The report follows from a 2010 White House directive issued shortly after the FCC’s National Broadband Plan was published, in which the FCC raised the alarm of an imminent “spectrum crunch” for mobile users.

By the FCC’s estimates, mobile broadband will need an additional 300 MHz. of spectrum by 2015 and 500 MHz. by 2020, in order to satisfy increases in demand that have only amped up since the report was issued.  So far, only a small amount of additional spectrum has been allocated.  Increasingly, the FCC appears rudderless in efforts to supply the rest, and to do so in time.

It’s not entirely their fault.  At the core of the problem, the FCC is simply not constituted to resolve this increasingly urgent crisis.  That’s because, as I write in the article, the management of radio frequencies has entered new and unchartered territory.

For the first time since the FCC and its predecessor agencies began licensing spectrum nearly 100 years ago, there is no unassigned spectrum available, or at least none of which current technology can make effective use.

The spectrum frontier is now closed.  But the FCC, as created by Congress, is an agency that only functions at all on the frontier.

So it’s worth remembering what happened a hundred years earlier, when a young historian named Frederick Jackson Turner showed up at the 1893 annual meeting of the American Historical Association to present his paper on “The Significance of the Frontier in American History.”

The meeting took place that year on the grounds of the World’s Columbian Exposition in Chicago.  The weather was unspeakably hot, and Turner’s talk was poorly attended.  (The President of the AHA, Henry Adams, was in attendance but appears not to have heard Turner’s talk or ever to have read the paper—he was meditating in the Hall of Turbines, as he wrote in his autobiography, “The Education of Henry Adams,” having a nervous breakdown.)   But the paper has had an outsized and long-lasting impact, launching the field of western or frontier history.

Turner’s thesis was simple and unassailable.  Citing census data that showed there was no longer a recognizable line of American territory beyond which there was no settlement, Turner declared that by 1890 the frontier had “closed.”  The era of seemingly endless supplies of readily-available cheap land, dispensed for free or for nominal cost by the federal government, had come to an end.

For Turner, the history of the west was the history of the American experience.  And the defining feature of American life—shaping its laws, customs, culture and economy–had disappeared.  A new phase, with new rules, was beginning.

The FCC Only Functions, When it Functions at All, on the Frontier

Our problem, at least, is equally easy to describe.  The FCC, as created by Congress, is an agency that only functions, when it functions at all, on the frontier.

All the talk of “spectrum crunch” boils down to a simple but devastating fact:  it’s no longer possible to add capacity to existing mobile networks by assigning them unused ranges of radio frequencies.  While technology continues to expand the definition of “usable” frequencies, demand for mobile broadband is increasing faster than our ability to create new supply.

We need more spectrum.  And the only way to put more spectrum to use for the insatiable demands of mobile consumers is to reallocate spectrum that has already been licensed to someone else.

In the American west, reallocation of land was easy.  Land grants were given with full legal title, and holders were under no lasting obligation to use their land for any specific purpose or in any particular way.

The various acts of Congress that authorized the grants were intended to foster important social values—populating the frontier, developing agriculture, compensating freed slaves, building the railroads.  But those intentions were never translated into the kind of limited estates that plagued modern Europe after the feudal age came to an end.  (For a good example of the mischief a conditional estate can cause hundreds of years later, watch “Downton Abbey.”  Watch it even if you don’t want to see an example of inflexible estate law.)

Speculators sold to farmers, farmers to ranchers, ranchers to railroads and miners and oil drillers, and from there to developers of towns and other permanent settlements.  The market established the transfer price, and the government stood behind the change of title and its enforcement, where necessary.  Which was rarely.

So the closing of the western frontier, while it changed the nature of settlement in the American west, never threatened to bring future development to a screeching halt.

Reallocation Options are Few and Far Between

Unfortunately, spectrum licensing has never followed a property model, even though one was first proposed by Ronald Coase as early as 1959.  Under the FCC’s command-and-control model, spectrum assignments have historically been made to foster new technologies or new applications the FCC deems to be of good potential to advance national interests.  Spectrum has been licensed, usually at no or nominal cost to the licensor, for particular uses, with special conditions (often unrelated) attached.

In theory, of course, the FCC could begin revoking the licenses of public and private users who aren’t using the spectrum they already have, or who aren’t using it effectively or, to use the legal term of art, “in the public interest.”  Legally and politically, however, revoking (or even refusing to renew) licenses is a non-starter.

Consequently, the most disastrous side-effect of the “public interest” approach to licensing has been that when old technologies grow obsolete, there is no efficient way to reclaim the spectrum for new or more valuable uses.  The FCC must by law approve any transfer of an existing license on the secondary market, slowing the process at best and creating an opportunity to introduce new criteria and new conditions for the transfer at worst.

Even when the agency approves a transfer, the limitations on use and the existing conditions of the original licensor apply in full force to the new user.  That means that specific ranges of spectrum more-or-less arbitrarily set aside for a particular application remains forever set aside for that application, unless and until the FCC undertakes a rulemaking to reassign it.

That also takes time and effort, and offers the chance for new regulatory mischief.  (Only since 1999, the FCC has had the power, under limited circumstances, to grant flexible use licenses.  The power cannot be applied retroactively to existing licenses.)

With the spectrum frontier closed, mobile broadband providers must find additional capacity from existing license holders.  But because of the use restrictions and conditions, the universe of potential acquisition targets immediately and drastically shrinks to those making similar use of their licenses–that is, to current competitors.

So it’s no surprise that since 2005, as mobile use has exploded with the advent of 2G, 3G, and now 4G networks, the FCC has been called upon to approve over a dozen significant transfers within the mobile industry, including Sprint/Nextel, Verizon/Alltel, and Sprint Nextel/Clearwire.  Indeed, expanding capacity through merger seemed to be the agency’s preferred solution, and the one that required the least amount of time and effort.

But with the rejection last year of AT&T’s proposed merger with T-Mobile USA, the FCC has signaled that it no longer sees such transactions as a preferred or perhaps even potential avenue for acquiring additional capacity.  At least not for AT&T–and perhaps as well for Verizon, which is currently fighting to acquire unused spectrum held by a consortium of cable providers.

