When an ROI 500 Times Better than Goldman Isn’t Enough: Reallocating Our Focus on Reallocating Spectrum

by Guest Contributor on March 14, 2012

Blair Levin, Aspen Institute Fellow and architect of the National Broadband Plan, made the following remarks at MMTC’s open forum on spectrum earlier this month.

The government invested about $20 million in a national broadband plan.  Just one of the ideas from that plan—an idea no one had previously proposed—was adopted and scored by the Congressional Budget Office as generating $22 billion for the feds.

That is a thousand to one return.

As an investor, our government did better with the plan than Goldman did investing in Facebook.  500 times better.  Our government; a better investor than Goldman.  That’s not a sentence you hear very often.  It’s actually even better.

Economists say the consumer surplus generated by a spectrum auction is about ten times the auction price; that $22 billion becomes $220 billion.  A one to ten thousand return for the American public.  That may be even better than Zuckerberg.  Actually not, but a guy can dream.

So I would just like to say that everyone who worked on the plan should have an enormous sense of pride for being part of something that solely through the power of ideas—and I can remember when the idea emerged around my conference table—created that kind of value for the American public.

And I would like to suggest that Congress now pass a law that provides all the team members of any planning effort a very, very small percentage commission for the value created by that plan.  And that the law be made immediately retroactive.  That’s what I’d like to do.  And then I would like to sit down.

The problem with that approach is that while there is a truth to what I just said—the Plan produced enormous value for the country—it would hide greater truths about the topic you all came here to discuss.

Those truths can be summed up in three sentences.

First, when it comes to addressing the looming spectrum crunch by putting more spectrum to commercial use, we are moving backwards, not forward.

Second, when it comes to the process of allocating and reallocating spectrum, we are moving backwards, not forward.

Third, just as the value of incentive auctions is that it provides a mechanism for reallocation in light of changing circumstances, we need to look at changing circumstances and reallocate our political capital to adjust our strategy for delivering enough spectrum to have a world leading wireless platform.

Let me explain.

Putting Spectrum to Commercial Use

Again, first, when it comes to addressing the looming spectrum crunch by putting more spectrum to commercial use, we are moving backwards, not forward.

I don’t mind us celebrating, as the Chairman did in Europe last week, that we are the first in the world to devise a market based system to reallocate spectrum that may get us 60-80 MHz in 5 years.

We should also be conscious, however, that during that same week we lost 50 MHz that really should have been available today.  I hate to say it, but that is a bad trade.  We lost 40 in the LightSquared process and 10 with the D block.  We also are down from the 120 we were hoping to get from the incentive auction to 80 at best, and more likely, 60.  That’s another 60 down from what we were hoping to get.  Further, government spectrum that we were hoping would be freed up has not been.

In particular, the federal spectrum at 1755MHz appears to be slipping out of reach, which makes the AWS-3 spectrum with which it could be paired far less useful. That’s another 40MHz down.  It’s clear we aren’t going to get close to the 300MHz by 2015 goal laid out in the Plan, never mind the longer-term goal of 500MHz by 2020.

I am not here to relitigate those decisions.  What is done is done.  And some of the decisions no doubt, have merit.  We should understand, however, the meaning of these events, particularly in light of the fact that nearly everyone acknowledges that our current spectrum policies will not produce what we need, and after a presidential executive order telling the relevant government agencies to free up spectrum.  Despite the momentum of the Plan and the executive order, most of what has happened over the last two years has made the problem worse.

I disagree with a lot of what AT&T Chairman Randall Stevenson said a few weeks ago on his quarterly earnings call, but on one important point, he is dead on target.  We haven’t had a spectrum auction in 5 years, and the next one is just barely on the drawing boards.  We will be lucky if the spectrum is actually used for broadband within the next 5 years.  A decade without a major inflow of spectrum; that’s a long time in the desert.

