Antitrust Law Daily Wrap Up, ANTITRUST NEWS: AT&T Blasts Justice Department’s Recommendation to “Rig” FCC’s Incentive Auction, (Apr 26, 2013)

By Paul Kirby, TRDaily

AT&T, Inc. blasted the Department of Justice’s suggestion that the FCC consider imposing spectrum caps, weights, or other measures to ensure that Sprint Nextel Corp. and T-Mobile USA, Inc., can gain access to spectrum—particularly frequencies below 1 gigahertz—charging that Justice Department’s proposal for the Commission to "rig" its planned incentive auction of spectrum returned by TV broadcasters would be unlawful.

"It is surprising that the Antitrust Division of the Department of Justice would even propose measures that are so nakedly designed to help specific companies," Wayne Watts, AT&T’s senior executive vice president and general counsel, said in an ex parte filing in WT docket 12-269, which is the FCC’s mobile spectrum holdings proceeding.

"The Commission’s mandate under the Communications Act is to promote the competitive process, not to pick winners and losers in that process. The Spectrum Act reinforces that mandate by requiring that 600 MHz spectrum be allocated pursuant to an auction from which no qualified carrier may be excluded. An auction that is deliberately designed to steer spectrum to two particular carriers is not consistent with those mandates."

Mr. Watts cited complaints about Justice Department’s filing from Republicans on the House Energy and Commerce Committee, who said that limiting the participation of Verizon Wireless and AT&T in the incentive auction would result in lower overall bids and revenues "and could lead to a complete failure of the auction and the Spectrum Act’s other priorities, such as the construction of an interoperable public safety broadband network."

Mr. Watts also criticized the suggestion that the Commission should ensure that the largest carriers don’t acquire spectrum simply to prevent competitors from getting it.

"These are reasons enough for the Commission to reject the Department’s recommendation; indeed, it has no choice under the law but to do so. Nonetheless, it bears noting that the Department bases its recommendation on nothing more than musings about theoretical possibilities that are neither substantiated nor remotely realistic," he said. "Indeed, the Department’s spectrum hoarding theory is so far afield from the real world that it is hard to see the Department’s filing as anything but a naked plea for regulatory favoritism."

Mr. Watts added that Sprint Nextel "has by far the largest nationwide portfolio of spectrum, and holds vastly more spectrum than either AT&T or Verizon." That statement seems to refer also to the spectrum of Clearwire Corp., which Sprint Nextel holds a majority interest in and is seeking to acquire the portion it doesn’t own. Mr. Watts noted that T-Mobile got spectrum from AT&T as part of the breakup of their merger, and has purchased some from Verizon Wireless, and that it is merging with MetroPCS Communications, Inc. He also noted that neither company bid in the FCC’s 2008 700 megahertz band auction.

"For all of these reasons, to the extent Sprint and T-Mobile now conclude that they desire or need spectrum in the upcoming auction, they are perfectly capable of bidding for it and paying the market price like every other auction participant," Mr. Watts said. He went on to criticize the Justice Department’s "musings" about the benefits of lower-band spectrum.

"In short, the record overwhelmingly supports spectrum aggregation policies that apply equally to all providers by employing a safe harbor spectrum screen that includes, and treats equally, all suitable available spectrum," Mr. Watts said. "The Department’s contrary view of an auction that is designed to favor particular competitors would be unlawful and completely unwarranted as a matter of public policy and should be rejected."

The Justice Department’s filing has drawn praise from smaller wireless carriers and public interest groups, which argue that the Commission should impose a spectrum cap or at least make changes to its spectrum screen, including weighting frequencies below 1 GHz. Verizon Wireless and AT&T hold 84% of cellular and 700 MHz band spectrum.

In response to the AT&T filing, Tom Sugrue, senior vice president-government affairs for T-Mobile, said that "T-Mobile agrees with the competition experts at the Department of Justice. We also stand behind our comments at the FCC advocating for strong competitive rules in the upcoming broadcast incentive auctions." Sprint Nextel said it had no comment.

A former FCC chief economist said that excluding Verizon Wireless and AT&T from the incentive auction could be costly, adding that it could result in less spectrum being reallocated for mobile broadband use and less revenue and impact the repacking of broadcast licensees. "Stronger buyers contribute more to value and to revenue, and so excluding them is more costly," said Leslie Marx, who is a research fellow and economics professor at the Fuqua School of Business at Duke University.

Excluding bidders can be more problematic in a two-sided incentive auction than in a normal one-sided auction, Ms. Marx also said during a webinar sponsored by Wiley Rein LLP and the Communications Liberty and Innovation Project.

Ms. Marx also said that in an incentive auction, efforts to maximize revenue will result in a greater decline "in terms of lost efficiency." Specifically, she said, maximizing revenue in an incentive auction would result in a 50% drop in efficiency. "Parties calling for the auction to generate substantial revenue may not fully appreciate the consequences of their demands," she said.

Ms. Marx said that the revenue/efficiency tradeoff can be reduced somewhat if the FCC also auctions government-held spectrum in the incentive auction, although she noted that other spectrum could crowd out the sale of some broadcast frequencies.

Fred Campbell, director of the Communications Liberty and Innovation Project and former chief of the FCC’s Wireless Telecommunications Bureau, also said the FCC should not limit participation by Verizon Wireless and AT&T in the incentive auction. "I have my own doubts regarding DOJ’s competitive analysis. But, whether or not their plan would enhance competition, it conflicts with congressional goals for the auction," he said.

Tom Dombrowsky, Jr., an engineering consultant at Wiley Rein and former chief of the Wireless Bureau’s Commercial Wireless Division, cited technical issues that the FCC must address in the proceeding related to the 600 MHz band plan, including how to structure the "duplex gap" and how much other guard band spectrum to set aside.

In another incentive auction development today, Preston Padden, executive director of the Expanding Opportunities for Broadcasters Coalition, reiterated in a "Wall Street Journal" column that the FCC "should abandon plans to ‘score’ TV stations."

"Unfortunately, instead of conducting a straight-up, unbiased auction to recover TV channels, the FCC has proposed a ‘scoring system’ that assigns different prices to TV stations based on the opinions of FCC staff regarding the value of those stations," he said. "These scoring proposals have made TV stations less likely to participate in the auctions. This threatens the government’s ability to reclaim the spectrum it needs to fulfill the public-policy goals established by Congress."

Mr. Padden also said that the FCC should not restrict the ability of Verizon Wireless and AT&T to participate in the auction, saying such action would result in lower proceeds and less interest by broadcasters in participating in the auction.

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