In recent years supporters of network neutrality have tried and failed to get Congress to enact neutrality regulations. In 2010, Julius Genachowski, President Obama’s choice to lead the Federal Communications Commission, decided to act anyway, relying on a controversial interpretation of existing statutes to justify a new regime of “open Internet” rules.

At the time, most network neutrality supporters described Genachowski’s as a step in the right direction. But some warned that the FCC’s legal arguments, if accepted by the courts, could be bad for network neutrality in the long run. They could open the door to future FCC regulations—for example, to combat online gambling, pornography, or piracy—that could actually undermine Internet freedom.

Two wireless carriers, Verizon Wireless and MetroPCS, have challenged Genachowski’s regulations. On Friday, in the wake of its recently-completed merger with T-Mobile, MetroPCS withdrew its challenge to those rules. Gigi Sohn, the president of the pro-net-neutrality group Public Knowledge, hailed MetroPCS’s decision and encouraged Verizon to follow suit.

But another prominent supporter of the open Internet, the Electronic Frontier Foundation, is skeptical of the FCC’s argument that existing law gives it “ancillary jurisdiction” to establish network neutrality rules. “We like the goal, but we’re concerned about the means for getting there,” says EFF’s Mitch Stolz. EFF laid out its concerns in a blog post in 2009:

If “ancillary jurisdiction” is enough for net neutrality regulations (something we might like) today, it could just as easily be invoked tomorrow for any other Internet regulation that the FCC dreams up (including things we won’t like). For example, it doesn’t take much imagination to envision a future FCC “Internet Decency Statement.” After all, outgoing FCC Chairman Martin was a crusader against “indecency” on the airwaves and it was the FCC that punished Pacifica radio for playing George Carlin’s “seven dirty words” monologue, something you can easily find on the Internet.

Stoltz draws a parallel to a decade-old battle over the “broadcast flag,” a rule that would have forced television manufacturers to build anti-piracy capabilities into their products. Opponents of the rule, including EFF, convinced the courts that the FCC’s authority was limited to the use of spectrum—it didn’t extend to regulating the design of TV sets.

Public Knowledge also opposed the broadcast flag. And Sohn shares EFF’s concerns about overreach by the FCC. But she says that the FCC’s current approach was better than nothing. Republicans in the House are unlikely to allow new Internet regulations, she says, and “we fear a situation in which the FCC has no authority.”

MetroPCS dropped its lawsuit challenging the Federal Communications Commission’s net neutrality regulations on Friday, leaving Verizon to continue the legal battle against the rules on its own.

T-Mobile, which was not challenging the rules, acquired MetroPCS earlier this month.

The FCC’s rules require wireline broadband providers to treat all Internet traffic equally. Cellphone carriers are prohibited from blocking any apps or services.

Supporters of the rules argue they are critical for ensuring an open Internet and promoting competition, but critics claim the rules unnecessarily restrict businesses and amount to government control of the Internet.

Putting the regulations into place was one of the signature accomplishments by Chairman Julius Genachowski, who will step down at the end of the day.

In a statement, Genachowski applauded T-Mobile for withdrawing the MetroPCS suit.

“The FCC’s widely supported open Internet framework has contributed to healthy growth in innovation and investment across the U.S. broadband economy. Since 2010, our strong and balanced rules have been protecting entrepreneurs and consumers, and have increased certainty and predictability for investors in Internet services as well as networks,” he said.

“The ongoing litigation – now pursued by a single company – only serves to reduce that certainty and predictability,” Genachowski added.

Verizon declined to comment.

The company’s lawsuit, which is pending before the D.C. Circuit Court of Appeals, claims the FCC lacked the authority to adopt the regulations. Verizon also argues the rules are “arbitrary and capricious” and violate its First Amendment free speech rights.

Gigi Sohn, president of consumer advocacy group Public Knowledge, claimed Verizon’s ongoing challenge is an “attempt to take away the FCC’s ability to protect consumers and promote competition.”

“In addition to being anti-consumer, this is against the long-term interests of the largest incumbent providers,” she said.

