Freedom Line Blog

From economist Thomas Hazlett, in an insightful admonition against crony capitalist government intervention into the telecommunications market entitled “The U.S. May Repeat Mexico’s Wireless Spectrum Mistake” in today’s Wall Street Journal,  offers this little gem and tribute to the positive payoff of America’s comparatively pro-market deregulatory approach:

Meanwhile, 5G networks are spreading more rapidly in the U.S. than in any other nation, with 49% coverage in October 2021.  (China was at 20% that month.)  This rollout benefits from recent U.S. auctions for flexible-use spectrum rights, infusing networks with new capacity that lowers costs and spurs rivalry.  Further liberalization should continue.  Regulators haven’t been able to divert frequencies to selected business models to increase competition.  U.S. policy makers should avoid trying.”

CFIF has long advocated auction of over-the-air television stations’ airwaves – or spectrum – by the Federal Communications Commission (FCC), which offers a critical free-market opportunity for the wireless telecommunications industry to avoid looming network congestion issues.  It’s one of those rare potential win/win opportunities as Americans increasingly rely on mobile devices, and it constitutes the core mission of what the FCC should rightfully be doing with its resources.

While strongly favoring spectrum auction, however, we’ve also consistently opposed crony capitalist efforts to game the system and corrupt this promising opportunity.  Just last week, for example, we highlighted our distaste for Dish Network’s scheme to exploit “small business” discounts for its own benefit.

Unfortunately, we may be witnessing another attempt at exploitation of the spectrum auction process.  Namely, television broadcasters offering spectrum in the upcoming incentive auction may possess the ability to sell it twice, as reported by Broadcasting & Cable’s Washington Bureau Chief John Eggerton:

According to a source familiar with their thinking, some ‘major’ broadcasters are looking at putting spectrum in the pot and, if they win, taking advantage of tax laws to keep that money in escrow and use more cash, or a loan, to bid on some of that reclaimed broadcast spectrum in the forward auction – they would need to use other money since reverse payments won’t be available until both sides of the auction close.  They could then sell or lease the spectrum to wireless carriers hungry for it.”

What would make such attempts particularly galling is that the broadcasters originally received that spectrum free of charge, so they’d be selling twice something they didn’t pay for even once.

FCC auction of spectrum for more productive use is to be applauded, and was a long time in coming.  But please, let’s keep it free of attempts at unjust enrichment via exploitation of byzantine regulatory mechanisms.

Softbank CEO Masayoshi Son came to Washington a week ago to discuss “the state of America’s wireless communications industry and the competitive global landscape.”  Despite being Chairman of one of the top wireless companies in America, Sprint, Mr. Son spent the majority of his speech at the U.S. Chamber of Commerce explaining why he believes the U.S. telecom market falls short.  The data we’re looking at, however, tells a far different story.

As an initial matter, peak mobile speed in the U.S. actually doubled from 7.5 to 15 megabits per second between 2012 and 2013, despite the fact that the U.S. is the clear leader in LTE connections.  We make up 50% of the world’s LTE connections, while only constituting 5% of the world’s overall wireless connections.

That data stands in stark contrast to Mr. Son’s claim about lagging LTE speeds in the U.S., particularly in comparison to Japan.  His data derived from anecdotal evidence from mobile users who voluntarily download an app from OpenSignal to track data signal strength.  If he wants to trust that methodology, however, Mr. Son should consider another OpenSignal study claiming Japan had one of the slowest LTE experiences.

Moreover, American consumers  reap the benefits of faster connections for education, health and entertainment at a lower price point.  Americans use their mobile devices significantly more than their European counterparts, with five times more voice minutes and twice as much data.  Despite that, in terms of data alone, the price per MB has fallen more than 93% in the past five years.  That is also reflected in the broadband space, where the U.S. maintains the lowest entry-level price of any OECD country, and that price continues to drop as measured on a per-MB basis.

