Spectrum and Net Neutrality Lessons from the FCC’s Recent Spectrum Auction

August 29, 2006 FCC , Network Neutrality , Policy Blog , Spectrum Reform

As reported in yesterday's New York Times, although the AWS spectrum auction will not formally close for another month or so, the likely winners of the licenses will be the incumbent wireless companies and "SpectrumCo LLC," a joint partnership with Comcast, Time Warner, and Sprint-Nextel (albeit with Comcast and Time Warner the dominant partners). The much ballyhooed hope that the AWS auction would produce a new, disruptive competitor for either mobile phone service or broadband service died when the DBS partnership of DIRECTV and Echostar exited the auction after getting systemically outbid by the incumbents and Spectrum Co.

Of course, this outcome was entirely predictable to anyone who (a) actually looks at the economics of bidding in open, ascending spectrum auctions and (b) has not drunk the intermodal competition cool-aid. Which is why I pushed the FCC for anonymous bidding rules back in the spring and have argued that we should not allow incumbent cable operators to bid on spectrum if we want competition.

The FCC has a chance to learn some lessons here for the upcomming auction of returned analog television spectrum, the so called "700 MHz Auction." The FCC issued a Notice of Proposed Rulemaking soliciting comment on service rules and auction considerations. Unfortunately, it will be hard to convince the FCC that an auction with almost 170 bidders raising close to the maximum anticipated $15 Billion in revenue was a failure because it further entrenched the incumbents and failed to produce a meaningful new competitor. For those devoted to the dogma of the perfection of "the market" as the ultimate arbiter, the failure of a new competitor to emerge indicates that there is no need for another competitor or that another competitor is not economically viable (the notion of strategic behavior to preserve market dominance apparently being a heresy to be firmly rejected by orthodox free market theologians). Heaven forfend the government should "interfere with the market" by structuring an auction more likely to produce the emergence of new entrants.

It is also worth noting in passing that the triumph of the incumbents likewise has implications for the network neutrality debate. At the start of the AWS auction, the Wall St. Journal and other opponents of network neutrality as an evil government mandate and attempt to "socialize the internet" pointed to the AWS auction as proof that (a) we have more than enough competition in broadband to eliminate any need for "net neutrality" and (b)if tech companies like Google or Microsoft want to build their own pipe, they can get spectrum to do so.

Instead, as predicted by Greg Rose and Mark Lloyd in a paper for the Center for American Progress, the incumbents (including the incumbent residential broadband providers Comcast and Time Warner) acted to block potentially disruptive new entrants from getting licenses. As a result, we have exactly the same competitors and potential competitors in the broadband market today as we had before the auction started.

Sure, AWS licenses acquired by the wireless incumbents may eliminate some capacity constraints that wireless providers claim have hampered their deployment and required them to impose limits on users. But the fact that three of the four largest national mobile phone companies are owned or affiliated with incumbent wireline providers (Cingular with AT&T & Bell South, Verizon Wireless with Verizon, and SprintNextel with Comcast & Time Warner via their affiliation and resale agreements) makes it a lot less likely that these "competitors" will prove sufficiently aggressive and disruptive that the incmbents will not dare degrade user choice of where to go online or what applications to run over the network.

Worse, consider this exchange between Tod Cohen of Ebay and Carolyn Brandon of the Cellular Telecomunications and Internet Association (CTIA, the primary trade group for the incumbent wireless carriers). Apparently, the dominant wireless companies that won the AWS licenses and offer our best hope of broadband competition see no problem at all with exercising control over the user's choice of content and application, regardless of network capacity.

[Tod] Cohen [deputy general counsel for Ebay] said the wireless Internet in the U.S. is already operating in a non-net neutrality environment when it comes to EBay, an online auction service.

He said Cingular customers are not able to use text messages to make a payment through eBay's online subsidiary, PayPal, because Cingular won't agree to give PayPal access to necessary wireless codes on its network. PayPal is available to customers of other wireless services.