The U.S. Senate recently approved a measure handing significant new powers to each state’s department of revenue, the state equivalent of the IRS. That means that each senator voting for the Marketplace Fairness Act is encouraging state tax collectors to reach outside of their own state and into the pockets of non-citizens. Thus the legislation radically expands the power of government, particularly where taxes and government audits are concerned.

Not long after the Senate vote the story broke that the IRS targeted conservative groups seeking tax-exempt status for additional scrutiny and harassment, even while expediting the applications of supposed “liberal” groups. Every day the facts get more damning and more politicians line up to denounce this obvious government abuse of power.  All indications are that the abuse was political, but in other situations the motivations could be different, perhaps to something as simple as a desire to raise questionable revenue from a target that cannot really fight back.

The Marketplace Fairness Act allows just that by greatly expanding the power of each state’s department of revenue, making it easier to shake down out-of-state businesses. For example, California could summon a Louisiana merchant to defend itself in a California court. How much easier to just pay the demand rather than to spend the time and resources to fight it?  Do we trust that the audits will be legitimate or driven by the need for new revenue?  As with the IRS scandal, abuse of power can take many forms.

We’ve been through all of this before, when states under the Articles of Confederation were erecting all manner of barriers to trade and sought to advance themselves to the economic detriment of other states. Hence, the new U.S. Constitution included a Commerce Clause and a Due Process Clause. Both of which are violated under the proposed law.

So why would a conservative embrace such a huge expansion of government taxing power?  Real conservatives would not.

You don’t need to be fan of history to know why supporting this legislation is bad. Just look to the IRS to see what happens when extensive intrusive government powers are granted.

The U.S. Court of Appeals for the DC Circuit – the same Court that will hear Verizon’s suit against the FCC’s Net Neutrality order later this year – came out with a ruling last week which may bolster the claim that the FCC violated Verizon’s First Amendment rights through its Net Neutrality regulations.

In National Association of Manufacturers v. National Labor Relations Board, the Court tossed out a rule by the NLRB which made employers presumptively guilty of unfair labor practices simply by not displaying government posters informing workers of their rights.

Interestingly, a centerpiece of the Court’s reasoning hinges on the fact that the First Amendment protects speakers from government-compelled speech.

How does this apply to the upcoming Net Neutrality case?

Well, in operating its networks, Verizon avers it is a “speaker,” possessing editorial discretion akin to a newspaper.  In its view (one I agree with), the Order – such as its no blocking and non-discrimination requirements – compels the network provider to take all (lawful) speech all the time, even speech it does not desire to have on its network.   Moreover, it forbids the provider from favoring or differentiating its content and offerings over others’, essentially compelling a free, unlimited right of access by third-parties to speak over the company’s “modern day microphone.”

The following quotes were taken from the NLRB ruling.  True – there are a number of other factors that will affect how the Court decides the case.  That said, these excerpts provide some modest insight into how the Court might approach Verizon’s First Amendment claim:

• P. 17 – “The right to disseminate another’s speech necessarily includes the right to decide not to disseminate it. First Amendment law acknowledges this apparent truth: ‘all speech inherently involves choices of what to say and what to leave unsaid.’”

• P. 17 – “Chief Justice Roberts, writing for a unanimous Court, put it this way in Rumsfeld v. Forum for Academic & Institutional Rights, Inc.: ‘Some of [the] Court’s leading First Amendment precedents have established the principle that freedom of speech prohibits the government from telling people what they must say.’”

• P. 17 – “As the Supreme Court put it in United States v. United Foods, Inc.: ‘Just as the First Amendment may prevent government from prohibiting speech, the Amendment may prevent the government from compelling individuals to express certain views…’”

• P. 18 – “The right against compelled speech is not, and cannot be, restricted to ideological messages.”

• P. 20 – “[E]ven in cases in which the message was other than one the government had devised, a ‘compelled-speech violation’ occurred when ‘the complaining speaker’s own message was affected by the speech it was forced to accommodate.’”

