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.

“People love to categorize.” Categorization helps us make sense of a complicated world. But, when categorization doesn’t reflect substantial similarities, it obfuscates as much as it illuminates. So it is with communications policy, which is categorized primarily by the technologies used to deliver communications services (“stovepipes”) rather than their impact on consumers. This approach to categorization obfuscates the relevant question – whether a particular regulatory approach maximizes consumer welfare (rather than the prospects of particular competitors).

If the government subsidizes universal broadband, it would render government subsidization of over the air broadcast duplicative.

The ongoing debates about broadcast incentive auctions and universal service reform offer a poignant example of such obfuscation. Because the services that are the subjects of these debates use different technologies, and are thus categorized separately, these debates are being conducted independently. When viewed from the perspective of consumer welfare, however, these debates are inherently interrelated. They both involve regulations that are intended to address the same concern – the widespread dissemination of information to consumers from a multiplicity of sources.

The core question in both debates is to what extent the government should subsidize consumer access to information. Because broadband service provides access to far more information than is possible through over the air broadcast, answering this question in the universal service debate informs the incentive auction debate: If the government subsidizes universal broadband, it would render government subsidization of over the air broadcast duplicative.

The Government Subsidizes Both Universal Service and Television Broadcast

The government subsidizes universal telephone service through mandatory fees. As I explained in a previous post, the broadcast industry is subsidized by the government through the imposition of must-carry obligations on cable providers:

As a result of the success of cable television, it had become clear by 1992 that broadcasters lacked a viable business plan. Because fewer and fewer people were watching broadcast television over the air, broadcasters were having a more difficult time selling advertisements. To prop up the dying broadcast industry, Congress decided to force cable providers to carry broadcast channels on their cable systems. Forced cable carriage ensures that broadcasters reach enough “eyeballs” to satisfy advertisers, which is how broadcasters make money.

Because only about 10% of the population actually watches television transmitted over-the-air, without government mandated must carry, most broadcasters couldn’t sell enough advertisements to survive. Forced cable carriage of broadcast signals is thus an indirect government subsidy financed by cable consumers. (For a detailed must-carry discussion, see Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994) (Turner I).)

Television broadcasters also enjoy subsidized use of radio spectrum worth up to $33 billion. When Congress provided the FCC with auction authority in 1993, it required that FCC auctions promote multiple purposes (see 47 U.S.C. § 309(j)(3)), including:

• development and rapid deployment of new technologies, products, and services;
• recovery for the public of a portion of the value of the public spectrum resource and avoidance of unjust enrichment; and
• efficient and intensive use of the electromagnetic spectrum.

Auctioning broadcast spectrum would support all of these Congressional objectives. For that reason, during the debates that preceded the 1996 Act, multiple bills were introduced proposing to auction digital broadcast channels. (For a detailed history, see Ellen P. Goodman, Digital Television and the Allure of Auctions: The Birth and Stillbirth of DTV Legislation, 49 FED. COMM. L.J. 517 (1997).) But Congress ultimately bowed to broadcast industry pressure and exempted from auction “initial licenses or construction permits for digital television service given to existing terrestrial broadcast licensees to replace their analog television service licenses.” (See 47 U.S.C. § 309(j)(2).) As a result, broadcasters lacked economic incentives to transition to digital technology more quickly or use their spectrum more efficiently, and the public didn’t recover any of the value of the public spectrum resource the broadcasters squatted on for over a decade.

These broadcast subsidies remain in place today even though “the social opportunity cost of using the TV Band for television broadcasting . . . is conservatively estimated to exceed $1 trillion (in present value).” (Thomas W. Hazlett, Unleashing the DTV BAND: A Proposal for an Overlay Auction (2009) at p. 5.) This opportunity cost dwarfs the benefits of over-the-air broadcast television. Only about 10% of the population actually watches television transmitted over the air and there is little evidence all of these viewers actually need subsidized television. Because over the air broadcast subsidies are not targeted to lower income Americans, the 10% of over the air TV watchers includes middle-class and wealthy Americans who have no need for government subsidies. Given the high opportunity costs and limited benefits of over the air broadcasting, it’s hard to understand why there is any interest at all in subsidizing television.

Both Universal Broadband Service and Television Broadcast Serve the Same Purpose

Preservation of free over-the-air broadcasting was originally intended to promote the widespread dissemination of information from a multiplicity of sources. (See Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180 (1997) (Turner II).) In the Turner decisions, the Supreme Court upheld must carry legislation because broadcasting was “a principal source of information and entertainment for a great part of the Nation’s population.” When the Turner II decisions were issued in the 1990s, 40% of American households still relied on over the air signals for television programming. Although consumption of programming over the air had declined by the 1990s, broadcasting was still a significant source of information.

