Friday, December 12, 2008

The Downsides in Maximizing Spectrum Auction Proceeds

My classical economics training suggests that when governments maximize spectrum auctions—or the award of any franchise—the nation “wins” by awarding a public resource to the party most willing and able to maximize the value reflected by the asset. Surely a venture willing to part with the most money has maximum motivation to operate efficiently and to offer consumers what they want.

But might there exist long term downsides when the process extracts maximum value for the treasury? I think so, particularly in light of recent suggestions from economists that any condition on spectrum use, or any restriction on who qualifies to bid, simply reduces what the government will reap without any public benefit.

Most recently some economists grew apoplectic at the FCC’s small endorsement of wireless Carterfone principles and somewhat more open spectrum access to the C Block of the 700 MHz spectrum auction. True enough somewhat greater access translates into somewhat less revenue to the treasury, but might long standing public benefits compensate for this shortfall? I believe so, in light of how greater accessibility typically triggers greater competition, more robust and diverse applications and uses for spectrum and opportunities for spectrum users to customize their services. The wired Carterfone policy triggered competition in the market for handsets as well as uses for basic telecommunications line transport.

I will go one step farther and suggest that had the FCC maintained a cap on the amount of aggregate spectrum any single venture could control, the ensuring competition generated by market entrants would have forced incumbent carriers, such as Verizon and AT&T to compete more aggressively on price and perhaps even on network accessibility. One cannot readily quantify the downstream financial benefits when a nation establishes policies that in the short term lower auction proceeds, but surely enhances spectrum consumer welfare in the long term.

There certainly is one financial impact no one seems to consider when national treasuries reap billions in auction proceeds: the treasury probably will not receive much in the way of future tax proceeds from ventures able to spread its auction bid amount as an offset against current revenues.