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Why is FCC spectrum policy favoring weak business models?

Reading Jeff Mazella’s piece for the Center of Individual Freedom regarding T-Mobile’s two-sided arguments on spectrum has me wondering why the Federal Communications Commission even attempts to implement spectrum auction policies that favor carriers like T-Mobile and Sprint.  In my opinion, Sprint and T-Mobile’s business models are primitive and lack the vision of AT&T or Verizon’s business models, models that recognize the convergence of broadband platforms and media.

Mr. Mazella makes the argument that the FCC should not accept T-Mobile and Sprint’s request that portions of spectrum be set aside during the 2016 incentive auction.  T-Mobile and Sprint have portfolios filled with an ample amount of spectrum, are backed by large foreign corporations, and in the case of Sprint, have even exercised the option of sitting out a spectrum auction, in Sprint’s case an auction for advanced wireless services (AWS-3) spectrum.

I would add to Mr. Mazella’s argument that Sprint and T-Mobile simply haven’t shown that they are worthy of more favorable treatment simply because they are stuck in the early 2000s and have not shown me that they can or even want to take their business model to the next step.  As a platform, what are they prepared to do in a converging media and broadband environment?  Why should the FCC pick a loser if they are going to pick and choose which companies will succeed in the first place?

After reviewing company filings with the U.S. Securities and Exchange Commission as well as company press releases, I determined that neither Sprint or T-Mobile plan to innovate or make acquisitions in the media space.  In my opinion the next great moves that the duopoly has embarked on, namely acquiring content and the advertising space and technology they provide, is a business model that goes back to the future and works.  The content model puts a premium on the spectrum that wireless carriers compete for and should signal to regulators which carriers are willing to do more than just make rhetorical arguments about competition and innovation.

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Fred Campbell points out flaw in FCC “pick winners” strategy

If the Federal Communications Commission is really interested in ensuring the deployment of broadband, its broadcast spectrum policy of allowing Sprint and T-Mobile to get more low band spectrum in hopes of getting broadband rolled out to rural customers may be dead on arrival.  That’s my takeaway from a blog post by Fred Campbell of the Center for Boundless Innovation in Technology.

Mr. Campbell highlights Sprint and T-Mobile’s earlier conclusions that deploying mobile rural broadband is an expensive proposition.  having spectrum is one thing.  Building the actual infrastructure is another.  Deployment is still about the bottom line and building towers and laying cabling over less densely populated areas relative to urban areas is still not cost effective.  Quoting Mr. Campbell:

“As a result, Sprint and T-Mobile have chosen to rely primarily on roaming agreements to provide service in rural areas, because it is cheaper than building their own networks. The most notorious example is Sprint, who actually reduced its rural coverage to cut costs after the FCC eliminated the spectrum exemption to the automatic roaming right. This decision was not driven by Sprint’s lack of access to low frequency spectrum — Sprint has held low frequency spectrum on a nationwide basis for years.”

I would go one step further.  By taking away from AT&T and Verizon the opportunity to get more lower frequency spectrum and shifting it to Sprint and T-Mobile, broadband deployment suffers a double whammy.  Not only will rural customers not see additional mobile broadband deployment from Sprint and T-Mobile, rural and urban consumers won’t see additional broadband deployment by AT&T and Verizon either.  All this picking and choosing does is erode AT&T and Verizon’s ability to grab a little more market share while serving their current customers and adding new urban and rural consumers.

This is not how you enhance a competitive environment in wireless.

 

Steps that Congress can take to modernizing spectrum policy

Happy Monday to all.  This morning I shared the following comments via a letter with the House Committee on Energy and Commerce.  I thought I’d share them with you as well.

An updated Act should not only provide broadband access to providers with clear guidance as to the rules of the road, but it should ensure that the road is not littered with debris from a 20th century regulatory framework.  Through legislation and rulemaking, Congress and the FCC have worked to increase the amount of spectrum available to commercial providers.

Now is the time for Congress to go another step further by ensuring that an update of the Act sends a clear message to the FCC to the take steps necessary for increasing the amount of commercially available spectrum to providers that are ready to put this finite and valuable resource to its best use.

Increasing the amount of spectrum available for commercial use should be viewed as an investment in the value the wireless industry brings to the American economy.  According to CTIA-The Wireless Association, in terms of contribution to gross domestic product, the wireless industry is now larger than the publishing, agriculture, hotels and lodging, air transportation, motion picture and recording, and motor vehicle manufacturing industry segments and rivals the computer system design services as well as the oil and gas extraction industries.

