Communications Insights: Trends and Cool Stuff

It is not often that my work squarely lines up with Presidential politics; however, it seems that work I am currently doing relates to statements made by Sen. John McCain on the campaign trail. I am en route to the 19th European Regional International Telecommunications Society Conference in Rome. Of the two papers I am scheduled to present, one is a paper chronicling the history of the US FCC’s Part 15 rules. These are the set of rules which enable devices such as Wi-Fi in the United States. Based on my research for this paper, Sen. McCain’s recent statements from the campaign trail are demonstrably false.

In a written response to Science Debates 2008’s questionnaire for the two major party’s Presidential candidates, the McCain campaign stated:

I am the former chairman of the Senate Committee on Commerce, Science and Transportation. The Committee plays a major role in the development of technology policy, specifically any legislation affecting communications services, the Internet, cable television and other technologies. Under my guiding hand, Congress developed a wireless spectrum policy that spurred the rapid rise of mobile phones and Wi-Fi technology that enables Americans to surf the web while sitting at a coffee shop, airport lounge, or public park.

While the first two sentences are factually correct, the assertion that Sen. McCain’s “guiding hand” led to these policies is false. The policies which led to the creation of Wi-Fi (the IEEE’s 802.11 suite of standards) were a set of rules originally crafted in a 1985 FCC Report and Order. This rulemaking permitted low power, unlicensed use of spread spectrum radios in the 2.4 GHz band in which the standards 802.11 b & g currently operate.  (The 5.8 GHz band, which 802.11a uses, was opened by the Commission in a 1996 proceeding).  The first commercial spread spectrum product was a radio LAN which was introduced by Telesystems in 1988. The IEEE did not ratify the first 802.11 standard until 1999.

While it is true that the FCC is an independent regulator with delegated rulemaking authority from Congress, it is completely specious for Sen. McCain to claim credit for these rulemakings.  At the time of the 1985 rulemaking Sen. McCain was not Chairman of the Senate Committee on Commerce, Science and Transportation. Indeed, in 1985, Sen. McCain was serving in the House of Representatives.  Further, the 1985 Order was based on a 1979 consultant’s report commissioned by the FCC.  MITRE, the firm which drafted the report, recommended permitting the technologies which Wi-Fi uses in certain spectrum bands (the ISM band).  This was certainly not Sen. McCain’s idea, but Wallace C. Scales, the report’s author.

Similarly, Sen. McCain’s the claim that he guided the Congressional policy making which lead to the widespread adoption of cell phones is equally bogus.  The original cellular telephony spectrum licenses were allocated and assigned by the FCC in the early 1980s.  However, the true stimulus which, “spurred the rapid rise of mobile phones,” was the 1993 Omnibus Spending Act.  This law granted to the FCC the power to assign spectrum licenses by “comparative bidding” - auctions.  Through these first auctions the FCC allocated and assigned Personal Communications Services (PCS).  These licenses were designed to compete with the pre-existing cellular licenses and let to the fantastic success of mobile communications.  While this law was in fact drafted by Congress, it was done so by a Democratically controlled one.  Thus, in 1993 (and 1985) Sen. McCain was not the head of any Senate Committee.  (Just as a historical footnote, Sen. McCain was the only Republican in both the Senate and the House to vote against the 1996 Telecommunications Act).

Insight: Most candidates stretch the truth, embellishing their records or being one of the many fathers to success.  However, the absence of penalties for a candidate’s false statements distorts the electoral process - even those little tiny deceptions which go unnoticed by except by the wonkiest of policy wonks, like me.  The highest office comes with it the fiduciary duty.  Thus, we must hold candidates, “not to mere honesty alone, but a punctilio the honor most sensitive,” as Justice Cardozo admonishes us.   Allowing our candidates even the most minor of misstatements and misrepresentations creates a giant incentive for politicians to try to con us.  This leads to the “adverse election” of unqualified candidates who, once in office, establish bad policies.  We deserve better from our political process and should hold our candidates for elected office to the highest standards of “truthiness”.

Yesterday, Prof. Tim Wu of Columbia Law School published an Op-Ed in the New York Times on the subject of bandwidth.  In the article, he compares bandwidth to oil in terms of its percentage of the average household’s expenditures and in terms of the cartels which produce it.  He says:

Like energy, bandwidth is an essential economic input. You can’t run an engine without gas, or a cellphone without bandwidth. Both are also resources controlled by a tight group of producers, whether oil companies and Middle Eastern nations or communications companies like AT&T, Comcast and Vodafone. That’s why, as with energy, we need to develop alternative sources of bandwidth.

