REMARKS OF MICHELE C. FARQUHAR CHIEF WIRELESS TELECOMMUNICATIONS BUREAU FEDERAL COMMUNICATIONS COMMISSION NOVEMBER 20, 1996 (as delivered) SPECTRUM POLICIES THAT PROMOTE COMPETITION: THE U.S. MODEL I. INTRODUCTION It is a pleasure for me to address what I hope will be the first of many informal gatherings of Wireless Bureau and International Bureau staff to discuss telecommunications policy and spectrum policy. The Wireless Bureau has become increasingly aware of the international context of our spectrum policies, particularly as U.S. wireless companies successfully penetrate overseas markets. Therefore, I am particularly excited about presenting the topic of spectrum policies that promote competition, and glad that this is the first topic this group will discuss. As many of you know, the Commission held an en banc hearing earlier this year on its role in managing the spectrum. In addition, we released just last week a comparative paper on auctions and other spectrum licensing methods used in 25 countries, which was compiled by Martin Spicer under the auspices of the Wireless Bureau (and with the help of the International Bureau). I believe that the release of policy statements and similar documents that clearly state the policies of the Commission can help the United States in promoting competition policies in other countries, which helps not only economic development in those countries but also, of course, the U.S. industry. I hope that my remarks will be the impetus for a lively and frank exchange of ideas -- I'm going to talk for about 20 minutes and then I'd like to open the floor for discussion. II. SPECTRUM POLICIES THAT PROMOTE COMPETITION Flexible, pro-competitive spectrum policies are important to promote competition among different wireless services and between wireless and other technologies. Competition, in turn, can help us make sure that the spectrum is used in a way that produces the greatest public benefits. I want to raise what I think are some of the most important aspects of our spectrum policy for competition. A. The Importance of Competition For Spectrum Policy Creating a competitive market for spectrum is the best way to ensure that spectrum is used for services that the public values most highly. Government agencies are poor substitutes, because they tend to be unable to reliably predict public demand for specific services or the future direction of new technologies, they tend to do a poor job evaluating the potential benefits of the myriad possible uses of spectrum, and they tend to move too slowly even when they become aware of a new demand or a new benefit. Sometimes, government agencies even make decisions that favor less efficient and less desirable uses, because of the influence of particular parties on the decision-making process. Even if we could correctly identify the most economically efficient use of spectrum at any given time, and always make decisions that best serve the greatest public good, we would be obliged continually to modify our allocations to reflect technological and economic developments. This reallocation process necessarily consumes substantial public and private resources, reduces certainty for users of spectrum, discourages investment, and delays the introduction of new services. In recognition of these shortcomings of central planning, we should wherever possible rely on competitive market forces to ensure economically efficient use of spectrum. If reasonably competitive conditions exist, and significant market failures do not occur, we've seen that the market achieves economically efficient use of resources more quickly and more reliably than government regulation. B. Letting the Competitive Market Work -- The Importance of Flexible Allocations Our spectrum policies therefore should both permit and promote the operation of competitive market forces. Our first priorities in serving this principle are (1) ensuring there are no barriers to market entry, and (2) not interfering with unnecessary regulation where we conclude that the judgment of the marketplace is sufficiently reliable. In instances of substantial market failure, there are steps we can take to restore and promote competition, which I will note in a moment. But first I want to emphasize the importance of flexibility in spectrum allocations. In general, we believe that government should minimize regulations governing what services may be provided, and how they should be provided, because such regulations tend to limit competition, obstruct innovation, and impede efficient investment. Flexibility in allocations promotes a competitive marketplace that is responsive to consumer demands. Flexibility eliminates regulatory barriers to market entry, enabling parties already using the spectrum to change uses to respond to consumer demand, keeping downward pressure on prices in all markets and facilitating innovation and investment in areas where demand is greatest. Such an "open entry" policy enhances competition both by widening the pool of potential competitors for a particular service and by creating incentives for users to diversify their service offerings. Having flexible allocations also eliminates the cost and delays associated with government management of the use of the spectrum. Finally, flexible policies can help us realize the maximum potential of the spectrum because, without artificial constraints, spectrum users have a profit incentive to develop ways to use the spectrum as