Poor Tom Wheeler. The besieged Chairman of the Federal Communications Commission has only been in office for six months, but he isn’t getting much love, especially from his friends.
From the Open Internet rules to spectrum auctions to the review of pending transactions including the merger of Comcast and Time Warner Cable, the FCC has been falling on its sword with worrisome regularity, often the victim of its own miscommunication than of actual policy disputes—though there are plenty of the latter.
Things got off to a bad start just weeks after Wheeler’s confirmation, when the new Chairman happily announced an FCC finding that there was no technical reason cell phones couldn’t be used on airplanes.
Instead of gratitude, the announcement unleashed a flood of criticism that yakking airplane passengers would make the miserable life of U.S. air travelers even more hellish than it already is. That is certainly true, but what Wheeler failed to make clear in his initial announcement is that it’s up to the FAA and the airlines, not the FCC, to decide the how or even the whether of cell phone use in the air.
The criticism was both pre-emptive and misdirected. But both could have easily been avoided with a more carefully-drafted announcement.
And then there was the failed auction in late February of valuable radio spectrum known as the H Block. The auction had gone well off the wheels while Wheeler awaited confirmation last year, with Sprint and T-Mobile USA maneuvering the agency to carve off the high-frequency block and attach various conditions to its use that were in the companies’ own interests.
Having poisoned the waters, the two companies then abandoned the auction at the last minute, leaving Dish Network as the only bidder. Dish picked up the entire block for the minimum bid of $1.5 billion, confirming the worst fears of Commissioner Jessica Rosenworcel that the “auction” had become a “retail sale.” Wheeler, who predicted fiercely competitive bidding, was left hanging.
The PR gaffes have only gotten worse since the winter, which is unfortunate. Tom Wheeler is a communications industry veteran and published historian of network dynamics, who came to the job of FCC Chairman with high expectations and crucial unfinished agency business to complete. Hopes of getting that business—notably the repurposing of radio spectrum essential for consumers of exploding mobile broadband services— done at all, let alone in an expedited fashion, are fading fast.
The “Open Internet” Crisis
While the challenges confronting the Chairman are indeed daunting, a (non-comprehensive) review of Wheeler’s first six months in office suggests that some issues could be more easily resolved if the agency had just avoided some predictable communications gaffes.
Consider a recent example. On April 23, word leaked out (perhaps intentionally) from an anonymous “FCC official” that the Chairman had drafted new Open Internet rules to replace those that had been voided in January by a federal appellate court.
The draft rules won’t be public until mid-May, and won’t be voted on until the agency conducts a lengthy period of public review and comment. But within hours of the leak, self-styled consumer advocacy groups fell over themselves to express outrage at what they imagine the rules will say, recharging a campaign going back over a decade whose not-very-secret goal is the nationalization of U.S. communications infrastructure.
Since the first inaccurate reports of the proposed rules’ scope, Wheeler has been furiously trying to course correct, , issuing press releases, publishing blog posts, and admonishing the haters, sensibly, to wait until they actually see the proposed rules before declaring the latest Internet apocalypse. Last week, at the annual Cable Show in Los Angeles, the Chairman dispensed with the usual pleasantries and presented yet another spirited defense of his unreleased proposal.
The Chairman’s frustration is understandable, but he’ll need to keep his anger in check if he has any hope of achieving consensus on his plans both inside and outside of FCC headquarters. Otherwise, “net neutrality” (as legal academics evocatively but incorrectly call the Open Internet rules) could derail the Wheeler Chairmanship, much as it did that of his predecessor Julius Genachowski.
Which would be a tragic end to the Obama Administration’s largely hapless turn at the FCC’s tiller. Tragic because Wheeler, whose long experience in the communications industry made him an enviable choice for Chairman, is steering dangerously close to the rocks.
The Chairman has an admirable vision for the potential of our ever-expanding digital ecosystem, most recently spelled out in an e-book published just after Wheeler took over at the FCC. A study for a longer history of network revolutions put on hold with his nomination, the short book nonetheless makes clear Wheeler’s view that digital networks have become the defining force of the global economy. “Information delivery networks,” Wheeler writes, “are the new economy.”