What other avenues are left?  With the approval of “voluntary incentive auction” legislation earlier this year, the FCC can now begin the process of gently coercing over-the-air television broadcasters to give up some or all of their licensed capacity in exchange for a share of the proceeds of any auctions the agency conducts to repurpose that spectrum for mobile broadband.

(Broadcast television seems the obvious place to start freeing up spectrum.  With the transition to digital TV, every station was given a 6 MHz. allocation in the 700 MHz. range.  But over-the-air viewership has collapsed to as few as 10% of homes in favor of cable and fiber systems, which today reach nearly every home in the country and offer far greater selection and services.  Many local broadcasters remain in business largely through the regulatory arbitrage of the FCC’s retransmission consent and must-carry rules.)

Those auctions will likely take years to complete, however, and the agency and Congress have already fallen out over how and how much the agency can “shape” the outcomes of these future auctions by disqualifying bidders who the agency feels already have too high a concentration of existing licenses.

And it’s far from clear that the broadcasters will be in any hurry to sign up, or that enough of them will to make the auctions worthwhile.  Participation is, at least so far, entirely voluntary.  Just getting Congress to agree to give the FCC even limited new auction authority took years.

There’s also the possibility of reassigning other kinds of spectrum to mobile use—increasing the pool of usable spectrum allocated to mobile, in other words.  That option, however, has also failed to produce results.  For example, the FCC initially gave start-up LightSquared a waiver that would allow it to repurpose unused spectrum allocated for satellite use for a new satellite and terrestrial-based LTE network.

But after concerns were raised by the Department of Defense and the GPS device industry about possible interference, the waiver was revoked and the company now stands on the brink of bankruptcy.  (Allegations of political favoritism in the granting of the waiver are holding up the nominations of two FCC commissioners.)

So when Dish Networks recently asked for a similar waiver, the agency traded speed and flexibility for the relative safety of  full process.  The FCC has now published a formal Notice of Proposed Rulemaking to evaluate the request.  If the rulemaking is approved, Dish will be able to repurpose satellite spectrum for a terrestrial mobile broadband network (possibly a wholesale network, rather than a new competitor).  That, of course, will take time.  And given enough time, anything can and will happen.

Finally, there’s the potential to free up unused or underutilized spectrum currently licensed to the federal government, one of the largest holders of usable spectrum and a notoriously poor manager of this valuable resource.

That was the subject of the NTIA’s recent report, which seemed to suggest that the high-priority 1755-1850 MHz. range (internationally targeted for mobile users) could be cleared of government users within ten years—some in five years, and in some cases, with possible sharing of public and private use during a transitional phase.

But as I point out in the article, the details behind that encouraging headline suggest rather that some if not all of the twenty agencies who currently hold some 1,300 assignments in this band are in no hurry to vacate it.  Having paid nothing for their allocations and with no option to get future auction proceeds earmarked to their agency, the feds have little incentive to do so.  (NTIA can’t make them do much of anything.)  The offer to share may in fact be a stalling tactic to ensure they never actually have to vacate the frequencies.

What’s Left?  Perhaps Nothing, at Least as Far as the FCC is Concerned

The color-coded map of current assignments is so complicated it can’t actually be read at all except on very large screens.  There are currently some 50,000 active licenses.  The agency still doesn’t even have a working inventory of them.  This is the legacy of the FCC’s command-and-control approach to spectrum allocation over nearly 100 years.

Almost everyone agrees that even with advances in hardware and software that make spectrum usage and sharing more efficient, large quantities of additional spectrum must be allocated soon if we want to keep the mobile ecosystem healthy and the mobile revolution in full and glorious swing.

With the closing of the spectrum frontier, the easy solutions have all been extinguished.  And the century-long licensing regime, which tolerated tremendous inefficiency and waste when spectrum was cheap, has left the FCC, the NTIA, the mobile industry and consumers dangerously hamstrung in finding alternative methods to meet demand.  Existing spectrum, by and large, can’t be repurposed even when everyone involved wants to do so and where the market would easily catalyze mutually-beneficial transactions.

Given the law as it stands and the FCC’s current policy choices, carriers can’t get spectrum from outside the mobile industry, nor can they get it from their competitors.  They can’t get it from the government, and may not be allowed to participate in future auctions of spectrum agonizingly pried loose from broadcasters who aren’t using what they have cost-effectively—assuming those auctions ever take place.  They also can’t put up more towers and antennae to make better use of what they have, thanks to the foot-dragging and NIMBY policies of local zoning authorities.

And even when network operators do get more usable spectrum, it comes burdened with inflexible use limits and unrelated conditions that attach like barnacles at every stage of the process—from assignment to auction to transfer—and which require regular reporting, oversight, and supervision by the FCC.

A New Approach to Spectrum Management–Following an Old Model that Worked

The frontier system for spectrum management is hopelessly and dangerously broken.  It cannot be repaired.  For the mobile broadband economy to continue its remarkable development (one bright spot throughout the sour economy), Congress and the FCC must transition quickly to a new model that makes sense in a world without a spectrum frontier.

That model would look much more like the 19th century system of federal land management than the FCC’s legacy command-and-control system.  The new approach would start by taking the FCC out of the middle of every transaction, and leave to the market to determine the best and highest use of our limited range of usable frequencies.  It would treat licenses as transferable property, just like federal land grants in the 18^th and 19^th centuries.

It would leave to the market—with the legal system as backup—to work out problems of interference, just as the common law courts have stood as backup for land disputes.

And it would deal with any genuine problems of over-concentration (that is, those that cause demonstrable harm to consumers) through modern principles of antitrust applied by the Department of Justice, not the squishy and undefined “public interest” non-standard of the FCC.  It would correct problems once it was clear the market had failed to do so, not short-circuit the market at the first hint of theoretical trouble.  (Hello, net neutrality rules.)

That’s the system, according to Frederick Jackson Turner, that formed American culture and values, shaped American law and provided the fuel to create the engine of capitalism.

For starters.

