The Economics of the Wireless Last Mile
By Arnold Kling
dilemma for Congress and the FCC. The terms
of existing spectrum licenses are not flexible
enough to accommodate the wireless last mile.”
were available anywhere and everywhere. You could access the
Internet in all of the rooms of your house, or in your yard, or in
your car, or on the beach, as easily as listening to the radio today.
Imagine that this connectivity is at broadband speed, meaning equal
to or better than the download speeds of cable or digital subscriber
lines (DSL). Now, imagine something else—this pervasive, high-speed
Internet access available for a small monthly fee—or even for
This is the vision of the Wireless Last Mile. Rather than trying to
expand broadband Internet access by bringing fiber or cable to homes,
the partisans of the Wireless Last Mile argue that by changing the
way that we use radio spectrum, we can achieve dramatic improvements
in Internet access, at low cost. The potential for the
Wireless Last Mile reflects the progressive improvement in computing
power, which is changing the terms of the trade-off between different
ways of using the radio spectrum for communication.
The architecture for the Wireless Last Mile raises issues of
public policy. Current regulation of the radio spectrum is not
compatible with the proposed new architecture. How should these
regulatory barriers be addressed?
Another issue concerns the need, if any, for a government subsidy
for the Wireless Last Mile. For years, some pundits have argued that
widespread Internet access at broadband speed is valuable enough to
warrant government resources to be spent to achieve such a goal. Is
the Wireless Last Mile a public good in the economic sense of the
term, and therefore deserving of a subsidy?
The Last Mile Problem: 5 Solutions
The goal of widespread access to the Internet at broadband speed has attracted the interest of many public officials. For example, in the debate over regulation of local phone companies, both the pro-regulatory and anti-regulatory forces claim that their respective approaches would provide a better incentive to expand the provision of broadband services.
According to this chart, about four-fifths of the more than fifty million households with Internet access continue to use dial-up connections over modems that offer much slower speeds than broadband. According to this study, about 2/3 of the broadband connections are through cable modems, with the remainder over phone lines using DSL.
The Internet “backbone” (the main communication links between hubs on the Internet) already has sufficient capacity or could readily have its capacity increased to handle more broadband users. The challenge is in connecting the hubs to individual households. Getting these endpoints connected to broadband is known as the “last mile” problem.
For potential solutions to the “last mile” problem, there are five contenders. DSL and cable modems are the two leaders thus far. Another option, which was popular among pundits five years ago but which is less in favor today, is bringing “fiber to the curb.” High-speed fiber-optic communication lines make up the Internet backbone, and this network could be extended to consumers. As with cable television, this would require a massive effort to bring new underground cables into every household.
Because digging yet another underground cable infrastructure is such an expensive and daunting prospect, two other options are under consideration. One of the dark horses is using the electrical wiring grid to carry communication signals. There have been a few small-scale demonstrations that this is feasible, but the technology has yet to take off commercially.
The final contender in the “last mile” derby is wireless Internet access. If it were feasible, it could save the nation’s streets and yards from another enormous excavation project. Furthermore, wireless access is the kind of access that people want. As I found with my DSL line at home, having a broadband Internet connection that only works in one room is frustrating, particularly when more than one person needs to use the Internet at the same time. People want broadband wherever they may be, not just in the room that has the broadband modem.
Today’s radios assume that signals arrive on separate
frequencies. If the radio station at 99.3 FM all of a sudden started
broadcasting at 99.5 FM where another station also is broadcasting,
our radio would not be able to sort out the two stations. We have
come to call this “interference.”
Contemporary engineers say that “interference” is not given by the
laws of physics. Rather, it is a characteristic of an architecture
in which radios are relatively dumb. Smarter radios, they suggest,
would not have to “tune” to one frequency at a time. Instead, they
could interpret multiple signals coming in over multiple frequencies.
In other words, a single frequency can be used by more than one
transmitter, and a single message might be broken up and sent over
What the engineers propose is substituting smart radios and a less
restrictive allocation of frequencies for the current architecture of
dumb radios and limitations on access to frequencies. Whether this
substitution makes sense depends on economics.
To understand the economics of this new vision for radio spectrum,
it may help to compare it with the relationship between the Internet
and traditional telephony. A traditional phone network tends to use
switches efficiently and lines inefficiently. By keeping the circuit
open during a pause in the conversation, you reduce
switching costs but waste the line. In contrast, the Internet is
relatively more efficient in its use of lines, but it is less
efficient in its use of switches.
