Here’s what’s happened: The current generation of telecommunications is not only better in various ways than landlines, but considerably cheaper. So many countries in which landlines were beyond the means of the average worker have been blanketed with cell phones in the last decade, thereby leapfrogging the old technology.

Wait, it gets better. Cell phones are what is often called a “disruptive innovation“—one that has implications for productivity that go far beyond the immediate benefits of cheap, reliable communication. Indeed, a new World Bank study of cell phone use in Kenya suggests that the new technology is democratizing financial markets, opening the door to faster, more equitable economic growth.

In 1999, just 3 percent of Kenyans owned a phone of any sort; today, the figure is 93 percent (not a misprint). Phone use is thus ubiquitous in urban areas and commonplace even in remote parts of the country, generating all the obvious benefits. But the study’s authors, researchers at the World Bank’s Kenya office, focus on a benefit that is far from obvious: Just as cell phone technology bypassed landlines, electronic banking facilitated by cell phone technology is bypassing banking that depends on bricks and mortar.

With the help of Britain’s Department for International Development (and tolerance of Kenya’s central bank), Safaricom, Kenya’s biggest mobile telecom company, introduced a form of E-banking in 2007 that allows phone subscribers to send money by instant message. No bank account is required. Users buy E-cash which is stored on their SIM cards from the same variety of small local shops that sell minutes. The folks at the other end of the text message can then redeem the transfer in the form of paper money from their own local Safaricom agents—or transfer it electronically to somebody else.

E-banking took off at light speed: Three out of four Kenyan adults are now registered to transfer money electronically, and one in four says he makes at least one transaction a day by phone. One reason is that Safaricom’s system (called M-PESA) has three competitors, all of whom have had the good sense to allow cheap transfers across systems. Probably the more important explanation—apart from convenience and cost—the World Bank researchers say, is fear of theft of paper money in a country in which traditional bank accounts, credit cards, and paper checking are out of reach for the great majority.

Mobile money does all the good things for productivity you might expect—among them, reducing the amount of working capital that businesses must maintain and providing financial security for households by allowing instant transfers to family members and friends. But the researchers note one major unexpected benefit, too: encouragement of savings. SIM cards can securely store up to 100,000 Kenyan Shillings—roughly $1,200. System users can also link their E-accounts to bank accounts, which offer the potential for earning interest on savings.

The study found that, other things equal, M-PESA account holders saved 12 percent more than Kenyans without accounts. That’s, of course, exceptionally important for the households involved. But it also has macroeconomic implications, increasing the potential for economic growth without reliance on foreign capital.

What works in Kenya ought to work in other developing countries. And apparently, we’ll soon find out. Vodafone, which developed M-PESA, has introduced it in Tanzania, South Africa, and Afghanistan. In Afghanistan, incidentally, it was initially used to pay policemen. One consequence: The government “discovered” that 10 percent of the people on the payroll didn’t exist.

Economists generally assume that the sources of economic growth in developing countries are very different than those in rich countries. In the former, what really matters is the transfer of workers from unproductive to productive activities—typically from farming to manufacturing and services. In the latter, it’s technological change in which workers become more productive without moving or doing something qualitatively different. The dramatic rise of E-money in Kenya suggests that both sources of growth can drive growth in developing countries—good news, indeed.

(This post was also published in U.S. News & World Report.)

A rip-off, you say? A conspiracy to squeeze bigger bucks out of the nice folks who regularly watch Hulu and stream Pandora on their smartphones? The policy change may, indeed, cost a relatively small number of data guzzlers some inconvenience (when they are “throttled”) or some cash (if they step up to metered plans designed for heavy users).

But the change was inevitable: With demand for bandwidth growing at an astounding pace, the carriers simply don’t have enough capacity to satisfy everybody inclined to watch Modern Family or NFL highlights on their iPhones during their lunch breaks. Meanwhile, next-generation tablets like the brand new iPad 3 with 4G LTE are bound to make mobile video a reality for millions more. What’s more—and this is the part you’re not going to like—it’s a good thing. Pricing based on usage is vital, if mobile wireless is to deliver on its remarkable promise.