Most significantly, the U.S. telecom industry has achieved those gains with comparatively fewer burdensome regulations.  Unfortunately, the US company in which Mr. Son now has a significant ownership stake, Sprint, seeks to exploit government intervention and corporate welfare to prop it up against its competitors.  Despite its status as the “king of spectrum,” Sprint wants the Federal Communications Commission (FCC) to set rules for the incentive auction that would artificially favor Sprint and T-Mobile while limiting the ability of AT&T and Verizon to freely bid on coveted spectrum just as a spectrum crunch looms.  Additionally, despite using spectrum in the 2.5 band for its “enhanced” LTE network, Sprint doesn’t want the FCC to count all of its 2.5 spectrum in the spectrum screen.  Keep in mind that the standard for inclusion is suitable and available for mobile broadband use.

In the end, Mr. Son is right:  America’s wireless market is not Japan’s.  Not only are Americans enjoying faster speeds at lower prices, our wireless companies are achieving that by competing in our comparatively free market.  That’s how America’s wireless market was built in the first instance, and that’s the model it should keep in order to continue our global leadership position.

This week’s CFIF TechNotes – happy Thanksgiving week, and enjoy!

(1)  At Wireless Week, Representative Greg Walden (R – Oregon) warns the Federal Communications Commission (FCC) against spectrum caps in upcoming auctions:

Walden and other Republicans are warning the FCC not to pick winners and losers in the auction and to allow as much participation as possible.  ‘I don’t think it’s fair to take perhaps some of the biggest bidders out of the process in the beginning,’ Walden said.  ‘Remember, part of the requirement here is to generate maximum revenues for the taxpayers.'”

(2) From Reuters, T-Mobile eyes an airwaves purchase from Verizon Wireless, according to sources:

T-Mobile US is looking to buy wireless airwaves from larger rival Verizon Wireless to bolster its mobile network capacity for data services, a source familiar with the matter said on Tuesday.  While T-Mobile has approached Verizon about buying the spectrum, the process is still in the early stages, according to the source, who asked not to be named. The source was not authorized to discuss the matter.  T-Mobile, the No. 4 U.S. mobile service provider, might have to pay as much as $3 billion for the airwaves, which are not being used by Verizon, according to one analyst estimate.  The airwaves would give T-Mobile additional network capacity to help it catch up with its bigger rivals in delivering high-speed wireless services.”

(3) From The New York Times, FCC Chairman Tom Wheeler calls for transforming the technology used by phone systems:

Americans could soon be one step closer to getting that videophone they were promised in the 1960s.  The chairman of the Federal Communications Commission said on Tuesday that the agency would begin ‘a diverse set of experiments’ next year that would begin to move the nation’s telephone system from its century-old network of circuits, switches and copper wires to one that transmits phone calls in a manner similar to that used for Internet data.  The Internet-based systems allow more information to be transmitted at one time, making possible the addition of video to phone calls, as employed by services like Skype and Vonage.  While consumers can already use those services, most of the legacy telephone networks still use analog technology, employing an out-of-date system of physical switches that is expensive to keep operating.”

(4) From The Wall Street Journal, “FCC to Begin Acting on Phone-Network Upgrade”:

AT&T and other legacy phone providers have been looking to retire the old networks in favor of new, IP-based phone systems that are often delivered by broadband, both wired and wireless.  But it has been unclear how many of those old rules would be applied to the new networks, in part because the FCC previously decided against classifying broadband Internet as a telecom service, which would subject it to greater regulatory oversight.  ‘Our current infrastructure has served us well for almost a century but it no longer meets the needs of America’s consumers.  The transition to broadband and IP services that has already begun is driven by consumers who are moving to the Internet and choosing to connect in ways not imagined just a decade ago,’ AT&T’s Jim Cicconi said in a response published online.  The transition to IP technology has yielded many benefits, such as greater speed and capabilities.”

