5G Fight With China: Politicization Leads to Suboptimal US Outcome

Journal of Political Risk, Vol. 7, No. 4, April 2019

By Anders Corr, Ph.D.

A customer wearing a headset plays a virtual reality (VR) game at a 5G experience hall on April 8, 2019 in Hangzhou, Zhejiang Province of China. Photo: Long Wei/VCG via Getty Images

The Federal Communications Commission (FCC) announced a national 5G auction of large slices (up to 3.4 gigahertz) of the millimeter wave (mmWave) spectrum, along with $20.4 billion in subsidies over 10 years for rural connections, on April 12. The plan ignores expert cyber-security advice, has major security, timing, strategic and financial problems, and will not facilitate new competitors in the telecommunications market. The announcement by President Trump and FCC Chairman Ajit Pai, likely under the influence of telecommunications lobbyists, was a surprise to most experts and took place with no real public input. The auction of the mmWave spectrum is set for December 10. At the press conference announcing the decision, Chairman Pai thanked Director of the National Economic Council Larry Kudlow and Ivanka Trump for their assistance, with Ms. Trump giving a speech in support of the plan.

According to Chairman Pai at the April 12 press conference, “We finished our first 5G spectrum auction in January, and we’re holding a second, right now, that has already generated almost $2 billion in bids.” That isn’t much for a North American telecommunications industry expected to reap $294 billion in 2019 revenues.

The mmWave part of the spectrum, which is the part Chairman Pai plans to chop up for sale, does allow more connections and higher speeds, compared to sub-6 5G, in high-density areas like stadiums and major urban areas. The mmWave will likely be an important part of the 5G future. However, chopping the mmWave up leads to slower 5G speeds in this potentially ultra-fast part of the 5G spectrum. It is also drawing away attention from sub-6 5G, which requires less infrastructure, start-up costs, and has longer ranges. Virtual division of a unified sub-6 spectrum would yield equivalent speeds, up to several gigabytes per second (Gbps), to the current plan of chopping up the mmWave spectrum. The rest of the world is proceeding down the sub-6 5G path as a first step towards 5G speeds, and will likely only get to ultrafast mmWave 5G (over 20 Gbps, if not chopped apart by auctions) in the more distant future. A focus on mmWave 5G today will make U.S. companies globally uncompetitive in the short and long-run. In the short run, they will be slower in providing broad geographic coverage through sub-6 5G. In the long run, they will be unable to provide ultrafast mmWave speeds because they will have already chopped up that part of the spectrum.

The FCC has not advanced a comprehensive plan for 5G, and its hasty auction of three approximately 1.1 Ghz slices of the mmWave to three different companies may constrain future options for ultra-fast mmWave. There are major economies of scale to keeping the 3.4 Ghz total as a single spectrum, which if kept together and divided virtually is faster than spectrum that is divided ex ante. Spectrum sharing, or virtual division, yields faster speeds, given a certain amount of spectrum, than physically divided spectrum as the upcoming FCC auction will require. Virtual division and sale of spectrum is not “nationalization” as its detractors claim, but rather the only way the laws of physics allow us to get the fastest 5G speeds. Virtual spectrum division also has the market-friendly effect of encouraging small businesses and entrepreneurs to innovate and get involved in the 5G competition. Small businesses will be able to afford short-term virtual leases of shared (and therefore ultrafast) 5G spectrum, but will be unable to afford bidding for chunks of a physically chopped up (and therefore slower) 5G spectrum.  

Dividing up and concentrating on the mmWave has major strategic and practical weaknesses that could undercut U.S. national security. It addition to stifling American competition and innovation by pricing out small business and entrepreneurs, it will distract large American telecommunications companies, like AT&T and Verizon, from the international competition for sub-6 5G, which is longer-range and therefore cheaper from an infrastructure perspective. Telecommunications is also known as telecom or telco.

Chinese telecom companies like Huawei and ZTE, which are planning to first supply sub-6 5G services globally, before they enter the more rarefied mmWave space, have adopted the more competitive sequencing strategy. Most global cities will want the cheaper sub-6 5G, which is still blazing fast at several Gbps, before they proceed to the benefits of higher-cost ultra-fast mmWave spectrum at over 20 Gbps.

Lastly, an American focus on mmWave 5G will leave U.S. rural customers without effective 5G speeds for upcoming innovations in smart agriculture, like utilization of networked drones. The U.S. plan to provide rural subsidies of $20.4 billion over 10 years is woefully insufficient to bridge the infrastructure gap, which would require hundreds of billions of dollars to get mmWave 5G to all rural Americans. As 5G requires base stations every 200 meters in urban areas, and can only be marginally more spaced out in rural areas, rural mmWave 5G will probably never happen. Utilizing the sub-6 spectrum for 5G would require far fewer base stations, at one every few miles.

What then explains this lack of a coherent 5G strategy on the part of President Trump and the FCC? I would argue that they are influenced by the major telecom companies, like Verizon and AT&T, which are seeking an mmWave spectrum giveaway well in advance of demand for such spectrum. Auctioning the mmWave now, when only a few large companies could possibly bid, will drive bids to rock bottom prices. That is essentially giving away this valuable commodity, currently in the hands of taxpayers, without most citizens even realizing what they are losing. This may make sense in order to get telecom support for President Trump in the short-term, but in the long-term it comes at the expense of taxpayers and small telecom companies trying to get into the market but barred by large and unnecessary investments in mmWave infrastructure and spectrum auctions. As such, it rewards countries with more coherent strategies, most importantly China, who will win the global 5G race and as a result have access to all future information flows over global 5G networks. The power that such a future data windfall will give to China cannot be understated.

The optimal U.S. 5G strategy is to first clear and unify as much sub-6 spectrum as possible. Second, virtually lease bandwidth on this spectrum to large and small telcos, providing average consumers and companies with several Gbps speeds. And third, virtually lease a unified mmWave spectrum for special use, such as in high density urban areas, and for ultra-fast requirements of over 20 Gbps.

Use of current infrastructure for sub-6 spectrum, and shorter term leases of that spectrum, would better allow large telcos to deploy their scarce capital for sub-6 network infrastructure and devices, and facilitate entrepreneurs and small businesses in the telecom space, ultimately creating a quicker and smoother transition to 5G speeds of several Gbps, and more small business competition that would increase innovation and lower costs for American consumers. Shorter-term leases would also get top dollar for use of both sub-6 and mmWave spectrum, which would contribute to taxpayer relief, paying down the national debt, and social and defense expenditures. A quick (over 3 years) international success in the sub-6 5G space would springboard U.S. telcos into the mmWave, which can be achieved in parallel where necessary.

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