Wu on Wireless: A Simple Solution?

When the digital television transition wraps up in February 2009, television stations will be required to give back the spectrum that is currently being used for analog television broadcasts. That spectrum will be awarded to the winners of an auction to be held next year. In a Forbes article published last month, Wu proposed that the FCC impose a “simple requirement” on the auction winners: “give consumers the right to attach any safe device (meaning it does no harm) to the wireless network that uses that spectrum.”

Without that rule, Wu argues, wireless network carriers will use their control over the platform to stifle competition and innovation in both the handset market and the market for wireless applications. Wu notes that some wireless carriers have crippled the phones they sell to prevent cannibalization of the carriers’ existing products and that the process for getting carriers’ approval for a new wireless application is too expensive and cumbersome for the small start‐​ups that often produce the most innovative products.

Wu’s solution might sound simple, but as with any regulatory proposal, the devil is in the details. From Wu’s brief article, it’s not clear exactly what shape his proposed rules would take, but some hints can be found in a paper he published in February with the New America Foundation.

In that paper, Wu concedes that two of the current incumbent wireless carriers-AT&T and T‑Mobile‐​already allow customers to attach any phone to their network that complies with the GSM standard. Those carriers do not provide subsidies or tech support for unapproved devices, but they don’t ban them from their networks either. If it’s already being done, there isn’t much sense in requiring it. Wu’s proposal must be more than a simple requirement that networks not actively block unapproved phones. What he appears to be proposing is more ambitious. In his paper, he describes it as a “cellular Carterfone” rule, after a famous 1968 FCC decision that opened up the monopoly AT&T telephone network to devices provided by third parties. His rule would “define a basic interface to which any equipment manufacturer could build a mobile device and sell to consumers.”

Getting federal regulators to settle on the design of an interface for wireless devices would be quite a complex challenge, of course, carrying with it no guarantee of success. In Wu’s 40‐​page February paper, he conceded, “This report, obviously, cannot address the full set of technical issues involved,” continuing:

True, a government‐​designed standard is not impossible, but “not impossible” is a long way from a good idea. Indeed, Wu seems to be implicitly conceding that it is far from the “simple requirement” he touts in his Forbes article. He seems to be proposing that the FCC dictate to wireless carriers what network services they must offer, who may access them, on what terms, and at what price.

History suggests that such efforts often end badly. Even when a government‐​created monopoly situation makes public utility regulation unavoidable, as in the Carterfone case, it can take a decade or longer for the dust to settle. The Clinton‐​era FCC attempted to create competition in the telephone and DSL markets by requiring Baby Bells to “unbundled” their local phone lines and lease them at FCC‐​determined prices to competitors. The Bells ultimately killed the plan using a combination of lobbying, litigation, and foot‐​dragging. But for the nine years between the passage of the Telecom Act in 1996 and the Supreme Court’s Brand X decision in 2005, telecommunications firms spent tens of millions of dollars on lawyers and lobbyists to seek advantage in the regulatory arena.

An even better example is the seemingly interminable battle over the CableCARD, a credit‐​card‐​sized device that allows televisions to decode cable signals without a set‐​top box. It, too, was prompted by the 1996 Telecom Act, which instructed the FCC to create regulations opening the market for cable set‐​top boxes. The CableCARD fight is closely analogous to Wu’s proposal because the FCC ordered the cable industry to develop a standard interface that could be used to build third‐​party set‐​top boxes. Like the Bells, the cable industry has done everything in its power to slow the progress of the CableCARD effort because it prefers to continue using proprietary set‐​top boxes. As a result, after more than a decade of bickering, the CableCARD continues to be a niche product.

Even the Carterfone decision itself shows that forcing owners to open their networks is not a simple process. Wu is right that Carterfone was a landmark decision exposing a government‐​backed monopolist to much‐​needed competition in the market for telephone equipment. But it took a long time to come about, much less have an impact. Thomas Carter began selling the Carterfone in 1959. Soon after, he sued AT&T on antitrust grounds. He got a favorable court ruling in 1966, and the FCC released the Carterfone decision in 1968. But the FCC didn’t formally codify the principles behind that decision until 1975.

To sum up, the battle over telephone “unbundling” took a total of nine years and ended in failure. The regulatory battle over the CableCARD standard has already taken 11 years, and it’s still not clear if it will be successful. And it took 16 years from the release of the first Carterfone for the FCC to formally enshrine an attachment right in its rules. These examples suggest that if the FCC were to begin working on cellular Carterfone regulations today, we might not see the legal issues resolved until well into the 2020s.

In contrast, the current generation of “3G” cellular technologies has been on the market for barely three years, and the market continues to evolve rapidly. Some of the problems Wu identifies in his paper may be mere growing pains. Until recently, the carriers’ attention has been focused on just getting the 3G networks up and running. If Wu is right that an open wireless network would be more congenial to innovation‐​and he most likely is‐​then it is in the self‐​interest of each carrier to open its data network. A bit of consumer pressure might be all it takes to persuade one or more carriers to change their ways.

Given how slowly the regulatory process moves‐​and the goal of unregulated, unsubsidized competition‐​it would be premature and counterproductive for the FCC to step in now. Any rules the FCC promulgates are likely to be rendered irrelevant by relentless technological progress. And there’s a real danger that the wireless industry will be slowed down, forced to wait for the FCC to complete its glacial decisionmaking process before rolling out new products and services and deciding whether to invest in further improvements to its networks.