THE ECONOMIC IMPACT OF THIRD-GENERATION WIRELESS TECHNOLOGY

October 2000

A Report by

The Council of Economic Advisers
1

THE ECONOMIC IMPACT OF THIRD -GENERATION WIRELESS TECHNOLOGY

EXECUTIVE SUMMARY

“Third-generation” (3G) wireless technology provides high-speed mobile access to the Internet

and other communications networks. This technology offers significant benefits to consumers

and telecommunications providers and complementary benefits to the U.S. economy. It is urgent

that the United States follow other advanced countries in making adequate spectrum available for

3G applications. This report documents the likely benefits of 3G technology and explains why

adequate spectrum is needed to provide these services efficiently. The key points are these:

• Telecommunications and the Internet are among the most important sectors of the New

Economy. Telecommunications represented 3 percent of GDP in 1998, having grown at a 7

percent annual rate over the previous 10 years. Wireless carriers employ over 150,000 people in the United States and generate $44 billion in annual revenue. At the end of 1999, the

United States had 86 million wireless subscribers; today that number exceeds 100 million. 

By year-end 2000 there will be over 600 million wireless subscribers worldwide. The Internet has spawned thousands of companies, as entrepreneurs have raced to provide content,

commerce, and new services to consumers and firms. Consumers purchased $5.5 billion of

goods and services over the Internet during the second quarter of 2000 alone. Sales over the

Internet between businesses are estimated to hit $251 billion in 2000, up from only $43 billion in 1998. The most successful Internet startup companies have created hundreds of billions of dollars of market value.

• Third-generation wireless technology combines two powerful innovations: wireless

communications and the Internet. Today’s wireless devices are designed to transmit voice

and brief text messages and cannot handle digital multimedia and other high-bandwidth

Internet content. 3G devices, by contrast, provide high-speed mobile connections to the

Internet and other communications networks, giving users full access to the rich content and

commercial possibilities of the “information superhighway.”

• This new technology promises substantial benefits to consumers, producers, and the

economy as a whole. The annual consumer benefit from today’s wireless telephone services

is estimated at $53–$111 billion. The consumer benefits from 3G services will likely be of

this order of magnitude. Providers also stand to reap substantial gains. Recently completed

3G spectrum auctions in Europe have raised $150–$600 per capita. These auction revenues

indicate the expected producer benefits from operating 3G licenses. 

• To provide 3G applications most efficiently, adequate spectrum must be made available

for commercial use. In telecommunications, the most important scarce resource is spectrum. While current U.S. carriers can develop 3G applications using currently allocated

spectrum, the allocation of additional spectrum could lower the cost of bringing 3G to U.S.

consumers. However, parts of the spectrum being considered for 3G applications are already

in use.
2

• Delays in introducing 3G products and services can be costly. Besides the foregone benefits to 3G consumers and providers, delay may be harmful to U.S. firms seeking to provide

complementary products and services. Early investments are necessary to develop a vibrant

U.S. industry for 3G applications. Knowledge spillovers, which are important in high-tech

industries, tend to be geographically localized. Finland, which allocated its 3G spectrum licenses in March 1999, has already taken the lead in developing an industry to provide mobile

applications.

• Government policy in allocating spectrum must weigh carefully all benefits and costs.

Consumer benefits, provider profits, and the potential benefits of industry leadership should

be weighed against the possible costs of moving incumbent users to ensure that adequate

spectrum is made available for 3G applications.
3

THE ECONOMIC IMPACT OF THIRD -GENERATION WIRELESS TECHNOLOGY

1. INTRODUCTION

The U.S. economy has performed remarkably over the last several years. Productivity

growth has accelerated from about 11⁄2 percent per year from l973 to 1995 to about 3 percent per

year from 1995 to 1999. This acceleration is heavily related to technology, both the investment

in IT hardware and software and the extraordinary productivity of the industries producing the

technology. Between January 1993 and September 2000 the total market value of firms on the

NYSE and NASDAQ increased by 400 percent. Knowledge and intangible capital are increasingly important: R&D spending has soared, along with the numbers of patents.

At the heart of this “New Economy” lie a series of dramatic technological innovations. 

Advances in computing, information storage, and data transmission have reduced costs, created

new markets, and expanded existing markets. These innovations came from a remarkable flourishing of entrepreneurship, often concentrated in Silicon Valley and other high-technology corridors in the United States. Firms and other organizations have moved quickly to exploit the opportunities provided by these new technologies. Firms are spending billions on enterprise systems, sophisticated software and hardware packages that integrate ordering, procurement, inventory, finance, and human resources. Consumers are offered an increasing array of goods and

services for communication, entertainment, shopping, education, and other activities. In some

industries, firms are taking advantage of technological improvements by expanding and consolidating their operations to reduce costs; in other industries, startup companies are using technology to create new products and markets. These changes explain a large portion of recent U.S.

productivity gains.

The telecommunications sector has been a primary beneficiary of these technological advances. Radical improvements in computing power, along with healthy competition in the

communications sector, have reduced the costs of communications dramatically. As costs have

fallen, and capabilities have expanded, the wireless telephone and pager markets have expanded

rapidly. Wireless carriers employ more than 150,000 people in the United States and generate

over $44 billion in annual revenue (see Figures 1 and 2). Mobile-phone penetration in the

United States now exceeds 35 percent. Today, the number of U.S. wireless subscribers exceeds

100 million. Experts estimate that by year-end 2000, there will be over 600 million wireless subscribers worldwide.1

The Internet is also transforming the ways individuals and organizations communicate

and manage information. Nearly 54 percent of U.S. households have access to the Internet and

surveys indicate that over 50 percent of U.S. businesses will sell products online in the year

2000.2 Traditional firms and new firms alike are competing to deliver consumers higher-speed

access to the Internet and more sophisticated services for this new medium. Internet sales to

 

1

 Cellular Telephone Industry Association (www.wow-com.com); Electronic Trend Publications, “The Worldwide

Wireless Network,” July 2000.

