Archive for January, 2012

New Study Links Wireless Adoption to Jobs: It’s All About the Spectrum (and Siri)

Economists recognize that the source of sustainable, private-sector jobs is investment. Due to measurement problems with investment data, however, it is sometimes easier to link a byproduct of investment—namely, adoption of the technology made possible by the investment—to job creation. This is precisely what economists Rob Shapiro and Kevin Hassett have done in their new study on the employment effects of wireless investments.

Shapiro and Hassett credit the nation’s upgrade of wireless broadband infrastructure from second-generation (2G) to third-generation (3G) technology with generating over one million jobs between 2006 and 2011. To demonstrate that adoption of 3G handsets “caused” job creation in an econometric sense, the authors studied the relationship between the change in a state’s employment and the cumulative penetration of cell phone technologies. According to their econometric model, every 10 percentage point increase in the penetration of a new generation of cell phones in a given quarter causes between a 0.05 and 0.07 percentage point increase in employment growth in the following three quarters.

How reasonable are these results? In 2010, Bob Crandall and I estimated that investment in second-generation broadband infrastructure of roughly $30 billion per year, including wireless infrastructure, sustained roughly 500,000 jobs between 2006 and 2009. We further estimated that spillover effects in other industries that exploit broadband technology could sustain another 500,000, bringing the total job effect close to one million jobs per year. Although Shapiro’s and Hassett’s estimates (based on wireless deployment only) significantly exceed ours (based on all broadband deployment), their estimate is not outside the realm of the possibility.

Crandall, Lehr, and Litan (2007) also conducted a regression analysis using state-level broadband penetration data from 2003-2005 to estimate job effects. They projected that for every one percentage point increase in broadband penetration in a state, employment increases by 0.2 to 0.3 percent per year. On a national level, their results imply an increase of approximately 300,000 jobs per year per one-percentage-point increase in broadband penetration. Once again, Shapiro’s and Hassett’s estimates are consistent with this prior work.

Scholars may differ on the precise way to measure the employment effects, but that debate misses the more important policy point—namely, that broadband technologies generally and wireless broadband in particular have become a vital engine of job creation. The observed correlation between wireless adoption and employment is not accidental: To induce customers to adopt the coolest handset, firms must continuously invest in the next generation of network and device technologies. And these costly investments sustain jobs.

Moreover, contrary to the FCC’s opinion in its 15th annual wireless competition report, private industry’s sustained and widespread investment in new wireless broadband technologies is consistent with the sector being intensely competitive. Industry critics have decried such evidence, arguing instead that the industry is in the death grip of monopolists. Although a monopolist may have an incentive to innovate to protect against a future threat, firms in a competitive industry have incentives to invest and innovate as a way to protect against losing market share today.

Policymakers should ask themselves this question: Why would wireless carriers continually invest billions of dollars on next-generation technologies if they could sit back and exploit their alleged monopoly rents? Experience and common sense tell us that in fact, companies in this space are not behaving like monopolists. Rather, wireless providers of all stripes are desperately trying to distinguish themselves from their rivals. Wireless tablets and phones are driving demand for more and faster wireless broadband, while spectrum-devouring apps like Siri have captured the imagination of millions. The wireless arms race is on, and the U.S. economy stands to benefit directly as wireless companies try to outmaneuver one another with the fastest networks, coolest devices, and deepest array of killer apps.

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Divining a Regulator’s Intent

Regulated firms and their Washington lawyers study agency reports and public statements carefully to figure out the rules of the road; the clearer the rules, the easier it is for regulated firms to understand how the rules affect their businesses and to plan accordingly. So long as the regulator and the regulated firm are on the same page, resources will be put to the most valuable use allowed under the regulations.

When a regulator’s signals get blurry, resources may be squandered. For starters, take the FCC’s annual wireless competition report and the Commission’s pronouncements on spectrum policy. For several years, the competition report cited a trend of falling prices and increasing entry as evidence of robust competition while at the same time noting that industry concentration was slowly rising.