The Process for Reallocation

Second, when it comes to the process of allocating and reallocating spectrum, we are moving backwards, not forward.

Something extraordinary happened last week.  Our country reallocated 40 MHz of commercial spectrum.  No Notice of Proposed Rulemaking from the FCC.  No notice and comment period.  No economic analysis.  Not even a legal decision stating that that is what we are doing.

But make no mistake.  Through a complicated process—mostly out of the public eye—of K St. machinations, inter-agency battles, and congressional pressure, we as a country came to the unstated but clear conclusion that the GPS industry has a primary right to use the spectrum in the band owned by LightSquared.

Again, my point is not to relitigate the result or point fingers.

But we should not kid ourselves about the meaning of this.  Just as the stock market sends signals, our political system has just sent a clear signal to anyone seeking to utilize previously under-utilized spectrum that the process by which they can invest in and innovate on top of spectrum is fraught with uncertainty, irrationality, and last-minute surprises.

If anyone thinks that the kind of entrepreneurial creativity and money that went into an M2Z or Lightsquared is going to happen again soon, give up that fantasy.

And today, the spectrum they wished to invest in remains as it was; without new investment, networks, or services.

A New Strategy for Addressing the Spectrum Crunch

Third, we may need to change our strategy.

Let’s face the facts.  Even if incentive auctions work great, even if I turn out to be wrong about the LightSquared spectrum and a fix can be found to make it useable, even if we had been successful at figuring out how to incent government agencies with spectrum to find ways to turn it over to commercial uses, we still would be behind where we need to be in terms of the spectrum we need to keep America on the front edge of the wireless revolution.

The model for how we deliver wireless services is going to have to change, and the market knows this.  Which is why you see a lot of activity with other ways of architecting the network to off-load traffic to different networks at different points.  The big news coming out of last week’s international wireless conference was all about use of unlicensed spectrum and utilizing smaller cells for spectrum off-load.

We thought this might happen with the broadband plan.  The spectrum chapter proposes two simultaneous strategies; one on freeing up more spectrum for commercial use through auctions and rulemaking; and the second on better use through technology, such as dynamic access or Wi-Fi off-load.  Most of the political capital was focused on the first, and while incentive auctions represent progress, it only does so like a gain of 3 represents progress in a set of plays in which we lost 20.

If, two years after the plan and an executive order, we have not freed up a single MHz of spectrum, we have to consider that given our political process, the path of reallocating spectrum may be not bear much fruit.

We should keep at it, but we should not put all our chips on that number.  The events of the last few years suggest we may need to reallocate our energy on a strategy that has a higher chance of success.

Implications for Minority Communities

As minority communities tend to rely on wireless more, poorly allocated spectrum and bad spectrum policy represent a tax on your community that is disproportionately high.  It is a tax that will be felt with degraded service, higher prices, and less opportunity.  It will be a tax imposed on all, but it will be particularly hard hitting on the communities all gathered here know we need to do more to assist.

The Big Challenge: Achieving a Strategic Bandwidth Advantage

Let me close by saying that I think the most important domestic challenge for broadband policy is how do we have an ecosystem that delivers to us a strategic bandwidth advantage.  As bandwidth is a strategic input, we should want the residents of our country to have the appropriate bandwidth they need to collaborate with others in driving economic growth and social welfare with a value proposition superior to those in other regions or countries.

Yes, we need to get everyone access, but with billions of federal subsidies already paid out and more coming through USF reform, that train has left the station.

The train that is still in the station is the one that makes sure that those segments of our economy that need world-leading amounts of bandwidth have the bandwidth, both wired and wireless, to compete and innovate.

Better use of spectrum is essential to obtaining that bandwidth advantage.

Thank you.

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  • Gorand

    Straight from the mouth of the broadband architect himself – what we’re doing isn’t working! Levin points out all the ways we haven’t increased the MHz of spectrum out there and why what we’re doing isn’t working – but is the FCC looking at alternatives that WILL work?

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