(5)  And from Broadcasting & Cable, even Senator Charles Schumer (D – New York) has urged the FCC to refrain from attempting to adopt incentive auction rules that would limit the participation of any wireless carriers:

‘It is the responsibility of the Commission to structure the auction so that broadcasters will realize substantial benefit for choosing to put spectrum up for auction, broadcasters who will have to move to new channel assignments can be adequately compensated, and so that the auctions can generate maximum revenue in order to adequately fund FirstNet,’ Schumer wrote in a letter to FCC Chairman Tom Wheeler.”

Last week, the Federal Communications Commission (FCC) approved a pair of sequential purchases:  (1)  Sprint’s purchase of the remainder of Clearwire’s spectrum, and (2)  the Japanese company SoftBank’s purchase of Sprint.  So far, so good.

Here’s the problem.  Those interrelated transactions presented the FCC with a perfect opportunity to reform the so-called “spectrum screen,” a tool that measures spectrum available for wireless use in order to ensure competition in the wireless market.  Unfortunately, the FCC failed to make any reform whatsoever to that spectrum screen framework, which will only serve to create even more regulatory uncertainty and discourage critical wireless infrastructure investment.

The screen framework has been, and can continue to be, a useful tool for assessing competitive effects of spectrum.  But until that framework is brought up-to-date to reflect all spectrum available and useable for mobile wireless services, the tool remains outmoded and flawed, effectively artificially picking winners and losers.

With the FCC’s inaction last week, a 2008 decision (the last time the FCC visited the spectrum screen issue) continues to guide spectrum aggregation policy.  In that decision, the FCC chose to ignore the bulk of Clearwire’s 2.5 GHz spectrum, counting only 55.5 MHz of it toward the screen.  By not revisiting the spectrum screen when it green-lighted last week’s transactions, the FCC continued to discount a large portion of spectrum available for wireless use.  It’s difficult to understand their rationale.

Sprint continues to advocate for its own interests, insisting that only one-third of its Clearwire spectrum should be included in the spectrum screen.  Sprint bought the remainder of Clearwire’s spectrum to pave the way for the SoftBank deal, to leverage the value of Clearwire’s network and to optimize Clearwire’s spectrum.  So while the FCC chooses not to tally all of Clearwire’s available BRS/EBS spectrum, SoftBank gained rights to the 2.5 GHz band.   In contrast, when AT&T previously acquired WCS licenses at 2.3 GHz, the FCC found that the spectrum was usable for mobile wireless services and made changes to the screen.

Curiously, the FCC’s order last week maintained that the three-way deal was not the appropriate vehicle for reviewing the spectrum screen because, from the Commission’s point of view, no spectrum was being swapped.  SoftBank, however, owns no U.S. airwaves.  Moreover, the FCC had previously ascribed Clearwire’s spectrum to Sprint.  Thus, the FCC oddly seems to believe that such an exchange of spectrum is not a transfer.

The FCC’s position not to adjust the spectrum screen in the recent transfer of spectrum to a Japanese owned company is disturbing, especially given that it is currently considering imposing—on an ad hoc basis—a spectrum screen on America’s two largest domestic wireless companies in the upcoming spectrum auction.

The spectrum screen, used properly and applied in a competitively neutral manner, can be a useful tool to protect competition in the wireless marketplace.  But the FCC should stop trying to exploit it to pick “winners and losers” in the marketplace.  Instead, the FCC should update its existing screen to ensure that it incorporates all available spectrum suitable for mobile wireless services.  Only then will it provide the market with the business certainty necessary to advance further infrastructure investment and wireless innovation.

In a letter delivered on Friday, a coalition of 14 free market organizations, including the Center for Individual Freedom (“CFIF”), urged the Federal Communications Commission (“FCC”) to approve a private deal between Verizon and cable companies that will free currently unused spectrum to help alleviate the growing “spectrum crunch” that many wireless consumers – particularly those in densely populated areas of the country – are already feeling.

The letter, which was organized by ATR’s Digital Liberty, reads in part:

Demand for wireless broadband is more than doubling annually, but vast swaths of valuable spectrum – the lifeblood of mobile communications – remain unavailable to wireless carriers. Consumers in densely populated urban areas are already suffering from inadequate wireless capacity. While meeting this robust demand will require wireless carriers to adopt an ‘all-of-the-above’ approach, increasing spectrum availability is unquestionably the most fundamental and cost-effective means to meet wireless demand.

