Category Archives: Information Economics

Spectrum reform in our lifetime?

Last week the Senate Commerce Committee passed–with deep bi-partisan support–the Public Safety Spectrum and Wireless Innovation Act. The bill, co-sponsored by Committee Chairman Jay Rockefeller and Ranking Member Kay Bailey Hutchison, is a comprehensive effort to resolve several long-standing stalemates and impending crises having to do with one of the most critical 21st century resources:  radio spectrum.

My analysis of the bill appears today on CNET.  See “Spectrum reform, public safety network move forward in Senate.”

The proposed legislation is impressive in scope; it offers new and in some cases novel solutions to more than half-a-dozen spectrum-related problems, including:

1.  Voluntary incentive auctions – The bill authorizes the FCC to coordinate “voluntary incentive auctions”  (VIA) of under-utilized spectrum from over-the-air TV broadcasters to better uses, including mobile broadband.  Broadcasters giving up some or all of their licensed spectrum would share the proceeds with the government.  The FCC has been asking for this authority for two years.

2.  Public safety network – The bill would break the logjam over the long-desired nationwide interoperable public safety network.  It would create a new non-profit public-private partnership to build the network, with an outright grant of the D-block of 700 Mhz. spectrum.  (That block, freed up as part of the 2009 transition to digital TV, has sat idle since a failed auction in 2008.)  Financing for the build-out would come from proceeds of the VIAs.  The public safety network has been in limbo since it was first proposed soon after 9/11.  (The proposed bill is S. 911.)

3.  Spectrum inventory – The FCC would be required to complete a comprehensive inventory of existing licenses (which, amazingly, doesn’t exist) within 180 days.  President Obama ordered the agency to complete the inventory over a year ago, but so far only a “baseline” inventory has been created.

4.  Secondary markets – The FCC would be required to begin a rulemaking to review current limits to secondary spectrum markets that interfere with liquidity, in the hopes of making them more robust.  (VIAs could take years to organize and conduct.)

5.  Public spectrum – The National Telecommunications and Information Administration would be required to identify significant blocks of underutilized federal spectrum allocations and make them available for auction by the FCC.

6.  Spectrum innovation – The National Science Foundation and other grant-making agencies would be required to accelerate research grants for new technologies that would make spectrum use more efficient.

7.  Repacking – While the FCC can’t require broadcasters to participate in VIAs, it can force them to move to nearby channels if doing so would free up more valuable blocks of spectrum for auction.  A fund would be created to compensate stations for the disruption of switching channels.

The range of issues that S.911 deals with suggests the breadth of the current spectrum crisis.  Here it is in a nutshell.  Radio frequencies are a limited public resource.  Up until recently, however, there’s been more than enough to go around.  Following the advice of Nobel prizewinning economist Ronald A. Coase, the FCC has used auctions to find the best and highest use for this resource, generating significant revenue in the process.

But the digital age has changed the dynamics of spectrum.  Mobile uses are exploding, as are mobile devices, mobile applications, mobile users and mobile everything else.  Moore’s Law is rapidly overtaking FCC law once again.  Existing wireless networks are groaning under the strain of volume that has increased 8000% since the launch of the iPhone.

Last year’s National Broadband Plan, for example, predicted that 300 Mhz. of additional spectrum would need to be found to keep mobile broadband on track.

But the government’s current processes of finding and allocating more spectrum are simply too slow to keep pace with the current wave of technological innovation.  It will get worse as 3G moves to 4G and from there–well, who knows?  All we can safely predict is that the “G”s will keep coming, and arrive faster all the time.  So radical re-thinking of spectrum management is urgent.  We need serious spectrum policy reform, and we need it yesterday.

Part of the solution will come from technology itself, including innovation to make more efficient use of existing allocations, expanding the range of usable spectrum for more uses, capabilities to dynamically share spectrum and rebalance loads, and so on.  There are impressive developments in these and other strategies for coping with the potential of spectrum exhaustion, but no one can say with confidence that the solutions will outpace the problems.

The bigger issue underlying spectrum exhaustion is the glacial pace with which current regulatory systems work to rebalance allocations.

