Spectrum Crisis, Hyperbole or Quest for Market Control?

[Source: Benton Foundation, by Kevin Taglang, April 20, 2012]

Fueled in no small part by a Congressional hearing, the need for more spectrum devoted to wireless telecommunications services was a big topic this week. AT&T, Verizon, T-Mobile and Sprint say they need more spectrum to meet the exploding demands for mobile data. If they don’t get more soon, they warn, mobile users will experience slower, spottier connections – and higher prices.
 
There seems to be no argument that mobile data use is exploding. The wireless industry’s lobbying arm, CTIA, recently released research stating that U.S. wireless data traffic grew by 123 percent from 2010 to 2011. CTIA found a 43 percent increase in the number of active smartphones and other wireless personal devices, from 78 million in 2010 to 111.5 million last year.
 
At the same time, Dow Jones reported this week that wireless carriers are facing increased capital investment needs as they race to handle surging data traffic, just as maturing industry penetration and more competitors offering the iPhone begin to dent revenue growth. Bloomberg went as far as to speculate that the wireless market, long the fastest-growing sector in the telecommunications industry, looks like it’s headed for a wall. Sales of wireless contracts, the most lucrative segment of the business because it locks in monthly payments over long periods, are shrinking. One big reason for the sharp reversal: Soaring iPhone sales in late 2011 may have satiated consumers’ appetites for wireless plans. The decline forces carriers to seek revenue gains at the expense of weaker players, said Chetan Sharma of Chetan Sharma Consulting. That may mean increasing promotional activity by carriers who already are selling smartphones at a loss to lure users into two-year contracts, a practice that has reduced profit margins. Sharma is predicting price pressure, shrinking margins and consolidation.
 
On April 18, the New York Times examined the spectrum issue but noted that some scientists and engineers say the carriers are playing a game that is more about protecting their businesses from competitors. Martin Cooper, the inventor of the cellphone, explained that for carriers, buying spectrum is the easiest way for them to expand their network, but newer technologies, like improved antennas and techniques for offloading mobile traffic to Wi-Fi networks, could multiply the number of mobile devices that carriers can serve by at least tenfold. David P. Reed, one of the original architects of the Internet and a former professor of computer science and engineering at the Massachusetts Institute of Technology, noted that there are in fact newer technologies for transmitting and receiving signals so that they do not interfere with one another. That means separating the frequency bands would not be required — in other words, everybody could share spectrum and not run out. The reason spectrum is treated as though it were finite is because it is still divided by frequencies — an outdated understanding of how radio technology works, he said.
 
Why, then, wouldn’t carriers want to use these newer technologies that cause frequencies to not interfere? Because licensing spectrum is a zero-sum game. When a company gets the license for a band of radio waves, it has the exclusive rights to use it. Once a company owns it, competitors can’t have it. Reed said the carriers haven’t advocated for the newer technologies because they want to retain their monopolies.
 
Martin Cooper says that rather than give the carriers a few more slices of spectrum, regulators should require them to use newer technologies – like smart antennas (1) – that amplify their networks. Fourth-generation LTE networks are supposed to adopt smart antennas, but most carriers haven’t started installing these yet. In fact, carriers claim new technology would not be enough to solve all their problems, and they said they would eventually need access to more of the nation’s spectrum. “They’re all Band-Aids, and you have to provide additional spectrum to deal with the wound to deal with the large capacity of bandwidth demands,” said Kathleen Ham, vice president for federal regulatory affairs of T-Mobile USA.
 
The House Science Committee held a hearing, “Avoiding the Spectrum Crunch: Growing the Wireless Economy through Innovation,” on April 18. Industry advocates reiterated their position that new technology allowing spectrum to be shared won't be enough to meet demand. Noting that a recently-released National Telecommunications and Information Administration plan to release some government-held spectrum is a good start, CTIA and others argued:
  • more spectrum must be cleared and released to the consumer market if a spectrum crisis is to be prevented;
  • it is doubtful that the massive investment … in [wireless services] would have happened without exclusive licenses for the private sector;
  • without more spectrum, companies that develop new technologies could migrate outside the United States, and America's role as a technology leader could be threatened; and
  • there is "a long way to go" before a comprehensive spectrum-sharing plan for the whole country can be developed.
On April 19, Sen Mark Warner (D-VA) called for a national spectrum inventory in order to help speed development of next-generation wireless networks. He said many government agencies use only a portion of the spectrum they've been allocated over the years, leaving many bands "semi-fallow" and therefore inefficiently used. This problem is compounded because often military and intelligence sectors are especially reluctant to show "non-use.” A number of bills have been considered by the Senate to require the NTIA to conduct an inventory, but none made it past the committee level.
 
But the U.S. government’s response – or, not to put too fine a point on it – the response from the U.S. government that’s garnered the most headlines is a push for making more spectrum available to carriers – mainly through freeing up airwaves and auctioning them off for exclusive use by the carriers. Although, to be fair, Federal Communications Commission spokesperson Neil Grace said this week, “No single action is a silver bullet when it comes to meeting mobile capacity needs. More efficient use of spectrum, new technologies, and unleashing new spectrum are all important parts of the mix.”
 
