White House Makes Intelligent Case For Incentive Auctions.

Yesterday I attended the White House event on incentive auctions. It was probably the most sensible public event on the pro-incentive auction side I’ve attended to date. I have had several discussions with Federal Communications Commission (FCC) staff that persuade me that, if Congress gave the FCC generic authority to do voluntary incentive auctions (subject to limitations to protect broadcasters – including low-power broadcasters – that want to stay in the broadcasting business), they could design a pretty good auction that would get more spectrum out for both licensed and unlicensed broadband access. Unfortunately, just about every public discussion on incentive auctions tends to focus on either a few simplistic talking points (more spectrum=good!) or, worse, has been about trying to persuade members of Congress that spectrum auctions are magical money trees that let you solve the deficit problem without raising taxes (just look at how the 2008 700 MHz auction completely eliminated the federal deficit).

So a pro-incentive auction event that does not make me grit my teeth or put me to sleep is worth celebrating.

Perhaps you think my standards are too low. Maybe you are right. But the sad truth is that most public discussions of spectrum policy go like this: “Blah blah, command control bad, market forces good, blah blah” followed by some insanely ignorant twaddle about the 700 MHz auction that shows that the person doing the speaking clearly did not look at the post-auction release of data because if they did, they would have noticed that lots of companies did, in fact, bid on the C block REAGs and that the highest MHz/Pop values for the A and B block licenses corresponded to the most populated areas (shocking). Honestly, I have heard Vogon Poetry more euphonious and coherent than some of the spectrum presentations making the rounds these days.

So four economists giving a one-sided but actually coherent, modest and intelligent explanation of why giving the FCC incentive auction authority would make things more Pareto efficient without claims that it will make squindoodles of money or is justified because the iPhone spells the doom of civilization unless it is fed more spectrum NOW is actually a fairly pleasant change.  More importantly, the key take aways bear repeating: 1) Congress should leave the details to the FCC; and 2) Unlicensed spectrum is a big part of promoting broadband and the FCC ought to take the opportunity presented by repacking to expand the available white spaces. Or as Michelle Connolly, former FCC Chief Economist, put it: “”The amount of money gained [at an auction] is less important than the value of reallocation [for new, innovative uses].”

Mind you, it could certainly have been a bit less of a hymn to the glories of auctions generally. Assuming we must have exclusive licenses (which we will for the foreseeable future), we will require some way to distribute them. I grant, to paraphrase Winston Churchill, that auctions are the worst way to distribute license except for every other way ever tried. But we should be willing to recognize that auctions create their own problems and that the ability to pay for an exclusive government right at a particular point in time does not translate into “the highest, best use” of spectrum. Indeed, as Hal Varian kept pointing out, the presence of unlicensed spectrum enables a very different kind of equally important innovation and productive activity. There is tremendous value to having spectrum access with very low barriers to entry that encourages  innovation and new, competitive services. (True, Hal Varian works for Google these days, which supports the white spaces, but so does Microsoft, Dell, and a bunch of other companies. Even the licensed wireless carriers recognize that unlicensed makes a necessary compliment to licensed rather than a competitor.)

Unfortunately, however, spectrum auction revenues have become the crack cocaine of public policy. As Michelle Connolly observed, the actual revenue from spectrum auction is tiny compared to what we need to raise (or cut from spending) to balance the federal budget. Sadly, this does not stop  “deficit hawks” from flocking to spectrum auctions as if they were a “get out of fiscal and social responsibility free” card.

But if Congress sets this up so that revenue drives the policy, it will end up a total disaster from a policy perspective, and quite likely from an auction/revenue maximization perspective as well. First, Congress is going to fund a bunch of very important projects (public safety network, wireless innovation) on the basis of revenue that may or may not actually be there. As I’ve written before, guessing auction revenue is a crap shoot at the best of times. I understand that auction revenue is what makes this attractive for the majority of members of Congress, who otherwise would not know a spectrum auction from a kiwi fruit, and that nothing moves on the Hill these days without a score from the Congressional Budget Office (CBO). Nevertheless, there is a difference between noting that this is likely to be revenue positive and pretending that auctions are a license for the federal government to print money.
The second way it becomes a disaster is that as much as members of Congress don’t trust the FCC, you should trust members of Congress to understand this even less. That’s no knock on members of Congress, or their staff. It is a simple acknowledgement that this stuff is super hard and that it requires both expertise and flexibility to address (and that by the time the statute passes and the FCC is actually implementing this, many things may have changed). So you want to set boundaries with care. Myopic notions of “maximizing revenue” are almost certain to lock the auction design and repacking into something destructive (such as an inability to compensate licensees for unforeseen costs, or squeezing out secondary services such as Low Power TV or cable headends). Worse, no one can accurately predict what is going to “maximize revenue.” So efforts by Congress to incorporate specific instructions are likely to screw things up pretty good.

Therefore, express limitations on FCC discretion ought to be reserved for things that are amenable to bright line rules, such as the limitation that auctions be voluntary. But to get members to vote for the bill, supporters will say what they think members want to hear. Sadly, that includes working on the general anti-government and specific anti-FCC sentiment prevalent among many members and promising that spectrum auctions are just gushers of gold waiting to be tapped.

Anyway, at least it was an intelligent discussion of the pro-incentive auction side of things. I am hoping NAB will respond with a solid, serious “here is why voluntary auctions potentially jeopardize free over the air broadcasting, which still serves a valuable purpose for millions of Americans and the public as a whole.” Then we would have some serious engagement around these legitimate concerns, followed by a measured public dialog about weighing and addressing these concerns in the context of maximizing overall social utility. After that, we will all ride off on our unicorns into the sunset.

Meanwhile, I can hope that Congress will not screw up the spectrum bill by chasing equally mythical spectrum leprechauns for their supposed pots of auction gold.

Stay tuned . . . .

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