And the book pulls no punches about the part Wheeler sees for the FCC and the federal government in regulating that network:
The role of the FCC is to both protect and stimulate competition in order to provide consumers access to world class networks on reasonable terms. If the goal of the providers of telecommunications services is to avoid regulation, then the path to that end is clear: effective competition in the present and an effective path to competition in the future. Where markets fail or are threatened, the FCC has the responsibility to provide redress.
Wheeler’s challenge for the remainder of his term will be to make clearer what he sees as “effective competition.” And to propose forms of “redress” that don’t create more problems than they solve.
The Spectrum Crisis is Still the Real Issue
The media frenzy over the rumored Open Internet rules and cell phones on planes are merely the side show here. The FCC has more serious business to attend to and a ticking clock of its own setting, on a more urgent problem that continues to receive inadequate attention: the impending spectrum crisis.
In the FCC’s visionary 2010 National Broadband Plan, the report’s authors sounded the alarm about the unavoidable exhaustion of existing radio frequencies allocated for mobile services.
The “spectrum crisis,” as former Chairman Genachowski called it, is the unfortunate downside of an explosive growth in demand for mobile broadband services that took off with the launch of the Apple iPhone, Google’s Android operating system, and the tablet revolution that soon followed.
As more users embrace more devices and more high-bandwidth services—especially video—broadband network operators are running out of capacity, a problem exacerbated by persistent delays in processing fermenting applications to build or enhance existing cell towers and antennas, requests mired in incompetent and corrupt local government zoning boards and planning commissions.
According to the NBP, the mobile revolution is likely to hit a hard stop if the FCC doesn’t make available an additional 300 MHz of spectrum by 2015, and 500 MHz by 2020.
Hence the crisis. The agency’s inventory of useable and unassigned frequencies is, for the first time in nearly a century of federal management of the spectrum map, nearly exhausted.
Though the FCC under Chairman Wheeler has moved quickly to make available high-frequency spectrum in the 3.5 GHz and 5 GHz ranges (the latter for expanded unlicensed high-speed WiFi networks), complex rules and technologies will need to be developed in those bands to allow sharing the spectrum with incumbent public and private users. That will certainly take years.
There’s been other notable progress. In 2012, the agency gave permission for Dish Network to reclassify some of its satellite frequencies for terrestrial use. Dish is considering developing its own mobile network, perhaps for wholesale purposes, which could significantly improve both the capacity and competitive conditions in mobile broadband. (Hence the company’s interest in the H Block and in spectrum currently licensed to LightSquared, which failed in its efforts to get similar reclassification of its satellite spectrum and is now in bankruptcy).
The agency is also preparing to auction high-frequency bands known as AWS-3, which have sat fallow waiting for technical and engineering improvements that would allow its use without interference to federal government users, some of whom will need to be relocated.
That still leaves mobile broadband users in serious jeopardy, upping the ante for other efforts to reclaim and repurpose spectrum that is not being put to its best and highest use.
Congress and the FCC have targeted two specific groups of wasteful license holders. The first are over-the-air television broadcasters, whose viewership has declined to a tiny fraction of its former audience as the migration to cable, satellite, and Internet-based video viewing nears its inevitable conclusion.
The second is the federal government itself, which holds vast swaths of spectrum of particular importance to mobile broadband, often for applications that rarely use it or do so using grossly inefficient technologies.
The FCC’s High-Risk Efforts to Engineer the Incentive Auctions
Efforts to pry licenses from the federal government seem to be going nowhere. So the FCC’s attentions must be laser-focused on reclaiming as much spectrum as possible currently licensed to the broadcasters.
Despite deep partisan divides, Congress managed to pass legislation in 2012 aimed at doing just that. The Spectrum Act authorized the FCC to design a series of innovative auctions to recover unused and underutilized spectrum from the broadcasters using a first-of-its-kind approach known as Voluntary Incentive Auctions (VIA).