If the Court reaches the constitutional claim (which is not a given, as seen at 4:30 in this video), Verizon will succeed to the extent it can show it is more than merely a mute conduit; that it is in fact a “modern day microphone” – or certainly could be more of one – which has been forbidden from speaking as it sees fit, in its own fashion and at its own direction due to an FCC rule that cannot be constitutionally justified.

House Democrats urged the Federal Communications Commission (FCC) on Thursday to reject the advice of a group of Republicans on the upcoming auction of broadcast TV licenses.

The Energy and Commerce Committee Democrats accused House Republicans of seeking to “advance a one-sided re-interpretation of the goals and meaning” of the law authorizing the auction and trying to “spin the legislative history in a way that inaccurately reflects the intent of Congress.”

The letter was signed by Democratic Reps. Henry Waxman (Calif.), Anna Eshoo (Calif.), Edward Markey (Mass.), Diana DeGette (Colo.), Mike Doyle (Pa.), and Doris Matsui (Calif.).

Last year, Congress authorized the FCC to encourage TV stations to give up their broadcast licenses for auction to cellphone carriers. The additional spectrum — the airwaves that carry all wireless signals — will help the carriers meet the skyrocketing demand for mobile data.

The Justice Department’s Antitrust Division has recommended that the FCC use “rules, weights, or caps” to prevent industry giants Verizon and AT&T from buying up the most valuable spectrum at auction. The agency argued that ensuring that Sprint and T-Mobile have access to the critical resource will boost competition and lower prices for consumers.

Last month, Committee Chairman Fred Upton (R-Mich.), Rep. Greg Walden (R-Ore.) and other Energy and Commerce Republicans warned the FCC that following the Justice Department’s advice would limit the government’s auction revenue and prevent the firms that need the spectrum the most from obtaining it.

The Republicans urged the FCC to “implement the Spectrum Act as Congress intended” and not to “pick winners and losers before the auction even commences.”

But in Thursday’s letter, the Democrats argued that the spectrum law “explicitly preserves the FCC’s pre-existing authority to issue rules limiting the amount of spectrum that companies can bid for or own, as long as the rules do not name specific entities or specific persons.”

“We believe the views of the Antitrust Division at the Department of Justice are entitled to serious consideration on such core antitrust principles as market foreclosure and the relative competitive value of various spectrum bands,” the Democrats wrote.

As Federal Communications Commissioner Robert McDowell packs up his office after seven years anchoring the right side of the agency’s lineup, he hesitates over a photograph.

“That’s the most important man you’ve never heard of,” he told a reporter as he picked up the picture of a white-haired man with a weather-beaten face standing next to the perennially dapper Republican commissioner.

“It’s Martin Cooper,” he says. “The inventor of the cellphone.”

McDowell met Cooper at the Charles Stark Draper awards dinner this year when Cooper and other cellphone pioneers were honored with the National Academy of Engineering award that is often called the Nobel Prize for engineers.

While McDowell said it was an honor to meet the man who changed the world and the path of the commission forever, he had a lament.

“The saddest thing is I was the highest-ranking government official there. Isn’t that pathetic?” he said. “It was a who’s who of heavyweights. … These folks don’t make the headlines but are the doers in society.”

By nature McDowell is not gloomy man. More often than not, he’s got a smile on his face and a quip on his lips, but packing up an office that you’ve held for nearly a decade tends to make one pensive. He took the opportunity to reflect on the issues that shaped his tenure, from net neutrality to spectrum auctions to Internet freedom.

“It’s a little sad. I love these issues. I love the way the FCC is independent,” he said. “I’ll never have another job like this. It really empowers you to do what you think is best.”

While the Democratic-led commission and McDowell were at odds with some of the biggest decisions, the 49-year-old commissioner wasn’t a bomb thrower.

He is still an outspoken critic of the net neutrality rules because he thinks they are unnecessary government meddling. He still finds portions of the commission’s rules governing the 700-MHz wireless spectrum auction vexing because of their complexity, and he worries that the same complexity will doom the incentive auction.