On CNET today, I have a longish post on the FCC’s continued machinations over LightSquared and Dish Networks respective efforts to use existing satellite spectrum to build terrestrial mobile broadband networks. Both companies plan to build 4G LTE networks; LightSquared has already spent $4 billion in build-out for its network, which it plans to offer wholesale.

After first granting and then, a year later, revoking LightSquared’s waiver to repurpose its satellite spectrum, the agency has taken a more conservative (albeit slower) course with Dish. Yesterday, the agency initiated a Notice of Proposed Rulemaking that would, if adopted, assign flexible use rights to about 40 Mhz. of MSS spectrum licensed to Dish.

Current allocations of spectrum have little to do with the technical characteristics of different bands. That existing licenses limit Dish and LightSquared to satellite applications, for example, is simply an artifact of more-or-less random carve-outs to the absurdly complicated spectrum map managed by the agency since 1934. Advances in technology makes it possible to successfully use many different bands for many different purposes.

But the legacy of the FCC’s command-and-control model for allocations to favor “new” services (new, that is, until they are made obsolete in later years or decades) and shape competition to its changing whims is a confusing and unnecessary pile-up of limitations and conditions that severely and artificially limit the ways in which spectrum can be redeployed as technology and consumer demands change. Today, the FCC sits squarely in the middle of each of over 50,000 licenses, a huge bottleneck that is making the imminent spectrum crisis in mobile broadband even worse.

Even with the best of intentions, the agency can’t possibly continue to micromanage the map. And, as the LightSquared and Dish stroies demonstrate yet again, the risk of agency capture and political pressure often mean the agency doesn’t do the right thing even when it does act.

Who would be the more efficient and neutral regulator? According to Nobel Prize-winning economist Ronald Coase’s seminal 1959 article, “The Federal Communications Commission,” the answer is the market. In his trademark straight-forward, common sense style, Coase elegantly dismantles the idea that scarce spectrum resources demand a non-market solution of government management.

For one thing, Coase demonstrates how screwed up the system already was over fifty years ago. There’s little doubt that the problems he describes have only gotten worse with time and increased demand on the airwaves by insatiable consumers.

Instead, Coase proposed to treat spectrum like any other industry input–as property. The FCC, he said, should auction spectrum rights to the highest bidder, without licenses, conditions, or limitations on use, and then stand back. (He acknowledged the risk of antitrust problems, but, as in any industry, such problems could be addressed by antitrust regulators and not the FCC.) Spectrum rights would efficiently change hands when new applications and devices created higher-value uses.

Potential interference problems–such as those raised by GPS device manufacturers in the case of LightSquared–would be resolved precisely as they are in other property contexts. Without an FCC to run to, the parties would be forced to negotiate against a backdrop of established liability rules and a safety net of potential litigation. Indeed, LightSquared and GPS offer a classic example of Coase’s later work demonstrating that regardlesss of how property is initially allocated, liability rules ensure that parties will bargain to the most socially-efficient solution to interference.

Of course we’ll never know if the socially-optimal solution here is for LightSquared to protect GPS devices from receiving its signal or for device manufacturers to change their designs to stay out of LightSquared’s bands. The heavy hand of the regulator has foreclosed a market solution, or even an attempt at negotiations.

Instead, we have the disaster of the FCC’s decision in January, 2011 to grant a conditional waiver to LightSquared and then, last month, indefinitely revoking it. Meanwhile, LightSqaured spent $4 billion on infrastructure it may never use, and lost its CEO and key customers including Sprint. No one is happy, and no one reasonably argue this is was an optimal outcome, or even close to one.

For Dish, the NPRM will ensure a more orderly process, but at the cost of months or perhaps longer delay before Dish can begin building its terrestrial network. And in the interim, all sorts of irrelevant issues may interfere with the orderly (and expensive) resolution.

When Coase proposed a property model for spectrum in 1959, the idea was considered too radical. Congress and the FCC have, slowly but surely, taken pieces of the proposal to heart, introducing auctions (but not property rights) in the 1990′s. Yesterday’s NPRM takes a small step toward more flexible use licenses, but this may be too little reform too late. We have all the evidence we need that micromanagement of spectrum can’t possibly keep up with the pace of innovation. Time to try a new, fifty year old, approach.

The year began with two big stories: the successful fight to halt efforts for quick passage of SOPA and PIPA, two bills that would have added dangerous new legal remedies for government and private parties to tinker with the underlying engineering of the Internet in a fool-hardy effort to curb unlicensed copying by consumers. Larry was front and center, making several trips to Washington to speak with Members of Congress urging them to reconsider the bills, and reported as well from the annual Consumer Electronics Show in Las Vegas, where the tide turned definitively against the bills.  Larry’s work, including a controversial article for Forbes on “Who Really Stopped SOPA, and Why,” was cited in publications as varied as The National Review, Aljazeera, The National Post, TechCrunch, Techdirt, AdWeek and a radio interview on WHYY’s “Radio Times.”

The second big story was Larry’s barn-burning article for Forbes on the failure of electronics retailer Best Buy to adapt to changing market and technology dynamics.  The original article how has nearly 3,000,000 pageviews, and set off a firestorm of response both positive and negative. The article spawned several follow-up pieces on Forbes, as well as extensive coverage nearly everywhere else, including  The Financial Times, The Wall Street Journal, The New York Times, TechCrunch, Slashdot, MetaFilter, Reddit, The Huffington Post, The Motley Fool, MSN Money and CNN. Some of these articles generated thousands of user comments, in addition to over a thousand that appeared on Forbes.

With the SOPA and PIPA fights temporarily on hold, Larry pivoted back to other important innovation and policy matters, including reform of the FCC’s troubled Lifeline program, Internet privacy,  and a fight over future spectrum auctions vital to the future of mobile broadband.  Look for articles in CNET and Forbes as well as interviews in U.S. News, This Week in Law, The Los Angeles Times, The Hill, WebProNews and the Heartland Institute.

Stayed tuned!  It’s going to be an exciting year.

Ceci c'est un meme.

On Forbes today, I look at the phenomenon of memes in the legal and economic context, using my now notorious “Best Buy” post as an example. Along the way, I talk antitrust, copyright, trademark, network effects, Robert Metcalfe and Ronald Coase.

