Building broadband takes time. There’s permitting, environmental reviews, engineering, negotiations with city officials and pole owners, and other considerations.

That said, temporary wireless broadband systems can be set up quickly, sometimes in days and weeks, not months or years like wireline networks. Setting up outdoor WiFi, as some schools have done (HT Billy Easley II), is a good step but WiFi has its limits and more can be done.

The FCC has done a great job freeing up more spectrum on a temporary basis for the COVID-19 crisis, like allowing carriers to use Dish’s unused cellular spectrum. Wireless systems need more than spectrum, however. Operators need real estate, electricity, backhaul, and permission. This is where cities, counties, and states can help.

Waive or simplify permitting

States, counties, and cities should consider waiving or simplifying their permitting for temporary wireless systems, particularly in rural or low-income areas where adoption lags.

Cellular providers set up Distributed Antenna Systems (DAS) and Cells on Wheels (COWs) for events like football games, parades, festivals, and emergency response after hurricanes. These provide good coverage and capacity in a pinch.

There are other ad hoc wireless systems that can be set up quickly in local areas, like WISP transmitters, cellular or WISP backhaul, outdoor WiFi, and mesh networks.

Allow rent-free access to municipal property

Public agencies own real estate and buildings that would lend themselves to temporary wireless facilities. Not only do they have power, taller public buildings and water towers allow wireless systems to have greater coverage. Cities should consider leasing out temporary space rent free for the duration of the crisis.

Many cities and counties also have a dark fiber and lit fiber networks that serve public facilities like police, fire, and hospitals. If there’s available capacity, state and local public agencies should consider providing cheap or free access to the municipal fiber network.

Now, these temporary measures won’t work miracles. Operators are looking at months of cash constraints and probably don’t have many field technicians available. But the temporary waiver of permitting and the easy access to public property could provide quick, needed broadband capacity in rural and hard-to-reach areas.

An interesting divide has opened up in recent months among right-of-center groups about what the FCC should do with the “C Band.” A few weeks ago, the FCC requested public comment on how to proceed with the band.

The C Band is 500 MHz of spectrum that the FCC, like regulators around the globe, dedicated for satellite use years ago and gave to satellite companies to share among each other. Satellite operators typically use it to transmit cable programming to a regional cable network operations center, where it is bundled and relayed to cable subscribers. However, the C Band would work terrifically if repurposed for 5G and cellular services. As Joe Kane explained in a white paper, the FCC and telecom companies are exploring various ways of accomplishing that.

Free-market groups disagree. Should the FCC prioritize:

The quick deployment of new wireless services? Or:

Deficit reduction and limiting FCC-granted windfalls?

This is a complex question since we’re dealing with the allocation of public property. Both sides, in my view, have a defensible free-market position. There are other non-trivial C Band issues like interference protection and the FCC’s authority to act here, but I’ll address the ideological split on the right.

The case for secondary markets

The full 500 MHz of “clean” C Band in the US would be worth tens of billions to cellular companies. However, the current satellite users don’t want to part with all of it and a group of satellite companies using the spectrum estimate they could sell 200 MHz to cellular carriers if the FCC would liberalize its rules to allow flexible uses (like 5G), not merely satellite services. The satellite providers would then be able to sell much of their spectrum on the secondary market (probably to cellular providers) at a nice premium.

Prof. Dan Lyons and Roslyn Layton wrote in support of the secondary market plan on the AEI blog and at Forbes, respectively. Joe Kane also favors the approach. As they say, the benefit of secondary market sales is that it will likely lead a significant and fast repurposing of the C Band for mobile use. The consumer benefits of “upzoned” spectrum are large and with every year of inaction, billions of dollars of consumer welfare evaporate. Hazlett and Munoz estimate that spectrum reallocated from a restricted use to flexible use generates annual consumer benefits in the same order of magnitude as auction value of the spectrum.

I’d add that there’s a history of the FCC upzoning spectrum (SMR spectrum in 2004, EBS spectrum in 2004, AWS-4 in 2011, WCS spectrum in 2012). The FCC is considering doing this with some government spectrum that Ligado or others could repurpose for mobile broadband. In these cases, the FCC upzoned spectrum so that it can be used for higher-valued uses, not legacy uses required by previous FCCs. The circumstances and technologies vary, but some of these bands were repurposed quickly for better uses by cellular providers and are used for 4G LTE today by tens of millions of Americans.

The case for FCC auction

Liberalizing spectrum quickly gets spectrum to higher-valued uses but does raise the complaint that the existing users are gaining an unfair windfall. I’m not sure when the C Band was allocated for satellite but many legacy assignments of spectrum were given to industries for free.

When the FCC upzones spectrum, it typically increases the value of the band. The “secondary market” plan is akin to the government giving away a parcel of public land to a developer to be used for a gas station, then deciding years later to upzone the land so that condo or office buildings can be built on it. It’s a better use for the land, but the gas station operator gains a big windfall when the property value increases. Not only is there a windfall, the government captures no revenue from the increase in the value of public property.

Free-market groups like Americans for Tax Reform, Taxpayers Protection Alliance, and Citizens Against Government Waste favor the FCC reclaiming the spectrum from satellite providers, perhaps via incentive auction, and collecting government revenue by re-selling it. If the FCC went the incentive auction route, the FCC would purchase the “satellite spectrum” (ie a low price) from the current C Band users, upzone it, and re-sell that spectrum as “mobile spectrum” (ie a high price) in an open auction. The FCC and the Treasury pocket the difference, probably several billion dollars here.

The FCC has only done one incentive auction, the 600 MHz auction. There, the FCC purchased “TV spectrum” from broadcasters and re-sold it to wireless carriers.

The benefit of this is deficit reduction and there’s more perceived fairness since there’s no big, FCC-granted windfall to legacy users. The downside is that it’s a slower, more complicated process since the FCC is deeply involved in the spectrum transfer. Arguably, however, the FCC should be deeply involved and interested in government revenue since spectrum is public property.

My view

A few years ago I would have definitely favored speed and the secondary market plan. I still lean towards that approach but I’m a little more on the fence after reading Richard Epstein’s work and others’ about the “public trust doctrine.” This is a traditional governance principle that requires public actors to receive fair value when disposing of public property. It prevents public institutions from giving discounted public property to friends and cronies. Clearly, cronyism isn’t the case here and FCC can’t undo what FCCs did generations ago in giving away spectrum. I think the need for speedy deployment trumps the windfall issue here, but it’s a closer call for me than in the past.

One proposal that hasn’t been contemplated with the C Band but might have merit is an overlay auction with a deadline. With such an auction, the FCC gives incumbent users a deadline to vacate a band (say, 5 years). The FCC then auctions flexible-use licenses in the band. The FCC receives the auction revenues and the winning bidders are allowed to deploy services immediately in the “white spaces” unoccupied by the incumbents. The winning bidders are allowed to pay the incumbents to move out before the deadline.

With an overlay auction, you get fairly rapid deployment–at least in the white spaces–and the government gains revenue from the auction. This type of auction was used to deploy cellular (PCS) in the 1990s and cellular (AWS-1) in the 2000s. However, incumbents dislike it because the deadline devalues their existing spectrum holdings.

I think overlay auctions should be considered in more spectrum proceedings because they avoid the serious windfall problems while also allowing rapid deployment of new services. That doesn’t seem in the cards, however, and secondary markets seems like the next best option.

By Brent Skorup and Trace Mitchell

An important benefit of 5G cellular technology is more bandwidth and more reliable wireless services. This means carriers can offer more niche services, like smart glasses for the blind and remote assistance for autonomous vehicles. A Vox article last week explored an issue familiar to technology experts: will millions of new 5G transmitters and devices increase cancer risk? It’s an important question but, in short, we’re not losing sleep over it.

5G differs from previous generations of cellular technology in that “densification” is important–putting smaller transmitters throughout neighborhoods. This densification process means that cities must regularly approve operators’ plans to upgrade infrastructure and install devices on public rights-of-way. However, some homeowners and activists are resisting 5G deployment because they fear more transmitters will lead to more radiation and cancer. (Under federal law, the FCC has safety requirements for emitters like cell towers and 5G. Therefore, state and local regulators are not allowed to make permitting decisions based on what they or their constituents believe are the effects of wireless emissions.)

We aren’t public health experts; however, we are technology researchers and decided to explore the telecom data to see if there is a relationship. If radio transmissions increase cancer, we should expect to see a correlation between the number of cellular transmitters and cancer rates. Presumably there is a cumulative effect: the more cellular radiation people are exposed to, the higher the cancer rates.

From what we can tell, there is no link between cellular systems and cancer. Despite a huge increase in the number of transmitters in the US since 2000, the nervous system cancer rate hasn’t budged.  In the US the number of wireless transmitters have increased massively–300%–in 15 years. (This is on the conservative side–there are tens of millions of WiFi devices that are also transmitting but are not counted here.)

But the US cancer rate is the dog that didn’t bark. In that same span of time, the type of cancers you would expect if cellphones pose a cancer risk–brain and nervous systems–have remained flat. If anything, as the NIH has said, these cancer rates have fallen slightly.

It’s a seeming paradox: In the US there was an introduction of 300,000 fairly powerful cell transmitters and hundreds of millions of (lower-power) devices that transmit signals through the air twenty four hours per day, seven days per week, every day of the year, yet these transmissions have no apparent effect on cancer rates.

The fear of 4G and 5G transmitters is due to a common misunderstanding about radiation. Significant exposure to ionizing radiation , the kind put off by X-rays and ultraviolet light, does have the potential to cause cancer. However, as the Vox article and other experts point out, cellular systems and devices don’t put off ionizing radiation. Tech devices emit a form of non-ionizing radiation , the type of radiation you receive from the visible light that bounces off, say, a book you hold in your hand. Unlike ionizing radiation, this non-ionizing radiation is too weak to alter DNA.

More research would be welcomed. The Vox article notes that much of the wireless system-cancer research is low-quality. Further, while wireless systems don’t seem to cause DNA damage there may be other effects on cells. A very focused wireless transmission from inches away can excite molecules and raise the temperature–this is how a microwave oven works–so it might be a good idea to keep your cellphone on your desk, not in your pocket, when possible. In the end, however, resist the technopanic–we don’t see much to be concerned about.

Federal Communications Commission (FCC) Chairman Ajit Pai today announced plans to expand the role of economic analysis at the FCC in a speech at the Hudson Institute. This is an eminently sensible idea that other regulatory agencies (both independent and executive branch) could learn from.

Pai first made the case that when the FCC listened to its economists in the past, it unlocked billions of dollars of value for consumers. The most prominent example was the switch from hearings to auctions in order to allocate spectrum licenses. He perceptively noted that the biggest effect of auctions was the massive improvement in consumer welfare, not just the more than $100 billion raised for the Treasury. Other examples of the FCC using the best ideas of its economists include:

• Use of reverse auctions to allocate universal service funds to reduce costs.
• Incentive auctions that reward broadcasters for transferring licenses to other uses – an idea initially proposed in a 2002 working paper by Evan Kwerel and John Williams at the FCC.
• The move from rate of return to price cap regulation for long distance carriers.

More recently, Pai argued, the FCC has failed to use economics effectively. He identified four key problems:

1. Economics is not systematically employed in policy decisions and often employed late in the process. The FCC has no guiding principles for conduct and use of economic analysis.
2. Economists work in silos. They are divided up among bureaus. Economists should be able to work together on a wide variety of issues, as they do in the Federal Trade Commission’s Bureau of Economics, the Department of Justice Antitrust Division’s economic analysis unit, and the Securities and Exchange Commission’s Division of Economic and Risk Analysis.
3. Benefit-cost analysis is not conducted well or often, and the FCC does not take Regulatory Flexibility Act analysis (which assesses effects of regulations on small entities) seriously. The FCC should use Office of Management and Budget guidance as its guide to doing good analysis, but OMB’s 2016 draft report on the benefits and costs of federal regulations shows that the FCC has estimated neither benefits nor costs of any of its major regulations issued in the past 10 years. Yet executive orders from multiple administrations demonstrate that “Serious cost-benefit analysis is a bipartisan tradition.”
4. Poor use of data. The FCC probably collects a lot of data that’s unnecessary, at a paperwork cost of $800 million per year, not including opportunity costs of the private sector. But even useful data are not utilized well. For example, a few years ago the FCC stopped trying to determine whether the wireless market is effectively competitive even though it collects lots of data on the wireless market.

To remedy these problems, Pai announced an initiative to establish an Office of Economics and Data that would house the FCC’s economists and data analysts. An internal working group will be established to collect input within the FCC and from the public. He hopes to have the new office up and running by the end of the year. The purpose of this change is to give economists early input into the rulemaking process, better manage the FCC’s data resources, and conduct strategic research to help find solutions to “the next set of difficult issues.”

Can this initiative significantly improve the quality and use of economic analysis at the FCC?

There’s evidence that independent regulatory agencies are capable of making some decent improvements in their economic analysis when they are sufficiently motivated to do so. For example, the Securities and Exchange Commission’s authorizing statue contains language that requires benefit-cost analysis of regulations when the commission seeks to determine whether they are in the public interest. Between 2005 and 2011, the SEC lost several major court cases due to inadequate economic analysis.

In 2012, the commission’s general counsel and chief economist issued new economic analysis guidance that pledged to assess regulations according to the principal criteria identified in executive orders, guidance from the Office of Management and Budget, and independent research. In a recent study, I found that the economic analysis accompanying a sample of major SEC regulations issued after this guidance was measurably better than the analysis accompanying regulations issued prior to the new guidance. The SEC improved on all five aspects of economic analysis it identified as critical: assessment of the need for the regulation, assessment of the baseline outcomes that will likely occur in the absence of new regulation, identification of alternatives, and assessment of the benefits and costs of alternatives.

Unlike the SEC, the FCC faces no statutory benefit-cost analysis requirement for its regulations. Unlike the executive branch agencies, the FCC is under no executive order requiring economic analysis of regulations. Unlike the Federal Trade Commission in the early 1980s, the FCC faces little congressional pressure for abolition.

But Congress is considering legislation that would require all regulatory agencies to conduct economic analysis of major regulations and subject that analysis to limited judicial review. Proponents of executive branch regulatory review have always contended that the president has legal authority to extend the executive orders on regulatory impact analysis to cover independent agencies, and perhaps President Trump is audacious enough to try this. Thus, it appears Chairman Pai is trying to get the FCC out ahead of the curve.

Those of us with deep reservations about the push for ever more unlicensed spectrum are having many of our fears realized with the new resistance to novel technologies using unlicensed spectrum. By law unlicensed spectrum users have no rights to their spectrum; unlicensed spectrum is a managed commons. In practice, however, existing users frequently act as if they own their spectrum and they can exclude others. By entertaining these complaints, the FCC simply encourages NIMBYism in unlicensed spectrum.

The general idea behind unlicensed spectrum is that by providing a free spectrum commons to any device maker who complies with certain simple rules (namely, Part 15’s low power operation requirement), device makers will develop wireless services that would never have developed if the device makers had to shell out millions for licensed spectrum. For decades, unlicensed spectrum has stimulated development and sale of millions of consumer devices, including cordless phones, Bluetooth devices, wifi access points, RC cars, and microwave ovens.

Now, however, many device makers are getting nervous about new entrants. For instance, Globalstar is developing a technology, TLPS, based on wifi standards that will use some unlicensed spectrum at 2.4 GHz and mobile carriers would like to market an unlicensed spectrum technology, LTE-U, based on 4G LTE standards that will use spectrum at 5 GHz.

This resistance from various groups and spectrum incumbents, who fear interference in “their” spectrum if these new technologies catch on, was foreseeable, which makes these intractable conflicts even more regrettable. As Prof. Tom Hazlett wrote in a 2001 essay, long before today’s conflicts, when it comes to unlicensed devices, “economic success spells its own demise.” Hazlett noted, “Where an unlicensed firm successfully innovates, open access guarantees imitation. This not only results in competition…but may degrade wireless emissions — perhaps severely.”

On the other hand, the many technical filings about potential interference to existing unlicensed devices are red herrings. Prospective device makers in these unlicensed bands have no duty to protect existing users. Part 15 rules say that unlicensed users like wifi and Bluetooth “shall not be deemed to have any vested or recognizable right to continued use of any given frequency by virtue of prior registration or certification of equipment” and that “interference must be accepted.” These rules, however, put the FCC in a self-created double bind: the agency provides no interference protection to existing users but its open access policy makes interference conflicts likely.