Shared spectrum represents a similar revolution in wireless
communications. The traditional model was to reserve slots of
spectrum for particular users. For example, the FM frequency of 99.3
would be reserved in a particular area for one radio station. An
alternative model allows spectrum to be shared among many users, with
something like the Internet’s packet-based model. Radio signals
would be routed to their destination by using an addressing system,
rather than by adhering to a specific frequency. A given frequency
could be used to carry many different signals from many different
types of users, rather than being limited to a single broadcaster.
Under the traditional model, sharing spectrum is impossible,
because of “interference.” However, the problem is not that signals
literally block one another. Rather, it is the case that receivers
cannot interpret multiple signals without having intelligence built
in. Interference is in the ear of the receiver. With intelligent
receivers, spectrum can be shared, as long as the devices adhere to
certain standards and protocols.
The shared-spectrum model is the basis for a number of wireless
networks used by early adopters. In my home, I am able to access my
DSL from any room, including my porch, using a wireless network. Starbucks offers wireless Internet access in many of its coffee shops. The University of Maryland offers wireless access in some of its common areas, and I predict that within two or three years it
will provide free wireless access to the entire surrounding
community, in order to be able to provide high-speed Internet
connections to the many students who live in nearby off-campus
Shared-spectrum advocates, such as David
P. Reed, believe that these small-scale examples could be
expanded to make wireless Internet access universally available. He
cites the work of Tim
Shepard, who argues that one can design a wireless network in
which the capacity of the network actually increases with the
number of devices communicating over it. As I understand it, devices
would act as relay stations as well as senders and receivers.
The traditional spectrum-allocation model is inefficient in its
use of spectrum. However, it saves on the computational capacity
required by devices that use the airwaves. The shared-spectrum model
allows a given amount of spectrum to carry more information, but it
requires devices with computational intelligence. Just as the
Internet uses communication lines more efficiently at the cost of
requiring smart computers in place of less-smart phones, the Wireless
Last Mile uses spectrum more efficiently at the cost of requiring
smarter devices in place of less-smart radios, televisions, or cell
Economists Hal R. Varian and Jeffrey K. MacKie-Mason wrote a seminal paper that explained how the Internet came to be favored by Moore’s Law. In 1965, Intel’s Gordon Moore had observed that the power of computer chips had just about doubled every year, and what came to be known as Moore’s Law is the striking—and accurate—conjecture that the power of computer chips would continue to double about every eighteen months. Thanks to Moore’s Law, the Internet has become progressively more economical over time in comparison with the traditional telephone network, as the cost of intelligent devices to route and interpret Internet packets has fallen faster than the cost of lines.
Similarly, the cost of providing devices with the intelligence to
communicate in a shared-spectrum setting has plummeted. In fact, Pat
Gelsinger, Intel’s Chief Technology Officer, sees radio embedded
in a chip as a technology that is within reach. That is, a
computer chip can have embedded in it hardware that allows it to send
and receive radio signals.
Imagine being able to integrate all the features of
wide-area, local-area, and personal-area networks into a single piece
of silicon. What if we were able to add transmit and receive,
intelligent roaming, network optimization, and permanent IP
connectivity capabilities? And what if we were able combine data,
voice, and video services on that same piece of silicon? Pretty cool,
Let’s take it to the next level. If we can shrink this technology
down to where it sits on the corner of a die, then we’ll have radio
on chip (RoC). Every processor will have integrated multiradio
capabilities. The result will be ubiquitous radios that are always
connected and seamlessly networked across offices, buildings, and
The radio-on-chip could make it possible to inexpensively embed
communication capabilities into just about any ordinary product,
including clothing, toys, appliances, medical devices, and dangerous
substances. One can conceive of using these capabilities for
anything from tracking the movement of explosives to enabling remote
medical treatment to being able to find your eyeglasses when you
cannot remember where you put them down.
The existing paradigm for regulating radio spectrum would tend to
frustrate the development of the shared-spectrum wireless solution
for the last mile. The problem is that spectrum licenses are not
flexible enough to allow the license owners to dedicate spectrum to
alternative uses. The owner of a television (radio) license only may
use that license for sending television (radio) signals over the
Existing license restrictions have the effect of fencing off
specific frequencies for specific types of content. For example, the
television frequencies are reserved for television content, meaning
that they cannot be used for phone calls.