Once a license is granted, the licensee can largely rely on keeping it indefinitely.  If they operate in a stable or shrinking market (such as over-the-air broadcast, which the Consumer Electronics Association said recently has shrunk to only 8% of U.S. households), there’s no incentive to optimize the property, which, for the licensee, is a sunk cost.

Given the limits of secondary markets, there’s also little  incentive to find more efficient uses of the allocation and free up spectrum that is no longer needed for its licensed purpose.  Indeed, even for operators who want to exit the market in part or in whole, use limitations on existing allocations make transfer through secondary markets cumbersome if not impossible.

Even if the FCC unblocks these markets, game theory problems may constrain the effectiveness of either the VIAs or the secondary markets.

Federal users, of course, feel no competitive threat to optimize their allocations, and fall back to the conversation-ending “national defense” excuse whenever the possibility emerges of giving up some of the frequencies they are warehousing.

And then there are state and local authorities, who also share jurisdiction over communications.  Limits on cell tower construction, use, and other technical improvements aren’t addressed in the proposed legislation.  But they are equally to blame for the crisis mentality.

S. 911 is a good start toward removing some of the institutional barriers that limit our flexibility in rebalancing spectrum needs and spectrum allocations.  But it’s only a start.  If the information revolution is to continue uninterrupted, we need a lot more improvements.

And soon.

Updates to the Media Page

We’ve added about a dozen new posts to the Media Page on my website, reflecting a sampling of articles, media quotes, and radio appearances from the last few months. These include several pieces for CNET News.com and Forbes, as well as links to appearances on NPR’s “Science Friday” (debating Sen. Al Franken on privacy law) and “Marketplace.”

I continue to be called on to help business leaders understand the confusing and dangerous new interest that national, state and local governments are taking in the “management” of the digital economy. I’ve been speaking most recently about Apple’s iPhone privacy flap (which turned out to have nothing to do with privacy), the AT&T/T-Mobile merger, and pending legislation in Congress aimed at curbing online piracy of movies and trademarked goods, the so-called “Protect IP” Act.

Next week, I’ll be making my tenth visit this year to Washington to meet with Congressional staffers and other policy makers to discuss these and other worrisome developments. Increasingly, my role seems to be as an unofficial representative of Silicon Valley helping regulators see the potential damage to innovation from ill-considered laws.

Of course I continue my long-standing work with companies working to introduce new products and services that exploit digital technology. The introduction of “killer apps” only gets faster with time, and more than ten years since the publication of my first book, I’m deeply flattered to hear from entrepreneurs who tell me the book still works as a manual for success in the digital age.

For AT&T/T-Mobile merger, Sprint throws in regulatory kitchen sink

For CNET this morning, I write about the latest tempest in the AT&T/T-Mobile USA merger teapot: cellular backhaul or “special access” as its known in the industry.

Like a child sitting on Santa’s lap at the mall, Sprint CEO Dan Hesse included backhaul in his wish list of conditions he’d like to see attached to the deal. Yesterday, Public Knowledge duly confirmed that yes, backhaul is a “multiplier” problem for the deal.

(Sprint says they would like the deal blocked, but that is mere posturing. What they really want is to use the FCC’s bloated and unprincipled merger review process to sneak in as many private concessions for themselves as they can get. And who can blame them for trying? More on that in a moment.)

For those who don’t know, backhaul is the process of moving cellular traffic (voice and data) to other high-speed networks (traditionally landline copper but now including cable, fiber, microwave and local Ethernet) to transport them to their ultimate destination. As mobile use increases, of course, the necessity of reliable, high-speed backhaul to keep overall performance up becomes more critical than ever.

Let’s work backwards:

1. The merger has no impact whatsoever on backhaul. PK’s Harold Feld told The Hill that “One measure of just and reasonable is comparing similarly situated customers. So AT&T has to at least be reasonably consistent in pricing. That means T-Mobile benefits to some degree from any pricing concessions that Sprint can negotiate, and vice versa. And if AT&T is too unreasonable to either one, or both, having two similarly situated companies complain to the FCC and produce evidence that AT&T is being unreasonable makes a stronger case than having just one company.”