efficiently as possible, so they can produce additional profit-making services or so they can transfer part of their spectrum to others who value it more highly, who also have an incentive to use it as efficiently as possible. We have tried to give licensees flexibility in three areas of spectrum policy- making: - in defining the services which the spectrum may be used to offer -- fixed and mobile, video and voice, even satellite and terrestrial; - in creating technical restrictions on the technology that may be used and the physical parameters of licensee operations (such as effective radiated power); and - in defining the amount of spectrum and the geographic scope of a license that they employ to offer services (and giving licensees freedom to alter that scope through aggregation and disaggregation of spectrum and license areas). Spectrum flexibility also means the freedom not to use the spectrum at any particular time if a licensee determines that the highest valued use of the spectrum is not something it currently can offer -- for example, because the technology is still in development, or because demand does not currently exist. As long as there are no barriers to entry, licensees bear the opportunity cost of letting spectrum lie idle. When we have tools to prevent excessive concentration of spectrum in the hands of a few, we should not impose use requirements simply to avoid anti-competitive warehousing of spectrum. Where we do have to impose limits on license scope to prevent excessive concentration of spectrum, we can do so in ways that lets the market function with maximum flexibility. For example, rather than prohibiting a particular company from obtaining a particular license, we can impose a "cap" or ceiling on how much of a broad range of spectrum any single entity may control. In the end, we believe that putting enough spectrum on the market, and allowing flexible use, scope and technical parameters, serves as the best hinderance to any entity obtaining market power in spectrum-based services. These forms of flexibility all contribute to an environment in which licensees have incentives to develop the most innovative, low-cost and spectrum-efficient technologies that meet the needs of consumers at any particular time. C. The Creation of Competitive Markets Through Competitive Bidding In creating a competitive spectrum market, we have found that we can choose methods of licensing the spectrum that can minimize delay and produce a more efficient distribution of licenses. That is, a system of competitive bidding -- or auctions -- can result in an assignment of licenses to those users who value the spectrum most highly, and can be done far more quickly than other methods we have tried. Competitive bidding serves the public interest in several ways. First, where spectrum is scarce, private users who are not required to pay for their use of spectrum commensurate with its value may have an incentive to acquire licenses on a speculative basis simply in order to sell the licenses to those for whom the spectrum has value. Indeed, this was our experience when we awarded cellular licenses by lottery. Although we should not in general attempt to prevent authorized spectrum users from selling their authorizations for a profit, it better serves the public interest to require the party that is initially authorized to use spectrum to pay the value of that spectrum to the public, rather than permitting windfall profits to accrue to parties simply because they are lucky enough to win free licenses through lotteries or comparative hearings. Second, a well designed competitive bidding approach is better able to get spec- trum into the hands of those who initially value it most highly and to facilitate efficient spectrum aggregation than fragmented secondary markets. The auction process ensures that spectrum will be initially awarded to the party that places the highest value on the spectrum and therefore is willing to pay a market price for it. Although secondary markets are useful to reassign spectrum as its value to different parties changes over time, relying on efficient auctions in the first instance reduces costs and delay in the initial assignment process. Third, auctions vastly reduce the delay involved in assigning mutually exclusive initial licenses as compared with lotteries or comparative hearings. Our successful experience in conducting auctions confirms our evaluation that, absent compelling countervailing considerations, competitive bidding is ordinari- ly the preferred means for awarding initial authorizations from among mutually exclusive applications to provide subscription-based services for compensation. In some instances, however, competitive bidding is not an appropriate means for assigning spectrum use authorizations. First, auctions are not currently autho- rized except in situations where we receive mutually exclusive applications for certain initial spectrum use authorizations for commercial services. In addition, auctions may be inappropriate in other circumstances for specific reasons. In particular, auctions may be problematic for services (such as low-earth orbit satellite services) that can only be provided on a transnational basis. Although in theory there is no reason that such licenses could not be awarded by competi- tive bidding, there are substantial practical difficulties involved in conducting competitive bidding for transnational services. For example, a set of