April 17, 2013 5:13 PM
At the end of last week and in advance of Assistant Attorney General for Antitrust William Baer's appearance before the Senate Judiciary Committee yesterday, the DoJ's Antitrust Division filed an ex parte submission
with the FCC offering some serious advice on how to conduct (read: limit participation in) a spectrum auction--specifically, the next spectrum auction.
The Department's "advice" contained all the acuity, but none of the profanity (and occasional hilarity), of a drunken sports heckler (like Bud Light's Mr. Pro Sports Heckler Guy
). Until I read the DoJ ex parte, I had no idea as to what might be the regulatory equivalent of "catch the ball", "make the basket", or "play defense, you idiots." Now I know.
The Department's "advice," while generally a meandering discussion of points not in contention, such as the DoJ's horizontal merger analysis and the many benefits of competition, also included such "game changing" spectrum auction tips as "protect competition", "don't award spectrum to buyers that won't use it efficiently", and "spectrum below 1 GHz is cheaper for smaller competitors to use." If You're Not Low, You Must Be High
The one "point" the Department puts on its relatively general discourse is its belief that to be successful on a nationwide basis a carrier needs some low frequency spectrum in order to efficiently serve rural areas and to provide service that works inside of buildings. The DoJ notes that the two "leading" wireless carriers (AT&T and Verizon) have a large amount of low frequency spectrum, but Sprint and T-Mobile have little to none of this spectrum.
By making this assertion (I would guess?), the DoJ wants us to conclude that "low frequency spectrum" is the only thing
distinguishing the leaders from the laggards in wireless market share. The only reason AT&T and Verizon have the most low frequency spectrum is because, the DoJ explains, they pay a lot more for low frequency spectrum in order to prevent Sprint and T-Mobile from using it.
The DoJ warns that this trend should be expected to continue into the next spectrum auction as well. Why the next auction? Because the next auction is for LOW frequency spectrum
, and this is the kind that AT&T and Verizon only buy in order to keep away from Sprint and T-Mobile. A Low-Down Dirty Shame
If Sprint and T-Mobile did have some low frequency spectrum, they would totally be able to build it out and offer better service to rural areas and inside of buildings, and thereby steal share from AT&T and Verizon. But, even if they didn't actually use the spectrum, Sprint and T-Mobile should still be able to gain share because AT&T and Verizon would provide worse service without this spectrum, right? Either way . . . it's cool, says DoJ.
You see what they're doing here? First, you establish that a firm's "success" in terms of market share, or whatever other benchmark you like, is critically dependent on one specific input. Next, you pick an industry characterized by a shortage of this key input that affects all firms--like wireless--and you're almost home.
Then, postulate that some companies have greater access to the scarce input than their rivals, and the conclusion falls into place. You see? The input-favored companies can benefit even if they don't use all of their superior access to inputs to increase output. This is because they know that their competitors cannot increase output to steal customers from the input-favored firms. Stick to the basic format, and this argument always works. Cool, huh?
If the FCC adopts rules that exclude AT&T and Verizon from the next auction, you can bet that they'll be using an iteration of this same argument on their appeal. But, if DoJ's argument is that transparent, and that malleable, why are they using it now? The FCC Lobs . . . And DoJ Dunks!
First, let's dispel any lingering suspicion you may have that the DoJ is offering its theories based on any observable facts. If AT&T and Verizon were merely warehousing low frequency spectrum to keep their rivals down, the simple way to check would be to see if they're using it.
Let's just assume that both AT&T and Verizon have been using the 850-900 MHz spectrum since the FCC first handed it out to their predecessor companies in the 1980's. After all, they didn't get to be the two largest companies by not using
their "first mover" spectrum. So, what about all the other low frequency spectrum?
