As Matt Stoller and others have noted, the FCC is finalizing plans for its upcoming auction of extremely-valuable wireless spectrum. It’s an incredibly important auction, the outcome of which will shape wireless voice service and, more importantly, wireless broadband for years to come. I’ll be writing more about this, but I thought it would be useful to provide an overview of some of the big-picture issues at stake. I’ll give a basic intro first, and then move on to more complicated policy debates.
As many of you know, the right to use the electromagnetic spectrum is controlled by the federal government. The FCC carves it up and “licenses” pieces of it to various types of parties (radio broadcasters, TV broadcasters, cell phone providers, etc.). Like real estate, though, not all spectrum is created equal. Lower-frequency spectrum is more valuable because it travels further and is more resilient (i.e. better able to go through walls, hills, etc.) than higher-frequency spectrum. That’s why, for instance, AM radio stations have much wider range than FM stations -- they operate at lower-frequencies.
For reasons both historical and political, TV broadcasters have enjoyed access to wide swaths of incredibly valuable low-frequency spectrum. However, as a result of the DTV transition (digital TV), broadcasters will soon be abandoning parts of this spectrum. Specifically, they will soon be required to broadcast digitally rather than in analog. Because digital transmissions are more efficient, the transition will free up spectrum space. Our eminently-wise public servants in Congress have decided that this newly-freed-up broadcasters’ spectrum should be reallocated to commercial users via auctions and to public safety agencies (e.g., fire departments, emergency communications). These are all good things.
At long last, the DTV transition draws nigh. Later this year (or early next year), the FCC will auction off big chunks of the broadcasters’ spectrum -- often referred to as the “700 MHz spectrum.” In the wireless world, this spectrum is considered “beachfront property” because it is stronger and more resilient than the spectrum that wireless providers (voice and broadband) currently use. For instance, one reason why your cell phone doesn’t work in urban office buildings (particularly if you have Sprint or T-Mobile) is that the phones often use higher frequency spectrum (e.g., PCS spectrum) that can’t penetrate heavy concrete walls very well. In addition, and for similar reasons, the 700 MHz spectrum is far better-suited for mobile broadband than higher-frequency spectrum.
Right now, the FCC is considering the rules (the “service rules”) that will govern the spectrum auction and will likely release those rules in the next month or so. The upshot here is that the rules the FCC adopts will essentially determine who is going to “win” this spectrum. There really is no “neutral” outcome here. The structure of the rules will determine the winners, and thus the shape of the wireless market in the years ahead. That’s why parties are furiously lobbying right now to get the rules they prefer embedded in regulations governing the auctions. To take one example, consider the “block size” rules (i.e., should the pie be sliced in 6 pieces or 4 pieces? Or maybe 2 big pieces and 100 tiny pieces?). Big carriers want the spectrum auctioned in “big” blocks that no one else can afford to bid on. Smaller carriers in turn want “smaller” (and more local) blocks.
Intro aside, let me cut to the chase (this is where it gets a bit wonkier). One key question in the policy debate is whether the wireless market is too concentrated. Most everything else turns on that. Do the ever-growing market shares of the AT&T (Cingular) and Verizons of the world pose a threat? Or do they provide important efficiencies, economies of scale, etc.? That’s really the debate. And depending on how you answer it, the rules can be structured accordingly. In other words, they can be structured to facilitate more competition or to facilitate more concentration (which, again, isn’t necessarily a bad thing).
If the answer to the question is “yes, the wireless market is too concentrated,” then that concentration has two important consequences on the future of the wireless market. First, the cell phone competition we’ve enjoyed over the years will slowly fade away as smaller carriers get pushed out or purchased. Second (and this is critical), wireless broadband will become a flimsy adjunct service run by national carriers rather than something that competes directly with landline (DSL, cable) broadband (more on this below). In other words, this auction will have a strong effect on the future of wireless broadband. Let me unpack both of these points and discuss how they relate to the auction.
On the first point, the fear is that the wireless voice market will eventually consist of a very small number of national carriers in most places and, accordingly, new providers won’t enter or existing ones won’t survive. Competition is difficult largely because it’s hard to become a big wireless carrier. Entering the wireless market (or expanding services) has enormous capital costs (building towers, etc.) that are basically barriers to entry. The use of 700 MHz spectrum, however, lowers these barriers to entry because it significantly lowers capital costs. In short, it’s cheaper to operate a 700 MHz service than an equivalent service at a higher frequency because you need less stuff. For instance, because higher-frequency spectrum (e.g., 2.5 GHz) doesn’t travel as far, you have to build many times more towers than you would if you had 700 MHz spectrum. The point here is that if non-national carriers (or smaller national ones) could obtain this valuable spectrum, they would be in a better position to compete or expand services.
The second point -- wireless broadband -- is more important though. Many people treat wireless broadband as the Second Coming-- the great next wave of the future of communications. Frankly, I don’t buy it. Barring some technical advances, wires will always beat wireless -- for instance, I suspect few of you have “cut the cord” for whatever crappy Internet service you get on your handheld devices.
But my skepticism aside, the only chance wireless broadband has to be a real competitor is by obtaining more and better spectrum. The current WiFi and WiMax services -- the supposed great competitors of big cable and telcos -- operate on high-frequency spectrum that isn’t ideal. The 700 MHz spectrum, however, could really help make wireless broadband ready for prime time, particularly if it is combined with providers’ existing high-frequency spectrum. (The construction costs argument applies here too).
There are good reasons, however, to fear that wireless broadband won’t be fully developed. Most importantly, the biggest wireless carriers -- AT&T Wireless and Verizon Wireless-- are wings of the behemoths AT&T and Verizon. These carriers are invested heavily in wireline broadband (i.e., DSL or fiber lines). Wire-less broadband potentially competes with those lucrative services. For this reason, these carriers have an incentive to make sure that wireless broadband never emerges as a full competitor with their landline services. Instead, they would prefer wireless broadband to be an additional service rather than a substitute for wireline broadband. Thus, these big carriers have strong incentives to buy up the spectrum that poses this threat and not fully exploit it (or, more likely, develop it as a limited service that you use in addition to your landline broadband).
This is getting long (and maybe boring), so I’ll stop for now. The point though is that the FCC’s service rules are going to determine the types of companies who get this valuable spectrum. This, in turn, will have a strong influence on the shape of the wireless market for decades to come (this auction is the last biggie for the foreseeable future). I haven’t really gotten into the nitty-gritty of what rules would be best for facilitating competition, but I’ll try to get into that later.
[On a final point, though I’m not longer a lawyer and no longer have clients, I should disclaim that I did represent clients in this proceeding that supported the arguments I outlined above. Take that for what it’s worth.]