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Spectrum Fees May Preclude US Low-Cost Cellular
theodp writes "Not to apologize for an industry that charges $27,000 to catch a Chicago Bears game, but will the huge spectrum fees charged by the government block the emergence of low-cost cellular service? In the most recent FCC spectrum auction, carriers paid nearly $20 billion to grab a swath of the 700MHz spectrum. And now under President Obama's proposed budget, wireless carriers would be hit with huge annual fees — eventually reaching $550 million per carrier per year — for the right to hold a spectrum license. Critics say the carriers will simply pass these fees through to consumers."
Maybe Obama is banking on them passing it on to the customers. It means more money into the economy through increased charges. They could just put th
They'd be insane not to.
What?
"Critics say the carriers will simply pass these fees through to consumers."
What we have here is a stealth tax. There is absolutely no way these costs will not be born by the consumer. This is the nature of business. If your costs rise, you need more revenue to cover them. Revenue does not come from fairies but from customers. In this way, Obama gains credibility only from those who want to stick it to the "big companies" and don't think deep enough to realize where this money actually has to come from. *sarcastically* Thank you President Obama for increasing my contribution to the federal budget. I was looking for another way to funnel you my money.
"According to the OMB (Office of Management and Budget), the fees would generate $4.8 billion over the next 10 years."
So, that's (on average) 480 million dollars per year for all carriers in the US. Assuming there are 180 million active cell phones in the US (accurate as of 2005), this is $2.70 per phone per year, or 23 cents a month. I think the total of hidden (read: fake) subcharges added to my bill are well over 23 cents a month. In other words, this charge really isn't noteworthy.
I don't know the specifics, but my only concern is that it will prevent small carrier from entering the market.
Since almost everyone got a cell phone, it's essentially raising taxes on everyone, but it's worse, because the poor and the rich will pay the same amount.
Exactly, good capitalism in action!
A business bids to get exclusive access to a public good (a band) and pays us all in exchange. Then it provides a service to paying customers and recoups its costs.
The whole thing seems so sensible that we need some republicans to swoop in and explain why it's unfair to businesses.
It is not surprising that the carriers are paying so much for a license. People that have studied wireless technologies know that the wireless spectrum is arguably one of the most valuable resources on earth. There is simply not enough space in the spectrum for us to do everything that we want to do.
If you look at the FCC frequency allocations chart (warning: PDF), you'll notice how many different industries and applications that are trying to use the wireless spectrum. And this chart is deceiving because much of the spectrum isn't usable for modern applications. Lower frequencies don't provide enough bandwidth, and high frequencies require very rare materials for the electronic components, so they are too expensive for most purposes.
There has been an explosion in research for wireless communication over the last several years because the demand for more capabilities has increased. This has led to incredibly complex encoding schemes and manipulation of the physical radio waves, and is now leading into cognitive radio.
The sad part is that most of the usable spectrum, even though allocated, remains underutilized. I am a researcher studying the spectral usage in Chicago, and we have calculated that the most heavily used parts of the spectrum are still only occupied about 11% of the time. There are also many parts of the spectrum that have been allocated, but are only used in certain geographical locations. The big TV Whitespace movement promises to introduce technologies that can potentially help us better utilize unused parts of the spectrum where available.
Am I surprised that the cellphone carriers paid $20 billion for the license? No. The survival of their company depends on them being able to transmit wireless signals. Just like an airline has to pay fees at an airport in order to be able to land their planes. There is no other option.
Perhaps someone with a better understanding of economics can explain where I go wrong.
It seems to me that the cellular companies already charge so as to result in the maximum profit. They would be fools not to. Thus either increasing or decreasing their prices would result in lower profits for them---the former as customers leave, and the later as not enough customers join to make up for the lower price. If this is so, then how is it possible for them to pass the costs on to customers?
This will never happen because the low cost cellular market is starting to heat up. Take a look at Boost Mobile, http://www.boostmobile.com/ which offers a $50 a month unlimited plan as an example. T-Mobile will soon be following suit. There will be consumer back lash against exhorbitant cellular service costs. For years now, cellular service has been way overpriced and I am thankful for Boost dropping the boom on it. While I do not use Boost, I am a T-Mobile customer and T-Mobile is already in serious consideration of matching Boost's service. When this happens, I will pretty much be a T-Mobile customer for life. While their coverage might not be as good as other GSM carriers, their customer service is outstanding.
Using the 700Mhz spectrum for cell phones means it can't be used for other purposes. If we hadn't used this spectrum for cell service we could have used it to provide faster WiFi or for all sorts of other uses.
Now the net effect of auctioning off the spectrum rather than giving it away is (assuming an efficent market) just to transfer money from the users of cellphones to those who don't use cellphones. That seems only fair. The people who benefit from exclusive use of a public resource should compensate those who are denied benefits as a result.
When developers want to build houses on federal land we expect them to pay for the land even though it means the cost of the houses they sell will be higher. This is no different.
Of course if you accept the evidence that the cellphone market is not really competitive (high barriers to entry make it more like a monopoly) then this cost won't be all passed on to consumers so it's even more justified.
