It seems that AT & T challenged Google: If you are so anxious for wider access, why don't you enter the auction, buy up the bandwidth yourself, and rent it out? Schmidt makes it clear an FTC auction and an E-bay auction are not the same. E-bay is the optimal free market whereas FTC auctions are an "artifically defined market." The FTC slices and dices the spectrum into packages according to their idea of prevailing technolgies, and only well-funded corporations capable of making the large capital investments required can afford to bid on such packages. A private citizen or a start-up entrepreneur with a novel idea or business plan simply does not have the wherewithal to compete.
In fact, in any bidding war between a new entrant and an established incumbent (like Verizon), the incumbent almost always wins. Schmidt explains that this is due to "key economic factors: what we call the 'incumbent blocking premium' and the 'incumbent dilution discount.'"
1) Incumbent blocking premium is a fancy way of saying the incumbent mega corporation has massive existing assets (radio towers, thousands of miles of "backhaul" networks, huge customer lists, enormous advertising budgets--- and ownership of existing spectrum which FTC gave away free years ago); the incumbent has been operating in a "less than fully competitive environment," enjoying excellent profits from revenues exceeding those normal in a fully competitive environment--- what are often referred to as "monopoly rents;" and, given the enormous investment the incumbent has already made, the incumbent has major incentives to block new entries that will compete with them. The capital involved is daunting for any new entrant, and the incumbent will undoubtedly bid the auction price way beyond what a normal free market would produce, thus shutting out the little beginner.
2) Incumbent dilution discount points to a different result: given the overwhelming weight of the incumbent blocking premium (number 1), any potential new bidder is intimidated and discouraged from entering the bidding, resulting actually in a lower final auction price. The number of players having been reduced to the existing Big Guys, with only one or two remaining bidders for some of the packages, the price will end up being below what a true free market would produce, and this is in fact what has been happening with many FTC auctions.
Now we know how it turned out: the consumer will be (trying) to deal in the future with the mega corporations, innovative new business models and technologies will undoubtedly be blocked or subverted by obese corporations clinging to their existing technology investments, and we will doubtless have to look to China and India, perhaps, for future marvels and innovations.
One has to ask: why was there an auction in the first place? Do not the airways belong to the whole population, to be dispensed to the advantage of the whole population? In the past, such spectra were allotted but not charged for.
In telecommunications we have corporations being "licensed" to use vast chunks of very profitable bandwidth, effectively granted a monopoly-- but no protective regulation. It's like a license to coin money at will. One frustrated commenter said "the current prices of wireless services are out of control." Do not overlook the fact that nowadays the individual regulators on the FTC came from the telecom industry, and probably will return there.
As I said, there is and will be no free market competition for you and me, in other words. But isn't free market competition an icon of the Republican dogma?
Great diary Teddy. Put this on the list of things to fix in 2009.
On another note: All our military dependence on electronics, including satellites, makes us vulnerable not only to, say, the Chinese shooting down our satellites, but to natural electro-magnetic storms from the sun. One good pulse and, poof! we're blind.
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Also, it's FCC auctions. No FTC auctions.