Spectrum, auctions and you: Part 2

Why spectrum auctions are a bad idea

Last week, I closed with an introduction to spectrum auctions and mentioned the upcoming Advanced Wireless Services (AWS) auctions, which are likely to be among the last auctions (for a good while, anyway) of the nice chunks of spectrum for mobile or fixed voice and broadband.

I also talked a little about politics, which I want to talk about further this week. I’m personally against auctioning spectrum for two reasons. First, I think this is bad policy, largely because it basically sells spectrum to the highest bidder, irrespective of application. Sure, the market will help the licensee do the "right" thing, but we miss in the process a golden opportunity to speed the deployment of new applications and push worthwhile social goals, like broader availability of basic mobile telephone and information services.

And the reason for this relates to reason No. 2, which is that you and I ultimately pay the bills here. I had a long discussion on just this point with an economist from the Federal Communications Commission during the PCS auctions about 10 years ago. He felt, as any good economist would, that the burden of the auctions falls equally on the bidders, and thus should have no ultimate effect on prices, which are set by competition and not by costs.

But he didn’t seem to take into account that the industry would ultimately consolidate for reasons of marketing, branding and operating economies of scale, reducing the number of players and thus allowing higher prices to prevail and reducing the effects of competition.

And that’s what we’re seeing today. The average monthly cellular bill in the U.S. is around $50, based on a variety of market research reports. How much lower these bills might be if the carriers didn’t pay for spectrum is anyone’s guess. As an aside, I might also argue that the U.S. government has no right to auction the airwaves, based on the ninth and 10th amendments to the U.S. Constitution. But I’m no constitutional scholar or a lawyer, although I was originally a political science major before switching to technology.

The AWS auction covers two bands, 1,710 to 1,755 MHz and 2,110 to 2,155-MHz, with six blocks of frequencies (a block consists of a pair of frequencies, one from each band) and a total of 1,122 licenses across the country. Most of the controversy in the latest auctions has been over "designated entities" (DE), which allow set-asides for certain classes of bidders, most notably small businesses and businesses owned by minorities and women.

There have been charges in the past over inappropriate behavior with respect to these, particularly accusations that small companies were being used as fronts for big-money interests, and bidding just to "flip" the frequencies won.

Anyway, the smart money is betting that there will be lawsuits filed over the recently revised DE rules. Last Friday, the auctions were delayed from June 29 to Aug. 9 to give everyone time to sort out the new rules. But that may not be good enough, and further delays may be likely. Auctions as a faster path to spectrum availability? I’m not sure about that.

So what might we use in place of auctions? I would suggest two elements. The first is a national spectrum policy (akin to an energy policy, which we also seem to be lacking), which would put forth national goals for wireless communications. Ever wonder why some countries, such as South Korea, have services so advanced over what we have here? Well, now you know.

The second is what is often called a "beauty contest," where qualified private entities propose a particular set of services at particular frequencies. One company is proposing this for a band of AWS frequencies not part of the current auctions. Menlo Park, Calif.-based M2Z Networks Inc. has reportedly proposed that it receive exclusive access to the 2,155-to-2,175-MHz band in exchange for a 5% annual royalty on sales (See "Start-up seeks spectrum for free U.S. network" ).

It’s unclear why M2Z feels it is qualified for this special treatment other than it was founded by John Muleta, who formerly headed the FCC’s wireless bureau. I suspect that while Muleta and his investors would have no trouble getting a meeting at the FCC, I think their proposal is DOA. Rules to replace auctions would need to be put in place -- even beauty contests have rule books, and big ones at that. And I’m sure other players would like to get in on this action.

There’s probably no universal solution to the spectrum-allocation problem. There is only one electromagnetic spectrum, and some parts of it are clearly more valuable than others. Figuring out what service should go where is at least as much politics as science, and that’s not going to change. Ultimately, I suspect, the politics will prove to be the deciding element in the debate, and, this being a democracy, I encourage you to weigh in on this issue.

Craig J. Mathias is a principal with Farpoint Group, an advisory firm specializing in wireless networking and mobile computing. He can be reached at craig@farpointgroup.com.

Copyright © 2006 IDG Communications, Inc.

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