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"Earmarked Airwaves" -- a 700 MHz auction "UNE-P" deja vu?

Kudos to Robert Hahn and Hal Singer for their outstanding op ed in the Washington Post "Earmarked Airwaves."

  • The editorial cogently presents the fork in the road that faces any major FCC decision: to follow law, which promotes competition and market-driven outcomes, or to freelance and try and "manage" competition and pick winners and losers in advance through "spectrum earmarking."
  • FCC history is littered with freelance "managed competition" failures, but two are particularly ignominious and highly relevant to this 700 MHz auction:
    • the illegal UNE-P scheme to rig telecom competitive outcomes following the 1996 Telecom Act; and
    • the Nextwave auction scandal that kept 30 MHz of prime spectrum fallow and tied up in court for almost a decade.

At its core a spectrum auction is the quintessential type of competition. The auction law's purpose in 1993 was to use market forces, competition, to allocate the public's asset most appropriately, largely because previous FCC spectrum allocation processes were so ineffective, unfair and prone to serious abuse and graft.

  • While no process is perfect, a clean competitive auction process has proven highly effective in rewarding US taxpayers and fostering a growing and highly competitive wireless marketplace that greatly benefits consumers.

This 700 MHz auction may be shaping up to be FCC Chairman Kevin Martin's legacy moment: will it be marked by promoting competition and market-based outcomes or will it be marked by standing on the auction scales to ensure the spectrum is "earmarked" to the predetermined, chosen "winner" -- in this case former Clinton-Gore FCC Chairman Reed Hundt's Frontline Wireless company.  

More specifically, this 700 MHz auction could be shaping up to be FCC Chairman Martin's very own wireless "UNE-P" moment.

  • For those of you who don't remember what UNE-P was -- let me take a brief moment to fill you in and explain why it is extremely relevant to the current 700 MHz debate.
  • UNE-P was a policy invention of then Clinton-Gore FCC Chairman Reed Hundt that was not in the 1996 Telecom Act, but was created by Mr. Hundt to engineer a deeper 50+% wholesale discount (for a complete local phone service offering) that was much greater than the ~20% wholesale resale discount in the law.
    • This UNE-P decision was ultimately found to be illegal, but it took almost 7 years of exceptionally bitter and unproductive legal fights for the Supreme Court to ultimately accede that UNE-P was in fact an illegal scheme.
    • If you read Mr. Hundt's book, "You say you want a Revolution" he was quite unabashed in picking market winners and losers. In his megalomaniacal mind, "his hands" could manage all market outcomes better than the "invisible hand of the market" could.
      • Unfortunately, Mr. Hundt's illegal UNE-P policies harmed a lot of Americans deeply.
      • His "managed competition" policies to stand on the competitive scales to heavily favor CLECs, WorldCom and Global Crossing, among other CLEC/fiber plays, led to two devastating outcomes for Americans that took years for the Nation to recover from.
        • First, the heavy market intervention of Mr. Hundt contributed greatly to the market hype for CLECs and fiber backbones which ultimately cost American pensioners and investors over one trillion dollars of their wealth when the market bubble burst.
        • Second, Hundt's artificial "managed competition" market, where investors were strongly led to believe that CLEC telecom competitors would be regulatory-ily favored, contributed to a lot of stranded infrastructure investment that was not driven by market economics but by 'managed competition" Hundtonomics. This artificial market skewing contributed heavily to the telecom debt spiral that ravaged the telecom sector for almost three years.
        • The consumer harm that resulted from this grand Hundtonomics experiment was that telecom broadband investment was delayed unnecessarily years. (It is the supreme irony now, that proponents of government-intervention Hundtonomics are complaining that the US is falling behind the world in broadband when Hundtonomics was more responsible for delaying the broadband "revolution" than maybe any other policy factor.)

So where does this leave current FCC Chairman Martin and the 700 MHz auction?

  • Does he learn from the UNE-P experience or potentially repeat it?
    • By way of background, then FCC Commissioner Martin joined two Democratic FCC commissioners to extend the legal life of UNE-P for almost two years. It was a decision that the Bush-Cheney White House ultimately did not support. 
    • It was that FCC UNE-P decision that the US Court of Appeals overturned and the Supreme Court acceded to.

So how would favoring Mr. Hundt's Frontline Wireless proposal in the 700 MHz be a potential repeat of the UNE-P fiasco?

  • Just like UNE-P, effectively earmarking spectrum for Frontline Wireless, the FCC would be inserting itself in the untenable position of trying to help Frontline Wireless succeed in the marektplace on a forward ongoing basis.
    • The FCC would then have to be involved in refereeing the inevitable disputes over rates, terms and conditions, between the Frontline wholesaler and Frontline's "managed competition" resellers.
    • To head off those problems, the FCC then might be tempted to create a new "improved" version of a UNE-P wholesale platform for wireless resellers.
    • Then the FCC would have to fight off the wave of law suits that will inevitably follow trying to defend whether the FCC overstepped its legal authority like the FCC did with its UNE-P "managed competition" policy.
    • The FCC dynamic of managed competition is abysmal because "if you break it, you have to fix it" and the fixes could require a government intervention spiral that could ultimately end in a similar market disaster that Hundtonomics wrought.
    • This 700 MHz decision matters greatly to the competitive trajectory for broadband and its implications on the marketplace will be felt for many years.  

There is an old adage that is particulary apt here: those who don't learn from the past are destined to repeat it.

Bottomline: This 700 MHz auction competition issue is shaping up to be the signature policy issue and philosophical legacy of the Bush-Cheney-Martin FCC.

  • Will it be a legacy of relying on market forces to promote broadband competition, deployment and innovation, or will it be a repeat of the FCC "managed competition" failures of the past?
  • Let's hope its not a UNE-P deja vu.