These restrictions conflict with the elegance of the packet-based
approach, in which any content can use any frequency. With shared
spectrum, the interpretation of the content takes place in the
receiver. A given collection of frequencies might be carrying phone
calls, television signals, and email all at once, to be sorted out at
the point of delivery.
The current owners of spectrum licenses could not open their
frequencies to shared-spectrum uses, even if they wanted to do so.
The terms of the license for an AM radio station, for example, say
that the frequency must be used for AM radio broadcasting.
Coase and the FCC
Nobel laureate Ronald Coase was the first to argue that market mechanisms could be used to allocate spectrum. The problem of “interference” is much like the externalities that are dealt with in Coase’s famous paper, “The Problem of Social Cost.” In that paper, Coase argues that externalities can be dealt with in the private sector if property rights are properly defined. This came to be known as the Coase Theorem. Moreover, as Hazlett points out, Coase was analyzing FCC issues, including spectrum allocation, at the time that he was working on what became the Coase Theorem.
Reed and other engineers who advocate shared-spectrum wireless
tend to support the idea of a spectrum “commons.” In that model,
ownership of spectrum licenses would be canceled. Instead, the
relevant spectrum would be in the public domain, to be used by any
device that adheres to the standards and protocols necessary to
enable spectrum sharing to work.
The alternative point of view is represented by Thomas
W. Hazlett. He argues that the property rights of the owners of
spectrum licenses ought to be strengthened rather than weakened. He
makes a case first argued by Ronald Coase, whose famous theorem can
be applied to spectrum allocation. Hazlett says that if license
owners had complete freedom to choose the uses of their spectrum,
then profit-maximizing behavior would lead to more spectrum allocated
to shared-spectrum packet-based communications.
For example, television stations own spectrum licenses that are
declining in value. Given the widespread adoption of cable,
broadcasting over the airwaves is an expensive proposition that on
the margin serves very few viewers. In fact, as Hazlett points out,
the FCC allocates 67 channels for broadcast television, even though
only a handful are used in most areas. The owner of a television
station is not free to re-sell the spectrum license to someone who
might have a better use for it.
If they were given the freedom to sell their licenses to other users,
some television stations might find profitable buyers from among
wireless Internet access providers. This would shift spectrum away
from an uneconomic use and toward a more productive use.
The traditional argument for licensing spectrum in segregated
blocks is to protect license-owners from interference. However, this
would appear to be a case in which the Coase theorem applies. As
long as property rights are clear, a license-owner who wants to do
traditional broadcasting could bargain with those who want to do
The “spectrum commons” approach amounts to confiscating spectrum
licenses from owners where the government deems the original purpose
of the license to be outmoded. The Hazlett-Coase approach allows
spectrum owners themselves to make the decision of whether or not to
shift the use of their spectrum from its original purpose to
shared-spectrum packet communications.
Reed and Hazlett appear to be talking past one another. Hazlett
argues that if spectrum were treated as a “commons” and made
available for free, then people would try to use it too intensively,
creating congestion. Reed argues that Hazlett does not understand
the technology, which in Reed’s view means that spectrum need not be
a scarce resource. In Reed’s view of the shared spectrum model, users
supply the physical network infrastructure by employing devices which
relay signals to other users. One can imagine this as a cell phone
network where the connectivity is supplied by the phones on the
network, without requiring cell towers.
If Reed is correct, then it may be that in a competitive market
the price for using spectrum ultimately would fall to zero. That is,
if adding more devices that adhere to proper protocols tends to
increase the capacity of a given amount of spectrum, and congestion
does not arise, then competition among spectrum license owners would
tend to drive the price of spectrum use to zero. In that case,
implementing Hazlett’s strong property rights would lead to a result
that from a consumer’s standpoint would be indistinguishable from the
“commons” that Reed advocates.
The current regulatory regime clearly is biased against the shared
spectrum solution. We will return to the question of how best to
change that regime in the conclusion.