While Prof. Wu’s might be right in his conclusions, I have to take exception to some of the points he makes along the way, particularly regarding cost of bandwidth.

To begin with, the price of oil is based, to some large measure, on the cost of its production and not necessarily the cost of its consumption.  The cost of production includes the cost to pump the oil out of the ground, refine it, and distribute it.  The cost of consumption would include the societal cost of pollution such as global warming caused by greenhouse gasses.  Here in Europe where a gallon of gasoline exceeds $9, most of which is tax, the retail price may better reflect the cost to society not only production but consumption as well.  The cost of the production of bandwidth includes both network CapEx and OpEx.  The cost of its consumption includes the negative effects of congestion felt by competing would-be users at times of peak use.  It is effectively zero, when use is non-rivalrous.  The price of bandwidth, as well as other resources subject to high negative externalities, should reflect the cost its production and consumption.  This maximizes the benefits which society obtains from the resource.

This is precisely why, contrary to Prof. Wu’s assertions, the FCC is working on such ideas.  FCC: OSP Working Papers #41, #42, and #43, on which I am a proud coauthor/collaborator, look at precisely these issues.  We designed and tested a system which instead of assigning spectrum in static blocks, would co-ordinate use of the spectrum to an efficient optimum.  Beyond the overly simplistic bandwidth dipstick, the FCC work also modeled other dimensions of performance, such as latency, and could be extended to include jitter, reliability, robustness, etc.  Nonetheless, the economic congestion protocols we developed would allocate bandwidth in real-time based on willingness to pay when there is congestion and it would be free otherwise.

To be fair, a business model which relies solely on congestion-based prices for its economic logic would not be sustainable.  Imagine an airline which would allow its passengers to fly for free, unless more passengers show up than there are seats, in which case it will charge all the passengers based on their willingness to pay.  One would expect such an airline to have very small planes, or, more likely, very large seats in its planes.  Without a way to ensure rivalry among its passengers for its capacity (i.e., seats), such an airline would surely go out of business.  Thus, a sustainable price for bandwidth must reflect the cost of both production and consumption of the resource.

Insight: I continue to tout these papers in my blog because they are important, cutting-edge work.  We sought to lay the groundwork for a better system which incorporates the best of the licensed and unlicensed approaches to spectrum access.  This system would be, to use Eli Noam’s words, would be “open, but not necessarily free.” As such, it would maintain sufficiently low barriers to entry, which would make it sufficiently difficult to obtain monopoly rents.  It would be nice if Prof. Wu would put forward some of the available solutions to “alternative supplies of bandwidth” in addition to pointing out the problems.

For more than nine decades, lawyers, engineers, and economists have argued that radio spectrum regulation is needed due to the fact that without some form of intervention, it is impossible to exclude or limit the use of a common resource such as spectrum.  Without exclusion, users consume the spectrum without regard to their usage’s impact on the benefits obtained by other would-be users.  They, therefore, tend to overuse the spectrum, causing interference to other users.  This reduction in social welfare due to overuse is referred to as the Tragedy of the Commons.However, we can now observe from the debate surrounding the TV White Spaces that the ability to exclude certain users is not sufficient to remedy the Tragedy of the Commons. A relatively small number of over-the-air TV households are able to use these spectrum bands without regard to the costs their use imposes on the rest of Americans.  Indeed, according to the most recent FCC statistics, in 2005 only about 14% (See Appendix B, Table B-1) of US TV households receive their TV over-the-air. The remaining 86% get no direct benefit from this spectrum.

The National Association of Broadcasters is now opposing tests the FCC is currently conducting which will measure the impact of unlicensed use of the White Spaces on digital TV reception. In order to protect digital TV receivers, potential White Space users must be excluded, and the NAB is throwing its weight around to ensure that outcome.  According to a quote from NAB spokesman Dennis Wharton, “We’re not going to be engaging in threats or anything, but about 70 members of Congress have already sent letters in expressing concern.” Well, as I wrote in a previous entry on Cool Stuff, at least one of those 70 letters is total bunk. Nonetheless, the cost to all of society of affording interference protection to this minority must also be considered.

Insight: If the NAB’s argument is accepted without scrutiny, the 14% of TV households will prevent the other 86% of US TV households (plus the TV-less households) from using those radio frequencies for broadband Internet, baby monitors, new forms of low-power broadcast, and other RCS (really cool stuff).  This lost benefit will not be compensated.  The exclusion of certain competing uses is necessary but not sufficient to ensure that society reaps the maximum benefit from the radio spectrum.  A means through which spectrum users can bear the costs they impose on others by excluding them is also necessary.

