05/04/2013 05:32 pm ET Updated Jul 04, 2013

Consumers to Lose From Rigged Wireless Auctions

In response to looming wireless spectrum shortages, Congress authorized the Federal Communications Commission (FCC) to conduct auctions that would free up underutilized spectrum held by over-the-air broadcast stations and redeploy it for use by wireless broadband service providers. As detailed by Congress last year, the process would entail two auctions -- one to determine how much spectrum over-the-air broadcast stations would be willing to offer up and at various prices; and a second auction to determine how much wireless service providers would be willing to pay for repurposed spectrum. While all of this may seem heading in the right direction, the FCC may be considering flawed auction rules that, if implemented, would undermine competitive outcomes and adversely impact wireless consumers.

As background, a lot is riding on these auctions. For consumers, it means faster services at affordable prices. But, there are other benefits too. For instance, the proceeds from the auctions would go toward paying off the national debt, as well as contributing $7 billion to build a high-speed nationwide public safety (first responder) network, called FirstNet.

A basic principle of any well-designed auction process is that it is open and competitive. However, there are some unsettling news reports that this basic principle may be in jeopardy. For one, there has been some recent coaxing by the Department of Justice that the FCC may want to consider favoring its auction to benefit some small wireless providers over larger ones. Along the same lines, there have been suggestions that the FCC may consider rules to prevent the largest two wireless providers, AT&T and Verizon, from participating in the upcoming auctions. If recent headlines and comments from the FCC Chairman are any indication, Sprint and T-Mobile are "getting stronger" and the reality remains: "Every mobile operator out there, including the largest ones, needs more spectrum."

Here is the problem -- protecting competitors does not help competition, and that hurts consumers. Any action by the FCC that would intentionally benefit some competitors at the expense of others runs counter to the intent of Congress to constrain the FCC's ability to limit participation in the upcoming spectrum auctions. When it comes to picking favorites in the market, that choice should stay with consumers, not regulators.

And, then there are other problems. A newly released study by Shapiro, Holtz-Eakin, and Bazelon found that limiting auction participation would result in a 40 percent reduction in auction revenues. With reduced auction revenues, over-the-air broadcast stations would offer less spectrum to be moved to wireless broadband services. That result would undermine the very purpose of the auction itself, thereby reducing funds for the U.S. Treasury and jeopardizing the first-responder public safety network.

There will also be adverse consequences for consumers. The Shapiro, Holtz-Eakin, and Bazelon study estimates that barring full participation would also increase consumer wireless prices by 9 percent and that would suppress wireless demand by 7 million subscribers. Higher prices and lower demand is, by definition, a reduction in consumer welfare. Simply put, rules that limit auction participation will make wireless consumers worse off.

American consumers love their wireless broadband services, and why not. Wireless broadband is being used for commerce, banking, communications, video, music, games and as a substitute for plain old telephone service. There are over 320 million wireless subscribers in the U.S., most new customers are adding broadband-capable smartphones. The sharp increase in Internet-based applications and the demand requires a lot spectrum. Congress has authorized a way to get that spectrum and the FCC needs to design competitive rules to make this happen.

Picking winners and losers is bad policy. Instead, policies should empower consumers to freely choose the services and service providers they want. Competition is not improved by rules that limit auction participation, restrict spectrum and create shortages that will raise consumer prices. How would consumers benefit by these uncompetitive rules?

Steve Pociask is president of the American Consumer Institute Center for Citizen Research and a member of the FCC's Consumer Advisory Committee. For more information, visit