On Wednesday, the Subcommittee on Communications and Technology will conduct an oversight hearing of the implementation of spectrum auctions by the Federal Communications Commission.
The subcommittee members ought to consider the fact that although the mobile wireless industry faces an acute shortage of spectrum ("broadband spectrum deficit is likely to approach 300 MHz by 2014"), the FCC risks getting distracted and mired in a pointless effort to leverage its spectrum auctioning authority to manipulate the structure of the mobile wireless industry.
In mid-2011, former Commissioner Michael J. Copps warned of "darkening clouds over the state of mobile competition ... we find ongoing trends of industry consolidation." As Copps saw it, increasing concentration will lead to higher prices for consumers. His solution was for the market to have more competitors that look and perform like AT&T and Verizon Wireless.
Since Congress failed to prevent the FCC from engaging in what the late Alfred Kahn once called "oxymoronic efforts to promote competition by regulation" when it adopted the Middle Class Tax Relief and Job Creation (JOBS) Act in February, the path was clear for the FCC to act on Mr. Copps' pessimism. The commission issued a Notice of Proposed Rulemaking in late September for establishing caps on mobile spectrum holdings. The NPRM is designed to eliminate AT&T's and Verizon Wireless' access to additional spectrum they need in the short-term to meet growing demand for mobile broadband services.
The hottest companies in Washington, DC right now include Netflix, Sprint and T-Mobile. What do these firms have in common? They are all marketplace losers.
A few years ago, the Supreme Court said that the Sherman Act "does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition" (see: Verizon v. Trinko, 2004). Yet this is precisely the course of action that technocrats are taking as a result of accepting invitations from Netflix to conduct a "wide-ranging antitrust investigation" of the cable industry and from Sprint and T-Mobile to find a way to block Verizon Wireless' acquisition of additional spectrum.
Netflix built a successful mail order DVD business when it wasn't very practical to download movies over the Internet. Fortunately for Netflix, consumers can send and receive, but they cannot rent DVDs from the Post Office. There are legal and political constraints that prevet the U.S. Postal Service from diversifying into new lines of business, and these restrictions conferred a significant degree of monopoly protection on Netflix. Incidentally, saving the Postal Service requires diversification, among other things. What was great for Netflix wasn't so good for the postal system (upon which we all depend).
Although some advocates of network neutrality wanted to postalize broadband, the Federal Communications Commission said no. Apparently, we are going to have that debate all over again.
Cable companies obviously will not be prevented from competing against Netflix and other online video providers. But a drive to eliminate any conceivable competitive advantage that cable providers may have would ultimately lead to extensive regulation, including, most likely, infrastructure sharing rules like those the Supreme Court looked at in AT&T v. Iowa Utilities Board (1999). In his separate opinion, Justice Stephen Breyer warned that "rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms."
The current administration promised to reinvigorate antitrust enforcement. What that means is a return to the economic stagnation of the 1970s, when antitrust forced consumers to do business with uncompetitive, inefficient firms. It is no exaggeration to speak of antitrust as a form of corporate welfare financed by hidden taxes on consumers. The reality is that government cannot create competition; it can only suppress competitors.
Continue reading "Government cares more about politics than the tech economy" »
Congress is considering a bill which would authorize the Federal Communications Commission to reassign certain electromagnetic spectrum for mobile broadband services through "voluntary incentive auctions." Speaking at a trade show earlier this month, FCC Chairman Julius Genachowski was critical of provisions in the "Jumpstarting Opportunity with Broadband Spectrum Act" (H.R. 3630, Title IV) limiting the FCC's power to impose conditions on successful bidders that have nothing to do with maximizing revenue for the Treasury.
One provision would prohibit the commission from unreasonably restricting who can participate in a spectrum auction, such as large firms. Another provision in the JOBS Act would prevent the FCC from requiring a successful bidder to sell access to its network on a wholesale basis.
"It's a mistake," according to Genachowski, "because it preempts an expert agency process that's fact-based, data-driven and informed by a broad range of economists, technologists and stakeholders on an open record."
Genachowski's old boss, former FCC Chairman Reed E. Hundt, reportedly criticized the proposals during a Capitol Hill briefing on Tuesday, as well.
He worried that the bill would allow the largest wireless carriers to buy up all of the spectrum at auction, expanding their dominance of the airwaves. He said the carriers might not even plan to use some of the spectrum but could buy it just to kill off competition.
He argued that Congress should rely on the FCC to use its technical expertise to set the conditions of the auction.
These guys apparently will never learn.
