Jerry Brito

Can the spectrum crunch get any clearer?

Regardless of what you think of the AT&T/T-Mobile merger or the recently announced purchase of SpectrumCo licenses by Verizon, these deals tell us one thing: wireless carriers need access to more spectrum for mobile broadband. If they can’t have access to TV broadcast spectrum, they will get it where they can, and that’s by acquiring competitors.

In a new Mercatus Center Working Paper filed today as a comment in the FCC’s 15th Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless proceeding, Tom Hazlett writes that while the market it competitive, the prospects for “new” spectrum look dim.

[S]pectrum allocation is the essential public policy that enables—or limits—growth in mobile markets. Spectrum, assigned via liberal licenses yielding competitive operators control of frequency spaces, sets “disruptive innovation” in motion. Liberalization allowed the market to do what was unanticipated and could not be specified in a traditional FCC wireless license. That success deserves to grow; the amount of spectrum allocated to liberal licenses needs to expand. Additional bandwidth raises all consumer welfare boats, promoting competitive entry, technological upgrades, and more intense rivalry between incumbent firms.

In this, the Report (correctly) follows the strong emphasis placed on pushing bandwidth  into  the  marketplace  via  liberal  licenses  in  the  FCC’s  National Broadband Plan, issued in March 2010. That analysis underscored  the  looming “mobile  data   tsunami,”  noting  that  the  long  delays  associated  with  new spectrum  allocations  seriously   handicap emerging wireless services. But, as if to spotlight a failure to adequately address those challenges, the FCC Report speaks approvingly of the Department of Commerce (which presides over the spectrum set-aside for federal agencies) initiative that proposes a “Fast  Track  Evaluation  report . .  . examin[ing]  four  spectrum  bands  for  potential   evaluation within five years … totaling 115 MHz … contingent upon the allocation of resources  for necessary  reallocation  activities.” A five-year  regulatory  “fast  track”—if everything goes as planned.

To paraphrase John Maynard Keynes: In  the  long  run,  we’re  all  in  a  dead  spot.

You can read the full report at the Mercatus Center website.

More spectrum for first responders?

Over at TIME.com, I write about the recent compromise on the D Block, which would give more spectrum to public safety, and I ponder if there may not be a better way..

Patrol cars are as indispensable to police as radio communications. Yet when we provision cars to police, we don’t give them steel, glass and rubber and expect them to build their own. So why do we do that with radio communications?

Read the whole thing here.

AT&T/T-Mobile highlights artificial spectrum scarcity

Many folks will no doubt be writing a lot about the competitive issues surrounding the announced AT&T/T-Mobile merger, so instead I thought I’d weigh in on what I know best: spectrum.

To the extent you’re worried about the concentration of the wireless market, you should really be concerned about the government policies that make entry and expansion so difficult.

First, if a carrier wants to acquire more spectrum to meet consumer demand for new services, it can’t thanks to the artificial scarcity created by federal policies that dedicate vast swaths of the most valuable spectrum to broadcast television and likely inefficient government uses. It’s gratifying to see the FCC now confronting the “spectrum crunch,” but waiting for a deal to be brokered on incentive auctions is a luxury carriers don’t have. So, buying a competitor might be the only way left for them to acquire more spectrum.

Second, if a carrier wants to put up a new tower, or add antennas to existing towers, it has to get permission from the local zoning board. This can be an extremely onerous process as different localities will have different reasons to hold up the process. Buying a competitor is therefore also an obvious way to get access to more towers.

Again, I’m not sure this merger will have a negative effect on competition. Many high sunk costs industries are perfectly competitive with just two or three players. (I’m look forward to a good analysis on that question, perhaps from our own Geoff Manne of Josh Wright.) What I do know is that if you are worried about competition, antitrust policy is not going to solve the long-term issue of artificial scarcity, which is the real problem here.

Entry is possible. In fact, a new entrant in the wireless market is waiting in the wings in the form of the cable industry with the spectrum they acquired in the AWS auction. Before they can start offering services, however, they must move incumbent users of the bands they acquired. There is also Clearwire, part owned by Comcast, Time Warner, and Google—serious competitors to the Bells.

If we really got serious about reallocating broadcast and inefficiently used federal spectrum, we might not have to worry competition. We’d likely see new entry, and access to spectrum would be less of a reason to acquire a competitor.