2

 NUA Internet, “How Many Online,” September 2000 (www.nua.ie/surveys/how_many_online); Internet Economy

Indicators, October 6, 2000 (www.internetindicators.com/facts.html).
4

consumers—so-called B2C ecommerce—were $5.5 billion for the second quarter of 2000 alone.3

Sales over the Internet between businesses (B2B) have increased even more dramatically. B2B

sales are estimated to hit $251 billion in 2000, up from only $43 billion in 1998.4

The latest advance in mobile communications technology, “third-generation” (3G) wireless, will be capable of combining the powerful technologies of wireless communications and the

Internet.5 Today’s wireless service, used for analog and digital cellular phones and pagers, was

designed to transmit voice and brief text messages. These devices transfer data at relatively slow

speeds, around 9.6 kilobits per second (kbps)6—significantly slower than conventional 56 kbps

dial-up modems. 3G devices, by contrast, will transmit data at speeds between 144 kbps and 2

megabits per second, about as fast as a cable modem or digital subscriber line. Increasing the

data-transfer rate allows mobile phones, hand-held computers, and other products to become

multimedia access devices. Further, the international standards that have been developed for 3G

allow global roaming with a single device.7

The market for high-speed, or “broadband,” wireless access has tremendous potential. 

Broadband applications such as streaming audio and video are already becoming increasingly

popular on the Internet, as evidenced by the rapid growth of high-speed cable and DSL modems.

 

3 U.S. Department of Commerce, Press Release, August 31, 2000.

4

 Forrester Research, Inc., “Resizing Online Business Trade,” November 1998.

5

 First-generation (1G) wireless phones, introduced in the United States in 1983, use analog technology to transmit

voice calls. Second-generation (2G) wireless phones use digital technology and were introduced into widespread

commercial service in 1996 following the FCC’s auction of PCS spectrum licenses in 1994 and 1995. While both

technologies are currently used in the United States, since 1999 the number of 2G subscribers has exceeded the

number of 1G subscribers. Judy Berck, “A Brief History of PCS (Digital Cellular) Technology Development in the

United States,” April 1998 (www.pcsdata.com/history.htm); Federal Communications Commission, Fifth Competition Report, August 18, 2000.

6

 Competitive Intelligence Publications, “3G Mobile: Future Markets,” Research Report #103, Chapter 2, May 2000

 (www.electronics.ca/reports/global/cit103.html).

7

 Throughout this document we generally use “3G” to refer to the entire class of high-speed wireless communications technologies. Other writers distinguish between 3G and an intermediary set of technologies, “2.5G,” which

offer mobile data services at rates between 56 kbps and 144 kbps, the speeds of conventional modems and ISDN

lines, respectively. Both 3G and 2.5G will offer substantial upgrades to the existing mobile data transmission capabilities, and development of both technologies benefit from allocation of additional spectrum.

Figure 1. Annual Revenue of U.S. Mobile 

Telephone Carriers (1985-1999)

0

5

10

15

20

25

30

35

40

45

50

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Dollars (Billions)

Roamer Revenue

Service Revenue

Figure 2. Direct Wireless Employees of U.S. 

Providers at Year-End (1986-1999)

3

4

7

11 16 21

26

34

40

54

68

84

109

135

156

0

20

40

60

80

100

120

140

160

180

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Thousands

Source: CTIA Semi-Annual Wireless Survey, 1999.
5

 As these and other applications multiply, wireless devices will require 3G capabilities to access

existing Internet materials, along with new Internet sites optimized for mobile access. The

bandwidth provided by 3G facilitates secure mobile commerce, real-time videoconferencing, online gaming, and other, not-yet-imagined applications. The 3G technology also gives the user an

“always-on” mobile Internet conne ction.

More importantly, the development of 3G technologies will encourage investment and

innovation in complementary services such as specialized content and billing and payment systems. The Internet has spawned thousands of companies as entrepreneurs have raced to provide

content, products and new services to consumers and to firms. The most successful of these

startup companies have created hundreds of billions of dollars of market value and have impacted the economy dramatically. The combined market capitalization of 15 leading internet applications companies—Yahoo, Verisign, eBay, Inktomi, Commerce One, Amazon, CMGI,

Infospace, Vignette, Lycos, Internet Capital Group, Akamai, Real Networks, Healtheon/WebMD, and Cacheflow—was $193 billion on October 2, 2000. An appropriate allocation of commercial spectrum licenses and other policies that favor investment have the potential

to unleash a wave of innovation in 3G applications. The impact of these yet-to-be-developed

applications is impossible to predict precisely, but history suggests that they may be profound.

Several other countries, including Finland, Japan, Spain, the U.K., the Netherlands, and

Germany, have already allocated new spectrum specifically for high-speed wireless devices and

applications.8 It is urgent that the United States follow other advanced countries in making adequate spectrum available for 3G applications. As explained below, delay is costly. 

This report documents the likely benefits of 3G technology and explains why an adequate

supply of commercial spectrum licenses is needed to provide these services efficiently. In general, benefits of technological innovation accrue to the consumers who use the new technology,

the producers who provide it, and other firms that supply complementary goods and services. 

Introducing new technologies is also costly: research and development must be funded, existing

technologies must be modified or abandoned, and new capital must be provided. In telecommunications, the most important scarce resource is spectrum. Commercial spectrum licenses allow

firms to transmit data over a particular frequency in a particular area. To provide high-speed and

other wireless applications efficiently, spectrum must be allocated to its highest valued use. This

may require a reallocation of spectrum. 

