How did the largest phone companies end up saving billions from discounts on wireless spectrum licenses that were supposed to be reserved for 'very small companies'? ...Hold that thought.
Recently, there has been some attention about the last wireless spectrum auction results. Ars Technica's headline reads:
"Dish used 'small business' discount to save $3 billion at taxpayer expense: FCC commissioner calls for investigation into Dish's spectrum bids."
According to the story, Dish was able to be classified as a 'very small business' at the FCC's wireless spectrum auctions and this allowed them to bid on discounted wireless licenses, saving the company $3 billion off of retail prices. This play was criticized by FCC Commissioner Ajit Pai, and others, and it has caused a bit of a tizzy at the Agency.
What about the Other $17 Billion or More?
Unfortunately, these practices are not new. AT&T, Verizon, et al., have been using this 'very small business' status themselves by either setting up companies called "designated entities" to do their bidding, or they simply bought companies that already had discounted, 'very small business' spectrum licenses.
In 2006, we filed a complaint with the FCC that documented $8 billion in small business spectrum owned by the largest phone companies; the documentation was based solely on the companies' own financial reporting and statements made.
"Wireless Spectrum Fraud by AT&T, Cingular (SBC & BellSouth), Verizon, T-Mobile and Sprint? Are these "Very Small Businesses"? $8 Billion Pocketed through Deceptive Practices in Wireless Spectrum Auctions. FCC, SEC and Other Violations Need Investigation."
"Teletruth today filed an $8 billion complaint alleging that Verizon, AT&T, (including Cingular, SBC, and BellSouth), T-Mobile, Sprint and others rigged the FCC wireless auctions by creating false fronts to pose as "very small businesses". This allowed these companies to secure valuable wireless spectrum at discounted prices."
Some details include:
- Salmon PCS LLC -- In November 2000, Cingular (now AT&T) formed Salmon to bid as a "very small business" for licenses auctioned by the FCC.
- In November 2004, Cingular and Edge Mobile Wireless formed Edge Mobile, (Edge) to bid as an "entrepreneur" for certain PCS licenses auctioned by the FCC.
- AT&T Wireless's financial statements include other "variable interest entities" (read very small business), similar to Salmon and Edge Mobile Wireless. ("AT&T" was a different company then, and separate from Cingular.)
- Verizon Wireless -- On February 15, 2005, the FCC's auction of broadband personal communications services licenses ended and Verizon Wireless and Vista PCS were the highest bidders for 63 licenses totaling approximately697 million. -- Vista worked for Verizon.
I'll get back to some of this 'very small business' shell game in a moment.
How Did this Happen?
The problem is not simply that the companies could game the regulatory system and pose as a very small business when they are some of the largest phone companies in America. The larger problem has been a systematic attack on all small business competitors over the last decade+, including small wireless-cell phone competitors, internet service providers, (ISP) or even cable, broadband or wireline phone competitors.
- The FCC is required by the Regulatory Flexibility Act of 1980 to essentially do an 'impact study' of how their regulations will affect small businesses -- and the FCC ignored the law.
- The data used is so corrupted that it created corrupted public policy that haunts us today. For example, it allowed AT&T, et al., to pose as 'very small businesses'.
Let me explain.
Small Business Impact Study Corruption: The Regulatory Flexibility Act
For me, this story starts 14 years ago when I found a stink-hole, a regulatory morass that is so deep it is hard to fathom -- yet the FCC never acted to clean up this mess.
FACT: In every FCC proceeding -- I repeat -- every proceeding, -- the FCC is required, by law, to do the equivalent of a 'small business impact study' on how their rules will affect small telecom companies. This is called a "Regulatory Flexibility Analysis" and it mandated by the Regulatory Flexibility Act of 1980 -- and in EVERY FCC proceeding it is always in the appendix.
This is from the FCC's Net Neutrality Order, February 26, 2015; the same FCC proceeding where over 4 million commenters chimed in, and the same Order that is now being sued over.
There are two parts; The "IRFA", "Initial Regulatory Flexibility Act Analysis", asks for comments during a proceeding and the "Final Regulatory Flexibility Act Analysis" gives the FCC's decision. Both are supposed to answer the question -- are there "possible significant economic impacts on small entities regarding the proposals addressed..."