“My hope is, I hope I’m wrong, but I don’t think it will yield as much spectrum as first advertised,” he said. “It could end up being too complex to work well. If there’s something I learned between the [Advanced Wireless Services] auction in ’06 and the 700-MHz auction December of ’07, it is: If you make spectrum auctions too complicated, they are less likely to work well.”

McDowell said there is still hope for a simple plan, but it will require the commission to take a different tack.

“There’s still plenty of time to keep things simple, but the general thrust of things thus far starting with the [notice of proposed rule-making] is to make things more complicated than they need to be,” he said.

McDowell may have criticisms, but more often, he looked for the common ground as he sought to make his mark.

“Obviously, we disagreed on some other fundamental issues, but we always kept the conversation going, and over the years, we agreed on more decisions pending at the commission than we disagreed,” said former Democratic Commissioner Michael Copps, who described him in an email as “a gentleman of great good humor.”

“We worked well together,” Copps wrote. “I will always remember how hard he worked to facilitate the [digital television] transition while I was acting chairman, and he made an enormous contribution to making that far-reaching and mandated transition as seamless as possible.”

While at the commission, McDowell took up the cause of Internet freedom internationally, fighting against proposals at the World Conference on International Telecommunications that he said would give the International Telecommunication Union, a United Nations agency, more control over the Internet. It’s something he still worries about.

“Internationally, the Internet is in real trouble,” he said. Efforts to expand ITU authority “will ultimately be disruptive to the Internet economy and stunt the growth of freedom and prosperity most in the developing world.”

McDowell may have been tilting at windmills at the WCIT, but his push to resuscitate a long-dormant proceeding on medical body area networks, which are needed for cutting-edge health technology, struck pay dirt.

Working with Copps, who was then the acting FCC chairman, McDowell was able to resurrect the proceeding, eventually leading to a commission decision that allows medical devices access to some of the airwaves. The Medical Body Area Networking proceeding opened the door for devices including electronic implants that allow paralyzed patients to regain use of their limbs.

“That languished for years,” he said. “There are a lot of big-ticket, headline-grabbing issues, but that one makes the top-drawer list for me.”

The interagency fight that caused the mBAN issue to lie fallow for years was particularly galling for the commissioner.

“You literally had victims paralyzed lying in their beds, waiting for the government to act, and there was this game of standoff between the FCC and [Federal Aviation Administration]. It just wasn’t moving,” he explained. “When [Commissioner] Mike Copps became acting chair in January of ’09, it was the first thing I talked to him about. It was a win, win, win.”

The FCC under Chairman Julius Genachowski approved the mBAN use of the airwaves in 2012.

The mBAN decision illuminates both the strengths and weaknesses of the commission, he said.

“This is both the best and the worst of the FCC — the personalities involved shape the outcomes more than you might think,” he said. “That has been more true in some years than others.”

If the 2012 election had gone a different way, McDowell could have ended up in the commission’s coveted center seat, as he was widely perceived to be the front-runner to chair the commission if GOP nominee Mitt Romney had won.

McDowell, whose final day at the commission is May 17, is joining the Hudson Institute’s Center for Economics of the Internet as a visiting fellow. Looking back now, he’s unsure if the chairman’s seat is worth it.

“In all honesty, there are many things I wish I had done, but I leave now with a lot of nice people on both sides of the aisle saying nice things about me. That probably wouldn’t be the case if I were chairman,” he said. “The good news for Tom Wheeler is: Congratulations, you’re going to be chairman. The bad news is: You’re going to be chairman.”

Yesterday, the U.S House of Representatives unanimously voted to keep the Internet from being subject to international regulation. H.R. 1590, sponsored by Greg Walden (R-OR), was a victory not only for internet freedom but for the United States, who would not bow to pressure and join countries like Russia, China and India in having their internet regulated.

Speaking on the House floor, Rep. Walden said:

“The Internet is possibly the most important technological advancement since the printing press. Governments’ hands off approach has enabled the Internet’s rapid growth and made it a powerful engine of social and economic freedom. This bipartisan bill is designed to combat recent efforts by some in the international community to regulate the Internet, which could jeopardize not only its vibrancy, but also the benefits it brings to the world.”

