Unsurprisingly, in the swirl of folks around this week's House Commerce “iPhone” Hearing [2], rumors and gossip about the 700 MHz Endgame abounded. In the nasty-but-sadly-believable category comes a rumor that the Bells have asked (through a wholly owned subsidiary in the House) for the Office of Management and Budget [3] (OMB) to do a “study” on whether any open access condition (of any definition) or other incumbent restriction (such as the spectrum caps urged by the Public Interest Spectrum Coalition) will depress auction revenue.

To those who know how these things usually work, the first question is “Why Ask OMB and not the Congressional Budget Office (CBO) or the Congressional Research Service (CRS), which usually do this sort of thing?” And to those of us who have lived through the last 6 years of an Administration that spells “research” P-R-O-P-O-G-A-N-D-A will cynically answer, “because that way the telcos can make sure they get the 'right' result.” Unlike CBO or CRS, which are under the control of Congress and generally take their research pretty seriously, OMB is directly under the control of the Bush administration.

Man, Telco spying for NSA is just the gift that keeps on giving. First the Bush Justice Department behaves like a nice little lap doggie and rolls over and plays dead for AT&T buying BellSouth [4]. Then Bush tried to give the Bells retroactive immunity for what they did [5]. Now, according to rumor, Bush will help the telcos rig the auction to keep the status quo.

Some needed background and why the oft-repeated idea that open access will automatically reduce auction revenue is a load of nonsense below . . . .

A bit of background first. In 1993, Congress authorized the FCC to distribute licenses by auction. Since it was still gauche at the time to actually say you were selling off valuable public resources (rather than it being a point of pride), the relevant statute tells the FCC that it must not consider the impact on auction revenues when it makes rules for auction. 47 U.S.C. 309(j)(7) [6]. Setting the rules for the service licensed and for the auction are supposed to be exercises in public policy done to serve the public interest.

We all know, of course, what happened. We started having spectrum auctions, and some of them generated a lot of revenue. Then we got into a war, generated a huge national debt, refused to cut our spending, insisted on cutting taxes, etc., etc.

The sad result of this is that spectrum auctions are now the crack cocaine of telecom policy. Members of Congress will do anything to get that revenue. And they are not particularly rational about it. If anything even looks like it might reduce auction revenue, they get the shakes and become (even more than usual) willing to prostitute themselves to industry for an assurance that nothing will mess with the auction revenue.

Unsurprisingly, and with increasing lack of subtlty as it looks like the FCC might actually adopt something resembling a service rule (which, while having no practical consequences, establishes what the incumbents would consider a bad precedent [7]), the wireless incumbents and their coin operated think tank buddies have warning that if you start imposing any kind of conditions you will reduce the auction revenue from a projected $20 billion (depending on who is estimating) to pocket lint and a wad of old chewing gum.

Consider, for example, this letter by AT&T [8]. Signed by Robert Quinn Jr., apparently to atone for letting it slip that AT&T might actually bid on a license with a wholesale open access condition [9], it threatens all manner of dire consequences if the FCC even thinks too hard about imposing any conditions. Chief among them in the lead off paragraph being that — surprise! — open access conditions will drive down auction rates and deprive tax payers of billions in revenue. (We'll skip the rest of the legal vaporings about lawsuits. I agree with the analysis Stifel Nicolaus did that determined that even the DC Circuit in all its activist glory is unlikely to hold up the auction over such a challenge.)

This allegation resurfaces as one of the chief talking points by AT&T, its fellow incumbents, and its sock puppet op ed planters (Did I mention that Washington Post Co., whose flagship paper has run several op eds like this one by industry consultants [10], was a bidder in the last auction and will probably bid in this auction as well?) Any conditions will hurt auction revenues, so don't impose them. At the iPhone hearing, one could see some Republicans (who I imagine feel more guilt over the current budget mess) positively frothing in a mix of anger and terror that anything might get in the way of increasing the auction revenues.

The problem for AT&T and its cronies is that while that sounds intuitively good, it turns out to be a total crock. On the surface it seems reasonable: an unrestricted license is “worth” more than a restricted license. But as always in applied economics, it turns out to be more complicated. For starters, eve on a simple level, only one license (so far) is conditioned. If that makes the “conditional” license less desirable, shouldn't the remaining “unconditional licenses” become more desirable because they are now scarcer? Remember, we care about total auction revenue, not just one license.

