Category Archives: Digital Life

My summer romance: the FCC's wireless competition report

I’m spending the summer curled up with a good book–or more precisely, a good 300 page printout of the FCC’s 15th Annual Mobile Wireless Competition Report. It’s massive collection of data makes compelling reading for the mobile industry geek, and the 100 or so charts and tables make the 3d special effects in “Green Lantern” look like a hand-drawn flip book. (Well, so I guess, since I haven’t seen “Green Lantern” or nearly any other summer blockbuster.)

So far, I’ve written three thumbs-up book reviews, and looking over my notes, I’ve barely scratched the surface. But for now I think I’ll take a break.  Though I’m sure I’ll have more to say before the sequel comes out next year.

Here’s what we’ve got so far, in short, longer, and longest order:

1. San Jose Mercury News (with Geoff Manne): “California PUC Should Approve Merger of AT&T and T-Mobile.”

2.  BNA Daily Report for Executives (with Geoff Manne):  “FCC Mobile Competition Report is One Green Light for AT&T/T-Mobile Deal.”

3. Forbes.com, “The iPhone, Android, and the FCC:  Obeying the Prime Directive.“

FCC Mobile Competition Report Is One Green Light for AT&T/T-Mobile Deal

BY LARRY DOWNES AND GEOFFREY A. MANNE

The FCC published in June its annual report on the state of competition in the mobile services marketplace. Under ordinary circumstances, this 300-plus page tome would sit quietly on the shelf, since, like last year’s report, it ‘‘makes no formal finding as to whether there is, or is not, effective competition in the industry.’’

But these are not ordinary circumstances. Thanks to innovations including new smartphones and tablet computers, application (app) stores and the mania for games such as ‘‘Angry Birds,’’ the mobile industry is perhaps the only sector of the economy where consumer demand is growing explosively.

Meanwhile, the pending merger between AT&T and T-Mobile USA, valued at more than $39 billion, has the potential to accelerate development of the mobile ecosystem. All eyes, including many in Congress, are on the FCC and the Department of Justice.  Their review of the deal could take the rest of the year. So the FCC’s refusal to make a definitive finding on the competitive state of the industry has left analysts poring through the report, reading the tea leaves for clues as to how the FCC will evaluate the proposed merger.

Make no mistake: this is some seriously expensive tea. If the deal is rejected, AT&T is reported to have agreed to pay T-Mobile $3 billion in cash for its troubles. Some competitors, notably Sprint, have declared
full-scale war, marshaling an army of interest groups and friendly journalists.

But the deal makes good economic sense for consumers. Most important, T-Mobile’s spectrum assets will allow AT&T to roll out a second national 4G LTE (longterm evolution) network to compete with Verizon’s, and expand service to rural customers. (Currently, only 38 percent of rural customers have three or more choices for mobile broadband.)

More to the point, the government has no legal basis for turning down the deal based on its antitrust review. Under the law, the FCC must approve AT&T’s bid to buy T-Mobile USA unless the agency can prove the transaction is not ‘‘in the public interest.’’ While the FCC’s public interest standard is famously undefined, the agency typically balances the benefits of the deal against potential harm to consumers. If the benefits outweigh the harms, the Commission must approve.

The benefits are there, and the harms are few. Though the FCC refuses to acknowledge it explicitly, the report’s impressive detail amply supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services. Indeed, the three main themes of the report all support AT&T’s contention that competition will thrive and the public’s interests will be well served by combining with T-Mobile.

1.  Mobile Service: Rare Bright Spot in Recession

Demand for mobile services is soaring. The FCC reports 274 million mobile subscribers in 2009, up almost 5 percent from the previous year. The number of mobile internet subscribers, the fastest-growing category, doubled between 2008 and 2009. By late 2010, 41 percent of new mobile phone purchases were for smartphones. More than 9 billion apps had been downloaded by the end of 2010.

Despite poor economic conditions elsewhere, new infrastructure investment continues at a frenzied clip. Between 1999 and 2009, industrywide investment exceeded $213 billion. In 2009 alone, investments topped $20 billion—almost 15 percent of total industry revenue. Of the leading providers, only Sprint decreased
its investments in recent years.