Digital Liberty and Americans for Tax Reform have long supported efforts to push back against attempts at international Internet regulation such as those pushed through at the WCIT. Americans for Tax Reform sent a letter officially supporting the multi-stakeholder model to keep the internet free and open so that it can continue to spawn economic and social benefits .

Yesterday’s House vote is an encouraging step in the fight against what FCC Commissioner Robert McDowell called “patient and persistent incrementalists” who want to alter the multi-stakeholder model. Hopefully, efforts to resist regulation abroad will be paired with those that resist similar mistakes at home.

Action is heating up on the next farm bill, as the Senate Agriculture Committee today completed its markup of their bill which will go to the Senate for consideration.  The House is scheduled to release its markup on Wednesday.  No surprise – the Senate bill is replete with subsidies and support programs that cost tens of billions of dollars.

Yesterday, in anticipation of the markup, eleven taxpayer and policy groups sent a letter to the House and the Senate with its listing of the “Terrible Twelve” – the twelve most egregious farm policies.  The groups urged policymakers to reform or eliminate these costly and distorting programs:

• • Direct payments
  • Federal crop insurance
  • Shallow loss program
  • USDA Trade Promotion programs
  • Sugar program
  • Diary Market Stabilization Plan
  • Target prices
  • Rural broadband
  • Mandatory assessments
  • Cotton program
  • Ethanol’s Feedstock Flexibility Program
  • Biomass Crop Assistance Program

Last week, a coalition organized by CEI sent a letter to policymakers urging reform of the U.S. sugar program, which costs consumers an estimated $4 billion a year in extra costs.

Amendments are likely to be introduced on the floor in both the House and the Senate to reform some of  these wasteful programs.  But the farm programs are a classic example of concentrated benefits and dispersed costs.   In addition, because nutrition and food stamp programs make up the majority of the costs of the farm bill, both urban and rural policymakers form an unholy bipartisan alliance to push farm bills through.  Bipartisanship isn’t all it’s cracked up to be.

Suppose I wish to purchase only the Sports page of the Washington Post on an a la carte basis on the theory that it ought to be priced less than the whole newspaper?

Or suppose that I wish to purchase only the interview in Playboy (or centerfold if you prefer) on the theory that it ought to be priced less than the whole magazine.

No one thinks the government should – or could – mandate that newspapers or magazines be made available on an a la carte basis just because some politician or policymaker thinks that some consumers might prefer to “pick-and-choose” only their favorite sections.

Yet, in the past, politicians and policymakers have suggested the government should require cable operators to make available the channels on their systems on an a la carte, pick-and-choose basis.

This was a bad idea when Senator John McCain and others offered it previously over a decade ago.

It is a worse one now. But Sen. McCain is back at it again, with his newly introduced “Television Consumer Freedom Act” (S. 912). In his May 9^th floor remarks introducing his bill, Sen. McCain said it “is about giving consumers more choices when watching television.”

My gosh! In the history of humankind, consumers never have had so many choices for watching so much diverse video programming offered by so many video providers.

Whatever the situation over a decade ago when Sen. McCain first urged adoption of an a la carte requirement, it is indisputable that the video programming and distribution marketplace is now competitive. Curiously, despite what should be its obvious relevance to consideration of new regulatory requirements, Sen. McCain does not discuss the current competitive marketplace environment in his floor remarks.

In the context of this blog, it is impossible and unnecessary to chronicle the remarkable increase in consumer choice in the video marketplace that has occurred over the past decade. For a general picture with lots of data points, I refer the reader to the FCC’s Video Programming Competition Report (Fourteenth Report), released in July 2012, even though this report covers marketplace developments only through 2010.

In the Fourteenth Report’s very first paragraph, the FCC states that “the most significant trends since the last report relate to the increased deployment of digital technology, consumers’ rising demands for access to video programming anywhere and anytime, and the evolution of online video from a niche service into a thriving industry.” Remember, this is as of the end of 2010.