There is a concerted effort, then, by some wireless industry associations, tech journalists, and tech-focused nonprofits to ignore the Part 15 rules and suggest that open access no longer applies. In particular, there are suggestions that LTE-U must or should comply with wifi-like listen-before-talk mechanisms before using the unlicensed commons. Chris Lewis at Public Knowledge insinuated as much in a blog post on the issue. He states the correct but legally irrelevant fact that early versions of LTE-U don’t use listen-before-talk protocols and then adds a confusing non sequitur, “This is in violation of basic Wi-Fi standards.”

The notion that LTE-U or any other new technology must employ the wifi industry’s preference, listen-before-talk, is wrong. There are tens of millions of Part 15 devices that don’t use listen-before-talk, including cordless phones, garage door openers, Bluetooth devices, and RC toys. There are different sharing etiquettes and the FCC has generally been hands-off regarding what etiquette device makers should use since, first, the strict Part 15 power limits mitigate most problems and second, interference is typically reciprocal and parties have an incentive to coordinate.

Interestingly, the FCC has required some unlicensed devices to employ listen-before-talk protocols in the unlicensed PCS band. Never heard of it? The band is a wireless graveyard. Aside from a few cordless telephones, it’s had very little use, in part because the FCC required a complex listen-before-talk etiquette that raises the cost of producing equipment. In light of this failed experiment, the FCC probably has little appetite (or aptitude) for predicting via technology mandates which sharing etiquette will most benefit consumers.

Further, unlicensed spectrum incumbents show a selective sensitivity to interference considering their unlicensed devices face interference daily. It’s impossible to approximate the severity and regularity of everyday interference but focusing on potential interference from new services like LTE-U or TLPS, which use spectrum sharing etiquettes, and ignoring the effects of, say, poorly configured or legacy wifi access points or microwave ovens in the 2.4 GHz band is akin to complaining about hearing your next-door neighbor’s TV volume when there’s a rock concert playing in your front yard. Microwave ovens are powerful emitters, typically around 400 to 800 watts compared to a 1-watt wifi device. While microwave ovens are built to shield most emissions from escaping, none are perfect and they are a frequent source of wireless interference in households and offices around the country. Relatedly, in apartments, condos, or dormitories with unmanaged wifi systems, interference occurs regularly.

The FCC sends very mixed signals regarding unlicensed policy. It formally provides no interference protection to unlicensed users but frequently solicits comment about possible harms to these existing users. No wonder, then, that some Wall Street investors have strenuously opposed Globalstar’s multi-year attempt to get approval for its TLPS technology to provide wifi-like Internet access. Why would a hedge fund take an interest in the intricacies of Part 15 rules? Recent tech reporting is suggestive.

Bloomberg BNA reported that one intervenor who has filed comments against Globalstar’s TLPS application “runs a hedge fund [and has] said he is short-selling Globalstar’s stock, so he has been very active in the Globalstar TLPS FCC proceeding.” The New York Times similarly reports on another frequent filer in the TLPS proceeding, “a little-known activist investor [who] has declared war on the multibillion-dollar satellite communications company Globalstar, contending that it is worthless.” Existing device makers likewise may see a competitive threat from new devices that provide similar services, as Hazlett notes, and pile on in these proceedings.

Singling out a company with important business before a regulatory agency is not unheard of but the FCC only encourages financial gamesmanship by requesting that parties weigh in on interference potential for users that formally aren’t entitled to interference protection. Is this how the spectrum commons dies?

The most effective tactic to use when the FCC is likely to do something you dislike is to induce regulatory delays. The public interest groups can see much of this and their responses have been relatively muted relative to the commercial interests. I suspect many are deeply uncomfortable with what is occurring because it undermines the idea of a commons and the intent of the Part 15 rules. Nevertheless, they favor the status quo because wifi works pretty well and consumers have reliance interests. Knowing that the Part 15 rules don’t help them, they typically resort to asking for more studies about interference potential. It sounds like an innocuous request but anyone following telecom policy knows that “more study” from the FCC is the kiss of death because it simply gives time for opponents to agitate for reinforcements (like powerful members of Congress) and to scare off investment.

Congress, by the way, foresaw this risk–pressure groups compelling the FCC to kill entrants with delay–and in 1983 added the little-known Section 7 of the Communications Act, which requires the FCC to approve new technologies within a year. By requesting parties weigh in on interference potential and delaying indefinitely Part 15 approvals for TLPS and LTE-U (assuming they show they comply with Part 15) the FCC violates the spirit of the law. The agency has a statutory duty to companies with new technologies to make a decision quickly, but these lengthy unlicensed proceedings send a chilling message to the tech industry (so much so the IEEE asked then-Chairman Genachowski for Section 7 guidance in 2011).

The FCC knows spectrum NIMBYism is a big, developing problem. The unlicensed incumbents are agitating more and more as new technologies encroach on “their” spectrum. It should be enough for the FCC to respond that these unlicensed device makers knew the tradeoff going in–you can avoid expensive licensure and use spectrum freely but you cannot object when interfered with. Firms that want interference protection and higher QoS are free to spend millions or billions of dollars on licensed spectrum. Increasingly, however, by largely remaining silent and delaying approvals, the FCC gets bogged down in proceedings and undermines the purpose of unlicensed spectrum–encourage innovators to experiment with new wireless technologies. If the delays in approving TLPS and foreseeable delays for LTE-U are any indication, the FCC is quietly slipping towards de facto beauty contests, the infamous practice of picking technology winners and losers.

Last Wednesday, it was my great pleasure to testify at a Senate Commerce Committee hearing entitled, “The Connected World: Examining the Internet of Things.” The hearing focused “on how devices… will be made smarter and more dynamic through Internet technologies. Government agencies like the Federal Trade Commission, however, are already considering possible changes to the law that could have the unintended consequence of slowing innovation.”

But the session went well beyond the Internet of Things and became a much more wide-ranging discussion about how America can maintain its global leadership for the next-generation of Internet-enabled, data-driven innovation. On both sides of the aisle at last week’s hearing, one Senator after another made impassioned remarks about the enormous innovation opportunities that were out there. While doing so, they highlighted not just the opportunities emanating out of the IoT and wearable device space, but also many other areas, such as connected cars, commercial drones, and next-generation spectrum.

I was impressed by the energy and nonpartisan vision that the Senators brought to these issues, but I wanted to single out the passionate statement that Sen. Cory Booker (D-NJ) delivered when it came his turn to speak because he very eloquently articulated what’s at stake in the battle for global innovation supremacy in the modern economy. (Sen. Booker’s remarks were not published, but you can watch them starting at the 1:34:00 mark of the hearing video.)

Embrace the Opportunity

First, Sen. Booker stressed the enormous opportunity with the Internet of Things. “ This is a phenomenal opportunity for a bipartisan, profoundly patriotic approach to an issue that can explode our economy. I think that there are trillions of dollars, creating countless jobs, improving quality of life, [and] democratizing our society,” he said. “We can’t even imagine the future that this portends of, and we should be embracing that.”

Sen. Booker has it exactly right. And for more details about the enormous innovation opportunities associated with the Internet of Things, see Section 2 of my new law review article, “The Internet of Things and Wearable Technology Addressing Privacy and Security Concerns without Derailing Innovation,” which provides concrete evidence.

Protect America’s Competitive Advantage in the Innovation Age

Second, Sen. Booker highlighted the importance of getting our policy vision right to achieve those opportunities. He noted that “a lot of my concerns are what my Republican colleagues also echoed, which is we should be doing everything possible to encourage this and nothing to restrict it.”

“ America right now is the net exporter of technology and innovation in the globe, and we can’t lose that advantage,” he said and “we should continue to be the global innovators on these areas.” He continued on to say:

And so, from copyright issues, security issues, privacy issues… all of these things are worthy of us wrestling and grappling with, but to me we cannot stop human innovation and we can’t give advantages in human innovation to other nations that we don’t have. America should continue to lead.

This is something I have been writing actively about now for many years and I agree with Sen. Booker that America needs to get our policy vision right to ensure we don’t lose ground in the international competition to see who will lead the next wave of Internet-enabled innovation. As I noted in my testimony, “If America hopes to be a global leader in the Internet of Things, as it has been for the Internet more generally over the past two decades, then we first have to get public policy right. America took a commanding lead in the digital economy because, in the mid-1990s, Congress and the Clinton administration crafted a nonpartisan vision for the Internet that protected “permissionless innovation”—the idea that experimentation with new technologies and business models should generally be permitted without prior approval.”

Meanwhile, as I documented in my longer essay, “Why Permissionless Innovation Matters: Why does economic growth occur in some societies & not in others?” our international rivals languished on this front because they strapped their tech sectors with layers of regulatory red tape that thwarted digital innovation.

Reject Fear-Based Policymaking

Third, and perhaps most importantly, Sen. Booker stressed how essential it was that we reject a fear-based approach to public policymaking. As he noted at the hearing about these new information technologies, “ there’s a lot of legitimate fears, but in the same way of every technological era, there must have been incredible fears.”

He cited, for example, the rise of air travel and the onset of humans taking flight. Sen. Booker correctly noted that while that must have been quite jarring at first, we quickly came to realize the benefits of that new innovation. The same will be true for new technologies such as the Internet of Things, connected cars, and private drones, Booker argued. In each case, some early fears about these technologies could lead to overly-precautionary approach to policy. “ But for us to do anything to inhibit that leap in humanity to me seems unfortunate,” he said.

Once again, the Senator has it exactly right. As I noted in my law review article on “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle,” as well as my recent essay, “Muddling Through: How We Learn to Cope with Technological Change,” humans have exhibited the uncanny ability to adapt to changes in their environment, bounce back from adversity, and learn to be resilient over time. A great deal of wisdom is born of experience, including experiences that involve risk and the possibility of occasional mistakes and failures while both developing new technologies and learning how to live with them. More often than not, citizens have found ways to adapt to technological change by employing a variety of coping mechanisms, new norms, or other creative fixes.

Booker gets that and understands why we need to be patient to allow that process to unfold once again so that we can enjoy the abundance of riches that will accompany a more innovative economy.

Avoiding Global Innovation Arbitrage

Sen. Booker also highlighted how some existing government legal and regulatory barriers could hold back progress. On the wireless spectrum front he noted that “ the government hoards too much spectrum and there is a need for more spectrum out there. Everything we are talking about,” he argued, “is going to necessitate more spectrum.” Again, 100% correct. Although some spectrum reform proposals (licensed vs. unlicensed, for example) will still prove contentious, we can at least all agree that we have to work together to find ways to open up more spectrum since the coming Internet of Things universe of technologies is going to demand lots of it.

Booker also noted that another area where fear undermines American leadership is the issue of private drone use. He noted that, “ the potential possibilities for drone technology to alleviate burdens on our infrastructure, to empower commerce, innovation, jobs… to really open up unlimited opportunities in this country is pretty incredible to me.”

The problem is that existing government policies, enforced by the Federal Aviation Administration (FAA), have been holding back progress. And that has had consequences in terms of global competitiveness. “As I watch our government go slow in promulgating rules holding back American innovation,” Booker said, “what happened as a result of that is that innovation has spread to other countries that don’t have these rules (or have) put in place sensible regulations. But now we seeing technology exported from America and going other places.”

Correct again! I wrote about this problem in a recent essay on “global innovation arbitrage,” in which I noted how “Capital moves like quicksilver around the globe today as investors and entrepreneurs look for more hospitable tax and regulatory environments. The same is increasingly true for innovation. Innovators can, and increasingly will, move to those countries and continents that provide a legal and regulatory environment more hospitable to entrepreneurial activity.”

That’s already happening with drone innovation, as I documented in that piece. Evidence suggests that the FAA’s heavy-handed and overly-precautionary approach to drones has encouraged some innovators to flock overseas in search of more hospitable regulatory environment.

Luckily, just this weekend, the FAA finally announced its (much-delayed) rules for private drone operations. (Here’s a summary of those rules.) Unfortunately, the rules are a bit of mixed bag, with some greater leeway being provided for very small drones, but the rules will still be too restrictive to allow for other innovative applications, such as widespread drone delivery (which has Amazon angry, among others.)

Bottom line: if our government doesn’t take a more flexible, light-touch approach to these and other cutting-edge technologies, than some of our most creative minds and companies are going to bolt.

I dealt with all of these innovation policy issues in far more detail in my latest little book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, which I condensed further still into this essay on, “Embracing a Culture of Permissionless Innovation.” But Sen. Booker has offered us an even more concise explanation of just what’s at stake in the battle for innovation leadership in the modern economy. His remarks point the way forward and illustrate, as I have noted before, that innovation policy can and should be a nonpartisan issue.

Additional Reading

• testimony: “My Testimony for Senate Internet of Things Hearing,” February 11, 2015.
• essay: “A Nonpartisan Policy Vision for the Internet of Things,” December 11, 2014.
• law review article: “The Internet of Things and Wearable Technology Addressing Privacy and Security Concerns without Derailing Innovation,” November 2014.
• essay: “Don’t Hit the (Techno-)Panic Button on Connected Car Hacking & IoT Security,” February 10, 2015.
• essay: “Striking a Sensible Balance on the Internet of Things and Privacy,” January 16, 2015.
• essay: “Some Initial Thoughts on the FTC Internet of Things Report,” January 28, 2015.
• slide presentation: “Policy Issues Surrounding the Internet of Things & Wearable Technology,” September 12, 2014.
• essay: “CES 2014 Report: The Internet of Things Arrives, but Will Washington Welcome It?” January 8, 2014.

Many readers will recall the telecom soap opera featuring the GPS industry and LightSquared and the subsequent bankruptcy of LightSquared. Economist Thomas W. Hazlett (who is now at Clemson, after a long tenure at the GMU School of Law) and I wrote an article published in the Duke Law & Technology Review titled Tragedy of the Regulatory Commons: Lightsquared and the Missing Spectrum Rights. The piece documents LightSquared’s ambitions and dramatic collapse. Contrary to popular reporting on this story, this was not a failure of technology. We make the case that, instead, the FCC’s method of rights assignment led to the demise of LightSquared and deprived American consumers of a new nationwide wireless network. Our analysis has important implications as the FCC and Congress seek to make wide swaths of spectrum available for unlicensed devices. Namely, our paper suggests that the top-down administrative planning model is increasingly harming consumers and delaying new technologies.

Read commentary from the GPS community about LightSquared and you’ll get the impression LightSquared is run by rapacious financiers (namely CEO Phil Falcone) who were willing to flaunt FCC rules and endanger thousands of American lives with their proposed LTE network. LightSquared filings, on the other hand, paint the GPS community as defense-backed dinosaurs who abused the political process to protect their deficient devices from an innovative entrant. As is often the case, it’s more complicated than these morality plays. We don’t find villains in this tale–simply destructive rent-seeking triggered by poor FCC spectrum policy.

We avoid assigning fault to either LightSquared or GPS, but we stipulate that there were serious interference problems between LightSquared’s network and GPS devices. Interference is not an intractable problem, however. Interference is resolved everyday in other circumstances. The problem here was intractable because GPS users are dispersed and unlicensed (including government users), and could not coordinate and bargain with LightSquared when problems arose. There is no feasible way for GPS companies to track down and compel users to use more efficient devices, for instance, if LightSquared compensated them for the hassle. Knowing that GPS mitigation was unfeasible, LightSquared’s only recourse after GPS users objected to the new LTE network was through the political and regulatory process, a fight LightSquared lost badly. The biggest losers, however, were consumers, who were deprived of another wireless broadband network because FCC spectrum assignment prevented win-win bargaining between licensees.

Our paper provides critical background to this dispute. Around 2004, because satellite phone spectrum was underused, the FCC permitted satellite phone licensees flexibility to repurpose some of their spectrum for use in traditional cellular phone networks. (Many people are appalled to learn that spectrum policy still largely resembles Soviet-style command-and-control. The FCC tells the wireless industry, essentially: “You can operate satellite phones only in band X. You can operate satellite TV in band Y. You can operate broadcast TV in band Z.” and assigns spectrum to industry players accordingly.) Seeing this underused satellite phone spectrum, LightSquared acquired some of this flexible satellite spectrum so that LightSquared could deploy a nationwide cellular phone network in competition with Verizon Wireless and AT&T Mobility. LightSquared had spent $4 billion in developing its network and reportedly had plans to spend $10 billion more when things ground to a halt.