Carolyn Brandon, vice president of policy for industry trade group Cellular Telecommunications & Internet Association, responded that under a capitalistic market Cingular has the right to strike a contract with another online payment company and shouldn't be required to a cut a deal with PayPal.

"What's the market failure?" she asked.

Recent remarks by AT&T's Ed Whitacre show that the Bells have not given up their hopes of cutting such deals themselves.

Which, of course, is exactly the concern of folks who see positive social and economic benefit in an open internet. Absent regulation to the contrary, it makes perfect economic sense for the few broadband providers in the market to exploit their market position and extract additional rents from suppliers of content and services on one end and captive customers on the other. I just happen to think that allowing these providers to exercise their market power would be a disaster for democracy and a disaster for our economy.

Reasonable minds can differ, of course, on my economic analysis and whether network neutrality is a cure worse than the disease. Nor do I expect the paid shills and true believers to look at the AWS auction results and proclaim "how wrong we were to assume that competition exists or is likely to emerge absent some form of government intervention, given the power of incumbents to block new entrants!" But I do point to the recent AWS auction as proof of two central tenants in my analysis: the behavior of profit seeking firms is predictable using undergraduate level economics and a willingness to embrace empirical data over theory, incumbents will do what they can to block the emergence of potentially disruptive new entrants, and — absent some form of government action — they will succeed.

You may still decide this produces a better world than "government intervention in the market" does. But don't kid yourself about the world you're going to get as a result.

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CALEA challenge

August 1, 2006 Blog Posts , FCC

CDT, EFF, the Media Access Project, Sun, and have asked the judges on the D.C. Circuit Court of Appeals to all sit together to reconsider the June 9 opinion upholding the FCC’s creative interpretation of CALEA.

In order for such a reconsideration request to be granted, the petition has to concern a “question of exceptional importance.”  That’s certainly present here — the D.C. Circuit’s June ruling allowing the FBI to serve as a gatekeeper for online applications doesn’t fit with the statute and poses enormous threats to innovation.

Remember, everyone has to comply with lawful wiretapping/interception requests.  Compliance is not the issue here.  The additional cost-shifting burden imposed by CALEA is to require that things be built so that they are easily tappable by law enforcement. 

In 1994, Congress unquestionably exempted the internet (both access to the internet and applications used online) from CALEA obligations.  (That’s why there’s an awful CALEA rewrite in circulation now — DOJ wants to change the law.)  Even though the statutory language is clear, the FCC decided to interpret the statute to include elements that had specifically been left out by Congress.

The FCC did this by saying that the statute was ambiguous — when it isn’t — and by arguing that because “interconnected VoIP” services are “replacements for a substantial portion” of traditional telephone services they must be covered by CALEA.

Their position was/is specious, in my view, because CALEA specfically excludes “information services.”  And “information services” include internet access and online applications.

But backing up the frame from the statutory arguments (which the petition admirably presents in visual/analogy form several times) reveals a crucial and enormous legal issue.  Congress hasn’t expressly delegated power to the FCC to “regulate the internet.”  Who gets to do this “regulation” is very important to the future of this country.  In the absence of an express delegation, no deference to the agency’s views is required.  The D.C. Circuit is the group we depend on to rein in the Commission when it gets adventurous — or succumbs to pressure.

The FCC is far from independent of the wishes of the Executive Branch, particularly when it comes to national security and law enforcement desires.  Incrementally, in a thousand definitional nuances and statutory-creep extensions, the Commission is becoming the de facto internet regulator.  Surely we’d want to have told them to do this; surely we would have thought through the consequences of such a step.  Because we haven’t, it would be wrong for a court to defer to what they have to say when it comes to the regulation of the internet.  Particularly when it comes to getting FBI guys involved in designing new online applications.

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So What’s a Good Source for Spectrum Allocation Info?

July 31, 2006 FCC , Policy Blog

With a major spectrum auction coming up on August 9, a rulemaking with the 900 MHz band in play, a Notice of Proposed Rulemaking for the returned TV Spectrum Auction rules on the agenda for the Commission open meeting this week, the Commission green lighting the new interference avoidance technology to make use of the 5.3 GHz unlicensed band, and lots of other spectrum issues buzzing about, readers may wonder where they can find a freely available, useful, up-to-date chart on who uses what portions of the electromagnetic spectrum.

