An Economic Solution to the D Block Dilemma

Last month, Cisco reported that wireless data traffic is growing faster than projected (up 159% in 2010 versus its estimate of 149%). YouTube illustrated the point with its own report that mobile views of its videos grew 3x last year to over 200 million per day. Tablets like the Apple iPad were part of the upside surprise.

The very success of smartphones, tablets, and all the new mobile form-factors fuels frustration. They are never fast enough. We always want more capacity, less latency, fewer dropped calls, and ubiquitous access. In a real sense, these are good problems to have. They reflect a fast-growing sector delivering huge value to consumers and businesses. Rapid growth, however, necessarily strains various nodes in the infrastructure. At some point, a lack of resources could stunt this upward spiral. And one of the most crucial resources is wireless spectrum.

There is broad support for opening vast swaths of underutilized airwaves — 300 megahertz (MHz) by 2015 and 500 MHz overall — but we first must dispose of one spectrum scuffle known as the “D block.” Several years ago in a previous spectrum auction, the FCC offered up 10 MHz for commercial use — with the proviso that the owner would have to share the spectrum with public safety users (police, fire, emergency) nationwide. This “D block” sat next to an additional 10 MHz known as Public Safety Broadband (PSB), which was granted outright to the public safety community. But the D block auction failed. Potential bidders could not reconcile the technical and business complexities of this “encumbered” spectrum. The FCC received just one D block bid for just $472 million, far below the FCC’s minimum acceptable bid of $1.3 billion. So today, three years after the failed auction and almost a decade after 9/11, we still have not resolved the public safety spectrum question.

Washington is considering two principal options: (1) redo the previous D block auction with the private-public sharing scheme; or (2) grant the D block to public safety, creating a nationwide contiguous 20 MHz public safety band.

The shared-spectrum scheme was perhaps worth a try the first time ’round. Although many doubted it would succeed, the concept was interesting, and it offered at least theoretical efficiencies — commercial users get most of the bandwidth during public tranquility, first responders get priority in emergency. Plus, it’d be nice to pick up a few billion dollars for the U.S. Treasury. Better than allocating it all (for free) to public safety where much of the bandwidth may lay fallow much of the time, right? Wrong. A failed auction yields no dollars and no usable spectrum.

It turned out the technical complexities of building for two very different purposes — high efficiency for commercial versus highly robust and redundant for public safety — and the likely conflicts of authority and responsibility (inherent in any entity with no true “owner”) posed too great a risk for anyone to bid a serious amount. Many of the technical and ownership risks still apply today.

Why not just award the D block to public safety and get on with the plan to allocate spectrum in amounts many times larger than the D block? Supporters of a re-auction say the government might leave money on the table and deny this particular band to commercial users. True, as far as it goes. Which isn’t very far.

A new paper by the Phoenix Center attempts to analyze this tricky subject from an economic perspective. Phoenix examines the costs and benefits of each option and concludes it is mostly timing of the allocation and the location of the spectrum in the frequency band that count.

allocating the contiguous D Block to public safety only postpones the allocation of an additional 10 MHz for commercial purposes (which the “new” block comes from the 500 MHz of spectrum promised by the FCC and the Obama Administration).  In the second option, the D Block is auctioned for commercial purposes now, precluding its assignment for public safety purposes.  In this case, the incremental benefits and costs from commercial use accrue now, but the benefits and costs of public safety’s use are postponed.  Framed in this way, the relevant issue is not whether the 10 MHz is used for public safety or used for commercial use, but rather when and which 10 MHz is put to use in both, and how the size and timing of benefits compare between these two alternatives.

Although the FCC says a new D block auction would be unencumbered, specific rules have not yet been proposed, and it’s likely some technical and even “open access” rules could accompany the block, thus reducing its market value. Further, in the new wireless broadband networks using LTE technology, contiguous 10 MHz bands are highly desirable. The physical separation of the D block with other commercial bands would mean a likely auction value of between $2-6 billion less than a contiguous 10 MHz block elsewhere. Phoenix estimates the cost of delaying a commercial auction of the D block is around $600 million annually, essentially the consumer surplus of having more spectrum available, which translates into lower prices for mobile services.

On the other hand, a public safety D block would be contiguous with the existing PSB block. This is important because it would substantially reduce the cost of building a public safety network. (It’s easier technically to build a system that covers one contiguous frequency band rather than two bands that are “far apart.” Phoenix estimates network equipment savings for contiguous bands of $4 billion.)

The cost of delaying the public safety network buildout is awfully hard to estimate. Can we get by on what we have now? What if a disaster hits? What is the value of having a real broadband network for combating everyday crime, for the next Katrina? Who knows, but it is likely to be a significantly large number. Leaving this probably significant number aside, however, it’s still easy to see from Phoenix’s estimates that $4 billion > $600 million. That is, once the costs and benefits are added up, the $4 billion in extra capital to build a noncontiguous public safety network is higher than the $0.6 billion in value generated by the commercial network over a five-year window, given all the challenges of this particular block. Any marginal public safety value would just make the gap wider and argue further for a grant to public safety.

If the U.S. weren’t about to open up hundreds of megahertz of much needed new spectrum, the argument may be different. Perhaps then we would have to force commercial and public safety to share a cramped apartment. But because we are opening up lots of new spectrum; because we do have this rare opportunity to give public safety a contiguous band, which should last basically forever; because it should preclude public safety from seeking impositions on commercial spectrum in the future; and because it could pave the way politically for the next huge spectrum expansion, it looks like the smart thing to do.

The fact is, with hundreds of megahertz of new spectrum being unleashed to the commercial world, an unencumbered grant of 10 MHz to the public safety world is probably worth it. Let’s get on with the show.

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