2. BENEFITS FROM NEW TECHNOLOGIES

Technological innovation does not occur in a vacuum; it requires a particular structure of

incentives and institutions. Firms’ demands for new technologies are derived from consumers’

demands for new products and services. Those firms that quickly learn to satisfy consumer

needs stand to reap substantial gains, particularly in markets where network effects and firstmover advantages are important. There can also be significant spillover benefits to firms that

provide complementary goods and services. 

 

8

 European regulators have mandated that newly allocated spectrum be used only for 3G technology. U.S. law generally permits carriers to use their allocated spectrum for a variety of technologies.
6

A. Benefits to Consumers

The potential consumer benefits from introducing 3G technology are substantial. While

it is impossible to predict the precise demand for any future product, one can see the order of

magnitude by studying the introduction of related technologies. For instance, a well-known

study attempts to measure the “consumer surplus” created by the introduction of analog cellular

service (1G).9 Economists define consumer surplus as the difference between the prices consumers actually pay and the maximum amounts they would be willing to pay for a particular

good or service. Consumer surplus is thus a measure of the net benefits to consumers created by

a particular market. Using data on price and number of subscribers in the top 30 cellular phone

markets between 1989 and 1993, the study estimates that consumer surplus generated by the introduction of the cellular telephone was in the range of $31 billion to $50 billion per year in constant 1994 dollars.10 In light of such potential benefits, delays in the introduction of these services can be extremely costly to consumers.

How have the benefits from the introduction of digital wireless (2G) compared with the

benefits of (1G)? Updated calculations estimate that the combined consumer surplus from 1G

and 2G was between $53 and $111 billion in 1999.11 This new consumer surplus is the product

of several factors. First, to the extent that consumers value the quality improvements such as

improved clarity provided by digital wireless, their willingness to pay rises and overall demand

increases. Second, because digital wireless uses spectrum more efficiently, providers can offer

the same service at lower cost. Consumers benefit to the extent that providers pass along these

gains through price reductions. Third, allocating new spectrum for digital wireless introduced

new competitors into the market. The average number of competitors in major metropolitan areas has increased from two to more than four. Increased competition pressures firms to lower

costs, ensuring that the cost savings from technological improvement are passed on to consumers. 

The combined results have been dramatic, as shown in the figures below. Following the

allocation of new spectrum for digital services starting in 1994, total wireless use has risen

sharply, prices have fallen rapidly, and subscribership has increased substantially. As shown in

Figure 3, total minutes of use by U.S. wireless customers more than tripled from 1995 to 1999. 

During the same period, consumers’ fully weighted cost per minute dropped by nearly 50 percent

(Figure 4), and average local monthly prices fell from $51 in 1995 to $41 in 1999 (Figure 5). In

1999, more than half of all mobile subscribers were using digital technology (Figure 6). 

 

9

 Jerry A. Hausman, “Valuing the Effect of Regulation on New Services in Telecommunications,” Brookings Papers

on Economic Activity, Microeconomics (1997), pp. 1–37.

10 An earlier study concluded that the total consumer welfare loss from the 10-year delay in licensing the cellular

(1G) spectrum at $86 billion in 1991, or 2 percent of GDP in 1983 when the licensing finally occurred. J. Rohlfs, C.

L. Jackson, and T. E. Kelley, “Estimate of the Loss to the United States Caused by the FCC's Delay in Licensing

Cellular Telecommunications,” National Economic Research Associates Report (1991).

11 Jerry A. Hausman, “Mobile Telephone,” Handbook of Telecommunications Economics, forthcoming.
7

Moreover, digital wireless has allowed new services, such as voice messaging, text messaging, and caller ID, to be integrated into mobile phones. The introduction of voice messaging

services for basic telephony created an estimated $1.3 billion in consumer surplus in constant

1994 dollars.12 This technology, which is included in the service provided to many digital wireless subscribers, may be even more valuable to consumers when combined with the freedom that

mobility provides.13

Consumers in other countries are already enjoying wireless Internet applications using

2G technology. In Japan, for example, Nippon Telegraph and Telephone’s DoCoMo subsidiary

has launched a service called i-mode. Over 10 million Japanese customers have subscribed. 

Subscribers use an i-mode phone that can send and receive e-mail as well as access websites optimized for tiny screens. With a thumb-controlled joystick, subscribers can tap into online news,

browse through restaurant guides, buy airline tickets, and trade stocks. Using another technology

called wireless application protocol (WAP), several European firms have turned phones into

 

12 Hausman, “Valuing the Effect of Regulation.”

13 Hausman, “Telecommunications: Building the Infrastructure for Value Creation,” in R. Nolan and S. Bradley,

eds., Sense and Respond (Cambridge, Mass.: Harvard Business School Press, 1998), provides a method to estimate

an upper and lower bound for consumer surplus for other goods using limited data, and he applies this method to

internet access.

Figure 3. Total Minutes of Use for U.S. 

Wireless Subscribers (1991-1999)

11 14

19

27

38

52

63

89

148

0

20

40

60

80

100

120

140

160

1991 1992 1993 1994 1995 1996 1997 1998 1999

Trillions of Minutes

Figure 4. Estimated Total Expense Per 

Minute for All Calls Made by U.S. Wireless 

Subscribers (1991-1999)

57.5

48.4

41.2

29.9

64.8 64.0

59.6 57.3

50.8

0

15

30

45

60

75

1991 1992 1993 1994 1995 1996 1997 1998 1999

Cents

Figure 5. Average Local Monthly Bill for U.S. 

