I have to imagine that AT&T and Verizon Wireless (and their troops in Washington, in particular) are taking some pleasure in the recent stories suggesting that Sprint and T-Mobile are once again contemplating a merger. The potential for such a union adds a new level of intrigue in the campaign these four wireless heavyweights have been waging over whether the Federal Communications Commission (FCC) should limit the amount of spectrum any one carrier can acquire in the FCC’s upcoming voluntary broadcast spectrum incentive auction.

For more than a year, AT&T and Verizon Wireless, aka “the big guys,” have been slugging it out with Sprint and T-Mobile, aka the “not-quite-as-big guys,” over whether the FCC should impose caps on the amount of spectrum the big guys can acquire in the voluntary broadcast spectrum incentive auction. The not-quite-as-big guys have been arguing that, if the FCC does not limit the amount of spectrum the big guys can acquire in the incentive auction, the not-quite-as-big guys will be frozen out, and the already expansive gulf between the big guys and not-quite-as-big guys will expand. The big guys respond that an “open auction” – one without restrictions – will yield the largest payday for the U.S. Treasury, as any artificial limits could hamper the auction’s overall success. As one might imagine, the not-quite-as-big guys disagree with this analysis, and what has followed is a massive subsidy of the economics profession in the United States, as each side has enlisted countless economists to support their respective worldviews.

The recent revelation concerning Sprint and T-Mobile has now fueled a new element of the wireless competition debate. Namely, how does this potential merger affect, if at all, the auction eligibility rules the FCC has been designing with today’s wireless industry in mind?

To illustrate the specific challenge this merger poses, let’s assume that the FCC is contemplating rules that would ensure that each of the top four wireless carriers has a reasonable shot at acquiring spectrum in the incentive auction. What happens, then, if those rules are enacted, and Sprint and T-Mobile subsequently reach a deal to merge, but prior to the auction itself? Or, what happens if the two companies participate in the auction independently, benefit from competitive rules designed for them, and then merge with spectrum assets they wouldn’t have had access to had they merged pre-auction?

The plot has certainly thickened.

The National Association of Broadcasters (NAB) has not taken a formal position on whether the FCC should enact any rules within the voluntary broadcast spectrum incentive auction to foster competition in the wireless industry. While competition in the wireless industry is certainly a good thing for broadcasters (e.g., Sprint’s deal to activate FM chips in cell phones when the big guys passed on the public safety opportunity), we haven’t studied carefully the effects of various rules imposed in an auction and their likelihood of success.

For the Commission, the rumors of a Sprint/T-Mobile merger seriously raise the stakes for the wireless competition issue; one that has already had more airplay than any other. One way to think about the added complication of the potential merger is through the eyes of those designing the rules. Any competitive rules being considered by the FCC necessarily have some “ideal” number of national carriers in mind. For example, the Commission could determine that no bidder should win more than 25 or maybe 33 percent of the licenses in each market area. The former (25 percent) is likely based on a desire for at least four carriers, while the latter (33 percent) for at least three. If the Commission chooses four (i.e., a 25 percent cap on each carrier), but then Sprint and T-Mobile merge post-auction, the new “Sprint-Mo” could walk away with 50 percent of the licenses in a given area, potentially undermining the Commission’s long-term competitive aims.

One may argue that this alleged problem is overblown, as a newly merged Sprint-Mo (pre-auction) could give even smaller carriers a shot at spectrum in the auction. One could also assert that a post-auction merger would likely result in serious spectrum divestitures, thus benefitting small wireless carriers. But, time has shown that most small carriers cannot survive the capital-intensive wireless business long-term, and they ultimately end up either relying on significant government intervention to survive (e.g., data roaming, interoperability, special access reform, the Universal Service Fund, auction rules to their benefit), or more likely, they simply sell out to the big guys in the end, anyway. This is likely why the Department of Justice focused almost exclusively on the nationwide providers in the competition analysis it submitted to the Commission last April.

The challenge for regulators is that the commercial wireless industry is consolidating at a rapid rate, therefore providing a moving target. It is difficult to employ effective competitive auction rules if you have no idea what the industry you are trying to keep competitive will look like when those rules take effect (i.e., in an auction at least 18 months away). This is not to suggest, in any way, that the FCC should not be looking closely at how to foster a competitive wireless marketplace, and even do so in the context of this auction. Rather, I’m merely highlighting the high degree of difficulty in getting it just right.

The major concern for AT&T and Verizon Wireless is that Sprint and T-Mobile may have a chance to end run the process. If they are savvy, they may be able to achieve favorable auction rules, win convincingly at auction and then merge. The FCC would then be in the tough position of having to either deny that merger or exact major divestitures, the latter of which (divestitures) has historically been a disaster. On the other hand, if approved, the resulting Sprint-Mo would be a spectrum powerhouse, having navigated the regulatory wireless morass in a way that only DISH Chairman Charlie Ergen has managed to so far.

And speaking of Charlie, let’s not forget that his 40 – oops, soon to be 50 – megahertz is still out there, lonely, fallow and perhaps waiting for a call from Sprint-Mo as well.  

It should be a fun first half of 2014. Happy New Year!