Network Effects and Switching Costs
If the FCC changed its regulations today in a way that encouraged
shared spectrum, tomorrow we would still wake up to a world in which
consumers have cell phones, radios, and televisions that rely on
today’s signal-segregating regulatory scheme. With the exception of
some recent-vintage laptop computers, none of the electronic
equipment is built for the shared-spectrum model of communication
over the airwaves. Until people switch to newer devices, they will
not want to see frequencies allocated away from their traditional
uses. For example, if AM radio were changed to a shared spectrum
solution, nobody’s car radio would work (until people get new cars or
new radios). On the other hand, if no changes are made to the way
that spectrum is allocated, it may not be possible to provide the
Wireless Last Mile, and people then would have no incentive to buy
new devices. Thus, the Wireless Last Mile must overcome network
effects and switching costs.
A network effect occurs when my benefit from joining a network
depends on how many others have joined the network. If the Wireless
Last Mile is going to involve relay stations embedded in consumer
devices, as required by
some business models, then clearly there are going to be network
effects. This could retard adoption of the wireless approach.
When radio-on-chip becomes available, adoption may be slow, even
if it adds little to the marginal cost of new devices. Consumers may
be perfectly content to stick with their existing televisions, cell
phones, and so forth. The need to obtain new equipment gives rise to
a cost of switching to newer technology. That cost must be weighed
against the benefits. Even though consumers would agree that they
would never choose traditional devices over newer devices, the fact
that they start with older devices makes it costly to switch to
Of course, new technology always must overcome network effects and
switching costs. When audio CDs were introduced, people who already
owned ordinary record players and tape players were reluctant to
adopt the new technology. This reluctance eventually was overcome,
because the newer technology offered quality, durability, and
In the case of shared spectrum, are the network effects and
switching costs strong enough to justify a government subsidy to
support the new alternative? David Isenberg and David Weinberger
Arguably, building the best network is a Public Good. It will boost
the economy, open global markets, and make us better informed
citizens, customers and business people.
However, most of these benefits are private benefits, for which
individual users should be willing to pay. It is not clear that the
purely social benefits—those that cannot be captured by individual
firms and consumers—are so high that a subsidy is warranted. Also,
it is not clear that policymakers have the information they need to
arrive at a reasonable estimate for a subsidy, or even to be sure
which is the best technology to subsidize. This is worrisome,
because as Weinberger and Isenberg also point out, “Big governments
tend to make big, costly, persistent mistakes.”
The wireless solution for the “last mile” has something in common
with the popular technologies of the Internet and cell phones. Like
the Internet, it employs an elegant network architecture that
benefits from the powerful economic force of Moore’s Law. Like cell
phones, it enables people to enjoy mobility as they take advantage of
communication services—in this case, broadband access to the
The wireless approach may pose a regulatory dilemma for Congress
and the FCC. The terms of existing spectrum licenses are not
flexible enough to accommodate the wireless last mile.
Because the Wireless Last Mile gets less expensive to deploy with
every iteration of Moore’s Law, it seems almost certain that at some
point the Wireless Last Mile will become reality. However, is the
cost-benefit calculation for adopting the Wireless Last Mile
favorable now? Or will it not be favorable for several more years?
As with any futuristic technology, such as hydrogen fuel cells or
obtaining fresh water from seawater, the market should help to
determine when the wireless last mile makes economic sense. That is,
given the uncertainty about the technical feasibility, costs, and
benefits of the Wireless Last Mile, the best public policy may be to
rely on the information supplied by individuals and firms via the
Perhaps one solution would be for the FCC to hold another auction.
In the new auction, current license owners could put their spectrum
up for sale, and the spectrum could be bid on by new or existing
owners. Once the spectrum has been re-auctioned, it could be used
for any purpose, and it could be sold at any time.
By putting all spectrum up for sale at once, the FCC could enable
Internet serviced providers to obtain large enough blocks of spectrum
to enable the Wireless Last Mile. However, by using an auction
mechanism rather than confiscating spectrum, the FCC could ensure
that existing owners are able to realize some economic value for the
licenses they now own.
The alternatives to a new auction are simply confiscating spectrum
to create a “commons” or de-regulating existing licenses to allow
owners to use or re-sell their licenses for any purpose.
Confiscating spectrum would assume that the government can determine
that the benefits of the Wireless Last Mile exceed the costs as of
right now. De-regulating existing licenses could be too chaotic, and
it might leave manufacturers and serviced providers too uncertain as
to which blocks of spectrum will ultimately be available for use in
the wireless last mile.
The Wireless Last Mile represents an intriguing opportunity. It
raises many questions about costs and benefits. The challenge is to
find a way for the market to supply the answers.