Unfortunately, spectrum auctions that will enable wireless carriers to bid on additional spectrum remain years away. Verizon Wireless’s proposed transfer presents a rare and crucial opportunity to deploy currently unused spectrum for wireless broadband. The spectrum at issue is ideally situated in the 1700/2100 MHz AWS bands, covering over 80 percent of the U.S. population (259 million POPs). Consumers will see substantial net benefits from expanded coverage enabled by additional spectrum, especially compared to more costly and time-consuming undertakings such as cell splitting.

With demand for wireless broadband more than doubling annually, the FCC’s own estimates predict that demand for wireless spectrum will exceed supply in 2013.  Yet Obama’s FCC has done little if anything at all to make additional and much-needed spectrum available to wireless network operators. 

In fact, under the Obama Administration the FCC has worked to delay and outright block private-sector deals to alleviate the growing spectrum crunch.  Last year, the FCC took unprecedented steps to block the then-pending AT&T-T-Mobile merger, going so far as to publicly release a biased draft staff report in opposition to the merger that the commissioners themselves never approved and quite  possibly didn’t even read.  Had that merger been approved, AT&T was promising to deploy high-speed mobile broadband to 95 percent of all Americans.  And the FCC has been over-scrutinizing and slow-walking approval of the Verizon-SpectrumCo deal since December.

Read the full coalition letter to the FCC here.

When it comes to highlighting federal inanity, Holman Jenkins hits a home run with his take in a Wall Street Journal article on the current FCC’s bureaucratic approach to the wireless industry.

As Jenkins describes the situation, “Like food rotting on a dock, only politics and policy prevents spectrum from getting where it’s needed.”

Jenkins goes on to articulate the point by aptly noting that wireless companies are “being starved of spectrum [their] customers would willingly pay for because of an archaic government allocation system in which economic logic does not penetrate.”

So why care?  Primarily because the wireless industry’s massive investment involved in developing spectrum for the public’s use is one of the few unmitigated bright spots in the US economy. Wireless carriers delivered approximately $27 billion in investment in U.S. mobile networks last year alone.  And continued wireless investment holds the potential to revolutionize our nation’s educational system, healthcare and so much more.

In employment terms, a Deloitte study last fall pegged 4G wireless investment as creating between 371,000 and 771,000 new jobs.  That includes the teams that deploy new cell towers, engineers and software developers, among others.

But the government’s dithering threatens to sideline billions in new investment that would otherwise be pumped into the economy and drive these benefits for consumers.

What’s especially ironic about the delays is that Obama’s FCC Chairman Julius Genachowski has repeatedly sounded the alarm about the “looming spectrum crisis” that threatens “continued innovation in broadband wireless.”  Similar acknowledgements continually have been made directly from the White House.  Yet, when it comes to spectrum policy, the FCC and the Obama Administration have been driven by politics and ideology instead of sound economics and logic — a mindset that not only exacerbates the spectrum problem, but threatens (if not stops cold) private investment to deal with the problem.

Indeed, when wireless providers seek to overcome government obstacles to spectrum and move to address the crunch on their respective networks, they are met with hostility.  Jenkins points to the two obvious examples:

To meet demand of its customers for more and more bandwidth, AT&T laid out $39 billion for T-Mobile, a retreating, second-rank player, only to have the proposal nixed by Washington after many months of torture.

Verizon has been undergoing months of torture over its proposal to buy, for $3.9 billion, several blocks of spectrum sitting idle in the hands of cable TV companies.

That, coupled with the FCC’s counterproductive obsession with putting use conditions on auctioned spectrum to the point of rendering it less desirable or frankly, economically unfeasible, is only making the spectrum problem worse.