Job seekers have benefited from the growth and size of the wireless industry.  CTIA reports that the wireless industry gained 1.6 million new jobs between 2007 and 2011.  Meanwhile the rest of the economy saw private sector jobs fall by 5.3 million during what was arguably the worst economic downturn since the 1930s.

And while prices for wireless services have fallen 93% between 2008 and 2013, the United States, contrary to critics right here at home, leads the rest of the world in mobile broadband speeds.  Again, according to CTIA the average mobile broadband speed in the U.S. in 2012 was 2.6 Mbps, the fastest in the world, and double the speeds seen in Europe.

American enterprise is exceptional because of America’s exceptional emphasis on innovation.  The wireless industry helps to set standards of innovative excellence.  An example of this excellence is the wireless industry’s rollout of 4G Long Term Evolution (LTE) technology and the devices that use it.  According to data from CTIA, the number of 4G LTE-connected devices was 33.1 million devices in 2012.  That number represented a 273% increase in devices that year.   By the end of 2013, that number increased to 62.5 million.

This small sample of industry data supports the argument that there is a thirst for services provided by wireless carriers; that consumers place a value on the services they receive from all carriers, whether they be large national carriers such as AT&T, Verizon, T-Mobile, or Sprint, or smaller carriers such as Boost Mobile, Virgin Mobile, or C-Beyond. 

There is competition in the wireless eco-system, and consumer demand for innovative, flexible services, pricing, and data plans motivate a demand for spectrum that is just as value driven.  Any mechanism for providing wireless carriers with access to additional spectrum must recognize the value the market delivers to consumers and the initiatives carriers take to bring value to the market. 

One mechanism that will provide quality spectrum to wireless carriers is the pending incentive auction.  While the FCC has certainly conducted spectrum auctions before, it has never done one like this complex, two-sided auction. During the first part, or the reverse auction, television broadcasters will give up their licenses if they are confident that they’ll be adequately compensated for doing so.  Then during the forward auction, wireless carriers will bid on the spectrum.  Part of the proceeds from the revenue of the forward auction will compensate the broadcasters; hence their interest in a bidding process that maximizes revenue. However, carriers like T-Mobile and Sprint and their advocates have been advocating for restrictions on the amount of spectrum that AT&T and Verizon may bid on.  What would be the consequences of implementing a policy that restricts AT&T and Verizon’s participation in the auction?

One consequence would be less revenue, which translates into less money to compensate the broadcasters, less money for deficit reduction, and potentially not enough funding a long-awaited national broadband first responder network.  How big would the risk of leaving dollars on the table be?  If we use past auctions as examples, leaving AT&T and Verizon out would have resulted in revenues being 45% lower in the 700 MHz auction and 16% lower in the AWS-1 auction. 

Another consequence would be less spectrum available for commercial use.  Data referenced above points to the value of the wireless industry to the economy and to consumers.  Consumer demand for spectrum is rising and will continue to do so as mobile plays a bigger role in the education, healthcare, and energy sectors, not to mention our day-to-day personal and professional lives.  The industry needs more spectrum to serve its customers as their needs increase. 

Also, another mechanism that could provide quality spectrum to wireless carriers is a federal incentive auction as proposed in HR 3674, the Federal Spectrum Incentive Act.  The bill would create a spectrum fund, and proceeds from the fund could be used to offset sequester cuts, among other uses.  The bill has been with the House Sub-Committee on Intelligence, Emerging Threats, and Capabilities for three months, and it’s time to move it forward.

I believe the broadcast television incentive auction and the federal agency incentive auction as defined in HR 3674 are great opportunities to create pathways for wireless carriers to get access to spectrum.

I encourage you to let Congress know that broadband deployment in the mobile world will mean greater access to spectrum by all carriers.  Consumers shouldn’t be penalized by the implementation of spectrum caps simply because they chose service with a larger wireless carrier.

The FCC should try a different economic model of supply and demand

Federal Communications Commission chairman Tom Wheeler posted the following statement today in a blog post:

“Getting the Incentive Auction right will revolutionize how spectrum is allocated. By marrying the economics of demand (think wireless providers) with the economics of current spectrum holders (think television broadcasters), the Incentive Auction will allow market forces to determine the highest and best use of spectrum.”

According to Chairman Wheeler’s demand and supply model, when assessing competition and market demand, the market is between wireless providers and television broadcasters.  The auction is designed to make a market between participants within each group.

Chairman Wheeler also appears to lay the groundwork for the argument that since AT&T and Verizon hold a large amount of low-frequency spectrum ( the quality that best serves long distances and penetrates buildings), there may be some adverse impact on smaller carriers.  In his words:

“A legacy of earlier spectrum assignments, however, is that two national carriers control the vast majority of low-band spectrum. As a result, rural consumers are denied the competition and choice that would be available if more wireless competitors also had access to low-band spectrum.

