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Your Turn:
A Day Late and a Dollar Short

by barry lambergman
July/August 2001

Like once quaint streets in Europe now littered with fast food joints, spectrum auctions are an example of Europe following a U.S. idea that has gone awry. In this case, rather than a quick burger, it’s a quick buck and a lot of them–$116 billion and counting. As has been well chronicled, this massive drain of capital from the wireless industry has contributed to plummeting stock prices, downgrading of credit ratings, asset sell-offs, industry consolidations, loss of jobs and delays in the rollout of next-generation wireless services. The question now is whether the U.S. government has learned enough from the European experience to convince itself to adopt reforms that will help avoid a similar fate when third-generation spectrum is licensed here in the next year or so.

This does not necessarily mean abandoning auctions. What Winston Churchill said about democracy may be just as true of auctions: They are the worst option, except for all the others. But it does mean that the U.S. government must first change its mindset to one where spectrum management is driven by productivity growth, economic development and job creation rather than by short- term budget fixes.

A starting point for auction policy reform would be to use auction proceeds to cover the cost of relocating the Department of Defense out of the globally allocated 3G bands. As a result of industry efforts over the past several months, proposals to do just that are now under consideration in Congress. In fact, by significantly reducing the transaction costs associated with clearing this encumbered spectrum–which is essentially all that remains–a cycle of accelerated spectrum availability could begin. That should eventually lead to lower, more appropriate spectrum prices, which will drop as supply begins to catch up with demand. Other targeted uses of auction revenue might also be explored, including funding FCC mandates such as E911, CALEA and disabilities access.

While using auction revenue to increase the supply of spectrum, the government might also bring down spectrum prices by reducing demand. For example, a hybrid approach could be employed under which the auction would follow a prequalification phase designed to weed out speculative bidders. The number of bidders in a given auction might also be reduced if the government had a five-year, long-term spectrum plan. If operators knew with some degree of certainty when spectrum was likely to be made available over a period of years, they might not feel compelled to bid every time spectrum is put on the block.

Third, the payment system could be changed so that operators do not incur huge expenses before the revenue needed to cover them has started flowing. For example, there might be a phased payment approach where auction payments are tied to when spectrum is actually cleared. Another possibility might be auctioning licenses on the basis of a “pay-as-you-grow” arrangement under which the license fee is spread over time, perhaps based on a percentage of revenues with an appropriate cap.

Finally, spectrum costs could be reduced through tax relief. For example, operators could be allowed to accelerate the period over which they depreciate licenses–e.g., three or five years rather than the current 15-year period. Tax credits tied to speed of infrastructure buildout and for research and development might also be considered.
It’s clear the United States lags behind much of the rest of the world in allocating spectrum for the next generation of advanced wireless services and the situation is not likely to improve until the logjam with the Department of Defense is broken. But there may be a silver lining to this delay: The United States now has the time to get it right.

Barry Lambergman is director of international regulatory affairs in Motorola’s government relations office in Washington, D.C.