In 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012. One of its key goals was to ensure that American consumers get access to the spectrum they need. As the Federal Communications Commission finalizes its design for the Incentive Auction that will buy back 600 megahertz spectrum from broadcasters in order to sell it to providers of mobile broadband, members of Congress continue to express intense interest in the auction. Recent letters from both sides of the aisle encourage the FCC to conduct an auction equally open to all participants.
As currently proposed, the rules that will be voted at the FCC’s May 15 meeting would not allow equal participation in the auction for all willing bidders. In the hope of bringing more competitors to rural America, Chairman Tom Wheeler would hold back considerable spectrum from AT&T and Verizon — who already serve rural areas with LTE, the newest mobile broadband technology — so that others, in particular Sprint and T-Mobile, could buy spectrum below its full market value.
While Wheeler’s desire for seeing the benefits of wireless competition extend to rural America is laudable, the auction’s design is unlikely to achieve that goal.
The role of spectrum auctions, which have been markedly successful since they were introduced in the 1990s, has been to place spectrum in the hands of those who value it most highly. This has led to a rapid deployment and diffusion of wireless telephony throughout the country, including rural America. Wireless coverage is universal and competition nearly so: 99.9 percent of all Americans have wireless coverage and 93 percent currently have access to four or more wireless carriers. This widespread proliferation provides a compelling prima facie case that unfettered auctions in the past have done a good job of disseminating wireless services throughout the country.
Moreover, given the reality of carriers’ nationwide pricing plans, the prices paid by rural customers are the same as those paid in urban areas; so the benefits of competition are surely flowing to rural areas even where there are fewer competitors.
More to the point, it is far from clear that the two “smaller” (they are actually quite big in absolute terms) companies that the FCC’s approach would favor will actually invest to bring mobile broadband to rural areas, while the companies that are disfavored by the regulatory process have already done so.
The reason is simple. While the propagation characteristics of 600 MHz spectrum may help to reduce the cost per square mile of serving rural areas, it cannot increase revenue per square mile in rural areas. The revenue potential is massively higher in densely populated areas than in remote areas.
The annual revenue realized per square mile in urban areas, where 250 million Americans live on 16 percent of this country’s landmass, is $248 thousand per square mile. The revenue realized in the rest of the U.S., where 60 million Americans live on 84 percent of our land mass is $12 thousand per square mile. At the extreme, in the most sparsely settled area where half a million people are dispersed over 25 percent of our landmass, the revenue potential is $262 per square mile.
The fact that not many customers exist in rural areas to buy service drastically shifts the profit calculus for firms as they bid for spectrum. The lack of revenue in rural areas cannot be cured, no matter what spectrum is used. The result is that attempts to provide cheap spectrum to favored competitors under the assumption that they will compete for rural customers is likely to backfire.
The market is overwhelming stacked toward urban markets, as is clear from Sprint and T-Mobile’s commitment to Wall Street to bring LTE to 250 million people, the urban areas in which 80 percent of U.S. wireless revenue can be accessed over 0.6 million square miles. In contrast, AT&T and Verizon have committed to cover 300 million Americans with LTE, as they already do with voice, over their own networks. Their networks have to cover 1.7 million square miles — three times the landmass — to reach those additional 50 million Americans.
AT&T and Verizon have already brought mobile broadband to rural America, but they need more spectrum because rural Americans — like their urban peers — want more and more bandwidth. By limiting the additional low-band spectrum their serving carriers can buy, the FCC is more likely to harm than help rural consumers. The current auction design assures that those willing to serve rural America will lack capacity, while those who will be given capacity have indicated no willingness to serve.
John W. Mayo is a professor of economics, business and public policy at Georgetown University and executive director of the Georgetown Center for Business and Public Policy. Anna-Maria Kovacs is a visiting senior policy scholar at the Georgetown Center for Business and Public Policy.