Monday, July 30, 2007

The 700 MHz spectrum auction: where things stand

The upcoming FCC 700 MHz spectrum auction certainly has spurred both lively debate and, at times, heated rhetoric. With the FCC set to vote tomorrow on the rules for the auction, I thought it would be useful to summarize briefly where things stand at this point.

FCC Chairman Kevin Martin has stated from the beginning that his number one priority is to make broadband available to all Americans through a “third pipe” to the home (in addition to telephone and cable company broadband service). In support of that viewpoint, the Chairman has taken a bold stand for consumer choice by proposing that licensees must allow the use of any device or application on a specified portion of the 700 MHz spectrum. This approach -- if crafted with appropriately effective and enforceable provisions -- would free consumers from burdensome and artificial constraints on what they can do with their phones and software. These license conditions for the first time will enable device and applications competition at the "edges" of the wireless network.

Unfortunately, these same conditions fall well short of Chairman Martin's own goal of fostering the creation of a third pipe competitor. As long as incumbents are motivated by a desire to protect their current business models, and can continue to use a “blocking premium” to thwart fair market rates, they have every incentive to outbid would-be rivals. Such an auction outcome will constitute business as usual -- with no new broadband options in sight for consumers.

Google has joined numerous public interest groups and other Web companies in seeking more fundamental “wholesale open access” conditions. We believe these additional conditions would ensure that, no matter who wins the auction, consumers, along with service providers of all shapes and sizes, will have a seat at the table. We even committed to invest at least $4.6 billion in such a scenario, despite the fact that we have not traditionally been a communications company. Some have criticized us for, in their view, rigging the auction to our own benefit. We think quite the reverse is true: only by imposing certain openness conditions will potential new market entrants have a fair shot at successfully bidding in the auction.

Openness, user choice, and innovation have been elements fundamental to the rise and success of the Internet. We believe those same elements are critical for even the possibility of new broadband competition in the wireless space. If the FCC ultimately decides not to adopt "wholesale open access" license conditions, we do not see how significant new competition can emerge from this auction.

The time for debate is drawing to a close. The five FCC commissioners are this moment contemplating the relative merits of the parties' arguments, and are set to make a final decision on Tuesday morning. The prospects for fostering robust competition in this slender but valuable slice of spectrum hangs in the balance.


Tom Coseven said...

Richard, the big question on everyone's mind right now is how does Google's recent announcement of walled garden applications for Sprint WiMax fit with your support for open access and net neutrality in general? On first blush it looks like Google is advocating open networks for everyone but Google.

Myrddin Emrys said...

I was not aware that the Sprint deal was a walled garden... from what I read, it was more a set of defaults that the customer could change.

Similar to Firefox defaulting to Google as its search engine, but you can adjust it. The defining factor of a walled garden is that you cannot change the provided applications.

Daniel said...

This latest post still does not address the basic flaws in the Google argument:

(1) the "blocking premium" analysis is only valid when there is a single incumbent or when the incumbents are colluding (as assumed by the Covington & Burling article cited for support in the last Google post), which if agreed-upon is already illegal and even when merely parallel can be thwarted with secret and simultaneous bidding (all that is required to undermine the entire analysis of the CAP article cited for support in Google's last post), because the acquiring incumbent bears the full cost of the new license but all incumbents—and this includes DSL and cable modem providers—get the benefit of reduced competition;

(2) still no explanation of how the price at which third parties could purchase upstream services would be calculated—and by whom—nor an explanation (at least no economic explanation) of why vertical integration through the service chain, which is generally procompetitive, would be bad here; and

(3) still no explanation of why licensees should be barred from price discrimination in the sale of wholesale wireless services, when price discrimination is generally procompetitive, increasing output and reducing prices for the lowest-intensity users (i.e. the poor).

Stop dressing up your populist argument in pseudoeconomics! There is not a single problem raised that secret, simultaneous bidding would not address, and this entire initiative is distracting your enormous lobbying power away from things that really are bad, such as the lack of truly national licenses.

directorblue said...

Daniel -

The long-term goal of the FCC should not be tied solely to the short-term returns associated with the auction. There is a concept called return-on-investment (or ROI). The auction should produce the maximum ROI to the US Government (i.e., the American taxpayer) over the life of the spectrum.

I know that’s a really difficult concept for the the FCC to grasp.

Maximizing ROI for the auction would mean preventing the telcos and its sock-puppets — who are already longtime beneficiaries of taxpayer largesse — from bidding to force new lifeblood into the competitive landscape.

gerard said...

I'd love to see an ROI calculation from our govenment which imposes tight accounting rule on businesses and an alice-in-wonderland based systems on their own.

Looks like google got 3 our of 4 and their upto $4.6 B bid is now a floor not a ceiling.

What next big guy?