One step closer to 3G nirvana

The Bush administration's decision to allocate spectrum for next-generation wireless services is a big win for consumers, the wireless industry and the entire information technology sector.

While there are more hurdles to be cleared, the decision ultimately will give wireless carriers access to 90MHz of spectrum to be used for broadband communications. These new "3G" services will allow consumers fast, mobile access to the Internet on laptops, PDAs, Web-enabled cell phones and other digital devices.

Though derided by some ("Who really wants to surf the Web on their cell phone?"), 3G may actually be one of the keys to the next generation of IT sector growth.

The key to compromise was--surprise!--money.

As the Internet matures, it increasingly will be used to deliver online music, movies and other rich digital content. Without 3G, that content would only be available over DSL, cable and fiber connections; mobile users would be limited to checking their e-mail over today's balky narrowband services, or forced to search out a "Wi-Fi" connection, the short-range fast wireless service now being tested in markets by Starbucks and others.

Wi-Fi is exciting stuff, but unlike 3G, its range is severely limited, and it can't offer "roaming" ability: Walk out of Starbucks and "poof!" the connection's gone. It's also likely that 3G will allow wireless to compete head-to-head with cable modems, DSL and satellites, just as cell phones today are competing effectively with landline telephony.

Those who worry about monopolization of the broadband market by cable or the Bell companies ought to find some comfort in the prospect of not just one, but as many as four or five new wireless broadband providers in each market.

Getting to this point wasn't easy. Ever since Commerce Secretary Herbert Hoover's 1927 decision to expropriate the electromagnetic spectrum from the private sector, the government has allocated spectrum according to its understanding of "the public interest"--which is to say mostly on the basis of political influence.

In this case, the politics were particularly difficult: The spectrum needed for 3G wireless was already occupied, mainly by public safety agencies and the Department of Defense.

The key to compromise was--surprise!--money. Under legislation sent to Congress by the Bush administration, revenue from the 3G spectrum auctions will go directly to pay relocation costs for the current users. The wireless companies get the spectrum they need to provide new services; DOD and the other government agencies get new communications systems; and taxpayers get off without paying a dime. (Indeed, leftover revenue from the auctions will go to the U.S. Treasury.)

If all this gives you an urge to rush out and invest what's left of your 401(k) in the wireless sector, some words of caution are in order.

First, it's not at all clear Congress will approve the proposed relocation fund. Without it, wireless companies could still negotiate with individual government agencies to pay their relocation costs, but the process would likely delay the release of 3G by two years or more, until the end of the decade.

The investment needed to release 3G would be a lot easier to make if the government wasn't using the wireless sector as an off-budget banker.

Then there's the issue of "auction 35," better known as the NextWave debacle. Back in 1996, a start-up called NextWave was the high bidder in an FCC auction for a big chunk of spectrum designated for current generation cell phones.

But the company failed to secure the financing to build out its system, defaulted on its payments to the government, and eventually declared bankruptcy. The FCC responded by re-auctioning the same spectrum to more established wireless companies, collecting $16.5 billion for the federal treasury in the process.

Then, last year, the Supreme Court declared the second auction illegal, effectively re-awarding the rights to (still bankrupt) NextWave. Untangling the resulting legal (and political) mess may take years.

In the meantime, the government--fearful of owning up to a bigger deficit--is refusing to give back the $16.5 billion it collected from the wireless industry in the second auction. It's tempting to dwell on the delicious irony of the federal government choosing this particular moment to engage in such accounting shenanigans.

The point here, though, is that the investment needed to release 3G would be a lot easier to make if the government wasn't using the wireless sector as an off-budget banker.

States and localities also pose a big challenge. Mandates on wireless have long been used by state and local politicians to raise revenue and procure a variety of other goodies. With cell phones now competing against landlines, state regulators are also looking for a piece of the action. Indeed, the national association of state regulators has just issued a call for more stringent state regulation of wireless.

These issues are important, and how they are resolved will affect the pace of wireless implementation, the strength of the value for consumers, and the speed at which the sector recovers from the current financial downturn. But now that Uncle Sam has made available the essential resource, the spectrum, it's only a matter of time before wireless joins the broadband revolution.