FCC Chairman Reed Hundt announcing May 27, 1997, that he would resign his post. (Brian K. Diggs/AP)

New Federal Communications Commission  Chairman Tom Wheeler faces a number of important decisions about the future of the wireless industry. Wheeler recently announced he would delay the proposed "incentive auction" (in which broadcasters will be paid to give up their spectrum so that it can be resold to wireless companies) to give the FCC more time to fine-tune the rules. And Wheeler's FCC may also have to weigh in on Sprint's rumored bid for rival T-Mobile.

To help us understand the spectrum policy decisions Wheeler faces, I talked to one of Wheeler's predecessors, Reed Hundt. Hundt served as FCC chairman during President Bill Clinton's first term. Because Hundt oversaw the first spectrum auctions, the decisions he made as FCC chairman continue to affect today's wireless market. Today Hundt is CEO of the Coalition for Green Capital, the principal of REH Advisers and on the boards of several other organizations.

We spoke by phone Tuesday afternoon. The transcript has been edited for length and clarity.

Timothy B. Lee: There are reports that Sprint is working on a bid to acquire T-Mobile. But that raises the question of how we got four national wireless carriers in the first place. Can you tell me about the history there and what lessons it has for the rumored Sprint/T-Mobile merger proposal?

Reed Hundt: I'm not going to comment about the non-proposal. But I'll be happy to tell you the history. The history is that the Omnibus Budget and Reconciliation Act, which was passed in 1993 by one vote in the House, gave the FCC for the first time ever the authority to offer spectrum [via auctions]. I got there the same month the bill was passed.

Everybody said "how many cellular companies should there be?" We called Michael Porter, a very famous Harvard business professor. He said, "you should auction the number of licenses that was one more than the number the market will sustain. Put a cap on the amount of spectrum that anybody can have and make sure the result of that is that you will have the maximum number of licenses sold. If the license is unsold, then that's one more than the market will sustain. If one goes bankrupt, that's one more than the market will sustain."

The point is you make the market decide the number of companies, you don't decide. That's what we did. In major markets, there were about seven, in small markets, there were about three. That was the beginning of the digital wireless revolution.

I think some people would say "letting the market decide" means not having spectrum caps at all. But you seem to be arguing that a market approach requires capping how much spectrum any single company can have. How do you explain that?

Let's go back to the beginning. This is the beginning of digital cellular. So if you didn't have a cap at that time, then what you're saying is that the people with the most money becomes the de facto monopolist. But if you want to have a market, then you have to have it be the market that decides [the number of wireless providers.]

How many newspapers are there in Washington? The answer is there are as many newspapers as the number of people who want to start them because there's no licensing. Coffee shops, there are as many as the number of people who want to start them because there's no licensing. Cellular is very weird because the number of firms is the number of licenses determined by the government. You don't want that because you've let them use the licensing to create a monopoly.

That's the problem with the FCC, you can't go into its businesses without getting its permission. Some people say that's the fundamental sin and the FCC should have everything beyond licensing [e.g. allow unlicensed spectrum use]. But the problem is it's not very easy to run a cellular business on an unlicensed business.

It may not be difficult in five years. There have been a lot of advances in spectrum sharing and spectrum hopping, but for the last 20 years, it hasn't really been possible.

You said there were about seven providers in the market in the 1990s. Now there are four national carriers. What changed?

The Bush administration repealed spectrum caps and encouraged consolidation. That's actually what happened.

Everybody knows that more spectrum for everybody is better because the more spectrum you have the cheaper it is to have a market. Each frequency is a carrier of communication. If you don't have very many, you have to use the same one more often. That requires a capital expenditure. It's a bad idea to raise peoples' costs. You want everybody's costs to be as low as possible because then the consumer's costs will be as low as possible.

But if someone has all of it then they'll charge a monopoly [price]. [So we want] more spectrum for everybody, but you don't want anyone to have all of it.

So we want to constantly try to have more spectrum in the market. That's the story of Light Squared right this second. Is anyone going to buy that spectrum out of bankruptcy and use it for broadband?

All spectrum stories are can we use it to the highest purpose. Everyone knows it's in the interest of consumers and companies to have more spectrum. But back to your first question, how did we decide. We did not decide it. We decided the market would decide.

How would you apply this reasoning to the current debate over the incentive auctions?

Chairman Wheeler has said "I'm probably going to have some kind of limits." He made an important decision about a week ago which was to postpone the auction until he could establish an aggregation rule [limiting how much spectrum any one company could have]. And so that seems to be his plan.