Spectrum Auctions and Smartphones

Next week the Federal Communications Commission (FCC) will make two tough decisions on the rules for next year’s auction of TV spectrum likely to have a huge impact on the affordability of wireless broadband and the future of Wi-Fi. In short, the FCC is deciding how many wireless operators will have the spectrum they need to compete in a broadband data world and also whether Wi-Fi users will have access to these prime frequencies.

While industry interests are closely divided, consumer advocates are pressing the Commission to adopt a balanced policy that favors more competition and more unlicensed spectrum for Wi-Fi over the short-sighted siren song of a bit more auction revenue.

Like real estate, not all frequency bands along the spectrum of useable airwaves are alike. TV spectrum is the ultimate “beachfront” location, since low-band signals penetrate far more deeply into buildings and cover far larger geographic areas for a given amount of investment in equipment.

That is why consumer advocates and high-tech companies, including Google and Microsoft, have been pushing to enrich the Wi-Fi ecosystem with TV-quality unlicensed spectrum. That’s also why second-tier carriers such as T-Mobile and Sprint argue that as customers demand high-quality video calling and streaming, they will be hard-pressed to compete without access to the airwaves that make that feasible and affordable.

First, the commissioners must decide whether to reverse their decision last year to ensure that a portion of the TV spectrum not being auctioned is made available to the public for Wi-Fi and other innovative unlicensed applications. When Congress authorized the FCC to conduct an “incentive auction” that shares auction proceeds with local TV stations willing to sell their licenses, the bipartisan bill struck a compromise. Although most of the unused TV channels currently available for unlicensed use would be auctioned, the conferees intended to designate the guard bands between licensed services to “create a nationwide band of spectrum that can be used for innovative unlicensed applications,” according to the Congressional Record statement of former Rep. Henry Waxman, then the ranking Democrat on the House Commerce Committee.

Last year the FCC adopted this approach and designated the post-auction guard bands for unlicensed public use nationwide. However, recently the FCC’s auction staff determined that it could possibly auction somewhat more spectrum if TV stations could be placed in these guard band channels in a few key markets, such as Los Angeles and Philadelphia, a suggestion the National Association of Broadcasters bitterly opposes. The problem for Wi-Fi and other unlicensed users is that big technology companies have said that unless there is a minimally sufficient amount of unlicensed spectrum available nationwide – and particularly in critical markets like L.A. – they won’t invest in a new generation of Wi-Fi chips that integrate “super Wi-Fi” connectivity into smartphones and tablets.

A second critical decision the FCC will make next week will determine whether the market for smartphone and other mobile data services becomes more competitive or more consolidated. At present only the two largest mobile carriers, AT&T and Verizon, hold licenses for enough TV-quality spectrum to give their customers good signals both inside buildings and in rural areas. The two dominant carriers control nearly three-quarters of the low-band spectrum (defined as being below 1 GHz) and even more on average in the top 30 urban markets.

Last year consumer advocates, including New America’s Open Technology Institute, joined with smaller carriers in proposing that no company should control more than one-third of the low-band spectrum in each market. The Department of Justice’s Antitrust Division also weighed in, filing three separate letters in favor of limiting the concentration of low-band spectrum. DOJ explained that low-band spectrum is a “competitively critical input” and expressed its concern that rules allowing the two dominant carriers to foreclose rivals from obtaining it at auction “may cause harm to competition and consumers.”

The FCC decided on a compromise: Rather than a limit on low-band spectrum holdings, three of the ten blocks of spectrum expected to be auctioned (that is, 30 of the 70 megahertz auctioned) would be set aside in a “reserve” for carriers with less than one-third of the low-band spectrum in a market. This allows AT&T and Verizon to bid on all spectrum in most markets, but would prevent the dominant carriers from acquiring all of the available spectrum in many top markets, such as New York City and Chicago, where they already each hold more than one-third of the beachfront spectrum.

The stakes for consumers are enormous. Despite the Antitrust Division’s admonition that a four-carrier marketplace is vital for healthy competition, a 30 megahertz reserve is a recipe for a three-carrier marketplace, particularly in the big cities.

Here’s why: Since there is an industry consensus that 20 megahertz of low-band spectrum is “table stakes” to be a top-tier carrier in a 4G/LTE world dominated by mobile video, only one of the other two second-tier national carriers (either Sprint or T-Mobile), or perhaps a regional carrier (such as C Spire in the south), can count on the reserve to yield 20 megahertz.

A mobile broadband market with fewer than four quality-of-service carriers means less affordable wireless broadband. AT&T and Verizon will never need to compete on price if their main rivals lack the low-band spectrum necessary to deliver good coverage inside buildings and across rural America. However, if other carriers can match their coverage – and if AT&T and Verizon reduced the price of the average group plan by even $5 to $10 per month – a new study by MIT economist William Lehr estimates this would save consumers on the order of $20 billion annually.

And contrary to AT&T’s claim that a reserve for carriers lacking low-band spectrum amounts to “corporate welfare” for smaller carriers like C Spire, Sprint and T-Mobile, putting 40 megahertz in the reserve will potentially save taxpayers (who are, after all, consumers) tens if not hundreds of billions of dollars in the years ahead. Price competition is far more valuable to the public than a marginally more profitable auction.

Finally, survey data from the Pew Research Center show that young, low-income and minority consumers are far more likely to rely on mobile devices as their exclusive or primary source of Internet access. It’s essential that it remain affordable.

And since the TV-band spectrum auction scheduled for early next year is the last chance to reallocate access to this beachfront spectrum for many years to come, the balance the FCC strikes will have a huge impact on the future availability, quality and affordability of mobile Internet access.