In early 2012, the Department of Commerce objected to LightSquared’s network on the grounds that the network would interfere with GPS units (including, reportedly, DOD and FAA instruments). Immediately, the FCC suspended LightSquared’s authorization to deploy a cellular network and backtracked on the 2004 rules permitting cellular phones in that band. Three months later, LightSquared declared bankruptcy. This was a non-market failure, not a market failure. This regulatory failure obtains because virtually any interference to existing wireless operations is prohibited even if the social benefits of a new wireless network are vast.

This analysis is not simply scholarly theory about the nature of regulation and property rights. We provide real-world evidence that supports our notion that, had the FCC assigned flexible, de facto property rights to GPS licensees like the FCC does in some other bands, rather than fragmented unlicensed users, LightSquared might be in operation today serving millions with wireless broadband. Our evidence comes, in fact, from LightSquared’s deals with non-GPS parties. Namely, LightSquared had interference problems with another satellite licensee on adjacent spectrum–Inmarsat.

Inmarsat provides public safety, aviation, and national security applications and hundreds of thousands of devices to government and commercial users. The LightSquared-Inmarsat interference problems were unavoidable but because Inmarsat had de facto property rights to its spectrum, it could internalize financial gains and coordinate with LightSquared. The result was classic Coasian bargaining. The two companies swapped spectrum and activated an agreement in 2010 in which LightSquared would pay Inmarsat over $300 million. Flush with cash and spectrum, Inmarsat could rationalize its spectrum and replace devices that wouldn’t play nicely with LightSquared LTE operations.

These trades avoided the non-market failure the FCC produced by giving GPS users fragmented, non-exclusive property rights. When de facto property rights are assigned to licensees, contentious spectrum border disputes typically give way to private ordering. The result is regular spectrum swaps and sales between competitors. Wireless licensees like Verizon, AT&T, Sprint, and T-Mobile deal with local interference and unauthorized operations daily because they have enforceable, exclusive rights to their spectrum. The FCC, unfortunately, never assigned these kinds of spectrum rights to the GPS industry.

The evaporation of billions of dollars of LightSquared funds was a non-market failure, not a market failure and not a technology failure. The economic loss to consumers was even greater than LightSquared’s. Different FCC rules could have permitted welfare-enhancing coordination between LightSquared and GPS. The FCC’s error was the nature of rights the agency assigned for GPS use. By authorizing the use of millions of unlicensed devices adjacent to LightSquared’s spectrum, the FCC virtually ensured that future attempts to reallocate spectrum in these bands would prove contentious. Going forward, the FCC should think far less about which technologies they want to promote and more about the nature of spectrum rights assigned. For tech entrepreneurs and policy entrepreneurs to create innovative new wireless products, they need well-functioning spectrum markets. The GPS experience shows vividly what to avoid.

I’ve spent much of the past year studying the potential public policy ramifications associated with the rise of the Internet of Things (IoT). As I was preparing some notes for my Jan. 6th panel discussing on “Privacy and the IoT: Navigating Policy Issues” at this year’s 2015 CES show, I went back and collected all my writing on IoT issues so that I would have everything in one place. Thus, down below I have listed most of what I’ve done over the past year or so. Most of this writing is focused on the privacy and security implications of the Internet of Things, and wearable technologies in particular.

I plan to stay on top of these issues in 2015 and beyond because, as I noted when I spoke on a previous CES panel on these issues, the Internet of Things finds itself at the center of what we might think of a perfect storm of public policy concerns: Privacy, safety, security, intellectual property, economic / labor disruptions, automation concerns, wireless spectrum issues, technical standards, and more. When a new technology raises one or two of these policy concerns, innovators in those sectors can expect some interest and inquiries from lawmakers or regulators. But when a new technology potentially touches all of these issues, then it means innovators in that space can expect an avalanche of attention and a potential world of regulatory trouble. Moreover, it sets the stage for a grand “clash of visions” about the future of IoT technologies that will continue to intensify in coming months and years.

That’s why I’ll be monitoring developments closely in this field going forward. For now, here’s what I’ve done on this issue as I prepare to head out to Las Vegas for another CES extravaganza that promises to showcase so many exciting IoT technologies.

• essay: “A Nonpartisan Policy Vision for the Internet of Things,” December 11, 2014.
• slide presentation: “Policy Issues Surrounding the Internet of Things & Wearable Technology,” September 12, 2014.
• law review article: “The Internet of Things and Wearable Technology Addressing Privacy and Security Concerns without Derailing Innovation,” November 2014.
• essay: “CES 2014 Report: The Internet of Things Arrives, but Will Washington Welcome It?” January 8, 2014.
• essay: “The Growing Conflict of Visions over the Internet of Things & Privacy,” January 14, 2014.
• oped: “Can We Adapt to the Internet of Things?” IAPP Privacy Perspectives, June 19, 2013
• agency filing: My Filing to the FTC in its ‘Internet of Things’ Proceeding, May 31, 2013
• book: Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, 2014.
• video: Cap Hill Briefing on Emerging Tech Policy Issues, June 2014.
• essay: “What’s at Stake with the FTC’s Internet of Things Workshop,” November 18, 2013.
• law review article: “Removing Roadblocks to Intelligent Vehicles and Driverless Cars,” September 16, 2014.

Congressional debates about STELA reauthorization have resurrected the notion that TV stations “must provide a free service” because they “are using public spectrum.” This notion, which is rooted in 1930s government policy, has long been used to justify the imposition of unique “public interest” regulations on TV stations. But outdated policy decisions don’t dictate future rights in perpetuity, and policymakers abandoned the “public spectrum” rationale long ago.

All wireless services use the public spectrum, yet none of them are required to provide a free commercial service except broadcasters. Satellite television operators, mobile service providers, wireless Internet service providers, and countless other commercial spectrum users are free to charge subscription fees for their services.

There is nothing intrinsic in the particular frequencies used by broadcasters that justifies their discriminatory treatment. Mobile services use spectrum once allocated to broadcast television, but aren’t treated like broadcasters.

The fact that broadcast licenses were once issued without holding an auction is similarly irrelevant.  All spectrum licenses were granted for free before the mid-1990s. For example, cable and satellite television operators received spectrum licenses for free, but are not required to offer their video services for free.

If the idea is to prevent companies who were granted free licenses from receiving a “windfall”, it’s too late. As Jeffrey A. Eisenach has demonstrated, “the vast majority of current television broadcast licensees [92%] have paid for their licenses through station transactions.”

The irrelevance of the free spectrum argument is particularly obvious when considering the differential treatment of broadcast and satellite spectrum. Spectrum licenses for broadcast TV stations are now subject to competitive bidding at auction while satellite television licenses are not. If either service should be required to provide a free service on the basis of spectrum policy, it should be  satellite television.

Although TV stations were loaned an extra channel during the DTV transition, the DTV transition is over. Those channels have been returned and were auctioned for approximately $19 billion in 2008. There is no reason to hold TV stations accountable in perpetuity for a temporary loan.

Even if there were, the loan was  not free. Though TV stations did not pay lease fees for the use of those channels, they nevertheless paid a heavy price. TV stations were required to invest substantial sums in HDTV technology and to broadcast signals in that format long before it was profitable. The FCC required “rapid construction of digital facilities by network-affiliated stations in the top markets, in order to expose a significant number of households, as early as possible, to the benefits of DTV.” TV stations were thus forced to “bear the risks of introducing digital television” for the benefit of consumers, television manufacturers, MVPDs, and other digital media.

The FCC did not impose comparable “loss leader” requirements on MVPDs. They are free to wait until consumer demand for digital and HDTV content justifies upgrading their systems — and they are still lagging TV stations by a significant margin. According to the FCC, only about half of the collective footprints of the top eight cable MVPDs had been transitioned to all-digital channels at the end of 2012. By comparison, the DTV transition was completed in 2009.

There simply is no satisfactory rationale for requiring broadcasters to provide a free service based on their use of spectrum or the details of past spectrum licensing decisions. If the applicability of a free service requirement turned on such issues, cable and satellite television subscribers wouldn’t be paying subscription fees.

Call it what you want: a bailout, a thumb on the scales, bidder restrictions–the FCC might conspicuously intervene in the 2015 incentive auctions at the behest of smaller carriers and public interest advocates.

Chairman Wheeler’s recent comments indicate the FCC may devise a way to prevent the largest two carriers–AT&T and Verizon–from purchasing “too much” of the television broadcasters’ spectrum at auction. AT&T likely sees the writing on the wall and argues that if there are auction limits, the restrictions should apply only to the auction, rather than more extreme restrictions that would penalize AT&T and Verizon, the largest carriers, for previously-acquired spectrum. As The Switch’s Brian Fung put it,

the small carriers favor what are called “asymmetric” spectrum caps that affect various carriers differently, while opponents prefer “symmetric” caps that don’t account for existing market positions.

While I wish AT&T put up more of a fight to auction interventions, they (and staff at the FCC) are handicapped in pursuing an unrestricted auction. The blame lies mostly with Congress who gave the FCC vague (thus ripe for abuse) and conflicting mandates spanning decades. The 1993 law authorizing auctions, for instance, requires the FCC to “avoid[] excessive concentration of licenses” and to “disseminat[e] licenses among a wide variety of applicants” among other regulatory carve-outs for smaller competitors. These latter requirements, if implemented as rigorously as smaller carriers would like, directly undermine the purpose of the 2012 American Taxpayer Relief Act that requires the upcoming spectrum auctions raise $7 billion for a public safety broadband network and $20 billion for deficit reduction.

By asymmetrically penalizing AT&T and Verizon, the FCC increases the probability the auction fails to raise the tens of billions of dollars needed (see Fred Campbell’s recent paper). I haven’t heard a policymaker speak about the incentive auction without remarking how extraordinarily complex it is. That complexity–as was made clear in this week’s Senate hearing on the subject–means no one knows how much spectrum will be auctioned off or how much money will be raised. I was doubtful the FCC would secure the called-for 120 MHz for auction in the first place, but the Senate hearing convinced me that they might not get even 60 MHz. If the FCC meddles too much and the broadcasters aren’t assured they’ll get top dollar for their spectrum, the broadcasters might not show up to sell.

For many reasons, the FCC should ignore the pressures to restrict the large carriers in bidding. Smaller carriers argue the large carriers will outbid them only to preclude competition and hoard the spectrum. Every major carrier is spending billions to expand its footprint and capacity rapidly so the hoarding argument is hard to accept (not to mention, carriers face FCC build out requirements). The hoarding argument also confounds me because AT&T and Verizon are at the forefront arguing for more spectrum auctions, particularly spectrum from federal agencies. Would they want the market flooded with new spectrum only so they could spend billions to hoard it?

Asymmetric auction restrictions also resemble a bailout for smaller carriers. T-Mobile and Sprint–who most actively lobby for auction restrictions–are not mom-and-pop establishments. Each is a sophisticated, powerful corporation with access to capital markets and backed by larger international telecoms–Germany’s Deutsche Telekom for T-Mobile and Japan’s SoftBank for Sprint. DT and SoftBank have both pledged to spend billions in the next few years to improve their American carrier’s competitive position. Such carriers do not need an FCC handout.

The bailout resemblance is more apparent when you realize Sprint has been hamstrung for nearly a decade with damaging business decisions. Three come immediately to mind: 1) the dreadful merger with Nextel in 2005; 2) the ill-fated bet in 2008 to forgo LTE rollout in favor of WiMax, a competing 4G standard; and 3) the loss of over one million customers when it discontinued its push-to-talk iDEN service for network upgrades. The losses from the Nextel merger alone approach $30 billion.

To be clear, I don’t second-guess Sprint’s decisions. They did what innovative firms are supposed to do in attempting big, risky investments. However, it should not be the job of the FCC to favor some firms through spectrum auctions because some carriers’ business decisions did not pan out. That is not a competitive wireless auction–that is an FCC-orchestrated bailout. Granted, the FCC has been handed conflicting mandates. The Commission has ample discretion, however, to conduct a competitive auction that both complies with the law and improves chances of reaching the ambitious revenue goals. Intense meddling with auction results could prove disastrous.

One year ago I wrote that conservatives were the leading voices in technology policy. Conservative leadership on tech policy issues became even more apparent last week, when House Energy and Commerce Committee Chairman Fred Upton (R-MI) and Communications and Technology Subcommittee Chairman Greg Walden (R-OR) announced plans to update the Communications Act for the Internet era (#CommActUpdate). Virtually everyone recognizes that the Act, which Rep. Walden noted was “written during the Great Depression and last updated when 56 kilobits per second via dial-up modem was state of the art,” is now hopelessly out of date. But it was conservative leadership that was willing to begin the legislative process necessary to update it.

Although the term “progressive” literally means “advocating progress, change, improvement, or reform, as opposed to wishing to maintain things as they are,” some political progressives have focused their communications advocacy on maintaining the status quo. In response to the #CommActUpdate, Free Press said, “We’re not going to get a better act than we have now.” (Communications Daily, Dec. 5, 2013 (subscription required)) Free Press, which describes itself as a “movement to change media and technology policies,” also told Comm Daily, “The IP transition should be governed by the laws on the books today.”

The “do-nothing” approach advocated by Free Press is symptomatic of the regressive policies pursued by some communications advocates today. The laws Free Press seeks to preserve unreasonably discriminate among similar networks providing substantially the same services based solely on their historical identity. Among other things, this discriminatory statutory framework artificially shifts the costs of communications services provided to corporations to residential consumers, inhibits investment in the modern communications infrastructure to serve rural and low-income areas, and distorts competition.

When did self-described “progressives” start believing that Congress cannot improve such painfully outdated laws?

I have more faith in the legislative process than Free Press. I am confident that Congress can work in a bipartisan way to improve laws that are unfairly subsidizing business services at the expense of residential consumers, inhibiting investment in modern communications infrastructure, and distorting competition. Previous revisions to the Communications Act have not provoked partisan rancor, and this one shouldn’t either. Policymakers and advocates from both right and left of center understand the importance of ensuring that consumer-focused communications laws provide a level playing field for all market participants and foster the investment necessary to bring high-speed Internet services to every American.

Of course, improving the act will require that Congress conduct a thorough examination of the current communications market and retain only those policies that have proven successful – which is why the #CommActUpdate announcement is so important. Reviewing the Communications Act will take time, and in a global economy, we have no more time to waste.

There is bipartisan agreement that the 1996 Telecom Act was antiquated only shortly after President Clinton’s signature had dried on the legislation. There is also consensus that spectrum policy, still largely grounded in the 1934 communications statute, absolutely distorts today’s wireless markets. And there is frequent criticism from thought leaders, right and left, that the FCC has been, for decades, too accommodating to the firms it regulates and too beholden to the status quo (economist Thomas Hazlett quips the agency’s initials stand for “Forever Captured by Corporations”).

For these reasons, members of Congress every few years announce their intention to reform the 1934 and 1996 communications laws and modernize the FCC. Yesterday, some powerful House members unexpectedly reignited hopes that Congress would overhaul our telecom, broadband, and video laws. In a Google Hangout (!), Reps. Fred Upton and Greg Walden said they wanted to take on the ambitious task of passing a new law in 2015.

Much depends on next year’s elections and the composition of Congress, but hopefully the announcement spurs a major re-write that eliminates regulatory distortions in communications, much as airlines and transportation were deregulated in the 1970s–an effort led by reformist Democrats.

About ten years ago, more than fifty scholars and technologists crafted reports which constituted the Digital Age Communications Act (or DACA) that is largely deregulatory (a majority of the group had served in Democratic administrations, interestingly enough). In 2005, then-Sen. Jim DeMint proposed a bill similar to the working group’s proposals. The working group’s recommendations aged very well in eight years–which you can’t say about the 1996 Act–and represents a great starting point for future legislation.

As Adam has said the DACA reports have five primary reform objectives:

– Replacing the amorphous “public interest” standard with a consumer welfare standard, which is more well-established in field of antitrust law – Eliminate regulatory silos and level the playing field through deregulation – Comprehensively reform spectrum not just through more auctioning but through clear property rights – Reform universal service by either voucherizing it or devolving it to the States and let them run their own telecom welfare programs; and – Significantly reforming & downsizing the scope of the FCC’s power of the modern information economy

DACA redefines the FCC as a specialized competition agency for the communications sector. The FCC largely sees itself as a competition agency today but the current statutes don’t represent that gradual change in purpose. The FCC is slow, arbitrary, Balkanizes industries artificially, and attempts to regulate in areas it isn’t equipped to regulate–the agency has a notoriously bad record in federal courts. These characteristics create a poor environment for substantial investments in technology and communications infrastructure. The DACA proposals aren’t perfect but it is a resilient framework that minimizes the effect of special interests in communications and encourages investments that improve consumers’ lives.

