How should the FCC allocate the broadcasters’ spectrum?

The new head of the Federal Communications Commission (FCC) faces many big challenges, but perhaps the most important one of all is getting spectrum out of the hands of parties that don’t use the scarce resource as efficiently and into the hands of those who do. This task is critical to ensuring a vibrant broadband ecosystem.

{mosads}Mobile connections are one of several ways in which a broadband customer accesses the Internet. According to a recent FCC report, the most common way a residential customer achieves download speeds considered “broadband” (in exceed of 3 Mbps) is via a cable connection (52 percent), followed by mobile wireless (26 percent), asymmetric DSL (15 percent), and fiber to the premises (8 percent).

Many broadband users appear to be trading in their wireline connections in favor a wireless one, as they did for voice services in the past decade. Nearly one fifth of cellphone owners did most of their online browsing in 2012 on their phone, rather than on a computer or other device. And Cisco IBSG recently noted that although wireless and wireline are largely complementary today, up to 15 percent of U.S. consumers could “cut their cord” in favor of a mobile data connection by 2016. Samsung announced this week that its 5G mobile technology will be “capable of ultra-high-speed data transmission up to several hundred times faster than even the 4G LTE,” and predicted that mobile networks could supplant wireline broadband by 2020.

In light of this coming inter-modal competition, it makes little sense to ask whether there are enough wireless operators to engender competitive wireless prices. That inquiry misses the forest for the trees. Instead, the relevant question is, what is the most effective way to spread spectrum across wireless carriers to ensure that 4G LTE can reach as many consumers and thereby constrain the prices of wireline broadband? If we spread the spectrum too thin, wireline broadband prices could follow the same trajectory as cable video prices — up, up, and away.

The upcoming incentive spectrum auction offers a chance to inject vitally needed spectrum into the broadband marketplace. In advance of the new chairman or chairwoman taking the helm, the FCC’s staff is furiously working on proposed auction procedures. One of the more controversial questions is whether to constrain the bidding activity of the largest wireless providers. The agency has indicated concern with the current structure of the U.S. mobile marketplace, and is looking to the auction as a tool to address their concerns.

For the non-engineers among us, the concern appears to stem from the precise spectrum holdings the various providers currently have. AT&T and Verizon hold a large slice of the “low-frequency” spectrum, which like Superman can leap buildings in a single bound. If Sprint or T-Mobile or other small carriers need access to that spectrum to compete effectively, the argument goes, then how can we hope for competitive wireless prices unless we steer more low-frequency spectrum to them?

The answer is that the higher-frequency spectrum, when combined with the right equipment, still does the trick. Despite its large spectrum holdings in the high-frequency bands, Sprint’s net additions for “postpaid” or contract customers was up 18 percent in 2012. And in the first quarter of 2013, T-Mobile enjoyed its first branded customer growth since the first quarter 2009, using its store of high-frequency spectrum to expand its network and improve speeds. This sort of growth would not be possible if the spectrum powering their networks were vastly inferior to AT&T’s and Verizon’s.

In April, the Department of Justice weighed into this debate by advocating “rules that ensure the smaller nationwide networks, which currently lack substantial low-frequency spectrum, have an opportunity to acquire such spectrum.” It’s not clear whether the DOJ would support barring AT&T and Verizon from the auction entirely, but for those contemplating that idea, consider these consequences: According to a study released last week by Georgetown’s Center for Business and Public Policy, auction revenues would decline by as much as 40 percent as the demand for spectrum artificially contracts, and monthly wireless bills would increase by about 9 percent as capacity-constrained carriers are forced to deploy more expensive solutions.

Fortunately, the pure-exclusion option appears to have little support among policymakers. In his departing speech last week, outgoing Chairman Julius Genachowski advocated a balanced approach in which all four major wireless carriers would have a reasonable chance to expand their spectrum holdings, noting that “even the largest cellphone carriers need access to more airwaves to meet their customers’ booming demand for mobile data.”

Regulators might look to the recent .U.K spectrum auction, in which the regulator (Ofcom) imposed modest caps on the amount of additional low-frequency bands that the two largest providers (Vodafone and O2) were allowed to buy — they already owned significant amounts of that spectrum before the auction — rather than bar those firms from bidding entirely.

Should the FCC follow this path, the new FCC chairperson will hopefully recognize the oncoming battle between wireless and wireline Internet providers, which cuts in favor of permitting a slightly more concentrated wireless industry in exchange for more intense inter-modal broadband competition. Wireless prices would not likely rise but cable modem prices could fall. What’s not to like about that?

Balto is a an antitrust attorney and former policy director of the Bureau of Competition of the Federal Trade Commission (1998-2001) and attorney advisor to Chairman Robert Pitofsky (1995-1997). Singer is a managing director at Navigant Economics, and the co-author of The Need for Speed: A New Framework for Telecommunications Policy for the 21st Century (Brookings Press 2013).