U.S. government causes wireless interference
By Dan Briody
Red Herring
October 4, 2001
This article is from the September 15, 2001, issue of Red Herring magazine.
In Tokyo, competitors type feverishly on their Internet phones in contests to determine the fastest wireless emailer in the land. Last year, wireless subscribers in Sweden sent 494 million text messages. At a population of only 9 million, that's 55 messages per Swede. In England, more than half the inhabitants subscribe to a wireless service. But in the United States, wireless users are lucky if they can get clear enough reception to complete an important business call, let alone carelessly blast playful messages to their friends and family. Yes, the United States lags embarrassingly behind the rest of the world in wireless services. But it's about to get worse -- a lot worse -- unless the U.S. government takes immediate steps to make more spectrum available to the domestic wireless industry.
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"Cisco's not going to sell routers, Intel's not going to sell chips, Microsoft's not going to sell software, and entrepreneurs are not going to sell products unless the U.S. has a wireless infrastructure to support them," laments Tom Wheeler, president and CEO of the Cellular Telecommunications & Internet Association (CTIA), which is lobbying Capitol Hill to free up the needed spectrum.
After struggling for years to compete with its overseas brethren, the U.S. wireless industry is now fighting a far more powerful force: its own government. U.S. federal regulators, paralyzed by warring political factions, have been unable to allocate radio spectrum to wireless providers in a timely fashion. And because spectrum is the lifeblood of next-generation wireless networks, known as third-generation wireless (3G) -- analog cellular was the first generation and digital PCS the second -- nothing could be more important to the future of the wireless industry.
The Clinton administration understood this when it issued a memorandum on October 13, 2000, to the heads of the entities involved, including the Federal Communications Commission, the U.S. Department of Defense, the U.S. Department of Commerce, broadcasters, and the Cellular Telecommunications Industry Association (the precursor to the CTIA), directing them to coöperate to get more spectrum into the hands of the wireless carriers. And after stiff lobbying by the wireless industry in early 2000, President Bill Clinton gave the FCC a deadline of July 2001 to identify spectrum for 3G -- a deadline that has since come and gone.
A formidable obstacle is the U.S. Department of Defense (DOD), squatting on broad swaths of the desired spectrum -- considered to be the beachfront property of wireless. The DOD considers its spectrum vital to national security and issued a report in April stating that it has no intention of giving it up. Besides the enormous cost of moving to another band of spectrum for its communications needs, the DOD likes its current band for the same reason the wireless industry covets it: it is perfect for sophisticated communication services that could one day include live battlefield video from cameras mounted on soldiers' helmets (see "New technologies may revolutionize war," August 1).
GRUDGE MATCH
For its part, the Bush administration has done nothing to alleviate the standoff between the military and industry. Both groups are high on President George W. Bush's priority list, making any decision a difficult one. And the one body that might be expected to act as referee, the FCC, has no authority over military uses of spectrum. Added to the mix are television broadcasters, which own huge chunks of spectrum for ultrahigh frequency television and have one of the most powerful lobbies in the United States. Needless to say, the wireless industry isn't expected to gain much ground against the broadcast industry.
Meanwhile, Senate Democrats, led by Senator Tom Daschle (D: South Dakota), are beginning to turn up the heat on the White House, waging an increasingly public lobby on behalf of wireless. In short, the future of U.S. wireless communications has become a political grudge match.
At stake is a huge boon to U.S. economic health over the next decade. Mr. Clinton's Council of Economic Advisers estimated last year that 3G services could have a $500 billion impact on the U.S. economy by 2010 -- assuming that the spectrum is made available. And that number goes well beyond just cell phones and networking equipment. Also at risk are the throngs of entrepreneurs hoping to capitalize on 3G with wireless applications and services, a market that has already begun to shrink due to the uncertain future.