The second complicating factor is that bidding behavior of incumbents and potential new entrants is shaped by the ability of incumbents to block new entrants [11]. The incumbents block new entrants because doing so forecloses competitors from the market. Potential new entrants, seeing the game is rigged, stop showing up to play, allowing incumbents to neatly divide the licenses amongst themselves. But throw in wholesale open access and the game changes dramatically. No matter what, incumbents know they cannot block new entrants because new entrants will be able to come into the market after the auction via the wholesale market. Indeed, the only way incumbents can block that is if the incumbents bid on and capture the wholesale open access licenses themselves, so they can mess up the deployment and lobby the FCC to get rid of the condition.

So either the incumbents will bid like mad for the open access blocks so they can warehouse them, or they will be forced to bid aggressively against each other for the “unrestricted blocks.” Meanwhile new entrants, seeing that they now have a chance to win licenses, will show up to bid in greater numbers and more aggressively than in the “unconditional” game which is actually rigged for the incumbents. Or so says Peter Cramton of UMD and one of the leading experts on this stuff, if I understood him yesterday, and he should actually know.

In any event, history belies the idea that auction restrictions that kee incumbents out “rig” the game or reduce auction value. Kim Maynard over at Public Knowledge posted this history of the 1994 PCS auction [12], where incumbent exclusions and new entrant credits produced a swarm of new entrants bidding that wiped out any loss of revenue from the credit.

Ah, I hear you spectrum auction groupies cry, but that was the “cursed C block auction,” where speculators bid up licenses and then when bankrupt. That doesn't prove anything!“ For them what remain unconvinced, I offer Exhibit B, the ”Nextwave PCS“ auction of 2000. This was the last auction cnducted with spectrum caps in place. That is to say, that incumbents were limited in how much spectrum they could acquire, leaving over licenses for new entrants. That auction gave a return of $4 Mhz/pop. (MHz/pop is the standard way to measure value of licenses. It is the license divided by the population of the area covered by the license.) The most recent comparable auction, last summer's AWS auction [13], fetched 53 cents per MHz/pop.

I have no doubt the auction geniuses hired by the incumbents will have all manner of reasons why this history teaches us nothing we should care about. But I would suggest that these two counter examples challenge the rather simplistic notion that letting AT&T and the other incumbents rig the game for their own benefit is the sure fire way to increase auction revenue — assuming that's our actual goal.

But no one questions a crack dealer when he threatens to cut off your supply, and Republicans don't question industry incumbents even a the best of times. So no surprise you have Barton, Upton and a whole bunch of folks (with the exception of Chip Pickering (R-MI), who was a staffer on the Hill during the debate over the 1996 Telecom Act and knows this stuff stone cold) rather shamelessly pimping for the incumbents and screaming that MArtin better damn well dance to AT&T's tune or the auction revenue will go away and we might have to start being fiscally responsible again. But AT&T also understand that not everyone is a Republican Congressman with a bad auction revenue habit and a need for big PAC contributions.

Hence the rumor of a request to OMB for a report, where AT&T and its buddies can make sure they can control the outcome. If they can claim that a ”government estimate“ shows that even Martin's open access lite [14] will cause auction values to drop and deny our troops needed body armor in Iraq — causing us to lose the war in Iraq just to rig the auction for Google — it will create more pressure for Martin to back off and make it much harder even for the Democrats to stand firm.

I wish I lived in administration where I could say ”that's crazy talk! Our government would never tell outright lies just to help some phone company keep a monopoly — especially when it would hurt our competitive standing in the world and might actually depress the real auction revenues these guys want." Unfortunately, I live in the Bush Administration, where lying to advance one's political agenda and help one's little industry buddies and party loyalists is a freakin' job qualification. So if I see a report next week from OMB with big scary headlines that agrees spot on with what AT&T just told the FCC, I won't be surprised. Nor, sadly, will I be surprised to see the mainstream media lap it up with a spoon.

Stay tuned . . . .