Sadly, this is another case of "chose two out of three."

The most recently available free information available can be found on the FCC's spectrum management web page:

Sadly, while it is available free and has been updated relatively recently, it is almost incomprehenisble because of its sheer size and scope (and the fact that absolutely no effort has been made to make it understandble to the interested lay person).

The most useful free resource available (unless someone points me elsewhere in the comments) is Jim Snider's "Citizen's Guide To The Airwaves," published by New America Foundation and available here. Jim put a lot of thought and research into it. You can download a very easy to read chart and accompanying report that explains how to use the guide. The only problem is that NAF has not updated it since they published it in 2003. Since then, the FCC has made a number of changes.

I'm told that a number of pay services offer excellent charts, but I can't afford any of them.

For those focusing on the upcomming auction issues, many people consider spectrum below 3 GHz (and particularly between 500 MHz and 1 GHz) as the best set of frequencies for delivering broadband (and ignoring more efficient architectures that use cognative radios to take better advantage of all available spectrum, because we don't allow that). These radio waves have particularly good penetration characteristics that allow them to send signals through such common barriers as wet leaves or building walls for relatively low energy cost. As a result, the most intense interest, for both licensed and unlicensed, revolves around the bands between 3 GHz and 500 MHz.

Hence the huge interest in the upcomming AWS Auction, which begins August 9. The FCC has confirmed 168 bidders (you can find the public notice here and the list of bidders here. A quick perusal reveals that, in addition the usual cellular suspects, the DirecTV and Echostar have formed a joint partnership and a number of cable companies have come to play. Judging by the bidding credits they paid for (the FCC requires a submission of an "upfront" payment to show you are good for the money), these companies have come to bid in a serious way.

The AWS band includes licenses in 1.710-1.755 GHz and 2.110-2.155 GHz bands. You can get the full info on the balnd plan and service at the FCC's AWS web page. The band therefore lies in the "sweet spot" for wireless broadband. The FCC hasn't auctioned such a nice chunk of spectrum for some time, and won't auction anything like this again until the broadcasters return the analog television spectrum (scheduled for February 2009, although the auction will take place in 2008). Hence the huge interest by players looking either to deliver broadband by wireless (DBS companies), or possibly looking to prevent others from delivering broadband by wireless and cutting into their wireline business (cable companies). It has also attracted bidders interested in new mobile services (cable companies, DBS companies) and those who want more of the same (existing wireless telephone incumbents).

FCC auctions have a life cycle longer than the NBA playoffs and the World Cup combined, so although I will head off for vacation on August 9, the auction may still be going when I get back two weeks later. The auctions go for so long because they take place over multiple rounds in multiple markets, with dozens of paid consultants employed by the biggest bidders using huge amounts of computational power to outwit the FCC enforcement staff by using bids to illegally signal to allies how to divide up markets and keep out disruptive competitors.

O.K., it's not the World Cup, it's really a very wonky version of Worlds of Warcraft.

But one factor in figuring out who is likely to bid for what is a knowledge of who already has what spectrum holdings where. Some folks want to plug holes in their existing systems. Some want to supplement their holdings, and need to expand in particular geographic markets. Some will seek complementary holdings to their wireline facilities. In any event, knowing the spectrum allocation chart, and who holds what would be a big help.

All of this is, I point out, public information (except for certain classified military allocations). Which is why all the big guys who can afford to collect it in dribs and drabs from the FCC and verify their truly awful record keeping with real world trade data willhave a huge edge in bidding strategy.

Sadly, for the rest of the bidders, or for members of the public trying to follow along, it's back to free, up-to-date, easy to use; pick two of these three.

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Should the FCC Let Cable Companies Buy Spectrum Licenses?