Over the last decade the facts have changed dramatically. As noted above, broadcasters now serve only about 10% of the population over the air. At the same time that over the air viewership has declined, broadband availability and subscription rates have exploded. Approximately 95% of the U.S. population has access at home to broadband service capable of delivering high quality video (4 mbps downloads) (see sixth broadband deployment report, available here), and approximately 66% of Americans use a high-speed connection at home. Because universal service reform would ensure that all Americans – regardless of their income – have access to broadband offering high quality video capabilities (just like TV), there would no longer be any rationale for subsidizing over the air television. The purpose served by over the air television – the widespread dissemination of information from a multiplicity of sources – would be served by universal broadband access.

Although government subsidies can promote consumer welfare, “[i]t is widely acknowledged that subsidies are generally economically inefficient.” (Erwin H. Bulte, Richard Damania, and Ramón López, On the Gains of Committing to Inefficient Production: Corruption and Low Land Productivity in Latin America (2004) at p. 2.) Subsidizing duplicative programs that serve the same purpose would be blatantly wasteful. Such waste would be particularly egregious in this context due to the high opportunity cost of using spectrum for over the air television. Television programming can be (and primarily is) delivered via the wired Internet, cable, and fixed satellite systems; but the wired Internet, cable and fixed satellite systems cannot provide the mobility that broadcast spectrum can enable.

When universal service reform and incentive auction policies are viewed holistically, the best course of action is clear: enact both policies this year. Universal broadband service would give every American consumer access to more information from more sources than could ever be made available via broadcast television, and freeing broadcast spectrum for mobile use would help the United States meet its goal of leading the world in mobile broadband. The resulting win-win would boost the U.S. economy, create jobs, and spur innovation.

The performance of Verizon’s FIOS service demonstrates that the business case for deploying FTTP just isn’t very attractive. Verizon apparently invested $23 billion in FIOS. Unfortunately for Verizon, it appears it’s losing money on that investment. Although Verizon denies losing money on FIOS, it has stopped investing in it. Despite its very high throughput and reliability, consumers aren’t subscribing to FIOS in large numbers, and only a small portion of Verizon’s revenue comes from FIOS. The vast majority of Verizon’s revenue and subscribers come from Verizon’s wireless business. Let’s take a look at the numbers from Verizon’s Q1 2011 earnings results.

(Source available here.)

(Source available here.)

As the above charts show, 63% of Verizon’s revenue comes from wireless while only 14% comes from FIOS Internet subscriptions, and Verizon has about 20x more wireless subscribers (88.4 million) than FIOS Internet connections (4.3 million). Verizon is also adding many more wireless subscribers (1.8 million in Q1) than FIOS subscribers (207,000 in Q1). The most striking statistic is that Verizon added 500,000 LTE subscribers in Q1 2011 – more than twice as many as it added to its FIOS Internet service. With this data its obvious why Verizon isn’t investing more money in FIOS – FTTP is not a strong growth business (presumably because consumers aren’t willing to pay for it).

In OBI Technical Paper 1: The Broadband Availability Gap (available here), the FCC estimated that it would cost $62 billion to deliver FTTP to the 7 million housing units it estimated were unserved by broadband. Can you imagine how the conversation would go if a broadband service provider asked an investor to finance such a build?

Investor: “So you want me to give you $62 billion to serve 7 million households with broadband access that most consumers don’t want when I could build a nationwide 4G LTE network that consumers do want for a lot less money?”

Broadband Service Provider: “Yes.”

Investor: “Are you serious?”

Broadband Service Provider: “Well, Internet advocates want me to build a FTTP network.”

Investor: Laughs and says “Ask them for the money.”

Many Internet advocates would say that’s why government should own and operate an FTTP network. But the government hasn’t built a much less expensive wireless public safety network nearly ten years after September 11. In the current budget environment, good luck relying on government to build FTTP networks any time soon.

The best chance for nationwide broadband is reform of the Universal Service Fund (USF) to support broadband networks. But the FCC’s been working on USF reform for years and hasn’t yet made any real progress. Instead, the FCC’s been hard at work on investment-killing initiatives like net neutrality and roaming. (See my post here.)

If we really want universal broadband access to high throughput wired and wireless networks, it’s time to get serious about adopting policies that promote investment and eliminating policies that kill investment. We need USF reform now and more spectrum for mobile broadband. What we don’t need is more regulation that shifts revenues from infrastructure investment to those who would take advantage of regulatory arbitrage (e.g., net neutrality).

Mila: Then what?

Mahad: By then I should have the second half of the plan figured out.