The FCC has a poor track record of trying to improve on the free market, and the Reed Hundt era is recent exhibit "A." Seeking to promote competition in local telephone service during Hundt's tenure in the late 1990s, the FCC required incumbent local telephone companies to provide below-cost wholesale access to their networks while preventing them from competing in the long-distance market. According to Hundt, in You Say You Want a Revolution? (2000),
The Clinton administration had the conviction that astute and sharp-edged rules could open markets to competitors ... some firms would succeed, others fail. But the competition would create choice for consumers, and the diversity of the competitors would weaken the political influence of the big, established (and typically Republican-leaning) firms. The new competitive markets would stimulate investment in new technologies and lead to fair prices for consumers. All five lanes of the information highway would converge in a race to tomorrow (which we would not stop thinking and talking about).
The FCC's "pro-competition" framework was an abject failure which led to overinvestment in the core of the network and underinvestment in the local connections at the network's edge. According to Robert W. Crandall of the Brookings Institution,
For the most part, these policies simply transferred billions of dollars from incumbent telephone companies to fund marketing campaigns required to sell the same services under a different name [that of an unaffiliated retail competitor].
While Reed Hundt and other idealists were busy helping to precipitate an investment bubble that burst in 2000-02, meaningful voice competition was emerging, unbeknownst to the FCC, from the wireless and cable industries which are not subject to active FCC oversight.
Continue reading "House spectrum bill protects taxpayers -- and progressives are not happy" »
AT&T and T-Mobile withdrew their merger application from the Federal Communications Commission Nov. 29 after it became clear that rigid ideologues at the FCC with no idea how to promote economic growth were determined to create as much trouble as possible.
The companies will continue to battle the U.S. Department of Justice on behalf of their deal. They can contend with the FCC later, perhaps after the next election. The conflict with DOJ will take place in a court of law, where usually there is scrupulous regard for facts, law and procedure. By comparison, the FCC is a playground for politicians, bureaucrats and lobbyists that tends to do whatever it wants.
In an unusual move, the agency released an analysis by the staff that is critical of the merger. Although the analysis has no legal significance whatsoever, publishing it is one way the zealots hope to influence the course of events given that they may no longer be in a position to judge the merger, eventually, as a result of the 2012 election.
This is not about promoting good government; this is about ideological preferences and a determination to obtain results by hook or crook.
The staff analysis makes it painfully clear that the people in charge have learned very little from the failure of government to reboot the nation's economy. For starters, the analysis notes points out that "there will be fewer total direct jobs across the business," notwithstanding various commitments the companies have made to protect many existing jobs and add many new ones. The staff should have checked with the chairman of President Obama's jobs council, for one. CEO Jeff Immelt drives growth at GE through productivity and innovation, not by subsidizing inefficiency (see this). He realizes that when government tries to preserve wasteful methods, firms become uncompetitive and lose market share. That's a recipe for unemployment. The FCC staff analysis has got it completely backwards. When politicians set out to "create" jobs, it is often at the expense of productivity. We don't need that kind of "help" from Washington. In a wonderful column I am fond of citing, Russell Roberts recounts a story that bears repeating here.
The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?"
FCC Chairman Julius Genachowski got it essentially correct when he remarked in a recent speech
that, "Our country faces tremendous economic challenges. Millions of Americans are struggling. And new technologies and a hyper-connected, flat world mean unprecedented competition for American businesses and workers." Sadly, he does not realize that a merger between AT&T and T-Mobile provides a vehicle for that.
The combined company would have the "necessary scale, scope, resources and spectrum" to deploy fourth generation wireless services to more than 97% percent of Americans (instead of 80%), according to a filing they made in April. That would make our nation more productive and improve our competitiveness, which is we want. An analysis by Ethan Pollack at the Economic Policy Institute predicts that every $1 billion invested in wireless infrastructure will create the equivalent of approximately 12,000 jobs held for one year throughout the economy, and that if the combined company's net investment were to increase by $8 billion, the total impact would be between 55,000 and 96,000 job-years. The FCC staff thinks this is an irrelevant consideration, because it might happen anyway.
Several commenters respond that even absent the proposed transaction, AT&T would likely upgrade its full footprint to LTE in response to competition from Verizon Wireless and other mobile and other mobile wireless providers * * * * Nothing in this record suggests that AT&T is likely to depart from its historical practice of footprint-wide technological upgrades with respect to LTE even absent this transaction.
They may be right, but this is wishful thinking at a time when millions of Americans are struggling. The best course of action at this point is to improve incentives for corporations to increase capital investment, improve productivity, capture market share and create more jobs. The Feds should obviously approve this merger, because the record clearly shows that the companies are willing to undertake a massive net increase in capital investment, now.
What about the counter-argument that if there are fewer wireless providers, that may lead to consumer price increases down the road? We can worry about that later. Right now, we need to worry about the unemployed. Incidentally, increasing supply in wireless is very simple. The FCC can simply award additional spectrum for mobile communications. Almost everyone agrees that this is the best tool the government has to promote competition in wireless.