The VIA will let over-the-air broadcasters give up some or all of their licensed frequencies in exchange for a share of the proceeds of a future auction to mobile broadband providers. (The rest of the money has been earmarked to fund the creation of a long-awaited interoperable public safety network, known as FirstNet, and to pay down the federal debt.)
The VIA auctions will proceed in two stages, with broadcasters first bidding against each other in a reverse auction that will establish a reserve price. Depending on who offers to sell and where, the FCC will then repack broadcast channels in the UHF band to create the largest blocks possible. Then, a forward auction will offer those frequencies in local geographies to the highest bidding mobile providers for use in, at last, averting the spectrum crisis.
Wheeler’s predecessor promised to hold the auctions this year, but soon after taking office Wheeler rightly decided that the agency wasn’t ready and delayed the VIAs until next year. Which is to say, until 2015, when by the agency’s own predictions, existing mobile networks could run out of capacity.
Even if the AWS auction goes better than the H Block debacle and even if the VIA auctions proceed without further delay, it will be years before reassigned or shared spectrum will actually come online.
But there’s now growing doubt the VIA auctions, whenever they take place, will come close to realizing the full 120 MHz Congress hoped for. That’s because the FCC’s delays and rumors of efforts to engineer the results of the auctions to fit the agency’s vision of a mobile broadband market with multiple and equal-sized broadband network operators has unsettled both the broadcasters and the operators.
Indeed, even before Congress passed the authorizing legislation, the FCC argued that it had the right to exclude or otherwise limit the abilities of the two leading network operators, Verizon and AT&T, to bid on some or all of the recovered frequencies. Despite clear language in the law that forbid the FCC from excluding eligible bidders, the agency has looked far and wide for loopholes that would allow it to offer some of the recovered spectrum to smaller carriers, including Sprint and T-Mobile USA, at subsidized prices.
The FCC’s machinations have begun to spook the broadcasters and the carriers. When word leaked out last month that up to 30% of the VIA spectrum would be “reserved” for smaller carriers, both AT&T and Verizon objected, with Verizon last week calling the crabbed design “perverse and unjust.”
Wall Street analysts are now betting the innovative VIA auctions will largely or completely fail. At a conference earlier this month in Washington sponsored by the Information Economy Project, Robert Kaminski, Associate Director at Capital Alpha Partners, estimated that the reverse auction was likely to yield less than 40 MHz of broadcaster spectrum—a third of what the FCC is hoping for.
The Technical and Business Case for Spectrum Set-Asides Collapses
Neither the technical or business case for spectrum set-asides for Sprint or T-Mobile makes much sense, particularly in light of persistent rumors that SoftBank, which bought the troubled Sprint in 2013, is now determined to take T-Mobile off the hands of its unhappy owner Deutsche Telekom and merge the two companies.
Such a merger, if approved, would reduce the number of nationwide mobile carriers from four to three, but the combined entity would be fully capable of competing with Verizon and AT&T without any federal government handouts.
Both SoftBank and DT are massively capitalized, in any case, with more than enough resources to compete in auctions against Verizon and AT&T without having to rig the results.
But neither company has shown much previous interest in lower-band frequencies, with both carriers sitting out the 2008 auction of 700 MHz spectrum freed up in the transition from analog to digital television. Sprint, indeed, sold off its considerable low-frequency spectrum licenses in 1996. And T-Mobile recently purchased some of Verizon’s 700 MHz licenses, suggesting that Verizon is hardly desperate for any low-frequency license it can get its hands on.
Wheeler argues that wide distribution of any recovered 600 MHz licenses is essential to providing rural Americans with more choices for mobile broadband. But there’s been no indication that the “reserved” auctions the FCC is contemplating will require build-out in rural areas. And up until now, neither Sprint nor T-Mobile has demonstrated much interest in building rural networks, preferring instead to rely on mandatory roaming agreements with AT&T and Verizon.
