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."

Comments

Stimulate economy?

[eggman9713]

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

Re:Stimulate economy?

[Anonymous Coward]

Repeat after me: deadweight loss. Taxes are useful to run a government and supply needed services, but they can never stimulate an economy. Deadweight loss is also one of the reasons that monopolies depress an economy.

Re:Stimulate economy?

[goombah99]

Of course they're going to pass the fees on to customers. What else are they going to do, hold a bake sale?

Right.

I think it's a fine idea. the spectrum is public land. You rent it you don't give it away. This is a point that both conservatives and socialists totally agree upon. It's the bought off congressmen who were out to sell it.

There have been exceptions to this of course. When you want a resource exploited you do sell it. For example, getting railroads built wiht land grants. Or the 1872 mining law.

But now a century later the 1872 mining law seems like a huge mistake to continue. And yet that's pretty much exactly what the "drill now" folks want to do.

The secret is to lease it and price it right. It's not that hard to do.

Re:Stimulate economy?

[nmb3000]

Maybe Obama is banking on them passing it on to the customers. It means more money into the economy through increased charges.

I certainly hope Obama's grand plan for the economy doesn't whittle down to a governmental implementation of the broken window fallacy.

Increased customer fees will hurt the economy, not help it. By increasing fees, it means more money going to the government not out into the economy where it might help smaller businesses from shutting down. It also means more people might cancel their service, or opt not to sign up in the first place, both of which hurt the cell providers.

They could just put th [CARRIER LOST]

Oh, the irony! :)

Re:Stimulate economy?

[rolfwind]

I think it's a fine idea. the spectrum is public land.

No, spectrum is not "public land". It's just there. Next the government will ban the sun because it's infringing on the visible spectrum that it rented/sold/leased to someone else.

All you are renting/selling is a monopoly to use said spectrum. In fact, it's an active deprivation of others who could put that spectrum in within their private lands.

Now, I know the practical reality and the reasons for it. But it would seem to me when the government uses eminent domain of something, to grant someone a monopoly on said resource, it should be for the public good. The public good does not mean filling government coffers. This is the heart of the dispute of the Kelo decision, where local governments took it to heart that anything that bought them more tax money was for the "public good", and thus the logic that farmers could be deprived of their farms simply because a developer swooped in and his construction would bring in more property taxes. It used to mean land was taken for a road or utility.

The same thing is happening here: filling government coffers is equated with "for the public good." This is not the case, because America was built on the principle of limited Government, not more of it. Filling public coffers only supports bureacracies the same way the PA Turnpike (now being given I-80 even though that was built with Federal Funds, pushed by the crook Rendell) monopolizes it's route, and the only thing is does (given the crappy generally 2 lane roads) is become a bigger and bigger bureacracy. You should see the public administration building dedicated to this one highway.

Monopolizing a section bandwidth in exchange of free national wireless internet would be for the public good. Monopolizing a section of bandwidth in exchange for money grows this insatiable government, just makes the system the domain of the highest bidder, raises the costs to the end consumers, and is not for the public good.

Re:Stimulate economy?

[Anonymous Coward]

Monopolizing a section of bandwidth in exchange for money grows this insatiable government, just makes the system the domain of the highest bidder, raises the costs to the end consumers, and is not for the public good.

Exactly. It's called an indirect tax.

Plus, you let the consumers get angry at the corporation while the government is left "innocent."

Re:Stimulate economy?

[OeLeWaPpErKe]

But, if you auction it off, with the proceeds going to government, the price will have to be in line with what companies think they can afford. The market makes a balance between maximizing service income versus spectrum price.

Thereby enabling both low-cost cell service and some amount of income to govt while not forcing the prices up more than people find reasonable.

By contrast, Obama's new tax on the poor does not accept any feedback from the market. The companies have no choice.

In addition, it will provide a $550 million per year per spectrum stimulus to government to prohibit "general use" spectrum. So say bye-bye to UWB and maybe even to some wireless spectra.

Re:Stimulate economy?

[mspohr]

I have probably had a lot more real world experience than you but my personal anecdotal experience is really irrelevant. For the record, I have done all three of your points... you didn't set a very high bar... only 5 employees... only one business... only dealing with bureaucrats in one country... you must have a sheltered life experience.

The original post was referring to the macroeconomic effect of government fees and as long as the fees are spent on goods and services they are a boost to the economy.

We all expect services from government and we all have to pay taxes to pay for these. I value health care, education in addition to roads, police, fire, etc. You may have different priorities but you do need government unless you live in a cave with no possibility of an external threat.

Simply pass the fees?

[iminplaya]

They'd be insane not to.

Do the math...

[aaarrrgggh]

$10/user/year for the proposed fees.

$40/user/life for the license.

Drop in the bucket compared to the initial infrastructure deployment. In an efficient business, service would be almost free after 12 months.

Re:Do the math...

[icebike]

> In an efficient business, service would be almost free after 12 months.

Perhaps in something like water or sewer where nothing changes.

But would you be happy with the cell phone service and coverage you had in the past? We demand new technology, better connections, faster data, unlimited calling, etc, etc, etc.