The FCC committed another unforgivable error when it tried to blow up this merger. This is not the first time the commission has recklessly put entire sectors of our nation's economy at risk while it conducts idealistic experiments for attaining consumer savings through rate regulation or regulatory mischief in pursuit perfectly competitive markets. The FCC's cable rate regulation experiment in the early 1990s and its local telephone competition experiment in the late 1990s were both total failures and complete disasters.
This agency could use some humility, or some adult oversight.
A Chinese American entrepreneur engineer named Henry Gao has written a Chinese book paralleling, enriching and affirming the more far reaching propositions in Telecosm.
His theme is that the history of communications networks has passed through three eras: 1) the telegraph (data with delay and buffering); 2) the public switched telephone network (PSTN for real-time two-way voice), and 3) now back to the telegraph (the data-rich Internet protocols and layers, with many asynch buffers and best efforts and lost bits).
Today under the stress of an interactive video exaflood, there is a new fork in the road. On the one hand, the industry wants to continue on its current path back to a new video best efforts telegraph--an ever more complex Internet patched and epicycled and upgraded for interactive video. This is the current choice.
Continue reading "My canonical paradigm" »
Although Congress directed the FCC to allow broadcasters to offer "ancillary or supplementary services on designated frequencies as may be consistent with the public interest, convenience, and necessity," it obviously hasn't worked.
A column by Holman W. Jenkins, Jr. offers some clues:
Ask the media bankers and investors at a recent FCC roundtable. To a man and woman, they said the FCC's stringent ownership rules have only cut broadcasters off from the capital to remake their businesses for the digital age.
And now, as Jenkins further notes, it's no secret that planning is underway at the FCC to coax broadcasters into voluntarily relinquishing some of their spectrum so it can be assigned for mobile voice and broadband services.
Obviously the FCC goal is to put the spectrum in other hands instead of freeing broadcasters to develop cutting-edge services.
Reacting to Apple's decision to not allow Google Voice for the iPhone, Wall Street Journal guest columnist Andy Kessler complains,
It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that--see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?
So Kessler proposes a "national data plan."
Before we get to that, Kessler complains that margins in AT&T's cellphone unit are an "embarrassingly" high 25%. He doesn't point out that AT&T's combined profit margin -- taking into account all products and services -- is only 9.66%.
AT&T is actually earning less now than it was legally entitled to earn when fully regulated -- 9.66% versus 11.75%.
Don't fall for the myth that AT&T killed Google Voice.
The truth is regulators are quietly expropriating wireless profits to hold prices for regulated services like plain old telephone service artificially low.
This has always been how the game is played. Regulation has kept prices for basic phone service at or near the bare cost providers incur to offer the service, forcing providers to chase profits elsewhere.
In a normal business, an unprofitable product or service would disappear. But telecom providers are still required by law to provide plain old telephone service to anyone who requests it. It's called the "carrier of last resort" obligation. Believe it or not, providers are still required to provide copper-based, circuit switched phone service in many places, even though they could cut costs by deploying fixed wireless and VoIP to deliver basic phone service.
This service obligation imposes a tax on those of us who have cancelled our landline service in favor of our cellphones in the form of artificially high prices for wireless service.
Kessler offers one solution, but before we get to that, I've got a simpler one.
The solution is to give providers full freedom to set prices and choose their own technology. Yes, I mean freedom to raise prices for basic phone service so cellphones don't have to subsidize it, because cellphone providers who are affiliated with landline units could afford to lower their prices.
Don't lose me here: Cellphone providers would lower their prices, because every time prices fall subscribers consume more minutes of use.
Kessler favors a more convoluted plan, which I will admit is more practical politically than my own:
- End phone exclusivity. Any device should work on any network. Data flows freely.
This is stupid. There may be instances where exclusivity promotes innovation, and others where it might not.
For example, a wireless provider might be willing to negotiate its customary profit margin, compromise the level of control it normally exercises over product design, promise to make special efforts to promote the product and provide technical support, and even make fresh investments in its network or back office systems to fully exploit the product's innovative features.
A bright line rule would kill both good and bad exclusivity.
- Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other.
As Kessler notes, Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. The fact is, our rulers in Washington, D.C., fifty state capitals and thousands of city halls view wireless as a giant taxing opportunity.
Wireless providers are recovering the $70-plus billion they deposited into the U.S. Treasury right now from each and every one of us in the form of artificially high prices for cellphone service.
Let unlicensed devices operate in the "white spaces," then refund the $70-plus billion so new and existing carriers can compete on quality of service rather than on artificial cost disparities.
- End municipal exclusivity deals for cable companies ... A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.
Congress invalidated exclusive cable franchises in 1984, and most states have recently streamlined the video franchising process so new entrants can obtain statewide franchises instead of negotiating individually with thousands of local franchising authorities.
Kessler's certainly accurate that competition between telephone and cable providers brings de facto network neutrality and open access. We have that competition already. In 2008, competition has pushed down the rates for bundles of Internet, phone and TV service by up to 20 percent, to as low as $80 per month, according to Consumer Reports.
