Saturday, December 14, 2013

Could a Merged Sprint-T Mobile US Change 600 MHz Auction Rules?

If Sprint eventually makes a bid to buy T-Mobile US and ultimately is successful, what does that mean for the upcoming auction of 600 MHz former TV broadcast spectrum?

Both carriers have asked for “set asides” that would prevent AT&T Mobility and Verizon Wireless from bidding on some percentage of the spectrum, to prevent those carriers from buying most of the new spectrum.

T-Mobile US and Sprint are in favor of "pro-competitive" auction rules for upcoming 600 MHz spectrum for good business reasons: both lag in ownership of lower-frequency spectrum with better propagation capabilities. The bulk of those mobile assets are owned by AT&T Mobility and Verizon Wireless.

According to the Justice Department, AT&T and Verizon control 78 percent of low-frequency spectrum, defined as spectrum below 1000 MHz.

Even a merger of Sprint and T-Mobile US would not change the disadvantage in lower-frequency spectrum, even though the the merged entity would, before the auctions, have the biggest amount of spectrum.

There now is greater focus on the “quality” of spectrum, as well as its “quantity.” Simply, both T-Mobile US and Sprint argue they will be at a disadvantage, compared to market leaders AT&T Mobility and Verizon Wireless, unless they are assured of access to about a third of the proposed spectrum to be auctioned, presumably under rules that would bar the two largest carriers from bidding for those blocks.

But some economists argue that barring the largest market contestants, or possibly even using set asides, could have negative impact. Basically, the argument is that the largest spectrum holders are able to more efficiently harness the spectrum than firms with smaller holdings.

Others argue that it'd be more fair to adopt a rule that enforces the same limit on all the participants, regardless of their existing holdings. Such symmetric caps would not take into account current market share or spectrum asset holdings.

Others (including Sprint and T-Mobile US) argue for “asymmetric” caps that take into account current market share and spectrum quality issues

As always, “efficiency” and “equity, ” “competition” and “investment” issues exist.

Regulators and policymakers often use set aside rules to encourage competitors. But, over the long term, markets still become more concentrated. And, as European regulators have discovered, competition can reduce the climate for investment.

Those arguments still will be made, even if Sprint and T-Mobile US become one company, but the resolution of that possible merger, one way or the other, could affect the construction of bidding rules for the 600 MHz auction.

If the new company has the largest amount of spectrum going into the auction, and has 28 percent market share, compared to Verizon’s 34 percent and AT&T’s 33 percent, is there still an argument for set asides?

To be sure, the disparity in ownership of lower-frequency spectrum still would exist, but not so much the argument that the two smaller carriers are so much smaller they need spectrum set asides to level the playing field.

And the argument about amount of spectrum owned would tip further in favor of the new entity, compared to AT&T Mobility and Verizon Wireless, before the auction.

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