If you liked this thought maybe you would find my blog nice too:
The carriers spend tons of money on buying spectrum. All this money goes to the government and is spent on who-knows-what. The owners of the spectrum then have much less money to invest in actually using the spectrum.
Don't get me wrong. I am all in favor of spectrum auctions. However, the bids should not be money. A bid should consist of what service will be provided, how much consumers will be charged for the service, and what areas the service will be provided in. The FCC can then pick winners based on who will provide the most efficient service. If a company doesn't live up to their bid, they lose their spectrum. This bidding process should be automatically repeated every 20 years. There's no reason an incumbent service should be able to hog spectrum that would be better used by a new service, or maybe even an entirely new technology.
If you had super powers, would you use them for good, or for awesome?
So right now, they hold and auction, big companies with deep pockets buy up everything they can, and then leave a huge chunk of it poorly utilized. They drive the price up because they have money to burn, but then keep the price high because they have no inclination to let anyone else in. It's a self perpetuating system which limits access to the few companies that have cash to buy in in the first place.
If you add a cost you drive them to be more efficient about what spectrum they do use, and lower the costs of entry for the 'little guy'. It's not in AT&Ts interest to buy 5 billion dollars in spectrum, and then spend 500 million a year on space they only really need 10% of. That drives down demand for spectrum space amongst rich companies, since they need way less and have no incentive to buy more than they need, and opens it up to smaller players to buy small pieces.
More efficient spectrum utilization is nothing but good. It's one of the few resources there is no possible way to get more of, no recycling as such etc. All you can do is increase the usable spectrum by high and low bandwidth research and fancy encoding schemes at a particular frequency. Forcing companies to pay for what they have will make them much more efficient about using it.
Yes, they will pass on costs to consumers, but if they're buying less spectrum, and only using exactly what they need then the cost is only going to be for the spectrum they need to provide you service, and not for spectrum they're holding for the sake of holding.
Not only critics say that, anyone who has ever run a business will tell you that ALL costs are passed on to the customers in one way or another.
Well that's definitely true in that eventually all costs must be paid, and businesses get their money from customers, and therefore all costs are in some way paid by customers. However, it's not true that all cost increases to a business result in cost increases to the customer, nor do cost decreases for the company necessarily lead to cost decreases for the consumer.
I find it almost funny how when you talk about customers getting overcharged-- "overcharged" in the sense that they're paying far most than something costs to produce-- everyone comes out of the woodwork to say, "Of course! This is capitalism! It's about supply and demand, and charging what the market will bear. Even if it costs $0.02 to product, they'll charge $100 for as long as people are willing to pay that price." Then these same people, when you mention that some regulation will increase the cost of production, they complain, "Well that cost is just going to get passed along to consumers!" Well you can't have it both ways.
There's some truth to it, but it's also true that companies do a lot of research to determine an optimal price for their product. If they charge too little, they sell lots of units but don't make as much per unit and they don't make as much money. If they charge too much, then they make more per unit but there volume is so low that they don't make as much money. There is often some kind of optimal point where they make the most money, and that's the price they charge.
Same thing with cell phone companies. The prices we're being charged per month is based on what will make the carriers the most money. Not cost. If you raise the costs sufficiently to "diminish supply", then you'll see an increase in price. But costs at this scale don't simply get "passed along to consumers" in the way people talk about it.
Quote: "Critics say the carriers will simply pass these fees through to consumers."
Critics, you say?
Customers pay all fees, expenses, taxes, and other costs related to wireless services. That is fundamentally how all businesses work.
Pointing out the basics of business is hardly being a critic.
(sigh) so much of the President's economic program is based on taxation of corporations and "the rich" that it seems bound to fail. While these policies have a populist ring to them that is currently rather popular after years of a Republican pro-business slant, ultimately the citizenry will come to realize that they are simply being taxed indirectly. Or, if they do not, then they are stupid and deserve what they get.
To prevent this, I think mobile phone operators should make it clear to consumers what percentage of their bill is directly tied to government corporate tax levies, just as the airlines do--when you look for a ticket, some of the airline websites like Southwest Airlines don't actually add in the taxes until the end, so that you get to watch that nice, cheap ticket suddenly get a lot more expensive thanks to Uncle Sam.
I suspect that in the end, the Dems will be forced to scale back their ambitious taxation program and the tax structure will be reshaped to resemble the Republican approach. Industry lobbyists will flock to Washington DC and make their case to members of Congress in terms of how it affects their constituencies (and chances for re-election), Congress will begin amending Obama's budget to alleviate the burden on constituency businesses, and we'll basically be back at square one. That, or we're probably going to have quite a prolonged recession as it gets even more expensive to start and operate a business in this country.
On the bright side, as cellular charges rise, wifi becomes a compelling alternative. We are seeing a lot of Skype-capable handhelds coming on the market, notably Android-powered phones, and one can foresee the day (hopefully soon) when dozens of generic Android handsets are available for cheap, that can make Skype calls at any hotspot. That may spell the end of the cellular industry's dominance in this country. If I were AT&T, Verizon, Sprint, or T-Mobile, I would be investing in wi-fi so as to be on the winning side of that game.
it's = "it is"; its = possessive. E.g., it's flapping its wings.