In an abrupt turnaround, the FCC’s 2010 competition report cited the slow but steady increase in concentration as evidence of a lack of competition despite the continued decline in prices and increase in new-firm entry. In other words, in the face of the same industry trends, the agency’s conclusion on competition reversed. The increased weight placed on concentration also seemed at odds with the DOJ’s revised Merger Guidelines, which deemphasized concentration in favor of direct evidence of market power.

At last week’s Consumer Electronics tradeshow, the FCC chairman suggested that the competition report’s objective was not to provide guidance on Commission policy but instead “to lay out data around the degrees of competition in the different sectors.” So much for clearing up the ambiguity. Industry participants expect more than a Wikipedia entry on something so weighty as an annual report to Congress regarding one of the economy’s most critical sectors.

The agency’s signals on spectrum policy are even murkier. On one hand, during the last few years, the current FCC has been calling for more frequencies to be made available to support and grow wireless broadband networks. The FCC has also been publicly supporting voluntary incentive auctions—a market-based tool to compensate existing spectrum licensees for returning their licenses—as the best way to reallocate unused broadcast spectrum to wireless broadband. However, in a confusing set of remarks at the same tradeshow, the FCC now seems to be saying that it only wants to see more spectrum made available if the agency can dictate who gets the spectrum and how they can use it. The very discretion that the FCC now seeks will invite rent-seeking behavior among auction contestants, who will lobby the agency to slant the rules in a way that limits competition and advances their narrow interests; better to immunize the FCC from this lobbying barrage by limiting its discretion.

The agency’s inconsistent and confusing analysis and statements in these two critical policy arenas—wireless competition and spectrum policy—created the perfect storm last year when AT&T sought to acquire T-Mobile. AT&T argued that it wanted to purchase T-Mobile and use its spectrum to augment existing spectrum and infrastructure resources, consistent with the agency’s acknowledgement that wireless carriers needed more spectrum to support surging demand for bandwidth-intensive wireless services such as streaming video. Had AT&T understood the FCC’s intentions, it would not have offered a four-billion-dollar breakup fee to T-Mobile’s parent; these resources could have been put to better use.

The singular objective that should drive the Commission in all matters wireless is getting spectrum into the hands of firms that value it the most. The last 20 years of wireless-industry growth has proven that those who value spectrum the most put it to use most quickly. To commit to this course of action, the agency needs to more clearly and consistently signal its regulatory intentions. If the agency wants to spur competition, it should support Congressional efforts to authorize incentive auctions without restrictions. It also needs to let the evidence of lower prices, growing adoption, and increasing innovation inform its understanding of the state of competition.

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Can Profit-Maximizing Enterprises Systematically Leave Money on the Table? The Curious Case of the BCS

For years the public has been clamoring for a playoff system to crown a champion in college football. Yet the geniuses at the BCS stubbornly defended—at least until now—their computer-knows-best system for inviting the two most worthy teams. By injecting doubt over the legitimacy of its invitees, the current system diminishes the meaning of the BCS title game, as evidenced by the abysmal Nielsen ratings for Monday night’s Alabama-LSU game (only 13.8 percent of U.S. television households tuned in to watch the television equivalent of paint drying) and last year’s Auburn-Oregon title game (15.3 percent). By comparison, the title game between Alabama and Texas just two years ago drew 17.2 percent of U.S. households; if this were a publicly traded firm, its shares would be falling fast.

Even worse, the current system diminishes the importance of the other BCS games. Besides alumni, who wants to watch an exhibition game between Oregon and Wisconsin (this year’s Rose Bowl) if the winner cannot advance to the next round? This year’s Rose Bowl drew a meager 9.9 percent of U.S. television households, down 15 percent from last year’s Rose Bowl between TCU and Wisconsin. And last year’s Rose Bowl drew 11.3 percent, down 15 percent from the prior year. Can anyone spot a pattern?

