Taxation by Condition: Spectrum Repurposing at the FCC and the Prolonging of Spectrum Exhaust

ABSTRACT In this POLICY PAPER, we show how the Federal Communications Commission’s regulatory process may be used to impede the efficient functioning of a secondary market for commercial spectrum. In particular, we show that imposing (and threatening to impose) significant conditions when firms seek to repurpose spectrum from a low-value to a higher-value use acts as a “tax” and thus reduces the incentives of firms to exchange spectrum in the secondary market. As a result, “taxation by condition” will discourage the larger scale transactions necessary to resolve spectrum exhaust, though we may still observe many deals of a less material nature that will attract less attention and thus fewer conditions. Our analysis also reveals that in many cases the arguments to condition spectrum licenses based on “market power” concerns are misguided. Market power does not over-motivate licensees to repurpose spectrum. In fact, economic theory shows that a monopolist will repurpose spectrum to a degree less than or equal to a benevolent “social planner.” Accordingly, under the constant threat of spectrum exhaust, “taxing” efforts to repurpose spectrum is perhaps the worst of all policies. Instead, if the Commission is serious about alleviating exhaust for commercial spectrum, then barring legitimate competitive or interference concerns, the agency should expeditiously approve efforts to repurpose spectrum without extraneous conditions.