It’s now been a month and a half since I wrote that electronics retailer Best Buy was going out of business…gradually.  The post, a preview of an article and future book that I’ve been researching on-and-off for the last year, continues to have a life of its own.

Commentary about the post has appeared in online and offline publications, including The Financial Times, The Wall Street Journal, The New York Times, TechCrunch, Slashdot, MetaFilter, Reddit, The Huffington Post, The Motley Fool, and CNN. Some of these articles generated hundreds of user comments, in addition to those that appeared here at Forbes.

(I was also interviewed by a variety of news sources, including TechCrunch’s Andrew Keen.)

Today, the original post hit another milestone, passing 2.9 million page views.

Watching the article move through the Internet, I’ve gotten a first-hand lesson in how network effects can generate real value.

Network effects are an economic principle that suggests certain goods and services experience increasing returns to scale.  That means the more users a particular product or service has, the more valuable the product becomes and the more rapidly its overall value increases.  A barrel of oil, like many commodity goods, does not experience network effects – only one person can own it at a time, and once it’s been burned, it’s gone.

In sharp contrast, the value of networked goods increase in value as they are consumed.  Indeed, the more they are used, the faster the increase–generating a kind of momentum or gravitational pull.  As Robert Metcalfe, founder of 3Com and co-inventor of Ethernet explained it, the value of a network can be plotted as the square of the number of connected users or devices—a curve that approaches infinity until most everything that can be connected already is.  George Gilder called that formula “Metcalfe’s Law.”

Since information can be used simultaneously by everyone and never gets used up, nearly all information products can be the beneficiaries of network effects.  Standards are the obvious example.  TCP/IP, the basic protocol that governs interactions between computers connected to the Internet, started out humbly as an information exchange standard for government and research university users.  But in part because it was non-proprietary and therefore free for anyone to use without permission or licensing fees, it spread from public to private sector users, slowly at first but over time at accelerating rates.

Gradually, then suddenly, TCP/IP became, in effect, a least common denominator standard by which otherwise incompatible systems could share information.  As momentum grew, TCP/IP and related protocols overtook and replaced better-marketed and more robust standards, including IBM’s SNA and DEC’s DECnet.  These proprietary standards, artificially limited to the devices of a particular manufacturer, couldn’t spread as quickly or as smoothly as TCP/IP.

From computing applications, Internet standards spread even faster, taking over switched telephone networks (Voice over IP), television (over-the-top services such as YouTube and Hulu), radio (Pandora, Spotify)—you name it.

Today the TCP/IP family of protocols, still free-of-charge, is the de facto global standard for information exchange, the lynchpin of the Internet revolution.  The standards continue to improve, thanks to the largely-voluntary efforts of The Internet Society and its virtual engineering task forces.  They’re the best example I know of network effects in action, and they’ve created both a platform and a blueprint for other networked goods that make use of the standards.

Beyond standards, network effects are natural features of other information products including software.  Since the marginal cost of a copy is low (essentially free in the post-media days of Web-based distribution and cloud services), establishing market share can happen at relatively low cost.  Once a piece of software—Microsoft Windows, AOL instant messenger in the old days, Facebook and Twitter more recently—starts ramping up the curve, it gains considerable momentum, which may be all it takes to beat out a rival or displace an older leader.  At saturation, a software product becomes, in essence, the standard.

From a legal standpoint, unfortunately, market saturation begins to resemble an illegal monopoly, especially when viewed through the lens of industrial age ideas about markets and competition.  (That, of course, is the lens that even 21^st century regulators still use.)  But what legal academics, notably Columbia’s Tim Wu, misunderstand about this phenomenon is that such products have a relatively short life-cycle of dominating.  These “information empires,” as Wu calls them, are short-lived, but not, as Wu argues, because regulators cut them down.

Even without government intervention, information products are replaced at accelerating speeds by new disruptors relying on new (or greatly improved) technologies, themselves the beneficiaries of network effects.  The actual need for legal intervention is rare.  Panicked interference with the natural cycle, on the other hand, results in unintended consequences that damage emerging markets rather than correcting them.  Distracted by lingering antitrust battles at home and abroad, Microsoft lost momentum in the last decade.  No consumer benefited from that “remedy.”

For more, see “What Makes an Idea a Meme?” on Forbes.

As regular readers know, I’ve been following these bills closely from the beginning, and made several trips to Capitol Hill to urge lawmakers to think more carefully about some of the more half-baked provisions.

But beyond traditional advocacy–of which there was a great deal–something remarkable happened in the last several months. A new, self-organizing protest movement emerged on the Internet, using social news and social networking tools including Reddit, Tumblr, Facebook and Twitter to stage virtual teach-ins, sit-ins, boycotts, and other protests.

The article describes the political philosophy and origins of this movement, which I called “bitroots” activism. I warn both fans and detractors about the dangers facing this new global political force as it navigates the delicate transition from single-issue protest to a sustainable voice in shaping technology law and regulation.

But so far, at least, supporters of PIPA and SOPA won’t even acknowledge the existence of this third front, dismissing it as a stunt perpetrated by a few large technology companies. That response not only misses the point, but makes clear the need for new forms of political dialogue over technology issues in the fist place.

As someone who spends time both in Silicon Valley and inside the Beltway, I’ve long been concerned about the lack of informed dialogue between innovators and regulators, especially as the two come increasingly into conflict as their worlds move closer together. (That was the central theme of The Laws of Disruption, now available practically for free on Amazon!)

Now that the bitroots movement has coalesced, I can’t wait to see where it goes next. I have high hopes for this new awareness and activism, and for their intuitive understanding that the innovations that enable them are their best weapons changing the political dialogue. Who knows? They may even wind up disrupting traditional forms of advocacy.

At CES last week, FCC Chairman Julius Genachowski largely repeated the speech he has now given three years in a row.  But there was a subtle twist this time, one echoed by comments from Wireless Bureau Chief Rick Kaplan at a separate panel.

Instead of simply warning of a spectrum crunch and touting the benefits of the incentive auction idea, the Chairman took aim at a House Republican bill that would authorize the auctions but limit the agency’s “flexibility” in designing and conducting them. “My message on incentive auctions today is simple,” he said, “we need to get it done now, and we need to get it done right.”