complementary licenses from different countries may not be assigned to the applicant that values them most highly if competitive bidding is used in a series of auctions by different countries. The licensing process would also be delayed if an international organization would have to be formed or designated to coordinate or conduct a simultaneous auction. If Congress so authorizes, the Commission may collect fees for spectrum use, and we should consider whether assessing fees that approximate the market value of spectrum will help to promote the economically efficient use of spectrum in the absence of an auction. We should not assess user fees simply in an effort to obtain revenue, however -- doing so only raises the costs of the licensees and, ultimately, the consumer. In addition to using competitive bidding, we should continue to take other actions to expedite the assignment of licenses. Thus, we have reduced delays by allowing applicants to file license applications electronically, and by streamlining many of our licensing processes. Similarly, we have expedited the availability of service by privatizing the spectrum coordination process for some services. We intend to continue exploring additional initiatives along these lines. We also should promote the functioning of a market for spectrum by maximizing the information we make available about the spectrum. For example, by making most of our documents publicly available over the Internet, and by making all our license information available on an electronic database, we can facilitate access to information for both buyers and sellers of spectrum. We think the success experienced by the United States in creating competitive markets can be duplicated in other countries and we encourage experimentation in this area; we can provide support and share the lessons we have learned from our experience conducting auctions and opening markets to competition. D. Promoting the Public Interest When Markets Fail Although competition ordinarily is the most effective means of ensuring the production of a socially optimal mix of goods and services in an economically efficient manner, under some circumstances market forces will fail to produce outputs that the public wants and needs. For example, market failures can occur if participants have inadequate information about the market -- service providers may fail to produce a particular service that consumers want (such as telephones that are compatible with hearing aids, for people with hearing disabilities). Not all market failures or potential public interests merit large-scale intervention into the operation of the market. Rather, any intervention should be narrowly tailored to the goal it is intended to promote, and all possibilities should be considered, including incentive-based alternatives to regulatory mandates. Before we reserve spectrum for any special service, for example, we should balance the value of spectrum in that service against its value for other uses, and consider the costs of interfering with competitive market forces and with our flexible licensing policies, to ensure that the public gets the maximum benefit from the spectrum. E. The Importance of Administrative Certainty An effectively functioning competitive market includes elements of both certainty and uncertainty. The very essence of competition is uncertainty of outcomes; in a competitive market, parties succeed or fail by the choices they make and their performance in the market. In order to function effectively, however, a competitive market needs clear and firm ground rules. If spectrum users and their financial supporters are not reasonably certain of the rules that will govern spectrum use, they will be less willing to invest in obtaining and developing the spectrum. For example, entrepreneurs likely will bid and invest greater amounts in spectrum if they know in advance that the use will be flexible and are confident that it will remain that way. In the absence of such certainty, the spectrum may not be used to its full potential and the public may fail to realize its full value. We must exercise our jurisdiction to reallocate spectrum or to change the rules governing use of spectrum judiciously, with due regard for the reasonable expectations of incumbent licensees. No incumbent has a legitimate expectation of freedom from competition, but incumbents do expect that they will be able to continue using spectrum that they have been assigned without additional or unexpected interference, or major new service and technical restrictions. Although in some instances the public interest will require us to act notwith- standing these expectations, we should do so only where necessary to promote clearly established public interest goals. Moreover, when it is necessary in the public interest to reallocate spectrum, we should make every effort to ensure efficient and fair compensation for spectrum incumbents whose rights are abridged by regulatory action. Such efforts in the long run will encourage efficient investment by promoting certainty among spectrum users regarding the security of their investments. III. WIRELESS LOCAL LOOP: AN EXAMPLE OF USING SPECTRUM POLICIES TO BRING COMPETITION TO THE LOCAL EXCHANGE I've talked about how promoting competitive spectrum markets can help us make sure that the spectrum is used in a way that produces the greatest public benefits. But as I mentioned at the start, competition also begets competition: Our