January 2017

Thoughts on “Demand” for Unlicensed Spectrum

by on January 23, 2017 · 7 comments

The proposed Mobile Now Act signals that spectrum policy is being prioritized by Congress and there’s some useful reforms in the bill. However, the bill encourages unlicensed spectrum allocations in ways that I believe will create major problems down the road.

Congress and the FCC need to proceed much more carefully before allocating more unlicensed spectrum. The FCC’s 2008 decision, for instance, to allow unlicensed devices in the “TV white spaces” has been disappointing. As some economists recently noted, “[s]imply stated, the FCC’s TV white space policy to date has been a flop.” Unlicensed spectrum policy is also generating costly fights (see WiFi v. LTE-U, Bluetooth v. TLPS, LightSquared v. GPS) as device makers and carriers lobby about who gains regulatory protection and how to divide this valuable resource that the FCC parcels out for free.

The unlicensed spectrum provisions in the Mobile Now Act may force the FCC to referee innumerable fights over who has access to unlicensed spectrum. Section 18 of the Mobile Now bill encourages unlicensed spectrum. It says the FCC must

make available on an unlicensed basis radio frequency bands sufficient to meet demand for unlicensed wireless broadband operations if doing so is…reasonable…and…in the public interest.

Note that we have language about supply and demand here. But unlicensed spectrum is free to all users using an approved device (that is, nearly everyone in the US). Quantity demanded will always outstrip quantity supplied when a valuable asset (like spectrum or real estate) is handed out when price = 0. By removing a valuable asset from the price system, large allocation distortions are likely.

Any policy originating from Congress or the FCC to satisfy “demand” for unlicensed spectrum biases the agency towards parceling out an excessive amount of unlicensed spectrum. 

The problems from unlicensed spectrum allocation could be mitigated if the FCC decided, as part of a “public interest” conclusion, to estimate the opportunity cost of any unlicensed spectrum allocated. That way, the government will have a rough idea of the market value of unlicensed spectrum being given away. There have been several auctions and there is an active secondary market for spectrum so estimates are achievable, and the UK has required the calculation of the opportunity cost of spectrum for over a decade.

With these estimates, it will be more difficult but still possible for the FCC to defend giving away spectrum for free. Economist Coleman Bazelon, for instance, estimates that the incremental value of a nationwide megahertz of licensed spectrum is more than 10x the equivalent unlicensed spectrum allocation. Significantly, unlike licensed spectrum, allocations of unlicensed bands are largely irreversible.

People can quibble with the estimates but it is unclear that unlicensed use is the best use of additional spectrum. In any case, hopefully the FCC will attempt to bring some economic rigor to public interest determinations.

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Did the Incentive Auction Fail?

by on January 19, 2017 · 0 comments

Is the incentive auction a disappointment? For consumers, this auction is not a disappointment. At least–not yet.

Scott Wallsten at the Technology Policy Institute has a good rundown. My thoughts below:

By my count, this was the eighth major auction of commercial, flexible-use spectrum since auctions were authorized in 1993. On the most important question–how much spectrum was repurposed from restricted uses to flexible, licensed uses?–this auction stacks up pretty well.

At 70 MHz, this was the third largest auction in terms of total spectrum repurposed, trailing the mid-1990s PCS auction (120 MHz) and 2006 AWS-1 auction (90 MHz).

On the next most important question–how quickly will new services be deployed?–the verdict is still out. Historically, repurposing spectrum like this typically takes six to twelve years. Depending on how you classify it, this proceeding commenced in 2010 (when the FCC proposed the incentive auction) or 2012 (when Congress authorized the auction). With the auction over, broadcasters have over three years to clear out of the spectrum but some believe it will take longer. Right now, it looks like the process will take seven to eleven years total–not great but pretty typical. 

Some people are disappointed, however, with this auction, particularly some in the broadcasting industry and in the FCC or Congress, who expected higher auction revenues.

High revenue gets nice headlines but is far less important than the amount of spectrum repurposed. It’s an underreported story but close to 290 MHz of spectrum, nearly 45% of all liberalized, licensed spectrum, was de-zoned by the FCC, not auctioned. De-zoning spectrum generates zero auction revenue for the government but consumers see substantial benefits from this de-zoning, even if the government does not directly benefit. I recently wrote a policy brief about the benefits of de-zoning spectrum.

In any case, in terms of revenue, this auction was not a failure. At around $17 billion, it’s third out of eight, trailing the 2008 700 MHz band auction (about $21 billion in 2015 dollars) and the massive haul from the 2015 AWS-3 auction (about $42 billion).

At close, broadcasters will receive $10 billion for the 70 MHz of available licensed spectrum. Some broadcasters consider it a failure, just as a home seller is disappointed when her home sells below list price. The broadcasters initially requested $86 billion for 100 MHz of available spectrum. When the carriers’ bids didn’t match that price, some broadcasters pulled out and the remaining broadcasters lowered their price.

Were there better ways of repurposing broadcast spectrum? Broadcasters have a point that the complexity of the auction might have reduced buyer and seller participation (which means lower bids and fewer deals). As Wallsten notes, an overlay auction (like AWS-1) or simply de-zoning the spectrum might have been better (faster) alternatives. But it goes too far deem this auction a failure (at least until we know how long the broadcaster repack takes).

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Remember What the Experts Said about the Apple iPhone 10 Years Ago?

by on January 9, 2017 · 0 comments

Today marks the 10th anniversary of the launch of the Apple iPhone. With all the headlines being written today about how the device changed the world forever, it is easy to forget that before its launch, plenty of experts scoffed at the idea that Steve Jobs and Apple had any chance of successfully breaking into the seemingly mature mobile phone market.

After all, those were the days when BlackBerry, Palm, Motorola, and Microsoft were on everyone’s minds. Perhaps, then, it wasn’t so surprising to hear predictions like these leading up to and following the launch of the iPhone:

  • In December 2006, Palm CEO Ed Colligan summarily dismissed the idea that a traditional personal computing company could compete in the smartphone business. “We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”
  • In January 2007, Microsoft CEO Steve Ballmer laughed off the prospect of an expensive smartphone without a keyboard having a chance in the marketplace as follows: “Five hundred dollars? Fully subsidized? With a plan? I said that’s the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good e-mail machine.”
  • In March 2007, computing industry pundit John C. Dvorak argued that “Apple should pull the plug on the iPhone” since “There is no likelihood that Apple can be successful in a business this competitive.” Dvorak believed the mobile handset business was already locked up by the era’s major players. “This is not an emerging business. In fact it’s gone so far that it’s in the process of consolidation with probably two players dominating everything, Nokia Corp. and Motorola Inc.”

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