Both parties of Congress has been increasingly critical of federal agencies’ inefficient use of spectrum in the past few years and it seems like agencies are getting the message. The NTIA, which is the official manager of federal agency spectrum, released a letter yesterday announcing that the Department of Defense would be relocating some of its systems. Defense had reached an agreement with broadcasters that Defense systems will share spectrum in the Broadcast Auxiliary Service (BAS) band.

The soon-to-be vacated band held by Defense will eventually be auctioned off–hopefully in 2014–for billions of dollars and likely used for mobile broadband provided by wireless carriers like AT&T, Verizon, Sprint, and T-Mobile. These carriers face serious congestion problems because of government-created scarcity of spectrum.

The carriers actually had targeted some of BAS spectrum because they weren’t convinced Defense would be willing to move their systems. The broadcaster deal reached with Defense means everyone’s apparently happy–the broadcasters can keep their BAS spectrum, the feds get new equipment and Congress off their back (temporarily), and the carriers get new spectrum for auction.

The deal is welcome news because the spectrum will be put to a higher-valued use once auctioned. The federal government pays almost nothing for its own spectrum and is a poor steward of the resource. Transferring spectrum from agencies to carriers means lower phone bills and more mobile broadband coverage. Government agencies are notoriously resistant to moving their systems or sharing with others, so entering into a sharing pact with the broadcasters indicates some of the resistance is thawing.

It’s not unequivocal good news, though.

The government is clearing out from a 25 MHz band of spectrum and occupying the larger, 85 MHz BAS band that will be shared with broadcasters. The military will need a larger band because sharing imposes some capacity constraints necessitating new, agile systems that search the airwaves to make sure they don’t interfere with existing broadcast users. Dynamic sharing like this only adds to the cost and complexity and may imperil next years’ planned auction.

Further, the BAS band is unavailable for auction only because of the antiquated command-and-control regime the FCC uses to award spectrum licenses. BAS is mostly used for electronic news gathering, which relays local and national newscasts from reporters on the scene to broadcast studios. Broadcasters have used BAS spectrum since the 1960s when it was allocated to them for free.

In a market, broadcasters likely would not have as much BAS spectrum as they currently have. In fact, because of technology changes and squeezed newsroom budgets, broadcasters are finding cheaper alternatives. Increasingly, journalists are using carriers’ LTE technology to transmit their breaking newscasts since the technology costs a fraction of the cost of news vans and equipment needed for BAS transmissions. That is to say, there are alternative business models in the absence of Soviet-style allocations.

So despite these industry changes, BAS spectrum cannot be auctioned for its highest-valued use (probably mobile broadband) under current FCC rules. Further, it will be even more difficult to bring the benefits of auctions to the airwaves if federal users are intermingling with existing users, broadcasters in this case. It’s a trend to be wary of. Let’s just hope that next year’s planned auctions occur on time so that more consumers can benefit from mobile broadband.

I recently prepared a paper for the Expanding Opportunities for Broadcasters Coalition and Consumer Electronics Association that provides empirical data regarding the costs of restricting the eligibility of large firms to participate in FCC spectrum auctions (available in PDF here). The paper demonstrates that there is no significant likelihood that an open incentive auction would substantially harm the competitive positions of Sprint and T-Mobile. It also demonstrates that Sprint and T-Mobile have incentives to constrain the ability of Verizon and AT&T to expand their network capacity, and that Sprint and T-Mobile could consider FCC restraints on their primary rivals a “win” even if Sprint and T-Mobile don’t place a single bid in the incentive auction. (Winning regulatory battles is a lot cheaper than winning spectrum in a competitive auction.)

Some might think it is implausible that Sprint or T-Mobile would decide to forgo participation in the incentive auction. However, the recent announcement by Sprint that it won’t compete in the H block auction highlights the difficulty in predicting accurately whether any particular company will participate in a particular auction. Sprint’s announcement stunned market analysts, who had considered Sprint a key contender for the H block spectrum. Until recently, Sprint had given every indication it was keen to acquire this spectrum, which is located directly adjacent to the nationwide G block that Sprint already owns. It participated heavily in the FCC’s service rules proceeding for the H block (WT Docket No. 12-357) and even conducted its own testing to assist the FCC in assessing the technical issues. But, by the time the H Block auction was actually announced, Sprint decided its business would be better served by focusing its efforts on the deployment of its trove of spectrum in the 2.5 GHz band.

Such reversals are not unusual during the FCC auction process. Frontline Wireless, a company that no longer exists, successfully persuaded the FCC that it would build a nationwide, interoperable public safety network in the 700 MHz band, if the FCC imposed a public/private partnership condition on the D Block. But, shortly before the auction was scheduled to start, Frontline announced that it had been unable to obtain sufficient financing, and as a result, the D block was never sold.

To be clear, I’m not suggesting that Sprint or Frontline acted deceitfully in seeking spectrum rules they considered favorable to their interests without actually participating in the resulting auction. My point is that there is a critical distinction between regulatory efforts and business decisions. Companies often participate in regulatory proceedings to optimize their potential business options, but the results they seek are just that –  options – until a business decision must be made.

This distinction leads to another important point: It is impossible for the FCC to predict accurately the ultimate business decisions of multiple independent companies whose particular business plans and the circumstances determining them are unknown to the FCC or anybody else. A particular company often cannot accurately predict its  own decisions in rapidly changing circumstances (e.g., when Frontline was lobbying the FCC, it could not know with certainty that it would obtain the financing it required to buy the D Block). This inherent uncertainty is why the discredited licensing methodology of comparative hearings failed. It required the FCC to make reliable predictive judgments about the needs and efficiency of potential spectrum users, which proved to be an impossible task.

Ironically, the bidding restrictions proposed for the incentive auction are a form of “comparative hearing lite”. The DOJ’s recommendation – that the FCC “ensure” that Sprint and T-Mobile win spectrum in the incentive auction – is based on its own predictive judgments regarding the relative spectrum needs of all four nationwide mobile providers and their willingness to use future spectrum resources efficiently. Of course, there is no reason to believe that the DOJ is capable of judging such matters more reliably than the FCC did during the era of comparative hearings. As the H and D Block auctions demonstrate, it is impossible for the DOJ to know whether Sprint and T-Mobile will even show up to participate in the incentive auction.

Jerry Ellig, senior research fellow at the Mercatus Center at George Mason University, discusses the the FCC’s lifeline assistance benefit funded through the Universal Service Fund (USF). The program, created in 1997, subsidizes phone services for low-income households. The USF is not funded through the federal budget, rather via a fee from monthly phone bills — reaching an all-time high of 17% of telecomm companies’ revenues last year. Ellig discusses the similarities between the USF fee and a tax, how the fee fluctuates, how subsidies to the telecomm industry have boomed in recent years, and how to curb the waste, fraud and abuse that comes as a result of the lifeline assistance benefit.

Download

Related Links

• Jerry Ellig’s Biography Mercatus Center
• Benefits, Costs and other Important Stuff-Demystifying Regulatory Analysis Ellig, Mercatus Center
• The Future of Regulation Ellig, Pepperdine University School of Public Policy

“Permitting voluntary spectrum transactions between federal and commercial users would harness the power of market forces to put both commercial and federal spectrum to its highest and best uses.”

The House Energy and Commerce Committee’s Subcommittee on Communications and Technology is holding a hearing today to ask, “How can Congress meet the needs of Federal agencies while addressing carriers’ spiraling demand for spectrum in the age of the data-intensive smartphone?” In my view, the answer requires a flexible approach that permits experimentation among multiple approaches.

There are challenges and opportunities for  both (1) clearing and reallocating federal spectrum for commercial use and (2) sharing spectrum among federal and commercial users. Economic and technical issues may require different strategies for different spectrum bands and different uses. Experience indicates that voluntary negotiations among interested parties – not bureaucratic fiat – are likely to produce the most efficient strategy in any particular instance. Unfortunately, current law does not provide market incentives or mechanisms for the relevant parties (federal and commercial spectrum users and spectrum regulators) to achieve efficient outcomes.

Congressional action creating markets for spectrum transactions between federal and commercial users would provide the relevant parties with an opportunity to maximize their spectrum use through voluntary negotiation. A market-oriented approach would permit experimentation, encourage innovation, and promote investment while increasing the efficiency of spectrum use. The result would benefit consumers, federal agencies, and the economy.

Federal users lack incentives to relinquish or share spectrum with commercial users

The law requires the NTIA and FCC to jointly plan spectrum allocations to accommodate all users and promote the efficient use of the spectrum. Although the agencies have agreed to share spectrum when the potential for harmful interference is low, the NTIA typically does not voluntarily agree to repurpose federal spectrum for exclusive commercial use. That typically requires a Presidential memorandum, Congressional legislation, or both.

The reason: NTIA and its constituent federal spectrum users have no  incentive to voluntarily relinquish federal spectrum rights.

First, government agencies generally cannot profit from relinquishing their spectrum (i.e., they are not subject to the opportunity costs applicable in commercial markets). They are entitled to reimbursement for the costs of relocating their wireless systems after a commercial spectrum auction, but the majority of auction proceeds are remitted to the general Treasury.

Second, government agencies face an uncertain funding environment (i.e., they cannot raise capital in commercial markets). Agencies often reserve federal spectrum allocations for planned wireless systems that are unfunded, which can result in federal spectrum lying fallow for years. An agency that reserves spectrum for a planned system can remain optimistic that it will receive funding in the next budget cycle. But, if the agency relinquishes its spectrum, it cannot build the planned system even if it does receive funding.

The lack of potential benefits and the funding uncertainty inherent in the government budgeting process combine to create an environment in which federal agencies have low opportunity costs for reserving spectrum and high opportunity costs for relinquishing it. Creating market mechanisms that  reverse these opportunity costs would provide government agencies with incentives to voluntarily relinquish or share their spectrum in ways that promote overall spectrum efficiency.

Federal users lack incentives to share spectrum with other federal users

The lack of incentives for efficient use of federal spectrum extends to intra-agency sharing as well.

There are approximately eighty different federal entities that are authorized to use federal spectrum. It would be more efficient for multiple agencies to share spectrum and systems in certain bands, but the lack of market incentives combined with jurisdictional issues make it difficult for them to work together. For example, DOJ, DHS, and DOT tried to build a shared wireless network for voice communications, but, “despite costing over $356 million over 10 years,” the project failed to achieve the results intended.

Market mechanisms that permit federal agencies to profit from their spectrum could eliminate the funding issues and alleviate the “turf wars” that plague intra-agency projects.

Potential mechanisms for repurposing federal spectrum

The current proposals for repurposing federal spectrum fall into three general categories.

One option is to create a GSA-like agency for federal spectrum users. This would provide an incentive for efficient use of federal spectrum by imposing an opportunity cost for inefficiency (in the form of rents paid by federal spectrum users to the new agency), but it would not improve funding mechanisms for federal wireless systems.

Another option is the sharing-only approach proposed by the President’s Council of Advisors on Science and Technology (PCAST). This approach could provide commercial users with additional access to federal spectrum, but it would not alter federal incentives or funding and lacks the degree of certainty that is typically necessary for substantial commercial investment.

The third option would permit federal spectrum users to sell or lease their spectrum rights and use the funds to build new systems or secure usage rights on commercial systems. This could be accomplished through the use of incentive auctions in some circumstances, though individually negotiated transactions between federal and commercial users would provide significantly more flexibility. This alternative would tend to reverse (by merging) the incentives discussed above: Federal users would face higher opportunity costs for reserving spectrum and lower opportunity costs for relinquishing it.

The third option also has the advantage of permitting multiple approaches to the issue of apportioning spectrum for federal and commercial uses. I expect that, even if government agencies were permitted to engage in secondary market transactions with commercial spectrum users, they would still prefer sharing on a non-interference basis in bands with unique requirements, which would accommodate additional spectrum for unlicensed uses. If it appeared that federal users still lacked sufficient incentives to improve the efficiency of their spectrum use, Congress would retain the option of creating a GSA-like agency to charge rents to federal spectrum users.

Permitting voluntary spectrum transactions between federal and commercial users would harness the power of market forces to put both commercial and federal spectrum to its highest and best uses. As FCC Commissioner Rosenworcel noted recently, “our federal spectrum policy needs to be built on carrots, not sticks.” Giving federal spectrum users an opportunity to negotiate a share in the benefits of repurposing federal spectrum would be a carrot worth pursuing.

A few days ago, the big news in the telecom world was that President Obama again ordered federal agencies to share and sell their spectrum to expand commercial mobile broadband use. This effort is premised on the fact that agencies use their gifted airwaves poorly while demand for mobile broadband is surging. While the presidential memorandum half-heartedly supports clearing out agencies from some bands and selling it off, the focus of the memo is shared access, whereby federal agencies agree to allow non-federal users to use the same spectrum bands with non-interfering technologies.

The good news is that there is no mention of PCAST’s 2012 recommendation to the president to create a 1000 MHz “superhighway” of unlicensed federal spectrum accessed by sensing devices. This radical proposal would replace the conventional clearing-and-auction process with a spectrum commons framework reliant on unproven sensing technologies. Instead of consumers relying on carriers’ spectrum for mobile broadband, this plan would crudely imitate (in theory) wifi on steroids, where devices would search out access over a huge portion of valuable spectrum, avoiding federal users. Its omission in the recent memo likely means the unlicensed superhighway won’t be pursued.

Still, this doubling-down on other forms of dynamic spectrum sharing is unfortunate for several reasons. First, it mostly entrenches the disastrous status quo by acceding to federal agencies’ claims that they can’t be safely moved. Giving federal agencies free spectrum decades ago was a costly mistake that needs to be corrected through pricing and through clearing. By throwing their hands up and saying that clearing and auctioning federal spectrum is too difficult and sharing is the best alternative, the administration forces us to suffer for the mistakes of the past.

Second, sharing, as envisioned in the memo, will not be accomplished quickly or extensively. Whatever technologies come out of this–there are several options, which only adds research delays–will be constrained by what interference risks the agencies accept. Engineering tests and simulations cannot answer this question; it is an economic and political question, and the economics is very distorted as it is. Federal agencies and particularly the military are very jealous of their spectrum. And who can blame them, since their wireless systems are often used for communications and training exercises that, if not directly protecting the lives of civilians, employees, and soldiers, are an important component of preparation for combat. But this jealousy means agencies are not good at sharing wireless bandwidth.

For “sharing skeptics,” UWB’s experiences illuminates our concerns. Ultrawideband (UWB) is a wireless low-power technology used for radar and data services and, beginning in 1989, its proponents sought regulatory approval to share federal spectrum for UWB commercial applications. UWB uses huge portions of spectrum but is very low power–transmissions from a cellphone are millions of times more powerful than UWB transmissions. Even then, UWB applicants were subjected to a process that can only be described as Kafka-esque as it went–for 13 years–agency to agency, submitting filings and completing interference tests, attempting to show that the technology would not threaten federal operations, before it finally got approval. Indicative of agency foot-dragging, a UWB manufacturer noted,

It took NTIA nearly a year to obtain internal sign off by government users of spectrum to approve with conditions the requests for waivers submitted by [UWB] companies. This despite the fact that the devices . . . were lifesaving instruments for public safety and law enforcement personnel, and all 2500 devices requested, if operating together in a single room, would emit less than one quarter the power of a cell phone.

That same UWB applicant made over 100 trips to DC in 6 years and spent millions of dollars to push his technology. Another large UWB company backed by Intel went out of business in the meantime. To be clear, the technologies contemplated in the memo are different from UWB, but UWB is not alone and the institutional resistance will be the same for future sharing technologies. There will be extensive tests, frequent denials, delays, and billions of dollars of continued waste of underused federal spectrum.