flexible, pro-competitive spectrum policies also are important to promote competition among different services, including competition between wireless and other technologies -- such as the monopoly local exchange networks. We are already beginning to see how wireless services can bring the benefits of competition to the local phone market. Wireless is a natural, lower cost alternative to wireline service. Wireless is especially attractive in bringing service to customers with existing structures -- such as schools -- where wired alternatives could be prohibitively expensive and disruptive, due to the age of and materials used in existing buildings. More widely, wireless can be a cost effective means of connecting customers to the wireline telephone network in rural or very densely populated urban areas, where the cost of installing or replacing wireline plant may be prohibitive. When wireless is used to provide fixed (as opposed to mobile) services directly to end-users, and when the service forms all or part of a switched local voice network, this service is called "wireless local loop." Wireless Local Loop does not just refer to the replacement of the "loop" provided by local exchange telephone companies between their switch and the customer's premises. Rather, Wireless Local Loop can refer to the replacement of a number of different pieces of the wireline network with a radio-based link; or it can refer to an entire local exchange network provided over radio-based facilities. A number of wireless service providers are interested in offering customers a radio connection from the customer's premises to the first point of aggregation of traffic, which may be the telephone pole in the street, or the service provider's "serving wire center;" some providers envision a wireless link to the first point of switching, at the service provider's "end office" or "central office." Many providers envision a full-service, flexibly priced wireless local network, with services offered on both fixed and mobile bases, with rates that vary depending on the user's distance from a "home base" and the degree of mobility desired. Wireless Local Loop is an excellent example of our spectrum policy paradigm in action. Wireless Local Loop depends on: - the availability of spectrum for commercial development, - the flexibility to use spectrum to offer innovative services, and - complimentary regulatory policies that promote competition and guard against the abuse of bottlenecks by companies with market power. You are all familiar with what the Commission has done already to promote competition in the terrestrial mobile wireless services, including allocating 120 MHz of spectrum for PCS, assigning PCS licenses through competitive bidding, and imposing a "spectrum cap" on cellular, PCS and SMR licenses. In June of this year, the Commission took another significant action to increase competition among mobile services, as well as between mobile and fixed services. The Commission eliminated restrictions on the use of spectrum allocated for commercial mobile radio services (CMRS) to permit unlimited fixed use of that spectrum. This increased flexibility allows mobile licensees, such as cellular, SMR and PCS licensees, to offer mobile or fixed services, or any combination of the two. These service providers must continue to meet the legal, technical and service requirements for their respective services, but need not seek prior FCC approval before offering fixed services. So far, the FCC has merely changed the spectrum allocation for these services -- The Commission has not decided how these services should be regulated. Whether fixed wireless services should be regulated like mobile services or like "local exchange" services, or both, or neither, is the subject of a Further Notice of Proposed Rulemaking now before us. Of course, a key difference between the two in the United States is that commercial mobile radio services are exempt from rate regulation, and entry is regulated only to the extent that a license is required to use the spectrum, whereas local exchange carriers' rates and entry are regulated both by the FCC and by public utility regulators in each of the states. Until the FCC decides otherwise, wireless providers cannot be regulated as local exchange carriers. Meanwhile, we understand that at least several carriers are already experimenting with Wireless Local Loop in commercial applications -- in a single building, in "campus" environments linking fixed and mobile points among a few buildings, and as a total replacement for the wireline local exchange network. We will be watching these experiments and we will be vigilant to make sure that we are taking appropriate regulatory and deregulatory steps to facilitate this important form of competition. IV. OTHER REGULATORY POLICIES THAT PROMOTE COMPETITION So far I have discussed the most important principles of spectrum management that the FCC has employed to help create a vibrant market for spectrum-based services in the United States. However, innovative service offerings like Wireless Local Loop cannot be successful without government engaging in some basic oversight of the telecommunications market. Like virtually every country in the world, we in the United States have a telecommunications market characterized by diversity: some product markets -- such as equipment and wireless -- are highly competitive, while others -- such as local exchange -- are still dominated