At the National Association of Broadcasters convention in Las Vegas this week, FCC Chairman Julius Genachowski once again attempted to sell the FCC's spectrum incentive auction plan to broadcasters, many of them skeptical. He said the incentive auction for broadcasters' spectrum might well be a favorable opportunity for the 40% of TV stations not getting retransmission consent cash, and for those who do not air local news. But Chairman Genachowski stressed that broadcasters in all markets, and of all sizes, should at least hear the details of the plan. "It's an unprecedented opportunity [for broadcasters] to improve their financial position," he said. "Don't be afraid to be interested. Others already are." At the same venue, FCC Commissioner Robert McDowell said he doesn't think that incentive auctions will yield much spectrum for wireless broadband providers.
 
Also in Las Vegas, FCC Media Bureau Chief William Lake gave a few more details about how broadcasters may participate in incentive auctions to make more spectrum available for wireless use, saying some stations have inquired about possibly sharing channels. Under the process, broadcasters that choose to participate will offer a bid for what it will take for them to give up all their spectrum and get out of the business, give up of their spectrum and share a channel with another broadcaster, or trade their UHF channel spectrum for a lower-quality VHF channel. Lake expects the FCC to release a proposal for public comment this fall.
 
The FCC is also considering loosening rules on mobile satellite spectrum to allow for terrestrial use, a move that would open the door to allowing Dish to deliver mobile wireless broadband. The satellite giant has said that it plans to build out its own wireless network.
 
Wireless industry leaders AT&T and Verizon Wireless are not just waiting for the government to free more spectrum. Last year, AT&T attempted to buy T-Mobile in a deal that regulators helped quash. Verizon is currently seeking approval to purchase 122 spectrum licenses that major cable companies won in auction but never built out to use. On April 19, Verizon offered to sell some unused airwaves in exchange for federal approval of its purchase. Verizon said it would sell some spectrum licenses in the 700 megahertz band that it bought at a federal auction in 2008 during which the FCC placed "open access" requirements on the spectrum. The sale is meant to appease regulators who are reviewing whether Verizon will have too much dominance in the wireless industry if it were also to buy the cable companies’ spectrum licenses.
 
National Association of Broadcasters spokesman Dennis Wharton reacted to the announcement saying, "Today's proposal by Verizon to sell reallocated broadcast TV spectrum involves airwaves in the largest urban markets in America that it purchased more than four years ago. The fact that it has warehoused this ‘beachfront property' raises the fundamental question of whether a spectrum shortage actually exists. Rather than simply take at face value the specious claims of wireless broadband providers, policymakers should heed the words of Martin Cooper, the inventor of the cellphone, who disputes the notion of a spectrum crisis."
 
Public interest groups reacted negatively to Verizon's announcement for varying reasons. Public Knowledge legal director Harold Feld said in a statement that "there is less than meets the eye" to the announcement, since even if the proposed sale takes place, there will still be a "cartel" extant in which Verizon will still "rule the air for wireless broadband" and cable will remain the only option for landline service. Feld accused Verizon of using "the mere offer" of a sale to entice regulators into approving the deal. But even when spectrum changes hands, Feld said, history shows that AT&T buys Verizon's spectrum and visa-versa, giving consumers no new options. Even if AT&T were barred from bidding, Feld said any other entrant would only "marginally" increase capacity. "[T]he gap between the biggest companies and the rest of the industry would grow and the competitive world would shrink even more. Consumers would again be the losers,” Feld said.
 
Free Press research director Derek Turner said the announcement shows previous statements by Verizon that it wasn't hoarding capacity to be untrue. The announcement "demonstrates that Verizon has in fact warehoused spectrum," Turner said.
 
On April 20, Verizon responded to its critics saying, "We are responsible and efficient owners of the spectrum, and as a company policy we would not hoard the spectrum," he said. The spectrum Verizon seeks to buy from cable companies is very efficient from an "overbuild perspective" on the capacity of the Verizon Wireless LTE platform, particularly in the East, Shammo said. That means the lower 700 MHz A and B licenses do not "fit as nicely into our spectrum holdings as it may for others... so we think it is the prudent thing to do to sell these licenses off to the rest of the industry for the benefit of their customers and to enhance their ability to build out 4G LTE," he said. Shammo added, "We did not just wake up yesterday and decide we were going to sell spectrum because we ran into a roadblock at the FCC." Verizon is "still very confident" that the AWS deals will receive approval from the FCC and Department of Justice, he said. The auction of the 700 MHz A and B blocks is contingent on the approval of the AWS spectrum sale "because obviously, we would need this spectrum if that is not approved," Shammo said.
 
This debate is far from settled. The Benton Foundation will continue to track developments in spectrum and wireless -- and we’ll see you in the Headlines.