I have no doubt the heads of NTIA and DoD favor making mobile broadband more available to consumers. But it is also their duty to ensure that military and federal systems work well all the time. Given these two priorities (faster mobile downloads of cat videos versus public safety and military training), guess which one the NTIA and agencies will favor? What probability of service disruption will federal agencies tolerate? The answer–as we’ve seen in previous sharing attempts–is vanishingly small. That means if any technologies are approved for sharing on federal bands–a process that will take years–they will be likely constrained by very conservative technical criteria and low-power operations.

The memo’s best recommendation is exploring “incentives” (that is, pricing) for federal agencies to relinquish spectrum. Blair Levin–who worked on the FCC’s 2010 National Broadband Plan–voiced support for creating a “GSA for spectrum” at a Washington Post forum this week, and hopefully this sentiment will become a priority. Until agencies are paying market prices for this valuable resource, attempts to force agencies to share are bound to run into these problems since there is no way to analyze the economic tradeoffs.

But a GSA for spectrum is a long ways off and I suspect the regulatory risks and delays in the interim, combined with the poor economics of the permitted technologies, will scare away most investment. Whatever does emerge will be a poor substitute for the robust wireless networks we see everyday on our smartphones using exclusively licensed commercial spectrum, which is why the memo’s focus on sharing–not clearing and auctioning–is sorry news.

For more on proposals for reclaiming federal spectrum through clearing and auctioning, please see my hot-off-the-presses Mercatus working paper.

Declan McCullagh, chief political correspondent for CNET and former Washington bureau chief for Wired News, discusses recent leaks of NSA surveillance programs. What do we know so far, and what more might be unveiled in the coming weeks? McCullagh covers legal challenges to the programs, the Patriot Act, the fourth amendment, email encryption, the media and public response, and broader implications for privacy and reform.

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• Snowden: NSA snoops on U.S. phone calls without warrants, McCullagh
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The Department of Justice has suddenly reversed course from its previous findings that mobile providers who lack spectrum below 1 GHz can become “strong competitors” in rural markets and are “well-positioned” to drive competition locally and nationally. Those supporting government intervention as a means of avoiding competition in the upcoming incentive auction attempt to avoid these findings by highlighting misleading FCC statistics, including the assertion that Verizon owns “approximately 45 percent of the licensed MHz-POPs of the combined [800 MHz] Cellular and 700 MHz band spectrum, while AT&T holds approximately 39 percent.”

Sprint Nextel Corporation (Sprint Nextel) recently sent a letter to the Federal Communications Commission (FCC) signed by Dick Thornburgh, a former US Attorney General who is currently of counsel at K&L Gates, expressing his support for the ex parte submission of the Department of Justice (DOJ) that was recently filed in the FCC’s spectrum aggregation proceeding. The DOJ ex parte recommends that the FCC “ensure” Sprint Nextel and T-Mobile obtain a nationwide block of mobile spectrum in the upcoming broadcast incentive auction. In his letter of support on behalf of Sprint Nextel, Mr. Thornburgh states he believes the DOJ ex parte “is fully consistent with its longstanding approach to competition policy under Republican and Democratic administrations alike.”

Mr. Thornburgh is mistaken. The principle finding on which the DOJ’s new recommendation is based – that the FCC should adopt an inflexible, nationwide restriction on spectrum holdings below 1 GHz – is clearly  inconsistent with the DOJ’s previous approach to competition policy in the mobile marketplace. Both the FCC and the DOJ have traditionally found that there is no factual basis for making competitive distinctions among mobile spectrum bands in urban markets, and the DOJ has distinguished among mobile spectrum bands only in rural markets.

In its 2006 complaint against the merger of Alltel and Western Wireless, the DOJ found that, in rural markets with relatively low population densities, it cost more to achieve broad mobile coverage using 1.9 GHz PCS spectrum, which made it less likely that providers with PCS spectrum would deploy in those markets. Based on that finding, the DOJ concluded that additional mobile entry would be difficult in certain rural markets in which the combined firm would own all available 800 MHz Cellular spectrum – the only mobile spectrum below 1 GHz that was available on a nationwide basis at that time.

In that same merger proceeding (I was the FCC Chairman’s wireless advisor at the time), the FCC refused to adopt the DOJ’s rural market distinction and instead maintained its traditional view that spectrum bands above 1 GHz are suitable for the provision of competitive services in both urban and rural markets.

Although the DOJ continued to apply its rural market distinction in subsequent merger reviews ( i.e., Alltel/Midwest Wireless and AT&T/Dobson), it recognized that the distinction wasn’t reliably predictive in every rural market and was competitively irrelevant to nationwide competition. For example, in the 2008 Verizon/Alltel merger, the DOJ found that Verizon was a “strong competitor” in rural markets in which Verizon didn’t own any Cellular spectrum below 1 GHz, “because, unlike many other providers with PCS spectrum in rural areas, it has constructed a PCS network that covers a significant portion of the population.” Similarly, in its 2011 complaint against the proposed merger of AT&T and T-Mobile, the DOJ concluded that “T-Mobile in particular” was “especially well-positioned to drive competition, at both a national and local level,” in the mobile market even though T-Mobile owned very little spectrum below 1 GHz at that time.

The DOJ’s new recommendation is a sudden reverse in course from its previous findings that mobile providers who lack spectrum below 1 GHz can become “strong competitors” in rural markets and are “well-positioned” to drive competition locally and nationally.

The DOJ’s sudden reversal is particularly surprising given that the amount of spectrum below 1 GHz has increased substantially since the DOJ adopted its rural distinction in 2006. At that time, the 800 MHz Cellular band was the  only spectrum band below 1 GHz that was broadband-capable and fully available on a nationwide basis. Since then, two additional sub-1 GHz spectrum bands capable of supporting mobile broadband services have become available on a nationwide basis – the 800 MHz SMR and 700 MHz bands. Sprint Nextel owns nearly all of the 800 MHz SMR band nationwide, T-Mobile acquired 700 MHz spectrum through its acquisition of MetroPCS this year, and many rural and regional mobile providers own 800 MHz Cellular and 700 MHz spectrum in rural areas across the country.

Those supporting government intervention as a means of avoiding competition in the upcoming incentive auction attempt to avoid these facts by highlighting misleading FCC statistics, including the assertion that Verizon owns “approximately 45 percent of the licensed MHz-POPs of the combined [800 MHz] Cellular and 700 MHz band spectrum, while AT&T holds approximately 39 percent.” This statistic is misleading in two respects.

First, this statistic  excludes the 800 MHz SMR band, which is owned almost exclusively by Sprint Nextel. Excluding an entire spectrum band below one gigahertz from the statistical calculation creates the misleading impression that Verizon and AT&T hold a higher percentage of mobile spectrum below 1 GHz than they actually do.

Second, the FCC’s “MHz-POPs” methodology is weighted by population, which skews the resulting percentage of spectrum ownership significantly higher for companies that own spectrum in densely populated urban areas. A hypothetical using this methodology to calculate the percentage of “MHz-POPs” in the Cellular Market Areas (CMAs) covering the State of New York demonstrates just how skewed this methodology can be in the spectrum aggregation context.

Assume that “Company A” and “Company B” both own spectrum “Block X” (i.e., both companies own the same amount of spectrum in absolute terms) in different geographic areas in New York State. Specifically, assume that “Company A” owns “Block X” in geographic license area CMA001 (covering New York City and Newark, New Jersey), and “Company B” owns the same spectrum block in the other sixteen CMAs, including all six rural license areas in the state. If their spectrum holdings are calculated using the FCC’s population-weighted “MHz-POPs” methodology, “Company A” holds 70 percent of the “Block X” spectrum and “Company B” holds only 30 percent. (For an explanation of this methodology, see the “Technical Appendix” at the bottom of this post.)

As this example demonstrates, analyzing the percentage of spectrum mobile providers hold on a nationwide basis using the FCC’s “MHz-POPs” methodology is particularly misleading given the DOJ’s determination that spectrum below 1 GHz is competitively relevant only in sparsely populated rural areas. For example, if the FCC were to adopt a rule prohibiting any one mobile provider from holding 50% or more of the spectrum below 1 GHz in New York State on a “MHz-POPs” basis, “Company A” would be in violation of the rule even though it holds spectrum in  only 1 market and doesn’t hold any spectrum in rural markets.

When the 800 MHz SMR band is included and spectrum holdings are evaluated on a market-by-market basis, at least four different mobile providers hold spectrum below 1 GHz in most markets – a result that wasn’t even possible in 2006 (absent nationwide spectrum disaggregation on the secondary market) when the DOJ adopted its rural distinction.

Mr. Thornburgh’s broad statements about the DOJ’s past approach to competition policy generally and the FCC’s skewed statistics are not legitimate, data-based substitutes for a detailed analysis of DOJ precedent and current spectrum holdings below 1 GHz in both urban and rural markets. A detailed analysis indicates that the DOJ’s new recommendation is  not “fully consistent” with its previous approach to competition in the mobile marketplace, though it is consistent with a desire to rig the spectrum auction to favor certain competitors.

Technical Appendix

The FCC calculates “MHz-POPs” by multiplying the megahertz of spectrum held by a mobile provider in a given area by the population of that area.

The FCC also weights spectrum holdings by population using a “population-weighted average megahertz” calculation. The FCC calculates the nationwide “population-weighted average megahertz” of a mobile provider by dividing that provider’s “MHz-POPs” (as calculated above) by the US population.

The calculations for the New York State example in this blog post use “Cellular Market Areas,” which consist of Metropolitan Statistical Area (MSA) and Rural Service Area (RSA) licenses as defined by the FCC in Public Notice Report No. CL-92-40, “Common Carrier Public Mobile Services Information, Cellular MSA/RSA Markets and Counties,” DA 92-109, 7 FCC Rcd. 742 (1992). The population figures are from the 2000 U.S. Census, U.S. Department of Commerce, Bureau of the Census.

This post is a parody of “ Dialogue Concerning the Two Chief World Systems ” written by Galileo Galilei in 1632, which attempted to prove that the earth revolves around the sun (the Copernican system). Although the Copernican system was ultimately proven to be scientifically correct, Galileo was convicted of heresy and his book was placed on the Index of Forbidden Books for more than two hundred years.

Galileo’s book was written as a dialogue between three characters, Salviati, who supported Galileo’s view, Simplicio, who believed the universe revolves around the earth (the Ptolemaic system), and Sagredo, an open-minded person with no established position. In this parody, Salviati supports the use of actual or de facto guard bands between broadcast and mobile services, Simplicio supports the FCC’s competing guard band proposals in the 600 MHz and 700 MHz bands, and Sagredo remains open-minded.

INTERLOCUTORS

Salviati, Sagredo, Simplicio

SALVIATI. We resolved to meet today and discuss the differences in the FCC’s approach to the potential for harmful interference between broadcast and mobile services in the 600 MHz band on the one hand and the lower 700 MHz band on the other.

To prevent harmful interference between broadcast and mobile services in the 600 MHz band, the FCC has proposed separating these services with guard bands in which neither service would be allowed to operate. To make this easier to understand, let us use this tablet to illustrate the FCC’s proposed 600 MHz band plan and other such matters as they arise during our discussion.

The FCC adopted a very different approach to this issue in the 700 MHz band. Rather than require a spectral guard band between broadcast and mobile services, the FCC created geographic exclusion zones to protect broadcast services from the potential for harmful interference from mobile services in the lower 700 MHz A Block.

The FCC considered imposing additional limitations to protect mobile services in the A Block from broadcast services in Channel 51, but ultimately decided to provide A Block licensees with the flexibility to account for harmful interference through their own business plans, services, and facilities.

As a result, the 3GPP defined two LTE band classes for paired spectrum in the lower 700 MHz band:

• Band Class 17, which uses the A Block as a de facto guard band separating mobile services in the lower 700 MHz B and C Blocks from broadcast services in Channel 51; and

• Band Class 12, which has no guard band.

A group of A Block licensees subsequently filed a petition asking the FCC to initiate a rulemaking proceeding to require that all devices operating on paired commercial spectrum in the 700 MHz band be capable of operating on all paired frequencies in the band and also to suspend authorization of 700 MHz devices that are incapable of operating on all such frequencies. Last year the FCC initiated a rulemaking proceeding to evaluate whether the lower 700 MHz B and C Blocks would experience harmful interference, and to what degree, if the FCC were to impose an interoperability mandate.

It would appear that the FCC has since answered the first question, whether eliminating the  de facto guard band in 3GPP Band Class 17 would cause harmful interference, by proposing 6 MHz guard bands between broadcast and mobile services in the 600 MHz band.

SIMPLICIO. The 600 MHz band uses different frequencies than the 700 MHz band, and different frequencies have different characteristics. The FCC has often adopted different rules for different frequency bands. If the potential for harmful interference between broadband mobile services were similar in both bands, the FCC would not have omitted that fact.

SAGREDO. You might at least add, “if it had occurred to the FCC to consider the question.” If the FCC were to consider it, could the FCC plausibly conclude that the potential for harmful interference between broadcast and mobile services is substantially different in the 600 MHz band?

SALVIATI. Your question seems to me most excellent. Though I grant that the FCC adopts spectrum rules on an ad hoc basis, I feel no compulsion to grant that the arbitrary distinctions of FCC process confer legitimacy on question of physics. Whether the potential for harmful interference is substantially the same in the 600 MHz and 700 MHz bands is a question amenable to answer only by demonstrative science, not speculation regarding past FCC actions and current omissions.

Neither the FCC nor the industry has adduced any evidence that the potential for harmful interference varies substantially between the 600 MHz and 700 MHz bands. To the contrary, the available evidence indicates that the potential for harmful interference in these bands is substantially similar due their relatively close proximity within the electromagnetic spectrum and the fact that the phenomena responsible for interference between broadcast and mobile services are not frequency dependent.

SIMPLICIO. I do not mean to join the number of those who are too curious about the mysteries of physics. But as to the point at hand, I reply that licensees in the A Block are asking the FCC to impose an interoperability mandate for competitive reasons. AT&T, who owns spectrum in the lower 700 MHz B and C Blocks, has deployed only Band Class 17, which excludes the A Block. Licensees in the A Block must use Band Class 12, which is not supported by AT&T. That is preventing A Block licensees from taking advantage of AT&T’s economies of scale for purchasing devices and roaming on its network. This seems to be conclusive evidence that AT&T excluded Band Class 12 from its B and C Block devices to raise the costs of its rivals, a form of anticompetitive behavior.

SAGREDO: I do not claim to comprehend the mysteries of physics, but I have some knowledge of the laws governing competition. The law does not penalize a company merely for being successful in the marketplace – it prohibits only anticompetitive behavior that is “unreasonable” or “wrongful.” The fact that AT&T’s decision to deploy Band Class 17 may incidentally raise its rivals’ costs is irrelevant if AT&T had legitimate business reasons to make that decision.

SALVIATI. Exactly so, which brings us full circle. Whether AT&T had legitimate reasons to deploy Band Class 17 depends on the laws of physics. If deploying Band Class 12 has the potential to cause harmful interference to the B and C Blocks, AT&T’s decisions to deploy Band Class 17 cannot be considered anticompetitive.

SIMPLICIO. What about the expectations of the A Block licensees? Band Class 17 was not proposed to the 3GPP until after the 700 MHz auction was completed. It seems legitimate to me that the FCC honor their expectation that all licensees would deploy Band Class 12.

SALVIATI. Another question answers yours. Did the FCC require or even encourage the deployment of interoperable devices in the 700 MHz band?

SIMPLICIO . You already know the answer. The FCC clearly said licensees could make their own determinations respecting the services and technologies they deploy in the band so long as they comply with the FCC’s technical rules. What does that have to do with the expectations of the A Block licensees?

SALVIATI. It demonstrates that the ostensible expectations of the A Block licensees were unreasonable. The FCC’s rules clearly gave B and C block licensees the absolute right to eschew deploying Band Class 12, and it was reasonably foreseeable that B and C Block licensees would exercise that right given the potential for harmful interference inherent in Band Class 12. Based on the FCC’s rules, the ostensible expectation of the A Block licensees is more reasonably categorized as a blind hope or a calculated risk. On average, the A Block licensees paid less than half the price the B Block licensees paid for the same amount of spectrum. If the B Block licensees had decided to deploy Band Class 12, the A Block licensees would have enjoyed access to maximal economies of scale while the B Block licensees suffered from the same interference potential at twice the price. If not, the A Block licensees knew that they could still deploy Band Class 12 on their own at half the price.