By “done right,” Genachowski means without meaningful limits on how the agency constructs or oversees the auctions.  The Chairman’s attitude now seems to be if the FCC can’t have complete freedom, it would rather not have incentive auctions at all.  That’s a strange stance given the energy the FCC has expended making the case that such auctions are critical for mobile broadband users.

What’s the fight about?  The House bill would prohibit the agency from introducing bidder qualifications based on external factors, such as current spectrum holdings.  The FCC could not, in other words, directly or indirectly exclude carriers who already have significant spectrum licenses.  The agency would also be limited in its ability to attach special conditions to new licenses issued as part of particular auctions.  An amendment by Rep. Marsha Blackburn (T-Tenn.) that was approved last month would specifically forbid special net neutrality conditions.

This may sound like an inside-the-beltway spat, but the stakes are in fact quite high, going right to the core of what role the FCC should play in 21st century communications.  For the Chairman, these limits rise to the level of an existential crisis, casting doubt on the agency’s very nature as an expert regulator.  Congress should, he argued, authorize the auctions and let the agency’s staff of legal, economic and technical experts decide how best to organize them.  Tying the FCC’s hands by statute, he said, is “a mistake”:

because it preempts an expert agency process that’s fact-based, data-driven and informed by a broad range of economists, technologists and stakeholders on an open record. The proposals on the table to restrict the FCC’s flexibility in its area of technical expertise would be a significant departure from precedent.

Spectrum- and auction-related issues pose hard questions.  I believe they should be answered based on the evidence, on an open record, as close as possible to the time when they need to be made.

House leaders see it very differently.  They see an agency that badly bungled the recent 700 Mhz. auctions—the last major auctions the FCC has conducted.   As a pre-condition to bidding, for example, Google demanded “open access” conditions, which the FCC belatedly agreed to add.  Instead of answering “hard” questions based on “facts” and “data” in an open record, the agency simply gave in to pressure from a late and well-connected bidder.

There was no expertise applied here.  And the result, as I’ve noted elsewhere, was that bids for the C block (where the open access conditioned were applied) were discounted to the tune of billions of dollars that would otherwise have gone to the Treasury.

Verizon won the auction, but now faces uncertain application of the conditions, which differ materially from the open Internet rules the agency passed last year in the net neutrality rulemaking.  Meanwhile, the mobile marketplace is a very different place than it was when Google first stepped in, dominated by device  and operating system providers and proprietary app stores that didn’t even exist in 2008.

Larger bidders, meanwhile, wary of the vaguely-defined new conditions, shifted to the A and B blocks, pushing out smaller carriers.  Precisely the opposite result to what the agency intended in designing the auctions in the first place.

Politically-driven choices on how the D block should be licensed for public safety turned out even worse.  That auction could not find a bidder willing to live with the FCC’s conditions.  The spectrum sits unused, even as public safety still has no interoperable network more than a decade after 9/11.

If that’s what an “expert” agency with does with its “flexibility,” then it’s no wonder House leaders are skeptical.   “Flexibility” should mean maximizing revenues and ensuring that limited and critical spectrum assets are licensed to those who can put them to the best and highest use.  Not trying to stack the deck in favor of some bidders–and still getting it wrong.

Nothing has changed.  The agency still seems determined to use its auction authority to shape mobile broadband competition in its own sclerotic image.  It wants to create a competitive market among carriers even as competition is increasingly driven by other players in the mobile ecosystem.  It wants a return to the failed practice of unbundling to create an abundance of phantom competitors who have no assets and no understanding of communications, created by financial engineers who recognize a good regulatory arbitrage when they see one.

Not so, says the Chairman.  Our view of the market is deeply analytical, the result of thorough technical and economic analysis conducted by the bureaus.  His evidence?  The agency’s annual competition reports.  Or so he told CEA Gary Shapiro following his speech, when asked for proof that the agency understands the markets with which it tinkers.

But the competition reports are hardly models of lucid analysis.  They are constrained by the bureaus’ crabbed view of the market, a view required by the statutory requirements that generate the reports.  They continue to emphasize obsolete proxies for measuring competition, including HHIs and the spectrum screen, even as actual data on market conditions is relegated to the back of the report.  For the last two years, the mobile competition report pointedly refused to say whether the agency thought the market was competitive or not.

Yet the agency deliberately forfeited even the limited value of the competition reports by rejecting out-of-hand the AT&T/T-Mobile USA deal.  Rather than focusing on declining prices for voice, text, and data over the last ten years, or the regulatory constraints that make mergers necessary to expand coverage and service (both amply documented in the reports), the staff report on the T-Mobile deal largely swallowed the simplistic mantra of opponents of the deal that taking out one “national” carrier was per se anti-competitive.  The report’s principal objection seemed to be that any horizontal merger of two companies would result in one fewer competitor.  True, but irrelevant.

There was no sign of expert regulator at work here; nothing to suggest an analysis that was “fact-based, data-driven and informed by a broad range of economists, technologists and stakeholders.”  The analysis started with a conclusion and worked backwards.  And when even the old formulas didn’t come out right, at least in the case of the spectrum screen, the books were simply cooked until they did.

Well, that’s all water under the bridge in 2012.  “This is an incredibly fast-moving space,” the Chairman said of the need for flexibility, “and any policy that pre-judges or predicts the future runs a great risk of unintended and unfortunate consequences.”

That’s a good point.  But it’s also a perfect description of last year’s Net Neutrality rulemaking.  During a year of proceedings, the FCC turned up next to no evidence of an actual problem, let alone a market failure.  Still, the agency stuck doggedly to its first principals, insisting after-the-fact that “prophylactic” rules limiting network management technologies of the future were essential to maintaining a “level playing field.”  Never mind that the playing field showed no signs of imbalance, or that it continued to evolve dramatically (iPhone, iPad, Android and Verizon’s LTE introduction, for starters) as deliberations dragged on in a regulatory vacuum.

One “unintended and unfortunate consequence” of that and similar missteps has already become clear—Congress doesn’t trust the Chairman to follow the law.

