Politics

More PANS, Less POTS

Thomas Hazlett, conservative critic of government regulation and former FCC economist, wittily criticized current wireless regulation in a timely speech last week in New York.

by Alex Goldman ISP-Planet Associate Editor [November 18, 2003]

If you're an avid ISP-Planet reader, you may already know of Thomas Hazlett. He penned a diatribe in the Financial Times against the fear of VoIP by regulators, saying that VoIP brilliantly exposes the numerous flaws of telecom taxation, and allows those who are taxed by it to escape subsidizing others' service. We posted an excerpt in our Notable Quotes section and a link to the article itself.

Last Thursday, Hazlett was in New York City. Currently a Senior Fellow at The Manhattan Institute, he was in town to talk about wireless regulation in a speech titled, "Wireless Regulation for a Digital Economy: How the FCC Can Bring Spectrum Policy Into the 21st Century."

He opened by telling his urban audience, "you should be sad you're not living in Fargo, North Dakota, because the wireless options are more attractive there. A company called Monet Mobile Networks provides broadband everywhere in town. And there's no technological reason why you couldn't do the same in New York, Boston, or LA, but in larger markets, these services, though legal, are crowded out by the large volume of cellular phone calls."

He followed up with a prediction. "I have a prediction. By September 7, 2006, there will be more wireless subscribers than POTS subscribers."

Hazlett believes that the US government has done a little bit right—and a lot wrong—in its regulation of wireless spectrum. He says that the FCC learned from its errors of the 1980s, when it issued analog-only licenses, and has stopped requiring that providers use specific technologies.

No policy is good policy
The greatest success of non-regulation, he says, is PDA networks, like RIM Blackberries. "I was talking to some people at the FCC last week, and I said, 'look at PDAs. What's your policy on PDAs?'" He said that they had to think for a moment because it did not immediately occur to them that the FCC had no policy on PDAs, and that was exactly why PDA networks had been so successful.

Hazlett said that there are now six national networks. When the FCC was considering licensing cell phone technology in the sixties, seventies, and early eighties (it seems the FCC took its time), it was considering that the technology might be a natural monopoly. Eventually, it decided to allow two networks, to enable some competition. Hazlett says the market has a better idea, and has suggested that there be six competitors.

Of those six, several use different technologies. One uses GSM, the technology mandated in Europe, which is older, less efficient, but may be more stable. Many use versions of CDMA, which is more efficient and may provide better upgrade paths to future services but is more expensive because it is owned by Qualcomm, which charges royalty fees. One (Sprint) uses PCS, which is especially suited to dense urban areas.

Competition remains fierce in the data-enabling technologies that have not yet been deployed, with one publication calling the debate a set of "holy wars."

Hazlett pointed out that here, too, the US is behind the rest of the world. He said that although the overall cellular business is massive, with revenues close to $100 billion, barely 1 percent of that is data related, which is a low proportion compared to Europe or Asia.

He said that the federal government's numerous mistakes have been one founding error. "Most nations award four or six cellular licenses. A particularly large, dispersed nation like Canada may award 11 licenses. Guess how many licenses have been awarded in the US?"

The number, he said, is about 50,646, including about 40,000 licenses for Specialized Mobile Radio (SMR) which have been bought up by Nextel (it wasn't a really really big tower as is jestingly suggested in some Nextel ads, but buying that many licenses took a lot of time and a lot of money, money which went to federal, state, and local regulators). That still leaves several thousand PCS licenses and over 1,000 cellular licenses.

The business of regulation is America's business
The incentive for regulators to require more licenses is obvious: they generate more money. But the money comes from taxpayers and entrepreneurs, and the costs slow innovation and are a barrier to competition.

Hazlett said that the perverse incentives of selling licenses are most obvious in auctions. "Politics delays auctions, so that the government can ask for more revenue. In March 2001, the Bush Powell FCC decided to delay 3G auctions because there might be more demand for the licenses later. They called it a 'win, win situation.' Of course, somewhere, someone's saying, 'hey, I'm a consumer. What about me?'"

He added that for lobbyists, the easiest request to satisfy is when an established company asks that a ruling be delayed. He joked that one of his favorite headlines is, Spectrum Auction Delay Hits Fast Track.

"The Bush administration and the FCC say that it's going well because they're having meetings and rulemakings. But the plan is cut back even from what the Clinton administration had planned."

When he talks about regulators, Hazlett knows his subject. He was FCC Chief Economist during 1991-1992. "Regulators are very passive. The private sector has to come to them. Regulators listen to the incumbents, listen to the competitors, and then weigh the politics."

He said that manufacturers play a very valuable role in this process because they want competition and a viable market. When making decisions on spectrum allocation, he paid particular attention to the filings of Nortel Networks. "The company is Canadian, so it wanted competition, and it could not own a spectrum license."

The process consists of insiders fighting outsiders over how the law is structured. This is clearest when a company that was on the outside buys in (AOL, which advocated open access until it purchased Time Warner, is probably the most famous case). Hazlett said, "AT&T wanted the FCC to issue national licenses, which would make it easier to deploy national networks. Then AT&T bought McCaw Cellular and in their next filing, they advocated lots of tiny little local licenses."

Unchain my ideas
He pointed out that the FCC can do real harm to true innovation. A current example is Northpoint Technology (not to be confused with Northpoint, the late data CLEC). Northpoint had a simple and possibly even obvious idea. It has been trying to get permission to implement the idea since 1994. The company pointed out that, currently, all satellite dishes point South. It proposed to launch satellites to provide service that could be delivered to satellites facing North (hence the name Northpoint Communications).

The FCC refused, on the grounds that Northpoint might disrupt service for several minutes each month. Hazlett, whose background is in Economics, pointed out how absurd that was. He said satellite users are used to their service being disrupted by weather conditions. The cost of several minutes' worth of service each month is a fraction of a penny. The benefit to consumers of competition would be at least a 1 percent price drop and perhaps a 5 percent price drop. That's anything from 50 cents to 3 dollars—real money. While claiming to be defending customers and their quality of service, the FCC is preventing innovation, defending incumbents, and keeping costs artificially high by not allowing technology to change the marketplace.

"The worst thing you can do to spectrum is not use it," Hazlett said.

In order to encourage spectrum use, he recommended selling it without restriction. He advocated selling property rights in spectrum. This may sound similar to the way the railroads of the US were built in the nineteenth century—companies received land at a relatively cheap price and the government assumed the railroads themselves and the value they added to the US economy would be greater in dollar terms than the price to the government of the land handed out to the railways. Much later, one of those railroads became the financial platform on which Qwest was built.

He said, "we want more PANS (Pretty Amazing New Stuff), less POTS (Plain Old Telephone Service)." He said that it might be a pipe dream, and the machine of politcs would work against it.

"Experiments should be encouraged, even if they're stupid," Hazlett concluded. "Let a thousand wireless flowers bloom."

—End