That’s because the low density of rural America makes for a harder business case for infrastructure investment. As my Georgetown colleague Anna-Maria Kovacs recently wrote, Sprint and T-Mobile’s plans for rural America “are unlikely to change simply because the FCC provides low-band spectrum at below-market prices. No matter how cheap the spectrum, no matter how good its propagation characteristics, the lack of revenue potential in the markets that are not currently addressed by Sprint and T-Mobile remains a deterrent to investment.”
Though rural Americans do have fewer choices for wireless broadband providers, Kovacs goes on, that fact has no impact on the prices rural users pay, thanks to nationwide pricing plans by the carriers. “[T]he absence of additional national competitors will not create higher prices for rural Americans,” she writes, “who will continue to enjoy the same benefits as urban Americans from AT&T and Verizon, as well as from rural carriers.”
An Urgent Need for “Regulatory Humility”
So why is the FCC so determined to stack the deck in the VIA auctions, even if doing so reduces the amount of spectrum the broadcasters actually offer and threatens funding critical infrastructure like FirstNet and next generation 911?
The best answer appears to be an overwhelming commitment to a simple "headcount" theory of competition. Wheeler’s FCC, as the Chairman frequently tells his audiences, is all about three things: “competition, competition, and competition.”
While ensuring the marketplace for mobile broadband supports a variety of competitors is an important policy goal, it is shouldn’t be an end in itself, especially when, as here, market forces are already disciplining network operators and keeping prices in check.
Indeed, many of the weaknesses with the intensity of competition in the communications industry are the unintended consequences of previous efforts by the FCC to engineer the future. Chairman Wheeler, an accomplished historian, has the opportunity to learn from those mistakes.
But the haphazard roll-out of the forthcoming Open Internet rules are distracting the agency to the detriment of more urgent work. That distraction is unnecessary. As the FCC said over a dozen times the last time they tried this, the rules are only “prophylactic” in nature. They deal with problems that could happen but which so far haven’t materialized.
Meanwhile, the Internet ecosystem continues to evolve. Infrastructure providers continue to invest and expand their services, with unit prices for voice, video and data transit continuing to plummet. The broadband market is disciplined not simply by direct competitors, but by multiple interacting participants, including powerful content providers and device, operating system, and app developers.
Facilities-based providers are also kept in check by the rise of new broadband technologies and competitors, and rapid improvement in mobile broadband and WiFi as competing access methods.
Getting the Open Internet rules right not only isn’t urgent; it isn’t even a priority. And Chairman Wheeler’s efforts to hew closer to the court’s ruling than the previous effort clearly aren’t making him any friends in the noisy but politically well-connected community of activists who view any punishment to any corporation as a victory. So even as a matter of pragmatism, the pivot back to the Open Internet rules isn't helping the agency.
Mobile broadband users, on the other hand, urgently need more network capacity, and not in some theoretical future. We need it now. Yet the spectrum auctions are now in serious danger of falling apart before they’ve even been scheduled.
The technical and business case for subsidizing the foreign owners of Sprint and T-Mobile in the name of enhanced competition is extremely weak. Worse, as broadcasters continue to read the FCC’s machinations and the likeilihood that "reserved" spectrum will depress auction prices, the result could be the complete failure of the auction, meaning little or no new spectrum for mobile users or insufficient auction revenue to build out FirstNet.
Chairman Wheeler knows more about the communications industry than nearly anyone. But even he can’t predict how it will continue to evolve in the face of exponential improvements in core technologies.
Despite his expertise and his admirable passion, the Chairman needs to quickly develop a sense of what the Federal Trade Commission’s Maureen Ohlhausen calls “regulatory humility.” Mr. Chairman, put the Open Internet rules aside and step back from the brink on over-engineering essential spectrum auctions.
Not just to save your legacy. But to save the Internet.
My new book, co-authored with Paul Nunes, is “Big Bang Disruption: Strategy in the Age of Devastating Innovation” (Portfolio 2014). Follow me on Twitter and Facebook for more on the accident-prone intersection of technology and policy.
