Efficiency Gains and Consumer Benefits of Unlicensed Access to the Public Airwaves the Dramatic Success of Combining Market Principles and Shared Access
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EFFICIENCY GAINS AND CONSUMER BENEFITS OF UNLICENSED ACCESS TO THE PUBLIC AIRWAVES THE DRAMATIC SUCCESS OF COMBINING MARKET PRINCIPLES AND SHARED ACCESS MARK COOPER SENIOR ADJUNCT FELLOW, SILICON FLATIRONS UNIVERSITY OF COLORADO, BOULDER JANUARY 2012 CONTENTS EXECUTIVE SUMMARY iii I. INTRODUCTION 1 EXPERIMENTS IN DEREGULATION THE UNIQUENESS OF THE UNLICENSED SPECTRUM MODEL PURPOSE: FRAMING THE ANALYTIC AND POLICY QUESTIONS OUTLINE II. ACTIVITY 7 THE RAPID EXPANSION OF THE UNLICENSED SECTOR Devices Users MASS MARKET ACTIVITIES Extension of Broadband Hot Spots INTERMEDIATE INPUTS AND THE INTERNET OF THINGS Offloading Cellular Traffic Intra-firm Communications III. ECONOMIC EFFICIENCY AND INNOVATION 13 THE IMPORTANCE OF OFFLOADING TO EFFICIENCY QUANTIFYING THE EFFICIENCY GAINS IV. INNOVATION 19 DEVICES AND STANDARDS NETWORK TECHNOLOGIES AND APPLICATIONS MAKING THE MOST OF SCARE SPECTRUM RESOURCES V. ECONOMIC VALUE 23 DEMAND-SIDE SUPPLY-SIDE: VALUING THE EFFICIENCY GAINS THE VALUE OF UNLICENSED ACTIVITY IN PERSPECTIVE VI. FUTURE PROSPECTS AND CHALLENGES 29 THE POTENTIAL VALUE OF FUTURE MOBILE COMMUNICATIONS TECHNOLOGY CHALLENGES IV. POLICY IMPLICATIONS OF THE SUCCESS OF THE UNLICENSED USE MODEL 34 INGREDIENTS OF SUCCESS AUCTIONS ARE AN INEFFECTIVE MEANS FOR MAKING SPECTRUM AVAILABLE FOR UNLICENSED USE Large, Incumbent Cellular Providers Dominate Auction Exclusive License Winners will not Provide for Unlicensed Use Spectrum The Beneficiaries of Unlicensed Use are Unlikely to Win Auctions Making Spectrum Available for Unlicensed Use Will Reduce the Deficit CONCLUSION Policy should Support the Expansion of the Unlicensed Use Model Avoiding Another 100-Year Mistake BIBLIOGRAPHY 43 i LIST OF EXHIBITS Exhibit II-1: Shipments of Wi-Fi Capable Devices 8 Exhibit II-2: Shares of Unlicensed Spectrum in Intermediate Input Wireless Data Activity 14 Exhibit III-1: Growth of Subscribers, Subscriptions and Cell Sites 20 Exhibit III-2: Unlicensed Use Enables Efficiency in Wireless Data Service: 22 Reduction in the Number of Cell Sites Exhibit IV-1: Innovation in Standards and Devices 26 Exhibit IV-2: Innovation in Network Technologies and Applications 27 Exhibit IV-3: Comparison of Spectrum Available for Cellular Licenses 28 and Unlicensed Use below 3 GHz Exhibit V-1: Value of Use of Unlicensed Spectrum: Billion per Year 2010 17 Exhibit V-2: Capital vs. Spectrum Indifference Curve – 2014 23 Exhibit VI-1: Technology and Cost Challenges, Resource and Institutions 31 Exhibit VI-2: The Potential Gains from Access to Higher Quality Spectrum 29 Exhibit VII-1: Licensed Spectrum for Broadband is Highly Concentrated and 37 Recent Auctions have allowed Large Firms to Increase their Dominance ii EXECUTIVE SUMMARY 1. Economic theory predicts that removing barriers to entry in the market for radio spectrum usage improves the static and dynamic efficiency of utilization of this scarce resource. In particular, theory suggests that removing the spectrum barrier to entry by allowing unlicensed access will: (1) decentralize decision making, (2) Deconcentrate investment; (3) Improve spectral efficiency; x Allow user innovations; x Promote end-user focus; x Capture externalities; and x Lower transaction costs. Unlicensed use also enriches the wireless ecology because it creates a diversity of ownership models, which in turn increases value, enhances innovativeness, promotes resilience, and supports pluralism. 2. Economic reality shows that shared use of the public airwaves has lowered consumer costs and increased consumer value by billions of dollars. The unlicensed model has equaled or exceeded the exclusive licensed model, on which cellular service providers primarily rely, on all the key measures of economic output performance, including: x Use; x Value; x Applications; x Efficiency; and x Innovation 3. The economic value created and innovations developed by using unlicensed spectrum have been achieved even though shared use has been confined to relatively small slivers of low-quality spectrum. Unlicensed use is largely restricted to frequency bands that were crowded with non-commercial noise or possessed propagation characteristics that were unattractive to communications service providers. x Shared use has been virtually shut out of access to the most attractive spectrum, which lies in frequencies in the 500 MHz to 1 GHz range. x The FCC’s decision to allow shared use of the TV “White Spaces” is threatened by some legislative proposals to auction all high-quality spectrum. 