Wireless & Spectrum Policy

So this panel continues to applaud Europe & Asia on the issue of broadband, but is a lack of subsidy, neutrality, and public ownership/regulation really to blame for our lack of a 3rd (wireless) pipe.

Let’s do a little imagining to help think about the broadband landscape in America. The wired landscape is like a bustling city. Though franchising laws and other regulations keep building from going on as much as it might, the landscape is fairly well developed.

Then picture the wireless landscape. Because of the FCC’s iron grip on wireless allocation, this landscape has acres set aside for aging, archaic buildings from bygone eras while other narrow tracts are being feverishly developed with modern skyscrapers. But the most notable thing about this landscape are the brown fields. Mile after mile of land laying fallow and undeveloped.



I don’t know if this mental picture painting helps, but the point is that wireless 3rd pipes don’t arise or at least don’t arise in the quality we’d like because they aren’t allowed to. The FCC allocation system–though it now involves auctions–is a command and control central allocation system that resembles similar board that have existed in places like the USSR or the People’s Republic of China. The FCC is not too far away from a government board that allocates who gets a ton of pig iron this month or a shipment of aluminum next week.

Until wireless spectrum has no restrictions on use and can be bought and sold in a free market, we shouldn’t expect it to be all that efficient.

Side note: I’m trying to find some good policy papers that talk about what Korea actually does with spectrum, which I imagine is similar to the FCC. So far the only thing I have been able to Google is this presentation from Hyun-young Yoon of Seoul National University. It describes what sounds a lot like the FCC’s central planning regime, except that Korea doesn’t seem to have the auction component of the FCC, a reform introduced in 1994 that has eliminated the past practice of favorite picking or what what Hyun-young describes as a “rigid beauty contest.”

Speaking of, perhaps we ought to view subsidies in the same light we view the auction process. Eliminating FCC choice in who gets what spectrum eliminated a lot of corruption and spectrum has been arguably allocated more fairly and efficiently. Subsidies are a step backwards in that they would reintroduce favoritism, allowing government bureaucrats or perhaps Congress to choose who gets the millions in research grants.

That said, I’m interested in good papers that lay out how other countries allocate their spectrum. I know that New Zealand has privatized much of their airwaves with success, but are there other good examples? Please share in the comments section!

I’m sitting in a panel called “The Future of Wide-Area Public Broadband” and Jonathan Taplin, a Professor at USC Annenberg’s School for Communication, just made a point about wireless connectivity. He mentioned that in a class he was teaching a Korean student brought her phone to class–a phone made to work on networks in Seoul. She explained that she could watch 30 minute videos on the phone, seamlessly streaming while walking through the city or riding the subway. He went on to say that in the United States many municipalities are relying–or did rely–on a rather pathetic effort from Earthlink to build out wireless networks.

The problem, it seems, is that the United States doesn’t follow the policies of Korea. Those policies are can be summed up by one word: subsidize. Korea rents computers to poor families for what one questioner cited as $2 per month. This gets many people clamoring for connections, driving demand. I imagine that this demand doesn’t matter as much as it might otherwise were Korean wireless companies not also subsidized.

What’s curious to me is that no one has mentioned the other glaring difference between the U.S. and Korea. Seoul is a dense city–like a neutron star. There are 17,000 people for every square kilometer in Seoul. Back in the states, only Union City and West New York, both cities in New Jersey, have that density or greater. New York city is only 10,000 people per square kilometer–only about 60% of Seoul’s density.

If you look farther down the sheet of America’s most dense cities, you’ll notice that all but the top-five large cities have a density ranging from 1,000 to 6,000 people per square kilometer. With most U.S. large cities at best coming in at one third as dense as Korea’s capital it seems natural that the U.S. would have different approaches to wireless connectivity.

I’m all for sorting out the public policy differences and discussing what regulation help and hurt broadband deployment, but let’s be honest when we’re comparing apple to oranges–or in this case, supercities to plain, old cities.

One-time TLF blogger Brooke Oberwetter (no really, she posted here one time) fretted to me recently that there was no commentary here on the outcome of the recent 700 mhz spectrum auction. Here goes, Brooke:

The way I see it, the result shows that Google has arrived as a Washington player and rent-seeker. It masterfully used the regulatory process to bend the rules in its favor. Rather than buying the spectrum, it managed to convince the FCC to require any buyer to make use of the spectrum in a way that benefits Google.

The $billions in benefits Google’s owners may reap come at the cost of the relatively tiny sum it spent on PR and lobbying. It didn’t have to plunk down any of its big money on spectrum itself. Richard Whitt’s recent post phrased the outcome in terms of benefit to consumers, of course, but its as much self-congratulations for the rewards that will come to Google from his work.

Make no mistake, I believe that an open network will be a better network with more innovation and more interesting uses, but we could have had that same open network if Google had paid full price for the spectrum in an open auction. Instead, Google will reap excess returns from the encumbrance it got placed on the spectrum.

<mild derision>Well played, Google. Welcome to Washington.</mild derision>

Congressman Ed Markey (D-Mass) has introduced legislation aimed at ridding the cell phone world of the much criticized practicies of phone subsidies, long-term contracts, and termination fees. In the name of contract “consistency” Markey’s bill mandates that cell companies offer alternative plans that contain no subsidy for the handset and plans that offer month-to-month service.

The bill contains a long section of “findings,” which are intended to point out what, from Rep. Markey’s perspective, are the illogical practices of cell phone providers. However, if you look at the issue of termination fees, you’ll find that Rep. Markey’s bill ignores the role of competition in decreasing costs to consumers and fails to take into account long-term investment in increasing nation-wide wireless capacity.

The bill claims that termination fees “Do not reflect the cost of recovering the monetary amount of a bundled mobile device or any other expenditure for customer acquisition.” The most glaring problem with this finding is that it’s already outed. Sprint, which is currently hemorrhaging money, instituted a new policy in November that allows customers to change plans without extending contracts and prorates termination fees. This came on the heels of similar announcements from Verizon and AT&T in October of last year. So, the bill’s $175 average termination fee figure is likely an incorrect one based on old policies.

But termination fees don’t just serve the purpose of cost recovery, they also provide an incentive for customers staying loyal to their wireless provider and giving these providers revenue predictability. With predictable revenues, it’s easier for cell phone network companies to get the financing they need to build the multi-billion dollar networks of tomorrow. Rep. Markey’s bill may save consumers in the short-term, but in the long run adding volatility to the marketplace will stem investment and slow the roll-out of 4G and Wi-Max networks.

We often talk about the unintended consequences of legislation in our work at CEI–this is a prime example of some very significant and costly unintended consequences that will ultimately hurt consumers and threatens to put America behind the curve on cell phone technology.

Rep. Markey’s bill also deals with wireless broadband, coverage maps, and spectrum efficiency. Topics that Ryan Radia and I will be addressing in future posts.