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Private Investment and the National Broadband Plan

April 21st, 2010 by Admin User

[Prepared Remarks by Omnibus Broadband Initiative Executive Director Blair Levin Wednesday April 21, 2010 at the Congressional Internet Caucus’ State of the Mobile Internet Conference in Washington, D.C.]

"Private Investment and the National Broadband Plan"


Over the last 9 months, I had the pleasure of working with a wonderful team who dedicated every day to trying to figure out how America could have the healthiest broadband ecosystem in the world.

Our answer is complex, filling more than 300 pages of Plan and hundreds more of post-Plan technical papers.
But one consistent theme is that the health of that ecosystem depends heavily—in fact, primarily—on private investment.

Today I want to discuss how we thought about private investment–in particular, the relationship between private investment and the mobile Internet.

If we get the implementation of the mobile piece of the Plan right, we can precipitate a massive private investment boom and build a world-leading broadband ecosystem.

And if we get it wrong, we will cause our economy to suffer huge losses in wealth and jobs, our competitiveness diminished as other countries surge ahead, riding over the wireless networks of the future.

Let me start by saying that the entire plan, in some sense, is about private investment. 

For example, the second half of the plan offers dozens of recommendations about revising outdated policies so as to stimulate investment in applications that will improve health care, education, energy efficiency, and other national priorities.

These investments will in turn stimulate increased private investments in devices and networks.

Another section of the plan focuses on lowering the cost of inputs to broadband deployment—access to rights of way, for example—to improve the business case for deployment and encourage greater private investment.

The plan also has a section on supporting more expansive R&D efforts, which involve substantial private investment. 

Included in that section, by the way, is a recommendation that the FCC start a rulemaking process to establish a more flexible experimental licensing regime for spectrum and for the use of spectrum by researchers.

Another recommendation is that the federal government investigate a national framework for digital goods and services taxation.

This was an idea suggested by industry. They believed, and we concurred, that the current patchwork of state and local laws relating to taxation of digital goods and services hinders new investment and business models. 

We were convinced that entrepreneurs and small businesses in particular lacked resources to understand and comply with the growing plethora of tax regimes.

Broadband won’t be all it can be if we don’t address this issue.

But we didn’t take every idea that related to private investment.

For example, some believed we should recommend tax credits for building out specified kinds of broadband infrastructure.

There were several reasons we didn’t.

First, it is difficult to be certain that tax credits would stimulate private investment that would not have happened otherwise.

After much analysis, we remained concerned that credits would simply increase margins, not investment.

Second, we were concerned about government putting a heavy thumb on a scale regarding capital investment.

For example, companies like AT&T and Verizon have a difficult job determining how much to allocate to deploying advanced wired networks versus how much to allocate to 4G mobile networks.

Given the complexity, I’m sure Ivan Seidenberg second-guesses himself weekly as to how much to invest in FiOS versus LTE.

But I think we want his team to make that decision, not the government.

And we want them to do it based on market signals, not tax rules.

Third, we were concerned that tax credits could unfairly tilt the competitive playing field.

The market for broadband services is complex and still developing.  Adopting a tax rule that advantages a particular technology could favor a less efficient way of delivering broadband and in the long run, hurt the health of the American broadband ecosystem.

This is an issue over which reasonable minds can differ, but I thought it important to publicly discuss not only why we did what we did but also, in some cases, why we didn’t do what some suggested.

What isn’t really subject to debate is the importance of spectrum to the future of private investment.

Following every major auction, we have seen billions of dollars flow through the broadband ecosystem.

And it’s not just the broadband ecosystem.

Over the next decade, mobile broadband will likely be the single most important platform for productivity gains throughout the entire economy.

If we use our spectrum less efficiently than other countries, our businesses and consumers will pay more for worse service, discouraging investment across the economy.

Spectrum policy is a huge government lever.

So we had to ask if we were doing it right.

And in many ways, we’re not.

First, let’s agree that the least productive use of spectrum is no use at all when the spectrum is lying fallow due to government inaction.

So where spectrum has not been used due to the government’s failure to act, we now must. 

The FCC has already started: Partly as a result of the planning process, the FCC clarified some of the rules that enabled an owner of MSS spectrum to commit to building a new 4G network, a commitment that will require billions of dollars and represent the first new facilities-based entrant in the broadband space in nearly a decade.

There are many uncertainties, but that single change could have a great impact on innovation and competitiveness in the broadband market; an impact that may expand beyond the wireless market.

There is little evidence in the United States today of mobile broadband competing with fixed broadband.

But the next generation of mobile will provide the speed most Americans require today.

In the near term, a more competitive mobile market could produce price points that cause low-end fixed providers, who are generally telcos, to either reduce prices or upgrade their own networks, which in turn would put greater competitive pressure on cable providers utilizing DOCSIS 3.0.

No one can be certain how this will play out—one reason why the plan has specific recommendations for what data needs to be gathered to monitor the market—but any impact will be better for private investment than the status quo of the spectrum sitting unused.