July 18, 2006 Broadband , FCC , Policy Blog

On August 9, the FCC will auction prime spectrum cleared of government users last year by act of Congress. This "advanced wireless services" (AWS) auction will distribute licenses in the much coveted range below 3 GHz (two paired bands, 1.710-1.755 and 2.110-2.155) and, as the name implies, the FCC will permit licensees to offer any advanced service over wireless. Mobile broadband, fixed point-to-point broadband, enhanced "4G" mobile cellular services, and just about anything else.

The auction has generated a lot of interest. It's been about 10 years since the FCC made such a good chunk of spectrum available, and it won't come up again until the FCC gets ahold of the returned television spectrum after the DTV conversion. Over 200 bidders have applied (although about 170 applications were somehow incomplete and need to be redone ASAP) and the FCC estimates the auction could make as much as $15 Billion.

I'll skip the rather dramatic and bumpy road it has taken for the FCC to get to this point. Media Access Project got heavily involved in some of the issues. You can read about them on my professional blog here and here, but they don't impact much what I want to say here.

I should also add that while normally a proponent of unlicensed over licensed (and a read through of this report from the Center for American Progress will provide some enlightenment as to why), I do think that if we must have auctions (and we are stuck with them for the foreseeable future), we should at least make every effort to hold them in a way that promotes competition and discourages collusion and manipulation of the rules.

Hence my concern with the news that, in addition to the usual wireless operators like T-Mobile, the major cable operators have also applied to bid for licenses.

Why concern? Isn't this good? After all, the Center for American Progress Report linked to above points out that the mobile phone industry has become increasingly consolidated and that incumbent wireless companies use auctions to keep out competitors. Isn't getting giant companies like Comcast that can go toe-to-toe with the T-Mobile's of the world a good thing? Other than Microsoft or some other tech company, who else can outbid the incumbents on licenses?

That's the traditional FCC analysis. You look at a specific market and don't worry about any related markets. Cable companies don't offer mobile phone service. They would be a new entrant in mobile telephony. Sure, they have total dominance in pay video services (what the FCC calls "multichannel video programming distributors," or MVPDS) and are the largest residential broadband providers, but so what? This isn't a competing video service, it's a spectrum license.

The problem with this analysis is that it ignores the dark side of convergence. The Commission expects AWS licensees to potentially compete in broadband and video as well as (mobile) voice, the same markets that, thanks to convergence, cable now occupies as either the dominant incumbent (video), the largest provider in an emerging duopoly (residential broadband) or the top competitor (voice, where cable has about 50% of the total VOIP market). Even on a simple level, every license acquired by an incumbent cable operator (in its franchise areas) is one less potential competitor in video, broadband and voice.

The situation is somewhat reminiscent of when the FCC distributed the first cellular licenses in the 1980s. Every region had two licenses, one of which went to the incumbent local telephone company on a theory that this would ensure survival of the cellular service. The FCC reasoned that if the new entrant failed, the "expert" telco incumbent would still be around and keep cellular going (the notion that telcos might want to throttle the potentially competing service being dismissed as mere speculation). Instead, in no small part because there were only two competitors and one was the incumbent voice provider with every incentive to undercut a market that cannabilized its main business, mobile telephony remained stunted as a luxury service until the Commission sold off more licenses to create competition in the mid-1990s.

On this basis alone — fear of eliminating a potential MVPD, broadband and voice competititor — allowing cable operators to bid on spectrum that provides competing services should give the FCC pause. But it gets worse. Allowing cable operators to get into mobile telephony could have serious bad consequences for competition in video services (and possibly the related markets of residential broadband and voice).

This part gets a bit complicated. If you want the theoretical basis, I recommend an excellent paper by Paul Klemperer and Joseph Farrell called Coordination and Lock In: Competition With Switching Costs and Network Effects.

Briefly, the more cost and hassle it takes for a subscriber to switch services, the less likely it becomes the subscriber will switch. Economists call this a switching cost. In addition, network environments create disincentives to switch through a phenomena called network effect — where the value of the network grows because of the number of people connected to it.

These phenomena create "lock in." A user can theoretically switch to a competing service, but the cost is so high, and loss of utility due to exclusion from the more popular network so severe, that it is practically impossible to switch. The triumph of the Windows operating system is often sited as a classic example of user lock-in from a combination of switching costs and network effects.