Wireless Subscribers (1988-1999)

98.0

89.3

80.9

72.7 68.7

61.5

56.2

51.0 47.7

42.8 39.4 41.2

0

20

40

60

80

100

120

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Dollars

Figure 6. U.S. Analog and Digital Mobile 

Telephone Subscribers

47.6 48.5 41.7

20.7

44.3

7.7

0

20

40

60

80

100

1997 1998 1999

Millions of Subscribers

Digital

Analog

Source: CTIA Semi-Annual Wireless Survey, December 1999; FCC, Fifth Report on Commercial Mobile

Services, August 18, 2000.
8

electronic wallets, allowing customers to pay for goods and services via their mobile phone bill

rather than via credit cards or cash. According to recent news reports, Finnish consumers can

make vending machine purchases, pay rent, phone, or electricity bills, and pay for parking spaces

with their mobile phones.

Possible 3G applications are even more impressive. According to the International Telecommunication Union (ITU), 3G devices will be compact enough to fit into a pocket or handbag

and will integrate the functions of a range of existing devices. The ITU suggests that the 3G device

will function as a phone, a computer, a television, a pager, a videoconferencing center, a

newspaper, a diary and even a credit card. [It will] support not only voice communic ations, but also real-time video and full-scale multimedia via a screen that can be pulledout and flexible. It will also function as a portable address book and agenda, containing

all the information about meetings and contacts and able to remind you automatically before an important appointment or automatically connect to an audio or videoconference at

a specified time. It will automatically search the Internet for relevant news and information on pre-selected subjects, book your next holiday for you on-line, and download a

bedtime story for your child, complete with moving pictures. It will even be able to pay

for goods when you shop via wireless electronic funds transfer. In short, the new mobile

handset will become the single, indispensable “life tool,” carried everywhere by ever yone, just like a wallet or purse is today.14

B. Benefits to Providers

In a dynamic, rivalrous market such as the U.S. telecommunications market, firms compete aggressively to provide new goods and services to consumers. First-mover advantages can

be important in many telecommunications markets, so the profits from establishing an early lead

in these markets can be substantial. Of course, the precise value to U.S. operators of additional

spectrum for 3G technology is uncertain. A simple analysis of the existing wireless industry indicates that, in the aggregate, U.S. wireless operators earned $238 million of revenue per MHz

under the existing spectrum allocation in 1999. At similar rates, an additional 150 MHz of spectrum could bring an additional $35.7 billion of service revenues per year, depending on what

services are provided. Mobile data technology may also facilitate new business models for providers, as revenues from advertising, licensing content and applications providers, transaction

processing, and billing may augment or replace the traditional fee-for-service (subscription)

model.

A second, more precise measure of the order of magnitude of provider benefits is given

by the recently completed auctions for 3G spectrum in Europe. Auctions in Germany and the

U.K. raised $46 and $35 billion, respectively, representing total payments in excess of $500 per

inhabitant in these two countries. An auction in the Netherlands raised about $2.5 billion, or

$150 per inhabitant. Table 1 describes the results of these auctions. 

 

14 International Telecommunication Union, “The Next Generation of Mobile Communications,” October 10, 2000

(http://www.itu.int/imt/what_is/3rdgen/index.html).
9

The most a company will be willing to pay for a spectrum license is the present value of

the future profits (after tax) it expects to make from using this license.15,16 In a competitive auction with multiple bidders, the price paid by each winning firm will come close to, but will not

exceed, this willingness to pay. 17 Using the data from Table 1, this suggests that winners of the

German auctions, for example, expect to earn at least $7.7 billion in present value of profits from

operating 3G licenses in Germany. Annuitizing this present value at a 15 percent rate suggests

 

15 The present value of expected future profits is the sum of all expected future profits discounted by the project’s

cost of capital. Future profits are all cash flows from operating the service less operating costs and additional investments required to bring the service online.

16 A more refined view also considers the value of profits foregone if the firm does not win the license. Since 3G is

partly a substitute for existing services, incumbent firms must consider their expected reduction in profits from 1G

and 2G services in the case in which they do operate a 3G license and in the case in which they do not operate a 3G

license. For example, incumbents without the new technology may lose customers to entrants that provide the

newer services. In theory, this can increase a firm’s willingness to pay for the license (and will depend on its existing market share with the current technology). By contrast, new entrants consider only their expected future profits

from operating using the license.

17 It is possible for a firm to overpay if its expectation and that of other bidders is too optimistic.

Table 1. Comparison of European Spectrum Auctions

UK Germany Netherlands

Start Date 3/2000 7/31/2000 7/10/2000

End Date 4/27/2000 8/17/2000 7/24/2000

Net Proceeds $35.4 billion

(£22.5)

$46.2 billion

(98.8 DM)

$2.5 billion

Net Proceeds

per Capita

$599 $563 $158.4

Number of Licenses 5* 6** 5***

Fees Paid by Winners$7.1 billion $7.7 billion $0.5 billion

Winning Firms

(parent company

country of origin)

• Vodafone Airtouch

(UK)

• BT Cellnet (UK)

• Orange (France Telecom)

• One2One (Deutsche

Telekom)

• Telesystem International Wireless (Teleglobe – Canada)

• Deutsche Telekom

(Germany)

• Viag Telekom (British

Telecom)

• Mannesmann (Vodafone)

• Telefonica / Sonera

(Spain / Finland)

• E-Plus (Netherlands)

• MobilCom (Germany)

/ France Telecom

• Libertel (Netherlands)

• KPN Mobile (Netherlands)

• Dutchtone (Netherlands)

• Telfort (British Telecom)

• 3G Blue consortium

(Tele Danmark /

Deutsche Telecom /

Belgacom)

Source: UMTS Forum; population figures from Statistical Abstract of the United States, 1999. All figures converted to current U.S. dollars.

