Why is the Unlicensed Band the 'Innovation Band?'

Abstract

Unlicensed spectrum is often referred to by proponents as the “innovation band.” Even those who generally defend the superiority of licensed spectrum to unlicensed spectrum often concede that numerous innovations in both product development and service development supports the continued preservation of some unlicensed bands for “innovation.” A core of “property school” theorists, however, still insist that any innovation in the unlicensed space could, and ultimately would, be replicated in the licensed space to the extent such innovation is inherently valuable because licensees have incentive to maximize the value of their spectrum holdings. This paper consists of three parts. First, it seeks to define “innovation” as a necessary predicate to determining whether unlicensed spectrum produces either “greater” innovation or substantively different types of “innovation” from licensed spectrum. By comparing products and business models in all flexible use spectrum, the paper concludes that while both licensed providers and unlicensed providers produce “innovation” in both products and business models, the nature of the innovation in unlicensed space is dramatically different as a substantive matter than that which arises in the licensed space. Next, the paper seeks to determine whether these “innovations” have value, and if that value would ultimately be discovered and exploited by licensees using flexible use spectrum. Establishing “value” is fairly straightforward. Not only does the continued growth of products and services using unlicensed spectrum demonstrate that these innovations have “value,” but many are ultimately incorporated into licensed spectrum. Further, despite the putative advantages of licensed spectrum (notably interference protection and ‘curation’ by licensees), we rarely see uses developed in the unlicensed space abandon unlicensed spectrum when licensed options become available. By contrast, numerous creators of licensed technology have recently sought to expand licensed technologies (e.g., LTE) into the unlicensed space. If licensed spectrum were inherently superior for these uses, we would expect providers to shift from unlicensed spectrum to licensed spectrum wherever possible. Instead, we see the reverse. While it is difficult to prove that the innovations in licensed spectrum would never arise in the licensed space, the paper notes the following: 1. Many of these innovations, while valued in the market, remain unexploited by licensees with flexible use spectrum. In some cases, where businesses have relied on licensed narrowband technologies, they are actively moving to unlicensed broadband technologies. 2. Even where innovations developed in the unlicensed space are adopted by licensees, the innovations in question arose in the unlicensed space well before being adopted into the licensed space, and were in some instances initially resisted by operators of licensed spectrum. At a minimum, therefore, the availability of unlicensed spectrum rapidly accelerated the innovation process and the ability to discover the value of the innovations. 3. Most recently, a satellite licensee, Globalstar, has sought to convert its terrestrial ancillary use spectrum right into a “private commons.” The proposal relies entirely on leveraging existing unlicensed spectrum equipment and use. In one case, at least, the entire value of the licensed spectrum rests on the ability of the licensee to capture the developments in the neighboring unlicensed band. The third part of the paper seeks to analyze why this outcome exists. The paper proposes the following reasons. 1. Unlicensed spectrum dramatically lowers transaction cost for would be innovators and users. The ability of licensees to charge for access is, from the perspective of the innovator, pure deadweight loss. Even the process of discovering how to negotiate with a licensed provider eliminates a large number of innovators and potential uses. 2. By contrast, the benefits of licensed spectrum, notably interference protection, are minimal for most innovators and use cases. Nor do potential partnerships with the licensee offer much advantage for many users, such as infrastructure providers or consumer device manufacturers. 3. Additional benefits, such as the ability to control network configuration, control business plan, and otherwise exercise control over the nature and development of the product or service, enhance the value of unlicensed access over licensed access to the would-be innovator. 4. The bounded rationality of flexible use licensees prevents them from discovering and exploiting these opportunities themselves. Indeed, the development of these innovations may appear to threaten traditional revenue streams, such as wifi. The combination of these factors, combined with the economic forces that drive the wireless industry to consolidation, essentially makes licensed spectrum access a form of “command and control” where a handful of licensees displace the government.