- Encourage faster and faster data connections to our homes and phones. It should more than double every two years.
One way to encourage it is to make it clear up front that investors will be allowed to earn a profit -- that's unclear now due to the possibility of extensive new regulation which would lead to bureaucratic control of broadband networks and bandwidth rationing.
The other way to encourage it is to subsidize it to make up for the harmful effects of taxes and regulation.
If we accept the idea there are too many vested interests to permit meaningful reform of legacy telephone regulation, then we are forced to look for ways to treat the various symptoms.
But the advent of wireless and VoIP technology mean that legacy phone service is unsustainable and will die unless politicians are going to treat it like GM because it provides employment for thousands of unionized workers.
There is still time for the politicians to simply let go of it and let it adapt.
Communications Daily ($) cited my recent post comparing Google's limited objectives for the 700 MHz auction with the expansive objectives it outlined to the Federal Communications Commission last summer, and it included the following reaction to my comments from Richard Whitt of Google:
Whitt said in response that Haney had misread his company's comments from last summer. "We consistently have argued that the open access license conditions adopted by the FCC would inject much-needed competition into the wireless apps and handset sectors, but would not by themselves lead to new wireless networks," he said Monday. "Only if the commission had adopted the interconnection and resale license conditions we also had suggested -- which the agency ultimately did not do -- would we have seen the potential for new facilities-based competition."
Another way to look at this is if there wasn't any potential for new facilities-based wireless competition without the interconnection and resale license conditions Google wanted, why would Google have submitted bids for the spectrum which it might have won and had to pay for?
I do agree that prior to the FCC's adoption of two of the four open platform principles Google proposed the company consistently premised its commitment to participate in the auction on the FCC adopting all four principles. I also agree Google was clear that it believed all four principles were necessary to promote competition.
Then it participated in the auction anyway.
This case may reveal how some regulators and some legislators are shrewd, have their own ideas about how to get what they want and even think they know what's in the best interest of corporations like Google.
It makes sense, as Whitt told Communications Daily, that the interconnection and resale license conditions would seem necessary to a hypothetical competitor who is a network provider. But in its Jul. 9th letter (and in the statement to Communications Daily) Google characterizes all four principles as being relevant to whether a new entrant would bid for the spectrum. For example:
Should the Commission not adopt the four open platforms requirements listed above, we believe it is doubtful that even the most determined and committed new entrant will be able to outbid an equally determined and committed incumbent wireless carrier, or consequently pave the way for second order competition.
In other words, each of the principles could be of interest to a new entrant who might bid for the spectrum. That seems logical, and the proof is Google. A new entrant who isn't a network provider -- such as Google -- might be more interested in open platforms for applications and handsets upon which its lucrative advertising plans depend. It might be worth it for Google to become a wireless broadband competitor in order to promote its highly profitable legacy business model.
Google was presenting an all-or-nothing-offer. But in Washington all-or-nothing-deals are rare. Google must have known this. Google got half of what it asked for (the typical return on investment here). And half a loaf seemed to be enough in view of the fact Google participated in the auction.
If in its prior conduct Google was saying only that it intended to ensure that the reserve price was met but it had no interest in owning the spectrum itself, that wasn't particularly clear.
Reasonable people might differ, but I think if Google never intended to win the spectrum (unless there was no way around it), and it was merely advancing its hypothesis that the four open platform conditions would summon forth hypothetical new entrants that wasn't especially clear at the time, either. Nor would it have seemed convincing to many people. Google's proposal wouldn't have acquired much momentum. The excitement was around the possibility Google would become the competitor. Google's previous Jul. 9th letter to the FCC said "Google remains keenly interested in participating in the auction" and its subsequent behavior continued to highlight that interest.
In 1993 Congress substituted auctions for the deplorable practice of giving away valuable spectrum to well-connected commercial entities.
Lawmakers who think spectrum is a valuable public resource for which the taxpayers should be compensated need to wake up for a minute. FCC rulemaking could render the remaining assets worthless, distort wireless competition and contribute to the unfortunate perception of the FCC as a candy store.
Google has made it clear that it plans to weigh in at the FCC as it determines how to re-auction the D-block from the recent 700 MHz auction, and that it wants to open the white spaces between channels 2 and 51 on the TV dial for unlicensed broadband services.
Anna-Maria Kovacs, a regulatory analyst, reported that in the recent 700 MHz auction AT&T Mobility paid an average price of $3.15 per POP in the B-block while Verizon Wireless paid 77 cents per POP in the C-block which was subject to special rules advocated by Google.
Now comes an admission that Google's main goal was not to win C-block licenses in the auction but to jack up the price just enough so the reserve could be met, according to the New York Times.
"Our primary goal was to trigger the openness conditions," said Richard Whitt, Google's Washington telecommunications and media counsel.