by monopolists who control bottleneck facilities. In addition, levels of competition differ in different geographic areas, and different classes of customers -- business versus residential, for example -- may have more or fewer choices available to them. The persistent lack of competition in the residential local exchange market was acknowledged by Congress and the President early this year, when they signed into law the Telecommunications Act of 1996. The new law recognizes that a truly competitive telecommunications market that serves consumers fully cannot be characterized by bottlenecks at critical points; nor can its full potential be realized if it becomes a fragmented collection of multiple networks using different technologies that isolate subscribers, rather than connecting them. Therefore, under our law, we have the responsibility to create the conditions under which Wireless Local Loop, and other innovative services, can be offered to consumers as part of a comprehensive national telecommunications infrastructure in which customers obtain the services they want at reasonable prices, communicate with anyone in the country regardless of their choice of service provider, and move seamlessly between networks. Some of the most important regulatory tools to make sure we promote this low- cost, innovative and interoperable network of networks are: - interconnection between networks, - open standards-setting processes, and - neutral administration of numbering resources. Other safeguards may also continue to be necessary to prevent abuse of monopoly power by local exchange companies, particularly because these same companies also have interests in other product markets that are competitive, and the monopoly telephony position may give the competitive affiliate some advantage over all of the other competitors. For example, the Communications Act sets strict limits on the sharing of service use and billing information ("customer proprietary network information") by telecommunications carriers with their affiliates in other businesses. This not only protects the privacy of the customer but also ensures that the non-affiliated competitor is not disadvantaged by the lack of information to which one company may have exclusive access. Another important regulatory safeguard is the rate regulation process: pricing policies can ensure that monopolists do not have an opportunity to charge below-cost rates, which discourages competitive entry. The FCC thus continues to play a role in overseeing the behavior of competitors even as we strive to give carriers greater flexibility. It is my hope that if we create competitive markets, and if we restrain the behavior of the firms with market power, the market will continue to expand and produce innovative and cost-saving ways to meet the needs of consumers. V. COMPARISON OF LICENSING POLICIES IN OTHER COUNTRIES Last week we released a quasi "report card" on the use of spectrum auctions around the world, prepared by Martin Spicer, a consultant to the Auctions Division. He informally reviewed thirty wireless licensing events in twenty-five countries, and identified the legal, financial and political environments in which auctions are most successful. The report concludes that a stable legal environment that includes transparent decision-making processes and a clear statement of the rights and obligations of licensees is critical to the success of spectrum auctions. In addition, the report cites wide participation by qualified applicants and concurrent assignment of multiple, similar licenses as elements of successful auctions. The report also notes the importance of well-developed financial markets to creating a successful competitive spectrum market. Other nations have begun to use spectrum auctions (including India, Panama, and Mexico most recently). Even more countries have added financial bids to their licensing criteria (including Australia, Austria, Belgium, Ireland, Italy, New Zealand, Poland, and Spain). Many other nations, including Canada and U.K., have stated they are seriously considering the auctions approach for future assignments. Not surprisingly, the report concludes that the United States has the most advanced and successful auction methodology in the world today. It also concludes that the use of auctions to assign spectrum will continue to increase around the world as more countries liberalize their telecommunications sectors. VI. CONCLUSION If this group takes away one point from today's session, I hope it will be that our Bureaus need to work closely together on wireless issues in the international context. Last spring, some phenomenal figures were released describing the world-wide growth of the wireless industry. To cite just two statistics: - Even as subscriber growth in the U.S. cellular market has been 40 to 50 percent per year the past couple of years, worldwide growth in cellular has reached 70 percent per year. - Investments by mobile communications businesses in Japan are expected to reach 1.6 trillion yen, five times the amount invested four years ago. This exceeds the amounts invested by the Japanese automobile industry (1.2 trillion yen) and the Japanese steel industry (7.3 billion yen). We must coordinate our efforts if we are to make the kinds of spectrum planning and allocation decisions that can maximize the benefits of the spectrum for the public interest. We look forward to working with the International Bureau on this front.