*National licenses

**Each operator purchased 2 sets of 2x5 MHz licenses. The result is 6 national licenses.

***National licenses
10

that each of the six winning firms expects future after-tax profits in excess of $1 billion per

year.18

Will 3G be as profitable for U.S. companies? While these auction results suggest that

European firms have high expectations for 3G, European and the U.S wireless markets differ in

important ways. First, three of the bands under consideration for 3G applications in the United

States—the 806–960 MHz, 1710–1850 MHz, and 2500–2690 MHz bands—are currently used by

analog cellular phone providers, the Department of Defense, fixed wireless providers, satellite

broadcasters, school systems, and private video teleconferences. The U.K., Germany, and the

Netherlands, by contrast, did not face significant incumbency problems when spectrum was auctioned for 3G applications. 

Moreover, wireless Internet access may be less popular here than abroad because U.S.

prices for wireline Internet access are already low. The average monthly U.S. price for 30 hours

of Internet access at off-peak times is $22; the average monthly price for all OECD countries is

$35.19 To the extent that wireless and wireline Internet access are substitutes, these price differences could reduce the potential market for 3G services in the United States. On the other hand,

wireless and wireline Internet access may be complements, and providers could choose to provide combined service. Of course, firms in the United States and abroad may change their pricing strategies for wireline Internet access once 3G services become available.

Finally, firms’ expectations about the profitability of 3G may change. Carriers will learn

more about the technology and about consumer demand between now and a U.S. auction. If 3G

applications developed within the next 2 years turn out to be highly successful, carriers may decide that U.S. licenses are more valuable than previously thought. Firms that win 3G licenses in

other countries may also view U.S. licenses as more valuable if bargaining power with equipment suppliers and learning-by-doing decreases anticipated costs. Additionally, as information

about 3G emerges, financial markets’ willingness to finance license purchases may change. 

Early evidence suggests that financial markets are not as willing to finance European 3G licenses

as firms had anticipated. After bidding an average of $7.7 billion for German UMTS licenses,

companies including Deutsche Telekom have seen their credit ratings fall. France Telecom’s

credit rating was lowered from AA– to A after it supported winning bidders in the U.K. and

Germany. (Of course, these downgrades may reflect other factors as well.) A ratings downgrade

of this sort typically increases a firm’s cost of borrowing significantly. Macroeconomic changes,

too, may have an impact on firms’ cost of borrowing. A significant increase in U.S. interest

rates, for example, would likely depress firms’ bids.

 

18 Besides the cost of the license, firms will have additional capital expenditures to operate their networks in Ge rmany. Cash flow from operations must cover the expense for this as well.

19 OECD, Directorate of Science Technology and Industry, “Internet Access Price Comparison,” September 21,

2000 (www.oecd.org/dsti/sti/it/cm/).
11

C. Benefits to U.S. Industry

Besides the direct benefits to consumers and 3G providers, the introduction of this technology could unleash a wave of secondary innovations in related goods and services, and to foster the development of new “technology corridors” such as Silicon Valley. The spillover benefits to the U.S economy could be significant.

The emergence of the Internet economy, particularly in the United States, shows how

technological innovation can generate large social returns. Communications protocols such as

TCP/IP and HTML provide a standard platform for exchanging information between computers.

Opening a new platform stimulates investment not only for the provision of the necessary hardware and software, but also for applications and content delivered over that platform. Widespread diffusion of these communications standards has given rise to entire industries devoted to

providing Internet content and commercial services to consumers and businesses. Startup companies, along with established retailers and information services, have created hundreds of billions of dollars of shareholder wealth through Internet-related activities. Employment in several

IT sectors more than doubled between 1993 and 1999.20 These investments in IT and complementary services have been major contributors to productivity improvements over the latter half

of the 1990s.21

Importantly, the sectors producing these technological innovations often cluster geographically. One reason is that knowledge spillovers between firms, and spillovers between

firms and academic institutions, are particularly significant in high-technology sectors. A recent

study of knowledge flows used patent citations to show that these spillovers tend to be geographically localized, even after controlling for pre-existing research activity. 22 In the technology sector much of the relevant knowledge is “tacit,” rather than explicit, making close social

ties (between entrepreneurs and venture capitalists, for example) all the more important.23 Investigators have shown that spatial concentration of innovations was significantly higher in industries in which knowledge generation—as measured by industry R&D/sales, the use of skilled

labor, and the importance of academic research—was particularly important.24 In short, location

matters.

 

20 U.S. Department of Labor, Bureau of Labor Statistics, “National Employment, Hours, and Earnings,” series

EEU00500001 and EEU80737001.

21 Dale Jorgenson and Kevin Stiroh, “Raising the Speed Limit: US Economic Growth in the Information Age,”

Working Paper, Department of Economics, Harvard University (May 2000); Stephen Oliner and Daniel Sichel, “The

Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Working Paper, Federal Reserve

Board (February 2000).

22 Adam B. Jaffe, Manuel Trajtenberg, and Rebecca Henderson, “Geographic Localization of Knowledge Spillovers

as Evidenced by Patent Citations,” Quarterly Journal of Economics, Vol. 108 (1993), pp. 577–98.

23 Gunnar Eliasson,, “Business Competence, Organizational Learning, and Economic Growth: Establishing the

Smith-Schumpeter-Wicksell Connection,” in F. M. Scherer and M. Perman, eds., Entrepreneurship, Technological

Innovation, and Economic Growth: Studies in the Schumpeterian Tradition (Ann Arbor: University of Michigan

Press, 1992); Jacqueline Senker, “Tacit Knowledge and Models of Innovation,” Industrial and Corporate Change,

Vol. 4 (1995), pp. 425–77.