As I have written elsewhere, incumbent cable operators enjoy significant switching cost advantages already, making it very hard to get customers away from them in the video market. They can also leverage this market power to make it harder for competitors, further eliminating the the threat of potential competition.

Allowing incumbent cable operators to layer additional wireless and mobile services on top of their existing video, voice, and broadband offerings may introduce competition to mobile wireless, but it dramatically increases the lock in to subscribers and thus aggravates the cable incumbent dominance in video and residential broadband (and gives it a huge advantage on VOIP against competing VOIP providers). Any subscriber that opts for bundled cable "quadrupple play" service will almost never switch — particularly if the cable operator creates network synergies between the products.

Policymakers and regulators keep thinking of convergence and integration as an unqualified good thing. They imagine deregulation and cross ownership of facilities producing a cornucopia of competition in which consumers gaily hop from service to service among facilities based providers, neatly casting aside inferior offerings, until downright Darwinian competition ensues to the benefit of all.

Sadly, this happy world has as much to do with reality as the physics problems you get in high school that begin "assume a world of zero friction, now calculate the speed of a rocket with X thrust over Y time." It's a nice basic problem that teaches some important principles. But no rocket scientist would ever assume that he or she lives in a "world with no friction" when designing a rocket to go from Earth to space, no matter how much that would simplify design. Nor would they propose launching a few rockets until we determined if friction was "a real problem" or just "conjectural" on the grounds that since we can measure a variance in friction between what we find at the bottom of Death Valley and what we find at the top of Pike's Peak, the friction at Cape Canaveral may be different, or not exist at all.

Here too, policymakers ignore switching cost, network effects and the resulting lock in at their (and our) peril. Whatever benefits incumbent cable companies bring to the mobile telephone market, we should not assume they offset the harms to competition in related video, voice and residential broadband markets. At the very least, it would be nice to imagine that the FCC thought about it before holding the auction.

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So what happenend at the FCC?

July 16, 2006 Broadband , FCC , Network Neutrality , Policy Blog

I have a much more complete write up on the resolution of the Adelphia transaction and what it may mean in the long run on my regular blog here. To condense that to points relevant here and comparing to my post last Wednesday:

1) The FCC failed to adopt a network neutrality condition. Commissioner Copps dissented in full from grant of the merger, while Commissioner Adelstien dissented from the failure to adopt a network neutrality condition but otherwise concurred in the order.

In addition, Copps called for the FCC to add a "fifth principle" to the four broadband principles adopted last year. This fifth principle would prohibit tiering or other discrimination based on source or content, while permitting approriate network management. Adelstien, in his dissenting section, also endorsed this proposed principle.

The FCC's failure to adopt a network neutrality principle does not augur well for adoption of such a principle in the AT&T/BellSouth merger. Chariman Martin's position, spelled out in his separate statement, acknowledges that there is a great deal of controversy about NN, but that he feels they have the power to enforce the existing principles if the FCC finds evidence of real harms.

2) Appropos of this, however, it is worth noting that FCC enforcement staff came in for quite the tongue lashing for their failue to enforce existing law against cable operators using their market power in violation of the 1992 Cable Act. How on Earth can people trust that the FCC staff will enforce the broadband "four principles" when it can't even manage to enforce laws passed by Congress?

3) The Commission did express a lot of interest in "leased access," a provision of the Cable Act (codified in Section 612 of the Communications Act, as amended) that requires cable operators to lease channels to independent programmers. This may provide a new venue for programmers to get around the cable bottleneck and promote more diverse viewpoints in video programming. We will need to see how this plays out in the comming months.

4) The FCC withdrew the digital audio broadcast (digital radio) item from the agenda. It is not clear why. It may be that the last minute negotiations over Adelphia prevented the Commissioners from reaching final agreement on the DAB item. In that case, the Commission may release it "on circulation" after the Commissioners vote on it (The FCC does not have to wait for an open meeting to vote on an item). Otherwise, Martin can put it back on the agenda for the August meeting and force a vote.

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