Spectrum Crunch Fast Approaching

Apple’s recent release of the iPad 3 continues a trend toward more powerful and useful wireless devices that consume a lot more bandwidth.  The number of mobile-connected tablets tripled last year to 34 million, according to Cisco.  The average tablet generated 3.4 times more mobile data traffic than the average smartphone, which generated 35 times more traffic than a typical basic-feature cell phone.

Despite the efforts of network operators to meet the growing demand for wireless data services by investing billions of dollars in fourth generation mobile broadband technologies, more towers, antennas and WiFi hotspots, access to more airwaves is urgently needed.  Mobile data demand could exceed available spectrum capacity next year, according to a Federal Communications Commission staff analysis, and the nation faces a broadband spectrum deficit likely to approach 300 megahertz by 2014.

Congress recently gave the FCC specific authority to auction 300 MHz of spectrum, much of which is currently allocated for broadcast television.  Under the terms of the new law, broadcasters may voluntarily surrender unneeded spectrum and share in the subsequent auction proceeds.  This process, which may or may not produce sufficient spectrum to meet the growing demand for mobile broadband services, could take years.  Historically, it has taken the FCC 6-13 years to reallocate spectrum.

Meanwhile, Cisco projects that mobile-connected tablets alone will generate almost as much traffic in 2016 as the entire global mobile network in 2012.  This looming spectrum crunch explains Verizon Wireless’ attempt to acquire unused spectrum from a consortium of cable companies, as well as a previous attempt by AT&T to acquire T-Mobile USA.

In the event that Washington fails to reallocate sufficient spectrum in time and network operators are not allowed to acquire additional spectrum on the secondary market, consumers will experience more blocked and dropped calls and data connections, higher prices and/or usage caps.  Network operators will have no alternative but to ration service in some form.

Rationing won’t just inconvenience consumers, but could have devastating consequences for the economy. The digital industry continues to be one of the strongest growing sectors in the economy, contributing to both job creation and technological innovations.  The contribution of wireless services to overall gross domestic product grew over 16% annually from 1992-2007, according to economist Harold Furchtgott-Roth, compared with less than 3% annual growth for the remainder of the economy.

As if the situation is not challenging enough, passive-aggressive FCC bureaucrats increase the likelihood of rationing when they question whether the wireless industry could become too “concentrated” if present trends continue.  Market concentration alarmism torpedoed the AT&T/T-Mobile merger – depriving AT&T of badly-needed spectrum – and suggests the possibility that spectrum could be allocated in artificial and convoluted ways that might tend to promote competition in theory from a bureaucrat’s perspective.

The FCC can demonstrate no market failure in wireless, where there are six large and more than 100 smaller providers that cover a majority of the U.S. through a combination of their own network and roaming agreements, where no provider has more than 30% to 35% of subscribers and revenues and where annual aggregate capital investment has varied between $20 billion and $25 billion over the past five years.  The Department of Justice recently commented that in “markets such as this, with differentiated products subject to large economies of scale (relative to the size of the market), the Department does not expect to see a large number of suppliers.”

Nevertheless, FCC Chairman Julius Genachowski successfully fought off a provision in the spectrum auction law that would have prevented the FCC from structuring the auction to give preferential treatment to friends and allies of the regime du jour.  The prohibition would have prevented Genachowski from capping the amount of spectrum available for AT&T and Verizon Wireless, among other things.

Another way of stating this “problem” in the structure of the wireless market is to observe that while growing numbers of consumers have been choosing AT&T and Verizon Wireless instead of Sprint and T-Mobile in recent years, consumer preference is what happens in a well-functioning, free market that provides appropriate incentives for innovation and efficiency.  Stagnant market shares would indicate a static market.  A “competitive” market in the distorted view of the FCC is a market in which there are no winners or losers.  There is no innovation in such a market.

Good intentions notwithstanding, FCC experiments fail at least as often as they succeed.  The agency’s strategy for jumpstarting competition in telecommunications in the late 1990s contributed to a disastrous investment bubble that burst in 2000-02.

Additional spectrum is critical to meeting the demands of 4G wireless devices, like the new iPad, and data-intensive applications.  The FCC should acknowledge that it has a spotty record in terms of reallocating spectrum in a timely manner, a weakness for playing favorites and an unhealthy urge to micromanage.  The FCC does have a useful role to play, however, and that is to prevent a spectrum crunch and to let the market pick winners and losers.

Hance Haney is a senior fellow at the Discovery Institute