Not very long ago, wireless was mostly used for phone calls, text messaging, and an occasional peek at Yelp.com to find the closest pizza parlor. But wireless broadband opened the door to streaming video anywhere anytime, and everybody under age 35 seemed to get the message at the same time. The mobile carriers are now racing to keep up with demand for 4G service that can deliver gorgeous HD. And while they will likely get some help from Congress’s initiative to auction off a big swath of spectrum now controlled by over-the-air TV broadcasters, it’s going to cost a large fortune and take years to have an impact. Over the next few years, there’s just no way the carriers will stay ahead of demand without raising revenues and pricing by the byte-to-ration capacity.

Limits on download speeds for heavy users in the remaining unlimited data plans—the equivalent of those long lines for almost-free bread in the long-since-collapsed Soviet Union—will probably be gone in a few years because unlimited data plans will be gone. But as long as the government cooperates by selling spectrum to the highest bidders, the variety and quality of mobile wireless services will keep on expanding.

The impact on mobile wireless bills will depend on both demand and supply. On the demand side, mobile video will likely put significant upward pressure on prices. On the supply side, the FCC could alleviate supply constraints by getting spectrum out there more quickly and allowing secondary markets in spectrum to operate with a minimum of regulatory oversight.

Average mobile wireless bills may well go up, but only because the growth in use of ever-more indispensable mobile services will more than offset the decline in the price of a gigabyte. Would you really prefer to go back to the good old days, when the most valuable use of a cell phone was to tell your spouse you were stuck in traffic and would be late for dinner?

(This post was also published in U.S. News & World Report.)

We like it; actually we love it. But there are a few troubling aspects to this triumph of political log-rolling. Read on.

Almost everybody in Congress saw some virtue in extending both unemployment benefits and the payroll tax cut. The economics is a no-brainer: the fragile recovery will benefit from the ongoing stimulus, and almost all of the money will go to folks who really need it. But to vote for it, establishment Republicans—especially those in the House who must worry about Tea Party challengers—needed political cover.

Meanwhile, thanks to the exploding demand for bandwidth-hungry smartphones and tablets, the wireless carriers face serious shortages of spectrum to carry their signals. For years, they’ve been pressing Congress and the FCC to reallocate spectrum assigned to local TV stations that has been gathering dust ever since over-the-air TV went digital. But the stations and their allies on Capitol Hill have been resisting because they wanted something (hint: it’s color is green) in return for giving up turf they’ve controlled for more than half a century.

Miracle of miracles, the stars aligned. Congress agreed to force the sale of the spectrum, assigning $15 billion of future proceeds to partially offset the extra spending on unemployment benefits, and another $1.75 billion to TV stations as compensation for their loss of squatters’ rights. To cement the deal, another $7 billion will go to build a state-of-the-art public safety communications network that states and localities have been yearning for since 9/11.

Telecoms get the spectrum needed to deliver on their promises of whiz-bang wireless features. Police and firefighters get better emergency communications capacity. TV station owners get their ransom. Politicians get to hang tough on deficits without becoming vulnerable on the Grinch factor. And, of course, the unemployed get a leg up on their mortgage payments. As our Jewish grandmothers probably never said, “What’s not to like?”

The payments to the TV stations are a bit hard to swallow. But, considering how hard it is to make broadcasters do anything they don’t want to do, the country’s probably getting off easy.

And the availability of more spectrum for wireless is certain to heat up the simmering controversy over whether the industry leaders—Verizon and AT&T—should face restrictions on how much spectrum they can buy. FCC Chair Julius Genachowski would apparently like to handicap the progress of the most successful providers by limiting their access to spectrum sold in future auctions. Like many other economists, we think he’s probably wrong—that the benefits of open auctions in terms of assigning spectrum to its most valued uses likely outweigh the costs—but it would be useful to see more research on this issue.

No matter where you stand on this issue, though, it’s important to keep your eyes on the prize(s). Repurposing spectrum from obsolete uses is enormously important if we are to maintain the rapid pace of innovation in wireless telecom. And, hey, it’s nice—better than nice—to boost responders’ communications capacities and to feed the unemployed as part of the bargain.

(This post was also published in U.S. News & World Report.)

But the fact that we astonish ourselves everyday with the latest jaw-dropper in wireless telecommunication doesn’t mean it will always be thus. Nobody has a crystal ball when it comes to predicting how wireless media will be used down the road.