SIMPLICIO. You say the A Block licensees could still deploy Band Class 12 systems in their spectrum, but they say they cannot deploy without AT&T’s help. Why should I favor your position over theirs?

SALVIATI. Experience proves my position is correct. US Cellular, one of the A Block licensees who petitioned the FCC in this matter, has already deployed Band Class 12 in its A Block spectrum.

SAGREDO. I cannot without great astonishment – I might say without great insult to my intelligence – hear it said that something cannot be done that has already been done. I submit that I am better satisfied with your discourse than that of the A Block licensees in respect to the competitive and economic issues. But my knowledge is insufficient to reach my own conclusion regarding the physics. Perhaps AT&T was acting unreasonably when it chose to use the A Block as a de facto guard band to protect its operations in the C and B Blocks from harmful interference.

SALVIATI. That is the question Simplicio dreads. He knows that, if the FCC answers that question in the affirmative, it cannot establish guard bands in the 600 MHz band. The law governing the 600 MHz band provides that “guard bands shall be no larger than is technically reasonable to prevent harmful interference between licensed services outside the guard bands.” It can hardly be technically reasonable to require a 6 MHz guard band in the 600 MHz band while finding it was technically unreasonable for AT&T to treat the 6 MHz A Block as a de facto guard band given the evidence that the interference potential is substantially the same.

SAGREDO. Let us close our discussions for the day. The honest hours being past, I think Simplicio might like to contemplate this question during our cool ones. Tomorrow I shall expect you both so that we may continue the discussions now begun.

Few dispute that mobile carriers are being squeezed by the relative scarcity of radio spectrum. This scarcity is a painful artifact of regulatory decisions made decades ago, when the regulators gave valuable spectrum away for free to government agencies and to commercial users via so-called “beauty contests.” As more Americans purchase tablets and smartphones (as of a year ago, smartphones comprise a majority of phone plans in the US), many fear that consumers will be hurt by higher prices, stringent data limits, and less wireless innovation.

In the face of this demand, freeing up more airwaves for mobile broadband became a bipartisan effort and many scholars and policymakers have turned their hungry eyes to the ample spectrum possessed by federal agencies, which hold around 1500 MHz of the most valuable bands. The scholarly consensus–confirmed by government audits–is that federal agencies use their spectrum poorly. Because many licensees use spectrum under the old rules (free spectrum) and use it inefficiently, President Obama directed the FCC and NTIA to find 500 MHz of spectrum for mobile broadband use by 2020.

I recently published a Mercatus working paper surveying plans that encourage federal agencies to economize on their use of radio spectrum, with the ultimate goal of auctioning cleared spectrum to the highest bidders (probably mobile broadband service providers given consumer needs). In my research, interviewees pointed to two problems with reclaiming federal spectrum: (a) there is no effective process to get federal users (especially the powerful Department of Defense) to turn over spectrum, and (b) federal users don’t pay market prices for spectrum, resulting in inefficient use and billions of dollars of value annually wasted.

I’ll note two of the promising spectrum management plans here. As for improving the process of quickly getting federal spectrum auctioned off, there is a bill, promoted by Sen. Kirk and Rep. Kinzinger, to “BRAC the spectrum.” BRAC (the Base Realignment and Closure procedure), as Jerry Brito documents, was a move by Congress in 1988 to successfully accomplish the politically difficult task of closing military bases. BRAC-ing the spectrum would mean the congressional creation of a commission with the authority to clear federal users out of their spectrum. All spectrum-clearing decisions by this commission during its tenure would stand, absent a disapproving joint resolution from Congress. The identified spectrum could be auctioned off within a few years and the proceeds could be used to move the federal systems to other bands, with the remainder going to the Treasury.

The second proposal I highlight is the creation of a GSA-like agency that controls federal spectrum. This proposal, from Thomas Lenard, Lawrence White, and James Riso, would accomplish the second goal of making federal users pay substantial fees for their spectrum. The federal government pays market rates for many important inputs–tanks, carriers, land, etc.–so why is spectrum free? The GSA, the authors explain, owns real estate and buildings and it leases those to federal agencies. Just as paying rent forces federal agencies to economize on building size and amenities, a “GSA for spectrum” would lease spectrum to agencies, hopefully preventing the sort of waste currently seen in federal bands.

I’m probably the first TLF author to favor the creation of 2 new federal agencies in a post (hopefully not my last!), but these proposals may be necessary given the damaging status quo. Federal waste of spectrum assets isn’t disputed and the consumer benefits of freeing up spectrum are obvious. The fight lies primarily between powerful interest groups and affected congressional committees, some of whom will see their constituent oxen gored (DoD, defense contractors, technology firms). Given the urgent needs, it’s foolish to continue to do nothing.

” . . . the cooperative process envisioned by the National Broadband Plan is at risk of shifting to the traditionally contentious band plan process that has delayed spectrum auctions in the past.”

The National Broadband Plan proposed a new way to reassign reallocated spectrum. The Plan noted that, “Contentious spectrum proceedings can be time-consuming, sometimes taking many years to resolve, and incurring significant opportunity costs.” It proposed “shifting [this] contentious process to a cooperative one” to “accelerate productive use of encumbered spectrum” by “motivating existing licensees to voluntarily clear spectrum through incentive auctions.” Congress implemented this recommendation through legislation requiring the FCC to transition additional broadcast spectrum to mobile use through a voluntary incentive auction process rather than traditional FCC mandates.

Among other things, the FCC’s Notice of Proposed Rulemaking initiating the broadcast incentive auction proceeding proposed a “lead” band plan approach and several alternative options, including the “down from 51” approach. An overwhelming majority of broadcasters, wireless providers, equipment manufacturers, and consumer groups rejected the “lead” approach and endorsed the alternative “down from 51” approach. This remarkably broad consensus on the basic approach to the band plan promised to meet the goals of the National Broadband Plan by accelerating the proceeding and motivating voluntary participation in the auction.

That promise was broken when the FCC’s Wireless Bureau unilaterally decided to issue a Public Notice seeking additional comment on a variation of the FCC’s “lead” proposal as well as a TDD approach to the band plan. The Bureau issued this notice over the objection of FCC Commissioner Ajit Pai, who issued a separate statement expressing his concern that seeking comment on additional approaches to the band plan when there is a “growing consensus” in favor of the “down from 51” approach could unnecessarily delay the incentive auction. This statement “peeved” Harold Feld, Senior Vice President at Public Knowledge, who declared that there is no consensus and that the “down from 51” plan would be a “disaster.” As a result, the cooperative process envisioned by the National Broadband Plan is at risk of shifting to the traditionally contentious band plan process that has delayed spectrum auctions in the past.

Consumer groups, including Public Knowledge, acknowledged the consensus

Mr. Feld’s “pique” with Commissioner Pai’s view that the “down from 51” approach had become the “consensus framework” for the 600 MHz band plan is surprising. According to Mr. Feld, Sprint, Microsoft, and the Public Interest Spectrum Coalition (PISC) objected to the “down from 51” approach. As support for this position, Mr. Feld cited reply comments filed by the PISC, a coalition that includes, among others, Public Knowledge.

Contrary to Mr. Feld’s assertion, however, the PISC reply comments  support Commissioner Pai’s view. The PISC reply comments expressly state that there is a “consensus in favor of a 51-down band plan with a duplex gap,” which is “supported as technically superior by virtually all major industry commenters.”

To be sure,  after Commissioner Pai issued his statement, Mr. Feld met with the Wireless Bureau to state for the record that there is no consensus support for the “down from 51” approach. Prior to that meeting, however, Public Knowledge had not expressed that view.

Why has Mr. Feld suddenly become so vehemently opposed to the “down from 51” approach?

“Down from 51” would not reduce revenue

Mr. Feld claims that the “down from 51” approach embraced by the broadcasters and “so many carriers and equipment manufacturers” would be an “absolute disaster” for that very reason – i.e., most of the industry supports it. In Mr. Feld’s view, the fact that the overwhelming majority of industry participants support the “down from 51” approach is evidence that they are “colluding” to reduce auction revenue.

Although the service rules and auction revenue are to some extent interdependent, insofar as band plans are concerned, wireless providers have far greater incentives to promote spectral and operational efficiency than to reduce auction prices. The costs of building and operating wireless networks are significantly higher than the one-time costs of acquiring spectrum at auction, and consumer demand for wireless broadband capacity is rapidly increasing. Given these facts, no rational wireless provider has an incentive to promote a band plan designed to reduce auction revenue.

In any event, Mr. Feld’s theory that the “down from 51” approach could reduce revenue by making too much spectrum available is irrelevant to the band plan issue. Even assuming his theory is correct, the FCC’s other proposed approaches to the band plan, none of which “cap” the amount of spectrum that would be accepted in the reverse auction, would run the same risk. Similarly, Mr. Feld’s proposed solution of limiting the amount of spectrum accepted in the reverse auction could be applied to any approach to the band plan, including “down from 51.”

“Down from 51”  is not anticompetitive

Mr. Feld claims that the “down from 51” approach is anticompetitive because, in his view, wireless providers that lack spectrum below 1 GHz “are the only ones capable of using the downlink spectrum, and even then only if they bid exclusively on the supplementary downlinks.” According to Mr. Feld, this means such providers will bid only on the downlink spectrum and leave the paired spectrum to Verizon and AT&T even though, in his view, providers that lack spectrum below 1 GHz are the ones that “most need” uplink spectrum.

Of course, if this were true, it would be irrational for any wireless provider to join Verizon and AT&T in supporting the “down from 51” approach. Yet, T-Mobile, the only nationwide provider that lacks nationwide spectrum below 1 GHz, is a signatory to the “Joint Accord” supporting the “down from 51” approach, an approach that is also supported by rural and regional providers.

Given the current state of the record, a finding based on Mr. Feld’s hypothesis would require the FCC to assume that wireless providers generally behave irrationally when developing band plans – an assumption so absurd it would fail even the most deferential application of the  Chevron standard for judicial review.

“Down from 51” is not inefficient

Mr. Feld claims the “down from 51” approach is spectrally inefficient because it “maximizes the total number of guard bands” while retaining a duplex gap.

To the contrary, the “down from 51” approach proposed by the FCC would require the  minimum total number of guard bands while retaining a duplex gap: one.

If enough spectrum is cleared to place the guard band adjacent to Channel 37 as proposed by T-Mobile, the “down from 51” approach would also minimize the amount of spectrum that must be allocated to guard bands. This specific version of the “down from 51” approach would require a total of only 4 MHz of guard band spectrum while providing 10 MHz of protection against interference (6 MHz in Channel 37 plus an additional 4 MHz yielded by broadcasters in the reverse auction).

In comparison, the “down from 51 reversed” approach proposed by the Wireless Bureau in the Public Notice would require at least  two guard bands.

If the FCC intends to maximize spectral efficiency by minimizing the total number of guard bands, it will not adopt the “down from 51 reversed” approach proposed by the Wireless Bureau. That is why the FCC proposed to place the 600 MHz uplink band adjacent to the lower 700 MHz uplink band in the “lead” proposal in its Notice of Proposed Rulemaking.

A TDD approach is inefficient

Mr. Feld claims that a “down from 51 TDD” approach would make “maximum use” of spectrum above Channel 37 because it would eliminate the duplex gap required for FDD deployments. He neglects to mention, however, that a TDD approach would require an additional guard band that would be the same or substantially similar in size to the FDD duplex gap in the “down from 51″ approach. Compare the FCC’s “down from 51” approach with the Wireless Bureau’s “down from 51 TDD” approach:

As I’ve noted previously, the switching times inherent in LTE TDD systems also produce latency and reduce coverage – issues that would be exacerbated in rural deployments in the 600 MHz band. LTE TDD operates in two modes: a 10-millisecond mode (more latency, but more coverage) and a 5-millisecond mode (less latency, but less coverage). In the 10-millisecond mode, LTE TDD is generally not suitable for the streaming applications that stress mobile networks the most (e.g., video chat applications). In the 5-millisecond mode, LTE TDD is generally suitable for streaming applications, but suffers from significantly reduced coverage. According to Qualcomm, in a coverage-limited system using the same frequency, TDD requires 31 to 65 percent more base stations than FDD to maintain the same throughput.

This doesn’t mean that TDD technologies have no role to play in the wireless marketplace. In the absence of channel aggregation opportunities, TDD is the only choice when paired spectrum is unavailable. It can also be used to enhance capacity when coverage is not the delimiting factor.

The primary driver behind LTE TDD deployment generally, however, appears to be Chinese industrial policy, not spectral efficiency. After China’s TDD-based SCDMA technology failed to gain traction internationally, it focused its efforts on developing a TDD version of LTE that would be backward compatible with its SCDMA standard and expand China’s technological influence globally. As a result, China became the primary promoter of the LTE TDD standard and a major owner of the standard’s essential patents (i.e., Huawei states that it leads the world in essential LTE patents). Based on likely deployment scenarios in the 600 MHz band, an FCC-mandated TDD approach would benefit Chinese patent holders, not American consumers.

The Public Notice Should Not Have Been Issued by the Bureau

Finally, Mr. Feld accused Commissioner Pai of “poisoning” the rulemaking process by calling attention to the Wireless Bureau’s disregard for his role as a Commissioner. Mr. Feld portrayed the Public Notice as a routine matter, but as a former Chief of the Wireless Bureau, I know that Bureaus do not circulate routine items to the Commissioners. A Bureau typically circulates an item to the Commissioners with a waiting period only when its authority to issue the item at the Bureau-level is unclear. If a Commissioner objects to the issuance of the item at the Bureau level, established practice requires that it be submitted to the Commission for a vote.

In my experience, the Bureau’s decision to ignore Commissioner Pai’s objection was, at a minimum, a serious breach of comity and established protocol. If anything “poisoned” the process in this instance, it was the Bureau’s insistence on issuing a Public Notice on authority delegated to it by the Commission over the objection of a Commissioner.

Conclusion

The surest path to “disaster” in this proceeding is for the FCC to take the incentives out of the incentive auction. The Bureau’s insistence on pushing an approach that most broadcasters, wireless providers, and equipment manufacturers don’t support is more likely to deter participation in the auction than incent it. It is the industry – not the Wireless Bureau – that ultimately must agree to risk its capital in the auction and deploy new wireless infrastructure. If the Wireless Bureau’s preferred approach wins and, as a result, the industry declines to participate in the auction, everyone loses.

Frontline relied on the DOJ foreclosure theory to predict that the lack of eligibility restrictions in the 700 MHz auction would “inevitably” increase prices, stifle innovation, and reduce the diversity of service offerings as Verizon and AT&T warehoused the spectrum. In reality, the exact opposite occurred.

The DOJ recently recommended that the FCC rig the upcoming incentive auction to ensure Sprint Nextel and T-Mobile are winners and Verizon and AT&T are losers. I previously noted that the DOJ spectrum plan (1) inconsistent with its own findings in recent merger proceedings and the intent of Congress, (2) inherently discriminatory, and (3) irrational as applied. Additional analysis indicates that it isn’t supported by economic theory or FCC factual findings either.

Economic Theory

The Phoenix Center published a paper with an economic simulation that exposes the fundamental economic defect in the foreclosure theory underlying the DOJ recommendation. The DOJ implicitly recognizes that the “private value” of spectrum (the amount a firm is willing to pay) equals its “use value” (derived from using spectrum to meet consumer demand) plus its “foreclosure value” (derived from excluding its use by rivals). In its application of this theory, however, the DOJ erroneously presumes that Verizon and AT&T would derive zero use value from the acquisition of additional spectrum – a presumption that is inconsistent with the FCC findings that prompted the auction.

The Phoenix Center notes that  all firms – including Sprint Nextel and T-Mobile – derive a foreclosure value from the acquisition of spectrum due to its scarcity. When considering the benefits to consumers, it is the comparative use value of the spectrum for each provider that is relevant. If the use value of the spectrum to Verizon and AT&T exceeds that of Sprint Nextel and T-Mobile, economic theory says Verizon and AT&T would maximize the potential consumer benefits of that spectrum irrespective of its foreclosure value.

Of course, determining the differing use values of spectrum to particular firms is what spectrum auctions are for, which brings the DOJ’s argument full circle: If government bureaucrats at the DOJ and the FCC could accurately assess the use values of spectrum, we wouldn’t need to hold spectrum auctions in the first place.

