[opendtv] Re: 20050509 Mark's Monday Memo

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Tue, 31 May 2005 09:41:43 -0400

At 12:19 PM -0400 5/26/05, Manfredi, Albert E wrote:
>Oh? Then explain why AT&T, a "service" by your
>definition, was broken up, and why the baby bells that
>emerged are on their way to becoming the same thing
>as the original monolith. I don't think that creating
>monopolies is necessarily the right answer either.
>Not to mention how the telephone companies that
>originally offered a "service" want to get into TV
>distribution, and how cable TV companies have already
>gotten into offering telephone service.

Well first, AT&T had NO COMPETITION, except for telegraph and the 
limited amount of spectrum that is allocated for private two-way 
radio. And in the early years, this was a VERY capital intensive 
business. One could argue that a monopoly was needed just to 
encourage the investment in infrastructure, as was the case when the 
government decided to subsidize the development of rural 
infrastructure by shifting revenues from the more profitable urban 

If the baby bells are on their way out (and I doubt that this will 
happen), it is because the telecom infrastructure is upside down (in 
the words of Nick Negreponte). we are moving to a telecom 
infrastructure where phones do not have wires, as this is the usage 
pattern that most consumers want. In the long run, most of the 
traffic on the wired telecom networks will be bits, and I am not 
talking about voice-grade two-way communications. Those bits may well 
be used to compete with bits from cable systems, DBS, and the 
spectrum utility I am talking about.

The really important issue to consider with a spectrum utility is 
whether the monopoly has control over the pricing for the system. Ma 
Bell and the seven dwarfs had almost total control over the tariff 
rates they charged - the only control came from captive regulators, 
who have little incentive to control costs. When competition came in 
long lines (after Ma Bell was split up), the cost for long distance 
and data services plummeted.

There are two key considerations in the proper design of a spectrum utility.

1. Optimization of the infrastructure - it will always be easy to 
make money in the big markets, and less than attractive to serve the 
niche markets. The value of the infrastructure increases directly in 
proportion to its ability to serve EVERYONE in a region. Thus there 
are advantages in assigning a region to a single infrastructure 
provider, with the understanding that they will use the big profits 
from the major markets to build the infrastructure to serve the 
ENTIRE region. This may mean that in the early years, the government 
does not get a cut, UNTIL the infrastructure is in place - EVERYWHERE.

2. Creation of a real market for use of the infrastructure - The 
utility should have little if ANY say in the pricing structure. This 
is for the marketplace and regulators to decide. I include 
regulation, as there must be some rules to prevent large entities 
from controlling the system. we already have similar regulations in 
terms of numbers of stations owned in a market, market caps, etc. 
What is needed is a cap on the percentage of available bits that any 
single entity could control in markets with intense competition; on 
the other hand, these caps might not be appropriate in a small 
community where there are tons of bits but little opportunity for 
profiting from them. Thus, in a major market, an single entity might 
be capped at say 20-25% of the bits available on the system, while in 
a tiny market, a single entity might be able to control 50% or more 
of the bits.

There must be a real marketplace at work to set rates.

Today, OTA broadcasting is all but dying, at least the TV 
application. There is competition from cable, DBS, and soon the 
telcos, not to mention packaged media and the Internet. So the real 
issue is not that of a monopoly that is likely to rely upon 
regulation to maximize profits  - that's what we have today with OTA 

The real issue is how to promote the spectrum utility so that it will 
gain a meaningful audience, which in turn will drive up the fees that 
content providers are willing to pay to use the service.

That part is not that difficult, IF the infrastructure actually 
works, and if manufacturers develop products that take advantage of 
the bits that are available. Remember, it will be up to each content 
provider to come up with an economic model to justify the payment for 
carriage. This may be an advertiser supported service, or it could be 
a subscription service, or a pay per use service. And it doesnot need 
to belimited to what we have today - i.e. radio and TV.

>The technical arguments on spectrum utilization are
>the same, whether a single monolith operates the OTA
>frequencies, or whether separate independent companies
>do. Use IEEE 802.16 as an example of a very flexible
>RF-based scheme, just to prove this to yourself. In
>essence, WiMax does something very much like
>combining ATSC, DVB-T, and DBS under one umbrella
>(in terms of the different modulation schemes and
>distribution models it supports). So in practice, any
>RF "utility" that offers service to a large variety of
>appliances will end up having to create many different
>channels, with different capabilities, perhaps
>dynamically changing these channels at different times
>of day.

Correct. This level of competition for allocation of services also 
helps to drive demand. A monolithic (not monopolistic) assignment of 
spectrum tends to lead to less than optimal allocation of the scarce 
spectrum resource, as we have today with radio and TV.

>On a smaller scale, individual broadcasters could do
>the same thing. And entities like USDTV can aggregate
>some parts of the spectrum run by the individual
>broadcasters, to create a hybrid between your single
>monopolistic "utility" and the existing broadcaster

But this does not work. Broadcasters will ONLY focus on THEIR market. 
There is no incentive for cost shifting to provide service to smaller 
markets.  And there is no incentive to allocate spectrum for 
potentially competitive applications.

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