The FCC will be getting two aces. Rosenworcel is a telecom attorney who has dealt with industry and consumer matters on the Hill and at the FCC for 13 years. Pai is also a telecom attorney whose experience includes several positions in the FCC’s Office of General Counsel. With the addition of these smart, experienced experts, the FCC can begin making substantial progress toward the President’s goals of eliminating unnecessary regulation and bringing high-speed wireless Internet service to 98 percent of Americans. Our nation’s global competitiveness and economic future are at stake.

Let’s hope the Senate votes soon to give the FCC a winning hand.

The Rural Cellular Association is urging the FCC to choose the politically palatable option by blaming AT&T. It might be a good sound bite, but it’s also revisionist history that ignores the very real interference issues inherent in the band plan. I was Chief of the Wireless Telecommunications Bureau (WTB) when the lower 700 MHz band plan was created and auctioned, and I remember my discussions with the engineers in WTB and the FCC’s Office of Engineering and Technology (OET) about this very issue. During the proceeding, I noticed that the mobile wireless industry appeared completely uninterested in the lower 700 MHz band. When I asked why, I was told that the potential for harmful interference would prevent the deployment of 4G technologies because, at that time, all of the blocks in the lower band were authorized to operate at high power (a legacy of the DTV transition). Interference issues typically occur when high-power (e.g., TV broadcast) and low-power (e.g., cellular) networks operate in adjacent frequencies. The interference high-power communications can cause to adjacent communications operating at lower power is often significant enough to completely disrupt consumer and public safety services (the same problem affects LightSquared’s proposed LTE network (higher-power) and GPS (lower-power)).

To remedy the potential for interference in the lower band, the engineers in OET decided to reduce the power limits in the lower band’s paired spectrum, which largely resolved the interference issues for the B and C blocks. It did not resolve them for the A block, however, because it was still adjacent to high-power unpaired spectrum (TV Channel 51 and the unpaired 700 MHz blocks where Qualcomm was already providing a mobile broadcast service). The ongoing DTV transition coupled with the Qualcomm deployment made it impractical to resolve these issues before the auction. The FCC was subject to Congressional deadlines for completion of the auction and the DTV transition, and there simply wasn’t enough time to resolve the A block interference issues while meeting the deadlines.

It’s no coincidence that the lower B block sold for more than double the price of the lower A block (and much more than the upper C block, which is subject to open platform conditions and interference safeguards related to public safety). The A block’s interference problems made it significantly less valuable than the B block, so the A block sold at a steep discount. As the old saying goes, “you get what you pay for.” That doesn’t mean the FCC should ignore the A block’s interference issues. Now that the Congressional deadlines have passed and the DTV transition is over, the FCC should make every effort to find a real solution that promotes mobile broadband deployment in the block. (I intend to offer some potential solutions and discuss other 700 MHz band issues in a later blog post.) It does mean, however, that the FCC has no rational basis for placing the blame on AT&T. The A block license winners had full notice of the potential for harmful interference when they bid on the spectrum. I expect AT&T had no idea the FCC would consider foisting the A block interference issues on it only after it paid a premium for the B block.

It is obvious that the FCC’s choice in this proceeding is critical to consumers and mobile wireless competition. It is less obvious but no less important that the FCC’s choice is critical to the credibility of the institution itself.

Is the FCC a fact-driven, expert agency with the engineering resources and will to tackle the tough issues, or is it a political institution that offers government benefits based on the demands of special interest groups? If it’s the former, the FCC will resolve the A block’s interference issues with sound engineering and fair policies. If it’s the latter, it will ignore the rules and auction results that created this issue and impose an arbitrary and capricious regulatory mandate on AT&T. For the sake of consumers and putting this valuable spectrum to its most efficient use, I’m hoping it’s the former.

Last week the House Energy and Commerce Committee approved, in bipartisan votes, bills that take some steps to bring the FCC into the 21^st century. Importantly, the bills will, among other things, require the FCC to make sure that the benefits of any regulation outweigh the costs and do a better job of keeping up to date with the fast-changing telecom market.

Specifically, the Federal Communications Commission Consolidated Reporting Act (H.R. 3310) will replace eight currently mandated reports with one – which will focus on the real tasks ahead:  measuring competition, bringing advanced communications services to everyone, getting rid of needless regulation, and helping small businesses.

The Federal Communications Commission Process Reform Act (H.R. 3309) is even more ambitious. It will require the FCC to survey the market through a Notice of Inquiry before starting new regulatory efforts rather than assuming the need for regulation. The FCC will also be required to identify a specific market failure, consumer harm, or regulatory barrier before imposing new, intrusive regulation – and then show that the benefits of regulation outweigh the costs. To prevent regulation of an entire industry through the back door of a single transaction that requires FCC approval (when not all interested parties even have a right to comment), the bill requires that the FCC limit any conditions it imposes to specific concerns with the specific transaction.

The bill also shines a new light of transparency on the Commission’s internal operations. The FCC must establish and disclose internal procedures for adequate review and deliberation on pending orders, publish orders before open meetings, and adopt other reforms, including the further use of “shot clocks” so parties seeking Commission action know how long the proceedings will take. These reforms will help ensure that the FCC encourages much-needed private investment in telecom that will meet growing consumer demand for wireless services, rather than discouraging it.

Taken together, this is an ambitious series of reforms that addresses longstanding issues. The FCC has traditionally operated with little regard for transparency, regulatory necessity, and regulatory certainty. To maintain its credibility as an expert agency in the 21^st century, however, the FCC must be more disciplined. For regulation to work, everyone – from amateur radio operators to multinational corporations – needs to know that they will be treated with fairness and due process. These bills help provide that certainty.

The results will benefit everyone. Consumers will benefit from a system that ensures regulation focuses only on areas of clear need, rather than simply adding regulatory burdens without counting the cost. The FCC will benefit from a renewed focus on its most critical function: encouraging investment in communications infrastructure that provides innovative services to consumers and businesses. The economy will benefit most of all – from a renewed investment in America’s competitive future.

If certain groups in Washington get their way, the answer will be “no”. Congressional efforts to make more spectrum available are being held up by the FCC and so-called “public interest” groups who want to play favorites with our spectrum resources. They are actively lobbying against spectrum legislation because they want to prevent companies like AT&T and Verizon Wireless from getting the spectrum they need to provide the services their customers want. That might be good news if you are a competitor of those companies, but it is very bad news if you’re a customer of those companies. If those companies are denied the spectrum they need, their customers will be denied the service they deserve. I doubt the millions of subscribers that rely on those companies for wireless communications are going to be happy when they find out the FCC is lobbying to deny them an opportunity to receive better service.

The FCC’s job is to put the interests of consumers first. Its plan to rig government spectrum auctions would instead place the interests of certain companies first. The FCC and other interest groups believe that, if AT&T and Verizon Wireless don’t have enough spectrum to offer quality service to their customers, those customers will have an incentive to switch to companies that do have enough spectrum. In the words of the FCC’s 14^th Mobile Wireless Competition Report, the FCC wants to use its regulatory power to “produce superior outcomes.” The House legislation says that’s not the FCC’s job, and I expect millions of mobile subscribers who voluntarily chose their current service providers would agree.

The interest groups that are advocating against the Legislation know this, which is why they’d rather see spectrum legislation die altogether than see it pass with any limitations on the FCC’s virtually unlimited authority. They apparently believe it’s better for consumers to run out of spectrum than it is to hold a fair and open auction. That’s like letting a car run out of gas because you don’t like a certain brand of gasoline. It only makes sense if you’re not riding in that car.

What if it’s an ambulance, a fire engine, or a police car? The 9/11 Commission Report found that “the inability to communicate was a critical element at the World Trade Center.” Yet, more than ten years later, our first responders still don’t have access to a nationwide, interoperable public safety network. Both the House and Senate versions of the spectrum legislation would finally implement the recommendation of the 9/11 Commission Report that we allocate more spectrum to public safety and build such a network. Killing spectrum legislation would also kill Congress’ plan to achieve this critical goal. It’s sad that mobile consumers would, in the words of FCC Chairman Genachowski, “face slower speeds, more dropped connections, and higher prices” if spectrum legislation fails. It’s absolutely tragic that we would miss an opportunity to give our first responders a fighting chance when they face the next national crisis.

We don’t need an FCC spectrum Czar wielding a Soviet-style industrial policy hammer to forge a “superior outcome” in the mobile market. Consumers are already doing a fine job choosing among their many mobile options on their own. What we really need is more spectrum; a fair auction process that’s open to all; and a nationwide, interoperable public safety network. And we need to act before it’s too late.

Convergence 2.0

With the notable exception of video programming, the FCC has traditionally focused its regulatory efforts on certain portions of our communications infrastructure: The public switched telephone network, the coaxial cable plant, the cellular network, broadcast towers, and satellite space and earth stations. To the extent computing capability and devices (though arguably inappropriate, let’s call computing capability and devices “nodes”) have been considered by the FCC at all, it has targeted the treatment of nodes by the operators of certain portions of the Internet’s infrastructure rather than the manufacturers and distributors of nodes themselves. The FCC has also regulated various portions of the Internet’s infrastructure using separate regulatory regimes based on their technical characteristics.

Convergence 1.0 – the convergence of communications and computing capabilities – began disrupting this “stovepiped” regulatory model in 1966 when the FCC began is Computer Inquiries. Convergence 2.0 – the complete integration of computing, networks, nodes, software, services, and content – is now rendering the model hopelessly obsolete:

• Computing capabilities have become inseparable from network infrastructure;
• Different network infrastructures (e.g., mobile and fixed) are beginning to provide integrated services;
• A single type of node can access different network infrastructures (e.g., a smartphone can access a fixed or mobile network);
• Multiple types of nodes can use the same operating systems and software (e.g., a converged OS X and iOS are expected to power the Apple iPhone, iPad, Apple TV, Apple laptops, and Apple desktop computers with in the next two years);
• Multiple network and node types can provide the same type of services; and
• Content can be created and distributed by anyone using any combination of service, software, node, network, and computing capabilities.

The convergence of networks, nodes, software, services and content into platforms offering seamless communications experiences is already driving disruptive competition in the communications sector. I expect it will soon be driving disruptive regulatory change as well.

Cloud Computing

Cloud computing isn’t new. It’s on the list because it is only now beginning to impact end-user behavior – the issue at which the FCC tends to target its regulation.

As cloud computing matures, it is making users truly node and location independent. Services like Dropbox and Evernote synchronize all of a user’s files across all their nodes and the nodes of others with whom they wish to share. Automatic syncing of files and preferences is making it easy for families to share nodes. If I need to work with image files, I might take my 17-inch laptop on the road while other family members use the desktop and iPad. When I return and want to use the desktop, they can use the laptop knowing that all the files and preferences they’ve changed while I was away will be there waiting for them. Although smartphones are still generally tied to particular users based on phone numbers, services like Google Voice are rendering this limitation on node sharing less relevant. All nodes are becoming capable of providing both phone and computing capabilities that differ primarily in form factor rather than use.

Cloud computing is also proving to be one of the “killer apps” driving the mobile data explosion and spectrum crunch. When the “need for speed” was debated in the National Broadband Plan proceeding, many assumed additional capacity would be needed to accommodate future applications with high peak or sustained throughput. Greater capacity is needed right now due to the use of existing applications that are leveraging the capabilities and convenience of the cloud. “Applications” that once required little or no Internet bandwidth at all – e.g., transferring a file from home to the office using a thumb drive – now generate Internet traffic multiple times per day to access the cloud’s enhanced capabilities. Cloud computing also generates traffic by making current applications more convenient to use. Recent reports indicate that Apples’s cloud-based Siri application has already doubled data use on the iPhone.

As these shifts in usage become more prevalent, the FCC’s current approaches to many issues will have to shift as well. I never thought I’d say this, but it’s time the FCC put its head in the cloud.

Hotspot 2.0

Wi-Fi is increasingly being used to offload data traffic from mobile networks, but generally doesn’t provide as seamless an experience as a mobile network, primarily due to authentication and security issues. Hotspot 2.0 promises to bring the mobile network’s end-user experience to Wi-Fi through a standards-based approach. A complementary initiative, the Next Generation Hotspot, is addressing interoperability between Wi-Fi and mobile network operators and service providers on the backend. Together, these two initiatives could break down the walls that currently divide licensed and unlicensed networks.

The integration of unlicensed spectrum into mobile networks raises several questions at the FCC. If these initiatives are successful, should unlicensed spectrum be included in spectrum aggregation analyses (i.e., the spectrum screen)? If enterprise vendors of unlicensed networks using new Wi-Fi technologies are able to successfully compete with licensed mobile network operators, should the FCC attempt to address the potential regulatory disparities between licensed and unlicensed networks? I expect these questions won’t be easy to answer.

Small Cells

Small cells are like Wi-Fi hot spots that use licensed spectrum and are already integrated into mobile networks. Some argue that the spectrum crunch can be solved by increasing capacity with small cell deployment. However, there are both economic and regulatory barriers to widespread deployment of small cells. According to a Gartner report, global mobile data traffic is expected to grow 26-fold between 2010 and 2015, while revenue is expected to double. The gap between data revenues and traffic will tend to limit the availability of capex for extensive small cell deployment.

The regulatory barriers are actually more daunting. Operators often are required to reach agreements with municipalities before deploying small cell networks. AT&T initially submitted an application to the City of Palo Alto on January 14, 2011, to build a small cell network, but is still awaiting a decision more than a year later. The availability of backhaul is also a significant problem. Laying fiber to thousands of small cells mounted on light poles is cost prohibitive and impractical. Wireless backhaul solutions will likely work in many situations but may be unable to handle large numbers of small cells. Cable plant may offer the most practical solution in many instances, but now that cable is entering the mobile space through its relationship with Verizon, cable may not be willing to share its plant with potential competitors. The FCC has taken steps to lower regulatory barriers to antenna siting, but it may need to move faster and go further before we see widespread deployment of small cells.

Not so fast. The Chairman also said “getting it right is as important as getting it done.” By “getting it right,” he means doing it the FCC’s way rather than the way Congress has proposed. Chairman Genachowski took issue with provisions in the House bill that would prohibit the FCC from allocating cleared spectrum bands for unlicensed use by companies that didn’t pay the price required to clear those bands, and would prohibit the FCC from rigging the auction results by limiting the ability of certain companies to win. Even assuming the FCC would do a better job making such decisions, I can’t agree that doing it the FCC’s way is more important than doing it at all when the FCC Chairman says doing nothing would kill jobs, harm consumers, and hurt our global competitiveness. (For a more detailed look at the substantive issues, see posts here and here.)

As AT&T said on its policy blog last week, “it would be a disservice to the Nation if the FCC is so adamant about preserving and enhancing its own power that it would risk killing this crucial legislation.” The House and Senate have already compromised on the key issue that held up the legislation last year, which was the reallocation of the D Block to public safety. We can’t afford to further delay the deployment of a nationwide, interoperable public safety network or the availability of more mobile spectrum while we argue about the extent of the FCC’s regulatory authority. It’s time to embrace the public safety compromise forged in Congress and declare victory.

The key phrase in the letter is the desire to “set aside” spectrum for unlicensed use. Once spectrum is set aside for use on an unlicensed basis, that set aside is permanent – as a practical matter, alternative uses of the spectrum become impossible. I acknowledge that the FCC’s rules say that unlicensed uses are not entitled to protection from interference, which in theory means that unlicensed spectrum could easily be converted to other uses. But when the FCC has been confronted with proposals that would result in interference to unlicensed devices, the FCC has chosen to protect the unlicensed use no matter what its rules say. If the FCC sets aside more spectrum for unlicensed use, it would preclude other potential uses of the spectrum for the foreseeable future.

Limiting the use of cleared spectrum solely for unlicensed devices would also fundamentally change our current approach to spectrum policy. Congress and the FCC have been moving away from prescriptive spectrum policies for more than a decade. The result has been an explosion in wireless innovation and consumer demand. The current FCC, however, has begun to reverse course. It has shown a tendency to impose its own views regarding optimal spectrum use via government fiat rather than allow the high tech industry to balance the tradeoffs inherent in wireless network design. Congress is more than justified in limiting the ability of the FCC to return to more prescriptive spectrum policies.

The letter says government-mandated use of spectrum for unlicensed devices is the “truest form” of free markets. In a free market, economic intervention and regulation by the state is limited to tax collection and enforcement of private ownership and contracts. The House bill would provide market participants an opportunity to decide whether spectrum should be used for unlicensed devices (a private commons) or for some other purpose, and if it were used for unlicensed devices, how the potential for interference would be avoided. The letter advocates government-mandated use of the spectrum by unlicensed devices pursuant to mandatory technical requirements. That is not a free market approach to spectrum policy.

The letter closes with an ironic appeal to “suppress our desire to be overly prescriptive” and allow the FCC to set the course because technology is “ever-changing.” The House bill would allow the high tech industry – the experts most capable of adapting to changing technology – to decide how spectrum is used. If the market is allowed to decide, it is possible the high tech industry will determine that the spectrum is best put to licensed use. The statements of FCC Commissioners leave no doubt, however, that if the FCC were allowed to decide, it would mandate some portion of the spectrum be put to unlicensed use irrespective of market forces. The fundamental choice before Congress is whether it believes the high tech industry or the FCC is better positioned to decide how spectrum should adapt to a rapidly changing technology environment. With due respect to the FCC, history suggests the high tech industry is the better choice.

Although I appreciate the FCC’s desire for unlimited authority, it isn’t surprising that the House has proposed to limit the scope of the FCC’s delegation over spectrum policies granting special market privileges to favored technologies, services, or industry groups. Rather than make things better, FCC attempts to fine tune the market through government privilege typically result in unintended consequences that make things worse.

Spectrum Cleared at Auction Should Not Be Allocated on an Unlicensed Basis

Although the FCC’s policies authorizing the use of encumbered spectrum bands on an unlicensed basis have generally proven successful, the FCC’s attempt to make cleared spectrum available for unlicensed use in the PCS band was largely considered a disaster. Unlicensed advocates are nevertheless urging that Congress permit the FCC to authorize unlicensed use of TV band spectrum that has been cleared through an incentive auction – spectrum that would otherwise be ideal for licensing by auction.

Harold Feld recently extoled the ability of unlicensed devices in the TV bands to work “really well for mobile broadband” and send signals “up to 60 miles.” If Harold is right, such devices could be used to provide mobile broadband services that compete directly with services provided by operators who paid for spectrum licenses at auction. Why should the FCC use the proceeds from the auction of one block to clear another spectrum block and authorize its use for free when both blocks will be used to provide competing services? The FCC hasn’t attempted to answer that question. In the absence of an FCC analysis supported by persuasive evidence demonstrating that the proposed unlicensed approach would be preferable to proven spectrum policy, unlicensed advocates are asking Congress to take a leap of faith. Congress should not accept an invitation to yell “Geronimo” when the U.S. is in the midst of a spectrum crisis that is threatening its competitiveness.

The Case for Unlicensed Spectrum (“Milgrom”) offered by unlicensed advocates asks more questions than it answers. Unlicensed advocates say “the primary benefits of unlicensed spectrum may well come from innovations that cannot yet be foreseen.” (Milgrom at p. 2.) They rely on the “story of Wi-Fi” to provide evidence that unlicensed spectrum increases the “pace of innovation.” (See Milgrom at pp. 9-11, 15.). Wi-Fi is an innovative technology, but it took longer to develop and deploy than mobile technologies. The FCC first set aside spectrum for cellular services in 1981 and spectrum for unlicensed use enabling Wi-Fi in 1985. The first Wi-Fi standard (a spread spectrum technology) wasn’t finalized until 1997, and the first Wi-Fi capable laptop wasn’t released until 1999, almost twenty years after unlicensed spectrum was first made available for spread spectrum technologies. (See Carter, Lahjouji, and McNeil here at pp. 23, 28-29.) By 1999, spread spectrum technology was already widely deployed in licensed mobile networks, and in 2000, the 3GPP standards body released its third-generation standard for mobile networks. Unlicensed advocates don’t attempt to explain why unlicensed and mobile technologies developed at such different rates.

Unlicensed advocates also argue that free access to unlicensed spectrum “encourages a more competitive market structure” because the cost of deploying an unlicensed network is “extremely low” and the “services that operate on unlicensed spectrum increasingly compete with services offered by operators that rely on license spectrum.” (Milgrom at p. 15.) Fair competition benefits consumers, but promoting competition through disparate regulatory treatment of competitive services distorts economic incentives and outcomes. (One of the FCC’s fiscal year 2010 performance goals is to “ensure harmonized regulatory treatment of competing broadband services.”) The low cost of deploying unlicensed networks is in part explained by such regulatory disparity. Unlike licensed spectrum users, unlicensed network operators have no build out requirements and aren’t subject to government oversight of their deployments. They also are not subject to other public interest obligations generally imposed on licensed mobile service providers (e.g., hearing aid compatibility requirements). Given these advantages, operators using TV band spectrum to support mobile services would be free to cherry-pick the most valuable customers while leaving costly deployment in rural areas and lower income communities to licensed operators who are subject to greater regulatory scrutiny. Unlicensed advocates do not attempt to address the competitive or public interest impact of such a policy regime.

Finally, unlicensed advocates argue that using an auction to determine the relative allocation of licensed and unlicensed spectrum would be untenable. (See Milgrom at p. 24-26.) The advocates recognize that the “beneficiaries of unlicensed spectrum are the manufacturers of all these devices,” but then make the mistake of assuming that these manufacturers would be unable to compete in an auction. (See Milgrom at p. 15.) Device manufacturers know how to form consortiums that value and monetize usage rights made available for collective use: They are called patent pools. Google was willing to pay $12.5 billion for Motorola’s patents in order to protect the open use of Android, Google’s mobile operating system. That’s more than double what Verizon Wireless paid to outbid Google for a nationwide spectrum license in the 700 MHz auction. If unlicensed use of cleared, nationwide spectrum in the TV band were as valuable as unlicensed advocates suggest, Google would have had an incentive to actually win the spectrum and make it available on an open basis (known as a “private commons”) similar to its practices with Android. Google could have recouped its investment through fees assessed on other device manufacturers (akin to patent royalties), fees to end users, or a dynamic auction mechanism. Alternatively, a consortium of manufacturers could have bid on the spectrum and made it available to its members as a private commons (akin to a patent pool or the work of the Open Handset Alliance). Unlicensed advocates don’t explain why manufacturers can form consortiums to pool patents or develop a mobile operating system (the Open Handset Alliance is comprised of 84 different companies), yet it is untenable for them to form a consortium to bid on a spectrum license.

If auctioning unlicensed spectrum is possible and unlicensed spectrum provides as much value as licensed spectrum, why do unlicensed advocates so strenuously oppose unlicensed auctions? I can think of at least two reasons. First, if a manufacturing consortium buys spectrum at auction and makes it available as a private commons, the consortium’s use of the spectrum would be subject to the public interest obligations applicable to licensed spectrum (e.g., build out obligations). Second, the manufacturers would have to invest their own capital to buy the spectrum and bear the risk that use of the spectrum on a private commons basis proves less valuable than projected (it is the taxpayer who bears that risk if the spectrum is made available for free). Why should manufacturers pay for spectrum subject to costly public interest obligations and market risk when they can try to convince the government to give them unregulated spectrum for free through the art of political compromise? Congress doesn’t need unlicensed advocates to answer that question.

Auctions Should Not Be Subject to Eligibility Restrictions

The FCC’s attempt in the mid-1990’s to implement policies restricting auction eligibility proved disastrous. In so-called “entrepreneur auction” completed in 1996, the FCC restricted the bidding to small businesses and allowed them to pay 90% of their winning bids through installment payments over ten years. Less than one year after the auction was completed, it was apparent that many bidders would be unable to raise enough money in the private capital markets to meet their obligations to the government, so the FCC suspended their payment obligations. (See CBO Report here.) It took nearly ten years to resolve the legal issues plaguing these licenses and reassign them to operators capable of providing service to the public. Rather than create additional competition, the FCC’s eligibility restrictions deprived the mobile industry of approximately 30 MHz of nationwide bandwidth for close to a decade at a cost to society of $65 billion. (See Hazlett, Porter, and Smith here at pp. 16-18.)

When the 700 MHz auction closed in 2008 (Auction 73), the FCC noted the auction had produced approximately as much revenue for the U.S. Treasury as all other previous auctions combined (excluding the 2006 AWS-1 auction (Auction 66)). (See exhibit here.) Auction 73 generated approximately $19 billion in net winning bids while all other FCC auctions (sans Auction 66) generated approximately $45 billion in net winning bids. (See FCC auction results here.) Although those auctions raised $45 billion on paper, the U.S. Treasury only received approximately $19 billion. Where did the other $26 billion go? It was lost through defaults, bankruptcies, and other licensing debacles enabled by the auction policies Chairman Genachowski wants authority to implement. Twenty-six billion dollars in lost revenue is more than enough evidence to justify limiting the FCC’s authority on this issue.

The House Bill Offers Significant Compromises to the Senate

Those who disfavor Congressional limits on the FCC will try to use the reconciliation process to force “compromise” on these issues. The problem with that approach is that the House bill already offers significant compromises to the Senate. House Republicans initially opposed the Senate’s proposal to reallocate the D-block to public safety, but embraced it in the bill as passed. The House bill also preserves the white spaces concept in the TV band and provides for additional unlicensed allocations in other bands. If the unlicensed and auction eligibility issues ultimately bring the entire spectrum reform bill down, it won’t be due to the unwillingness of House Republicans to compromise. It would be a sign that real compromise was never possible.

That changed a few weeks ago when Dish Network unveiled its own plans to build a terrestrial LTE network using MSS spectrum. Dish Network is buying both DBSD North America and TerreStar, who together hold 40 MHz of MSS spectrum in the 2 GHz band. In its recent application seeking approval for the Terrestar transaction and waivers to provide terrestrial service (available here), Dish Network says that, if its requests are granted, it will make “substantial terrestrial network deployment commitments intended to increase wireless broadband competition, including in rural areas.” (Application at 48.) These commitments include deploying an LTE Advanced network pursuant to a “reasonable, attainable buildout schedule keyed to commercial availability of the LTE Advanced Standard.” (Application at 48.)

Dish Network’s plan to build a new 4G broadband network offers the potential for significant competitive disruption in both the mobile broadband and MVPD markets, especially when combined with the retail and streaming video assets Dish Network acquired from Blockbuster earlier this year. Due to capacity and other limitations inherent in satellite broadband services, satellite TV providers don’t currently offer broadband services capable of competing in urban and suburban markets with the cable modem, DSL, and fiber offerings of other multichannel video programming distributors (MVPDs). The inability of satellite TV providers to offer competitive broadband services in urban and suburban markets is in part why cable operators have maintained approximately 70% market share while Dish Network has competed primarily on price. With its planned 4G deployment, Dish Network could compete on quality of experience by offering video, broadband, telephone, and mobile services on integrated service platforms through Blockbuster’s virtual and retail stores (imagine mobile devices that access a Blockbuster apps store with streaming content, a TV device that seamlessly combines Dish Networks satellite programming with streamed wireless services, etc.). For the first time, Dish Network would be able to compete across the entire value chain.

Dish Network is also well positioned to quickly become a formidable new competitor in the mobile broadband market. Unlike a typical new entrant, Dish Network already has significant brand awareness and customer relationships, existing retail networks, and an industry partnership with Frontier Communications. Dish Network could leverage its 14 million MVPD subscribers, 4 million Frontier Communications customers, and Blockbuster retail stores to quickly generate a nationwide presence in the mobile market and substantially lower its customer acquisition costs. Because Dish Network does not have an embedded base of devices that depend on earlier generations of wireless technology, it would be able to deploy and maintain a single, cost effective LTE Advanced network. Its spectrum would also enable the use of spectrally efficient 20 MHz channels – a channel size some incumbent mobile operators cannot deploy due to the limitations of their spectrum holdings. (For example, Verizon’s current generation LTE network is limited to 10 MHz channels based on its available spectrum.) Although Dish Network may eventually need more spectrum, as a new entrant with no legacy technology concerns, Dish Network wouldn’t face a capacity crunch anytime in the near term.

Given the potential for Dish Network to increase competition in both the MVPD and mobile markets, I expect the FCC to grant the application. It would be difficult for the FCC to deny Dish Network’s application after granting similar relief to LightSquared. Even if the FCC would have preferred to reassign the 2 GHz MSS spectrum using an incentive auction, Dish Network’s commitment to “creating a competitor against the mobile broadband incumbents” (Application at 22) is an offer the FCC is unlikely to refuse.

The FCC’s new interest in legitimizing the distribution of signal boosters without licensee consent or control is perplexing. Given the FCC’s ongoing existential crisis, it’s not surprising that its signal booster proposal lacks any market analysis justifying regulatory intervention (e.g., there is no evidence that consumers lack access to signal boosters authorized by licensees). What is surprising is that legitimizing third-party signal booster sales would be flatly inconsistent with the regulatory approach the FCC adopted last year in its net neutrality order. In the net neutrality order, the FCC recognized the wisdom of affording network operators “the latitude they need to effectively manage their networks.” (Net Neutrality Order at paragraph 86.) Network operators are thus able to “implement reasonable practices to ensure network security and integrity, including by addressing traffic that is harmful to the network.” (Net Neutrality Order at paragraph 88.) Signal boosters implicate the same reasonable network management concerns the FCC address in the net neutrality order, but, inexplicably, the FCC wants to specify detailed network management practices for signal boosters.

By their very nature – their purpose is to “boost” the power of a radio signal – signal boosters present a risk of harmful interference to the network (either by completely blocking other customers’ signals or degrading data rates). This risk must be balanced against the potential coverage benefits signal boosters provide. Operators have strong incentives to balance these risks in an effort to maximize overall network performance. Operators reduce the risk of harm to the network through careful selection of signal booster features and quality, and by maintaining control over their deployment and use, i.e., through reasonable network management. In economic terms, operators internalize the harms caused by signal boosters.

Manufacturers of unauthorized signal boosters do not share operators’ incentives to maximize network performance. The Manufacturers’ incentives are to maximize signal booster revenue and profits irrespective of signal boosters’ impact on the network as a whole. They maximize revenue by offering consumers signal boosters that can improve the experience of their individual customers at the expense of other consumers. Manufacturers maximize their profit by producing signal boosters at the lowest cost, which results in the sale of low feature, low quality signal boosters that cause harmful interference to operators’ networks.

The individual consumer’s incentives are similar to those of the manufacturers. Consumers want to maximize their connectivity at the lowest cost, irrespective of the impact on others using the network. Consumers’ lack of incentive to avoid harmful interference to the network is coupled with an inability to remedy such harm if it does occur. The average consumer doesn’t have the technical knowledge or resources to know that interference to other users is occurring, let alone determine that they are the cause. Even if they did, consumers whose connectivity is improved by their signal boosters would have an incentive to remain silent (a free-rider problem).

In economic terms, the harm caused by the sale of signal boosters to consumers without licensee consent or control is a negative externality, i.e., a harm incurred by a party (in this case, consumers adversely affected by harmful interference with their use of the network) who did not agree to the action causing the harm (i.e., the use of a signal booster by their neighbor). “Externalities are a type of market failure.” By codifying this negative externality, the FCC’s proposed signal booster rules would codify a market failure. Regulation is typically justified by the desire to correct a market failure, not create one. But that is what the FCC would do if it proceeds to take reasonable network management out of the hands of network operators and put it into the hands of manufacturers and consumers who have no incentive to be reasonable.

Given the relatively straightforward economic incentives involved, it is obvious that network operators are in the best position to reasonably manage the use of signal boosters within their networks. The FCC is nevertheless proposing to insert itself directly into the network management process through inflexible, prescriptive regulations specifying detailed technical parameters for signal boosters. Even assuming the FCC could find the optimal balance between the potential harms and benefits of signal boosters today, the prescriptive nature of the regulations would prevent operators from adapting signal booster technology and uses to innovative network technologies and topologies in the future. The result would be less innovation and unhappy consumers.