Good news from House Energy & Commerce on spectrum

In the past we’ve commended the FCC and the administration for their support of incentive auctions to move spectrum now held by broadcaster to its best valued use, likely mobile broadband. Now it’s time to applaud the new House leadership for similarly making moves in the right direction.

The Washington Post reports today that “TV broadcasters resist FCC proposal to surrender more airwaves,” and earlier this month Chairman Genachowski expressed uncertainty about whether he would get congressional support for incentive auctions. But now comes word that newly inaugurated House Energy and Commerce Chairman Fred Upton is likely to include spectrum incentive auctions in new broadband rules. It’s great to see Republicans and Democrats coming together on good policy, especially in the face of opposition from a lobby as powerful as the broadcasters.

Moreover, today we also find out that the committee leadership is also considering a commercial auction of the infamous D Block spectrum, which public safety wants simply allocated to them. This puts the E&C leadership at odds with AT&T and Verizon, who oppose auctioning the D Block and would rather see a taxpayer-built built public safety network on the band. (Aside: While I’m all in favor of auction as an allocation method, I am skeptical at solving the public safety interoperability problem by simply throwing money at the existing system.)

So cheers to the new House leadership. Now that everyone’s one the same page (fingers crossed), this should be an easy win for smart policy.

Why exactly do we have a “spectrum crunch”?

It’s wonderful to see that the FCC is putting spectrum front and center on its agenda. Yesterday it held a spectrum “summit” at which it released several papers looking at the challenges and opportunities mobile broadband faces, and it was announced that at its November meeting, the chairman will introduce several items related to spectrum reallocation. NTIA is keeping pace, identifying over 100 MHz now in federal hands (mostly DoD) to be moved over for commercial use.

The consensus that has led us to this happy time is that there is a spectrum “shortage” or spectrum “crunch,” as many said yesterday. Here’s how Chairman Genachowski explained it:

The explosive growth in mobile communications is outpacing our ability to keep up. If we don’t act to update our spectrum policies for the 21st century, we’re going to run into a wall—-a spectrum crunch—-that will stifle American innovation and economic growth and cost us the opportunity to lead the world in mobile communications.

Spectrum is finite. Demand will soon outpace the supply available for mobile broadband.

Every natural resource is finite, however. So how exactly did we end up with this “spectrum crunch”?

Spectrum is a vital input to the mobile industry, just as steel is for the automobile industry or timber is for housing and paper products. Yet even during the productive peaks of those industries, we never saw any meaningful shortages of resources. That is because (aside from some government interference here and there) those resources are freely traded in a market. If demand for them increases, prices rise accordingly, and supply moves to better uses. Higher prices will also create an incentive for entrepreneurs to develop more efficient uses of finite resources.

In contrast, spectrum is barely traded in a market. It’s uses are largely mandated by government fiat. For example, less than 15 percent of U.S. households depend on over-the-air TV broadcasts because they do not subscribe to cable or satellite. Yet our most valuable spectrum is in the hands of broadcasters, with no easy exit, thanks to government regulation. This is the cause of the “shortage,” and we shouldn’t forget that as we move to reallocate spectrum.

The incentive auctions and secondary market rules the FCC will consider steps in the right direction. But once the spectrum is released from the grasp of old and inefficient technology, we should make sure we don’t make the same mistake again. Television and radio were the most important technologies in the world at one point, which is why they were given so much spectrum by government. Today it’s mobile broadband, and that’s where we want the spectrum to go. But let’s be careful we don’t earmark the spectrum in any way so that fifty years from now we find that we have a spectrum crunch for teleportation because it’s in the hands of broadband.

Reallocated spectrum should be made as property-like as possible. Exclusive, flexible, and tradable. The spectrum “crunch” is another instance of the government stepping in to clean up a mess it made. Let’s hope they get it right this time.

Gutierrez: Strong demand for free money

Commerce Secretary Carlos Gutierrez issued this statement on Friday:

The TV Converter Coupon Program opened as scheduled on January 1, and is off to a great start. Americans have begun requesting coupons that will help them get the converter boxes needed for when our television signals change on February 17, 2009. With these coupons, the federal government will defray $40 of the cost of an eligible converter, which is expected to cost between $50 and $70.

The demand for coupons is strong. We’ve taken requests from every state for nearly 1.9 million coupons from more than one million households.

The demand is strong? Really? For something that’s free? You’re kidding.