My article Unlicensed to Kill: a Brief History of the FCC Part 15 Rules has just gone to press and will be published in the journal Info.  I originally gave the paper at The Genesis of Unlicensed Wireless Policy conference organized by Tom Hazlett at George Mason University Law School.  (Yes, dear reader, Tom Hazlett hosted a conference on unlicensed.  The Seventh Seal is broken and the End of Days is truly upon us.)

The conference looked at the origin and evolution of the FCC’s Part 15 rules.  There were several interesting takeaways.  Most of these are lessons which we already know, but all too often take for granted.  Keynote speaker Michael Marcus reminded the audience that people frequently act in their short term interest, in a way in which they foreclose long-term opportunities for themselves.  Dr. Marcus described the regulatory battles of the 1980s during the FCC’s rulemakings where cordless manufacturers fought fiercely, opposing certain rule changes.  These rules now enable most of the cordless phones these manufacturers now sell.  The closing keynote, Dewayne Hendrix pointed out how spectrum policy the cognitive dissidence spectrum policy faces in affording interference rights.  We allow licensees to “whine” about interference when they use decades old technologies which do not have the ability to reject unwanted signals which more modern gear does.

Insight: In the US, there is no such thing as unlicensed spectrum.  Rather, and this is an important distinction, the FCC allows low power operation on a sufferance basis, proved the devices cause no harmful interference and accept all received by them.  Operators have a right, but not a vested right to continued operation.  The FCC has historically viewed the radio energy emission from these devices as not rising to a level sufficient to call “spectrum”.  This has left me wondering if there is no such thing as spectrum at all.  Spectrum is a legal and engineering construct to control for an immutable fundamental physical property.  When multiple electromagnetic waves, used as carrier waves to transmit information are incident in time, harmonic in frequency, and alight on the same reception antenna, they degrade one another’s ability to transmit information.  Next generation radio policy will focus more on solving the coordination/congestion problem, and not on “spectrum” per se.  (I also gave a really cool PowerPoint.  (Click to start, click to advance each slide after the animation stops).

In a previous Cool Stuff, I wrote about the study which I completed demonstrating the social value from reallocating some of the Digital Dividend spectrum for broadband mission critical public safety communications. The European Parliament seems to agree.

Yesterday, the European Parliament’s Industry Committee adopted a report urging that the EU should ensure a set of harmonized, EU-wide rules on how to allocate radio frequencies that will be freed up when analog terrestrial television broadcasting ends in 2012. The report was an own-initiative report authored by Italian liberal MEP, Patrizia Toia and was adopted in Committee with 41 votes in favor, 1 against, and 1 abstention. A plenary vote is scheduled for September. Further, the amendments to the report argue that approximately 100 MHz of the Digital Dividend could be reallocated to mobile broadband and other services such as public safety services, radio frequency identification (RFID), and road safety applications, without preventing broadcasting services from flourishing.

Insight:  While the transition from analog to digital terrestrial television should be complete in Europe by the end of 2012 (nearly 4 years after the U.S. is scheduled to complete its transition), decisions on how to reallocate the approximately 75% of the highest quality spectrum which will be released cannot come fast enough. Mission critical broadband communications networks require long lead-times to plan and deploy, and the services they enable are nothing short of lifesaving.  Public safety and security users urgently need an additional allocation of a approximately 30 MHz for these purposes.  The Industry Committee correctly urges Member States to release their Digital Dividend spectrum as quickly as possible, follow a common methodology, and develop national Digital Dividend strategies by the end of 2009.

I finally just had a chance to read the FNPRM for the rules governing the C Block in FCC’s recently concluded 700 MHz Auction and it says “handsets”! Why is this significant?

For the C Block, comprising 22 MHz in the upper 700 MHz band, the FCC created special open access provisions. The FCC will require licensees to provide a platform that is open to third party devices and applications. Specifically, licensees must allow customers, device manufacturers, third-party application developers, and others to use any device or application of their choice on their networks in this band, subject to certain limited conditions. Licensees may not “lock” handsets to prevent their transfer from one system to another, or to other services that compete with wireless service providers’ own offerings. The FCC concluded that these rules were justified because it did not find “that competition in the [mobile] marketplace is ensuring that consumers drive handset and application choices, especially in the emerging wireless broadband market…. it is easy for consumers to differentiate among providers by price, most consumers are unaware when carriers block or degrade applications and of the implications of such actions, thus making it difficult for providers to differentiate themselves on this score.”