The circularity of the DOJ theory explains its reliance on an unsubstantiated presumption that Sprint Nextel and T-Mobile have the highest use value for the spectrum. If the DOJ had instead (1) conducted a thorough factual investigation, (2) analyzed the resulting data to assign bureaucratic use values for the spectrum to each of the four nationwide mobile providers, and (3) compared the results to determine that Verizon and AT&T had lower use values, the DOJ would have engaged in the same failed “comparative hearing” analysis that Congress intended to avoid when it authorized spectrum auctions. Given the Congressional mandate to auction spectrum yielded by the broadcasters, the FCC cannot engage in a comparative process to pick winners and losers, and it certainly cannot substitute an unsubstantiated presumption for an actual comparative process in order to avoid the legal prohibition.

FCC Factual Findings

The foreclosure theory and DOJ presumption are also inconsistent with the auction experience and current factual findings of the FCC. The DOJ foreclosure theory has been presented to the FCC before and has proved invalid by the market.

When the FCC was developing rules for the 700 MHz auction in 2007, Frontline Wireless sought preferential treatment using the same foreclosure theory as the DOJ. Frontline submitted a paper (prepared by Stanford professors of economics and management) that relied on the same types of information and reached the same conclusion as the DOJ – that Verizon and AT&T were dominant “low-frequency” wireless incumbents with “strong incentives” to acquire and warehouse 700 MHz spectrum, and that their participation in the 700 MHz auction must be limited in order to “promote competition” and prevent “foreclosure.” Frontline predicted that, if Verizon and AT&T were not prevented from bidding in the 700 MHz auction, it would “inevitably lead to higher prices, stifled innovation, and reduced diversity of service offerings.”

The FCC rejected Frontline’s foreclosure theory. The FCC concluded that, “given the number of actual wireless providers and potential broadband competitors, it [was] unlikely that [incumbents] would be able to behave in an anticompetitive manner as a result of any potential acquisition of 700 MHz spectrum.”

The last five years have proven that the FCC was correct. Though Verizon and AT&T acquired significant amounts of unfettered 700 MHz spectrum, the auction results have not led to the “higher prices, stifled innovation, and reduced diversity of service offerings” predicted by Frontline. In its most recent mobile competition report, the FCC reported that:

• Verizon used its 700 MHz spectrum to deploy a 4G LTE network to more than 250 million Americans less than four years after Verizon’s 700 MHz licenses were approved (i.e., it didn’t warehouse the spectrum).

• Mobile wireless prices declined overall in 2010 and 2011, and the price per megabyte of data declined 89% from the 3^rd quarter of 2008 – a few months before Verizon received its 700 MHz licenses – to the 4^th quarter of 2010 (i.e., industry prices decreased).

• The number of subscribers to mobile Internet access services more than doubled from year-end 2009 to year-end 2011 (i.e., industry output increased).

• Prepaid services are growing at the fastest rate, and new wholesale and connected device services are growing significantly (i.e., providers continued to provide new and diverse service offerings).

• Market concentration has remained essentially unchanged since 2008 (the population weighted average of HHIs increased from 2,842 in 2008 to 2,873 in 2011 – a change of only 1 percent).

Remember: Frontline relied on the DOJ foreclosure theory to predict that the lack of eligibility restrictions in the 700 MHz auction would “inevitably” increase prices, stifle innovation, and reduce the diversity of service offerings as Verizon and AT&T warehoused the spectrum. In reality, the exact opposite occurred. Verizon and AT&T did not warehouse the spectrum, industry prices decreased while output increased, diverse new service offerings exhibited the strongest growth, and market concentration remained essentially unchanged. And, while competition thrived, consumers reaped the benefits.

So, why would the DOJ make the same failed argument for the 600 MHz auction (other than crony capitalism)? Some might say, “Even the boy who cried wolf was right once.” But, even if one were inclined to give the DOJ the benefit of the doubt, the theoretical possibility that the foreclosure theory could adversely impact the 600 MHz auction must be weighed against the potential harm of limiting participation in the auction.

The harm is well documented and could prove particularly problematic in this auction. A paper coauthored by Leslie Marx, who led the design team for the 700 MHz auction when she was the FCC’s Chief Economist, demonstrates that excluding Verizon and AT&T would have even more severe consequences in the incentive auction than in previous auctions.

A paper published by economists at Georgetown University’s Center for Business and Public Policy attempts to quantify the severity of these consequences. It estimates that excluding Verizon and AT&T from the auction could reduce revenues by as much as 40 percent ($12 billion) – a result that would jeopardize funding for the nationwide public safety network, reduce the amount of spectrum made available for wireless Internet services, and adversely affect more than 118,000 U.S. jobs. That is a steep price to pay for the privilege of seeing whether the boy is crying wolf again.

The DOJ’s recommendation would likely reduce the amount of revenue produced by the incentive auction and risk leaving the public safety network unfunded (as the economist who led the design of the most successful auction in FCC history will explain in this webinar on Thursday). The unsubstantiated, speculative increase in commercial competition the DOJ says could occur if the FCC picks winners and losers in the incentive auction is a poor justification for continuing to deny our nation’s first responders the network they need to protect the safety of every American.

Beyond enforcing the antitrust laws, the Antitrust Division of the Department of Justice (DOJ) advocates for competition policy in regulatory proceedings initiated by Executive Branch and independent agencies, including the Federal Communications Commission (FCC). In this role, the DOJ works with the FCC on mergers involving communications companies and occasionally provides input in other FCC proceedings. The historical reputation of the DOJ in this area has been one of impartial engagement and deliberate analysis based on empirical data. The DOJ’s recent filing (DOJ filing) on mobile spectrum aggregation jeopardizes that reputation, however, by recommending that the FCC “ensure” Sprint Nextel and T-Mobile obtain a nationwide block of mobile spectrum in the upcoming broadcast incentive auction.

The new “findings” in the  DOJ filing fail to cite any factual record and are inconsistent with the DOJ’s factual findings in recent merger proceedings that contain extensive factual records. The DOJ filing blithely relies on a discriminatory evidentiary presumption to insinuate that Verizon and AT&T are “warehousing” spectrum, and then uses that presumption to support a proposed remedy that bears no rational relationship to factual findings that the DOJ has actually made. The absence of any empirical evidence supporting the relevant conclusions in the DOJ filing gives it the appearance of a political document rather than a deliberative work product crafted with the traditionally substantive and impartial standards of the Justice Department. The FCC, the independent agency that prides itself on being fact-based and data-driven, should give this screed no weight.

DOJ Flip-Flops on Competition in the Mobile Market

The  DOJ filing concludes – without citing any evidence – that Verizon and AT&T have “the ability and, in some cases, the incentive to exercise at least some degree of market power, particularly given that there is already significant nationwide concentration in the wireless industry.” This conclusion directly contradicts the representations of the DOJ in its federal court complaint to block the merger of AT&T and T-Mobile. The companies had argued that the absence of T-Mobile would not have a significant impact on the mobile marketplace because, as a standalone company, T-Mobile faced substantial commercial and spectrum challenges. The DOJ refuted this rationale by finding that, “Due to the advantages arising from their scale and scope of coverage, each of the Big Four nationwide carriers is especially well-positioned to drive competition, at both a national and local level, in this industry.” Now, however, the DOJ asserts that Verizon and AT&T are “dominant firms” in the mobile market and that Sprint Nextel and T-Mobile cannot compete in the upcoming incentive auction unless the FCC adopts laws granting them special privileges. “Each” of the “Big Four” could hardly have been “well-positioned” to “drive competition” if half of them require government subsidies to compete – something I expect the federal court judge would have been interested to hear.

DOJ Recommends a Discriminatory Evidentiary Presumption

After flip-flopping on competition, the DOJ theorizes that Verizon and AT&T could use their “dominant” positions in the mobile market to “foreclose” competition by aggregating excessive mobile spectrum. Rather than rely on actual evidence to support its foreclosure theory, the DOJ  presumes that Verizon and AT&T are not using their spectrum “efficiently” while assuming that Sprint Nextel and T-Mobile could “effectively” make use of more spectrum. The filing concludes – again without citing any evidence – that Sprint Nextel and T-Mobile would make the “highest value use” of new spectrum “absent compelling evidence that the largest incumbent carriers are already using their existing spectrum licenses efficiently and their networks are still capacity-constrained.” The DOJ offered no explanation for its outrageous suggestion that the FCC should hold certain companies to a higher evidentiary standard (a presumption that must be rebutted by “compelling evidence”) than others (for which efficiency is assumed) when evaluating whether they are using their spectrum efficiently.

The DOJ also failed to offer any actual evidence supporting the notion, reiterated in testimony before the Senate Judiciary Committee, that the FCC “take a close look at whether some of the spectrum already available to some providers is being warehoused and not being used.” The FCC established “build out” requirements to ensure spectrum is not being “warehoused” and has previously found that a “single objective metric” of spectrum efficiency is “neither possible nor appropriate.” If the FCC now intends to consider the efficiency of current spectrum use as a factor in developing its spectrum aggregation and auction rules, fundamental principles of justice require that it establish an open and transparent process for defining spectrum efficiency and apply the new metric equally to all mobile providers after a full factual investigation of their actual spectrum use. Among all agencies, one would expect the Justice Department to understand that without a reminder.

DOJ Recommends an Irrational Remedy

The DOJ’s factual flip-flop on competition in the mobile market and its proposed adoption of a discriminatory evidentiary presumption merely lay the predicate for its ultimate policy recommendation: That the FCC distinguish between “low” and “high” frequencies in its spectrum aggregation rules in order to “ensure” Sprint Nextel and T-Mobile obtain a nationwide block of spectrum in the upcoming broadcast incentive auction. In the past, the FCC could simply decree that only Sprint Nextel and T-Mobile are eligible to bid on certain spectrum blocks or to participate in the auction at all. But, based on the disastrous results of previous spectrum auctions that limited the eligibility of certain types of companies to participate, Congress prohibited the FCC from imposing eligibility restrictions on the broadcast incentive auction.

So how does the DOJ propose that the FCC “ensure” Sprint Nextel and T-Mobile are “winners”? Although it cannot directly limit the participation of Verizon and AT&T, the FCC retains jurisdiction to limit the overall amount of mobile spectrum any one provider can hold. Most economists agree that, if a single provider were able to aggregate a significant amount of the total available mobile spectrum, that provider could use its spectrum holdings to engage in anticompetitive behavior. The potential for excessive aggregation of mobile spectrum would not normally be relevant to a particular spectrum auction because the FCC has traditionally treated all spectrum bands the same in this respect. Now, however, the FCC has proposed to apply different rules to “low” frequency spectrum (i.e., frequencies less than 1 GHz) on a nationwide basis – even though the only new mobile spectrum the FCC has proposed to auction in the last five years happens to be the broadcast spectrum, which, coincidentally of course, is below 1 GHz.

In its recent FCC filing, the DOJ is, also coincidentally, recommending this new approach as well, even though its own factual findings don’t support that outcome. Unlike the FCC, the DOJ has traditionally distinguished among mobile spectrum bands below and above 1 GHz, but only in rural areas. After conducting detailed market-by-market analyses in merger proceedings with voluminous factual records, the DOJ found that mobile providers that lack access to spectrum below 1 GHz “generally have found it less attractive to build out in rural areas.” After expressly considering the question in multiple merger proceedings, the DOJ has never considered the distinction between “lower” and “higher” frequency mobile spectrum competitively relevant in urban areas. As it admits in its filing with the FCC, the DOJ considers spectrum above 1 GHz “just as effective as low-frequency spectrum” when a provider “is attempting to augment the capacity of its network in dense urban areas.”

If mobile providers required spectrum below 1 GHz to compete successfully in non-rural areas, the DOJ could not have  truthfully told the federal court that T-Mobile was “well-positioned” to “drive competition” in the mobile market, because T-Mobile has never held substantial “low” frequency spectrum. Despite the fact that T-Mobile has always relied on mobile spectrum above 1 GHz, the DOJ found that T-Mobile managed to build a mobile network covering 90% of the US population and is using that network to compete successfully in the mobile market on a nationwide basis. The DOJ’s factual findings have repeatedly affirmed that, to the extent spectrum below 1 GHz is competitively relevant, its relevance is limited to sparsely populated rural areas where capacity is not a substantial issue. The “spectrum crunch” the incentive auction is intended to ameliorate is a capacity issue caused by the massive growth in data traffic, not a coverage issue, and capacity issues primarily impact areas with high population densities.

The DOJ’s factual findings regarding the competitive relevance of spectrum below 1 GHz would, at best, support a rule limiting the amount of “low” frequency spectrum that a particular mobile provider could hold in low-density rural areas where the distinction between higher and lower frequencies may actually have competitive relevance. Suggesting that the FCC should nevertheless apply such a distinction on a nationwide basis is an irrationally overbroad remedy for potential competition issues that are limited to sparsely populated rural areas when the “spectrum crunch” harms areas with the densest population the most.

It’s also too clever by half in this context. When Congress enacted legislation prohibiting the FCC from imposing eligibility restrictions on the incentive auction, it did so with knowledge that the FCC had not traditionally distinguished among spectrum bands suitable for mobile use. Although the DOJ has recognized a distinction in rural areas during its case-by-case merger reviews, the FCC’s chosen remedy for rural coverage issues has been to mandate by rule that Verizon and AT&T enter into roaming agreements that allow other providers to use their networks, in part because it is often uneconomic for more than one or two providers to build separate networks in areas with low population densities. If the FCC’s findings supporting its roaming orders remain valid, it would presumably be uneconomic for T-Mobile to substantially increase its current rural coverage even if it held spectrum below 1 GHz on a nationwide basis.

DOJ Contradicts Congressional Priorities

Even if “ensuring” Sprint Nextel and T-Mobile “win” spectrum in the incentive auction would prompt those companies to spend the capital necessary to substantially improve their mobile coverage in rural areas (a particularly unlikely outcome for Sprint Nextel, which already holds a nationwide block of spectrum below 1 GHz), picking winners in the incentive auction is inconsistent with Congressional priorities. Among other things, Congress intended that the incentive auction raise $7 billion for the construction of an interoperable public safety network first recommended by the 9/11 Commission Report over a decade ago. The DOJ’s recommendation would likely reduce the amount of revenue produced by the incentive auction and risk leaving the public safety network unfunded (as the economist who led the design of the most successful auction in FCC history will explain in this webinar on Thursday). The unsubstantiated, speculative increase in commercial competition the DOJ says could occur if the FCC picks winners and losers in the incentive auction is a poor justification for continuing to deny our nation’s first responders the network they need to protect the safety of every American. For that reason alone, I expect a thoughtful and independent FCC to reject the politically motivated recommendations of a DOJ that considers itself unaccountable to Congress.

The Information Economy Project at the George Mason University School of Law is hosting a conference tomorrow, Friday, April 19. The conference title is From Monopoly to Competition or Competition to Monopoly? U.S. Broadband Markets in 2013. There will be two morning panels featuring discussion of competition in the broadband marketplace and the social value of “ultra-fast” broadband speeds.

We have a great lineup, including keynote addresses from Commissioner Joshua Wright, Federal Trade Commission and from Dr. Robert Crandall, Brookings Institution.

The panelists include:

Eli Noam, Columbia Business School

Marius Schwartz, Georgetown University, former FCC Chief Economist

Babette Boliek, Pepperdine University School of Law

Robert Kenny, Communications Chambers (U.K.)

Scott Wallsten, Technology Policy Institute

The panels will be moderated by Kenneth Heyer, Federal Trade Commission and Gus Hurwitz, University of Pennsylvania, respectively. A continental breakfast will be served at 8:00 am and a buffet lunch is provided. We expect to adjourn at 1:30 pm. You can find an agenda here and can RSVP here. Space is limited and we expect a full house, so those interested are encouraged to register as soon as possible.

At Mobile World Congress in Barcelona last month, I was surprised that nobody had access to 4G mobile Internet services. How could Barcelona, the second largest city in Spain and host to the “world’s premier mobile industry event,” lack access to 4G? In the opening day keynote session, Vittorio Colao, Vodafone’s CEO, said Europe has only 6% of the world’s LTE connections, and Telefónica’s CEO, César Alierta, said only 17% of European mobile subscribers have smartphones. European mobile operators agreed they are lagging the world in 4G deployment and penetration due to existing price regulations that discourage new infrastructure investments.