Everyone, including the FCC and the Obama Administration, agrees that the spectrum crunch must be resolved… and fast.  “The solution,” as Jenkins points out, “is to permit any spectrum that’s immediately deployable to be immediately deployed by those who can make use of it.”  And it must be deployed without burdensome government conditions and discriminatory bidder qualifications to ensure its most efficient use.

In other words, the FCC and Obama Administration must set aside politics and ideology, stop trying to pick winners and losers in an effort to shape some utopian vision of perfect competition in an already ultra-competitive market and allocate more spectrum for consumer use… now.

Just months ago, T-Mobile became another unjustified casualty of the arbitrary and capricious Federal Communications Commission (FCC).  It was bad enough that the FCC curiously opposed T-Mobile’s proposed merger with AT&T, which would have upgraded wireless service for tens of millions of American consumers and created thousands of new jobs.  Compounding that injustice, however, the FCC committed the unprecedented transgression of releasing a confidential staff report that inaccurately maligned the proposed merger’s justifications.

Sadly, T-Mobile now seeks to employ that same FCC as a bureaucratic bludgeon to cripple a market competitor, by asking it to block a private spectrum purchase by Verizon Wireless.   Whereas T-Mobile announced a few months ago that, “The U.S. wireless industry will remain fiercely competitive”  by allowing acquisition of 50 MHz of T-Mobile’s spectrum as part of the AT&T deal, it now claims that Verizon’s proposed acquisition of 20 MHz of unused spectrum will somehow “unduly tip the scales” in Verizon’s favor.  Moreover, T-Mobile itself seeks to acquire 20 MHz of spectrum, which it claims is in the public interest and “seeks only to assign spectrum licenses and no other assets.”

CFIF supported T-Mobile’s right to enter into a bargained-for exchange between private parties during its proposed merger with AT&T, which the FCC and Obama Justice Department improperly blocked.  But by the same token, it should not turn around and attempt to interfere with other parties’ market transactions.  T-Mobile is a subsidiary of Deutsche Telecom, the world’s fourth-largest telecommunications company, which itself is partly owned by the German government.  So it’s not exactly David fighting Goliath, unable to contend in the marketplace without exploiting the FCC as some sort of protective big brother.

Verizon Wireless merely seeks to purchase unused spectrum, which will bring desperately-needed wireless service improvements for U.S. consumers.  That’s none of T-Mobile’s business, and the FCC is not some sort of instrument to be used as a competitive weapon.

With the unemployment rate holding steady above 8% for over three long years now, it’s obvious that the United States must pursue policies that spur rather than retard job creation and economic growth.  One continuing economic bright spot already exists in the telecommunications sector, where several prospects for generating new jobs exist.  Unfortunately, federal bureaucrats continue to obstruct those prospects.  The leading current example is spectrum and, specifically, Big Labor special interests pressuring the Federal Communications Commission (FCC) to block telecom companies from buying unused wireless broadband.  That pressure only serves to obstruct economic recovery, because more access to spectrum for service providers would mean greater incentive to invest, and in turn more business opportunities that would raise revenue and create jobs.

For example, a recent study by NDN found that from April 2007 to June 2011, broadband companies created some 1,585,000 new jobs in their transition from 2G to 3G wireless technologies and Internet infrastructure.  NDN also noted that “the investments being undertaken today to upgrade wireless network and Internet technologies from 3G to 4G hold comparable promise for job creation.”  Similarly, a Deloitte study from last year agreed with NDN’s assertion, estimating that U.S. investment in 4G networks could generate anywhere from $25 to $53 billion in economic revenue between 2012 and 2016.  Furthermore, according to their study, these investments could produce between 371,000 and 771,000 new jobs and account for $73 billion to $151 billion in GDP growth.