But we do know that legislators and regulators in Washington will have a big impact on the pace and direction of wireless innovation through their management of electromagnetic spectrum—what was called the “airwaves” long before Apple or Google or Verizon were on the scene.

Spectrum is scarce—that is, the amount of information that can be pushed through those metaphoric airwaves is limited by economics and the state of technology. So most economists support auctioning spectrum to the highest bidder in order to make sure it ends up in the hands of those who value it most. Indeed, many have favored it ever since Nobel laureate economist Ronald Coase came up with the idea a half-century ago.

But the market for wireless networks, while competitive, has two clear industry leaders—Verizon and AT&T. And some telecom analysts argue that consumers would be better off if the auctions were set up to favor smaller companies, perhaps keeping the two industry leaders out of the game entirely.

We think the potential costs of such discrimination against the giants outweigh any plausible benefits. In fact, it’s hard to think of a market in which the old saw—don’t fix it if it ain’t broke—fits better. Usage on wireless networks has been exploding—including usage by low-income groups and minorities. At the same time, charges for both voice and data use have been falling even as reliability and geographic coverage have been improving.

The risk here is that freezing the industry leaders in place while giving competitors indirect subsidies (in the form of less-than-competitive prices for spectrum) would slow innovation. Indeed, both of the industry leaders are racing to acquire the spectrum to broaden access to “4G” service—the sort needed to watch video without hiccups and to seamlessly manage a host of other sophisticated smartphone and tablet functions.

But the Federal Communications Commission, which has the last word on most mobile regulation (unless Congress pulls rank), has other priorities. It is apparently inclined to throw sand in the gears of Verizon and AT&T in the name of increasing competition.

In response, the House Republicans have introduced a bill that would limit the FCC’s discretion on spectrum auctions, giving everybody equal opportunity to participate in any auction. That strikes us as a reasonable place to start, since it makes sense to place the burden of proof on those who think discrimination against large firms in spectrum auctions would do more good than harm. Moreover, the “proof” in question should be practical, not theoretical—actual experience in which discrimination in auctions of government resources has served the interests of consumers.

Spectrum allocation—like so many issues that falls under the rubric of economic regulation in Washington—is excruciatingly boring for almost everybody except the policy wonks who toil in the blogosphere and the lawyers/lobbyists/consultants who build country homes on the proceedings. But ignorance here is not bliss. We’ve all had a great ride on wireless technology over the past few decades. Some bad decisions now, though, could take much of the wind out of its sails.

(This post was first published on U.S. News & World Report.)

The AT&T deal drew the wrath of both the Justice Department and the FCC, which ultimately proved fatal. Does a similar fate await Verizon?

Ah, you say – there’s no real comparison. Unlike the proposed AT&T/T-Mobile merger, Verizon’s acquisition doesn’t involve the acquisition of millions of subscribers from a competitor, increasing market concentration in the wireless market.

But the deals do have one big thing in common: In both, the primary objective was to cope with the looming scarcity of spectrum. For without more bandwidth, neither carrier will be able to deliver on the promise of whiz-bang wireless broadband services such as high definition movies anytime, anywhere.

To be sure, the problem here is not precisely a shortage of spectrum per se, but a shortage created by the wasteful allocation of spectrum today. If Washington were so inclined, it could free up a ton of spectrum for more valuable uses. That includes spectrum now warehoused by government for low-value tasks and spectrum assigned to commercial interests – notably local TV stations – that no longer make much use of it. The process would be pretty simple: auction the spectrum to the highest bidders (perhaps with a share of the proceeds going to legacy holders), and then allow it to be traded like any other valued resource.

This is an old, but important, idea, one first suggested by Nobel economics laureate Ronald Coase back in 1959. And it’s one that has taken on greater urgency in recent years, both because the technology of spectrum-hungry broadband mobile has arrived in the form of tablets and smartphones, and because Washington desperately needs revenue. (We’re talking tens of billions here.) But the politics of spectrum allocation remain gridlocked, as competing interests push and shove for advantage.

So AT&T and Verizon, the number one and two players in the American wireless market, resorted to end-runs around the problem – that is, to buying spectrum from other carriers or merging to make more efficient use of the partners’ combined holdings. If the AT&T/T-Mobile combination had survived the legal gauntlet, it could have become the largest U.S. wireless provider, with as much as one-third of the market. But the emphasis here is on the word “theory.” The merger might or might not have reversed T-Mobile’s sinking fortunes – which is why its parent company, Deutsche Telekom, has signaled its intent to leave the U.S. market, with or without a merger deal.

