Out of Control

Incumbent parties covet the added bandwidth because it will give them more radio channels to support broadband wireless services, addressing the very speed and congestion problems Hundt says only Frontline can solve.

Frontline’s frenetic lobbying should remind us why auctions replaced lotteries. Say what you will about airwaves belonging to the public, a spectrum license nonetheless has tangible value. While the lottery concept sounded fair—every applicant had an equal chance of winning a license—speculators immediately realized that the government was using random chance to award the exclusive right to a chunk of valuable spectrum that could be sold on the open market. The lotteries triggered a deluge of thousands of applicants, who, for a relatively small administrative fee, could get a “ball” in the FCC lottery basket. (Some may remember those late-night TV commercials featuring one-time talk show host Mike Douglas, who touted a legal service that would handle the application process).

The odds were long, but the winner, as proud owner of a spectrum license, came in for a genuine windfall as wireless companies were willing to pay millions for it.

The introduction of spectrum auctions eliminated license speculation. The FCC, by recognizing the licenses carried a true value in the marketplace, was able to realize the actual worth of the spectrum.

By using loaded word like “deep-pocketed” to describe its competition, Frontline suggests that the auction process is somehow unfair, when, in fact, it’s Frontline that’s seeking to use the regulatory process to create a whopping advantage for itself. Frontline wants Congress and the FCC to revert to its one-time view that spectrum has no independent value. Not true. The acquisition of spectrum is a legitimate cost of entry, just as much as the investment in network equipment, site acquisition and construction. Simply claiming to have a better idea for a wireless network is not a good enough reason to ask the FCC for a freebie.

Frontline is attempting to acquire spectrum at below-market cost. Should Frontline succeed, the value of the company will skyrocket, reflecting the true market price of the spectrum assets it holds, not the rigged price it paid. Frontline investors will benefit upfront from this surge in value. The public benefit that Hundt touts is entirely contingent on Frontline following through on its idea. And that’s a big if.

If Frontline’s technology and business plan are sound enough, it should attract the capital and/or credit to make it a player in the 700 MHz auction without special dispensation.

Finally, the incumbents aren’t going to bid up the price of spectrum just to keep Frontline out. That only happens in the movies. In real life, shareowners take a dim view of management that pays more for assets than what they are worth. In line with this, the price of spectrum has fluctuated over the years. After the tech bust in late nineties, when it became apparent that companies worldwide were overpaying for spectrum licenses, fees tumbled.

On the other hand, Frontline, as a new participant, creates additional demand. Its presence in the auction might itself raise the market price. That’s why the 700 MHz auction needs to be on the level. Spectrum must go to the company that, on a dollar-for-dollar basis, can use it most efficiently and thereby deliver the best service at the lowest cost. Anything else is simple rent-seeking.