24 David B. Audretsch and M. P. Feldman, “R&D Spillovers and the Geography of Innovation and Production,”

American Economic Review, Vol. 86 (1996), pp. 630–40.
12

Besides this academic work on spillovers, strong anecdotal evidence suggests that

location can be important in the early-stages of high technology industries. Silicon Valley is the

most famous example. Moreover, in Finland—which allocated its 3G spectrum in March

1999—a vibrant cluster of startups developing commercial applications for 3G and existing

digital wireless technologies has emerged. Nearly 3,000 companies in Finland are involved in

telecommunications and other IT industries, including work on wireless technologies and

applications ranging from bill-payment systems to wireless portals and entertainment. Recently,

major companies such as Hewlett-Packard have chosen to base their wireless applications

development programs there, where wireless penetration is the highest among the OECD

economies. (See Appendix 2 for a description of the Finnish wireless cluster.)

Economic clusters such as these play a major role in advanced economies.25 Firms

within economic clusters are often able to perceive new customer needs more clearly and more

rapidly. According to one important study on economic clusters, “cluster participation also offers advantages in perceiving new technological, operating, or delivery possibilities.”26 Moreover, new business formation occurs more readily in economic clusters, because the barriers to

entry are lower there than elsewhere. The required assets, skills, inputs, and staff are readily

available at the cluster location and are more easily assembled there.27

Finally, it should be noted that first-mover advantages are particularly important in ma rkets with network externalities.28 Many Internet markets display strong network externalities,29

and wireless Internet markets may be subject to the same effects. In short, to promote a domestic

cluster of internationally competitive wireless firms, it is essential that adequate spectrum be

made available for commercial use. 

3. THE NEED FOR ADEQUATE SPECTRUM

If the benefits to firms from operating 3G are so large, why aren’t U.S. mobile operators

and owners of other spectrum already scrambling to offer this service? No law prevents providers from using their currently licensed spectrum for mobile data services such as 3G. In principle, some (or all) of the roughly 200 MHz currently in use for wireless telephone technologies

could be converted by its owners to provide 3G service. However, there are several reasons why

converting currently used spectrum to this new technology may be costly. 

 

25 Michael E. Porter, “Location, Competition, and Economic Development: Local Clusters in a Global Economy,”

Economic Development Journal, Vol. 14 (2000), pp. 15–34. Porter defines economic clusters as “geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and

associated institutions (e.g., universities, standards agencies, trade associations) in a particular field that compete but

also cooperate.” See also Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990).

26 Porter, “Location, Competition, and Economic Development.”

27 Ibid.

28 Michael L. Katz and Carl Shapiro, “Systems Competition and Network Effects,” Journal of Economic Perspectives, Vol. 8 (1994), pp. 93–115.

29 For example, consider this explanation from CEO Meg Whitman for eBay’s dominance of the online-auction

business: “We have the largest marketplace by far. That does matter because the sellers want to be where the buyers

are and the buyers want to be where the sellers are.” Wall Street Journal, November 22, 1999.
13

First, as bandwidth becomes increasingly scarce, the costs and prices for

current mobile phone services such as voice

will increase. Second, much of the existing

capital stock would have to be replaced.

Through the end of 1999, wireless carriers

had invested over $70 billion in capital

equipment (see Figure 7). A carrier that

tried to use its existing spectrum for 3G

would find some fraction of its current

capital stock obsolete. Third, the allocation

of new spectrum licenses could lower the

cost of entry into the wireless market, reducing costs by increasing competition. 

Moreover, physical capacity limitations may set in with wireless technology before the

consumer demand for additional bandwidth is exhausted. Although technological improvements

have increased the amount of data that can be transmitted per unit of spectrum, transmitting more

wireless data will, at some point, require allocation of more spectrum for these services.30

Given these considerations, the provision of additional spectrum for high-speed applications should be considered a cost reduction for mobile data services. Depending on competitive

conditions, this cost reduction could lead to substantially lower prices and higher quantities for

consumers.

Uncertainty itself can also cause firms to delay investments and hinder the diffusion of

new technologies.31 In the current environment, U.S. firms face three types of uncertainty:

regulatory, technical, and business. Whether and when the FCC will allocate new spectrum licenses are the key elements of regulatory uncertainty. If firms are required to use existing spectrum to introduce 3G services, technical uncertainty will be high, because equipment manufacturers and service providers must learn to squeeze both existing and 3G applications into existing

bandwidth. Customer demand for new services is the major source of business uncertainty. Because the demand for mobile data services will be dependent on the applications developed for it

(i.e., the software that will run on the 3G hardware), the timing of customer demand must also be

considered. The decisions made by software developers will depend on their estimates of the

size of the user base. If developers believe that the user base will be small or slow to develop—

because of high service prices or because service providers themselves will delay investments—

they will choose to develop fewer applications. This may, in turn, stall the development and

diffusion of the technology. 32

 

30 Splitting cells requires very expensing additional network infrastructure, especially in congested areas (Berck, “A

Brief History of PCS”). Goldman Sachs (Wireless Data, 2000) points out that in large metro areas, carriers are already hitting capacity constraints. This allows them to sustain higher prices.

31 Michael E. Porter and A. Michael Spence, “The Capacity Expansion Process in a Growing Oligopoly: The Case

of Corn Wet Milling,” in J. McCall, ed., The Economics of Information and Uncertainty (Chicago: University of

Chicago Press, 1982).

32 Katz and Shapiro, “Systems Competition and Network Effects.”

Figure 7. Cumulative Capital Investment of 

U.S. Wireless Carriers by Year-End (1985-

1999)

0.9 1.4 2.2 3.3 4.5 6.3

8.7

11.3

14.0

18.9

24.1

32.6

46.1

60.5

71.3

0

10

20

30

40

50

60

70

80

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Dollars (billions)
14

In short, while some mobile data services would probably be forthcoming without the

provision of additional commercial spectrum licenses, one can assume that the amount would be

dramatically lower (at significantly higher prices) without adequate spectrum.

