• by Diane Mermigas , February 24, 2012

Congress’ rare bipartisan move to auction broadcast spectrum to create more wireless Internet systems, a $25 billion payroll tax cut extension and a national emergency communications network overlooks one important fact.

The reallocated spectrum most likely will be used by dominant mobile operators, connectivity kingpins like Apple and other winning influential bidders to make billions more off of consumers’ fixation with digital engagement, rather than open the floodgates to entrepreneurs and innovation.

There are no plans in place to ensure a fraction of the transferred spectrum goes to the young Turks on the sidelines who may have the next great idea (a la Facebook) instead of giving major players license to do more of the same.

The notion of transforming Redbox kiosks into coffee-vending machines to offset movie rental declines is an indication of the outside-the-box thinking that is possible, but not probable, at mainstream companies all too comfortable with their MO.

It’s evident in the broadcast and cable companies willingness to forfeit their excess spectrum for a price rather than innovate outside their comfort zone to generate new revenues. These traditional media sectors have barely tipped their toes into the waters of connectivity and consumer engagement that will unleash a major economic revolution hinged on social mobile communication, creativity and commerce.

But investors see it coming.

Each hour of consumer engagement has the potential to generate $266 in revenue over the next five years driven by social, mobile, personalization and content, according to Needham analyst Laura Martin. Put another way, every 10 million people who visit a site and stay for 60 minutes should represent $2.6 billion over time. By 2015, social media revenues will top $40 million, mobile advertising revenues will reach $20 billion and mobile commerce revenues could reach $35 billion, according to Gartner.

With Internet users representing 70% of the total population in the U.S., Japan and much of Europe, none of this new engagement value can be created without reallocation of finite spectrum to support real-time dialogue, viral marketing, sharing and commerce. But how much of this new value creation will come from mainstream players versus more nimble upstarts?  

We’re already getting a preview of how the availability of more spectrum will foster both greed (mobile operators such as AT&T and Verizon will charge more for more services) and rampant infighting among rivals (such as Sprint or Dish) to expand their service offerings. T-Mobile has wasted no time pleading with the federal government to avoid “excessive concentration” of bandwidth power by blocking Verizon’s planned purchase of additional unused spectrum from cable companies including Comcast, Time Warner and Cox.

The Federal Communications Commission has rejected the notion that flooding the market with spectrum will result in lower consumer service pricing by the major players seeking to snatch up the excess, and has the ability to restrict AT&T and Verizon’s participation in future spectrum auctions. But the FCC is failing to enable new competitors. The recent LightSquared debacle is an example of just how difficult it is, even with the FCC’s so-called help, to enter the hotly competitive arena.

BTIG analyst Walter Piecyk contends “Dish Network, cable operators and DirecTV all stand to benefit under the current administration, particularly if the legislature does not limit the FCC’s power if and when it authorizes incentive spectrum auctions as part of the payroll tax plan.”

Apple and Google aren’t much better in leveraging their spectrum-gobbling branded operating system devices to just produce essentially the same profitable products and services. Tablets like Apple’s iPad use 122-times more data than a smart phone, which uses 24-times more data than conventional feature phones.

Bernstein analyst Carlos Kirjner insists that intensified competition among mobile carriers, device manufacturers (such as Apple and Samsung), and service provider, including Apple, Google and Microsoft, will serve consumer interests with new products and services in an exploding connectivity market.

So far, advancing the National Broadband Plan with the creation of a long overdue national public safety band is the only certain and necessary innovation. But, it is predicated on enough broadcasters in enough of the right places contributing to a continuous national block of spectrum.

Quantum improvements in technology or significant changes in important business practices will often lead to massive, abrupt value transfer,” such as the explosive growth of the mobile Internet ignited by Apple’s iPhone, Kirjner says. We still see the reverberation of that changed dynamics across all mobile Internet categories, from carriers and device makers to service providers and commerce players.

It will happen again with the transfer of spectrum from players that horde but don’t know how to creatively use it those who may horde but more ingeniously unleash new interactive applications and value.