The 3G political gridlock threatens to rob a coveted source of revenue from Silicon Valley and reduce countless startups to rubble. Spending on 3G networks, and the new revenue streams the services might generate, could pull the high-tech industry out of its malaise. But further spectrum-allocation delays could have a devastating effect, not only on the high-tech industry, but on the overall economic health and global competitiveness of the United States.
3G'S A CROWD
Simply put, when a wireless carrier has limited spectrum, it is forced to "split" cell sites, or add more towers between existing towers, to add capacity. Each cell site can cost more than $1 million, a cost that is passed on to customers. Therefore, less spectrum equals more cell sites equals more expensive and lower-quality service. Europe and Asia have set aside generous amounts of spectrum for wireless infrastructure that, while costly, is less expensive than splitting cell sites. Japan, Germany, and the United Kingdom each have more than 300 MHz of spectrum designated specifically for wireless services. The United States, with a much greater population than any of those countries, struggles to get by with only 189 MHz. The next time a U.S.-based subscriber can't get through on her cell phone, she ought to consider that it may not be her carrier's fault. Instead, she probably should blame the DOD.
The one thing all wireless companies agree on is that they need more spectrum. All other issues -- price wars, new services, and protracted battles over technology standards -- take a back seat to allocation of radio frequencies for 3G communications. Spectrum has become more valuable to the wireless industry than pure gold -- and the government is sitting on a stash the size of Fort Knox.
Wireless telecommunications, in particular 3G, has had the misfortune of becoming the next big thing now that Internet businesses are revealed to have been built on flimsy business models rather than defensible technology. With the promise of high-speed Internet access on mobile devices -- between 1 and 5 Mbps -- investors thought 3G was their salvation. Last year, European wireless service providers spent $100 billion at 3G-spectrum auctions. Then, when analysts began to take into account the high cost of building the 3G networks and factored in the uncertain demand for the services they would deliver, European telecom stocks crashed, credit ratings sagged, and reality set in (see "European telecoms get desperate," September 1).
"The wireless Internet was completely blown out of proportion," says Amit Nagpal, a senior consultant for UK-based Analysys, a consultancy that advised the UK government on its 3G-spectrum auction. "The first reaction after the auction was, 'My God, everyone has overpaid for these things,' and in hindsight, it was crazy." So crazy, in fact, that Martin Varsavsky, chairman of Spanish telecom Jazztel (Nasdaq: JAZZ), said in a January New York Times article that, in thinking they could recoup the costs of the wireless Internet, European telecoms "acted like idiots." Investors agreed: since the beginning of the European auctions in April 2000, the stocks of British Telecommunications (NYSE: BTY) and Deutsche Telekom (NYSE: DT), two of largest spectrum customers, have dropped 64 percent and 70 percent, respectively.
Thus far, 3G has been a classic case of too much hype, too soon. Both British Telecom and Japan's NTT DoCoMo have had to postpone their 3G rollouts to year-end. DoCoMo's delay, in particular, was a public embarrassment. After months of hyping itself as the world's first 3G carrier, DoCoMo's proposed April launch fell victim to software glitches. The company plans to spend $8.2 billion on 3G infrastructure over the next three years and doesn't expect the new service, now slated to launch in October, to be profitable for another four years. British Telecom, which is $43 billion in debt after overspending on spectrum in Europe, also postponed its highly publicized 3G trial on the Isle of Man.
But U.S. carriers seem to be purposefully ignorant of the setbacks faced by their overseas counterparts. They spent a healthy $16.9 billion this past winter on spectrum -- little of which is suited for 3G. U.S. companies ought to have been more frugal in buying spectrum and estimating demand for faster second-generation (2.5G) wireless services like text messaging and Internet access. Instead, U.S. companies have ensured that the wireless whacking they're getting from European and Asian companies will continue unabated.
BATTLE OF THE BANDS
It is a long-standing joke in political circles that when the White House is having trouble balancing the budget, after day-long meetings and heated debates, someone inevitably pipes up and says, "Let's just sell some more spectrum." And then the officials all go home, problem solved.