Skyland (2005)

Two weeks ago NAB released a paper claiming there is no spectrum crisis (pdf here). Even though the paper lacks any relevant, quantifiable analysis, it somehow continues to get cited in articles and in Congress. Yesterday even an IEEE publication stooped to parroting NAB’s unsupported claims (see article here). According to the IEEE blog, the crux of NAB’s argument is the lack of a “spectrum inventory.” Waiting to make more spectrum available while conducting a lengthy “spectrum inventory” is a distraction, not a plan.

Broadcasters are keen to focus on the spectrum use of others to distract Congress from the broadcasters’ own Achilles heel: broadcasters use the largest amount of the most valuable spectrum to serve only about ten percent of the population. As I’ve blogged before, broadcasters primarily use their spectrum to take advantage of government subsidized must carry rights. Without must carry rights, most broadcasters would quickly be out of business and would no longer have any use for their spectrum at all. Using spectrum to access a government subsidy is hardly an efficient use of spectrum.

It’s not surprising that the broadcasters would rather have the government look at the spectrum use of others rather than the broadcasters’ own. The problem for NAB is that we already have more than enough information to know that the broadcast spectrum must be made available for mobile use if America is serious about satisfying consumer demand for mobile services. Here’s what we know already:

• The broadcast spectrum is the only large, contiguous block of spectrum in the prime frequencies for mobile use.

• Mobile use is exploding now and will exhaust currently available mobile spectrum.

• Broadcasters can be repacked at the expense of mobile providers without harm to the services broadcasters already offer (especially given that the vast majority of their profits are the result of must carry rights rather than spectrum use).

• The broadcasters’ current services are a paragon of inefficient spectrum use.

Given what we know already, we don’t need any additional information from a spectrum inventory to move forward on incentive auctions now. No matter how inefficient other spectrum users may be, we already know they don’t have a large, contiguous block of spectrum in prime mobile frequencies that can be made available quickly and at no cost to consumers. The broadcasters do. That’s why Congress should focus on incentive auction legislation now rather than NAB’s groundless distractions.

Net Neutrality: Last December, the FCC adopted net neutrality regulations (see order available here). These rules shift potential Internet revenue from service providers – the companies that actually deploy broadband infrastructure – to software companies and device manufacturers. The obvious result is to discourage investment in costly broadband infrastructure.

Incentive Auction Authority: Making more spectrum available through incentive auctions would promote significant broadband deployment. The FCC is now working toward this goal, but in 2010, the FCC made net neutrality its top priority rather than incentive auctions. Had the FCC focused on the need for more spectrum in 2010, the FCC might have obtained incentive auction authority already by striking a deal with Congressional Republicans opposed to net neutrality. Instead, the FCC is fighting with broadcasters over incentive auctions in 2011, with the election cycle looming ahead.

Universal Service: Universal service reform is one of the most important regulatory actions the FCC could take to promote broadband deployment. But, while the FCC was busy working on net neutrality regulations last year, universal service reform languished, and another opportunity to promote broadband deployment now was lost.

Roaming: The FCC found in 2007 (see order here), that mobile wireless roaming regulation discourages infrastructure-based broadband deployment if roaming is required in markets in which the requesting service provider holds spectrum licenses. In 2010, however, the FCC changed its mind (see order here), and in 2011 (see order here), it imposed new roaming requirements on broadband service providers. It’s difficult to see how allowing one provider to use another provider’s infrastructure rather than build its own network will promote more infrastructure deployment.

If broadband deployment is lagging, the FCC should point the finger at itself. The FCC needs to get back to the task of implementing policies that promote broadband deployment rather than imposing heavy handed regulation. For starters, the FCC can focus on making more spectrum available and reforming the Universal Service Fund. That would go a long way toward reversing the FCC’s troubling trend of discouraging broadband deployment.

They note that the FCC’s analysis eschews direct evidence of the state of competition based on consumer behavior in favor of reliance on indirect evidence. The FCC ignored the direct evidence it collected in favor of market share measures, even though the FCC itself admitted that measures of market share are not synonymous with market power. Messrs. Faulhaber and Singer generally reached the same conclusion I did in my previous posts: the FCC intends to rely its mobile wireless competition reports to further regulate the wireless industry.

They take particular issue with the FCC’s implied intent to limit the ability of larger mobile wireless service providers to acquire spectrum via auction. They then note that, in this circumstance, the only viable solution for larger service providers is to acquire additional spectrum in the secondary markets. If the FCC wants to have a competitive mobile wireless industry, it can’t have its cake and eat it too. The FCC needs to release more spectrum immediately and allow larger mobile service providers to access it, or the FCC needs to speed its review of secondary markets transactions. If the FCC instead does neither, the mobile wireless industry and consumers both will suffer.