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

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The Federal Communications Commission will soon vote on rulesfor a long overdue auction of licenses to usespectrum from 747 to 792 Megahertz. These frequencies, ideal forbroadband wireless services, are currently used by UHF broadcasttelevision stations, which must return the spectrum as they changetheir signals over from analog to digital.

Things are getting interesting as likely auction participantsjockey for advantage, lobbying the FCC for their preferred auctionrules. If the FCC grants special favors, the perverse result couldbe yet more lag in the development of competition in the market forbroadband Internet access.

Some months ago, the FCC painted some broad outlines of how theoft-delayed auction would proceed. The spectrum is to be used for"commercial use including fixed, mobile, and broadcastingservices." The middle of the spectrum, from 764 to 776 MHz, will befor public safety uses. The rest, aside from guard bands to preventinterference, will be sold as 12 separate licenses, two for each ofsix geographical regions.

By statute, the FCC is supposed to design the auction tomaximize competition, serve the public interest, and ensure the"efficient and intensive use of the electromagnetic spectrum." Aswe see so often, though, some firms have been pressing thecommissioners to load up the final rules with restrictions mostgeared 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 withother firms in the "Coalition for 4G in America" to shape theauction. An "open applications" rule would require the spectrumlicensee to allow consumers to "download and utilize any softwareapplications, 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 networkbecause of an exclusivity deal between Apple and AT&T thatthese regulations would not change.) The Google-led consortium alsowants third parties such as Internet service providers andresellers to be able to connect to and lease space from the auctionwinner's wireless network. Google has committed to bid the reserve price of $4.6billion if the FCC grants all of its wishes.

Another firm pressing the FCC is FrontlineWireless, a nascent telecommunications group whose veryexistence seems to be predicated on winning the auction. To thatend, the firm has pulled together an impressive team, including twoformer 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 infavor of national licenses, reconfiguring the guidelines laid outby the FCC months ago. That reconfiguration would also require thewinner to build hardened network hardware for the public-safetyspectrum. Much of it would be so integrated with the public-safetynetwork as to "permit emergency preemption by public safety userson the commercial spectrum" - a federal takeover of the nation'stelecommunications when officials declare the need.

Many consumer- and "public-interest"-oriented groups have joinedthe crusade for open-access rules in the 700 MHz auction. ThePublic Interest Spectrum Coalition is eager tosee the emergence of another competitor to the incumbenttelecommunications firms. They are not wrong to want better. An"open" network would support connections to an array of new devicesthat might develop. It might support all kinds of software andservices. If new modes of communication blossomed, that would be awelcome change from the good-but-not-great status quo. But, for alltheir genuine enthusiasm about the "open" business model, it'sunseemly that these consumer groups are backing a group ofcorporations seeking government favors.

With so much corporate profit available to the builder of anopen network, one wonders why this great leap forward must be modeled by FCC auctionrules. Google, in particular, would not only profit from runningthe network, but also from the expansion of Internet access whichwould bring more use to its field-leading search products. Whydoesn't an entrepreneurial firm just buy the spectrum in aless-regulated - we could call it "open" - auction?

The answer seems to be rent-seeking. Newer, leaner companieslike Google and Frontline are probably better-positioned than theincumbent telecom firms to build and operate an open network. Butif the price of the spectrum is bid up by incumbenttelecommunications firms, the profit to Google or Frontline frombuilding this ground-breaking network shrinks. Government-mandatedopenness would deter other auction bidders by eliminating the usesthey might make of the spectrum. Frontline and Google are trying touse federal regulatory lobbying to buy a new business model fromthe government. A few million dollars of lobbying and PR may makethe 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 fromthe risk that building it entails. Doing so could lock in "open"even if that business model doesn't pan out - it's possible thatother innovations in network design could prove better forconsumers. And there's no reason why regulatory protection shouldfurther enrich some of the very richest Americans if the "open"business model works.

In a prior life, I lobbied briefly for a company calledICO/Teledesic, which had a plan for high-speed Internet access viasatellite. They needed permission from the FCC to add ground-basedrepeaters that would augment their satellite signals, which weresubject to reflection and refraction by the expanses of concreteand steel in cities. No such problems existed in the countryside,and building the system for the whole nation would have been adramatic advance for Internet access in rural areas.

While I doggedly sought support for the ICO/Teledesic repeaters,I considered how universal service subsidies for ruraltelecommunications directly undermined the business opportunityICO/Teledesic was pursuing. With federal subsidies softening theircommunications pain, rural people undoubtedly found satellite-basedInternet access marginally less attractive. Investors knew it, andthey were willing to risk less money on serving this thinnercustomer base. Sure enough, the money gave out before ICO/Teledesic could get throughall the hurdles of bringing their product to market. Ruraltelecommunications are still subsidized and second-rate.

If the FCC shapes the 700 MHz auction in favor of particularbidders like Google or Frontline, this will send a similar signalto investors in Clearwire, the Intel- and Sprint-backed project tospread high-speed Internet access across the country usingpromising WiMax technology. Would-be investors in that effort,seeing an FCC-backed effort to build a new style of network, mayjust back away from the entire, newly muddied field. There will beless certainty of either approach developing into real competitionfor the incumbent ISPs.

Regulatory uncertainty and delay function as entrybarriers, limiting investment and impeding deployment of newservices. If the FCC injects uncertainty into the wirelessbroadband area by backing one business model over another in the700 MHz auction, the result could be a loss for everyone asbroadband competition fails to strengthen.