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There's new political leadership in Washington, but there's nothing new about the crowded airwaves and the policy problems that surround them. Michael Powell is the new chairman of the Federal Communications Commission (FCC) and Rep. Billy Tauzin (R-La.) has stepped up as the new chairman of the FCC's oversight body, the House Commerce Committee. There may be many challenges, but as far as these men are concerned, there's only one problem: The U.S. is trailing in the development of next-generation services. If only clear goals conjured easy solutions -- the FCC and its congressional sponsors have few simple options. They can lift the restraints on spectrum ownership and let the large carriers grow larger at the risk of stifling competition and reducing choice for consumers and businesses. Rapid deployment of third-generation (3G) services will require reallocating wide bands of spectrum that have stubborn tenants. Finally, the government must also inspire confidence that businesses' hard work won't be upended by a fickle, powerful government agency. THE BIGGER GET BIGGER It's generally agreed that the wireless sector has more competitors than just about any telecommunications market in the U.S., and many attribute that to the spectrum cap. The cap restricts a single company to controlling no more than 45MHz of spectrum in a given urban market. After this spring's spectrum auction, some national carriers are bumping up against the caps, so it's difficult to see how any of the carriers could acquire the new spectrum needed for 3G services without violating the cap regulations. The FCC is expected to rule by this summer whether the caps should be raised or lifted. From a growth perspective, the solution seems simple: Eliminate the caps and let the market run. "If you lift the spectrum cap, a lot of this crisis won't be a crisis," says Elliott Hamilton, executive vice president of the Strategis Group research firm. New FCC chairman Powell has repeatedly made clear his overall opposition to market caps, making many observers believe that the spectrum caps' days are numbered. Lifting or eliminating the caps will inevitably lead to greater consolidation in the wireless industry. While this is something previous FCC chairmen have sought to avoid, Powell believes that -- when dealing with network-based industries -- consolidation is inevitable. He made it clear when he was an FCC commissioner that he believed that the agency too often dragged the process out for over a year and attached onerous conditions to the deals. When talking about competitive alternatives in a market, Powell asks rhetorically, "What's enough? Two? Three? Four? Seven? It depends on the technology." The bottom line, Powell says, is that a market should have companies differentiated on technology -- which leads to some interesting conclusions. Following that logic to its natural conclusion, the U.S. could end up with two national cellular carriers, one based on the CDMA family of transmission technologies and one based on the TDMA/GSM family. It's generally assumed on Wall Street that there will be significant consolidation; opinion differs on how few carriers will remain. CLEARING THE AIRWAVES: MILITARY OPTIONS Regardless of the size or number of companies that purchase spectrum licenses, that spectrum has to be free of other operators first. But government officials are learning that clearing spectrum is not an easy task. Case in point: At a recent public forum on 3G spectrum, a Pentagon representative showed a map of the U.S. covered with large black circles indicating areas where the Defense Department considers it "all but impossible" to give up airspace. Those circles covered over a dozen major markets across the U.S., including New York, Dallas, Denver, Washington, D.C., and the entire San Francisco Bay area. It has been a chore just to determine how the military is using the spectrum in the 1.7GHz band -- one of three bands identified by the National Telecommunications and Information Administration (NTIA) as most desirable for 3G services in the U.S. -- let alone how easily any of those tasks could be relocated. All the Pentagon will say is that the spectrum is used heavily for fighter, bomber, tank, and even satellite communications, as well as training and logistics. This is a case where the House Commerce Committee, chaired by Tauzin, will have to become involved, as the FCC doesn't have the authority to insist that the U.S. military -- which has never before been forced to give up spectrum -- back off. Tauzin isn't applying any public pressure: "There are a lot of national security issues involved," he says. But one key senator who controls the military's purse strings is already indicating that a compromise is possible. Sen. John Warner (R-Va.), chairman of the Senate Armed Services Committee, is asking that wireless companies be patient. "I'm sure we can resolve spectrum allocation" so that the Pentagon and wireless providers are both satisfied, Warner says. "We've got to give up some spectrum. We've got our arms wrapped around too much." One theory in Washington is that some sort of a back-room deal involving the military, Warner, Tauzin, and congressional appropriators will be ironed out, in which the Pentagon is compensated for relocating to another spectrum band and possibly gets another incentive, such as funding for a new fighter jet. Strategis' Hamilton suspects Congress will give guidance to direct the FCC and NTIA to work out a sharing arrangement with the Pentagon, which "95 percent of the time is not even using its spectrum." The deal he envisions would give the military first right to the spectrum, and during those times it was in use by the military the private carriers in that space could carry traffic in other portions of the spectrum band where they already hold licenses. "The technology is there to allow first-priority use" for the military, Hamilton says. SLIM SPECTRUM PICKINGS Astonishingly enough, the Defense Department may turn out to be one of the most tractable spectrum tenants. The 2.5GHz band is occupied by high-speed wireless Internet providers Sprint and WorldCom; educators and public broadcasters also use it for distance learning and other services. Sprint and WorldCom have made large investments to offer two-way high-speed Internet access in this airspace and are refusing to budge. The final spectrum band available for 3G is 700MHz, occupied by television broadcasters in channels 60 through 69. These channel owners promised to vacate this band as soon as they converted to different spectrum given to them for digital broadcast, but that is taking longer than expected. Under the current agreement, the broadcasters aren't required to leave until December 31, 2006, or until 85 percent of U.S. households can receive digital TV signals. It's worth noting that wireless providers who purchase their licenses at auction are given certain ownership rights while the spectrum incumbents at issue here had their licenses given to them and are technically only borrowing the spectrum from the government. Nevertheless, there are no indications that Congress or the FCC would force incumbent spectrum owners to relocate except as an emergency last resort. STANDING ON SOLID GROUND Forcing anyone to relocate would threaten exactly the certainty that Powell feels is his duty to provide. "I believe that one of the single greatest dangers an agency can present is to produce and raise the level of risk in the market," Powell says. Uncertainty has been a chronic problem for the U.S. wireless market, however, as nobody has ever been sure how much wireless spectrum would be available for auction, when it would be available, or who would be permitted to bid on it. Former FCC chairman Reed Hundt argued at a wireless forum in February that it was this uncertainty that led to the enormously high $17 billion in bids in the last PCS auction, because carriers such as Verizon didn't know when they'd get another chance at spectrum. Powell hasn't laid out specifics on how he'll provide regulatory certainty, but it's possible he doesn't have to. Previous FCC chairmen have envisioned how the wireless market should look, and then have issued rules to make it so. Powell says he prefers a market with few rules other than ensuring the consumer isn't abused by bad business practices. His FCC, he says, will go light on writing rules but heavy on enforcement. If that's the case, the U.S. will find out if a freer wireless market can provide the stability and explosive growth that government regulation couldn't.
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