"All the other" low frequency spectrum would be the 700 MHz spectrum that AT&T and Verizon purchased in 2008. The companies claim to have needed the spectrum to accommodate the very predictable surge in demand for wireless data services. And, according to no less venerable a source than Wikipedia
, AT&T and Verizon are, in fact, using their 700 MHz spectrum to roll out their fancy LTE service, for their fancy data-loving, bandwidth-hogging LTE customers. So, why is the DoJ insinuating otherwise?
Well, as near as I can tell, low frequency spectrum just became a "thing" in the FCC's NPRM
from 6 months ago, where they solicited comments on whether the Commission should change its spectrum screen to account for the perceived greater value of low frequency spectrum. So, if I had to guess, I would say that the FCC's been waiting for 6 months for some big player to take the low frequency "lob" they put up with the NPRM and slam-dunk it home--and the DoJ is that big playa'.
DoJ . . . with no regard for human life!
So, do you think any Senators called out William Baer on this at the oversight hearing yesterday? According to the trade press, the ranking member of the Antitrust Subcommittee, Senator Mike Lee (R-UT), expressed concern
that the Department was suggesting to the FCC that AT&T and Verizon were warehousing spectrum. You bet he did--because us Lees just happen to know a f@$k-ton of stuff about telecom and antitrust.
May 17, 2012 3:23 PM
As punishment for requesting their freedom, the Egyptian Pharaoh told the Israelite slaves that they had to maintain their quota of bricks, but with less of an essential input: straw
. The burden of meeting demand with less resources applies as well in today's mobile services marketplace. Wireless carriers face demands for greater bandwidth to support growing mobile data services but, for the intermediate term, cannot expect additional spectrum capacity--it's essential input--on either a firm-specific or industry-wide basis.
It's unanimous: no matter who you talk to about wireless data, everyone
agrees that "more bricks, less straw" is the unavoidable policy. Thus, as wireless data demand continues to show no sign of abating, wireless service providers will simply have to make do with less than optimal spectrum capacity. So if we're stuck in a "more bandwidth demand, less capacity supply" world, how do we solve the problem of how to ration capacity? Who Needs Spectrum When You Can Upgrade Your Capacity?
So what's a wireless operator to do? Well, for starters, you upgrade existing capacity like crazy by constantly deploying the most efficient technology. But this isn't cheap. Since wireless data exploded in 2007 with the iPhone, AT&T alone has gone through a 3G upgrade, an HSPA upgrade, an HSPA+ upgrade, and, more recently, is in the midst of an upgrade to LTE.
Other companies have accelerated their own pace of upgrades as well. From December '06 (right before the iPhone launch) through December '11 (when most firms still have a long way to go to realize full LTE deployment) industry capex has increased by almost 50%, according to CTIA (the actual numbers are in a report that I can't afford, so take my word for it). But, even these improvements won't keep up with surging demand.With No Spectrum Relief In Sight, Do You Play The Price Card?
Given the limited options for rationing capacity another, though unpopular, move is to raise prices. Over the last several months we've seen AT&T raise data prices
, after realizing that the government was not--anytime soon--going to allow AT&T to efficiently augment its own capacity. Verizon quickly followed suit
. For now, Sprint appears to be content to let its shareholders shoulder the costs
of increased wireless data demand. But to be sure, increased demand without increased supply does create network strain--regardless of who pays.
Last week, at the CTIA Conference, Chairman Genachowski maintained/reasoned/disputed
that the failure of the AT&T and T-Mobile merger last year had anything to do with AT&T's decision to raise prices. Yet, the Chairman knows better, as he has been a leading prophet of the spectrum shortage. How to Recover Costs of Spectrum-less Capacity Expansion?
Given the costs of constantly upgrading capacity, how does a carrier manage excess data demand? As I indicated above, raising prices sounds like a simple solution, but must account for the fact that big data users are contract customers. That's how smartphones, and data plans become affordable, and predictable.