4. If policymakers create more space for unlicensed uses in higher-quality spectrum, the best is yet to come. Expanded shared use will allow carriers and other service providers multiple new opportunities, including: x A greater ability to carry traffic offloaded from cellular networks; x Increased coverage of Wi-Fi and similar technologies; x Expansion of rural broadband deployment; and iii x Support for many more business services. 5. Auctioning spectrum without making more unlicensed spectrum available will undermine the future success of the shared use model by starving it of a critical input and/or imposing conditions that undermine its core value. Large incumbent telecommunications companies have gobbled up spectrum by mergers and acquisition and through auctions to such an extent that the top four firms control over four-fifths of the spectrum potentially useful for wireless broadband. The large incumbents dominate auctions because they x Have deep pockets; x Possess communications infrastructure; x Concentrate demand and decision making; and x Have a strong incentive to bid — suppressing competition. Large incumbent telecommunications carriers will not allow access to exclusive licensed spectrum on terms and conditions that would allow the unlicensed use model to thrive. They are certain to encumber access to the spectrum, x They will have a strong economic incentive to exclude “free riders.” x They will charge for use of “their” spectrum. x They will resist applications that might compete with their core businesses. x They will seek rents from new applications that do not compete. 6. Auctions will result in little, if any, additional spectrum being made available for shared use. x Many of the beneficiaries of shared use are unknown. While we can predict that there will be economic benefit associated with unlicensed spectrum, it is difficult to identify in advance precisely what form that benefit will take. x Firms that supply shared use devices and applications generally have less access to capital than the massive telecommunications bidders at auction. x Because device and applications developers are not telecommunications companies, access to spectrum is likely not necessary to their core business models. x They are also likely to lack expertise in negotiating the processes of an FCC auction. 7. Making high-quality spectrum available for shared use will increase federal revenues and reduce the deficit. x First, if the supply of spectrum for exclusive licenses is reduced, cellular providers will bid up the price of the spectrum that is auctioned. Given that the cellular service providers have declared a “spectrum crisis,” it would be reasonable to assume that they will bid up the price substantially. x Second, the expansion of economic activity associated with the spectrum made available for shared use not only generates tax revenues, but it also does so at a higher tax rate than exclusive licenses because the purchase price of the spectrum is not claimed as a business expense. iv I. INTRODUCTION EXPERIMENTS IN DEREGULATION Over the past decade, the growth of mobile communications has been nothing short of remarkable. Although wireline telephone service has been available for over a century and wireless voice became widely available in the late 1980s, globally the number of people who subscribe to wireless voice is four times the number of people who subscribe to wireline connections, with 80 wireless subscribers per 100 people worldwide in 2010.1 In the United States, there are twice as many wireless subscribers as wireline telephone subscribers.2 In fact, the penetration of wireline telephone service has begun to decline in the United States and globally. However, the mobile communications revolution is now entering into a new phase, as new technologies make broadband Internet access service available with mobile devices like smartphones, laptop computers, tablets and other consumer electronic devices. Today, more people subscribe to wireless broadband Internet service than wireline broadband Internet service, globally.3 In the United States, wireless and wireline broadband service subscriptions are about equal even though wireline Internet access has been available for a longer period of time.4 The mobile communications revolution has been built upon two very different and successful approaches to the management of spectrum that were made possible by a remarkable, U.S. led, real-world experiment.5 In the early days of radio communications, policymakers chose to manage interference in radio transmission by granting an exclusive license to one user to transmit signals on specific frequencies, called bands, in a specific geographic area for a specific purpose. For three quarters of a century this approach led to the dominance of broadcasting in the commercial use of the airwaves. In the mid-1980s the Federal Communications Commission (FCC) altered the regulatory regime for access to spectrum and created the opportunity for dramatic improvements and changes in the use of spectrum