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Cellphones Government The Almighty Buck United States News

Spectrum Fees May Preclude US Low-Cost Cellular 246

theodp writes "Not to apologize for an industry that charges $27,000 to catch a Chicago Bears game, but will the huge spectrum fees charged by the government block the emergence of low-cost cellular service? In the most recent FCC spectrum auction, carriers paid nearly $20 billion to grab a swath of the 700MHz spectrum. And now under President Obama's proposed budget, wireless carriers would be hit with huge annual fees — eventually reaching $550 million per carrier per year — for the right to hold a spectrum license. Critics say the carriers will simply pass these fees through to consumers."
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Spectrum Fees May Preclude US Low-Cost Cellular

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  • Do the math... (Score:5, Informative)

    by aaarrrgggh ( 9205 ) on Sunday March 01, 2009 @12:39AM (#27027337)

    $10/user/year for the proposed fees.

    $40/user/life for the license.

    Drop in the bucket compared to the initial infrastructure deployment. In an efficient business, service would be almost free after 12 months.

  • Of course the carriers won't pass the fees on! How could they? The government won't let them. Just like the government doesn't let landlords pass on property taxes, or hotels tourism taxes, or airports landing fees.

    No, the carriers will simply absorb the fees and lose money.


  • Re:tax in disguise (Score:4, Informative)

    by Shakrai ( 717556 ) on Sunday March 01, 2009 @01:00AM (#27027435) Journal

    You are basically arguing the same old tired right wing arguement

    Pointing out that the carriers will pass any increased costs onto consumers is "the same old tired right wing argument"? Ya know, you guys don't get to automatically dismiss any and all criticism of Obama using that line, right?

  • by Anonymous Coward on Sunday March 01, 2009 @01:10AM (#27027481)

    You've seen the many-digit number they call the National Debt right? A few fees in order to support the budget now are going to be among the least of the children's worries.

  • Re:tax in disguise (Score:3, Informative)

    by afidel ( 530433 ) on Sunday March 01, 2009 @01:20AM (#27027543)
    Verizon's 2008 operating margin was 17.34%, their return on average equity was 13.93%, neither are particularly stellar or out of line. Exxon and GE are similar, Walmart is lower for margin and higher for return. Basically they are an average Bluechip stock.
  • Re:How? (Score:1, Informative)

    by Anonymous Coward on Sunday March 01, 2009 @01:21AM (#27027551)

    Perhaps someone with a better understanding of economics can explain where I go wrong.

    It seems to me that the cellular companies already charge so as to result in the maximum profit. They would be fools not to. Thus either increasing or decreasing their prices would result in lower profits for them---the former as customers leave, and the later as not enough customers join to make up for the lower price. If this is so, then how is it possible for them to pass the costs on to customers?

    You're basically saying, "The price is already set at the point where the supply and demand curves meet, so wouldn't raising prices result in lower revenues?"

    If supply and demand curves were fixed, you would be absolutely correct: changing the price in either direction would result in a loss of revenues. However, the price and demand curves are not fixed: when the seller faces new or higher expenses, the supply curve shifts along the price axis in the positive direction. This means that the supply and demand curves now meet in a new (more expensive) place, which means that the supplier must increase prices to maximize revenues.

    In this case, you may see the shift in the supply curve offset by a shift in the demand curve: many people will have less money to spend on cell phones, which means that the demand curve will shift in the direction of lower prices. Whether one or both of these shifts occur, the effect on volume will be the same: fewer people will buy mobile phone service (more specifically, the rate of new adoption will decline and existing users will cut back on their talk times).

  • Re:Taxes or fees (Score:3, Informative)

    by afidel ( 530433 ) on Sunday March 01, 2009 @01:26AM (#27027571)
    I'm pretty sure he's referring to the fact that this type of flat use tax is regressive which is generally considered to be bad since it has a much higher marginal rate on those least able to afford it. Basically if the government wants more funding they should come up with a more progressive tax system to grow the overall economy (regressive taxes reduce the rate of currency flow through the market).
  • Re:How? (Score:3, Informative)

    by Timothy Brownawell ( 627747 ) <> on Sunday March 01, 2009 @01:35AM (#27027617) Homepage Journal

    It depends on how competitive the market is, how profitable the cellular companies currently are, and probably a few other things.

