 Hi, and welcome to another 5 Minutes with Harold Feld, where we try to take incredibly complicated insanely boring things and make them slightly less boring because this stuff is important. I want to talk a little bit about the future of wireless competition and the problem that we have right now with the fight over rules for future spectrum auctions. Spectrum is the shorthand for that wireless capacity that Verizon, AT&T, T-Mobile, Sprint and all the other wireless companies need in order to make our mobile devices work. The way we deal with that right now is we chop it up into these exclusive licenses and then we auction those off. So the idea is that companies will bid and whoever is the highest bidder gets a license for a certain amount of spectrum in a certain geographic area. So here's the problem with that. Under auction theory, absolutely guaranteed that AT&T and Verizon will be the ones who win whatever licenses they want to win. Here's why. An auction works like this. How much value do I think I can get out of, let's pretend this can of delightful refreshing diet coke beverage is a jar of delightful refreshing spectrum. How much value can I get out of this? Well if I'm somebody who doesn't have any kind of wireless network, I'm new to this, I probably have to spend a couple of billion dollars to build the networks and get the customers before I can even get value out of this. So let's pretend in some absolute sense this is worth five billion dollars. But if I'm a new company, if I'm Apple and I want to break into the wireless business, I'll have to spend three billion dollars just to be able to take advantage of the spectrum. So the only amount of money that's rational for me to bid is two billion dollars for this. I mean, sure, I've got tons of money. If I wanted to lose money hand over fist, I could bid a 15 billion dollars for this and outbid everybody, but companies don't work that way. If you're Apple and you're in an auction and you're trying to figure out what's the rational thing for me to bid and I think that there's five billion dollars worth of value here and it's going to take me three billion dollars in order to be able to get that value out, then I'll only bid two billion dollars. Now let's say I'm already a wireless company like Sprint. So Sprint's a wireless company. They don't have to build a whole new network, but they don't get the same kind of economies of scale. They don't want to track the same kind of financing as the biggest companies. So if I'm Sprint, maybe I can bid three billion dollars for this spectrum can. If I'm AT&T or Verizon, I've got the biggest network, so I get the economies of scale. I've got everything that I could possibly need to plug this in and maximize the value. So I can get the full five billion dollars worth of value. So for me, AT&T or Verizon, it's rational to bid five billion dollars. So in any rational auction where everybody's acting rationally, the new entrant drops out earliest because they have the most additional cost. The midsize player drops out next because they don't have the economies of scale to be able to extract the value and the largest players will therefore win. Does that happen every single time? No, because sometimes you'll have somebody who will say, I so need spectrum that even though I'm going to lose money overall, I'll still bid more for it because I just got to have some. But that's not enough to create real competition. So what we have in economic terms is a conflict between the efficient auction theory and competition policy. Do we want to have competitors who have spectrum who are able to compete and that means lower prices for everybody and more innovation in the wireless space? Or do we want to maximize the efficiency of the auction which means the spectrum will always go to the player that can extract the greatest value from it? And that's even with the assumption that somebody like AT&T and Verizon will extract the full value out of it right away because here's the other thing that's important. If I'm AT&T or Verizon, there's value for me just in keeping it out of the hands of Sprint and T-Mobile. So let's say Sprint or T-Mobile or even Apple are bidding for it. And I say, hmm, normally I could only get $5 billion out of the spectrum. But it's so important for me to keep these competitors weak so that I keep the majority of my market share that it's worth $6 billion for me to have the spectrum, $5 billion for what I can get out of the spectrum, another billion dollars in value of keeping these guys from having it. That's something in economics terms called foreclosure value. And when you go to figure out what the value is at auction, that's a very real value that weighs into how much you're going to bid. To make matters even worse, who's going to get the financing for all these bids? No banks, no economics, the same way anybody else who studies this stuff does. So in an auction, who are they going to back? Are they going to back T-Mobile and Sprint? Or are they going to back AT&T and Verizon, who are the ones who are likely to win? Guess what? They're going to back AT&T and Verizon. So that's our choice going into this. Do we want to have some kind of let's be fair to everybody and know that in the end that's going to be a wireless duopoly that's going to screw consumers? Or do we want to leave the FCC the option to say, you know what? We need to balance things on the competition side. AT&T and Verizon, you guys sit this round out.