Spectrum Sudoku: Feds Have Verizon's, AT&T's Numbers

With prospects alive this year for congressional approval of incentive auctions, which would enable the U.S. government to compensate TV broadcasters for returned airwaves repurposed for mobile broadband, the debate has shifted to how much authority the Federal Communications Commission (FCC) should have to craft auction rules in ways that could limit the eligibility of top wireless carriers Verizon and AT&T.

Top-line messaging from FCC Chairman Julius Genachowski at this month’s Consumer Electronics Show and to US mayors last week is clear and unequivocal: Congress needs to promptly approve incentive auction legislation, but should not tie the FCC’s hands with respect to writing auction rules.

House Republican spectrum legislation seeks to do just that as well as well as forbid any recaptured broadcast airwaves from being set aside for unlicensed applications such as Wi-Fi. The House measure, championed by Commerce Committee Chairman Fred Upton (R-Mich.) and Communications Subcommittee Chairman Greg Walden (R-Ore.), was approved by the House in December 2011. The bill must be reconciled with legislation penned by Senate Commerce Committee Chairman Jay Rockefeller (D-W.V.) that would allow the FCC to continue fashioning auction rules as the agency sees fit. The Rockefeller bill remains pending after committee approval in June 2011.

Republicans in recent years have been critical of FCC imposition of license bidding conditions, including those designed to promote net neutrality, public safety and small/midsize carrier access to spectrum. Republicans argue such bidding restrictions diminish the value of spectrum auctioned and thereby decrease revenue for the U.S. Treasury.

House and Senate spectrum bills, which could considered within separate legislation to help underwrite the cost of extending the payroll tax cut and unemployment benefits, also include provisions to reallocate to first responders a slice of 700 MHz spectrum known as the D Block for development of a national public-safety wireless broadband network.

Architects of telecom competition policy in the Obama Administration, ranging from the FCC and the National Telecommunications and Information Administration to the U.S. Department of Justice (DoJ), continue to be leery of (if not hostile to) the spectrum-based market clout of Verizon and AT&T.

The Administration’s slapdown of the $39 billion AT&T/T-Mobile merger; FCC LightSquared resale restrictions aimed at Verizon and AT&T (potentially a moot point if GPS interference remains unresolved); the FCC’s aborted effort to revise the spectrum screen downward in the ultimately approved AT&T/Qualcomm spectrum deal; and the skeptical theme in recent FCC wireless competition reports are examples of Democratic apprehension regarding the two largest U.S. wireless operators and their spectrum holdings.

All Spectrum Is Not Equal

A subtle yet significant nuance in FCC thinking, which could work against AT&T and Verizon, is the notion that all spectrum is not equal. In the policymaking universe, there are two classes of spectrum and wireless operators.

The FCC (and by extension the Obama DoJ) gives greater weight in competition/antitrust policy formulation to below-1 GHz spectrum because propagation characteristics of signals are superior to higher frequencies. This is significant, particularly in the context of how auction rules are written for prime below-1 GHz broadcast spectrum in the future, because AT&T and Verizon control a large quantity of prime 800 MHz and 700 MHz spectrum.

AT&T’s and Verizon’s paranoia about FCC spectrum policy is justified in this regard, though the adversarial posture assumed by federal regulators toward the two companies does not necessarily portend wholesale negative consequences for each.

There is a dynamic mix of policy and political factors that could produce a variety of outcomes, good, bad and otherwise, for AT&T and Verizon as well as well as for the other class of wireless operators: Sprint, T-Mobile, Clearwire, Leap Wireless, MetroPCS, US Cellular and rural licensees.

In that regard, while the Number One and Number Two wireless carriers could face future auction restrictions, we continue to anticipate the FCC and DoJ will eventually approve the Verizon/cable spectrum transactions subject to conditions that could focus on marketing arrangements as well as spectrum. If indeed the Verizon/cable spectrum deals are greenlighted, there’s no reason to believe that an AT&T/Dish combo wouldn’t be able to conditionally pass muster with federal regulators and antitrust authorities.

Such "frenemy" transactions could become more common, which could further challenge antitrust analysis of mergers and joint ventures in the telecom, tech and media sectors. FCC Chairman Julius Genachowski walks a fine line in warning of a looming spectrum crunch and taking a hard line against AT&T and Verizon on spectrum in the face of increased data demands on evolving 4G networks that comprise dynamic platforms for innovation, investment and growth in broadband going forward.

Don’t Squeeze The Top Two

Genachowski (a Harvard Law School classmate of Barack Obama) must be careful to avoid overplaying his hand on AT&T and Verizon regulatory scrutiny because doing so would merely re-enforce the anti-business tag the GOP will continue trying to exploit this jobs-focused election year and give congressional Republicans more ammunition to use against the Democratic-led FCC.

A Republican attack against any FCC proposal to squeeze AT&T and Verizon would express itself in criticism that the Obama administration is once again trying to pick winners and losers instead of allowing the free market to do so.

Now that its purchase of Qualcomm 700 MHz spectrum has been approved and its play for T-Mobile quashed, AT&T is better-positioned to push a counter-narrative that it hopes will preempt any FCC effort to restrict the carrier’s ability to bid on spectrum going forward. AT&T has begun to publicly push back against any regulatory movement to restrict auction eligibility, though the company has to temper criticism of the FCC because it continues to have important business (special access, universal service fund/intercarrier compensation reform implementation, retransmission consent, 700 MHz interoperability) pending before the agency.

Verizon, needing approval of the FCC and DoJ to purchase cable spectrum assets of SpectrumCo (Comcast, Time Warner Cable, Bright House) for $3.6 billion and Cox for $315 million, will be forced to largely muzzle itself in the escalating incentive auction eligibility debate.

As the FCC mulls options for future options, a reinstitution of a spectrum probably is not in the cards. If Republicans reclaim the White House, the regulatory landscape will undergo a major shift in which auction and merger conditions are not prominent in the FCC lexicon.

– Jeffrey Silva, senior policy director/Telecommunications, Media and Technology, Medley Global Advisors LLC, 202/434-0980?