Which is, I suspect, the main reason incentive auction authority hasn’t yet passed, even though nearly everyone agrees it’s the best short-term solution to a spectrum crisis of the government’s own making.  And why, when it does come, there are likely to be plenty of strings attached.

Which is too bad.  Because, if the FCC really acted as the expert agency it is chartered to be, Genachowski would be right about the value of flexibility.

Larry appeared last month on the PBS Newshour to debate domain name seizures and the pending bills with a representative of the U.S. Chamber of Commerce. Video and a transcript are on the Media page.

Larry has also been busy with FCC stories, including the clumsy release of the staff report on the failed AT&T/T-Mobile merger and the subsequent revelations about manipulation of the agency’s important “spectrum screen,” a key metric in merger reviews that was grossly mishandled. (Congress is looking into how the agency fumbled so badly.) With the collapse of the deal, watch for louder cries about the spectrum crisis and the lack of any solution to it.

A New Year’s Day post at Forbes on the dimming prospect of consumer electronics retailer Best Buy generated tremendous response, including over 2.3 million page views on the site and thousands of comments there and elsewhere, most by customers with horror stories to tell. Follow-up and fall-out to come.

The post has so far received over 250,000 views and nearly 200 comments, mostly from disgruntled Best Buy customers.  I’ve also received many emails from former Best Buy employees confirming my intuition about the company’s strategic decision-making and attitudes toward customers.

It seems people are still passionate about strategy and the impact of disruptive technology.  And there are still lots of debates about the impact of e-commerce, good and bad, almost 15 years since I first published “Unleashing the Killer App.”

Best Buy, as I write in the article, violates at least one of the most important design principles from Killer App.  “Ensure Continuity for Customers, not Yourself.”

I’ve checked–the book is not available on Best Buy.com.  But it is still for sale over at Amazon!

Update, 1/5/2011:  The article has created an unintended sensation.  It has now received over 1.5 million page views which, according to Forbes’s Managing Editor Bruce Upbin, is more people than have visited a Best Buy store since the article was published.  Stay tuned for an update on the groundswell of response to the article.

The FCC is required by law to see separate communications technologies delivering specific kinds of content over incompatible channels requiring distinct bands of protected spectrum.  But that world ceased to exist, and it’s not coming back.  It is as if regulators from the Victorian Age were deciding the future of communications in the 21^st century.  The FCC is moving from rogue to steampunk.

With the unprecedented release of the staff’s draft report on the AT&T/T-Mobile merger, a turning point seems to have been reached.  I wrote on CNET  (see “FCC:  Ready for Reform Yet?”) that the clumsy decision to release the draft report without the Commissioners having reviewed or voted on it, for a deal that had been withdrawn, was at the very least ill-timed, coming in the midst of Congressional debate on reforming the agency.  Pending bills in the House and Senate, for example, are especially critical of how the agency has recently handled its reports, records, and merger reviews.  And each new draft of a spectrum auction bill expresses increased concern about giving the agency “flexibility” to define conditions and terms for the auctions.

The release of the draft report, which edges the independent agency that much closer to doing the unconstitutional bidding not of Congress but the White House, won’t help the agency convince anyone that it can be trusted with any new powers.   Let alone the novel authority to hold voluntary incentive auctions to free up underutilized broadcast spectrum.

What is the Spectrum Screen Really Screening, Anyway?

One particularly disturbing feature of the report was what appears to be a calculated jury-rigging of the spectrum screen, as I wrote in an op-ed for The Hill.  (See “FCC Plays Fast and Loose with the Law…Again”)  For the first time since introducing the test as a way to simplify merger review, the draft report lowers the amount of spectrum it believes available for mobile use, even as technology continues to make more spectrum usable.  The lower total added 82 markets in which the screen would have been triggered, though the staff report in any case never actually performs the analysis of any local market.

The rationale for the adjustment is hidden in a non-public draft of an order on the transfer of Qualcomm’s FLO-TV licenses to AT&T, an order that is only now just circulating among the Commissioners.   Indeed, the Qualcomm order was only circulated a day before the T-Mobile report was released to the public and (in unredacted form) to  the DoJ.

(Keeping draft documents private is the normal course of business at the agency—the T-Mobile report being the rare and disturbing exception of releasing a report before even the Commissioners have reviewed or voted on it, here in obvious hopes of influencing the Justice Department’s antitrust litigation).

In the draft Qualcomm order, according to a footnote in the draft T-Mobile report, agency staff propose a first-time-ever reduction in the total amount of usable spectrum that forms the basis of the screen.  (Under the test, if the total spectrum of the combined entity in a market is less than a third of the usable spectrum, the market is presumed competitive and no analysis is required.)

For purposes of the T-Mobile analysis, the unexplained reduction is assumed to be acceptable to the Commission and applied to calculations of spectrum concentration in each of the local Cellular Market Areas.  (The calculation also assumes AT&T has the pending Qualcomm spectrum.)  Notably, without the reduction the number of local markets in which the screen would be triggered goes down by a third.

Asked in a press conference today about the curious manipulation, FCC Chairman Genachowski refused to comment.

The spectrum screen, by the way, never made much sense.  Its gross oversimplification of total usable spectrum, for one thing, hides a ridiculous assumption that all bands of usable spectrum are equally usable, defying the most basic physics of mobile communications.  With a wink to the apples-and-oranges nature of different bands, since 2004 the agency has decided more or less arbitrarily to increase the total amount of “usable” spectrum by including some new bands of usable spectrum and not others, with little rhyme or reason.

The manipulation of the spectrum screen’s coefficients, in fact, have no rationale other than to fast-track some preferred mergers and create regulatory headaches for others.  In truth, a screen that counted all spectrum actually being used for mobile communications, and counted it equally, would suggest that Sprint, in combination with its subsidiary Clearwire, is the only dangerously monopolistic holder of spectrum assets.  As Chart 38 of the FCC’s 15^th Annual Mobile Competition Report suggests, Sprint and Clearwire hold more “spectrum” than any other carrier—enough to trigger the screen in most if not all CMAs.  That is, if it was all counted.