You see, the problem with raising prices for wireless data is that you can really only raise prices to the marginal
., the person who's not your customer
yet). Crazy, right? "Raising prices" is a statement of frustration and designed to curb consumption. Carriers are telling prospective customers that the network is nearing capacity and use of the remaining capacity will cost you. This is a horrible situation--who wants to be the (unpopular Redskins owner) Dan Snyder
of wireless data? If Sophisticated Buyers Want to Subsidize Consumers, Let Them!
Carriers know that raising prices for mobile data, or throttling data speeds to the largest users of mobile data, is no way to treat your biggest fans. But with the popularity of mobile device applications, which constantly stream information to and from the customer's phone, customers can unintentionally (and unnecessarily) stress capacity. Applications can distort data consumption in a way that even the most conscientious web surfers cannot offset.
So, earlier this year, at a conference in Barcelona, an AT&T executive suggested that maybe some applications providers would want to buy capacity
in bulk in order to assure their customers that using the desired app wouldn't cause the customer to exceed their usage cap, or become subject to throttling. Not a bad idea, right? I mean the applications developer knows how much bandwidth their customers use, and they have a lot more buying power than the consumer.
Given the public's embrace of mobile data, and the cost of continually augmenting capacity, especially for firms with sub-optimal spectrum allocations, one would think the "public interest" would support options that allow customers to still enjoy wireless data, but at a lower cost/consumption threshold. One would think . . . .But Don't Tell Public Knowledge!
The AT&T suggestion seemed harmless enough, but the reaction from the self-proclaimed public interest group Public Knowledge
was alarmingly critical
. Then again, this is the same group that published a paper
arguing that all wireless carriers should provide flat-rated mobile data service. The irony, of course, is that flat-rated price structures cannot be profitable unless the majority of users pay for more data than they consume
The notion of "more bricks, less straw" is, for regulators and service providers, an unfortunate and dystopic reality. Uniquely, Public Knowledge seems to relish the "more megabytes, less capacity" future with a fondness that can't help but be compared with how the ancient Egyptian brick consumers' lobby must have felt . . . right before the brick supply crashed.
May 9, 2012 6:42 PM
[In case no one noticed, I've been on a "Vision Quest" for the last few months; but, in the words of the great John Riggins, "I'm bored, I'm broke, and I'm back."]
One thing I've noticed during my self-imposed absence is that there really isn't much of a dialogue in the public discourse on telecom policy these days. That's not a particularly astute observation for some areas of public discourse, like politics. After all, anyone can tell you that the big political parties mischaracterize each other and talk past one another all the time. But telecom issues aren't especially political, so what's the harm in listening to what someone is saying and--if you want to respond--providing a thoughtful response?
No where was the unfortunate temptation to characterize, rather than accept and address, an opponent's arguments more on display as it was in Chairman Genachowski's remarks
at the CTIA show yesterday. Rather than respond to AT&T's CEO Randall Stephenson's contention that the Commission's decision to oppose AT&T's purchase of T-Mobile had caused AT&T to increase its retail prices for wireless data, the Chairman chose to mischaracterize and dismiss Stephenson's observation. This was unfortunate, and a missed opportunity by the Chairman to validate a different view of the same spectrum shortage the Chairman has sought to publicize.
While Stephenson's statement
made headlines last week in advance of the CTIA show, AT&T's Stephenson has made this same observation consistently, in both December, and over 3 months ago in a conference call
with shareholders and analysts.
Chairman Genachowski, to his credit, has been one of the most vocal advocates for the need for more spectrum for the wireless industry. The Chairman has, for most of his tenure as FCC Chairman, understood that demand for wireless data services is outstripping the supply of spectrum and the ability of wireless operators to use different techniques to most efficiently use the spectrum that they have. The Chairman made all of these points in his remarks yesterday at CTIA.
