Thursday, March 15, 2012

Optimal spectrum use for whom? Certainly not the consumer.

In an opinion piece in Fierce Wireless the other day, Anna-Maria Kovacs argued for “ and fully competitive auctions that maximize proceeds and make spectrum available to any wireless carrier...”.

To sell her message of how important it is to allow AT&T and Verizon to further limit competition by amassing larger amounts of spectrum I think she uses a number of faulty assumptions. 

I will call them them:

  • All spectrum is created equal.
  • Competition actually does not work.
  • Auction price is the only benefit to taxpayers

1. All spectrum is NOT created equal.

Anna-Maria points to the fact that “AT&T and Verizon have the lowest amount of spectrum per subscriber in the industry, each at roughly 60 percent of the industry average”. This is true, especially if you count the Clearwire position towards Sprint. However, this measure is more or less irrelevant because it assumes that all spectrum is created equal. It is most definitely not. There are two major issues that comes into play when it comes to the usability of wireless spectrum which Anna-Maria ignores in her piece and both have a huge impact on cost and competition.

First, propagation properties of spectrum varies vastly depending on at what frequency the spectrum is located. Lower-frequency spectrum like the 700Mhz Verizon & AT&T LTE spectrum is great for coverage because the signals can travel far and through obstacles like buildings. This makes it inexpensive to build out coverage quickly because the carrier needs fewer base stations. Higher frequency spectrum like the 2500Mhz spectrum used by Clearwire for WiMAX and LTE is not very good for coverage since the signals won’t travel very far and find it difficult to penetrate buildings. It is however great for building high-capacity networks because it requires tons of base stations resulting in small cells with fewer users, but requires an expensive build-out for carriers.

The other very important aspect of wireless spectrum which has a huge impact on its usability is whether it is in a widely adopted and standardized frequency band. Spectrum in the 850&1900Mhz bands in the US and 900, 1800&2100Mhz bands in the rest of the world are incredibly valuable because almost all network equipment providers (Ericsson, Nokia etc..) have off the shelf gear developed for these bands at much lower costs and handset providers (Apple, Motorola, Nokia, Samsung etc) focus almost exclusively on producing handsets for these bands.

Bottom line, if your spectrum is non-standard high-frequency spectrum, it is worth much less to you and possible users.

If we then look at who controls a vast majority of the relevant spectrum in the US (850&1900Mhz) we find AT&T and Verizon. T-Mobile runs most of its 3/4G network on the 1700Mhz AWS spectrum which from a coverage standpoint is fairly OK, but a disaster from a standards standpoint. Few handset providers have chips in their phones to handle the frequency which raises the cost and limits the choices of would-be customers. The huge 2500Mhz spectrum position owned by Clearwire/Sprint is not great from coverage standpoint and has also had significant problems from a standard standpoint. While the 2500Mhz spectrum exists in markets outside the US (EU etc) and offers the possibility of wide adoption in a few years if a technology called LTE TDD takes off, that is still somewhat of an if.

To summarize. AT&T and Verizon control most of the “good spectrum” in the US.

2. Competition actually DOES  work.

This is probably my favorite part of Anna-Maria Kovac’s piece.

“Even if other national and regional competitors were able to buy spectrum at deep discount in an auction that excludes AT&T and Verizon, they would have little incentive to pass the savings along.”

In my view Anna-Maria describes the incentives of an oligopoly player such as AT&T and Verizon, not necessarily competitive carriers such as Sprint and T-Mobile and others. Although Sprint has been hampered by poor management for a long time and T-Mobile by a weak owner, they have recently shown signs of life and have every incentive to put competitive pressure on AT&T and Verizon.

If we look at auctions where the scenario above has happened either by accident or plan we find examples where competition has been vastly improved. One obvious example is the Swedish 3G license award process. Here, the major incumbent carrier Telia was excluded from the process and as a result (even if it may have not been the stated goal) competition in the Swedish market was improved by the new entrant “3”. This has contributed to significantly lower prices and more choice for the consumers. Similar development has been observed in the UK and Netherlands just to mention a few. To further ease Anna-Marias worries about the lack of incentives for new or competitive carriers to actually utilize the spectrum in a way that benefit the consumers, “3” the new entrant to the Swedish market has now been awarded the “Best Swedish Mobile Broadband Network” award five years in a row. Remember that they started with no network at all when the other carriers already had national networks.

If anything should be learned from the Swedish example, it is that it is in the taxpayers and consumers best interest to make sure there is a level playing field, and at least four national competitive carriers, and strong regulation forcing carriers to use-or-lose spectrum.

3. Auction revenue is a minor part of the benefit to taxpayers.

Auction revenue is a nice windfall for the cash-strapped government and using the goal of paying down the national debt as part of the reason why selecting the highest bidder is best for taxpayers may seem like a good idea to Anna-Maria. To me it makes no sense at all.

First of all, if we are to understand how this works, we need to remember who the taxpayers are. Except for a handful of taxpayers (AT&T, Verizon, T-Mobile.....etc) they are you and me, consumers and businesses who use cell phones and other devices that use the spectrum.

Anna-Maria herself says “Wireless Broadband is essential to economic growth, job creation, and the health, education, and entertainment of individual Americans.”, and I completely agree with her on this point.

My point is that if that is the case, promoting competition, putting conditions on use of spectrum and timely build outs and other regulation from the FCC will benefit the taxpayers and consumers in a way that by far outweighs the lowered auction revenue. The availability of inexpensive and high quality services will only be achieved by fostering a competitive market, not by achieving the maximum auction revenue. 

In fact, if we go back to the Swedish 3G example mentioned above, the countries which had the fastest and most widespread build-out of 3G services were often times the ones with the lowest auction revenue (sometimes there was no auction at all) but instead the licenses came with detailed demands of how much coverage that had to be built by which date.


A combination of good spectrum planning from the FCC, policies to level the playing field and foster competition among carriers as well as a "big picture view" on total taxpayer benefits will radically improve the spectrum use and benefit to consumers in the United States.

After having read Anna-Maria Kovacs opinion piece in Fierce Wireless and her Georgetown reports I am worried that she is more concerned with the well being of AT&T and Verizon profit margins than any taxpayer or consumer benefit.

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