This certainly isn't consistent with the way Google presented the open access proposal to the Federal Communications Commission last summer. Google stressed
that open access was for the purpose of leading to the introduction of new facilities-based providers of broadband services.
Chairman Martin has articulated the critical issues at stake in this proceeding:
The most important step we can take to provide affordable broadband to all Americans is to facilitate the deployment of a third "pipe" into the home. We need a real third broadband competitor....The upcoming auction presents the single most important opportunity for us to achieve this goal. Depending on how we structure the upcoming auction, we will either enable the emergence of a third broadband pipe -- one that would be available to rural as well as urban American -- or we will miss our biggest opportunity. Such a status quo outcome certainly would not sit well with consumer groups that have been strongly urging us to adopt rules that facilitate the ability of a "third pipe" to develop. Further, Chairman Martin has observed that Google and other members of the Coalition for 4G in America are "the only parties that have promised to try to provide a national, wireless broadband alternative."
As Chairman Martin recognizes, the actual method of providing a broadband alternative is through a "real third broadband competitor." This means that the would-be new entrants should not be aligned with either an incumbent wireline carrier or incumbent wireless carrier. Those carriers, quite rationally, seek to extend and protect their legacy business models, and in particular not take any actions that would jeopardize existing and future revenue streams. For this reason, the appropriate public policy stance is not simply to facilitate an additional spectrum-based broadband platform, but rather to facilitate independent broadband platforms.
Obviously, the idea that an open access requirement would facilitate a third "pipe" was naïve on the part of pliant regulators.
We now have a block of spectrum owned by an incumbent with an open access requirement which aligns nicely with Google's business model. Yet it's fairly obvious that the open access requirement contributed to a substantial loss for the Treasury.
The admission by Google's counsel that winning the spectrum wasn't the company's goal and that Google submitted bids for the purpose of spiking the auction price casts doubt on the company's motivation and veracity in view of Google's previous representations to the FCC.
It may be that "everyone" attempts to "influence" the regulatory process when they can get away with it, but that doesn't make it right.
This week in the Tech Policy Weekly podcast, Adam Thierer, James Gattuso, Jerry Brito, Tim Lee and I discuss FCC Chairman Kevin Martin's reported plan to encumber a portion of the 700 MHz band with open access rules sought by Frontline Wireless LLP, Google and others.
We react to a statement issued by a top executive at AT&T claiming that the draft FCC order -- which none of us have seen -- would "simply take one block of the upper 700 band being auctioned to allow an experiment with an alternative open-devices/open applications business model of the type proposed by Google and others," and that "the proposal does not mandate a wholesale business model in any particular block, nor does it mandate net neutrality style regulations on the other commercial spectrum being auctioned."
Also, the AT&T statement claims there would be a reserve requirement to ensure that no one would be able to obtain any block of spectrum without paying an "appropriate price to the US Treasury." If bids for this particular block do not meet the reserve requirements, or if no qualified bidder comes forward, the block would be withdrawn and re-auctioned without the open device/open applications requirements.
Google wants the Federal Communications Commisison to make net neutrality a licensing requirement in the Upper 700 MHz spectrum band -- "(1) open applications, (2) open devices, (3) open services, and (4) open access." According to media reports, FCC Chairman Kevin Martin is circulating draft rules which would impose such a requirement (see: this, this and this).
What's Martin's agenda? I suspect he thinks he's come up with a brilliant strategic maneuver -- give Google the chance to acquire a nationwide broadband wireless footprint on the cheap and maybe the company will give up funding the advocates of net neutrality regulation. AOL ended its support for open access the minute it merged with Time Warner, didn't it?
But as we learned from the 1996 Telecommunications Act, procompetition policy is tricky and unpredictable. That debacle proved Thomas Sowell's observation that a self-equilibrating system like the market economy means a reduced role for intellectuals and politicians. Unfortunately, as Sowell added in an interview with Jason Riley, "even today many still haven't accepted that their superior wisdom might be superfluous, if not damaging." Nowhere is this more true than in communications policy.
It might be one thing if the FCC auctioned the spectrum with no strings attached, so the winning bidder could enter the market with the same advantages and disadvantages as the incumbents. That would offer the best hope for sustainable competition, the kind that doesn't require extensive oversight and participation by regulators into the future. The artificial kind we saw in the aftermath of the 1996 law with the competitive local exchange carriers (CLECs), who endlessly clamored for more regulatory favors, precipitated years of rulemaking and litigation.
But I realize I'm missing the point: It wouldn't be precompetitive if an incumbent bid for the spectrum and won, would it? As I've pointed out, the incumbents are effectively barred from the bidding by a requirement that the successful bidder must "adopt open access policies ... on any other licensed spectrum it holds." It would lead to less regulation if the FCC explicitly precluded AT&T, Alltel, Sprint, T-Mobile, Verizon et al. from participating in the upcoming auction instead of encumbering the successful bidder as a less transparent means of excluding the established carriers. Then we could expect the successful bidder to sink or swim without further regulatory intervention.
