It’s a shame that Frontline Wireless LLC‘s bold plan for a wireless broadband network providing nationwide interoperable public safety services in emergencies — that would be paid for by commercial users who can access the network on a wholesale, open-access basis at other times — includes a requirement that the successful bidder “must adopt open access policies not only on the E Block spectrum, but on any other licensed spectrum it holds.”
The rationale? According to Frontline:
The rationale for extending this requirement is clear: it prevents potential anti-competitive behavior. If the winner of the E Block spectrum holds other spectrum, it will be incentivized to offer consumers a single service device that will work on multiple bands. If the open access rules does not apply to all bands held by the E Block licensee, then the carrier could easily push consumers to other bands and tell them their devices are non-compliant. Consumers would not know (nor should they care) which band they are using, but a licensee acting strategically and in its best interests could readily defeat the purpose of open access requirements imposed on the E Block license.
But Frontline’s proposal already prevents such an outcome through a separate requirement that would prohibit the licensee from using the E Block network capacity for its own retail services or selling it to affiliated third parties. The necessity of an overlapping requirement doesn’t make a lot of sense to me, other than the fact that it has obvious value to Frontline as a restraint on competing bidders.
Extending an open access requirement to all the spectrum held by the bidder would mean they’d have to factor the possible diminution in value (if any) of all their spectrum into the bid they could afford to make in the E Block auction. Calculating the resulting obligation may be fraught with uncertainty, and the liability may wind up being highly “material,” in SEC parlance. As a practical matter, existing carriers may find they are excluded from this auction. That may be the point. Fewer bidders might allow Frontline to acquire the spectrum at a significant discount — depriving taxpayers of the full value of the spectrum.
Meanwhile, it should be noted that — not surprisingly — the Consumer Federation of America, Consumers Union, Free Press, Media Access Project, New America Foundation and Public Knowledge aren’t satisfied with applying open access principles merely to the 10 MHz sought by Frontline. They’re vigorously urging that at least half of the 700 MHz band to be auctioned be conditioned on the licensees’ compliance with open access.
Is it worth it for the government to rig the auctions to limit the number of bidders, so the spectrum may not be assigned to the highest, most valuable use?
The service Frontline hopes to offer is primarily aimed at allowing public safety agencies to lease space on a nationwide network that, in theory, is more reliable, more secure and less expensive than the current offerings of established carriers.
But is should be noted that public safety interoperability problems stem primarily from antiquated equipment — a result of the unwillingness of local officials to spend tax dollars on the mobile communications requirements of their police, filre and other emergency services. Frontline proposes to spend $12 billion on a network, but doesn’t offer to spend anything for the devices public saftey agencies need. Local officials have also been unwilling to coordinate, as Jerry Brito has previously noted here, with other local officials. A nationwide interoperable network may help alleviate this problem. Public safety communications aren’t prohibitively expensive; these services simply aren’t a high priority, in the present political environment, for the state and local officials who are currently responsible for budgeting for these services. The first question local officials always ask is how can the cost of something be shifted to the feds or to the private sector so local tax revenues can be spent on things not enough people care about? That’s what’s happening here. Federal lawmakers may be more inclined to assist their local officials as opposed to taxpayers — it’s their choice.
Frontline, among others, also claim that market concentration threatens the wireless and broadband markets due to the supposed presence of high barriers to entry and conflicts of interest.
Because market entry is prohibitively expensive, market concentration can easily solidify into permanent oligopolies and duopolies. These entry barriers are exacerbated by the fact that today’s wireless and broadband markets are dominated by legacy incumbents and their affiliates who have strong incentives to prevent the emergence of new wireless competitors (particularly wireless broadband competitors).
The argument that market entry is prohibitively expensive, for one thing, ignores the contrary evidence of Wi-Fi. MuniWireless.com’s June 2007 update showed that 385 cities and counties are in the deployment or planning phases, or have networks up and running. AT&T Wireless and T-Mobile operate thousands of Wi-Fi hotspots. And in August, AT&T announced it would build a municipal Wi-Fi network in Springfield, Ill. (see:“AT&T to build municipal WiFi network,” from the Financial Times); in the same month Business Week learned that Sprint Nextel plans to build a nationwide WiMAX network at a currently-projected cost of $3 billion (see: “Sprint’s Boundless Ambitions,” and “Sprint Explores Options for WiMAX,” Wall Street Journal).
I’m sure legacy wireline carriers would love to protect their wireless affiliates and their broadband services — if they could — from new wireless competitors, but consider how unsuccessfully they’re protected their core wireline services from wireless substitution (Harris Poll surveys show that slightly less than 18% of U.S. adults use only their landline phone; 11% use only their cellphone; and 2% are only using the Internet (VoIP)). The issue really isn’t what hypothetical anticompetitive incentives or fantasies may animate the imaginations of phone and cable company executives, but how likely it is they could block competition if they tried.
The acquisition of AT&T Wireless by Cingular Wireless in October 2004 and the merger between Sprint PCS and Nextel in August 2005 did result in a drop in the number of nationwide competitors from six to four. But the Federal Communications Commission reports that at the end of 2005, 94% of the U.S. population lived in counties with four or more mobile telephone operators competing to offer service — a slight increase over the previous year.
The consumer “harms” identified by Frontline have nothing to do with higher prices or reduced output. After all, average revenue per unit fell from 43 cents in 1995 to 7 cents in 2005, according to the FCC report cited above, while average minutes of use per subscriberper month increased from 507 in 2003 to 740 in the second half of 2005.
Frontline and others focus on limits imposed by some carries on the types of devices they permit; blocking or crippling of device capabilites such as call timers, Bluetooth technology and file transfer capabilities; and restrictive terms of use aimed at bandwidth “hogs.” These are all legitimate concerns. Mobile phone companies apparently believe that attributes like price and reliability matter most to consumers at this time. Although this may be changing. AT&T Wireless’ embrace of iTunes and the iPhone, while Verizon Wireless continues to opt for a more proprietary model, tends to prove that consumers are receiving the full benefits of competition — not the reverse. It would be impossible to prove that this market is not still evolving, and it might be a mistake to conclude that the basis of compeition is fixed in stone. Device capabilities and the pricing and limitations of data plans may assume more competitive significance in due course.
It’s unfortunate that the Frontline grand design can’t be tested in the real world without imposing collateral damage on the wireless market by imposing regulatory restraints on other carriers. It would be interesting to see whether a wireless broadband network subject to various public interest obligations, including network neutrality regulation and geographical build-out requirements, could turn a profit.
Since this isn’t possible, according to the plan’s authors, policymakers should continue to ensure that spectrum auctions are conducted so that new licensees and old licensees can compete with the same set of advantages and disadvantages. It would create less competitive distortion if spectrum auctions continue to focus on obtaining full value for taxpayers, and the government uses general revenues to subsidize national priorities.
The Technology Liberation Front is the tech policy blog dedicated to keeping politicians' hands off the 'net and everything else related to technology.