Today’s cable systems typically offer subscribers approximately 900 unique channels, and the two competing satellite operators (Dish Network and DIRECTV) offer nearly the same number of channels. And now, of course, the “telephone companies” compete in the multichannel video market with similar video offerings. Presently, the cable companies have approximately 58% of the multichannel video programming distributor (MVPD) market, the satellite providers 33%, and the telephone companies 9%.

But as the FCC observed, even as of 2010, the emergence of “over-the-top” online video as a “thriving industry” further altered the marketplace environment in the direction of more consumer choice. Today, Netflix, with 29 million subscribers, is the nation’s largest subscription video service, with more subscribers than Comcast (22 million). In addition to the dominant provider Netflix, other major online video programming purveyors include Hulu, Amazon, iTunes, HBOGo, and Apple TV. Not to mention YouTube, which recently announced initiation of a subscription video service. And, of course, in addition to the traditional “television” screen, you can watch all this various video programming on laptops, notebooks, and smartphones.

We truly do live in the age of “TV Anytime, Everywhere.”

While Sen. McCain did not focus on these competitive developments, it would be difficult to conclude a marketplace failure exists warranting further government regulation of video program providers. In his May 14^th statement at the Senate Subcommittee on Communications, Technology, and the Internet hearing hearing, Sen. McCain summed up this way: “Consumers should not have to pay for television channels they do not watch and have no interest in watching.” It is true that the cable and satellite operators do not presently allow consumers to purchase channels on an individual basis, but there are an increasing number of online providers that already offer just such “on demand” business models.

And the most fundamental point is this: In light of the existing competition among video programming purveyors, it is much more likely that the marketplace will satisfy consumer demand in the most efficient, least costly manner than some government-directed offering. While the idea that all consumers should be able to purchase only the channels they choose to watch from all MVPDs may have superficial appeal, the notion that such a universal a la carte regime really would benefit consumers is highly suspect.

Numerous previous studies have shown that a government-mandated a la carte regime would not necessarily lower prices for consumers and might well diminish, even substantially, the number of channels available, especially those appealing to minority or specialized tastes. This is only logical. With the unbundling of all channels, the costs for making available certain individual channels would rise as the audience size for particular channels is reduced. Some channels almost certainly never would get off the ground because, absent the opportunity to bundle them with already-popular channels, MVPDs would not risk incurring the costs of carrying a channel with little initial expected audience demand.

In a 2003 study, “Issues Related to Competition and Subscriber Rates in the Cable Television Industry,” the GAO concluded that, under an a la carte regime, cable networks could lose advertising revenue, and, as a result, “some subscribers’ bills might decline but others might increase.”

And in their 2008 Perspectives from FSF Scholars, “Bundles of Joy: The Efficiency and Ubiquity of Bundles in New Technology Markets,” Stan Liebowitz and Stephen Margolis explained at length why product bundling generally is efficient and ubiquitous throughout the economy. With respect to cable operators, at the time subject to pressure by then-FCC Chairman Kevin Martin to adopt an a la carte model, Professors Liebowitz and Margolis had this to say: “Customers may naïvely believe that the single channel price will be their bundle price divided by the number of channels in the bundle. Regulators may cynically give them pay-by-stations options. But since customers will be unhappy with the likely result, some regulatory alternative will be found, but no alternative is likely to enhance efficiency.”

Again, today’s video distribution and programming marketplace is more competitive than ever and, thus, almost certainly responsive to evolving consumer demands. It is foolish to think the government can do a better job of deciding how video programming should be offered than the marketplace.

I should say that I understand that, strictly speaking, Sen. McCain’s bill does not impose a government mandate requiring MVPDs to adopt an a la carte model. Rather, the bill would withhold from MVPDs and broadcasters certain regulatory “benefits” absent adoption of an a la carte model. It is in this sense that Sen. McCain says that his bill is “voluntary.”