Except that T-Mobile is not a customer. T-Mobile, like Sprint’s own subsidiary Clearwire, does not buy backhaul from AT&T or Verizon or any other landline infrastructure provider, relying instead on alternate backhaul technologies including microwave and Ethernet. T-Mobile doesn’t sell backhaul, and it doesn’t buy it from landline providers. So whatever part of the backhaul market AT&T holds today will be exactly the same the day after the merger. All Sprint loses is another company who could theoretically join it in complaining about AT&T’s rates to the FCC–except that T-Mobile doesn’t care about AT&T’s rates, because T-Mobile doesn’t buy from AT&T.

2. Sprint has only itself to blame if it’s too reliant on others for backhaul – The backhaul market, like many aspects of the communications industry (e.g., peering arrangements), is notoriously secret. No one really knows who is paying how much to whom for what–and those that do know are prohibited from disclosing.

But we do know that landline and cable companies have been investing billions over the last decade to upgrade, update, and extent their infrastructure. And we know that Sprint has not made a similar investment in landline infrastructure, putting its money in its wireless network. Which means that Sprint has known all along that it would remain reliant on its competitors for backhaul. The company made a strategic choice to lease rather than to build, knowing that while the FCC no longer regulates backhaul rates, the agency is there to keep prices in check. The merger doesn’t change that reality one iota.

Sprint says it pays “very very high” prices for backhaul from AT&T and Verizon, and that the backhaul business is exceptionally profitable. That sounds like a great opportunity, if it’s true, for someone else to enter the market. And indeed, dozens of companies large (Comcast) and small (local Ethernet) have entered the market. (Comcast projects $1 billion in its backhaul revenue in the near future.) Just not Sprint. Why should the FCC bail them out of what may have been a series of bad business decisions?

3. The real problem is merger review – As the two Republican FCC Commissioners said at the time of the Comcast-NBC Universal merger and its 200 pages of largely unrelated conditions, the FCC’s “regulation by merger” habit has grown life-threatening for the industries it regulates. Despite having nothing to do with the merger, and despite pure rent-seeking by Sprint to cut its backhaul costs in the name of antitrust, it seems possible that–sure, why not?–backhaul rate regulation concessions will be added to what will surely be the mother of all condition lists. (For AT&T, not Verizon or anyone else–at least not until their next merger review)

That is, when the FCC finally gets around to approving the deal. (The agency maintains a 180-day review deadline, but also grants itself the power to stop the clock anytime it likes. That’s how XM-Sirius took sixteen months, for example.)

The dangers of regulation by merger condition are obvious and getting worse. The merged entity is often crippled in its ability to operate for years after the merger, with each condition overseen by the FCC (and/or DOJ and/or FTC). Different companies offering similar products and services live by different sets of regulations, some of which exceed what the agencies could have legally done had they simply regulated everyone under their Congressional powers. The net result does nothing to improve competition in the relevant market. Quite the opposite.

Inviting competitors like Sprint to add to the list of unrelated conditions its Christmas list of kickbacks, sweetheart deals, tribute and plenary indulgences only makes a bad problem worse. Looking beyond the AT&T/T-Mobile merger, Sprint of all companies should know that…and know better.

What the Protect IP Act says about the current state of the Internet content wars

I’ve written two articles on the Protect IP Act of 2011, introduced last week by Sen. Leahy (D-Vt.).

For CNET, I look at some of the key differences, better and worse, between Protect IP and its predecessor last year, known as COICA.

On Forbes this morning, I have a long meditation on what Protect IP says about the current state of the Internet content wars.  Copyright, patent, and trademark are under siege from digital technology, and for now at least are clearly losing the arms race.

The new bill isn’t exactly the nuclear option in the fight between the media industries and everyone else, but it does signal increased desperation.

I’m not exactly a non-combatant here.  Increasingly, everyone is being dragged into this fight, including search engines, ISPs, advertisers, financial transaction processors, and, in Protect IP is passed, anyone who uses a hyperlink.

But as someone who earns his living from information exchanges–what the law anachronistically calls “intellectual property”–I’m not exactly an anarchist either (or as one recent commenter on CNET called me, a complete anarchist!).