Yet unlike virtually every other commodity, prices for mobile services continue to decline across the board, hardly a sign of flagging competition. The price of mobile voice services, the FCC reports, has ‘‘declined dramatically over the past 17 years,’’ falling 9 percent from 2008-2009 alone. (The average price for a voice minute is now 4 cents in the U.S., compared with 16 cents in Western Europe.) Text prices fell 25 percent in 2009. The price per megabyte of data traffic fell sevenfold from 2008-2010, from $1.21 to 17 cents.

2.  Mobile Competition Is Robust and Dynamic

The FCC, recognizing the dynamism of the mobile services industry, is moving away from simplistic tools the agency once used to evaluate industry competitiveness. The report repeatedly de-emphasizes the Herfindahl-Hirschman Index, or HHI concentration index, which tends to understate competition. The report also downplays the value of ‘‘spectrum screens’’ that once limited a single provider to one-third of the total spectrum in a given market.

Now, the commission says, its evaluation is based on real-world conditions, and looks at competition mostly at the local level. That makes sense. ‘‘Consumers generally search for service providers in the local areas where they live, work, and travel,’’ according to the report, ‘‘and are unlikely to search for providers that do not serve their local areas.’’

Looking at all 172 local markets individually, the FCC found ample evidence of vibrant competition. For mobile voice services, for example, nearly 90 percent of consumers have a choice of five or more providers. In 2010, almost 68 percent of U.S. consumers had four or more mobile broadband providers to choose from, a significant increase over 2009.

Competition between different kinds of wireless service (cellular, PCS, WiFi, and WiMax) is also increasing, and a wider range of the radio spectrum is now being included in the FCC’s analysis. Competition between mobile and traditional wireline service is growing in significance. More and more consumers are even ‘‘cutting the cord:’’ By the beginning of 2010, 25 percent of all households had no wireline service, up from 2 percent in 2003.

And competition within the mobile services marketplace, the Commission recognizes, is increasingly being driven not by the carriers but by new devices, applications and services. From 2008-2009, the FCC found that 38 percent of those who had switched carriers did so because it was the only way to obtain the particular handset that they wanted.

There are dozens of handsets to choose from, and no dominant provider among smartphone operating systems or device manufacturers. New entrants can and do thrive: handsets running Google’s Android operating system rose from 5 percent of the total market at the end of 2009 to almost 20 percent by mid-2010.

3.  If There Is a Problem, It Is Government

As consumers continue to embrace new mobile technologies and services, pressure is building on existing networks and the limited radio spectrum available to them. The risk of future network overload is serious—the one dark cloud hanging over the mobile industry’s abundant sunshine. According to the report, ‘‘mobile broadband growth is likely to outpace the ability of technology and network improvements to keep up by an estimated factor of three.’’

The FCC sees a ‘‘spectrum deficit’’ of 300 megahertz within five years. But the FCC and Congress have made little progress over the last two years to free up underutilized spectrum in both public and private hands. Auctions for available spectrum in the valuable 700 Mhz. band are tied up in political fights over a public safety network. Spectrum held by over-the-air television broadcasters is idling as Congress debates ‘‘incentive’’ auctions that would share proceeds between the broadcasters and the government.

Improving coverage by modifying or adding cell towers, the commission finds, is subject to considerable delay at the local level. Of 3,300 zoning applications for wireless facilities pending in 2009, nearly 25 percent had been idling for more than a year. Some had been languishing for more than three years, despite an FCC requirement that applications be decided within 150 days at the most.

Combining the spectrum assets of AT&T and T-Mobile would go a long  way toward limiting the potentially catastrophic effect of ‘‘spectrum deficit.’’ AT&T plans to move T-Mobile 3G customers to its existing network and integrate T-Mobile’s existing physical infrastructure, improving 3G service and freeing up valuable spectrum to launch a new nationwide 4G LTE network. As the report notes, T-Mobile had no plans to ever launch true 4G service and, given its limited spectrum
holdings, probably never could.