In contrast, the first round of the NFL playoffs this year drew massive audiences. For example, NBC’s coverage of the Saints-Lions earned a 19.3 overnight rating, the third-best overnight for a Wild Card Saturday game since the 1999 playoff season. Along with 42.4 million of my closest friends, I found myself compelled to watch the Broncos-Steelers Wild Card game (25.9 rating), not because I care about either team, but because the investment of my time would pay off in even greater happiness next week.

It is a tragedy that the BCS would run these valuable assets into the ground. Imagine the excitement of a Cinderella team like Baylor, Boise State, or TCU sneaking into the championship. Organized as a playoff, the Rose Bowl (or any BCS non-title game) would experience a significant lift in ratings, along the lines of the lift enjoyed by NFL post-season games relative to NFL regular-season games. To be fair, the profit function of the BCS conferences is presumably much more complicated than “maximize the value of the television revenues for the BCS games.” But these television revenues must be a critical component of their joint profits. Which begs the question: Why would the BCS systematically err when so much money is at stake?

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The Administration’s Rigorous Defense of the Affordable Care Act

In yesterday’s Washington Post, Health and Human Services Secretary Kathleen Sebelius makes an impassioned plea for skeptics to reconsider the Affordable Care Act. Secretary Sebelius argues that the Act will bring down health care costs by, among other things, assisting those who cannot afford health insurance coverage. Although expanding health insurance coverage is a worthy goal, bringing more folks into the health care system could result in higher prices for health care services. The housing market provides a nice example: although subsidized mortgage rates allowed more people to own homes, more buyers eventually meant higher home prices.

Secretary Sebelius reminds us of the broth of new regulations designed to constrain the worst impulses of insurance providers, including requiring providers to justify premium increases above 10 percent in an online forum; to spend at least 80 percent of premium dollars on health care as opposed to salary or advertising; to accept applicants with preexisting conditions; and to charge zero copays for so-called preventative services. This level of micro-management seems excessive, even by regulated-industry standards.

Given the raging debate over the constitutionality of the Act’s requirement that everyone buy health insurance, the other provisions of the Act have received relatively little attention. To an economist who believes in the efficacy of prices to allocate scarce resources in an economy, the zero-copay rule is perhaps the most offensive provision of the Act. Even for preventative services, a positive copay ensures that users do not abuse their privileges. For any doubters (who live or work in major cities), look out the window during rush hour to see what happens when an activity (using a road) is priced at zero. It is not clear that the increase in demand for preventative services will be offset by the promised decrease in demand for treatment of chronic ailments. Moreover, providers are likely to react to a zero-copay rule by raising deductibles; these terms are highly interrelated. Finally, there is no limit to what constitutes preventative medicine; some men do get breast cancer, but not enough to justify free mammograms for all men.

This is not the first time the Administration has imposed a zero-price rule. The chairman of the Federal Communications Commission, who was carefully screened by President Obama on the issue of net neutrality, adopted the Open Internet Order, which banned an Internet service provider (such as AT&T) from charging a price to an Internet content provider (like Sony) in exchange for speedier delivery. Under the Commission’s rationale, if some websites could not afford the surcharge for higher quality of service, then no one should.

It seems that prices for “critical” services such as preventative medicine and Internet access are evil because they exclude certain segments of the economy. To be fair, under certain conditions such as information asymmetries, externalities, and adverse selection (common in health insurance markets) market-based prices may result in too little or too much consumption relative to the socially optimal level. But the attacks on the price mechanism by these two pieces of regulation do not seem to be grounded in those traditional market-failure arguments. Without a limiting principle, one could oppose prices for just about any good or service, as there will always be someone who cannot afford it. Better to leave prices in place (and subsidize those who cannot afford the “critical” service) than to ban pricing altogether. In contrast to a zero-price rule, the cost of the subsidy is transparent to taxpayers.

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