Monday, January 17, 2011

Objections to the Mobility Fund NPRM: Part 1

With the Mobility Fund reply comments coming out this week, I thought I would go back and review the NPRM and the initial comments before summarizing the reply comments. This should give readers a good overview of my personal telecom policy philosophies because the Mobility Fund NPRM contains a plethora of objectionable proposals for rural telecom advocates.

Background: The Mobility Fund NPRM (In The Matter of Universal Service Reform Mobility Fund, WT Docket No. 10-208) was adopted on October 14, 2010. Basically, the FCC is proposing to use excess USF reserves as a one-time investment in wireless infrastructure, particularly in areas that currently do not have wireless coverage. This means rural areas, low income areas, and areas where the major providers (Verizon, etc.) have determined to not be worth the investment. I won't go through every detail of the NPRM (you can read it here:, but I do want point out some of the main components. The money will come from Verizon and Sprint-Nextel's surrendered universal service funds, it will be distributed via reverse auctions to the bidder who can do the job for the least amount of money, and the winner will be expected to provide at least 3G coverage in the areas identified as unserved. Simple, right? Sure, if you are Verizon, AT&T, Sprint-Nextel or T-Mobile. If you are a rural wireless carrier, don't get your hopes up. Not only are reverse auctions the absolute worst idea ever, but the money will basically just be transferred from Verizon back to Verizon. 3G service will probably be obsolete by the time the money has gone full circle. Finally, the amount of money for this one-time investment isn't even enough to provide coverage in a single state, and there is no plan for ongoing funding once the expensive wireless networks are actually constructed.

Arguments: My primary objections to this NPRM are the reverse auctions, the 3G requirement, and the lack of ongoing funding. I found other issue as well, but these three are especially unpleasant for rural providers.

  • Reverse Auctions: I could probably write about my complete disdain for reverse auctions all day, but I will try to keep it short. I strongly believe that reverse auctions will be an absolute disaster, as they have been in other countries that have tried to implement them for telecom systems (example: Chile, India). When you are dealing with a commodity, reverse auctions might make sense because obviously the government should try to keep costs as low as possible and reduce waste, etc. But when you are dealing with wireless infrastructure in an extremely diverse selection of geographies and demographics, you really don't want to go with a mechanism that only rewards low costs. It is also very difficult to compare two completely different wireless networks--such as a LTE and a WiMax network--on costs alone. The government will get what its paying for, as the saying goes. I find this analogy helpful:  I want to buy an airline ticket so I go to Travelocity (or wherever) and put in my dates and destinations. I get back a list of several different airlines, fares and flight choices and I pick the one that costs the least without looking at the details. I will most likely get stuck with several long and out-of-the-way connections, a middle seat in the back, and I won't get the full-fare frequent flier miles from the airline. It will be an unpleasant experience but I will get what I paid for by choosing the cheapest option. If the FCC picks the winner based only on the lowest cost, there are going to be a lot of unpleasant side effects throughout the trip to completing a quality wireless network in an unserved area. The reverse auction process does not identify the best provider for a particular area--which in many cases may be a rural provider. Reverse auctions provide no incentive for quality, which is not ideal for wireless networks. Rural providers do not have economies of scale for equipment that nationwide providers have, so it is highly likely that many rural providers won't even bother participating in the auction, as is often the case with wireless license auctions. I would like to know the cost ratio of wireless infrastructure equipment for a company like Verizon vs. a rural company that only serves a few thousand people, as I suspect it would probably cost the rural company many times more per customer to construct a network in an unserved area. Basically, these proposed reverse auctions will ultimately strengthen the market power of the Big 4, they will not help rural companies participate in the wireless industry, and the wireless networks that result from these auctions will be shoddy at best because the winning bidder will not bother investing in the best equipment for the area in question. The result will not close the Wireless Broadband Gap, nor will it really be beneficial for the customers that live in remote, low income, and rural areas. 
  • 3G Requirement: There has been so much buzz about 4G recently that it is hard to imagine any wireless company would actually want to take a step backwards and pour money into a 3G network. The NPRM proposes that the bidder must be able to build a 3G or better network, but if reverse auctions are used then 3G equipment is going to be much cheaper, and therefore the winners will probably be building 3G networks. Not that there is anything wrong with 3G, if you are just trying to get basic service in an unserved area then 3G is perfectly fine. The problem is that it is very costly to upgrade a network from 3G to 4G, so any company who is currently planning to build a wireless network in the near future should skip 3G altogether as to avoid two very costly investments--3G network operators are going to have to upgrade to 4G eventually to keep pace with innovation and customer demands. 3G networks will not be competitively sustainable in near future, and by the time the Mobility Fund money is actually distributed, the major providers will most likely have 4G (or not-really-but-kind-of-"4G") service in most major markets already. Once again, the rural folks will be stuck with sub-par service.
  •  Lack of Ongoing Funding: The money from the Mobility Fund will be a one-time investment, and it really is not much of an investment at that. There will potentially be $100-300 million available for the Mobility Fund, which may seem like a lot of money, but when you consider the vast Wireless Broadband Gap and how much the average wireless network costs, it is clear that this amount of money is a complete joke. One of the most significant costs for wireless operators is ongoing expenses, and the Mobility Fund will not cover anything except the initial capital expenditure. I did a little exercise in a wireless communications class I took last semester on wireless network costs, and the result was very interesting. For a small/medium sized city like Boulder, Colorado, it would probably cost at least $10 million to construct a citywide 4G WiMax network with approximately 20 towers, using 2.5 GHz spectrum. The ongoing expenses for maintenance, upgrades, tower land rent, etc. could run the network operator up to $1 million per year, or 10% of the initial cost. With only $100 million available, the Mobility Fund would only provide investment capital for 10 medium sized cities, and absolutely no ongoing support whatsoever. So I can't help but ask:
What is the point of even trying to distribute this money? Why not just let Verizon and Sprint-Nextel keep it with an agreement that it needs to be used for 4G investments in unserved areas? Will this money actually "close" the Wireless Broadband Gap? Will any rural provider actually benefit from the Mobility Fund?

I think I know the unfortunate answers to these questions. In Part 2 of this topic, I will review some of the especially interesting initial comments that address some of my fundamental issues with the Mobility Fund.

I would love to hear reader's thoughs on reverse auctions and ideas about how rural providers can effectively get a piece of the Mobility Fund pie--if it is even worth going after.

Cassandra Heyne

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