As part of its public interest analysis, the FCC will have to take these and other regulatory constraints to heart.

To Reality . . . and Beyond!

Reading the entire report, it’s clear that the FCC recognizes, as it must, that, even with the exit of T-Mobile from the U.S. market, mobile services would be anything but a ‘‘duopoly’’—either at the national level or at the local level, which is where it counts.

Competition is being driven by multiple local competitors, competing technologies, and handset and software providers. Federal, state and local governments all play an active role in overseeing the industry, which even the FCC now sees as the only serious constraint on future growth.

In Silicon Valley, if not inside the Beltway, consumers are understood to be the real drivers of the mobile services ecosystem—the true market-makers. Maybe that’s why the report found that the vast majority of U.S. consumers report being ‘‘very satisfied’’ with their mobile service.

It is a relief to see the FCC looking carefully at real data and coming to realistic conclusions, as it does throughout the report. Let’s hope reality continues its reign during the long AT&T/T-Mobile review and beyond, as this dynamic industry continues to evolve.

Reproduced with permission from Daily Report for Executives, July 11, 2011. Copyright 2011 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.

Supreme Court affirms First Amendment in Cyberspace

John Perry Barlow famously said that in cyberspace, the First Amendment is just a local ordinance.  That’s still true, of course, and worth remembering.  But at least today there is good news in the shire.  The local ordinance still applies with full force, if only locally.

As I write in CNET this evening (see “Video Games Given Full First Amendment Protection“), the U.S. Supreme Court issued a strong and clear opinion today nullifying California’s 2005 law prohibiting the sale or rental to minors of what the state deemed “violent video games.”

The 7-2 decision in Brown v. EMA follows last week’s decision in Sorrell, which also addressed the role of the First Amendment in the digital economy.  Sorrell dealt with a Vermont law that banned data mining of pharmacy information.  That application, the Court said, was also protected speech.

The CNET article is quite long (duh), and I’ll let it speak for itself.  There is also excellent commentary on both decisions from Adam Thierer and Berin Szoka at the Technology Liberation Front.  Adam and Berin submitted an amicus brief in the EMA case that closely tracked the Court’s opinion, which in fact quoted from another amicus brief from the Cato Institute.  Berin also contributed a brief in the Sorrell case, again on the winning side.

Perhaps the most interesting commentary on today’s decision, however, comes from Prof. Susan Crawford.  Prof. Crawford’s blog on EMA notes that an important feature of the majority decision (written by Justice Scalia and joined by Justices Kennedy, Ginsburg, Sotomayor and Kagan) is what she calls the “absolute” view it takes of speech.  Crawford writes of Scalia’s opinion:

“Whether government regulation applies to creating, distributing, or consuming speech makes no difference,” he says in response to Justice Alito’s attempt to say that sale/rental is different from “creation” or “possession” of particular speech.

That view is absolute in the sense that it does not distinguish between different stages of the supply chain of information provisioning.  The “speaker,” for First Amendment purposes, is not only the author of the content, but also distributors, retailers, and consumers.  Each is equally protected by the First Amendment’s prohibition on government interference, whether that interference is a ban on certain content (violent video games) or a requirement to promote it (must-carry rules for cable).

Why does this matter?  Though I have written and tesftified extensively about the FCC’s December, 2010 “Open Internet” order, I have so far avoided discussion of a possible First Amendment challenge.  Frankly, I hadn’t initially thought it to be the strongest available argument against the legality of the rules.

But Prof. Crawford, a strong advocate for “net neutrality” in general, reads EMA as adding support to such an argument:

Today’s opinion may further strengthen the carriers’ arguments that any nondiscrimination requirement imposed on them should be struck down.  Although a nondiscrimination requirement arguably promotes speech rather than proscribes it, the long-ago Turner case on “must-carry” obligations for cable already suggested that the valence of the requirement doesn’t really matter.

If challengers to the Open Internet order (which today added the State of Virginia to the list of those waiting in the wings to file lawsuits) can convince a court that rules requiring nondiscriminatory treatment of packets are effectively requiring carriers to speak, such a rule would be seen as content-based.  Under EMA and last year’s decision in Stevens, such a rule could fail a First Amendment challenge.