Unfortunately, union bosses oppose spectrum transactions in favor of their own self-interest.  For instance, in comments filed with the FCC, the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers (IBEW) falsely claimed that the transaction “agreements would appear to limit the availability of competitive services, dividing up geographic service areas for particular companies, leading to reduced investment in infrastructure, job losses, and ultimately, higher prices for consumers.”  As noted above, however, independent studies refute their allegation and attest to the economic and job benefits of allowing spectrum to be sold to companies that will apply it toward better customer service.  The spectrum sale will not only boost the economy and create jobs, but also benefit consumers by alleviating the oncoming spectrum crunch.   Greater access to spectrum will also create additional incentive to invest more toward innovation, which in turn means new devices, applications and services.  Providers will be able to upgrade their networks to a 4G LTE that has further geographic reach, faster downloads and greater capacity.

If the FCC continues to obstruct the sale , however, the quality of Internet service and our economy more generally will suffer due to the gradual exhaustion of existing spectrum.  In order to ensure that the domestic telecom sector continues to flourish, spectrum must therefore be made available to those who need it and who have the ability to use it in the most constructive way.   Union leaders should stop playing games that harm actual workers, and the FCC must put an end this obstruction.

For the past three years, those of us who eat, sleep and breathe the principles of limited government and free enterprise have been banging our heads against the wall because of the devastating and rampant overreach of executive departments and agencies in the Obama Administration.

The Environmental Protection Agency (EPA)… the National Labor Relations Board (NLRB)… the Department of Justice (DOJ)… Enough said.

But perhaps there has been no agency more guilty of abusing its power and imposing its regulatory overreach than the Federal Communications Commission (FCC).  After all, it is the FCC that unilaterally – by a 3-2 party-line vote – imposed so-called “Net Neutrality” regulations against a bipartisan majority in Congress, a unanimous federal court of appeals and 2-1 public opinion.  It is the FCC that, despite acknowledging a national spectrum crisis as more and more consumers use smart phones and tablet computers, continually works to block any and all productive efforts to relieve said crisis.

So it was refreshing to read earlier today that AT&T’s CEO Randall Stephenson is calling out the FCC’s overreach, charging that the Commission is “intent on picking winners and losers rather than letting these markets work.” 

For too long the FCC has interfered with the free market, which has created an unlevel playing field that unfairly props up politically-favored companies less likely to invest their own capital in new job-creating and economy-enhancing infrastructure at the expense of others that will. 

And, that’s precisely why Congress must act, not only to refrain from granting the FCC’s request for additional flexibility on spectrum auction authority, but also to tighten the reins on the FCC in order to prevent it from further skewing the wireless market. 

Instead of permitting the FCC to, by definition, pick “winners and losers” in the wireless marketplace by unfairly limiting and excluding certain companies from participating in spectrum auctions, Congress must pass legislation that that will facilitate the proper and fair functioning of spectrum auctions that are open to all willing buyers. 

That the FCC thinks otherwise, coupled with its recent history of abusive regulatory overreach, should spark a long overdue and serious discussion about clearly defining its proper authority once and for all.

While federal bureaucrats dither, the ever-evolving telecom market continues to move at warp speed.  As Holman Jenkins of The Wall Street Journal observed, “The half life of regulatory know-it-allism gets shorter and shorter.”

Under an agreement announced last week to rave reviews, Verizon will pay $3.6 billion for 20 MHz of  unutilized spectrum on which Comcast, Time Warner and Bright House Networks – collectively part of the SpectrumCo joint venture – were sitting.  As part of the agreement, Verizon will also offer cable television services for those entities while they can in turn resell Verizon’s wireless service.  But here’s the takeaway point of it all.  Spectrum is the critical conduit by which wireless technology operates, and this cooperative accord will more promptly make idle spectrum available for consumer use via such cutting-edge devices as tablets and smartphones.  By way of contrast, it would take years under even the rosiest scenarios before Congress and federal regulators got around to making desperately-needed spectrum available for consumer use.

With consumer demand continually placing greater demands upon finite capacity, this deal will increase wireless breathing room.  In so doing, it will thereby ensure better customer service and open more doors to foreseeable and unforeseeable innovations.  It’s a win for consumers, and it once again illustrates the possibilities that markets provide when we allow them to operate more freely and cooperatively.