Randall Stephenson, AT&T's CEO, has said nothing inconsistent with the facts the Chairman has used to argue for the need for more wireless spectrum to be brought to market. It only stands to reason that if there is insufficient spectrum (on an industry-wide basis) to satisfy the growth in aggregate demand for wireless data, then spectrum shortages will affect some firms earlier than others. The first firms to feel the spectrum crunch will necessarily be the first firms to react by managing demand (because input supplies are static). And, the only way to manage demand is through price increases. Indeed, avoiding this inevitable result of spectrum scarcity was AT&T's justification for its proposed merger with T-Mobile.
But, rather than accept the perspective of one of the industry's first firms to feel the spectrum crunch, the FCC Chairman chose to conflate the observations of AT&T's Stephenson into two arguments that Stephenson never makes. The first is that wireless competition is bad for consumers, and the second is that competition is bad for spectrum efficiency.
After reading Stephenson's observations, it makes more sense to interpret his statements as being that the "new" wireless industry is characterized by many firms lacking minimum efficient scale to meet the projected demand of their consumers. This is hardly a radical statement. Many industries demand significant scale in order to satisfy consumer demand--one reason we don't see "mom and pop" microchip manufacturers. A permanent increase in demand, which the Chairman perceives as a good thing, may well require a higher, firm-specific level of access to the vital input of spectrum.
The solution, which would best benefit consumers, would be for the Chairman to recognize that--if he is confident that more spectrum will come on the market soon--there cannot be any one static notion of how many firms should be in the market. In a world where spectrum can be expanded, so can the number of competitors. Any backward-looking concept of how competition should look reflects nothing more than an irrational time bias. In other words, if adequate spectrum (to support more firms in the market) is coming, then near term consolidation--if it maximizes industry output--will not lead to a less beneficial result for consumers in the long run.
Singapore is actively considering just such an approach, by reserving specific future spectrum for a new competitor
. Such an approach introduces the concept of "contestability" in a very real and certain way. Firms in the market are allowed to maximize current efficiency by using optimal blocks of spectrum. Yet these same firms understand that they will be facing certain competition by a potentially lower cost competitor in the foreseeable future.
Wireless broadband consumers benefit from solutions, not rhetoric. The FCC should stop viewing market participants as obstacles to consumer satisfaction, but rather as indispensable vehicles to satisfying consumer demand. In a world where a vital input like spectrum can be expanded, albeit slowly, does it really make sense to freeze firms' spectrum reserves at a pre-wireless-broadband level?
March 20, 2011 8:59 PM
Earlier today, AT&T announced it was acquiring T-Mobile for $39 billion
. Among the compelling reasons/benefits AT&T cited for the merger (from the AT&T news release):
With this transaction, AT&T commits to a significant expansion
of robust 4G LTE (Long Term Evolution) deployment to 95 percent of the
U.S. population to reach an additional 46.5 million Americans beyond
current plans - including rural communities and small towns. This helps
achieve the Federal Communications Commission (FCC) and President
Obama's goals to connect "every part of America to the digital age."
T-Mobile USA does not have a clear path to delivering LTE.
As I noted yesterda
y, I'm out at COMPTEL PLUS
, one of the most important trade shows for providers of fiber capacity of the year. Fiber guys (and gals) like COMPTEL because carriers come ready to write checks.
With this in mind, I have to say that AT&T's statement is not hard to believe. The show floor opened about an hour and a half ago, and a lot of carriers hadn't yet heard about the deal, but--after taking the temperature based on a quick lap around the floor--the reactions were generally optimistic.
Here's why: a lot of fiber backhaul providers do business with AT&T, not so many do business with T-Mobile. Many believe that, if this acquisition turns the CapEx spigots up higher for AT&T, then more capacity will trickle through the supply chain. The great thing about the wireless supply chain is that for LTE, it will have to be even more dense with high capacity bandwidth. Bandwidth that then becomes available for other carrier customers, and large enterprise users. Hopefully, regulators will understand that while spectrum starvation motivated this acquisition, the deal has benefits that can potentially cascade throughout the competitive telecom ecosystem.