January 11, 2011

Let the Spectrum Market Work

At first blush the crowds at this year’s International Consumer Electronics Show prompt the question, “Where’s the recession?” The cheek-to-jowl throngs were nowhere thicker than around the new generation of televisions and mobile devices.

The design of the mammoth LG booth physically delivered the message. On one side were digital televisions that connected to the Internet. On the other side were mobile devices, also connected to the Internet and also delivering video (including 3D). My bet is that at a future CES the wall separating the two areas of the exhibit will be gone. The concept of a specific product for television and another for mobility is so 20th Century.

One of the unsubstantiated rumors circulating around the show was that consumers were not buying as many TV sets for their homes as they once did. In part this was attributed to kids not brow-beating their parents for a TV in their room anymore because they watch video on their laptops and tablets (typically through WiFi). Inside that factoid resides the remaking of the television business.

Concurrent with the CES show, a headline in the Los Angeles Times announced, “Turner CEO says heavy Web exposure made company lose interest in reruns of ‘Modern Family.’” The fascinating nuance of this statement is that the flagship Turner service, TBS, became a “superstation” precisely because it offered time-shifting for syndicated programs that previously were licensed exclusively to one station in each market. Cable television was the choice alternative of 30 years ago; breaking the economics of scarcity to provide alternative viewing options. Now the business built on choice has been “out-choiced” by the on demand nature of the Web.

The tectonic plates of video distribution are shifting. Broadcasters used to complain about cable upsetting their applecart, now cable services are feeling the same new-technology pinch. The once solid and staid medium we called “television”, once again, has to come to grips with its future. Ultimately at the heart of those changes will be the wireless distribution of video product. Cicso forecasts that by 2014 wireless networks in North America will carry 50 times the data traffic they carry today and the vast majority of that throughput will be video.

This brings us to the issue that stands between today and the wireless broadband future: whether there will be enough spectrum available to carry the increased traffic demanded of wireless networks. While at CES I participated in a panel discussion regarding proposals for the Federal Communications Commission (FCC) to run a voluntary incentive auction that would reallocate broadcast spectrum for broadband wireless purposes. My comments were that the future looked bright for entrepreneurial broadcasters as well as for those who wanted to continue delivering the traditional single channel linear service – but individual broadcasters have to move beyond “we’ve always done it this way” and decide in which vision of the future they want to participate. When broadcasters “just say no” to any repurposing of the spectrum assigned to them by the government they are exacerbating what could become a national crisis as well as missing a business opportunity.

Broadcasting is the most efficient means of distributing content. The one-to-many delivery is what makes it broadcasting. How consumers are accessing video, however, makes it clear broadcasting is not the most efficient means of consuming video. The linear concept of, “This is what you’ll watch and when you’ll watch it,” was first challenged by cable, then by DVRs such as TiVo, and now by the on demand reality of content residing in the network cloud.

This isn’t to suggest broadcasting is a bad business proposition. The ability to deliver one channel of linear content both over-the-air and through mandated carriage on cable systems remains a viable business providing a public service. When television signals went digital, however, the ability to do so much more with the broadcast capacity opened up. As we approach the second anniversary of the digital conversion, however, broadcasters have done little to support the proposition that they can use the efficiency of broadcasting to satisfy the demand from consumers for flexible video consumption as opposed to when the broadcaster chooses to deliver the program.

Now, two years may seem a short time to expect action – but in a digital world it is a lifetime. Therein lies one of the issues: broadcast spectrum is being kept out of the hands of rapid-paced innovators, while those who hold the spectrum appear to be taking their time embracing the opportunities digital presents. During the time that broadcasters have been doing little with their digital capacity the cable industry has developed “TV Everywhere” to respond to consumers’ demands for viewing flexibility. In a similar period Android and iPhone have changed the nature of wireless services (and increased the demand for spectrum capacity to satisfy those services).

Under the digital television standard a single broadcast channel is 19.4 Mbps of throughput. A standard definition TV signal requires only about 2 Mbps of that throughput. What’s to become of the other 17+ Mbps – almost 90 percent of the digital capacity – to address the message being sent by consumers for choice in their video programming? The digital standard allows for non-real time (NRT) downloading of content that would help satisfy consumer demand. Thus far, however, no broadcaster has even tried to offer such a commercial service on their digital spectrum.

Gary Shapiro, CEO of the Consumer Electronics Association, accused broadcasters of “squatting” on their spectrum during his CES opening remarks. FCC Chairman Julius Genachowski reminded the CES audience that the percentage of viewers who watch television over the air as opposed to via cable or satellite has fallen from 100 percent when the broadcasters first received their spectrum licenses to “under 10%.” Yet a huge swath of 300MHz of prime spectrum continues to be occupied by broadcasters. Both men believe that spectrum could be repurposed through a voluntary incentive auction in which a broadcaster is given the choice of doing nothing, selling all or part of the assignment, or offering innovative services over the capacity.

For almost four decades I have listened to businesspeople tell government policy makers to “let the marketplace work.” There is no more effective marketplace than a voluntary auction where everyone is free to decide whether to sell, how much to sell, and at what price to sell. The marketplace for wireless spectrum has spoken through its explosion; now it’s time for the marketplace to be able to decide the best use of spectrum. There is no doubt that some broadcasters will opt to use their spectrum in innovative ways [my firm, Core Capital Partners, has invested in such a belief]. Bully for the broadcast entrepreneurs! The FCC should be encouraging and rewarding of entrepreneurial initiative. Just as clearly, however, some broadcasters will choose other options. It is essential that we get on with offering that option quickly so we can nip the spectrum crunch in the bud, spur innovation, stimulate investment, create jobs, and continue American leadership in wireless services.

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