Let’s see, 1.9 million coupons requested at $40 a pop is $76 million of taxpayer money out the door in just four days. As Secretary Gutierrez says, “off to a great start” indeed. At this “great” pace it’s good to know the coupon fund totals $1 billion.

What are you waiting for? Get your piece of the American dream here.

Public safety doesn’t need more spectrum

Ahead of tomorrow’s Senate Commerce Committee hearing on public safety communications, the Consumer Electronics Association released a report (PDF) it commissioned from Criterion Economics analyzing the Cyren Call plan. The report concludes that the Cyren Call plan would upturn Congress’s carefully crafted DTV transition scheme. It also calls into question whether the private sector would build a more expensive broadband network than it would otherwise have to in order to meet the more rigorous needs of public safety.

Like I said, the study was commissioned by a special interest and it should be read in that light. (And by all means, read it yourself and make up your own mind.) However, the study does outline some basic facts that support something I’ve been saying for a long time: public safety communications does not need more spectrum, what it needs is spectrum reform. Here’s a sampling from the report:

The federal government has allocated 99.7 MHz of spectrum for use by state and local public safety agencies. Of this total, less than 17 MHz of spectrum (in the frequency bands between 150 and 869 MHz) is currently used to support the vast majority of public safety’s current communications systems. More than three-quarters (76.5 MHz) of the spectrum allocated to public safety has been allocated since 1996 and is not yet widely used. …

To put this information in perspective, public safety has been allocated spectrum (99.7 MHz nationwide) that exceeds the spectrum holdings of any U.S. wireless operator, including Cingular (which averages 52 MHz nationwide), Verizon (which averages 40 MHz nationwide), Sprint Nextel (which averages 50 MHz of cellular/PCS spectrum and approximately 70-80 MHz of BRS spectrum in the 2.5 GHz band), and T-Mobile (which averages 25 MHz nationwide). Yet, it currently uses 20 percent or less of this spectrum for the operation of emergency communications systems

The report goes on to state that the private sector uses spectrum much more efficiently. The wireless carriers, on average, serve about a million customers for each MHz of spectrum they have. On the other hand, only 20,000 to 30,000 first responders will be served per MHz of spectrum licensed to public safety. Obviously this isn’t an apples to apples comparison because public safety has different needs, but such a big difference has got to give you a clue about who’s using spectrum efficiently and who’s not. As I point out in my recent paper, public safety doesn’t have the incentive to use spectrum efficiently:

The cost of spectrum to a public safety agency is measured not by what it paid for the spectrum, which is nothing, but rather by its opportunity cost—i.e., the loss of a potential benefit from other alternatives uses of the spectrum, such as gaining income by selling it or leasing excess capacity. As we have seen, the spectrum cannot be traded and it can only be used for public safety communications. This policy in effect insulates public safety agencies from the true opportunity cost of spectrum. …

Carnegie Mellon engineering professor Jon Peha has calculated that the number of antennas deployed by public safety entities nationwide correlates less with population or geographic area than with the number of political jurisdictions. This means that more antennas are put up, and more spectrum is used, than is necessary to cover an area simply because local agencies and jurisdictions do not coordinate to share antennas and spectrum. Peha also points out that “the number of antenna towers, base stations, and repeaters used by a public safety agency are largely independent of the number of responders using that agency’s wireless system where this number does not exceed 100, and 85% of US public safety agencies support no more than 100 users.”

In contrast, a commercial network operator will not employ more spectrum or equipment than necessary to produce a given amount of communications capacity at a certain quality level. Commercial management of spectrum has been shown to be consistently more efficient than government management. Unlike public safety users, commercial carriers have an incentive, as well as greater freedom, to combine into larger and more efficient networks. Public safety agencies do not have the same incentives because they do not face the true cost of spectrum.

For example, as the price of a good decreases, its consumption increases. Because public safety agencies are faced with an artificially low opportunity cost they will be induced to use more spectrum than would otherwise be efficient and therefore waste spectrum. In contrast, public safety agencies face correct opportunity costs when it comes to patrol cars and guns. Instead of direct gun or car subsidies, police departments are given budgets that they then use by weighing the money’s alternative uses. Faced with alternative uses for a budget, a police department will presumably not buy more guns or cars than it needs or can use.

What I hope this tells you is that public safety does not need more spectrum, what it needs is reform that changes how the spectrum already allocated to it is used. Letting commercial entities offer public safety communications might be the ticket, but there’s plenty of spectrum already allocated for public safety over which to do it.