Insight: Beware the law of unintended consequences. Here it is not the proverbial monkey wrench, but a pair of bolts, literally, which could bring the FCC’s policy to a grinding halt. Implicit in the service rules is the assumption that the band will evolve to resemble the next generation of the current mobile market in the US. But assumptions like this never last. I wonder if it is possible for clever operator could escape the open handset requirement by providing fixed services. The 700 MHz spectrum is particularly well suited to a variety of applications, one of which might be fixed broadband. In rural and suburban areas fixed wireless broadband could be an effective competitor to wireline. Presumably these areas would be sufficiently competitive that the FCC’s finding would not hold (remember it is limited to handsets, and not even service plans). Thus, if the licensee is bolting “pizza boxes” to the side of homes, would this type of network not be subject to the open access provisions? It’s unclear, but something to think about.

Google’s Larry Page spoke at a recent New American Foundation event, calling for “Wi-Fi on steroids” for the TV White Spaces.  Every time I hear this, I cannot help but think, “Oh great, a radio that is hyper-aggressive, muscle-bound, and impotent.  Why would I want such a technology?!” All joking aside, I approve the sentiment, but a little more careful analysis is need.There is here a unique window of opportunity to allow new uses of the TV spectrum which is currently inefficiently used.  For the past 9 decades, the FCC has regulated high power uses of the radio spectrum, such as broadcasting.  The FCC has also for the past 7 decades permitted low power uses, with increasing success.  The TV White Space presents the opportunity to permit medium power uses of the spectrum - something between Wi-Fi and TV.  However, neither the high-power of low-power paradigms seems to fit.  Licensed approaches typically allocate use to a single entity which makes decisions about use.  As a result, much remains unused at any given time.  The rules created are hard to change and do not afford much flexibility in terms of decisions regarding use by the licensee.  In contrast, unlicensed approaches strictly limit the radio energy which a device can radiate into the ether.  By controlling the emissions, the rules limit the possibility of harmful interference.  These rules create a much more flexible set of permission, but due to the stringent power limitations ranges of the radio devices can be extremely short.  What is needed is a new form of coordinating spectrum uses for medium power applications, which holds the benefits of both approaches while minimizing the potential downsides.

Insight:  Fortunately, some of the FCC’s best and brightest have been working this issue.  In a previous Cool Stuff, I wrote about my FCC Working Paper, which lays out ideas for the implementation of economic congestion etiquettes which would allocate spectrum use in real time to its highest monetary value uses.  This approach could significantly improve the value society receives from the use of the radio spectrum, without the need for dangerous pharmaceuticals.

Telecommunications network operators have traditionally charged on a unit basis for messages sent and received. Dating back to the heyday of telegraphy, operators charged by the word. With the rise of the Bell System telephony was charged on a per minute basis. The 1984 Divesture of AT&T saw the rise of two part tariffs, to separate costs related to access and long lines networks. However, the basic premise was a per minute charge (oftentimes including a connection or first minute charge). This arrangement was simple and allowed for easy comparisons of unit charges, dividing total revenues by total minutes of use (MoUs). This price per minute is an easily comparable metric - a voice minute has changed little since Alexander Graham Bell famously whispered, “Watson, come here I need you.” Regulators could employ price per minute performance as a gauge on the efficacy of policies, and consumers could understand the value of what they are getting.

However, now, driven by competition in mobile telephony, communications carriers have offered an alternative set of arrangements (the same is now true for fixed line carriers and even some data networks). These have been variant of the flat rate plan, mixing flat rate and per unit pricing plans. Under such “buckets of minutes” plans, customers pay a flat rate for a huge number of minutes whether they use them or not. If their usage is over the allotted amount, then they pay on a per minute basis at a rate much higher. The per-minute charges are not intended to be used on a routine basis; rather, they are set at high or punitive levels, so as to enforce the need to upgrade to the next higher band as the customer’s usage increases over time. These plans are most appropriately viewed as representing banded flat rate arrangements. There are different bands, representing different numbers of total MoUs per month. In the United States, these banded flat rate plans have been well accepted by consumers and industry. They probably track underlying costs of mobile telephone service reasonably well, to the extent that usage-based average incremental costs in the United States are primarily a function of air time. Customers appreciate the predictability and the relative simplicity of the plans. So long as the consumer does not exceed the maximum number of minutes in the band, the consumer will tend to think of the plan as being purely flat rate.