It’s an interesting argument, to say the least.  I think I’ll give it a little more thought.

Spectrum reform in our lifetime?

Last week the Senate Commerce Committee passed–with deep bi-partisan support–the Public Safety Spectrum and Wireless Innovation Act. The bill, co-sponsored by Committee Chairman Jay Rockefeller and Ranking Member Kay Bailey Hutchison, is a comprehensive effort to resolve several long-standing stalemates and impending crises having to do with one of the most critical 21st century resources:  radio spectrum.

My analysis of the bill appears today on CNET.  See “Spectrum reform, public safety network move forward in Senate.”

The proposed legislation is impressive in scope; it offers new and in some cases novel solutions to more than half-a-dozen spectrum-related problems, including:

1.  Voluntary incentive auctions – The bill authorizes the FCC to coordinate “voluntary incentive auctions”  (VIA) of under-utilized spectrum from over-the-air TV broadcasters to better uses, including mobile broadband.  Broadcasters giving up some or all of their licensed spectrum would share the proceeds with the government.  The FCC has been asking for this authority for two years.

2.  Public safety network – The bill would break the logjam over the long-desired nationwide interoperable public safety network.  It would create a new non-profit public-private partnership to build the network, with an outright grant of the D-block of 700 Mhz. spectrum.  (That block, freed up as part of the 2009 transition to digital TV, has sat idle since a failed auction in 2008.)  Financing for the build-out would come from proceeds of the VIAs.  The public safety network has been in limbo since it was first proposed soon after 9/11.  (The proposed bill is S. 911.)

3.  Spectrum inventory – The FCC would be required to complete a comprehensive inventory of existing licenses (which, amazingly, doesn’t exist) within 180 days.  President Obama ordered the agency to complete the inventory over a year ago, but so far only a “baseline” inventory has been created.

4.  Secondary markets – The FCC would be required to begin a rulemaking to review current limits to secondary spectrum markets that interfere with liquidity, in the hopes of making them more robust.  (VIAs could take years to organize and conduct.)

5.  Public spectrum – The National Telecommunications and Information Administration would be required to identify significant blocks of underutilized federal spectrum allocations and make them available for auction by the FCC.

6.  Spectrum innovation – The National Science Foundation and other grant-making agencies would be required to accelerate research grants for new technologies that would make spectrum use more efficient.

7.  Repacking – While the FCC can’t require broadcasters to participate in VIAs, it can force them to move to nearby channels if doing so would free up more valuable blocks of spectrum for auction.  A fund would be created to compensate stations for the disruption of switching channels.

The range of issues that S.911 deals with suggests the breadth of the current spectrum crisis.  Here it is in a nutshell.  Radio frequencies are a limited public resource.  Up until recently, however, there’s been more than enough to go around.  Following the advice of Nobel prizewinning economist Ronald A. Coase, the FCC has used auctions to find the best and highest use for this resource, generating significant revenue in the process.

But the digital age has changed the dynamics of spectrum.  Mobile uses are exploding, as are mobile devices, mobile applications, mobile users and mobile everything else.  Moore’s Law is rapidly overtaking FCC law once again.  Existing wireless networks are groaning under the strain of volume that has increased 8000% since the launch of the iPhone.

Last year’s National Broadband Plan, for example, predicted that 300 Mhz. of additional spectrum would need to be found to keep mobile broadband on track.

But the government’s current processes of finding and allocating more spectrum are simply too slow to keep pace with the current wave of technological innovation.  It will get worse as 3G moves to 4G and from there–well, who knows?  All we can safely predict is that the “G”s will keep coming, and arrive faster all the time.  So radical re-thinking of spectrum management is urgent.  We need serious spectrum policy reform, and we need it yesterday.

Part of the solution will come from technology itself, including innovation to make more efficient use of existing allocations, expanding the range of usable spectrum for more uses, capabilities to dynamically share spectrum and rebalance loads, and so on.  There are impressive developments in these and other strategies for coping with the potential of spectrum exhaustion, but no one can say with confidence that the solutions will outpace the problems.