How corrupt is this? The following paragraph is about the 1997 wireless spectrum auction and it reveals that there were seven 'very small businesses' that won the bids.
This was 18 years ago.
This same paragraph appears in all 2008 FCC proceedings (about wireless spectrum), while an identical paragraph can be found in the FCC's Open Internet proceeding that started in 2014.
The real issue isn't simply that the FCC is writing about auctions that happened 18 years ago.
Any 5th grader would have asked the same question we did -- What happened to the wireless small business license holders since 1997?
In fact, in 2010, we filed a complaint as every FCC proceeding was using the same corrupted information and the FCC needed to deal with these issues as it was undertaking the creation of a "National Broadband Plan".
The answer: The complaint tracked this 1997 spectrum auction and we found that the majority of the 'very small business' licenses were now in the hands of what are now Verizon (MCI) and AT&T.
Now, the FCC could have re-written this paragraph to explain what happened to the spectrum licenses (the FCC oversees all licenses), anytime over the 18 years, but didn't.
Had the FCC bothered to either go through this boilerplate summary of the previous auctions (or investigated our claims) they would have noticed that the FCC's entire small business spectrum discount plan had been corrupted, not simply at the time of the bidding, but over the next decade as the small business licenses would magically end up being controlled by the very large phone companies.
Moreover, every paragraph in the FCC's Reg Flex analyses over the last decade, (including the current FCC proceedings), is suspect or a violation of the law as providing 'boilerplate' responses does not fulfill the FCC's obligations -- and it harms different classes of small business competitors (or harms the customers because of a lack of choice of providers).
Here are two more examples:
1) The next two quotes is boilerplate language about the 1999 wireless auctions and it was just cut and pasted with no thought of what actually happened since 1999. The first quote is from the FCC's 2010 Open Internet Order and Opinion; the second from the recent 2014 Open Internet proceeding.
1999 is 16 years ago.
They are identical; figured I'd include them to reinforce just how bad this information is.
2010 Open internet Report and Order
"On April 15, 1999, the Commission completed the reauction of 347 C-, D-, E-, and F-Block licenses in Auction No. 22. Of the 57 winning bidders in that auction, 48 claimed small business status and won 277 licenses." (Emphasis added)
2014 Open Internet Proposed Rule Making
"On April 15, 1999, the Commission completed the reauction of 347 C-, D-, E-, and F-Block licenses in Auction No. 22. Of the 57 winning bidders in that auction, 48 claimed small business status and won 277 licenses."
2) The next two identical paragraphs are about the independent ISP market and they, too, are pure garbage -- as the FCC has no information past 2007. I give you the full quotes of this paragraph.
2010 Open Internet Report and Order
"The ISP industry has changed since these definitions were introduced in 2007. The data cited above may therefore include entities that no longer provide Internet access service and may exclude entities that now provide such service. To ensure that this IRFA describes the universe of small entities that our action might affect, we discuss in turn several different types of entities that might be providing Internet access service. We note that, although we have no specific information on the number of small entities that provide broadband Internet access service over unlicensed spectrum, we include these entities in our Initial Regulatory Flexibility Analysis."
2014 Open Internet Proposed Rule Making
"The ISP industry has changed since these definitions were introduced in 2007. The data cited above may therefore include entities that no longer provide Internet access service and may exclude entities that now provide such service. To ensure that this IRFA describes the universe of small entities that our action might affect, we discuss in turn several different types of entities that might be providing Internet access service. We note that, although we have no specific information on the number of small entities that provide broadband Internet access service over unlicensed spectrum, we include these entities in our Initial Regulatory Flexibility Analysis." (Emphasis added)
Does it really say "We have no specific information about the number of small entities." What the...?
I Note that a small Wireless ISP (WISP) is one of the companies that are suing the FCC over its Open Internet Order. How can the FCC make a determination that these companies will not be harmed with this corrupted data? They can't.
Consequences of Bad Data: Bad & Harmful Policy.
While there are few small, wired-broadband-based ISPs left in America, today you can't choose your own ISP or broadband or cable provider over the wire coming into your home, as the companies that control the wire controls all the primary services over the wire. And this is because, in a large part, the FCC's impact study used corrupted data, and the FCC simply rubber-stamped the wishes of what are now AT&T, Verizon et al.
