The Competition Conundrum: Can Competition Be Bad News for the Spectrum Crunch?

by Latoya Livingston on August 12, 2012

Part I of a three-part series.

Do more wireless competitors truly translate to lower prices for consumers?  We have all heard the logic that more competition means lower prices, but are there instances where this truth might be a falsity?

According to a paper written by the Phoenix Center for Advanced Legal and Economic Public Policy, the answer is a resounding “yes” if the discussion revolves around the wireless industry and spectrum.

The Phoenix Center’s paper combines economics and the theory of competition with that of spectrum exhaust to argue that due to spectrum capacity restraints, having spectrum held by fewer firms will result in lower prices for consumers.  In their words, “[If] it is true that there is spectrum exhaust, then the argument that more competitors leads to lower prices is not true.  In fact, it is more likely the case that lower industry concentration leads to higher prices.”

How do they figure?

The Phoenix Center’s analysis is the result of an economic model that is based on two main assumptions:

  1. That price falls as the number of competitors increases; and
  2. That the amount of capacity from spectrum is not linearly related to the amount of spectrum a firm has.  That is, if we double the amount of spectrum, then the capacity provided to a firm from that additional spectrum more than doubles.

Using this as a foundation, the organization concludes that the number of competitors has no effect on price when the constraint is binding. Thus, under a binding spectrum constraint, the wireless industry is more likely to produce lower prices in a market with fewer firms armed with more spectrum, rather than a market with a large number of firms holding smaller amounts of spectrum.  Their model also suggests that higher concentration may increase sector investment and employment.

If this theory holds any credence, then excluding the top two wireless firms, AT&T and Verizon, from freely bidding at the upcoming spectrum auction could be severely detrimental to American mobile users.  Therefore, proponents of this idea would scoff at using set-asides, conditions, or restrictions in order to ensure a competitive market and a range of spectrum license bid winners in the upcoming auction.  But what of the smaller players, such as Sprint and T-Mobile?  How would their subscribers fare if AT&T and Verizon were given free range to bid in the auctions?

They’ll be just fine, according to some analysts.

As Dr. Anna-Maria Kovacs pointed out in her February 2012 policy paper “Neutral Spectrum Auctions: Maximizing Proceeds and Consumer Benefit”:

Given scarce spectrum and explosive demand for wireless broadband, it is in the interest of consumers to ensure that spectrum is available to the carriers they have chosen, that it goes into service rapidly, and is efficiently utilized.  Yet, spectrum distribution is out of sync with subscriber choice.  The carriers who have the greatest number of subscribers have the least spectrum per subscriber.

Dr. Kovacs illustrated her point graphically:

And she’s correct.  A little more than half of American mobile users have chosen either AT&T or Verizon as their wireless carrier.  Sprint and T-Mobile together represent 32 percent of the wireless industry’s share of subscribers.  If we truly want to get spectrum out to providers that will help the biggest percentage of the U.S. population get more access to spectrum, these facts should not be ignored.

Conversely, competition proponents also have a valid point.  If the smaller providers were able to get more spectrum, they in turn can build up (and build out) their infrastructure and wireless capabilities to a level comparable to the big two.  History has shown us that, in the long run, having more options is better for consumers.  But in the case of wireless providers, the infrastructure needed to foster real options for consumers will likely take years to come into fruition.  We don’t have a decade or two to wait around.

At the National Association of Rural Utility Commissioners’ recent mid-year meeting, Rural Utilities Service Administrator Jonathan Adelstein and policy counsels from AT&T, Google, and Home Telephone Company all agreed that an “all-Broadband world” is coming. Spectrum exhaust is also rapidly approaching.  We need to make serious strides within the next few years, but how will we reconcile the battle between providing choice and beating the clock on the spectrum crunch?

Next time:  We continue our discussion competition and the spectrum crunch by further examining consumers’ need or desire for choice versus providers’ need for spectrum in a strained time frame.

    • Latoya LivingstonLatoya Livingston is a Washington-D.C.-based attorney with years of legal experience working in the private and public sector. Currently, Attorney Livingston serves as a Senior Attorney and the Earle K. Moore Fellow at MMTC.

 

  • Follow Us on Facebook
  • Follow Us on Twitter
  • Subscribe to Newsletter
  • Latoya Livingston

    In response to Mr. Craig’s comment:  MMTC is not “funded” by AT&T or any other major corporation…
    neither was this article meant to ‘push’ any particular study.
    The article is meant to push debate and encourage thinking outside of ideological boxes.. can’t learn if you can’t reason.

  • David Honig

    Craig, this is David Honig, your counterpart at MMTC
    – its President.  I have never had to answer a nasty post before, but I
    am doing it now because you have chosen to post a paternalistic slur
    rather than by addressing the issue on the merits – as has been the
    tradition followed by everyone else in the public interest movement for
    the 42 years I’ve lived and worked in it.  We published our post because
    it’s what we believe.  You’re free to disagree with it.  And BTW,
    AT&T is a conference sponsor, just like other corporations sponsor
    Free Press’ conferences.  We would never stoop to accusing you of
    kowtowing to their interests, however.  As you know, most of MMTC’s
    budget comes from its media brokerage, station operations, and broadband
    adoption work.  We make our own decisions, set our own policy agenda,
    and have never taken a position to satisfy a contributor.  Or ever will.
     Period. 

  • Magnus Cromulus

    I
    get the feeling that this sort of “competition” won’t really happen
    unless a real shock to the system (read “incredibly new and cheap
    technology that doesn’t use the poles and cables and towers owned by
    verizon and AT&T”) occurs. Right now it’s too expensive to build out your infrastructure, and if you do, it’s obsolete way too quickly.
    Sigh. But at least it’s not all bad news – unless you live somewhere
    where the big dogs aren’t battling it out for your dollar. 

  • Magnus Cromulus

    it’s not just the hard
    infrastructure, either – it’s things like training and retaining staff
    and obtaining favorable contracts (it took verizon years to get the
    iphone, for example). So unless you’re already a big player, your costs
    are probably too high and then you’re a niche competitor who has to
    offer something the other guys can’t or won’t because of cost.

  • http://profile.yahoo.com/VYHKUUQAWW2SAOBTNTI7Q3CPVI Dave


    If this theory holds any credence, then excluding the top two wireless firms, AT&T and Verizon, from freely bidding at the upcoming spectrum auction could be severely detrimental to American mobile users.”

    I agree, but all wireless and wireline (FTTH) providers should be required to wholesale as “dumb pipes” to value-added service providers. Now, _that_ would spur real competition and innovation.

Previous post:

Next post: