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.

• Nearly everyone agrees that more spectrum is needed for mobile wireless. The President’s plan proposes to free up 500 MHz of spectrum through incentive auctions and more efficient government use.

• Nearly everyone agrees we need to do more to provide broadband to unserved consumers, and that wireless is the most cost-effective way to do it. The President’s plan proposes to invest $5 billion and reform the Universal Service Fund to provide at least 98% of Americans with access to 4G wireless service.

• Nearly everyone agrees we need to deploy a nationwide wireless broadband network for public safety. The President’s plan proposes that $10.7 billion be dedicated to building that network and reallocation of the D Block to public safety use.

• Nearly everyone agrees we need to continue to innovate in wireless technologies. The President’s plan proposes to devote $3 billion to a Wireless Innovation (“WIN”) fund supporting research and development of emerging wireless technologies and applications.

• Nearly everyone agrees we need to reduce the deficit. The President’s plan proposes to reduce the deficit using $9.6 billion in auction proceeds.

Perhaps everyone won’t agree with every detail of the President’s plan. But everyone should agree that this bold, comprehensive plan is a real leap forward.

Dr. Peter Venkman: “It’s technical . . . .”

Ghostbusters (1984)

So far I’ve successfully resisted the urge to comment on the 700 MHz D Block issues percolating at the FCC (although I did reference the FCC’s report in an earlier post). After coming back from my traditional 4^th of July holiday, however, I’ve succumbed to the temptation to opine on the FCC’s “D Block Capacity Report.”

Others have already analyzed the Report in detail. (For Andrew Seybold’s comprehensive analysis, click here.) And I’ll try not to repeat their analyses in this post. Instead, I focus on the framing of the Report and, perhaps most importantly, what the Report doesn’t say.

The FCC frames its D Block capacity Report as a “technical” analysis intended to determine whether 10 MHz of spectrum is sufficient to meet public safety’s communications requirements in various scenarios. But, of course, this purported “technical” analysis is based as much on economic and policy assumptions as it is on engineering. It has to be: Because capacity is impacted by issues like cell density, which is in part a matter of economics, capacity isn’t solely a technical issue.

The FCC appears to concede that whether 10 MHz of spectrum is sufficient for day-to-day operations depends in part on how much money public safety has to deploy and maintain the network. (See Report at pages 5-7.) Indeed, the Report relies heavily on the potential economies of scope and scale that public safety would enjoy if the D Block is licensed to a commercial operator. (See Report at pages 16-17.) But the report erroneously assumes that the “benefits associated with sharing an LTE band class (Band Class 14) with the commercial D block licensee would evaporate” if the D Block were given to public safety. Isn’t it just as likely that public safety could use its access to an additional 10 MHz of spectrum (which, according to the Report, public safety doesn’t need) as an incentive to entice a commercial licensee into a mutually beneficial, voluntary partnership with public safety? Unfortunately, the Report doesn’t address this question or other alternative scenarios involving both economic and technical analysis.

Ironically, the FCC is clearly relying on significant relationships developing between public safety and commercial partners through roaming and priority access regimes. (See Report at pages 11-12.) However, the FCC apparently wishes to impose roaming and priority access requirements on commercial licensees as a matter of regulatory fiat, rather than allow them to develop through cooperative agreements between commercial licensees and public safety (using the D Block as leverage). It appears the FCC is more comfortable with imposing regulation on commercial licensees (who will be forced to allow public safety to access their spectrum and commercial resources) than giving more spectrum to public safety and relying on voluntary sharing arrangements. Regardless of its merits, this preference is one of policy and economics that has been given a dubious “technical” patina.

Now the FCC itself has confirmed the relevance of these factors to cell density. In a white paper released this week (“Public Safety Report”), the FCC published “a technical analysis of the capacity and performance of the public safety broadband network assuming that the National Broadband Plan recommendations concerning this network are implemented.” (Public Safety Report at 1.)

The Public Safety Report emphasizes that “sound network engineering principles” dictate high cell densities to maximize capacity. (See Public Safety Report at 5.) “Deploying greater numbers of cell sites achieves a greater aggregate capacity and higher overall level of spectral efficiency, consistent with Commission goals to achieve highest use for this scarce resource.” (Public Safety Report at 19.) Indeed, in analyzing a scenario in New York City (“NYC”), the Public Safety Report assumes there will be “considerably more than 3 times as many [700 MHz] cell sites” as were assumed necessary by the NYC Department of Information and Technology (Public Safety Report at 20). Although the propagation characteristics may have made the lower cell densities proposed by the NYC Department of Information and Technology possible, the Public Safety Report confirms that capacity concerns, rather than propagation characteristics, should dictate 700 MHz cell densities, at least in urban areas.

The Public Safety Report also recognizes that power limits inherent in mobile devices (due to concerns about human exposure to radiofrequency energy and adequate battery life) and desired data rates also limit cell sizes, regardless of favorable propagation characteristics. “The data rate and performance available to a device in a cellular broadband network is a function of how far it is from a transmission tower. . . . A network that must be capable of supporting a video device or other device that supports a high-data-rate application must therefore have smaller cell radii . . . .” (Public Safety Report at 13.) This is true in any geographic area, whether urban, suburban, or rural.

Although Dr. Peha was addressing the question in a different context, it’s still nice to see that the FCC’s Chief Technologist and I agree that propagation characteristics are only one of many relevant factors in mobile network design.

Today FCC Chairman Genachowski gave a speech outlining his plan for ensuring the United States has “the fastest, most robust, and most extensive mobile broadband networks, and the most innovative mobile broadband marketplace in the world.” Although any analysis must include significant caveats given the very general nature of the speech, it was clear on a few critical points.

The Chairman was clear that more spectrum must be made available for mobile broadband. He stated that the “National Broadband Plan will set a goal of freeing up 500 Megahertz of spectrum over the next decade.” What isn’t clear is everything else regarding the 500 MHz goal. How much of the spectrum will be licensed or unlicensed? How much spectrum will come from the broadcast bands and how much will come from federal users? The Chairman seemed to suggest that the National Broadband Plan would propose to license repurposed broadcast spectrum and provide for opportunistic use of federal spectrum, but we presumably won’t know the details until the National Broadband Plan is actually released.

The Chairman was also clear that the National Broadband Plan would propose a two-sided auction of broadcast spectrum, which he called a “Mobile Future Auction.” Two-sided auctions have been proposed by the Commission in the past, but the concept has never been given serious consideration in large part due to the lack of legal clarity regarding the FCC’s jurisdiction to conduct such an auction. I am intrigued by this proposal, and expect to provide additional analysis once the National Broadband Plan is released.

I’m pleased by the Chairman’s decision to create a “Mobility Fund” as part of comprehensive reform of the Universal Service Fund. This is something the Wireless Communications Association International argued for in its comments on the National Broadband Plan, and it is gratifying to see it included in the plan.

Finally, the Chairman clearly stated that the National Broadband Plan would propose a solution for a nationwide, interoperable public safety broadband network. However, it is far from clear at this point exactly what that proposal will look like. I again await the release of the actual plan itself before offering any real analysis of the proposal.