Without engaging in a linguistic debate concerning the definition of “voluntary” in the context of a regime in which the government confers and then threatens to withhold certain benefits absent agreement to adopt a government-preferred course of action, I will grant Sen. McCain this: Due to the remarkable changes in the video marketplace that I have already discussed, it is time to begin examining, on a comprehensive basis, jettisoning many of the outdated legacy regulatory requirements he has identified, such as the network non-duplication, syndicated exclusivity, must-carry and retransmission consent, compulsory copyright, and so forth.

But the existence of such a tangle of legacy requirements in a fast-changing, competitive marketplace should not be a justification for adopting still more government intervention. Rather, I would respectfully urge Sen. McCain to consider it a reason for reducing and eliminating outdated regulations so the free marketplace can be allowed to work.

One final note: Recall my (hypothetical) desire to purchase only the Washington Post Sports page or the Playboy interview (or centerfold). I said at the outset that no one believes the government should – or could – mandate that the Post or Playboy be required to satisfy my desire. Apart from any others, a reason for this is that the First Amendment would prevent such government intervention with respect to the exercise of the publishers’ editorial discretion regarding the way they wish to assemble their content into a package. I argued way back in May 2007 in “The Constitution, A La Carte” that any government requirement that has the effect of imposing an a la carte regime on cable operators and other MVPDs likewise should be found to violate their First Amendment rights because it would infringe upon their editorial discretion to package their program content as they wish.

I said then that “a la carte constitutionalism simply won’t do.” I still believe that to be true, of course, and I hope you do as well.

Frontline relied on the DOJ foreclosure theory to predict that the lack of eligibility restrictions in the 700 MHz auction would “inevitably” increase prices, stifle innovation, and reduce the diversity of service offerings as Verizon and AT&T warehoused the spectrum. In reality, the exact opposite occurred.

The DOJ recently recommended that the FCC rig the upcoming incentive auction to ensure Sprint Nextel and T-Mobile are winners and Verizon and AT&T are losers. I previously noted that the DOJ spectrum plan (1) inconsistent with its own findings in recent merger proceedings and the intent of Congress, (2) inherently discriminatory, and (3) irrational as applied. Additional analysis indicates that it isn’t supported by economic theory or FCC factual findings either.

Economic Theory

The Phoenix Center published a paper with an economic simulation that exposes the fundamental economic defect in the foreclosure theory underlying the DOJ recommendation. The DOJ implicitly recognizes that the “private value” of spectrum (the amount a firm is willing to pay) equals its “use value” (derived from using spectrum to meet consumer demand) plus its “foreclosure value” (derived from excluding its use by rivals). In its application of this theory, however, the DOJ erroneously presumes that Verizon and AT&T would derive zero use value from the acquisition of additional spectrum – a presumption that is inconsistent with the FCC findings that prompted the auction.

The Phoenix Center notes that all firms – including Sprint Nextel and T-Mobile – derive a foreclosure value from the acquisition of spectrum due to its scarcity. When considering the benefits to consumers, it is the comparative use value of the spectrum for each provider that is relevant. If the use value of the spectrum to Verizon and AT&T exceeds that of Sprint Nextel and T-Mobile, economic theory says Verizon and AT&T would maximize the potential consumer benefits of that spectrum irrespective of its foreclosure value.

Of course, determining the differing use values of spectrum to particular firms is what spectrum auctions are for, which brings the DOJ’s argument full circle: If government bureaucrats at the DOJ and the FCC could accurately assess the use values of spectrum, we wouldn’t need to hold spectrum auctions in the first place.

The circularity of the DOJ theory explains its reliance on an unsubstantiated presumption that Sprint Nextel and T-Mobile have the highest use value for the spectrum. If the DOJ had instead (1) conducted a thorough factual investigation, (2) analyzed the resulting data to assign bureaucratic use values for the spectrum to each of the four nationwide mobile providers, and (3) compared the results to determine that Verizon and AT&T had lower use values, the DOJ would have engaged in the same failed “comparative hearing” analysis that Congress intended to avoid when it authorized spectrum auctions. Given the Congressional mandate to auction spectrum yielded by the broadcasters, the FCC cannot engage in a comparative process to pick winners and losers, and it certainly cannot substitute an unsubstantiated presumption for an actual comparative process in order to avoid the legal prohibition.

