Under-the-Table Subsidies

Speaking of subsidies, in the news today there’s another really good example of the conflict between the old and new subsidy models. The Rural Cellular Association, the small carriers' lobbying group, pressed their case for handset subsidies at an event on the Hill today. They're formed a new front group called The Interoperability Alliance. If they have their way, handsets will become larger, slower, more expensive, and heavier for the 70% of Americans who have the poor taste to buy cellular service from the two largest carriers:

The alliance wants to pressure the FCC to adopt rules that would mandate a single technology in the 700 MHz band of radio spectrum. AT&T’s cell towers use a different technology in the frequency band, meaning their network is not interoperable with many devices.

As we explained in an FCC filing and our recent report on spectrum policy, the “interoperability” that the group seeks has three actual effects:

1. It makes the low-cost spectrum licenses that RCA members bought for the lower 700 MHz band more valuable.
2. It raises the cost of mainstream smartphones.
3. It puts the FCC in the middle of the design process for future smartphones.

And predictably, it doesn't even solve the rural carriers' problems. Other than that, it’s a great idea: Why wouldn't any business want to pass a significant portion of its costs onto a completely unrelated group of people if it can? It’s up to the FCC and Congress to ensure that they don't, however.

Just to be clear, the proposed mandate affects AT&T and Verizon Wireless in different ways, none of them good. For Verizon, it requires an additional antenna and related tuning apparatus in their phones, ostensibly to allow their customers to roam onto RCA members' networks, something they have no need to do. For AT&T customers, it requires the addition of both a new antenna and a new cellular chip to their phones in order to support the CDMA standard used by RCA members and not used at all by AT&T.

And it doesn't stop with new parts: AT&T and Verizon Wireless would also have to test and support access to networks over which they have no control and, in AT&T’s case, networks that operate on a completely different type of cellular equipment than they own.

This absurd demand from the Interoperability Alliance imposes all the costs of roaming between the RCA’s small pockets of CDMA technology and lower 700 MHz LTE onto the carriers who have resolved the roaming problem by building networks that are so extensive as to not require the massive roaming that RCA users need when traveling outside their local communities. So they pay once to build their networks, and they pay again to effectively pass an under-the-table subsidy to rural carriers who've invested very little in relative terms.

It’s not like RCA doesn't have alternatives. The phones they need require support for voice and LTE data in the band plan they use. Such phones are available, and may be purchased from MetroPCS:

MetroPCS has become the first operator in the country to launch voice service on an LTE network.

The operator began selling a voice-over-LTE (VoLTE) model of its LG Connect 4G smartphone in some of its retail stores on Tuesday.

The Android device has been available for some time, but up to this point was not loaded with a VoLTE client. Going forward, all new LG Connect units shipped to customers will be VoLTE-capable, a MetroPCS spokesman said.

The addition of VoLTE was simply a firmware update, so what’s the problem?

The RCA wants to offer the iPhone and the latest and greatest Samsung Galaxy, but their volume doesn't justify the engineering tweaks that would enable these phones to roam across their bands and the large carriers' bands while doing GSM voice, CDMA voice, and VoLTE all at the same time. Moreover, there’s the lingering interference issue with Channel 51 that remains unresolved for the moment. What this subsidy would do, assuming the engineering problems are solvable, is make the spectrum that RCA bought at a steep discount as valuable as the spectrum the large carriers bought at a substantially higher price. It’s like buying a house next to the airport for a discount because of the noise, and then making the people who live far away to buy you some sound-proofing while you're getting the airport shut down.

This is very bad public policy. If there’s a case to be made for subsidizing smart phones for budget carriers, let them make the case explicitly instead of seeking an hidden subsidy like this. This is not the way we pay for networks these days.

The most disturbing aspect of this effort is the power it would give the FCC to decide technical standards. Europe mandated the use of a single technology standard, GSM, for 2G and 3G cellular, and paid a heavy price for it as innovation shifted to the U. S. and to Japan, where CDMA was still legal. CDMA engineers produced the system that made LTE possible, and most of the action in smartphone platforms and applications shifted to the U. S. when Europe was unable to upgrade to LTE. This is a big part of the reason that the majority of LTE users are in the U. S. today.

If you're so happy with your cellular service today that you want it to be no better in ten years than it is now, empowering the FCC to impose technology mandates in cellular engineering is the way to go. If you think the progress we've seen in moving from analog cell phones to the iPhone and Android devices, it’s not.

Making networks stagnate the way that public utilities have stagnated for the last 50 years is really not an appealing prospect, so this initiative needs to be rejected.