This time, the DOD is the agency with the valuable spectrum: the 1,710- to 1,855-MHz range. These are the bands the World Radiocommunications Conference (WRC) identified last year as international 3G airwaves. The WRC action and the DOD's inaction underscore how hopelessly out of sync the United States is in the global wireless arena.
With little appreciation for political insiders' jokes and for the WRC, the DOD has made it clear that it is unwilling to vacate the spectrum for the benefit of the wireless industry. In its April report, the DOD argued that even if it had the $4.3 billion necessary to upgrade its systems to a different band of spectrum, the process would take 10 to 15 years to complete. Add to this the unavoidable fact that the newly appointed chairman of the FCC is Michael Powell, son of Secretary of State Colin Powell. At a recent wireless-industry trade show, Mr. Powell the younger clarified his position on taking spectrum from the DOD: "Those decisions are way above my pay grade. And as the son of a four-star, I respect authority." In other words, the FCC is unlikely to challenge the DOD.
"Who is in a position to question the military's needs?" asks Peter Tenhula, senior legal adviser to the chairman of the FCC, an organization that has loyalty to neither military nor industry concerns and has surprisingly little control. "Who is to say what technology DARPA [the Defense Advanced Research Projects Agency] is working on that is top secret and the DOD needs certain spectrum 10 or 15 years in advance? We don't tremendously care about what is going on in Europe and Japan. We are behind in spectrum allocation, but what does that mean? We also have the strongest military on earth."
The next most valuable chunk of potential 3G spectrum, in the 700-MHz band, is encumbered by the UHF TV stations, which, among others, includes the Catholic Television Network and several educational channels -- not exactly an appealing political battle. With an overpowering lobby, the broadcasters have also made it known they do not intend to give up their spectrum -- at least, not without a fight.
POLITICAL INACTION COMMITTEES
The battle remains a deadlock. Since the CTIA presented its case to the Senate Budget Committee in February 2000, very little has happened other than Mr. Clinton's memo setting the now-irrelevant July 2001 deadline for spectrum allocation. In the memo, Mr. Clinton hammered home the point that wireless is critical to the continued health of the U.S. economy, explaining that "first- and second-generation services increased productivity and reduced costs for thousands of businesses as well as government agencies. The next generation of wireless technology holds even greater promise.... As part of these efforts, radio spectrum must be made available for this new use."
And under the Bush administration, the wireless industry has actually managed to lose ground in its fight for more spectrum. U.S. Secretary of Commerce Donald Evans called a meeting with representatives of the largest wireless companies in March to reassure them that he understood their situation and was working with FCC Chairman Powell and U.S. Secretary of Defense Donald Rumsfeld to resolve the issues. Mr. Evans has been designated as the Bush administration's point person on spectrum issues. The meeting was deftly timed to occur days before the release of two devastating reports: one was the DOD's April report; the other was from the National Telecommunications and Information Administration (NTIA, an agency of the U.S. Department of Commerce). Both reports painted a bleak picture for the wireless industry, stating what was already known about the spectrum shortage and offering no signs of federal acquiescence to the demands of industry.
Mr. Evans's meeting was spun by White House officials as an effort by the Bush administration to address the concerns of the wireless lobby. But one attendee, a representative of a U.S. wireless equipment company, called the meeting nothing more than political posturing and said it was "without substance. Evans knew these reports were coming out, and he knew the industry was going to hate them. But he was just being a very smart politician, because the bottom line was that there is no easy way to do this."
It was only in August that the Bush administration finally appointed Nancy Victory, a Beltway attorney who has represented clients like Verizon, Motorola, and AT&T, as head of the NTIA, the organization that oversees use of spectrum by federal entities, including the DOD. As a result of not having an NTIA chief for eight months, Democrats find themselves in the rare position of siding with industry and pressuring a Republican administration to do the same.