The upshot is that it’s far from self-evident that AT&T would have remained first in subscribers for long in a post-merger market. Verizon’s rollout of 4G, the holy grail of mobile excellence, is expected to cover more than 200 million Americans by the end of this year — compared with roughly 70 million for AT&T. Moreover, the proposed Verizon deal includes cross-marketing with the cable companies’ retail stores, yet another advantage in this most visible of consumer markets.

But the merger succumbed to implacable opposition from the trustbusters at Justice and the micromanagers at the FCC. Both agencies argued that the merger would give AT&T more latitude to raise prices. And neither apparently put much weight on AT&T’s need for additional spectrum if it is to offer viable competition for Verizon in a 4G world.

If this were 1951 instead of 2011, a time when self-satisfied American mega-companies like GM set the pace for global industrial innovation, we’d have more sympathy for the government’s tilt against market concentration. But as the Verizon gambit makes clear, this is anything but a static contest. AT&T and Verizon are living in uncertain times in which they must run to stay in place. That doesn’t mean the risk of monopoly power is as dead as the Oldsmobile. But it does mean that discretion in managing markets really has become the better part of valor.

As we see it, Washing has three options. The first is to drastically limit what firms like Verizon and AT&T can do to improve their service offerings, with obvious short-term consequences in terms of slowing the roll out of 4G. The second is to break through interest-group gridlock and leaven competition in the wireless market with a lot more spectrum – the best option, surely, but probably a political non-starter at the moment. The third option, and the probably the best under the circs, is to look favorably upon telecom deals that promise more efficient use of currently available spectrum on the premise that the vitality of innovation means more to consumers than the potential downside of greater market concentration.

Does that mean giving free passes to the telecom giants? Hardly. But it would mean a change in priorities at Justice and the FCC in which the agencies used their legal leverage to minimize concentration in regional wireless market without undermining the potential for more efficient use of spectrum.

Heard about Viber yet? It’s an app for the iPhone and for Android smartphones, the neatest means yet for making virtually free phone calls and sending free text messages to anyone, anywhere, anytime. Oh, and did we mention that the voice quality is typically superior to that of the mobile phone networks? The only catch is that both parties need to install the software.

Well, not quite the only catch. If Viber and similar mobile phone applications from Skype and others are widely adopted – and we can’t imagine why they wouldn’t be – their use will significantly erode the revenues of the wireless telecom networks. This would bring into sharp focus an issue that neither the telecoms nor their regulators are eager to confront: Should the carriers be allowed to decide which applications can be used on their systems, and on what terms?

Viber is not a technological breakthrough. Dozens of companies offer ways to take advantage of the somewhat arbitrary distinction between voice and data communications built into the wireless carriers’ price plans. But Viber is the slickest, most seamless way to date to use so-called voice over Internet protocol technology on popular smartphones.

So what’s the problem here? Thanks to pricing structures going back to a time when the only wireless application that really mattered was voice communications, the voice “tail” still wags the data “dog.” Voice and text messaging use a small and rapidly diminishing share of wireless bandwidth, but generate much of the wireless telecoms’ revenues.

That is likely to force wireless telecoms to change the way they price services. They could switch to plans in which smartphone users were simply charged for their use of the networks, however they chose to use them. Indeed, since voice and text use so little network capacity compared to, say, video streaming, one could imagine plans that threw in unlimited voice minutes as a “free” bonus. Alternatively, they could maintain the voice-data distinction, charging fees for access to Viber-like voice applications – or simply bar access to services that competed directly with their own.

Now, from an economist’s perspective, there’s nothing wrong with charging according to use – especially since the FCC has muscled the big wireless carriers to provide advance notification when customers’ usage exceeds their plan limits. The second approach, controlling access to applications, is more problematic.

We all think it’s OK for a movie theatre to bar patrons from bringing their own popcorn. Isn’t that the same as a wireless carrier barring use of a competing service on its network?