The introduction of bucket plans, however, frustrates any calculation of per minute unit price. Plans of this type usually incorporate a per-minute charge for minutes, but it would be a mistake to analyse a banded flat rate plan as if it were a simple two-part tariff. In calculating per minute charges it is unclear whether to utilize actual minutes of use consumed or plan minutes sold, but not used. The results would be quite different. The former would yield a higher price, but would not indicate the value “left on the table” by the consumer. While the latter would tend to under represent the actual cost by making implicit the value of the option of further minutes of use at zero incremental price.

Insight: The appropriate way to regard bucket plans, and hence, to value per minute unit prices, is as a permutation of a financial call option. A call option affords the right, but not the obligation of use at a specified price, called the exercise or strike price, on or before a specified date. The intuition begins with a graphical analysis, see inserted figures. The graphic on the right displays the payoff of a financial option at various prices. The x-axis represents the price of the underlying security and the y-axis represents the potential profit or loss. The value of the option stays flat until the market price exceeds the strike price. At this point, its value increases and becomes positive once it exceeds the cost of the acquiring the option. Now consider the figure on the left. It shows the cost of two bucket plans. The x-axis is still the independent variable: minutes of use. The value (or price) of the plan is flat until exceeds the flat-rate portion of minutes. It then increases at a linear per minute rate, until at some point it is preferable for the customer to take the larger bucket. These two graphics look virtually identical, suggesting that the option valuation method holds promise as an effective metric.

The value of options can be captured by a complicated formula developed by Fischer Black and Myron Sholes in the early 1970s (the two shared the Nobel Prize for this observation). The option value is based, inter alia, on the current market price, the strike price, the variability of market price with regard to the strike price, the risk free cost of capital, and the maturity of the option. By finding equivalents for these variables in bucket plans, we can easily derive per minute values for under bucket plans.  I realize that this may be a bit of an oranges-to-tangerines comparison. There are certain items not present in the derivatives markets in these service plans. Nonetheless, such a calculus would allow for straight forward comparisons of the price of services plans across firms, countries and over time series where such plans might not exist.

My report on Public Safety and Security spectrum use in Europe publishes today. In the report, we marshal the policy and technological arguments for a reallocation of further dedicated spectrum for mission critical PSS communication from the transition to digital terrestrial television, the so called Digital Dividend. The website for the study is: http://www.public-safety-first.eu/. For the first time since I served on the FCC’s Hurricane Katrina response team, I have felt that my work has served a critical societal need. Yet, as an American who is used to being constantly bombarded with the need for homeland security, it was a bit surprising to me that PSS communications has received little attention in the discussion regarding how to redistribute this radio spectrum. So, it has been personally rewarding to influence the debate in at least some small way.

Insight: PSS service responders provide us with indispensable police, fire and other emergency services and the provision of emergency services extends beyond the social contract and invokes a moral obligation to protect life, welfare, and property. In order to enable the necessary broadband communications for next generation PSS communications, they will require two additional 15 MHz-wide blocks in the Digital Dividend bands. This allocation is on par with the 24 MHz which the US is reallocating from its DTV transition. A reallocation to PSS use cannot come soon enough since it may take more than ten years, to plan and deploy these networks.

The Justice Department has approved the merger of Sirius and XM radio. DoJ reasons (and I use the term loosely) that retail prices are unlikely to rise, in part because of competition from other program sources (including hybrid digital radio [high definition, sic] and iPods), and in part because the two firms do not compete. The NY Times reported Thomas O. Barnett, assistant attorney general, as saying in announcing the decision, “In several important segments of their business, with or without the merger, the parties simply do not compete today and therefore the merger would not be eliminating any competition between them.”

Insight: To the underpaid, over worked judicial clerk reviewing the DoJ decision in some far off Circuit Court of Appeals who finds my blog on a good Google search someday, I say this: You can no doubt see the significant economies of scope and societal efficiencies generated by merging programming sources for Howard Stern, Snoop Dogg, and NPR. However, the reasoning from the DoJ is as irrelevant as it is illogical as it is factually wrong. In a two-to-one merger, the fact that there may be some areas where they DO NOT compete is utterly irrelevant. The analysis was supposed to focus on the areas in which they DO compete. Moreover, in which segments could XM and Sirius possibly not compete? They are Coke and Pepsi. It’s like saying Coke and Pepsi do not compete because if you drop Mentos into Pepsi, it does not explode. Ergo, they are in different market segments. Let’s rewind the tape for a minute and think about the alleged competition from other program sources. Imagine going into the ICC to lobby Anning S. Prall and saying that we no longer need spectrum policy since there is no longer any scarcity. After all, Mr. Edison’s Victrola competes with Mr. Marconi’s wireless apparatus.

Just because I have never read DoJ’s merger guidelines does not mean that they should not.