Europe now stands at a crossroads: Does it adopt the modern, investment-based approach toward wireless markets that made the US the world’s 4G leader, or does it further increase regulation and impose new obligations on “over the top” ( e.g., Skype) services? Our history with the regulation of rural telephone companies demonstrates the perils of the second option. Yet European mobile operators appear ready to embrace new regulations as a means to enhance their business and create a “balanced relationship” with “US companies” that provide over the top (OTT) services.

Declining revenues in Europe are driving their choice. In Q4 2012, Vodafone’s European year-over-year revenue declined an average -7.6%. Telefónica’s Q4 2012 European revenue declined -6.5% as its primary source of revenue shifted from Europe to Latin America. Deutsche Telekom’s Q4 European revenue declined -4.0%, and Orange’s year-end revenue declined -5.7% in France and -1.7% overall.

Operators attribute these declines to price regulation and competition from unregulated OTT services. In Europe, operators kept “local” calling rates relatively low by relying predominantly on higher mobile termination (e.g., payments received from another mobile operator or a wired telephone company to complete a call) and roaming rates to generate revenue. This approach worked successfully until 2009, when the European Commission (EC) decided to regulate mobile Internet termination and roaming rates. European Mobile operators now struggle to replace the lost revenue resulting from this mandated price regulation.

EC regulations may have reduced prices, but they have also discouraged 4G development in Europe. Price regulations limit potential returns on investment in 4G infrastructure, yet they do not apply to OTT providers, whose business models can take full advantage of any additional capacity mobile operators create. Rene Obermann, Deutsche Telekom’s CEO, described the benefits of asymmetrical regulation for OTT services this way: “You invest – We take the profit.”

For years European mobile operators asked the EC to stop regulating their prices. After the EC extended its pricing regulations last year, mobile operators floated a new approach: if they could not succeed in getting freed from government price controls, then why not level the playing field by pursuing similar regulations for OTT services?

At Mobile World Congress, Alierta explained it this way, “New monopolies are hurting consumers,” yet are “entirely unrestrained by regulators.” He cited Google and Apple as monopolies Europe must “break” to “ensure those who risk investment can reap the benefits.” Similarly, Colao urged the EC to adopt rules that don’t discriminate against mobile operators, and Obermann claimed the European regulatory paradigm favoring OTT companies is “unsustainable in the long run.”

Their frustration is understandable; however, I expect European mobile operators may regret giving up on the investment-based approach. The US experience indicates that EC regulatory protection would render Europe’s mobile providers forever reliant on price regulated termination charges. In exchange for the short-term benefits of protectionist policies, they would sacrifice their long-term ability to innovate and thrive in the era of the mobile Internet.

In the US, we have witnessed first-hand the negative consequences of regulatory protection. America’s rural carriers have traditionally relied on a similar scheme of regulated “terminating access” charges for support. These charges were intended to provide predictable revenues to a stable telephone monopoly, but have proven ill suited to markets with new cable and mobile competitors. Today US regulators struggle to keep the antiquated telephone network on life support in competitive markets while the survival of rural carriers dependent on price regulated revenues hangs in the balance. The US experience illustrates the dangers of protectionist regulation: It works only so long as the government agrees with you and creative destruction is held at bay.

Europe can learn from our experiences with the dying, price regulated telephone market and thriving, lightly regulated mobile market. The free market is the best way for European mobile operators to grow and for European governments to achieve their 4G goals. The question is whether European mobile operators will survive until the EC realizes it.

There is renewed interest in unlicensed spectrum as the FCC approaches the TV white space issue (again). Tim B. Lee reports on some of the unlicensed supporters,

Activists at the South by Southwest Interactive festival in Austin, TX, built a free wireless network to help publicize the power of unlicensed “white spaces” technology. The project is part of a broader campaign to persuade the FCC not to auction off this spectrum for the exclusive use of wireless carriers.

Unlicensed spectrum for high-powered devices has been called Super Wifi (“wifi” in this context is used loosely; Super Wifi is a PR term and has nothing to do with the wifi technical standard). Frankly, there are many reasons to be cautious about assigning more unlicensed spectrum, especially given the confusing information out there about the technology. (For instance, despite a popular rumor, Super Wifi would not provide free Internet access to everyone with a device, as Matt Yglesias and Jon Brodkin point out.)

The unlicensed/licensed debate is several years old and often technical. I won’t rehash the old issues here, but there is a point I’d like to highlight about the nature of unlicensed spectrum: In spectrum assignments, you generally want to create “apartments, not condos.” Like most, I favor unlicensed spectrum under certain circumstances. However, we should be aware of the rigidity unlicensed spectrum imposes on future reassignments.

If you’re a property developer in a city and you want to raze and build on property occupied by a residential high-rise, you want that high-rise to be an apartment complex, not a condominium building. With apartments, you can bargain with the property management company and, with time, all tenants can be cleared out. Not so with condos, many urban developers are finding. Even if most condo owners in a building are contacted and compensated for leaving, the remaining owners have an effective veto over the new development.

Similarly, unlicensed device users can veto the future reassignment or transfer of the spectrum they occupy. Smartphone and satellite radio users, for example, have no veto ability–they are “apartments,” essentially leasing space from a spectrum “owner.” Like real property, you really need small-numbers bargaining to transfer and lease spectrum for its highest-valued use. Many unlicensed “owners” in a band creates a tragedy of the anticommons. Control over devices drives most unlicensed spectrum advocates mad, but it is also what permits technology upgrades and relatively fast spectrum transfers. (Mobile phones with 1G (analog) are long gone. Not so with old baby monitors, cordless phones, and garage door openers, which are all unlicensed. There’s no spectrum manager to clear these old devices out.) Once unlicensed devices populate a band, the spectrum almost certainly cannot be transferred and used for other technologies.

The time will come when–not if–a brand new social need arises that requires substantial amounts of spectrum as an input. If the FCC wanted to reassign spectrum in the future for, say, driverless car technology, Super Wifi bands are out of the question. It’s simply impractical to locate all the (mobile and transient) high-powered Super Wifi devices that will be using the band, install a new radio, and move them to another band. Even if you could identify most of them, people who buy or sell devices–many of whom will be powerful institutions like public safety, transportation, and tech companies–will have built business models based on the unlicensed spectrum. Entrenched users will not relinquish their spectrum easily after making substantial investments in the technology.

Ideally, you want a spectrum manager that can be compensated to discontinue services or move their users to another band when better uses come along. This is not to say we should not have “Super Wifi” or other unlicensed bands. But we should hesitate before creating these spectrum condos, particularly in the valuable bandwidth under 1 GHz. By permitting unlicensed operators, future spectrum reassignment of unlicensed bands moves from the marketplace to lengthy administrative resolution* by the FCC and NTIA because of the fragmented and numerous users–which is what the Congress and the FCC have tried to avoid for the past 20 years with auctions and secondary markets. Instead of negotiation and compensation, the reassignment becomes a shouting match between interested parties and their lobbyists. In the end, consumers typically lose.

* Recent history is illuminating. Just look at LightSquared’s dealings with Inmarsat (apartments) versus GPS users (condos). Conflicts with GPS users killed LightSquared’s new nationwide LTE network because there were too many GPS parties to bargain with. For another example, observe how NextNav is running into interference problems with WISPs (condos).

Tuesday was a big day for the FCC.  The Senate Commerce, Science and Transportation Committee held an oversight hearing with all five Commissioners, the same day that reply comments were due on the design of eventual “incentive auctions” for over-the-air broadcast spectrum.  And the proposed merger of T-Mobile USA and MetroPCS was approved.

All this activity reflects the stark reality that the Commission stands at a crossroads.  As once-separate wired and wireless communications networks for voice, video, and data converge on the single IP standard, and as mobile users continue to demonstrate insatiable demand for bandwidth for new apps, the FCC can serve as midwife in the transition to next-generation networks.  Or, the agency can put on the blinkers and mechanically apply rules and regulations designed for a by-gone era.

FCC Chairman Julius Genachowski, for one, believes the agency is clearly on the side of the future.  In an op-ed last week in the Wall Street Journal, the Chairman took justifiable pride in the focus his agency has demonstrated in advancing America’s broadband advantage, particularly for mobile users.

Mobile broadband has clearly been a bright spot in an otherwise bleak economy.  Network providers and their investors, according to the FCC’s most recent analysis, have spent over a trillion dollars since 1996 building next-generation mobile networks, today based on 4G LTE technology.

These investments are essential for high-bandwidth smartphones and tablet devices and the remarkable ecosystem of voice, video, and data apps they have enabled.  This platform for disruptive innovation has powered a level of “creative destruction” that would do Joseph Schumpeter proud.

Mobile disruptors, however, are entirely dependent on the continued availability of new radio spectrum.  In the first five years following the 2007 introduction of the iPhone, mobile data traffic increased 20,000%.  No surprise, then, that the FCC’s 2010 National Broadband Plan conservatively estimated that mobile consumers desperately needed an additional 300 MHz. of spectrum by 2015 and 500 MHz. by 2020.

With nearly all usable spectrum long-since allocated, the Plan acknowledged the need for creative new strategies for repurposing existing allocations to maximize the public interest.  But some current licensees including over-the-air television broadcasters and the federal government itself are resisting Chairman Genachowski’s efforts to keep the spectrum pipeline open and flowing.

So far, despite bold plans from the FCC for new unlicensed uses of TV “white spaces” and the  passage early in 2012 of “incentive auction” legislation from Congress, almost no new spectrum has been made available for mobile consumers.  The last significant auction the agency conducted was in 2008, based on capacity freed up in the digital television transition.

The “shared” spectrum the agency has recently been touting would have to be shared with the Department of Defense and other federal agencies, which have so far stonewalled a 2010 Executive Order from President Obama to vacate its unused or underutilized allocations.  (The federal government is, by far, the largest holder of usable spectrum today, with as much as 60% of the total.)

And after over a year of on-going design, there is still no timetable for the incentive auctions.  Last week, FCC Commissioner Jessica Rosenworcel, speaking to the National Association of Broadcasters, urged her colleagues at least to pencil in some dates.  But even in the best-case scenario, it will be years before significant new spectrum comes online for mobile devices.  The statute gives the agency until 2022.

In the interim, the mobile revolution has been kept alive by creative use of secondary markets, where mobile providers have bought and sold existing licenses to optimize current allocations, and by mergers and acquisitions, which allow network operators to combine spectrum and towers to improve coverage and efficiency.  Many transactions have been approved, but others have not.  Efforts to reallocate or reassign underutilized satellite spectrum are languishing in regulatory limbo.  Local zoning bodies continue to slow or refuse permission for the installation of new equipment.  Delays are endemic.

So even as the FCC pursues its visionary long-term plan for spectrum reform, the agency must redouble efforts to encourage optimal use of existing resources.  The agency and the Department of Justice must accelerate review of secondary market transactions, and place the immediate needs of mobile users ahead of hypothetical competitive harms that have yet to emerge.

In conducting the incentive auctions, unrelated conditions and pet projects need to be kept out of the mix, and qualified bidders must not be artificially limited to advance vague policy objectives that have previously spoiled some auctions and unnecessarily depressed prices on others.

Let’s hope Congress holds Chairman Genachowski to his promise to “[keep] discussions focused on solving problems, and on facts and data….so that innovation, private investment and jobs follow.”  We badly need all three.

(A condensed version of this essay appears today in Roll Call.)

In an opinion published in the Wall Street Journal last week, Federal Communications Commission Chairman Julius Genachowski admonished us to keep “discussions focused on solving problems, and on facts and data” when evaluating his spectrum policy proposals. That sounds reasonable, and it could be persuasive, if the FCC based its spectrum policy on consistently applied facts and data.

The FCC has instead chosen to selectively manipulate the facts and data to support its desired policy outcomes. Within a single quarter, the FCC has simultaneously concluded that:

• 194 MHz of spectrum in the 2.5 GHz band is available for mobile broadband services (note: when the FCC wants to show licensed spectrum in the US compares favorably with licensed spectrum on a global basis and that the ratio of licensed to unlicensed spectrum in the US is relatively balanced), and

• Only 55 MHz of the same 194 MHz in the 2.5 GHz band is available for mobile broadband services (note: when the FCC wants to deny a merger or limit the amount of spectrum available to disfavored competitors).

Neither the laws of physics and economics nor the regulations governing the 2.5 GHz band changed the actual facts and data in the intervening period between these inconsistent conclusions. The only things that changed were the results the FCC wanted to reach and the “facts and data” the FCC decided to present to the public.

The FCC concluded that 194 MHz of licensed spectrum in the 2.5 GHz band is available for mobile broadband services in a white paper released on February 26, 2013, which compares the availability of licensed mobile and unlicensed spectrum in the United States and other countries. The first table in the white paper summarizes “the results of [FCC] analyses of licensed and unlicensed spectrum in various parts of the world.” This table (excerpted from page 2 of the white paper) clearly indicates that 608 MHz of licensed spectrum is currently available for mobile broadband and 724.5 to 874.5 MHz of spectrum is currently available for unlicensed use in the United States.

The second table in the white paper compares the most commonly deployed mobile broadband spectrum bands in the US and the European Union. This table (excerpted from page 3 of the white paper) clearly indicates that there is currently 194 MHz of licensed mobile spectrum available in the 2.5 GHz band in the US compared to only 190 MHz in the same band in the EU (which is known as the 2.6 GHz band internationally).

Based on the facts and data represented in these two tables, the FCC makes it appear that the amount of licensed spectrum available for mobile broadband in the US is similar to the amount of unlicensed spectrum available in the US and compares favorably with other countries internationally.

When evaluating mergers, however, the FCC analysis of the facts and data is significantly different. On December 18, 2012 – about two months before it issued the white paper – the FCC affirmed its prior conclusion that only 55 MHz of the total 194 MHz of licensed spectrum in the 2.5 GHz band is available for mobile broadband services. This conclusion had previously been used to show that a merger would result in one company having too much licensed spectrum and to limit the amount of spectrum available to disfavored competitors generally.

It appears that the FCC considers the entire 194 MHz of licensed spectrum in the 2.5 GHz band as available for mobile broadband in the US when the ratio of licensed to unlicensed spectrum and international pride are at stake, but only 55 MHz is available when the FCC considers the impact of licensed spectrum aggregation on mobile competition. If the 139 MHz of spectrum the FCC excludes from its calculations when considering mergers is excluded from the international comparison in Table 1 of the report, the total licensed spectrum in the US that is available for mobile broadband drops from 608 to 469 MHz. The FCC presumably wished to avoid this “fact”, because it would indicate that the US has less licensed spectrum available for mobile broadband than every country in the sample except China and the UK, and that the US has nearly twice as much unlicensed spectrum as it has licensed spectrum.

According to the law, economics, and physics, spectrum is either “available” for mobile broadband or it is not. An agency that is truly “focused . . . on facts and data” would not pretend otherwise by manipulating facts and data to satisfy its desired results. Sadly, over the last three years, the FCC has demonstrated it is no such agency.

Christopher S. Yoo, the John H. Chestnut Professor of Law, Communication, and Computer & Information Science at the University of Pennsylvania and author of the new book, The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network, explains that the Internet that we knew in its early days—one with a client-server approach, with a small number of expert users, and a limited set of applications and business cases—has radically changed, and so it may be that the architecture underlying the internet may as well.

According to Yoo, the internet we use today barely resembles the original Defense Department and academic network from which it emerged. The applications that dominated the early Internet—e-mail and web browsing—have been joined by new applications such as video and cloud computing, which place much greater demands on the network. Wireless broadband and fiber optics have emerged as important alternatives to transmission services provided via legacy telephone and cable television systems, and mobile devices are replacing personal computers as the dominant means for accessing the Internet. At the same time, the networks comprising the Internet are interconnecting through a wider variety of locations and economic terms than ever before.

These changes are placing pressure on the Internet’s architecture to evolve in response, Yoo says. The Internet is becoming less standardized, more subject to formal governance, and more reliant on intelligence located in the core of the network. At the same time, Internet pricing is becoming more complex, intermediaries are playing increasingly important roles, and the maturation of the industry is causing the nature of competition to change. Moreover, the total convergence of all forms of communications into a single network predicted by many observers may turn out to be something of a myth. Policymakers, Yoo says, should allow room for this natural evolution of the network to take place.

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Related Links

• The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network, Yoo
• The Changing Patterns of Internet Usage, Yoo
• Network Neutrality and the Economics of Congestion, Yoo
• Cloud Computing: Architectural and Policy Implications, Yoo