Avoiding rent-seeking in secondary market spectrum transactions.

AuthorEisenach, Jeffrey A.

TABLE OF CONTENTS I. INTRODUCTION II. SECONDARY MARKETS AND EFFICIENT SPECTRUM USE A. Rent-Seeking and the Case Against Administrative Allocation B. The Emergence of Market-Based Mechanisms for Spectrum Reallocation C. Secondary Markets in Practice III. A CASE STUDY: RENT-SEEKING BEHAVIOR IN THE VERIZON WIRELESS--SPECTRUMCO PROCEEDING A. The Competitors B. The Ideological Opponents C. The Aftermath IV. THE COSTS OF RENT-SEEKING AND RECOMMENDATIONS FOR REFORM A. The Costs of Rent-Seeking in Secondary Spectrum Markets B. Proposals for Reform V. CONCLUSIONS I. INTRODUCTION

The power to allocate spectrum to specific uses and assign licenses to specific users is the power to distribute wealth. (1) Recipients of desirable spectrum assignments, sometimes from the Federal Communications Commission ("FCC" or the "Commission") and sometimes directly from Congress, have benefited handsomely over the years, and it is widely recognized that millions, if not billions, of dollars have been spent on rent-seeking--that is, on lobbying and similar activities designed to secure advantageous outcomes in spectrum allocation decisions. (2) Such is the nature of government-administered markets.

Beginning in the late 1950s, academics and, eventually, policymakers recognized that spectrum would more likely be put to its highest value use if it was allocated by markets rather than politicians and civil servants. (3) The spectrum reform consensus that developed over the course of the next five decades called for the creation of flexible usage rights that allow spectrum to be used for any (legal and non-interfering) purpose, the use of auctions to assign licenses to initial licensees, and the development of secondary markets to allow users to exchange spectrum freely. (4) In the early 1990s, these recommendations began to be adopted as policy, starting with the use of auctions to distribute newly released spectrum into the market and, later, with the development of secondary markets. (5) The emergence of a secondary market for spectrum has resulted in billions of dollars in trades and likely improved consumer welfare significantly, relative to the alternative of continued, command-and-control style regulation. (6)

The emergence of a robust secondary market for the spectrum used for mobile voice and, more recently, mobile broadband is perhaps the single biggest success story of the spectrum reform movement. (7) Commercial Mobile Radio Service ("CMRS") licenses provide for a substantial degree of flexibility, allowing licensees to use technologies (e.g., CDMA, GSM, Wi-Max, LTE) and offer services (e.g., text messages, voice, web browsing, mobile video) of their choice in the geographic and frequency range they desire. (8) Thus, to cite a prominent example from 2011, Qualcomm was able to sell spectrum it had been using to provide commercially unsuccessful mobile television service to AT&T, which will use it for two-way mobile voice and data, thereby helping to alleviate the "spectrum crunch" that has come about as a result of the emergence of smart phones and mobile data services. (9)

In addition to flexible rights, the success of secondary markets depends on the ability of market participants to engage in transactions quickly, at relatively low cost, and with a reasonable degree of certainty. (10) Under FCC rules adopted in the mid-2000s, most secondary market transactions were granted "fast track" treatment, resulting in a significant reduction in the time required to obtain approval. (11) Many transactions involving CMRS spectrum, however, remain subject to "special" public notice and comment procedures, including those in which a current licensee has foreign ownership or seeks to acquire additional, overlapping spectrum. This practice arguably serves as a de facto invitation for the sorts of rent-seeking behavior that plagued the old "command and control" system. (12)

Pursuant to section 310(d) of the Communications Act of 1934 and FCC rules, an acquiring firm must file applications for assignment of licenses with the Commission, asking for permission to consummate the transaction. (13) Typically, opposition parties (including competitors, trade associations, and non-profit groups) respond with petitions asking the FCC to deny approval for the transaction. (14) The petitioners generally fall broadly into two categories--competitors and ideological interest groups--but their complaints are similar: the transaction, regardless of the size, would result in the acquiring firm holding licenses to "too much" spectrum, thereby disadvantaging its competitors and ultimately giving the acquiring firm market power in the market for wireless services. (15) These parties' pleas for relief also have much in common: they typically urge the Commission to either deny permission for the transfer altogether or, in the alternative, to apply various regulatory conditions, many of which would have the effect of improving competitors' market positions. In short, both the competitors and the ideological opponents seek to impose conditions that would transfer rents from the applicants to themselves or other parties while, of course, cloaking their arguments in "the public interest."