That isn’t necessarily the right outcome either.  Much of Clearwire’s spectrum is in the >1 GHz. Bands, and, at least for now, those bands are usable but not as attractive for mobile communications as other, lower bands.

As the Mobile Competition Report notes, “these different technical characteristics provide relative advantages for the deployment of spectrum in different frequency bands under certain circumstances. For instance, there is general consensus that the more favorable propagation characteristics of lower frequency spectrum allow for better coverage across larger geographic areas and inside buildings, while higher frequency spectrum may be well suited for adding capacity.”

So not all spectrum is equal after all.  What, then, is the point or usefulness of the screen?  And what of this unmentioned judo move in the staff report, which suddenly changed the point of the screen from one that simplified merger review to a conclusive presumption against a finding of “public interest”?  The original point of the screen was to quickly eliminate competitive markets that don’t require detailed analysis.  In the AT&T/T-Mobile staff report, for the first time, it’s used to reject a proposed transaction if too many market (how many is not indicated) are triggered that would require that analysis.

But why continue to compare apples and oranges for any purpose, when the real data on CMA competition is readily available?  The only answer can be that the analysis wouldn’t yield the result that the agency had in mind when it started its review.  For in painstaking detail, the 15^th Mobile Competition report also demonstrates that adoption is up, usage is off the charts, prices for voice, data, and text continue to plummet, investments in infrastructure continue at a dramatic pace despite the economy, and new source of competitive discipline are proliferating, in the form of device manufacturers, mobile O/S providers, app developers, and inter-modal competitors.  For starters.

To conclude that AT&T’s interest in T-Mobile’s spectrum and physical infrastructure—an effort to overcome the failure of the FCC and local regulators to provide alternative spectrum or to allow infrastructure investments to proceed at an even faster pace—isn’t in the public interest requires the staff to ignore every piece of data the same staff, in another part of the space-time contiuum, collected and published.  But so long as HHIs and spectrum concentration are manipulated and relied on to foreclose real analysis, it all makes sense.

A Rogue Agency Slips into Steampunk

That is largely the point of Geoff Manne’s detailed critique of the substance of the report posted here at TLF, and of my own ridiculously long post on Forbes.  (See “A Strategic Plan for the FCC.”)

The Forbes piece tries to put the staff report into the context of on-going calls for agency reform that were working their way through Congress even before the release.  In it, I conclude that the real problem for the agency is that even with the significant changes of the 1996 Communications Act, the agency is still operating in a stovepipe model, where different communications technologies (cable, cellular, wire, satellite, “local”) are still regulated separately, with different bureaus and in many cases different regulations.

The model assumes that audio and video programming are different from data communications, offered by different industries using incompatible, single-purpose technologies.  A television is not a phone or a radio or a computer.  Broadcast is only for programming, cellular only for voice, satellites only for industrial use.  Cable is an inconveniently novel form of pay television, and data communications are only for large corporations with mainframe computers.

Those siloed regulations are further fragmented by attaching special regulatory conditions to individual license transfers and individual bands of spectrum as part of auctions. Dozens of unrelated and seemingly random requirements were added to Comcast-NBC Universal, for example.  At the last minute the agency added an eccentric version of the net neutrality rules to the 2008 auction for 700 Mhz. spectrum, but only for the C block.

The agency continues to operate under an anachronistic view that distinct technologies support distinct forms of communications (radio, TV, cable, data).  But the world has shifted dramatically under their feet since 1996.  The convergence of nearly all networks to the Internet’s single, non-proprietary standard of packet-switching, digital networks operating under TCP/IP protocols has been nothing short of a revolution in communications.  But it’s a revolution the agency sat out.  It has no idea what role it ought to play in the post-apocalyptic world; nor has Congress given them one.

As different kinds of communications technologies have all (or nearly all) converged on IP, communications applications have blurred beyond the ability to distinguish them.  Voice communications are now offered over data networks, data is flowing over the wires, TV is everywhere, and mobile devices that were unimaginable in 1996 now do everything.

Quite simply, the mismatch between the agency’s structure and the reality of a single digital, virtual network treating all content as bits regardless of the technology or the source that transports it has left the agency unable to cope or to regulate rationally.  Consider some of the paradoxes the agency has been forced to wrestle with in recent years:

• Is Voice over IP to be regulated as a traditional voice service, with barnacled requirements for Universal Service contribution and 911 services applied and, if so, applied how?
• Is TV on the Internet, delivered using any and every possible technology including wireless, fiber, copper, and cable, subject to the same Victorian standards of decency as broadcast TV, itself now entirely digital?
• Is the public interest served when mobile providers combine spectrum and infrastructure assets, largely to overcome the agency’s own paralysis in moving the deeply fractured spectrum map into even the 20^th century and the incompetent and corrupt local zoning agencies that hold up applications for new towers and antennae until the proper tribute is rendered?

In the face of these paradoxes, the FCC has become ungrounded; a victim of its own governing statute, which in many respects requires it to remain anachronistic.  Left without clear guidance from Congress on how or whether to regulate what applications (that’s really all we have now—applications, independent of technology), the agency increasingly improvises.

It’s like the wonderful genre of animation known as “steampunk,” where modern technology is projected anachronistically into the past, exploring what life would have been like if the 19^th century had robots, flight, information processing, and modern armaments, all powered by the steam engine.  (The concept of steam punk has now become a popular design genre, including some functioning devices wrapped in steampunk elements, as in the photo below.)

A Steampunk Computer

It’s cute on film, but applied to the real world it’s simply dangerous.  The FCC is required by law to keep its head in the sand with respect both to the realities of digital technology and the economics of the modern communications ecosystem.  Yet its natural desire to regulate something leaves the Commission flailing wildly in the dark for a foothold for its ancient regulatory structure in a world it doesn’t inhabit.

The Open Internet Notice of Proposed Rulemaking, for example, asked helplessly in over 80 separate paragraphs for education and update on the nature of the revolution spurred by the deployment of broadband Internet. (“We seek more detailed comment on the technological capabilities available today, as offered for sale and as actually deployed in providers’ networks.”)  Of course it had to ask these questions – the agency never regulated broadband.  Under the 1996 Act, as the 2005 Brand X case emphasizes, it never could.