    If the market is not competitive at all (perfect monopoly), the price is probably fixed at whatever generates the most revenue and won't change.

    If the cellular companies aren't making enough profit (result of perfect competition), they'll need to raise prices to cover the fees or go bust.

    Reality is somewhere in the middle, I'd personally guess somewhat closer to the "monopoly" end due to needing to buy spectrum and such. So the prices will go up some, and profits will go down some (probably slightly more, because of limited competition).

  • Re:tax in disguise (Score:3, Informative)

    by icebike ( 68054 ) on Sunday March 01, 2009 @01:36AM (#27027621)

    Oh, leave him alone.

    He needs to prove to himself that you can Tax your way out of a depression.

    When is shining dream lies shattered in the dust in four years he will be a right winger too.

  • Re:tax in disguise (Score:3, Informative)

    by Tycho ( 11893 ) on Sunday March 01, 2009 @04:51AM (#27028343)

    Here is a different analysis of the facts from me. From the SEC 10-K form Verizon filed for the fiscal year ending 12/31/2008, submitted 2/24/2009 and can be found here: []

    About a quarter of the way down the page is the Income and Expenses breakdown for the Wireless division. Keep in mind that 45% Verizon Wireless is owned by Vodafone and 55% is owned by Verizon proper. So Vodafone and Verizon most likely have some sort profit/loss sharing plan. In any case, these numbers are for the whole Wireless division. In 2008 the division received just over $49 billion in income, a 12.5% increase from 2007. The total expenses for 2008 ended up at just over $35 billion, 10.1% higher than 2007. The profit was about $14 billion, or 18.6% higher than 2007.

    As one looks at the breakdown of the wireless division expenses for 2008 one may notice a few odd or unusual numbers, 15.5 billion was from the cost of services and sales. These include both the costs of operating the wireless network, routing calls, and discounts given to customers upgrading their equipment. Not too much interesting I suppose, Verizon could start charging what the phone was actually worth instead of the joke prices they do now, the primary portion of the 19% increase in expenses this section from 2007 was customer equipment upgrades. However, some may claim that this passes the costs on to customers, but the discounts also lock customers into two year contracts.

    The $14.2 billion spent on the "Selling, General, and Administrative Expense" category is more interesting on the other hand. It represents wages, sales commissions, benefits, advertising, promotions, bad debt expenses, and regulatory fees. "Can you hear me now? Good." Who thinks that Verizon spends a bit much on advertising these days? Who thinks that Verizon could cut back even, just a bit, on advertising, retail stores, gimmicky promotions, and sales commissions for corporate sales, without significantly cutting back on service or increasing customer costs? In 2008, Verizon managed to decrease its cost related to wages and benefits even.

    These spectrum fees may exist so that if Verizon wishes to keep its spectrum, it better be willing to use it in a competitive manner. Otherwise, it is a yearly unneeded cost, like many Verizon employees, potentially, at least in the eyes of a few highly paid, but low skilled executives. One might think that surrendering unusable, costly spectrum to the FCC would be wise. Think of these fees perhaps as being a bit like property taxes for radio spectrum, an added incentive to dispose of costly unused assets that have value.

    Of course, I think the whole division of the 700MHz spectrum should be done again. It would be a better fix if it was done properly this time though.

  • Dumb (Score:1, Informative)

    by Anonymous Coward on Sunday March 01, 2009 @10:22AM (#27029465)

    "Critics say the carriers will simply pass these fees through to consumers."

    Proponents, too. How old _are_ you, Beavis?

    Corporations ALWAYS pass all costs through to their customers. All taxes ultimately fall on the consumer in the form of higher prices.

  • Re:good (Score:3, Informative)

    by rdean400 ( 322321 ) on Sunday March 01, 2009 @01:06PM (#27030657)

    These fees are being sold as a fee on the carrier, but that fee will be applied as a new surcharge on everyone's phone bill. The interesting thing about fees is that they do not operate as the progressive tax that Democrats typically favor. They operate as a fair tax -- applied uniformly based on consumption. The only way they get away with it is that people don't think it through, so they think someone else is getting the tax.

    I agree with the point of the article that applying huge fees to the wireless spectrum will create a huge barrier to entry for startups that don't have that kind of money. For the U.S. to remain competitive, we need to create an environment that nurtures the small inventor who might have a big idea but lack the funds to bring it to market.

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