The bigger issue underlying spectrum exhaustion is the glacial pace with which current regulatory systems work to rebalance allocations.

Once a license is granted, the licensee can largely rely on keeping it indefinitely.  If they operate in a stable or shrinking market (such as over-the-air broadcast, which the Consumer Electronics Association said recently has shrunk to only 8% of U.S. households), there’s no incentive to optimize the property, which, for the licensee, is a sunk cost.

Given the limits of secondary markets, there’s also little  incentive to find more efficient uses of the allocation and free up spectrum that is no longer needed for its licensed purpose.  Indeed, even for operators who want to exit the market in part or in whole, use limitations on existing allocations make transfer through secondary markets cumbersome if not impossible.

Even if the FCC unblocks these markets, game theory problems may constrain the effectiveness of either the VIAs or the secondary markets.

Federal users, of course, feel no competitive threat to optimize their allocations, and fall back to the conversation-ending “national defense” excuse whenever the possibility emerges of giving up some of the frequencies they are warehousing.

And then there are state and local authorities, who also share jurisdiction over communications.  Limits on cell tower construction, use, and other technical improvements aren’t addressed in the proposed legislation.  But they are equally to blame for the crisis mentality.

S. 911 is a good start toward removing some of the institutional barriers that limit our flexibility in rebalancing spectrum needs and spectrum allocations.  But it’s only a start.  If the information revolution is to continue uninterrupted, we need a lot more improvements.

And soon.

Updates to the Media Page

We’ve added about a dozen new posts to the Media Page on my website, reflecting a sampling of articles, media quotes, and radio appearances from the last few months. These include several pieces for CNET News.com and Forbes, as well as links to appearances on NPR’s “Science Friday” (debating Sen. Al Franken on privacy law) and “Marketplace.”

I continue to be called on to help business leaders understand the confusing and dangerous new interest that national, state and local governments are taking in the “management” of the digital economy. I’ve been speaking most recently about Apple’s iPhone privacy flap (which turned out to have nothing to do with privacy), the AT&T/T-Mobile merger, and pending legislation in Congress aimed at curbing online piracy of movies and trademarked goods, the so-called “Protect IP” Act.

Next week, I’ll be making my tenth visit this year to Washington to meet with Congressional staffers and other policy makers to discuss these and other worrisome developments. Increasingly, my role seems to be as an unofficial representative of Silicon Valley helping regulators see the potential damage to innovation from ill-considered laws.

Of course I continue my long-standing work with companies working to introduce new products and services that exploit digital technology. The introduction of “killer apps” only gets faster with time, and more than ten years since the publication of my first book, I’m deeply flattered to hear from entrepreneurs who tell me the book still works as a manual for success in the digital age.

What the Protect IP Act says about the current state of the Internet content wars

I’ve written two articles on the Protect IP Act of 2011, introduced last week by Sen. Leahy (D-Vt.).

For CNET, I look at some of the key differences, better and worse, between Protect IP and its predecessor last year, known as COICA.

On Forbes this morning, I have a long meditation on what Protect IP says about the current state of the Internet content wars.  Copyright, patent, and trademark are under siege from digital technology, and for now at least are clearly losing the arms race.

The new bill isn’t exactly the nuclear option in the fight between the media industries and everyone else, but it does signal increased desperation.

I’m not exactly a non-combatant here.  Increasingly, everyone is being dragged into this fight, including search engines, ISPs, advertisers, financial transaction processors, and, in Protect IP is passed, anyone who uses a hyperlink.

But as someone who earns his living from information exchanges–what the law anachronistically calls “intellectual property”–I’m not exactly an anarchist either (or as one recent commenter on CNET called me, a complete anarchist!).

The development of an information economy will stabilize and mature at some point, and, I believe, the new supply chain will be richer, more profitable, and give a greater share of the value than the current one does to those who actually create new content.  (Most of the cost of information products and services today is eaten up by middlemen, media, and distribution.)

But it’s not an especially smooth or predictable trajectory.  Joseph Schumpeter didn’t call it creative destruction for nothing.