Consider just a few of the absurd counterfactuals that the agency’s steampunk policies have led it in just the last few years (more examples greatly appreciated, by the way):

• Broadband isn’t being deployed  in a “reasonable and timely fashion” (2011 Section 706 Broadband Report)
• The mobile communications market is not “effectively competitive” (14^th and 15^th Mobile Competition Report)
• High concentrations of customers and spectrum, calculated using rigged HHIs and spectrum screens, are sufficient to raise presumptive antitrust concerns regardless of actual competitive and consumer welfare (AT&T/T-Mobile draft memo)
• Spectrum suitable for mobile use is decreasing (AT&T/Qualcomm memo)
• Despite a lack of any examples, broadband providers  “potentially face at least three types of incentives to reduce the current openness of the Internet” (Open Internet order)
• Encouraging competition and protecting consumer choice “cannot be achieved by preventing only those practices that are demonstrably anticompetitive or harmful to consumers.” (Open Internet order)
• The agency” expect[s] the costs of compliance with our prophylactic rules to be small”  (Open Internet order)
• Absent a mandatory data roaming regime for mobile broadband, “there will be a significant risk that fewer consumers would have nationwide access to competitive mobile broadband services….”  (Data Roaming order).

Not that there isn’t considerable expertise within the agency, and glimmers of understanding that manage to escape in whiffs from the steam pipes.  The 2010 National Broadband Plan, developed with a great deal of both internal and external agency expertise, does an admirable job of describing the current state of the broadband environment in the U.S.  More impressive, the later chapters predict with considerable vision the application areas that will drive the next decade of broadband deployment and use, including education, employment, health care and the smart grid.

The NBP, unfortunately, is the exception.  More and more of the agency’s reports, orders, and decisions instead bury the expertise, forcing ridiculous conclusions through an implausible lens of nostalgia and distortion.  The agency’s statutorily mandated hold on a never-realistic glorious communications past is increasingly threatening the health of the real communications ecosystem–an even more glorious (largely because unregulated) communications present.

I Love it When a Plan Comes Together

The FCC’s steampunk mentality is threatening to wreak havoc on the natural evolution of the Internet revolution.  It’s also turning the FCC from a respected and Constitutionally-required “independent” agency that answers to Congress and not the White House into a partisan monster, pursuing an agenda that’s light on facts and heavy on the politics of the administration and favored participants in the Internet ecosystem.  The agency relies on clichés and unexamined mantras rather than data—even its own data.  Mergers are bad, edge providers are good, and the agency doesn’t acknowledge that many of the genuine market failures that do exist are creatures of its own stovepipes.

As I note in the long Forbes piece, there was a simple, elegant way to avoid the steampunk phenomenon –an alternative that would have saved the FCC from increased obsolescence and the rest of us from its increasingly bizarre and disruptive regulatory behavior.   And in came from within the walls of FCC headquarters.

In 1999, in the midst of the first great Web boom, then-chairman William Kennard (a Democratic appointee) had a vision for the future of communications that has proven to be entirely accurate.  Kennard created a short, straightforward “strategic plan” for the agency that emphasized breaking down the silos.  It also took a realistic view of the agency’s need and ability to regulate an IP world, encouraging future Chairmen to get out of the way of a revolution that would provide far more benefit to consumers if left to police itself than with an FCC trying to play constant catch-up.

Kennard also proposed dramatic reform of spectrum policy, recognizing as is now obvious that imprinting the agency’s stovepiped model for communications like a tattoo on the radio waves was unnecessarily limiting the uses and usefulness of mobile technology, creating artificial scarcity and, eventually, a crisis.

In just a few pages of the report, the strategic plan lays out an alternative, including flexible allocations that wouldn’t require FCC permission to change uses, market-based mechanisms to ensure allocations moved easily to better and higher uses (no lingering conditions), even the creation of a spectrum inventory (still waiting).  The plan called for incentive systems for spectrum reallocation, an interoperable public safety network, and expanded use of unlicensed spectrum.  All reforms that we’re still violently agreeing need to be made.

We’ve arrived, unfortunately, at precisely the future Kennard hoped to avoid.  And we’re still moving, at accelerating speeds, in precisely the wrong direction.  Instead of working to ease spectrum restrictions and leave the “ecosystem” (the FCC’s own term) to otherwise police itself, recent NPRMs and NOIs suggest an agency determined to leverage its limited broadband authority into as many aspects of the converged world as possible.  As the Free State Foundation’s Seth Cooper recently wrote,  today’s FCC has developed a “proclivity to import legacy regulations into today’s IP world when doing so makes little or no sense.”

Fun’s fun.  I like my steampunk as well as anybody.  But I’d prefer to see it on a mobile broadband device, or over Netflix streamed through my IP-enabled television or game console.  Or anywhere else other than at the FCC.

We’ve recently added over two dozen new posts to the Media page. Most have to do with SOPA, the Stop Online Piracy Act, introduced a few weeks ago in Congress to cheers from the entertainment industry and jeers from Silicon Valley. The bill would make it easier–too easy–for copyright and trademark holders to turn on and off Web content they don’t like.

Larry’s early analysis of the bill for CNET, and his on-going work on the poor relations between Hollywood and Palo Alto, led to a great deal of press coverage and speaking engagements. His detailed review of the bill was praised across the political spectrum, including by TechDirt’s Mike Masnick and the National Review’s Reihan Salam.

Larry participated in a Capitol Hill debate on SOPA and other pending piracy legislation sponsored by the Congressional Internet Caucus, debating the bill against industry representatives. He also appeared on CNET’s Reporters’ Roundtable and This Week in Law, as well as podcasts by the Heartland Institute.

Net neutrality also stayed in the news, as did the AT&T/T-Mobile merger, privacy, spectrum reform and online human rights. Larry was quoted in a wide range of publications on these topics, including Politico, Reason, NPR’s Marketplace, the Wall Street Journal and the Daily Caller.  Conference footage from this year’s Compass Summit panels on privacy and tech policy are also available.