According to ISP Planet (and confirmed by Census data), in 2001 there were 9,335 independent ISPs in America and it was these small entrepreneurial companies that brought America to the Internet and handled over 50% of all US Internet customers.
And yet, the FCC closed the rights of these companies to use the networks, mainly because the FCC never bothered doing an impact study. Not only was the data old, but there was no analysis by the FCC that showed that there would be a wholesale killing off of 7000 small ISPs within a few years if the laws went through. We, in fact, did an impact study that was used by Small Business Administration's Office of Advocacy. And unfortunately our analysis was correct.
The consequence -- Why do you think there are only three phone companies, AT&T, Verizon and Centurylink, that don't compete and control most of the phone wires and the Internet service over the wires?
In more rural areas, there has been a rise in 'wireless ISPs', which offer broadband and ISP services, especially in areas where the incumbent phone companies didn't show up, but most are not competing in the wireless-cell-phone space.
Thus, because the FCC never did a proper analysis or collected accurate data about 'very small businesses' and the wireless spectrum auctions, the FCC never acknowledged just how corrupt the process had become -- and here we are.
We are estimating that the large phone and wireless companies were able to get over $17 billion or more of small biz spectrum.
Since 2006, when we filed a complaint because we uncovered about $8 billion in small business spectrum being controlled by the large wireless companies, it appears that nothing has changed. These are some of the transactions of AT&T with companies that were a 'very small business' or held licenses for very small business discounted spectrum.
- "AT&T Acquires Wireless Spectrum from Aloha Partners", October 9, 2007 AT&T will pay approximately2.5 billion in cash for the licenses. The company anticipates receiving necessary government approvals and closing the transaction within six to nine months.
In one transaction, where United Wireless Communications, Inc. ("United") transferred wireless spectrum to Aloha, it stated that "Aloha also qualifies as a very small business".
"United received a 25% bidding credit as a "very small business" pursuant to 47 C.F.R. § 27.702(a)(2). Aloha also qualifies as a very small business; as demonstrated in Exhibit Two , which provides the average gross revenues for Aloha and its affiliates and controlling interests for the preceding three years." (Emphasis added)
- "AT&T to Acquire Dobson Communications, Expand Wireless Coverage, June 29, 2007. Underscoring its interest in serving the rural market, AT&T Inc. (NYSE:T) announced today that it will acquire Dobson Communications Corporation, a provider of rural and suburban wireless communications services, for approximately2.8 billion in cash."
- "AT&T completes 1.2B acquisition of Leap Wireless."
While these three AT&T transactions are with companies that control small business spectrum or were classified as small businesses, we have no idea how much of this $6.5 billion that was paid to the companies is or is not for small business spectrum. And, this $6.5 billion is only about AT&T and it doesn't represent AT&T's total business dealings. Also, we didn't scour the other companies' spectrum deals or rummage through all of the Verizon et al transactions, which can include T-Mobile and Sprint.
Conclusion: While we are estimating that over $17 billion of small business spectrum may have ended up in the hands of the large players, it could be a lot higher, especially if we include the Dish spectrum.
Should Dish be allowed to keep their spectrum?
America needs to see one chart -- All of the small business spectrum licenses, all of the winners of the bids, what was paid, what was saved from the discounts, and most importantly, who currently owns that spectrum, and the current value. Then we should go after all of the companies.
And the FCC should finally fix all of the other information in the Reg Flex Analysis, using it for a real small business impact study -- before the Agency creates new regulations.
I'd argue that these transactions should never have been allowed to occur and that the FCC was gamed, as much as it has been incompetent, or worse. And so, this spectrum should be returned and made available to actual small businesses and others who could figure out ways to bring in competitive, innovative services to market.
And if you want some disingenuous statements by AT&T, et al., one has only to read the recent articles about how the phone companies have been bad-mouthing the Dish spectrum deal.
Fierce Wireless reports:
"AT&T slams Dish's AWS-3 auction bidding strategy, suggests rule changes for incentive auction", February 20, 2015
"...AT&T also thinks Dish manipulated the FCC's designated entity system in its bidding strategy for the auction to get discounts on airwaves."