This is part one of a week-long series on the cell phone capacity crunch.
NEW YORK (CNNMoney) — The U.S. mobile phone industry is running out of the airwaves necessary to provide voice, text and Internet services to its customers.
The problem, known as the “spectrum crunch,” threatens to increase the number of dropped calls, slow down data speeds andraise customers’ prices. It will also whittle down the nation’s number of wireless carriers and create a deeper financial divide between those companies that have capacity and those that don’t.
Wireless spectrum — the invisible infrastructure over which all wireless transmissions travel — is a finite resource. When, exactly, we’ll hit the wall is the subject of intense debate, but almost everyone in the industry agrees that a crunch is coming.
The U.S. still has a slight spectrum surplus. But at the current growth rate, the surplus turns into a deficit as early as next year, according to the Federal Communications Commission’s estimates.
“Network traffic is increasing,” says an official at the FCC’s wireless bureau. “[Carriers] can manage it for the next couple years, but demand is inevitably going to exceed the available spectrum.”
How did we get here?
The number-one biggest driver is consumers’ insatiable thirst for e-mail, apps and particularly video on their mobile devices — anywhere, anytime. Global mobile data traffic is just about doubling every year, and will continue to do so through at least 2016, according to Cisco’s (CSCO,Fortune 500) Mobile Visual Networking Index, the industry’s most comprehensive annual study.
The iPhone, for instance, uses 24 times as much spectrum as an old-fashioned cell phone, and the iPad uses 122 times as much, according to the Federal FCC. AT&T says wireless data traffic on its network has grown 20,000% since the iPhone debuted in 2007.
“We got into this principally because technology and demand exploded at a rate that nobody had anticipated,” says Rory Altman, director of technology consultancy Altman Vilandrie & Co.
Another catalyst is the way the U.S. government allocated spectrum. The bands that wireless companies hold were broken up into small chunks across various markets, which was helpful in increasing competition in the 1990s.
But the patchwork nature has proven problematic for new technologies likehigh-speed 4G broadband. Bigger swaths of uninterrupted spectrum provide the larger amounts of bandwidth needed for delivering faster speeds.
One more contributing factor is that TV broadcasters and government agencies like NASA and the Department of Defense hold some of the best spectrum — relatively low-frequency radio waves that can travel long distances and penetrate buildings.
There are also businesses such as Dish Network (DISH, Fortune 500) that have large spectrum allotments but aren’t currently using them. (Dish is exploring its options for either using or selling its spectrum. A group of cable companies with unused spectrum recently struck a $3.6 billion pact to sell their holdings to Verizon in a deal that’s facing heavy regulatory scrutiny.)
The spectrum crunch is not an inherently American problem, but its effects are magnified here, since the United States has an enormous population of connected users. This country serves more than twice as many customers per megahertz of spectrum as the next nearest spectrum-constrained nations, Japan and Mexico.
When spectrum runs short, service degrades sharply: calls get dropped and data speeds slow down.
That’s a nightmare scenario for the wireless carriers. To stave it off, they’re turning over rocks and searching the couch cushions for excess spectrum.
They have tried to limit customers’ data usage by putting caps in place,throttling speeds and raising prices. Carriers such as Verizon (VZ,Fortune 500), AT&T (T, Fortune 500), Sprint (S, Fortune 500), T-Mobile, MetroPCS (PCS) and Leap (LEAP) have been spending billions to make more efficient use of the spectrum they do hold and billions more to get their hands on new spectrum. And they have tried to merge with one another to consolidate resources.
The FCC has also been working to free up more spectrum for wireless operators. Congress reached a tentative deal last week, approving voluntary auctions that would let TV broadcasters’ spectrum licensesbe repurposed for wireless broadband use.
But freeing up more spectrum won’t be enough to solve the problem.
“There is no one solution that will address all the needs of the wireless industry,” says Dan Hays, a partner at PricewaterhouseCoopers who specializes in telecom issues.
The good news is that there are ways to buy time. Several innovative approaches are in the works, and there’s a decent amount of spectrum out there that could be turned over to the carriers’ possession.
The bad news is that none of the fixes are quick, and all are expensive. For the situation to improve, carriers — and, therefore, their customers — will have to pay more.
“For a while we won’t notice the quality of service changes, but over time as devices get better and use more data, we’ll start to take notice,” Altman says. “Consumers will notice it, and the burden will fall on the carriers to fix it.”
Coming Wednesday: Why the capacity crunch means there will soon be fewer wireless players.
First Published: February 21, 2012: 5:16 AM ET