The Market Design of Open Spectrum I had a chance to absorb Kevin Werbach's definitive position paper on Open Spectrum. He makes a compelling argument for the modern use of the public trust we call spectrum.
You might recall that the $150 billion spent on 3G spectrum licenses was what popped the tech bubble. Wireless carriers had to bid up licenses to maintain competitive equivalence and debt markets gave them unrestricted access to capital. This doesn't include the $150 billion to develop 3G infrastructure. There were strong incentives for carriers to acquire capacity they didn't really require. When total debt incurred to provide services is several orders of magnitude greater than the total market size -- something has got to give. The cost of money and credit spreads shot up, bond markets closed, followed by equity markets and carriers had no options to finance the rollout of new infrastructure.
The Open Spectrum alternative to licensing pushes capital investment to users and technology vendors, rather than service providers. By nature this decentralized structure fosters greater innovation, but also makes investment more incremental, a better balance between supply and demand. Smart edge devices like agile software radios on a first-come first-served basis negotiate access and use of spectrum.
Back during the bubble, I met with some economists at the FCC to urge the creation of a secondary market for spectrum and suggest lessons we learned from creating a secondary market for wireline capacity. In absence of a secondary market for spectrum, carriers sit on excess capacity, have less incentive to innovate and prevent those who would innovate from gaining access to requisite capacity.
There is no question in my mind that additional spectrum should be allocated for open use to create a market of users. Doing so will create a new wave of innovation for the public good.
However, I do have some concerns about the market design, namely the rules for access and use negotiation by smart edge devices. I do not believe that technical innovation can completely overcome scarcity. At some point, a band has a width, and the laws of physics apply.
Since Open Spectrum would be allocated on a first-come first-served basis, there is the potential for the system to be gamed. Users, especially those with money for more powerful devices, could occupy spectrum capacity to reserve for potential use, similar to the way current license owners sit on capacity in hopes of value appreciation. Since many parties have the incentive to disrupt the development of Open Spectrum the potential for foul play cannot be ignored.
Making spectrum open creates a physical arbitrage condition. This may create opportunities for abuse (e.g. Enron's manipulation of supply in the California power market). But arbitrage conditions are opportunities. The early days of ISP Peering were based on contracts that could be arbitraged, but beneficially decreased the cost of wholesale connectivity to allow the access services and equipment market to grow. While there are limits to the Span of Open Spectrum network architectures to create self-organizing services, an arbitrage condition that takes out the majority of costs of providing a service is more than compelling. Removing the cost of licenses, real estate, and operating overhead (25% SG&A, 20% billing) -- focuses investment and innovation in value-added edge infrastructure.
If there was anything ever to write to your congressman about, it may be to adopt Kevin's policy recommendations and affirmative steps -- one small way to encourage the revival of the most damaged sector of the economy. There will undoubtedly be an interesting discussion of this issue at Supernova, the decentralization conference put on by Kevin and Jeff Pulver.
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