There doesn't seem any prospect for sustainable competition in this instance, if a letter filed with the FCC by one of Google's attorneys is any indication. In it, Google identifies itself as a "new entrant" (which is code for a client of procompetition policy) and cites a very long list of competitive "disadvantages" it apparently has belatedly discovered it will have to overcome with the help of regulators:
Since filing its comments some six weeks ago, Google has undertaken further internal analyses, including meeting with auction experts and conducting extensive game theory scenarios, to determine whether and how it makes sense to participate -- and do so successfully -- in the upcoming auction. Our analysis has confirmed the view that incumbent wireless carriers are likely to prevail in a spectrum auction when they compete head-on with a potential new entrant like Google. This especially appears to be the case when incumbents and would-be new entrants are bidding for large, unencumbered blocks of spectrum, such as the 22 MHz REAG Block proposed by the Coalition for 4G in America.
Simply put, large incumbents have significant built-in advantages that are very difficult to overcome. While some argue that Google could simply choose to outbid any single entity in the auction, the notion of "deep pockets" alone is not the correct measure in this particular instance. Instead, the decisive factors include other significant economic and operational barriers to entry, and the relative value and usefulness of spectrum to the bidders. In particular, Verizon and AT&T are well-established, vertically-integrated incumbent providers of wireless and wireline services. By contrast, Google is a Web-based software applications company, not a service provider, with little pertinent experience in the wireless market and no legacy business models to protect. The incumbent carriers have an embedded national network of towers, backhaul, customers, retail outlets, and advertising. The incumbents also have far more ready cash flow at hand, and the willingness to spend it in furtherance of existing business plans. Consequently, the spectrum simply has more economic value and overall usefulness to incumbents like Verizon or AT&T, than to a would-be new entrant like Google.
To overcome these disadvantages, Google is also asking the FCC for a dynamic auction mechanism,
where a designated entity would provide access to spectrum on an as-needed basis. Payments would be made in perpetuity as the spectrum is being used, rather than months or even years in advance. Such a dynamic auction would facilitate infrastructure build-outs, remove barriers to entry for smaller and more innovative infrastructure.
And, oh yes, the company has told the FCC that "overly stringent deployment mandates will only harm the very entities that offer the greatest promise for independent broadband platforms." In other words, Google wants more time than the agency would normally allow a successful bidder to build out its network.
I'll predict it won't end here. If necessary to protect its investment, Google won't hesitate to seek more special favors for itself or more obstacles for its rivals. The company's track record demonstrates that it sees government as a tool, useful idiot or both. The letter cited above will serve down the road as a convenient "I told you" -- the first step in laying the groundwork to petition the FCC in a year or two. But of course, by then Martin will be gone.
I'm old-fashioned, I confess. I believe the market will deliver open-access -- if allowed to function freely -- because that's what consumers will demand.
Google obviously doesn't believe a broadband wireless network operating on an open access principle would be competitive, or it wouldn't seek regulatory advantages. I'd like to see Google put its money where its mouth is. Show the world that skeptics of net neutrality regulation don't know what they're talking about. Bid on the spectrum, with no strings attached, and voluntarily adopt an open-access model.
This week in the Tech Policy Weekly podcast
with Jerry Brito, Tim Lee and special guests Radley Balko of Reason
magazine and Ryan Paul of Ars Technica
I discuss the proposal by Frontline Wireless LLC for open access rules for a block of spectrum in the 700 MHz band, which I've previously described here
Frontline Wireless touts itself as an emerging wireless communications provider, but it's just a lobbying shop that includes a couple former officials from prior Democratic and Republican administrations seeking a lucrative government handout.
As a practical matter, as I have previously noted, existing carriers may find they're excluded from this auction, due to a handful of so-called "public interest" obligations Frontline is pushing the FCC to impose on the successful bidder. And that's the point. Fewer bidders could allow Frontline to acquire the spectrum at a significant discount -- depriving taxpayers of the full value of the spectrum.
On the op-ed page of yesterday's Washington Post, Robert Hahn and Hal Singer claim that Frontline is close to persuading the FCC to extract these obligations from whomever wins the bidding.
As for the argument that public safety needs a nationwide interoperable network financed by the private sector, it should be noted that their 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, fire and other emergency services. Local officials have also been unwilling to coordinate, as Jerry Brito has previously observed at Technology Liberation Front, with other local officials. They don't want to give up control.
As for the argument that the marketplace needs more competitors, the FCC 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 despite the Sprint-Nextel merger and the acquisition of AT&T Wireless by Cingular.
For further reading, see:
Jeff Eisenach's report, "Due Diligence: Risk Factors in the Frontline Proposal," available at FreedomWorks; Randy May's essay, "Sideline Frontline" and op-ed which appeared in the Washington Times, "Net Neutrality Overreach; and Scott Cleland's essay, "'Earmarked Airwaves' -- a 700 MHz auction 'UNE-P' deja vu?" at Precursor Blog.