Among other recommendations, we also suggested rule changes necessary to use currently unutilized rural spectrum for backhaul, as a way of reducing the transport costs in rural America—providing still greater incentives for private investment in rural broadband.

Second, we should agree that we want a mobile broadband ecosystem that welcomes innovation and new business models.

Right now, most mobile activity involves enterprises offering service over spectrum for which they are the exclusive licensees.

But other business models may emerge, either using spectrum through a secondary use or through an unlicensed or opportunistic use. 

We cannot be certain how different models will emerge, but we should want each to have the spectrum and other inputs necessary to realize their full potential.

For example, for secondary use, we need greater transparency. So the FCC created a dashboard that provides it.

For unlicensed or opportunistic uses, we need to finish the white spaces rulemaking--and we should also consider using that technology for other opportunities.

In calling on the FCC to clarify rules and enable new business models, the Plan has already helped generate investment.

But our most important long-term recommendations involve integrating market mechanisms into our spectrum allocation process.

Spectrum is the largest capital allocation our government makes into the broadband ecosystem.

Yet we often make spectrum capital allocation decisions not on the basis of economics or technology, but on the basis of history.

Can you imagine what the return on an investment fund would be if it was forced to invest only in companies it did 60 years ago?

But that is often the way we invest spectrum.

And when the government allocates spectrum on the basis of history, rather than markets, it substantially reduces the private investment that follows.

So we have proposed that the FCC have the ability to offer current holders of spectrum, both in the private sector and in the government, incentives to put their spectrum into an auction so that it can be used for a different purpose when consumer demands and markets change.

For example suppose some government entity was using a lot of spectrum, but a new receiver technology could reduce the amount it needed to perform the same task.

But the new receivers cost money.

Today, that entity has no incentive to use spectrum efficiently.

But if auction proceeds could be shared with that entity, the broadband ecosystem could have more spectrum, the entity could perform the same function better, and taxpayers could benefit as well.

Right now there are some broadcast stations that, as an ongoing matter, are worth less than the value of their spectrum.

To further exacerbate this value gap, a 6 MHz broadcast license generally ties up additional spectrum to provide interference protection, meaning even more spectrum is underutilized.

And what if there are developments that devalue some broadcast licensees even more, such as multi-channel video providers developing ways of having more effective, targeted ads, a court overturning must-carry, or a new set-top box that makes the multi-channel video offering even more attractive?

Under current law, nobody wins – broadcasters cannot efficiently monetize their spectrum licenses, the government can’t share auction proceeds during tough economic times, and the American people miss out on potential jobs and economic growth greater investment would create.

Broadcast lobbyists have characterized incentive auctions in ways Chairman Genachowski correctly characterized as hyperbole.

One even offered a comparison of this offer to broadcasters to sell spectrum—and a broadcast lobbyist actually said this—to the Bataan Death March.

More rational voices have understood there is value in this idea for broadcasters. 

For example, a Wall Street broadcast analyst, Marci Ryviker, said that incentive auctions:

“Could be good for the business…Broadcasters who believe they will be better monetizing the spectrum on their own will do something with it. Those who figure they really don't know what they are going to do with the extra spectrum will be the ones that are going to give it back. So, allowing the broadcasters to decide is probably the best part of the plan.”

What she understands is that the value of the number 1 broadcaster in New York is hugely greater than the value of the number 25 broadcaster.

But the value of their spectrum is the same.

So they would look at an incentive auction very differently.

And you have to ask, why should any broadcasters prohibit other broadcasters from taking advantage of an opportunity to get a cash infusion, if that cash is more productive than the spectrum?

The bottom line is that the most fruitful place to look for incentives for billions of dollars of capital investment is in spectrum policy.

Let me close with a personal point.

I had the opportunity to help implement the 1996 Telecommunications Act. 

One lesson I learned was the difficulty of knowing what would matter.

Decisions about Section 271 sure seemed important.

There was a lot less attention paid to our decisions to lower wireless-to-wired terminating access charges and setting a shorter, fixed timetable for ending the Digital Television Transition.

Yet in terms of the impact on jobs, economic growth, and consumer welfare, those latter two decisions--which to be fair, Chairman Hundt told me would be more important than I knew—clearly were bigger.

This is the beauty of the Internet: that we don’t know what’s going to happen next.  We don’t know precisely which recommendations in the Plan will help unlock the next great communications innovation.

We don’t know how wireless will grow, so we have to make sure there is sufficient spectrum for licensed and unlicensed, sufficient transparency for a robust secondary market and sufficient opportunity for competition.

We don’t know whether the next great innovation will come from a network, a device or an application, so we have to make sure all are part of the cycle of innovation, that all contribute to accelerating the velocity of commerce.

There is much we don’t know.

But the Plan has helped us pinpoint actions which, across the wide expanse of government activity, stimulate private investment to enable a self-sustaining, ever-improving market, and allow the American economy and the American people to benefit from constant innovation and a broadband ecosystem that will lead the world.

Thank you.
 



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