Maybe. In a competitive market, wireless customers who don’t like the restrictions imposed by one telecom are able to shop for another more to their tastes. (Right now, for example, T-Mobile and a number of regional carriers are trawling for business by offering flat-fee unlimited data plans.) If there isn’t much competition, though, it’s the job of the antitrust agencies and the FCC to prevent the carriers from protecting their own services at the expense of competitors by assuring that Viber and its ilk can be used on the networks on reasonable terms.

We think the wireless carriers deserve the benefit of the doubt (at least in markets with several carriers), because there is evidence of robust competition specifically aimed at enticing the tens of millions of Americans who still use plain-vanilla cellphones to step up to broadband Internet access.

But everybody needs to remember there’s no free lunch here – that, one way or another, the telecoms need to cover the costs of subsidizing smartphones and expanding their wireless networks to meet the exploding demand for bandwidth. And that’s probably going to mean bigger bills (along with bigger benefits) for customers who dive into the astonishing world of high speed wireless.

(This post was also published on Forbes.com.)

The Department of Justice has come out with guns blazing in an effort to stop the $39 billion AT&T/T-Mobile USA merger. But is it really in the interest of either the antitrust bureaucracy—or the consumers they are supposed to represent—to put the kibosh on this one?

There’s a legitimate dispute here. On one side are folks (like us) who believe that the merger’s likely benefits—faster introduction of new technology to meet the exploding demand for mobile broadband—far exceed the risks associated with greater market concentration. On the other side are those who believe that moving from four big national carriers to three would mean the end of serious price competition in the wireless industry.

Before engaging in a full-blown legal battle, we think it would serve the interests of the Justice Department to see if its concerns could be met without a trial. For one thing, there’s a real possibility that the trustbusters could lose —the judge in the case has shown in the past that she is no rubber stamp for the government. For another, a trial means that both company’s plans will be put on hold, a prospect that could prove costly to consumers, workers and the telecoms.

T-Mobile USA is running just to stay in place. It lost almost a half-million contract customers in the first quarter of 2011. And though it managed to replace most of them, the bulk of the newcomers were less lucrative subscribers recruited though resellers. Moreover, T-Mobile’s corporate parent, Deutsche Telekom, isn’t about to bankroll a rescue. The German communications giant has made it plain that it won’t invest more to sustain its American presence. Indeed, by the time a trial is over, a much-weakened T-Mobile may simply be unviable as a standalone entity.

Does AT&T have anything to give to satisfy the government? AT&T’s CEO Randall Stephenson is on record that the company is prepared to divest some assets, reducing its share of the business in some markets. That ought to open the door for a deal. The top 25 local wireless markets, served by all the major carriers along with smaller wireless companies eager to buy market share with low prices, are already so competitive that the merger would have little material effect. But divestitures in smaller markets ought to go a long way toward assuaging genuine concerns about market concentration.

We think serious settlement discussions are the way to go. Duking it out in court could lead to a winner-take-all outcome in which the only certain loser is the public.

Clever, but a tad shaky. Google operates in a “two-sided” market in which both advertisers and users of Google services are needed to make money. Without eyeballs on Google pages, the space is worthless to advertisers. But without advertising, Google couldn’t afford to give away services ranging from Google search to gmail to Google Docs.  

Google, moreover, is in no position to take its rank-and-file users for granted. While the Don’t-Be-Evil company still garners the majority of Internet searches, Microsoft’s Bing (and its ally, Yahoo!) have picked up about 30 percent of all search traffic in the United States. And there’s no reason to believe Google’s dominance would survive a serious decline in consumer goodwill, since the quality of the Bing search engine is plenty good enough – and sometimes better — than Brand G.

So, while it’s true Apple’s special place in supercool-gadget-loving hearts gives it very good reasons not to alienate the public, Google’s behaviour is also constrained by the market. We’re not claiming that either company’s incentives to balance gross commerce against high minded principle are perfectly disciplined by Adam Smith’s invisible hand. But neither are the incentives of those who would regulate them. For now, anyway, we think it makes the most sense to insist that all Internet companies make their privacy policies very clear, and let consumers decide what they think of them.

The coming wireless revolution depends on a huge expansion of transmission capacity to support 4G wireless broadband service. And while technology and oodles of cash will make it possible to cram more data through the existing wireless telecom system, avoiding hopeless traffic jams will require access to a lot more of what used to be called the “airwaves.” That’s why we’re delighted that FCC Chairman Genachowski has called for repurposing a broad swath of prime, underutilized spectrum now controlled by local TV stations. The big question is whether the broadcasters have the will and political clout to stop him.