4. COSTS OF DELAY

The process of allocating additional U.S. spectrum for 3G applications is complicated by

the presence of incumbent users. The costs borne by these incumbents must be figured into any

calculation of costs and benefits. Nonetheless, the potential benefits from the allocation of additional spectrum that have been documented in this paper are substantial. Each year of delay in

introducing 3G will deprive consumers of the surplus that technology will generate. Producers,

of course, will also lose the potential profits from providing 3G devices and applications. Finally, the U.S. Treasury will lose the interest on delayed auction revenues, which could be substantial.

Perhaps the most important cost of delay is the forgone benefits from the creation of internationally competitive industry clusters dedicated to 3G products and services. As discussed

above, these clusters are already emerging in Finland and elsewhere. The most important providers of wireline Internet services—firms like AOL, Amazon.com, Yahoo!, and eBay—are located in the United States. For U.S. firms to develop similar leadership in wireless technologies,

it is essential that the supporting institutions be developed as quickly as possible.

5. CONCLUSION

3G applications promise substantial benefits. In the United States, however, parts of the

spectrum suitable for 3G applications are already in use. In judging the costs of delaying 3G development, it is important to take into account not only the expected revenues from auctioning

spectrum licenses, but also the expected consumer benefits. These benefits are likely to be substantial—on the order of tens of billions of dollars per year. Further, greater delay in providing

additional spectrum licenses for high-speed applications reduces the likelihood that U.S. industry

will take the lead in developing wireless technology and applications. 
15

APPENDIX 1. CHARTS AND TABLES

Table A-1. Schedule of Allocations of Commercial Licenses to 3G Spectrum

Date Scheduled

Country

Month Year

Completed

?

Type Comment

Finland Mar 1999 yes Beauty Contest • 4 national licenses

awarded

Spain Mar 2000 yes Beauty Contest • 4 national licenses

United Kingdom Apr 2000 yes Auction • 5 national licenses

awarded

• $35 billion

Japan Jun 2000 yes Beauty Contest • 3 licenses

awarded; service to

commence 5/01

The Netherlands Jul 2000 yes Auction • 5 national licenses

• $2.5 billion

New Zealand Jul 2000 no Auction • 4 national licenses

Germany Jul 2000 yes Auction • 6 national licenses

• $45 billion

France Sep 2000 no Beauty Contest • 4 national licenses

• fixed cost of FFr

32.5 billion ($4 billion) per license

Sweden Nov 2000 yes Beauty Contest • 4 national licenses

Italy Nov 2000 no Hybrid Auction / Beauty

Contest

South Korea Year

end

2000 no Beauty Contest

Singapore Yearend2000 no Hybrid Auction / Beauty

Contest

Australia Jan 2001 no Auction

Taiwan Early 2001 no undecided

U.S. Sep 2002 no auction

Source: UMTS Forum, August 18, 2000 (www.umts-forum.org).

Note: In a beauty contest, license winners are generally chosen by government regulators on the basis of firms’

competing business plans. Firms’ business plans include descriptions of service offerings, pricing, geographic coverage, and timing of new technology introduction.
16

Table A-2. Wireless Subscribers as a Fraction of the Population in G7 Countries and Scandinavia

1995 1998 1999

Finland 19.9% 58.0% 65.0%

Norway 22.6 48.6 61.8

Sweden 22.8 46.5 57.6

Italy 6.9 35.8 52.5

Japan 8.2 37.7 44.9

UK 9.8 25.6 40.3

France 2.5 19.1 34.9

U.S. 11.8 25.5 31.5

Germany 4.6 16.9 28.6

Canada 8.8 17.8 22.7

Source: OECD Telecommunications Database. By October 2000 the U.S. figure exceeded 35 percent.

Table A-3. Wireless Subscribers, Internet Access, and Wireless Internet Access as a Fraction of

the Population in G7 Countries and Scandinavia

Mobile phones,

year-end 1999

Internet access,

mid-year 2000

Wireless Internet subscribers,

2000 estimates

Finland 65.0% 42.6 3.7%

Norway 61.8 49.4 3.4

Sweden 57.6 50.3 3.5

Italy 52.5 19.6 2.1

Japan 44.9 20.8 7.9 *

UK 40.3 32.7 1.4

France 34.9 11.0 1.5

U.S. 31.5 49.8 1.3

Germany 28.6 18.0 1.2

Canada 22.7 41.8 N/A

Sources: 1999 OECD Telecommunications Database; Nielsen Netratings, September 7, 2000; International Data

Corporation; Statistical Abstracts of the United States, 1999; Forrester Research, Inc., “Europe's Mobile Internet

Opens Up,” December 1999; Goldman Sachs; (*) Estimates for Japan are from press releases claiming that i-mode

has 10 million subscribers.
17

APPENDIX 2. CASE STUDY OF FINNISH WIRELESS CLUSTER

Michael Porter offers a framework for analyzing the sources of competitive advantage in geographically concentrated industry clusters such as the California wine industry, the Dutch flower industry, or

Silicon Valley’s high-tech industry.33 His framework identifies 4 complementary factors that promote

“locational competitive advantage,” which is characterized by above-average productivity and profitability among industry players in a particular region. These factors are (1) the context for firm strategy and

rivalry, (2) factor (input) condition, (3) demand conditions, and (4) the existence of related and supporting

industries. Figure A-1 diagrams the framework, used here to analyze the emerging Finnish wirelessapplications cluster. The Finnish wireless industry displays advanced characteristics in each of the four

areas.

Figure A-1. Sources of Locational Competitive Advantage

Reproduced from Porter, “Location, Competition, and Economic Development.” 