On July 2, the newly appointed Senate Majority Leader, Mr. Daschle, put the screws to Mr. Bush, writing a strongly worded letter imploring the White House to address the spectrum concerns or face dire financial consequences. In the letter, Mr. Daschle writes that "the Department of Commerce must act sooner ... or we will face significant economic losses to our competitors abroad. We must develop a comprehensive strategy to make spectrum available for advanced services. This will avoid the diversion of capital to foreign wireless markets. Every day of delay threatens our ability to realize this potential gain."
In July and August, however, Mr. Daschle's saber rattling resulted in nothing more than an airing of industry and federal concerns on the issue during pointless testimony before a Senate subcommittee. White House officials declined to comment on Mr. Daschle's letter and the Senate hearings.
CALLS WAITING
Hoping for a fast resolution to the stalemate are hundreds of startups that are creating services and applications for 3G networks. And, of course, nearly every one of these companies claims it has the "killer app" for 3G that will prove the huge investment in spectrum and infrastructure was money well spent.
"The sooner rich media is delivered over these networks, the sooner services like ours can take off," gushes Matthew Skyrm, CEO of Kick, which provides a service that adds personalization to streaming-music applications. But without 3G spectrum, many startups will run out of cash long before their services can be offered.
In the meantime, a growing number of startups have chosen not to hold their breath. Companies like ArrayComm, Metawave Communications (Nasdaq: MTWV), and Schema are creating new technologies to circumvent the DOD's stranglehold on spectrum. "You cannot invent more capacity in spectrum," says Yuval Davidor, founder of Schema, which makes software that optimizes spectrum usage on wireless networks. "But you can make it more efficient."
AUCTI0N WOES
With a sagging economy, a domestic communications industry in a tailspin, and a potential $500 billion boost on the line, the U.S. government should be more eager to develop a quick and fair solution to the spectrum-allocation difficulties. An immediate decision would help U.S. companies compete against their European and Asian counterparts, while a delay of more than a year would increase the advantage already enjoyed by the overseas competition to such an extent that they could easily dominate the U.S. domestic market when it does open up for 3G services. The paradox of such a scenario was voiced by Martin Cooper, cofounder, chairman, and CEO of ArrayComm, when speaking before the U.S. Senate in July: "While these [wireless] technologies originated in American laboratories and were often paid for by the Department of Defense, ironically, many are more widely deployed abroad than here at home."
Lost in the political maneuvering and Capitol Hill hearings is the simple economic reality that even if the White House and the FCC are able to dole out slivers of 3G spectrum to the wireless industry, the auction prices would be exorbitant. Verizon Wireless already spent $8 billion in the last spectrum auction held by the FCC, before the seriousness of the spectrum shortage was fully known. Now, with even less available, demand -- and auction bids -- will increase. "If we do get spectrum here, it will be very costly, and we could have a debt situation worse than it is in Europe," says Lars Nilsson, manager of strategic marketing for Ericsson (Nasdaq: ERICY).
The political stalemate could seriously harm 3G wireless in the United States, requiring expensive work-arounds and delaying its rollout. With the nascent industry in peril, most estimates now peg 3G networks as carrying less than 5 percent of network traffic in 2005. "The cost-benefit analysis and, therefore, business case for 3G cellular appears to be eroding. 3G cellular looks like it could become the next HDTV -- a neat technology with no customers," says Steve Milunovich, a global technology strategist at Merrill Lynch. Mr. Milunovich believes that 2.5G networks, despite slower data speeds, may be sufficient for the majority of users.
Without profitable business models, wireless carriers, which will likely have spent billions on 3G spectrum, would be left in a financial bind of epic proportions, further contributing to technology's downward spiral. A solid opportunity for the U.S. government to increase its country's productivity -- and to infuse its ailing communications industry with some much-needed revenue -- will have fallen by the wayside. According to Mr. Wheeler of the CTIA, "This is about the future of the new economy. This is something that will determine America's viability as a competitor. Nothing could be more significant."
Write to dan.briody@redherring.com.
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