FCC Factual Findings

The foreclosure theory and DOJ presumption are also inconsistent with the auction experience and current factual findings of the FCC. The DOJ foreclosure theory has been presented to the FCC before and has proved invalid by the market.

When the FCC was developing rules for the 700 MHz auction in 2007, Frontline Wireless sought preferential treatment using the same foreclosure theory as the DOJ. Frontline submitted a paper (prepared by Stanford professors of economics and management) that relied on the same types of information and reached the same conclusion as the DOJ – that Verizon and AT&T were dominant “low-frequency” wireless incumbents with “strong incentives” to acquire and warehouse 700 MHz spectrum, and that their participation in the 700 MHz auction must be limited in order to “promote competition” and prevent “foreclosure.” Frontline predicted that, if Verizon and AT&T were not prevented from bidding in the 700 MHz auction, it would “inevitably lead to higher prices, stifled innovation, and reduced diversity of service offerings.”

The FCC rejected Frontline’s foreclosure theory. The FCC concluded that, “given the number of actual wireless providers and potential broadband competitors, it [was] unlikely that [incumbents] would be able to behave in an anticompetitive manner as a result of any potential acquisition of 700 MHz spectrum.”

The last five years have proven that the FCC was correct. Though Verizon and AT&T acquired significant amounts of unfettered 700 MHz spectrum, the auction results have not led to the “higher prices, stifled innovation, and reduced diversity of service offerings” predicted by Frontline. In its most recent mobile competition report, the FCC reported that:

• Verizon used its 700 MHz spectrum to deploy a 4G LTE network to more than 250 million Americans less than four years after Verizon’s 700 MHz licenses were approved (i.e., it didn’t warehouse the spectrum).

• Mobile wireless prices declined overall in 2010 and 2011, and the price per megabyte of data declined 89% from the 3^rd quarter of 2008 – a few months before Verizon received its 700 MHz licenses – to the 4^th quarter of 2010 (i.e., industry prices decreased).

• The number of subscribers to mobile Internet access services more than doubled from year-end 2009 to year-end 2011 (i.e., industry output increased).

• Prepaid services are growing at the fastest rate, and new wholesale and connected device services are growing significantly (i.e., providers continued to provide new and diverse service offerings).

• Market concentration has remained essentially unchanged since 2008 (the population weighted average of HHIs increased from 2,842 in 2008 to 2,873 in 2011 – a change of only 1 percent).

Remember: Frontline relied on the DOJ foreclosure theory to predict that the lack of eligibility restrictions in the 700 MHz auction would “inevitably” increase prices, stifle innovation, and reduce the diversity of service offerings as Verizon and AT&T warehoused the spectrum. In reality, the exact opposite occurred. Verizon and AT&T did not warehouse the spectrum, industry prices decreased while output increased, diverse new service offerings exhibited the strongest growth, and market concentration remained essentially unchanged. And, while competition thrived, consumers reaped the benefits.

So, why would the DOJ make the same failed argument for the 600 MHz auction (other than crony capitalism)? Some might say, “Even the boy who cried wolf was right once.” But, even if one were inclined to give the DOJ the benefit of the doubt, the theoretical possibility that the foreclosure theory could adversely impact the 600 MHz auction must be weighed against the potential harm of limiting participation in the auction.

The harm is well documented and could prove particularly problematic in this auction. A paper coauthored by Leslie Marx, who led the design team for the 700 MHz auction when she was the FCC’s Chief Economist, demonstrates that excluding Verizon and AT&T would have even more severe consequences in the incentive auction than in previous auctions.

A paper published by economists at Georgetown University’s Center for Business and Public Policy attempts to quantify the severity of these consequences. It estimates that excluding Verizon and AT&T from the auction could reduce revenues by as much as 40 percent ($12 billion) – a result that would jeopardize funding for the nationwide public safety network, reduce the amount of spectrum made available for wireless Internet services, and adversely affect more than 118,000 U.S. jobs. That is a steep price to pay for the privilege of seeing whether the boy is crying wolf again.