Fact-Checking the Spectrum Food Fight

Published on February 20, 2013
by Mark Cooper

foofdfightThe FCC has undertaken an important quest to use an incentive auction to repurpose broadcast spectrum for wireless broadband. Some in Washington oppose designating any of the recovered spectrum for unlicensed technologies. They see this process merely as a way to raise money for the U.S. Treasury, rather than focusing on the much larger and more important impact it would have on the national economy — and they believe that designating any of the recovered spectrum for unlicensed technologies, which was explicitly authorized by Congress, would reduce the auction revenue that would flow to the US Treasury. Others support an unlicensed designation and believe that a large unlicensed band will lead to “free” Wi-Fi. Unfortunately, both sides of this battle are wrong.

Those who want to auction every last hertz of spectrum overlook two basic economic facts about unlicensed spectrum:

First, if spectrum is as valuable as mobile carriers claim it is, reducing the amount of spectrum available for auction by dedicating some of it for unlicensed use should drive up the price of the remaining auctioned spectrum. So designating some unlicensed spectrum will not reduce proceeds delivered to the Treasury. Given the inelastic demand for spectrum, the price increase for the spectrum that is auctioned will result in no loss of revenue. Some of the spectrum that is likely to be useful if set aside for unlicensed use is not likely to fetch much of a price at auction (e.g. the “duplex gap”) because it is not suitable for high power 4G (LTE) wireless networks.

Second, unlicensed spectrum is the most valuable part of the wireless broadband product space by a wide margin. It supports half the traffic delivered to consumer smartphones and tablets and is the final link to the consumer for one quarter of all traffic flow delivered to users with fixed, wireline broadband. The massive amount of economic activity in the unlicensed space generates huge economic value, which in turn maximizes large tax revenues for the federal government.

Those who think that more unlicensed spectrum will lead to “free” Wi-Fi also overlook basic economic realities. Even though unlicensed spectrum is very good for consumers and the economy, it is important to recognize that not paying money at auction to gain access to unlicensed spectrum does not mean that it is free to put it to use. Quite the opposite is true. There are real costs involved in moving the exaflood of bits to and from an unlicensed hotspot. There are real costs in building and acquiring the equipment that will receive the data transmissions and to manage an unlicensed wireless network. If you talk about service for hundreds of millions of people in the U.S. and billions globally, one thing is certain — if the cost of building and operating an unlicensed network are not recovered from consumers, the network will not be built or operated.

A substantive debate on spectrum policy is a good thing. The clash of ideas will produce better decisions at the FCC. But let’s all take a deep breath and get our facts straight. A hundred years ago, public policy to allocate spectrum concluded that interference could only be controlled by giving a small number of broadcasters exclusive licenses to operate in specific frequencies. Twenty years ago, the FCC decided to try a radical new approach by allowing anyone to transmit signals into spectrum that had been considered garbage, as long as they adhered to simple technical rules. We now recognize that this radical decision led to modern-day Wi-Fi. The remarkable success of Wi-Fi demonstrates that hotspot operators and consumers will willingly pay hundreds of billions of dollars to build and use the Wi-Fi infrastructure even without the ability to exclude others granted by a license — and they are likely to do the same for the FCC’s more recent innovations related to unlicensed use between TV channels, and new unlicensed designations in the 600 MHz, 3.5 GHz and 5 GHz bands in the future.

Could new, unlicensed designations lead to new competition for cellular wireless broadband service? Maybe, but the important point is that it will be an important input to the wireless broadband space, particularly the Internet of Things that connects hundreds of billions of objects.

There are two extremely important lessons to learned from the remarkable success of unlicensed spectrum.

  • Policy should expand possibilities, not foreclose them.
  • Having dramatically different business models occupy a single product space spurs and maximizes innovation and efficiency.

It would be a huge mistake to try to pick winners and losers by favoring cellular licensed service to the exclusion of unlicensed spectrum.

Mark Cooper is the Director of Research at the Consumer Federation of America and a fellow at the Donald McGannon Center for Communications Research at Fordham University.

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