It seems the industry is in a constant state of rolling out new services.

Re:Do the math...

[plover]

Perhaps in something like water or sewer where nothing changes.

The work crews digging up the road by my house would beg to differ.

Same with the work crews fixing the cellular spectrum outside my window. Oh, wait ...

Re:Do the math...

[Reziac]

Actually, one reason I *don't* have a cellphone is because rather than basic service getting cheap, they keep adding useless shit (at least to me). Give me a $5/month phone (so it's competitive with the poverty rate) that's *nothing but a phone* and I'd be happy.

tax in disguise

[token_username]

"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.

Re:tax in disguise

[ArsonSmith]

No, the big company executives are all going to go get a second job delivering pizzas in the evenings in order to pay for this. They wont pass it to the consumers that would be an excessive tax on the lower class and a drop in the bucket on the rich and upper middle.

Re:tax in disguise

[rhakka]

Your need for increased revenue presumes, of course, that you *need* all the profit you were originally making. What is the margin on cell phone services? I have no idea.

How about, specifically, the margin on texting? http://www.nytimes.com/2008/12/28/business/28digi.html

Hmm. yeah, that invisible hand does a really great job eh? So I guess if a text tax were in place, they would *have* to raise their prices. of course!

I don't know what the margins are on the overall business model. But it's simply not ture that there is "no way" these costs will not be born by the consumer: that is, if those "costs" are already born by the consumer, and the company is simply profiteering on OUR wireless spectrum. If that is not happening, of course, then I fully agree with your point.

But what do you think is a fair price for using our wireless spectrum then? by your argument, it should be free, so the service can be given at minimal cost to the consumer, or it's a 'stealth tax'. Is that really what you advocate? How about logging national forests for free to get the price of lumber down?

Re:tax in disguise

[Shakrai]

You are basically arguing the same old tired right wing arguement

Pointing out that the carriers will pass any increased costs onto consumers is "the same old tired right wing argument"? Ya know, you guys don't get to automatically dismiss any and all criticism of Obama using that line, right?

Re:tax in disguise

[afidel]

Verizon's 2008 operating margin was 17.34%, their return on average equity was 13.93%, neither are particularly stellar or out of line. Exxon and GE are similar, Walmart is lower for margin and higher for return. Basically they are an average Bluechip stock.

Re:tax in disguise

[mysidia]

However, from the point of view of fairness.. it makes sense.

Currently carriers pay a one-time fee for a bit of spectrum and get it for life, that isn't in the public interest.

Ongoing use of spectrum should require ongoing fees, to discourage waste, or carriers buying excessive spectrum they don't need.

The recurring fees ought to be based on how much spectrum they've bought instead of being a per-carrier fee, however...........

Re:tax in disguise

[icebike]

Oh, leave him alone.

He needs to prove to himself that you can Tax your way out of a depression.

When is shining dream lies shattered in the dust in four years he will be a right winger too.

Re:tax in disguise

[plover]

No, the big company executives are all going to go get a second job delivering pizzas in the evenings in order to pay for this

How do you deliver pizzas in a Gulfstream IV? ;)

Really, really fast.

Re:tax in disguise

[Reziac]

As the old saw goes, "If you're not a liberal at 20, you have no heart. If you're not a conservative at 40, you have no brain."

Re:tax in disguise

[tobiasly]

Verizon's 2008 operating margin was 17.34%, their return on average equity was 13.93%, neither are particularly stellar or out of line. Exxon and GE are similar, Walmart is lower for margin and higher for return. Basically they are an average Bluechip stock.

Your silly little "facts" and "numbers" have no place in the effort to make excuses for Obama's enlightened budget, please keep them to yourself. Obama says that if we make less than $250k then we won't pay another dime! So we need to make sure these big bad companies pay a fair price for their use of our spectrum...

Re:tax in disguise

[Tycho]

Here is a different analysis of the facts from me. From the SEC 10-K form Verizon filed for the fiscal year ending 12/31/2008, submitted 2/24/2009 and can be found here:
http://idea.sec.gov/Archives/edgar/data/732712/000119312509036349/dex13.htm

About a quarter of the way down the page is the Income and Expenses breakdown for the Wireless division. Keep in mind that 45% Verizon Wireless is owned by Vodafone and 55% is owned by Verizon proper. So Vodafone and Verizon most likely have some sort profit/loss sharing plan. In any case, these numbers are for the whole Wireless division. In 2008 the division received just over $49 billion in income, a 12.5% increase from 2007. The total expenses for 2008 ended up at just over $35 billion, 10.1% higher than 2007. The profit was about $14 billion, or 18.6% higher than 2007.

As one looks at the breakdown of the wireless division expenses for 2008 one may notice a few odd or unusual numbers, 15.5 billion was from the cost of services and sales. These include both the costs of operating the wireless network, routing calls, and discounts given to customers upgrading their equipment. Not too much interesting I suppose, Verizon could start charging what the phone was actually worth instead of the joke prices they do now, the primary portion of the 19% increase in expenses this section from 2007 was customer equipment upgrades. However, some may claim that this passes the costs on to customers, but the discounts also lock customers into two year contracts.

