Chris Dixon tweets this Sunday that:
The one tech service/product where prices are going up is also the one with the least competition: broadband access.
In part, this is due to a culture of monopoly among the providers: cable and wireline local access players. In additional part, this is also due to very high almost “natural monopoly” costs of laying those wires to households.
While these traditional broadband providers are still important, with the move to smartphones, wireless is the source of both the biggest problem and biggest opportunity. Mobile broadband prices have been moving in the wrong direction with Verizon and AT&T having pulled away from their all-you-can-eat pricing. The type of non-metered pricing that we are moving away from is critical for accelerated innovation along the network.
At the center of the problem is the FCC’s misunderstanding of how innovation occurs. The FCC assumes innovation will come by getting more spectrum into the hands of the wireless companies, but innovation theory tells us it will come by making it possible for small entrepreneurs to play around with innovative uses of spectrum. I have previously called this “innovation sandboxes.”
Let me explain.
At the core of the lack of broadband innovation and competition is the FCC’s spectrum policy — under which allocation of spectrum is by auction to the highest bidder, and thus, under auction theory, purportedly the most efficient user of the spectrum. As government policy goes, this is enlightened as it’s better than allocating a public resource by pure political connections or other corruption.
This policy favors incumbents (or the occasional others with deep pockets), as those are the only companies with the funds to bid for spectrum. So incumbents — as we see today — have an incentive to throw tantrums about spectrum exhaust, justifying their proposed mergers, rather than innovating to deal with the spectrum exhaust.
The FCC is focused on freeing up more spectrum, by reclaiming it from broadcasters and government uses. That part is good. But the presumption is that the freed up spectrum will be auctioned off so the wireless companies will add to their spectrum holdings. As the Multichannel News reports this week:
But on a serious note, he says that the FCC’s priority should be implementation of the incentive auction authority Congress gave it earlier this year. “With the proliferation of smart phones and functionally similar devices, the increasing use of high-bandwidth mobile applications is straining network capacity,” according to the testimony, which sounds much like his Democratic chairman. “The FCC therefore must do what it can to free up additional spectrum for broadband, and Congress’ recent action has given the Commission important authority to accomplish this objective.”
That presumption is defective. Like most innovation, true innovation in broadband access will come from outside the current system, not from granting spectrum to the incumbents Instead of pursuing policy that favors incumbents, policy should instead create fertile space innovators to play without upfront entry costs. My post from last November explains:
Traditional economic theory and policy, focused on a simple model of economic efficiency, usually undervalues what happens at the edge, which is where disruptive potential emerges. We’ve noted here, again and again, about the power of Professor Christensen’s theory of disruptive innovation in describing how game-changing customer value is created by companies jumping into markets that look already occupied, often with products that can be dismissed as toys or marginal when first introduced. See here, for example. We have also noted how policy often does not understand how important this innovative force is, and how policy must protect space for that innovative dynamic to take place. See here, for example.
One way to think of this is making sure there are open “sandboxes” in which small entrepreneurs can play.
Fred Wilson has a hugely important post by Professor Yochai Benkler about how important keeping open sandboxes is in spectrum policy, which has been dominated by the flawed theory that the most economically efficient way for society to give access to spectrum is to one-time auctions to raise money for the Treasury. The problems with that approach include that unless you are an incumbent (or come with a cash hoard like Google), you cannot play in this space because entry is billions of dollars, much of this spectrum in practice is hoarded and unused, and most importantly, actual empirical evidence is that disruptive entrepreneurs have created enormous economic evidence through playing around with “junk spectrum bands.” Professor Benkler writes on AVC:
These dynamic markets are telling us something new: The future of wireless will likely be mostly unlicensed, with an important, but residual role of auctioned, licensed services. And yet the drive to auctions simply ignores the evidence from actual markets in favor of an outmoded regulatory ideal that is the opposite of what cutting edge radio engineering and dynamic markets show.
Most of these applications were developed using junk bands, where regulators dumped industrial equipment and microwave ovens. They thrived even in these harsh conditions, but in an effort to open up new, less wasteland-like areas for these dynamic, innovative technologies, the last Republican and current Democratic FCC chairs presided over the bipartisan creation of TV White Spaces, a policy that permits device manufacturers to expand the capabilities of unlicensed devices by sharing the TV bands with broadcasters. The TV Band auctions being pushed through the supercommittee threaten to displace these white space devices. As we look at the enormous success of unlicensed wireless strategies across the most dynamic markets, we see that doing so is penny wise, pound foolish.
In order to truly encourage innovation for broadband access — and take advantage of the same innovation dynamics happening in applications on the network — the FCC has to provide wireless sandboxes for young entrepreneurs to play in. If it waits for innovation to come from those who can spend billions of dollars of capital on hand to buy spectrum (and not coincidentally those who also have billions of dollars of revenue at risk) in auctions, Professor Christensen’s theory of disruptive innovation tells us pretty clearly that the needed innovation in access is not going to come, and higher prices and lower price for access are going to ripple through the internet ecosystem as wireless users hesitate to try new applications in order to conserve their data allocations.