TechKnowledge No. 107

The 700 MHz Spectrum: How About an ‘Open’ Auction?

The Federal Communications Commission will soon vote on rules for a long overdue auction of licenses to use spectrum from 747 to 792 Megahertz. These frequencies, ideal for broadband wireless services, are currently used by UHF broadcast television stations, which must return the spectrum as they change their signals over from analog to digital.

Things are getting interesting as likely auction participants jockey for advantage, lobbying the FCC for their preferred auction rules. If the FCC grants special favors, the perverse result could be yet more lag in the development of competition in the market for broadband Internet access.

Some months ago, the FCC painted some broad outlines of how the oft-delayed auction would proceed. The spectrum is to be used for “commercial use including fixed, mobile, and broadcasting services.” The middle of the spectrum, from 764 to 776 MHz, will be for public safety uses. The rest, aside from guard bands to prevent interference, will be sold as 12 separate licenses, two for each of six geographical regions.

By statute, the FCC is supposed to design the auction to maximize competition, serve the public interest, and ensure the “efficient and intensive use of the electromagnetic spectrum.” As we see so often, though, some firms have been pressing the commissioners to load up the final rules with restrictions most geared to their own comparative advantages and business models. They hope to drive down demand from other firms and secure “beachfront” frequency at a bargain price.

Internet search juggernaut Google is pressing for such conditions, joining with other firms in the “Coalition for 4G in America” to shape the auction. An “open applications” rule would require the spectrum licensee to allow consumers to “download and utilize any software applications, content, or services they desire.” An “open devices” rule would mandate that all kinds of different consumer hardware (such as an iPhone) be able to connect to the wireless network. (The iPhone is currently available only on the AT&T network because of an exclusivity deal between Apple and AT&T that these regulations would not change.) The Google-led consortium also wants third parties such as Internet service providers and resellers to be able to connect to and lease space from the auction winner’s wireless network. Google has committed to bid the reserve price of $4.6 billion if the FCC grants all of its wishes.

Another firm pressing the FCC is Frontline Wireless, a nascent telecommunications group whose very existence seems to be predicated on winning the auction. To that end, the firm has pulled together an impressive team, including two former FCC chairmen and even a former FBI director.

Frontline sees Google’s prescriptions as a mere starting point. Frontline would have the FCC drop many of the regional licenses in favor of national licenses, reconfiguring the guidelines laid out by the FCC months ago. That reconfiguration would also require the winner to build hardened network hardware for the public-safety spectrum. Much of it would be so integrated with the public-safety network as to “permit emergency preemption by public safety users on the commercial spectrum” - a federal takeover of the nation’s telecommunications when officials declare the need.

Many consumer- and “public-interest”-oriented groups have joined the crusade for open-access rules in the 700 MHz auction. The Public Interest Spectrum Coalition is eager to see the emergence of another competitor to the incumbent telecommunications firms. They are not wrong to want better. An “open” network would support connections to an array of new devices that might develop. It might support all kinds of software and services. If new modes of communication blossomed, that would be a welcome change from the good-but-not-great status quo. But, for all their genuine enthusiasm about the “open” business model, it’s unseemly that these consumer groups are backing a group of corporations seeking government favors.

With so much corporate profit available to the builder of an open network, one wonders why this great leap forward must be modeled by FCC auction rules. Google, in particular, would not only profit from running the network, but also from the expansion of Internet access which would bring more use to its field-leading search products. Why doesn’t an entrepreneurial firm just buy the spectrum in a less-regulated - we could call it “open” - auction?

The answer seems to be rent-seeking. Newer, leaner companies like Google and Frontline are probably better-positioned than the incumbent telecom firms to build and operate an open network. But if the price of the spectrum is bid up by incumbent telecommunications firms, the profit to Google or Frontline from building this ground-breaking network shrinks. Government-mandated openness would deter other auction bidders by eliminating the uses they might make of the spectrum. Frontline and Google are trying to use federal regulatory lobbying to buy a new business model from the government. A few million dollars of lobbying and PR may make the open network idea billions of dollars less risky.

As exciting and full of potential as the open business model is, federal regulators should not protect these industry titans from the risk that building it entails. Doing so could lock in “open” even if that business model doesn’t pan out - it’s possible that other innovations in network design could prove better for consumers. And there’s no reason why regulatory protection should further enrich some of the very richest Americans if the “open” business model works.

In a prior life, I lobbied briefly for a company called ICO/Teledesic, which had a plan for high-speed Internet access via satellite. They needed permission from the FCC to add ground-based repeaters that would augment their satellite signals, which were subject to reflection and refraction by the expanses of concrete and steel in cities. No such problems existed in the countryside, and building the system for the whole nation would have been a dramatic advance for Internet access in rural areas.

While I doggedly sought support for the ICO/Teledesic repeaters, I considered how universal service subsidies for rural telecommunications directly undermined the business opportunity ICO/Teledesic was pursuing. With federal subsidies softening their communications pain, rural people undoubtedly found satellite-based Internet access marginally less attractive. Investors knew it, and they were willing to risk less money on serving this thinner customer base. Sure enough, the money gave out before ICO/Teledesic could get through all the hurdles of bringing their product to market. Rural telecommunications are still subsidized and second-rate.

If the FCC shapes the 700 MHz auction in favor of particular bidders like Google or Frontline, this will send a similar signal to investors in Clearwire, the Intel- and Sprint-backed project to spread high-speed Internet access across the country using promising WiMax technology. Would-be investors in that effort, seeing an FCC-backed effort to build a new style of network, may just back away from the entire, newly muddied field. There will be less certainty of either approach developing into real competition for the incumbent ISPs.

Regulatory uncertainty and delay function as entry barriers, limiting investment and impeding deployment of new services. If the FCC injects uncertainty into the wireless broadband area by backing one business model over another in the 700 MHz auction, the result could be a loss for everyone as broadband competition fails to strengthen.

Jim Harper is director of information policy studies at the Cato Institute. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.