Unbelievable Lack of Consensus on Spectrum Supply & Demand

I’ve recently spoken at several wireless industry conferences where I’ve had a chance to informally discuss various topics with a number of well-regarded U.S. industry experts. In the course of these conversations, the discussion often turned to the issue of supply and demand for wireless spectrum. While it’s normal for opinions about the future to vary, I was struck by the extent of the disagreement on this fundamental topic. Here’s a quick summary of the debate.

The Supply Debate

The supply side of the equation is more complex than the demand side. Much of the uncertainty is due to the difficulty in predicting the outcome and timing of various government efforts to increase spectrum availability. But the following is know:

  1.  The 2010 National Broadband Plan seeks to add 300 MHz of spectrum for mobile broadband by 2015 and 500 MHz by 2020. The largest part of that is the 120 MHz the FCC seeks to pull back from television broadcasters via the reverse broadcaster incentive auction process.
  2. The PCAST report, suggests the government share 1,000 MHz of federal spectrum below 3.7 GHz with commercial users.
  3. There is also a movement afoot to force spectrum license users to allow others to use their spectrum when they are not using it (see: http://newamerica.net/publications/policy/end_spectrum_scarcity).

Cumulatively, these plans, if realized, could massively increase spectrum supply for wireless services.

But these processes are somewhat behind schedule – some say hopelessly. Some say few government agencies will ultimately agree to share spectrum. They also suggest wireless companies will be reluctant to be “second class citizens” on government spectrum. They will resist use smart radios needed to determine when and where they can use it.

The television broadcasting incentive auction is currently getting a great deal of attention. Some say it won’t actually happen due to political issues while others say it’s on the road to happen in the next 18 months and will release 120 MHz of spectrum nationwide into the market. They note that all of the other spectrum reallocation efforts are all years behind schedule. Others say it will fail because the spectrum is too valuable for the broadcasters to sell and any price the FCC will likely offer. At the same time, another leading expert told me that the broadcast incentive auctions may not happen because so much of the government spectrum is being opened for sharing per the PCAST recommendations. Nearly 500MHz of shared spectrum allocation is currently in the NPRM process – 3.5GHz [100-150MHz], 4.9GHz [50MHz], 5Ghz [195MHz] and there is also some effort going on in the 1750-1850MHz [100MHz] band. This camp argues that the incentive auction may be called off because the broadcasters’ spectrum simply won’t be needed.

The Aereo, Inc situation creates ad additional wrinkle. Some broadcasters (including Fox) are now saying that if the Second Circuit decision affirming Aereo’s right to sell their over the air broadcasts through the internet, they may stop broadcasting over the air and only sell to satellite and cable systems. If this happens, television broadcasters might not have much incentive to keep their spectrum and would eagerly participate in the auction process. Ironically, in this case it would not be the weakest broadcasters who would participate, but rather the strongest. The strongest broadcasters, especially those with network affiliates, have leverage with the cable companies. The smaller ones are more likely to be dependent on “must carry” rules that are tied to broadcasting over the air. Of course the Aereo’s legal situation is not completely clear. A lower level (district court) in the Ninth Circuit (covering nine western states plus Guam and the Northern Mariana Islands) ordered a similar service to shut down. The judge indicated the broadcasters were likely to win their claim of copyright infringement. Should the case be appealed and the Ninth Circuit rules opposite the Second Circuit, it would set the stage for the Supreme Court to decide. The broadcasters may also seek regulatory relief. Broadcasters have a great deal of influence in Washington. However, the government is encouraging television broadcasters to leave their spectrum. Passing a law strengthening their hold on spectrum would seem inconsistent.

The Demand Debate

Like the argument with respect to supply, there is little consensus about the rate of future demand growth. The issue is somewhat more fundamental – predicting consumer usage patterns and improvements in spectrum efficiency. Some experts point to high historical demand growth and the increased rollout of smart phones, which tend to use multiple of the amount of spectrum of other phones and the rollout of 4G which only encourages increased internet usage including media downloading.  Cisco, for example, projects a 10-fold growth in mobile demand from 2012 and 2017. Currently approximately, the FCC has allocated approximately 608 MHz to wireless broadband. The “spectrum crunch” side argues that such demand growth will outpace any likely increase in supply.

Others say the demand growth is exaggerated (See http://gigaom.com/2013/02/09/is-cisco-stacking-the-deck-with-its-mobile-data-numbers/). They point to data caps that most operators have put on their new plans. Some evidence shows that the growth in data traffic has slowed. Newer 3G and 4G protocols are far more spectrally efficient that earlier versions. Additional rapid Wi-Fi off-loading – estimated at close to 33% of wireless traffic in 2011 and growing – perhaps to as much as 60% today — is absorbing much of the demand growth. Skeptics of the “spectrum crunch” point to the a study cited in the PCAST report indicating that less than 20% of the capacity in prime spectrum bands under 3.7 GHz is utilized even in the most congested areas (See PCAST Report, p.99) . The PCAST Report argues that more efficient spectrum use could increase effective capacity by a factor of 1,000 (p. vi).

Opportunities

It’s rare for an industry as mature as the U.S. wireless industry to have such little consensus about medium-term supply and demand growth. But a lack of consensus attracts investors because it creates an opportunity to make money for those who can get it right. Currently investors are bidding-up smaller broadcasters in major markets with the hope of selling back to the FCC at an even higher price. Broadcasters expecting the auction to be less attractive are eagerly selling to them. Wireless companies are making major spectrum transactions with little industry certainty about future supply that could significant impact the values of the spectrum they are trading.