The Front-end and Back-End Effects of Spectrum Auction Open Access Commitments

AT&T and others have noted that when a spectrum auction bidder must commit to using the bandwidth for an open and nondiscriminatory network, the bidder reduces its maximum monetary offer. From this discounting, opponents to open access and network neutrality would have you believe that such principles impose quantifiable financial burdens, a kind of regulatory canopy that results in lost revenues and profits for the carrier and lower spectrum auction revenues for the government and taxpayer. Empirically speaking, these opponents can point to the fact that the open access spectrum fetches lower bids as occurred for the C block 700 MHz spectrum made available in the conversion from analog to digital television. The spread might have been even greater had Google not participated, exiting only after the FCC’s reserve price had been met.

So AT&T and others have a point that in the front end, the national treasury loses funds. But might there be off setting benefits and other factors at the back end to justify such intervention? AT&T and others conveniently ignore such countervailing factors.

Even before one gets to the back end, the national treasury immediately starts to lose otherwise accruing tax payments from the winning spectrum bidder. The millions or even billions bid by a carrier qualify as a capital expenditure that offsets income. Winning bidders pay less tax than they otherwise would have to in light of their spectrum investment.

Additionally, we should at least consider whether open networks accrue private and public benefits for non-carriers. Because spectrum bidders insist that they lose revenues in having to operate open networks, it follows that their private loss might be captured by other private players, e.g., content creators and end users. Arguably, when users do not have to incur switching and other transaction costs to depart from a walled garden of content, offered by a carrier operating a closed network, welfare gains can accrue.

Consider the Apple/AT&T walled garden of software applications available to iPhone subscribers. The companies have magnanimously offered 85,000 choices out of the millions available software applications Internet subscribers can use. It is not a stretch in imagination to infer than some of the unavailable applications would benefit iPhone users and the absence of such options forecloses accrual of additional value from the iPhone subscription. Additionally the ability to control the access to working and easily accessed applications makes it possible for AT&T and Apple to capture rents, including higher software download and subscription fees. Has anyone noticed that AT&T charges for some iPhone applications that are freely available via the Internet? A more open network access requirement probably would prevent AT&T and the software vendor from imposing fees that they could not successfully charge on open networks such as the World Wide Web.

So when stakeholders smugly assert that open networks cost the government and taxpayers money, consider the offsetting benefits open networks provide.