Cleland points out that one of Frontline Wireless' heavy-hitters is former FCC Chairman Reed E. Hundt, a primary architect of the telecom bubble:
His "managed competition" policies to stand on the competitive scales to heavily favor CLECs, WorldCom and Global Crossing, among other CLEC/fiber plays, led to two devastating outcomes for Americans that took years for the Nation to recover from.
- First, the heavy market intervention of Mr. Hundt contributed greatly to the market hype for CLECs and fiber backbones which ultimately cost American pensioners and investors over one trillion dollars of their wealth when the market bubble burst.
- Second, Hundt's artificial "managed competition" market, where investors were strongly led to believe that CLEC telecom competitors would be regulatory-ily favored, contributed to a lot of stranded infrastructure investment that was not driven by market economics but by 'managed competition" Hundtonomics. This artificial market skewing contributed heavily to the telecom debt spiral that ravaged the telecom sector for almost three years.
- The consumer harm that resulted from this grand Hundtonomics experiment was that telecom broadband investment was delayed unnecessarily years. (It is the supreme irony now, that proponents of government-intervention Hundtonomics are complaining that the US is falling behind the world in broadband when Hundtonomics was more responsible for delaying the broadband "revolution" than maybe any other policy factor.)
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.
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.
Japan has 7.2 million all-fiber broadband subscribers who pay $34 per month and incumbent providers NTT East and NTT West have only a 66% market share. According to Takashi Ebihara, a Senior Director in the Corporate Strategy Department at Japan's NTT East Corp. and currently a Visiting Fellow at the Center for Strategic and International Studies here in Washington, Japan has the "fastest and least expensive" broadband in the world and non-incumbent CLECs have a "reasonable" market share. Ebihara was speaking at the Information Technology and Innovation Foundation, and his presentation can be found here. Ebihara said government strategy played a significant role. Local loop unbundling and line sharing led to fierce competition in DSL, which forced the incumbents to move to fiber-to-the premises.
Others have taken a slightly different view. Nobuo Ikeda, formerly a Senior Fellow with Japan's Research Institute of Economy, Trade and Industry, says that the "success of Japan's broadband has been brought about by such accidental combination of a Softbank's risky investment and NTT's strategic mistakes." Ebihara acknowledges that the results of the unbundling regulation have been "mixed" in terms of competitors investing in their own local switching and last-mile facilities, as the U.S. discovered for itself.
The whole point of Ebihara's lecture was that the U.S. doesn't have what he and others consider a national broadband strategy. Never mind that Verizon already plans to spend $23 billion to construct an all-fiber broadband network, which will pass up to 18 million homes by 2010, according to USATODAY. And AT&T is spending $4.6 billion to deploy VDSL to 19 million homes by 2008.
Viewed in hindsight, and not because the Bush Administration has done a particularly good job touting its own success, a clear strategy emerges. It consists mainly of relief from unbundling regulation for fiber deployments; flexibility to offer broadband services a common-carrier basis, a non-common carrier basis, or some combination of both; and national guidance for local franchising authorities.
When, on Feb. 20, 2003, the FCC set new rules for telephone network unbundling which freed fiber-to-the-home loops, hybrid fiber-copper loops and line-sharing from the unbundling obligations of incumbent carriers, then-SBC Communications (now AT&T) and Verizon quickly responded. Verizon announced it would begin installing fiber to the premises (FTTP) in Keller, Tex. and that it planned to pass "about 1 million homes in parts of nine states with this new technology by the end of the year." SBC outlined its own plans to deploy fiber to nodes (FTTN) within 5,000 feet of existing customers in order to deliver 20 to 25 Mbps DSL downstream to every home (amd that it would construct fiber to the premises for all new builds. SBC projected that FTTN deployment can be completed in one-fourth the time required for an FTTP overbuild and with about one-fifth the capital investment. Verizon subsequently announced it would hire between 3,000 and 5,000 new employees by the end of 2005 to help build the new network, on which it planned to spend $800 million that year. And that it planned to pass two million additional homes in 2006.
It may look like these major investment decisions didn't depend on subsequent deregulatory actions -- such as the Jun. 27, 2005 decision of the Supreme Court in NCTA v. Brand X Internet Services -- clearing the way for the FCC, on Aug. 5, 2005, to eliminate the requirement for telephone companies to share their DSL services with competitors. The FCC decision finally put DSL on an equal regulatory footing with cable modem services. However, it began to emerge as early as 1998 -- in an FCC Report to Congress -- that asymmetric regulation between the broadband offerings of the telephone companies versus their competitors would be impossible to sustain as a matter of logic. A decision by the U.S. Court of Appeals for the Ninth Circuit in 2000 all but confirmed this. Thus, it was possible to foresee that either cable would have to be regulated or the phone companies would have to be deregulated. When cable modem service achieved a higher market penetration than DSL, and given the Bush administration's preference for less regulation, it became possible to anticipate that DSL would ultimately be deregulated.
