two restrictions in some detail. We argue that the benefits of these restrictions would likely fall short of the costs, so they should not be adopted. In performing our cost-benefit analysis, we point out that Skrzypacz and Wilson failed to consider the unintended consequences of recent efforts to restrict entry in U.S. wireless auctions (the NextWave story) and to impose mandatory open access obligations on U.S. wireline operators (the CLEC story). To justify their first restriction, Frontline's economists assert that the only motivation for the incumbents' participation in the E Block would be to foreclose other wireless entrants. We explain that there are procompetitive reasons for the incumbent carriers to participate in the E Block auction. We also explain that Frontline's economists have failed to demonstrate that incumbent carriers have both the ability and incentive to warehouse spectrum. To justify their second restriction, Frontline's economists assert that the wireless industry's market structure is inefficient due to "vertical integration" of incumbent carriers across wholesale and retail functions. According to Skrzypacz and Wilson, Frontline's proposed wholesale-only restriction would permit the wireless industry to evolve into an allegedly more efficient state of structural separation, as incumbent carriers would be forced to embrace a wholesale business model. We demonstrate that the authors fail to present a compelling case as to why their proposed business model would likely result in benefits in excess of costs. We explain that the proposed restrictions on the auction would likely insulate firms, such as Frontline, from competition in the auction. Such insulation may result in a windfall for Frontline, but it is unlikely to be in the best interests of the American consumer. The FCC should send a clear signal to industry participants that it rejects any form of rent-seeking behavior by rejecting Frontline's proposal