The development of an information economy will stabilize and mature at some point, and, I believe, the new supply chain will be richer, more profitable, and give a greater share of the value than the current one does to those who actually create new content.  (Most of the cost of information products and services today is eaten up by middlemen, media, and distribution.)

But it’s not an especially smooth or predictable trajectory.  Joseph Schumpeter didn’t call it creative destruction for nothing.

 

FCC's Data Roaming Order: Trouble, Right here…

For Forbes.com this morning, I take a close look at last month’s controversial FCC order requiring facilities-based wireless carriers to negotiate data roaming agreements with other carriers.

There are business, technical, and legal reasons why the order stands on unsteady ground, which the article looks at in detail.

The order, by encouraging artificial competition in nationwide mobile broadband, could also undermine arguments against AT&T’s merger with T-Mobile USA.

How so?  If every regional, local, or rural carrier can offer their customers access to the nationwide coverage of Verizon, AT&T, or Sprint, on terms overseen for “commercial reasonableness” by the FCC, what’s the risk of combining AT&T and T-Mobile’s infrastructure.  Indeed, doing so would create stronger nationwide 3G and 4G networks for other carriers to use.  It’s actually pro-competitive, and a pragmatic solution to spectrum exhaustion.

The bigger question is why the FCC seems so determined to get into the business of regulating the Internet economy, when Congress has so clearly and consistently told them to stay out of it.

(The results of that wise foresight speak for themselves:  compare the health of digital life to the health of, say, wireline telephone and over-the-air TV broadcasters, which the FCC has long-regulated to within an inch of their lives, or less.)

With its historic client base rapidly disappearing, the FCC, like any good business, is looking for new markets and new clients.  But like Harold Hill, the flim-flam artist featured in Meredith Wilson’s classic “The Music Man,” it doesn’t know the territory.

Shut out of market for digital regulation by Congress (underscored repeatedly by the courts), the agency has no expertise in dealing with the business or technical dynamics of the Internet.  To paraphrase Wilson, the market is looking for mandolin picks, but the FCC keeps selling big trombones.

The result is trouble, my friends.  Right here.

The iPhone flap and the anatomy of a privacy panic

I’ve written a long article this morning for CNET (See “Privacy panic debate:  Whose data is it?”) on the discovery of the iPhone location tracking file and the utterly predictable panic response that followed.  Its life-cycle follows precisely the crisis model Adam Thierer has so frequently and eloquently traced, most recently at the Technology Liberation Front.

In particular, the CNET article takes a close and serious look at Richard Thaler’s column in Saturday’s New York Times, “Show us the data.  (It’s ours, after all.)” Thaler uses the iPhone scare as occassion to propose a regulatory fix to the “problem” of users being unable to access in “computer-friendly form” copies of the information “collected on” them by merchants. 

That information, Thaler assumes, is a discreet kind of property and must, since it refers to customer behavior, be the sole property of the customer, “lent” to the merchant and reclaimable at any time.

Information can certainly be treated as if it were property, and often is under law.  Personally, I don’t find the property metaphor to be the most useful in dealing with intangibles, but if you’re going to go there you need to understand the economics of how information behaves in ways very different to physical property.  (See my chapter on the subject in “The Next Digital Decade.”)

Thaler’s “proposed rule” is wrong on the facts (he doesn’t seem to know how cell phone bills really look, and he certainly doesn’t understand how supermarket club cards operate–and these are his leading examples of the “problem”), wrong on the law, and even wrong on the business and economics.  (Other than that, it’s a pretty good article!)

This kind of intellectual frivolity is par for the course with many academic economists.  Thaler is at the University of Chicago’s business school, and describes himself as an economist and behavioral scientist.  That means instead of throwing around calculus all day, he devises toy experiments with a few subjects–or reads the findings of other behavioral scientists who have done the same.

Not only is the article bad privacy policy, it’s bad economics.  The latter is certainly the more serious concern.  Nearly 70 years after Ronald Coase called on economists to put down the pencil and paper methods and do actual empirical research in how markets actually work, the profession has if anything become more insular.  There are exceptions, of course, but they stand out in a field of mediocrity.

Which is too bad.  We need good economists now, more than ever.