Until the rise of cable, phone-line and satellite TV transmission, terrestrial broadcasting using FCC-assigned spectrum frequencies was the only game in town. The FCC gave away local licenses to the “most qualified” applicants. And in the heyday of advertiser-supported broadcast television (before video games, the Internet and “narrowcast” cable channels were competing for eyeballs), stations with licenses for VHF channels in major markets traded for hundreds of millions of dollars more than their investments in broadcasting facilities.

By the 1990s, the explosive growth of digital cell phones was makinge spectrum far more valuable for mobile wireless, even as the gravy generated by broadcast TV was drying up. But thanks to a potent lobby (there’s a TV station or five in every Congressional district) and the promise of delivering “free” TV to everybody with a pair of rabbit ears, nobody seriously challenged the allocation of all that spectrum until the advent of over-the-air digital TV.

As part of the deal for switching to a spectrum-efficient digital system, the broadcasters gave up about one-quarter of their spectrum – what used to be UHF channels 52-69 – which was then auctioned to the wireless telecoms for close to $20 billion. But the broadcasters still control the rest, using it to deliver content to the 10 percent of households who don’t want (or can’t afford) TV delivered from satellites or through wires.

Now, all of this remaining spectrum could be sold to the highest bidders, which would almost certainly be wireless telecoms seeking to build capacious 4G networks. Washington, which needs every penny it can scrape up, would keep the tens of billions in revenue from the auctions. But the financial bonanza from repurposing the spectrum would be so large that one could, in theory, use a modest chunk of the auction proceeds to buy out the TV broadcasters licenses at a profit and endow everybody who was still watching on-air TV with a lifetime subscription to basic cable.

Chairman Genachowksi’s approach is less sweeping and more pragmatic. He would leave the broadcasters with enough spectrum to maintain over-the-air service, thereby finessing the populist argument that he was killing free TV. And to mollify the broadcasters (who, after all, appropriated the spectrum from the taxpayers, fair-and-square) he would share some of the proceeds of the auction with them. This is plainly a compromise, designed to build a winning political coalition. But it would also serve to mollify those who worry that challenging the de facto spectrum property rights of the broadcasters could make it more difficult to get private enterprise to invest everything from pollution emissions rights to private toll roads, where investors must have faith in the government’s long term commitment of resources.

The Genachowski solution sure beats the alternative of waiting until the political cost of denying 4G service to the multitudes is higher than the cost of standing up to the broadcasting lobby. But plenty of things could happen on the way to the forum. In particular, the broadcasters could play hard ball on the premise that they hold most of the political cards. The telecoms, which know a thing or two about getting their way in DC, and in some circumstances might be expected to offset the muscle of the broadcasters, don’t really have an interest in how the proceeds from the auctions are divided. All they care about is getting access to the spectrum – and sooner rather than later.

If and when a deal is reached, there’s going to be a lot of second-guessing about how much money is diverted from the Treasury to the broadcasters’ bank accounts. But it is important to remember that the prize here isn’t just the tens of billions that the spectrum would likely fetch at auction. It’s the value-added from 4G service that consumers and telecoms will share – a figure that could approach $1 trillion!

(A shorter version was first posted on Politico.com)

But telecom technology marches (sprints?) on, and with it the notion of what constitutes must-have service. Which is why the Federal Communications Commission is planning to steer some of the cash to high-speed Internet service. Here’s a more radical thought: Open the policy debate to the broader question of whether telecom subsidies are merited in the first place.

Our educated guess is that the benefits from USF outlays for plain old phone service are far less than the cost. Indeed, we expect that the case for subsidizing broadband is also weak, in part because over 90 percent of Americans already have access to broadband, and the number is growing rapidly without cash from a government slush fund.

OK, we didn’t just fall off the turnip truck. We understand that subsidies – especially subsidies funded from a tax that is collected in nickels and dimes – are hard to reverse. But if Congress can’t bear to let rural Americans pay the full cost of living in the country and won’t alleviate poverty directly, the least it could do is deliver the pork efficiently. That means targeting the subsidies more precisely and use competitive bidding to get the job done as cheaply as possible.