Latest series of spectrum auctions adds another $13 billion tax on wireless operators and customers. Still, the process could be a lot worse.

InformationWeek Staff, Contributor

September 1, 2006

3 Min Read

The FCC is due to wrap up this week its latest series of radio frequency auctions, having already secured commitments of more than $13 billion from several operators in three weeks of bidding. The big spender this time around is T-Mobile, whose $4.2 billion has landed it 116 licenses to provide wireless voice, data, and video services.

To paraphrase a 1950s-era congressman: A billion here, a billion there, and pretty soon we'll be talking about real money.

Between July 1994, when the FCC began conducting competitive auctions of electromagnetic spectrum, and February 2002, the last fully completed auction, the process raised a nominal $45 billion in 63 separate proceedings. As some winners defaulted on their financial commitments or were challenged in the courts, only $14.5 billion of the $45 billion had found its way to the U.S. Treasury as of October 2005--but that's still not chump change, especially when combined with this latest take.

Viewed another way, however, those billions of dollars represent a corporate tax that wireless network operators and other license winners ultimately will pass on to their customers. Meantime, that auction revenue isn't subsidizing handhelds for the poor or helping operators build out their networks or coordinate their spectrum usage. Instead, those much-needed capital investment dollars are being carted to the Treasury's butcher shop, where they will pay for someone else's pork.

Of course, auctions have proved efficient in other industries, for everything from baseball cards and airline tickets to expensive real estate and art to oil and gas futures. They're also all the rage in other tech-related circles. Companies buy and sell billions of dollars of new and used computers, network- ing gear, office systems, and other IT goods on eBay and specialty auction sites such as DoveBid. Ocean Tomo, an "intellectual capital merchant bank," will hold an auction this month in New York where the likes of IBM and 3Com, as well as small entrepreneurs, will buy and sell tech patents, domain names, and trademarks.

Supporters of the radio frequency auctions maintain that they encourage the most efficient use of a scarce resource, since only the most financially committed companies are likely to gain a slice of the precious ether (though as the disparity between the $45 billion and $14.5 billion indicates, many fly-by-nighters still creep into the mix). For the most part, auctions also favor the biggest companies, which are best positioned to offer the nationwide services that businesses and consumers demand. And as a neutral third-party administrator, the FCC isn't so vulnerable to the lobbying of special interests. Before the auctions, the FCC awarded spectrum licenses based on comparative hearings and lotteries--a bigger mess.

Still, there's an argument to be made for an even more laissez-faire approach, where all spectrum would be sold off to private-sector companies, which then could buy, sell, lease, subdivide, and aggregate their holdings as they see fit, subject to technical regulation to prevent interference. Such a wide-open market, rather than one administered piecemeal by the FCC bureaucracy, would get spectrum into the hands of go-getter operators more quickly, supporters maintain. (The FCC already keeps speculators in line by requiring companies under a certain size from selling their licenses before 10 years of the grant.) Ostensibly, the money raised in the initial mass auction could be put to productive use within the industries using the spectrum, rather than raked into the government's coffers.

Well, a guy can dream, can't he? The federal government isn't going to give up this under-the-radar tax any time soon. At least the current process is transparent, and the FCC is flexible in allowing licensees to use the spectrum for a variety of technologies and services. For that reason, the spectrum auctions aren't terrible, even if they aren't perfect.

Rob Preston,
VP/Editor In Chief
[email protected]

To find out more about Rob Preston, please visit his page.

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