The $14.2 billion spent on the "Selling, General, and Administrative Expense" category is more interesting on the other hand. It represents wages, sales commissions, benefits, advertising, promotions, bad debt expenses, and regulatory fees. "Can you hear me now? Good." Who thinks that Verizon spends a bit much on advertising these days? Who thinks that Verizon could cut back even, just a bit, on advertising, retail stores, gimmicky promotions, and sales commissions for corporate sales, without significantly cutting back on service or increasing customer costs? In 2008, Verizon managed to decrease its cost related to wages and benefits even.

These spectrum fees may exist so that if Verizon wishes to keep its spectrum, it better be willing to use it in a competitive manner. Otherwise, it is a yearly unneeded cost, like many Verizon employees, potentially, at least in the eyes of a few highly paid, but low skilled executives. One might think that surrendering unusable, costly spectrum to the FCC would be wise. Think of these fees perhaps as being a bit like property taxes for radio spectrum, an added incentive to dispose of costly unused assets that have value.

Of course, I think the whole division of the 700MHz spectrum should be done again. It would be a better fix if it was done properly this time though.

Actual Cost

[rm999]

"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.

Cirtics say...

[icebike]

> Critics say the carriers will simply pass these fees through to consumers."

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.

The only difference here, is that the carriers may be able to write these fees off of their taxes,
which is just that much less tax revenue, making the government's share zilch.

Re:Cirtics say...

[Gorobei]

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.

Re:Cirtics say...

[nine-times]

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.

Little Wonder

[Programmerangel]

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.

Re:Little Wonder

[Shakrai]

But it won't be, it will be swept into some welfare pot to buy condoms for crack addicts or something

I had a fun experience at the grocery store the other day. Witnessed a woman using a WIC card to buy half of her groceries. The other half (approximately $80 worth of junk food, beer and cigarettes) she paid for with cash. She had a iPhone too.

Aren't you glad your tax dollars are financing her iPhone, junk food and controlled substances? Imagine if she didn't have that wic card -- she might actually have had to settle for a candybar phone or something.

Re:Georgism 101

[icebike]

> Carriers cannot pass on ad valorem taxes like this

On what do you base that?

They pass on the cost of their own regulation, you can be sure they will pass this tax on to their customers.

Re:Taxes or fees

[Shakrai]

but it's worse, because the poor and the rich will pay the same amount.

Please explain to me why that's "worse". Do you honestly believe that the rich should pay more for cellular phone service just because they can? Do you also think that your phone company should get a copy of your W-2 so they can implement a progressive sliding scale of E-911 fees? Maybe SMS charges should be based on your income as well?

Of course the carriers won't pass the fees on

[Russ Nelson]

Of course the carriers won't pass the fees on! How could they? The government won't let them. Just like the government doesn't let landlords pass on property taxes, or hotels tourism taxes, or airports landing fees.

No, the carriers will simply absorb the fees and lose money.

(sheesh)

How?

[Pinckney]

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?

Re:How?

[Timothy Brownawell]

It depends on how competitive the market is, how profitable the cellular companies currently are, and probably a few other things.

If the market is not competitive at all (perfect monopoly), the price is probably fixed at whatever generates the most revenue and won't change.

If the cellular companies aren't making enough profit (result of perfect competition), they'll need to raise prices to cover the fees or go bust.

Reality is somewhere in the middle, I'd personally guess somewhat closer to the "monopoly" end due to needing to buy spectrum and such. So the prices will go up some, and profits will go down some (probably slightly more, because of limited competition).

Never Happen

[DaMattster]

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.

Not A Free Lunch!

[logicnazi]

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.

current spectrum auctions are stupid

[j0nb0y]

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.

Re:Taxes or fees

[afidel]

I'm pretty sure he's referring to the fact that this type of flat use tax is regressive which is generally considered to be bad since it has a much higher marginal rate on those least able to afford it. Basically if the government wants more funding they should come up with a more progressive tax system to grow the overall economy (regressive taxes reduce the rate of currency flow through the market).

I somewhat disagree with the critics

[Sir_Sri]

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.

Who pays for which fees?

[jgarzik]

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.

Just another hidden tax

[yog]

(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.

Re:Georgism 101

[tobiasly]

> Carriers cannot pass on ad valorem taxes like this

On what do you base that?

On the fact that he used a Latin phrase so he must know what he's talking about...

Re:good

[rdean400]

These fees are being sold as a fee on the carrier, but that fee will be applied as a new surcharge on everyone's phone bill. The interesting thing about fees is that they do not operate as the progressive tax that Democrats typically favor. They operate as a fair tax -- applied uniformly based on consumption. The only way they get away with it is that people don't think it through, so they think someone else is getting the tax.

I agree with the point of the article that applying huge fees to the wireless spectrum will create a huge barrier to entry for startups that don't have that kind of money. For the U.S. to remain competitive, we need to create an environment that nurtures the small inventor who might have a big idea but lack the funds to bring it to market.