Two sets of policy issues present themselves in scenarios where this rent-seeking behavior occurs. First, with respect to any given transaction, do opponents make a convincing case that the transaction would reduce consumer welfare and harm the public interest or, conversely, that the proposed regulatory conditions would generate net benefits? If no public interest harm can be demonstrated, then the application should be approved, and the transaction should be allowed to proceed without conditions.

Second, to what extent is rent-seeking present in secondary spectrum markets, and what are its consequences'? We present empirical evidence that rent-seeking is commonplace and becoming more so, and we argue that it results not only in higher transaction costs, increased risk, and longer (often significant) delays, but also in resource misallocation, i.e., that rent-seeking leads to both dynamic and allocative inefficiencies. Indeed, we estimate that delays in FCC review of secondary market transactions have raised costs by nearly $10 billion since 2003. Thus, the Commission should view the pleas of any interveners it determines to be engaged in rent-seeking with disfavor and make clear that it will view such activities in the future with prejudice.

The remainder of this paper is organized as follows. In Section II, we recount the development of secondary spectrum markets, beginning with a reminder of the failings including rent-seeking--of the command-and-control system and concluding with an assessment of major secondary market transactions since the adoption of market-oriented reforms in the early 2000s. In Section III, we present a case study on the positions taken by various competitors and other opponents of the 2012 transaction involving Verizon Wireless ("VZW") and SpectrumCo. Section IV discusses the consequences of rent-seeking in secondary markets, and offers some tentative policy recommendations. Section V presents a brief summary of our conclusions.

  1. SECONDARY MARKETS AND EFFICIENT SPECTRUM USE

    The evolution of spectrum policy from a pure command-and-control system of administrative allocation to today's increasingly market-driven approach has been underway for more than two decades. (16) It was motivated, in part, by the growing recognition that the command-and-control approach led interested parties to engage in rent-seeking, resulting not only in inefficient resource allocation but also wasteful spending on lobbying and related activities. (17) In this section, we describe both the progress and the limitations of the reforms. We begin by discussing the nexus between spectrum allocation and rent-seeking. Next, we describe the policy reforms that have been put in place since the mid-1990s. Finally, we analyze the effects of these policy reforms, noting that they have sped up the review process for smaller transactions but have not eliminated opportunities for rent-seeking in larger ones. Indeed, our analysis of the opposition to large CMRS transactions over the last decade shows that rent-seeking is commonplace.

    1. Rent-Seeking and the Case Against Administrative Allocation

      Rent-seeking describes the efforts of private actors--individuals or corporations--to use the power of the state to pursue private gain. (18) In situations where the state has the ability to award monopolies or other forms of economic privilege, individuals and citizens will expend resources to capture the resulting economic rents. As Gordon Tullock explained in 1967, "[t]hese expenditures, which may simply offset each other to some extent, are purely wasteful from the standpoint of society as a whole; they

      are spent not in increasing wealth, but in attempts to transfer or resist transfer of wealth." (19)

      It is well understood that the administrative allocation of scarce spectrum licenses creates strong incentives for rent-seeking. In his classic 1959 article describing the problems with administrative spectrum allocation, Ronald Coase noted that the FCC had "recently come into public prominence" as a result of disclosures about "the extent to which pressure is brought to bear on the Commission by politicians and businessmen (who often use methods of dubious propriety) with a view to influencing its decisions." (20) As he explained,

      That this should be happening is hardly surprising. When rights, worth millions of dollars, are awarded to one businessman and denied to others, it is no wonder if some applicants become overanxious and attempt to use whatever influence they have (political and otherwise), particularly as they can never be sure what pressure the other applicants may be exerting. (21) In the years since, Coase's insight has been well documented. (22) Indeed, one study found...

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