The FCC didn't enact national guidelines for local franchise authorities until Dec. 20, 2006, however there was a long history of abuses by local franchise authorities. In a report to Congress in 1990 the FCC said that "in order '[t]o encourage more robust competition in the local video marketplace, the Congress should ... forbid local franchising authorities from unreasonably denying a franchise to potential competitors who are ready and able to provide service.'" Despite howls of protest from local officials, Congress imposed limits on the franchise authorities in the Cable Act of 1992. Similar abuses began showing up when the telephone companies looked serious about upgrading their broadband services. After months of discussion, the FCC began the proceeding which resulted in the current guidelines in Nov. 2005.
There's more to be done. Spectrum policy, in particular, remains mired in special-interest broadcaster and public safety politics and must be fully sorted out. But it's not clear the U.S. should follow the costly Japanese model, with its heavy reliance on tax breaks, debt guarantees and subsidies (see, e.g., this). And don't forget that Japan had zero interest rates. Industrial policy leads to higher costs, because taxpayers are footing the bill. It also relies on policymakers, who usually understand the least about technology. Consider this poignant example, as noted by Philip J. Weiser:
It was the threat of Japan's rise in the 1980s that spurred the course toward digital television that the United States still follows today. Washington committed wide swaths of spectrum to digital television, leaving U.S. mobile-phone providers with less bandwidth than they needed and only about half the amount of their European counterparts. The entire effort assumed that Americans would continue to watch television shows broadcast over the air. Yet over the past two decades, more U.S. consumers have begun to watch cable and satellite television, undermining the rationale for this expensive policy, which has also delayed innovation and imposed unjustifiable costs on the nation.
Last week's Senate Commerce Committee hearings on the digital TV spectrum transition were important in their own right. But they also got me thinking about a related telecom issue: municipal telecom networks.
It now seems most parties are satisfied with a "hard date" transition of the 700 MHz band (UHF TV channels 52-69) in 2008. This means broadcasters will go all digital in a smaller spectrum band, and the vast and mostly vacant 700 MHz space will be opened up for all sorts of new technologies and services. This is a good thing, but by the time it happens, it will have been almost 20 years -- twenty! -- since this process began. Huge amounts of great spectrum have been mostly empty and idle for years. Time is money, and this process has wasted a lot of both.
Why has this transition been such a failure? Because of the supposedly "public" nature of the "airwaves." In the "public interest," the FCC in 1952 allocated spectrum to a few broadcasters, who have remained powerful politically even as their programming and business models have lost to cable, satellite, and the Internet. The quasi-public-private nature of broadcast TV calcified the industry and prevented resources (spectrum) from being deployed most productively.
Although not perfectly analogous, this tale should alert us to the pitfalls of new municipal broadband networks, now being built by towns, large and small, across the country. Supposedly deployed for public services (police, fire) or where telecom and cable companies don't offer broadband, these muni-networks most often are the result of clueless politicians yearning to be labeled tech-savvy and hip. Merging dynamic, technology-based business with government, however, is a recipe for disaster.
In addition to the bungled digital TV transition, consider wireline telecom regulation. We've just been through another wrenching, bungled transition from what was a quasi-public-private, highly regulated, monopoly wireline telecom environment to a privatized, competitive, highly-regulated one. We correctly realized that the government imposed monopoly in telecom was blocking investment in the new technologies of lasers and chips and the new services that could result. We correctly wanted to move to a deregulated private model, with many new entrants. But in practice, legacy political interests overwhelmed the pure idea of deregulation and produced a telecom crash and set America back vis-a-vis our international competitors.
There is still much to do at the federal and state levels to more fully deregulate and privatize our telecom and spectrum markets. But we are finally making some progress. So why would we now, at this crucial turning point, when communicaitons is finally exiting the failed public realm for the cornucopian private arena, go backward? Backward to more, not less, public involvement in telecom? And not just regulation, which is bad enough, but public ownership of networks competing with the numerous highly regulated, highly taxed private players? Why would we throw one more obstacle in the way of the private players, who are struggling to stay ahead of their many rivals in this dynamic and tricky market?
If this fad becomes a trend and then a widespread practice, I can see many years from now the same bungling and multi-decade transitions away from public projects that were ill-conceived from the start. Among the many good reasons for public entities not to enter the telecom market is that it will be very messy when they inevitably have to get out of the telecom market.
Governments should make good use of the technologies available to them, from military to public safety and services to general productivity enhancements. But the new muni-network fad is more about the vanity of short-sighted, techno-dunce politicians than it is about real public needs. In fact, as we see in the examples from previous eras, government and telecom are like oil and water. I thought we had learned that.