 

33 Porter, The Competitive Advantage of Nations, and Porter, “Location, Competition, and Economic Development.”

Demand

Conditions

Factor

(Input)

Conditions

Context for

Firm Strategy

and Rivalry

Related and

Supporting

Industries

• A local context that encourages appropriate

forms of investment and

sustained upgrading

• Vigorous competition

among locally based rivals

• Sophisticated and demanding local customer(s)

• Customers’ needs that

anticipate those elsewhere

• Unusual local demand in

specialized segments that

can be served globally

• Factor (input) quantity and

cost

- natural resources

- human resources

- capital resources

- science and technological i nfrastructure

- information infrastructure

- physical infrastructure

- administrative infrastructure

• Factor quality

• Factor specialization

• Presence of capable,

locally based suppliers

• Presence of competitive related industries
18

Finland is a country of 5.2 million people situated between Sweden and Russia, with per capita GDP

of $23,780 (1999), or 69 percent of the U.S. per capita GDP in purchasing power parity terms.

Context for Firm Strategy and Rivalry34

Finland has had competition in telecommunications throughout the 20th century. The national Post

and Telecommunications never enjoyed a monopoly. After the U.K., Finland was the first country to deregulate in several areas related to telecommunications: the manufacture of end-user terminals, basic telecommunications services, and data services. Today there are one hundred telecommunications operators

in Finland, or two operators per 100,000 residents.

Two mobile operators, Sonera and Radiolinja, have actively developed and launched new mobile

services and applications. This has created a favorable environment for small companies in related areas.

 Currently the Finnish telecommunications and IT sector is populated by approximately 3,000 firms. A

consortium of more than 30 smaller operators has recently been granted a license to build a competing

mobile network.

Besides domestic competition from Finnish carriers and equipment companies, Finnish firms face

staunch competition from neighboring Sweden.

Factor (Input) Conditions

Finland was the first country to allocate licenses for third-generation wireless networks. These licenses were granted free of charge to Sonera, Radiolinja, 3G (a consortium of local phone companies and

Swedish Netcom), and Telia (Sweden). 35 Some of the firms awarded 3G licenses plan to provide mainly

network operations, leasing their assets to other firms that will provide consumer marketing and service.

The public sector in Finland has been supportive of R&D in telecommunications. Tekes, Finland’s

National Technology agency, has jointly sponsored a program, “TLX: Creating a Global Village,” with

the private sector and Finnish research institutes. This program has provided FIM 710 million ($120 million) over three years to fund technology development, including 3rd and 4th generation wireless systems

and wireless value-added services. Tekes has also funded the “Electronics for the Information Society

Programme,” and the Academy of Finland has sponsored a research program in “Teletronics.”36 Tekes

also funds R&D programs conducted in small and medium sized enterprises.37

A recent Financial Times Survey of Finland indicates that private sector funding—outside of the

major equipment providers and carriers—for mobile applications has become widely available as well. In

this survey, a partner at venture capital firm Eqvitec claims that $2 billion in venture capital funding has

been made available in the last year and a half. 38

 

34 The major source for the following section is Finland Ministry of Transport and Communication, “Telecommunications Statistics 2000.”

35 “Finland opposes auctioning, because it considers this a form of indirect taxation, slowing down the spread of new

technologies.” Ibid.

36 Tekes Web site (www.tekes.fi).

37 Vijay Maheshwari, “Survey—Finland 2000: All Wired Up and Going Many Places,” Financial Times, July 10,

2000.

38 Ibid.
19

Demand Conditions

Finnish consumers may be the world’s most sophisticated consumers of mobile technology. At the

end of 1999, mobile phone penetration in Finland reached 65 percent, and by August 2000 penetration

reached 70 percent.39 The average household has 1.35 mobile telephone connections (subscriptions). In

early 2000, 20 percent of all Finnish households abandoned their wired telephones altogether and opted

only for mobile phones. Wireless revenue exceeded wireline revenue for the first time in 1997. 

In 1999, more than 650 million short message services (SMSs) were sent in Finland. SMSs are value

added mobile services that use the narrow-band data transmission capability of GSM. Examples of SMSs

include instant news, financial information, or sports reports, and online chat. 

Because of its high mobile penetration rate, Finland has become a test-market for WAP (Wireless

Application Protocol) applications. Applications developed in Finland include using phones to make

vending machine purchases and to purchase time at parking lots, sending and receiving e-mail, and reading public transportation timetables. As a result, major international corporations and venture capitalists

have identified Finland as the development site for mobile phone applications. Hewlett-Packard has

headquartered its WAP development unit in Helsinki. 40 Germany’s largest technology company,

Siemens, has announced that it will locate a new mobile data unit in Finland. Extensive venture capital

money has been distributed in Finland to create mobile Internet products.41

Related and Supporting Industries 

Nokia, the world’s largest producer of mobile handsets, is headquartered in Finland. Formerly a

widely diversified company, Nokia has focused exclusively on mobile technology since 1992, and has

shed its non-mobile businesses. Nokia has become one of the world’s most competitive telecommunic ations equipment suppliers. Its market capitalization of nearly $160 billion is second largest among telecom equipment producers and exceeds that of Lucent, Ericsson, Siemens, Alcatel, and Motorola, and represents about 65 percent of the Helsinki stock market’s capitalization. 42

 

39 Ministry of Transport and Communications Press Release, August 17, 2000 (www.mintc.fi). 

40 Tero Kuittinen, “Finland: WAP Pioneer,” October 6, 2000 (www.wapland.com).

41 Maheshwari, “All Wired Up and Going Many Places.”

42 Source: www.hex.fi/eng, as of October 6, 2000. Nokia shares also trade on the New York Stock exchange.