Low-band physics also makes this slice of spectrum essential in urban areas, since it permeates into buildings better than does high-band spectrum. With more and more Americans opting for wireless-only connectivity, they should not run the risk of being unable to place a 911 call from the interior of a building just because their wireless company has the wrong spectrum.

While many factors go into determining the quality of wireless service, access to a sufficient amount of low-band spectrum is a threshold requirement for extending and improving service in both rural and urban areas.”

Yes, AT&T and Verizon are the “Monsters of the Cellular Midway.”  According to data from the FCC, AT&T has 32.54% of market share based on reported connections while Verizon has 29.12% of connections.  Sprint comes in at 17.44% while T-Mobile brings up the oligopoly rear at 10.26%.  But does the size of a wireless carrier or even the services it provides means that it is the one driving demand for spectrum?  I argue no.

The wireless carrier isn’t the one making the call.  The consumer is.  The carrier, as it’s function implies, is just an intermediary that offers a set of technologies that allows a consumer to abandon two tin cans and a wire and use digital and wireless technology to make a call way beyond his front yard.  The consumer is driving demand for spectrum.  The carrier is merely his agent, an agent that promises his client to get his call to where he wants it with the best technology around.  The carrier shouldn’t be penalized because it was successful in aggregating the largest number of consumers into its portfolio.

The carrier shouldn’t be punished because it out-marketed and out-hustled a bunch of other players.  That’s synonymous to punishing a business for leveraging its capital and providing investors the best returns by providing consumers with the best service.

With its spectrum policy what the FCC should be doing is allowing a wireless carrier, no matter its size, to plan new service offerings without the uncertainty of allocation rules that would hinder organic growth and innovation.  Recognizing that consumers drive spectrum demand would help the FCC stay focused on providing a regulatory framework that encourages innovation.  When it comes to spectrum, it’s about consumer demand and a regulatory bottleneck that needs to be, at a minimum, widened, and in the ideal, straight up broken.

 

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FCC’s monopoly creates a monopoly on the H block

The Federal Communications Commission may be getting closer to fulfilling FCC member Jessica Rosenworcel’s worst nightmare for the H block spectrum auction, where instead of selling 65 megahertz of airwaves as authorized by Congress in the Middle Class Tax Relief and Job Creation Act, only 10 MHz will be sold and that sale will likely be to Dish Networks.

“I fear this approach fails the test”, Mrs. Rosenworcel stated back on 13 September 2013.  ”That is because holding a single auction of all 65 megahertz at once is bound to yield more interest, more bidders, and more revenue than dividing this spectrum up and holding an auction of the 10 megahertz H block alone.  As Wall Street analysts have noted, splitting this spectrum up for auction will likely limit interest in the H block to only one or possibly two bidders.  If that is true, we will have a retail sale–not an auction.”

Telecommunications analyst Larry Downes reiterated Mrs. Rosenworcel’s concerns in a piece for Forbes.com, arguing that not only has the expected competition for the H block been stymied, but the FCC has once again shown that picking winners and losers in a market results in failure versus letting market-based competition determine spectrum value while inviting more participants to bid.

In my opinion, the FCC is naive as to its own market power, that of a monopolist.  With the U.S. Department of Justice and the FCC playing anti trust tag team on large companies preferring to acquire spectrum in the secondary markets, the FCC is a bottleneck channel to additional spectrum.  Whatever supply signals the FCC sent out to the big four wireless carriers to ensure a multi-carrier demand, those signals probably didn’t have enough spectrum themselves.  AT&T and Verizon did not bid, which does not surprise me given their preference for the good stuff in the 600 and 700 megahertz range, and T-Mobile and Sprint decided to opt out.  Sprint, after jockeying for terms to its liking in the end decided it didn’t like the terms of the auction.  Mr. Downes writes:

“Sprint’s about-face is hard to explain.  According to an article in The Kansas City Star, Sprint CFO Joe Euteneuer surprised financial analysts in announcing that the company was walking away from the auction just a few weeks before bidder applications were due. Euteneuer ‘said the company took issue with the rules governing the auction,” according to the article, “but didn’t specify any complaints.’ “

Dish created a monopolist’s worse nightmare.  It became the only buyer of spectrum on an aggregated, national basis and with no other buyers available to bid up the per megahertz per population rate, the FCC, as Mr. Downes puts it in his article, was left holding the bag.

If this auction foreshadows the possible outcome of the reverse auction for broadcast television spectrum, the FCC should make sure that no restrictions are placed on carriers that wish to participate.