The 700 MHz Endgame Part II: Assessing the Martin Offer and Manuevering Room for Replies

In part I, I wrote about Martin’s carefull PR blitz to frame the 700 MHz endgame. But its important to look at the substance of Martin’s draft order itself. Because, as always, Martin is damn clever, and has put stuff in there that is bloody tempting to go for the compromise. To keep this manageable, I will limit my discussion here to just assessing the rumored offer and how I think we could improve it, keeping in mind that this is just press reports and really doesn’t cover the panoply of issues. In Part III, I will provide my Field Guide for the Endgame, reminiscent of my original Impossibly Long Field Guide from April (how much things have changed in 3 months).

Assessment below . . . .

About a year ago, in the context of the rather complicated outcome in the Adelphia cable transaction, I offered my “Red Sox sliding scale” for assessing whether or not we did well. Generally, any complicated FCC proceeding leaves a lot of room for debate on whether or not we did well. And the public interest community, rather like the Boston Red Sox, is never favored to win. Heck, it was a huge surprise that open access made it even this far. I do not offer this as excuse for defeat or as an incentive to settle for crumbs and call it victory. But it does mean that assessing whether we “won,” “lost,” or accomplished enough to make fighting worth it is no easy thing.

The Red Sox scale works like this. A total loss is not even making the playoffs. Next is getting a wild card spot, then winning the actual division, then winning the playoffs, then winning the playoffs by beating the Yankees (a HUGE improvement over just winning the playoffs), with the final Nirvana of ultimate victory being winning the World Series.

To provide for some comparisons, I ranked the Adelphia transaction as between winning the playoffs and winning the playoffs by beating the Yankees. Despite opinions to the contrary, I actually ranked the AT&T/BellSouth Merger as winning the playoffs by beating the Yankees. Our recent win on 3650-3700 MHz ranks as a World Series win (we got everything we asked for after all).

For the reasons given below, I put the Martin proposal (based on the news stories) as getting into the playoffs on a wild card. Overall, it’s a step forward, but a baby step. Fortunately, there is still time to improve.

Martin’s Reported Proposal

According to the Wall St. Journal Piece, Martin will circulate a draft Order that includes a network attachment condition (called “open access” by Martin) on two 11 MHz blocks (the C&D blocks). The article is unclear on whether these blocks will be the big REAG blocks favored by the telcos or smaller blocks favored by everyone else (you can see proposed band plans here). On the other hand, Martin apparently will also offer to go ahead with the creation of an E Block a la Frontline’s proposal, but without an open access requirement (which is theoretically offset by the “open access” on the C&D Block). This gives Verizon and AT&T the shot at a national coverage license they want for their purpose, without the pesky open access requirement.

Gauging by the early reactions from the major participants, the hardest resistance comes from the “Never Admit There Is A Problem In Glorious Competition World” crowd. Scott Clealand (hater of open access, hater of Google, devout believer in the Gods of the Marketplace) calls the proposal corporate welfare for Google. As does CTIA, the trade org for the wireless industry, which also disputes the notion that existing providers limit access or “cripple” technology. The telcos and individual wireless companies appear to be running quiet. Google calls this a favorable development but wants to see the actual proposed rules. On the public interest side, in addition to my own opinion given previously, Art Brodsky has this piece on how Martin is playing games with the definition of open access and squandering the chance for real broadband competition. I suspect the relative silence from the incumbents flows from their desire to see the whole package so they know whether to accept Martin’s compromise offer or push back on even this modest admission that there is anticompetitive trouble in the wireless paradise.

Which bring me to the evaluation of the proposal. Lets assume for a minute this becomes the final rule. On the plus side, it constitutes a direct admission by the FCC that there is a problem (or at least a potential problem) with the current, closed wireless market that needs a regulatory fix (at least a modest nudge) to make sure that subscribers get good value and wireless innovators can innovate and we don’t lose our tech edge to furriners who have actual open networks. That’s a modest political win for us. It’s a concession that a problem exists, and allows us to press for further incrimental change. As I’ve observed many times, this is a long-term war of attrition and jockeying for position. A win here can possibly be leveraged in the pending Skype Petition, pushing the Commission to expand on the principle and apply the network attachment rule to all wireless spectrum.

OTOH, it carries serious political risk. The official FCC Order will probably say that while everything is hunky dory in wireless land, it behooves the FCC to take some modest prophylactic action to prevent a problem from emerging in the future. Worse, Martin and other Republicans on the Commission will now have the opportunity to say “we fixed the problem, let’s not do anything until we see how our fix works out.” Certainly the opponents of any kind of network neutrality or wireless network neutrality rule, who see even this minor concession as too much, will use every opportunity to throw this supposed “fix” back at the network neutrality/wireless Carterfone crowd as proof that whatever problem that ever existed is solved, you all are just greedy Google huggers trying to get a free ride, etc. etc.

Which is a problem because, on a practical level, the proposed “fix” really doesn’t do much. Certainly it does absolutely zero for creating a “third pipe.” But even taken on its surface as just addressing the restrictions on edge devices in the wireless world, it doesn’t help. For one thing, the relevant networks won’t get deployed and become available to consumers until 2010 at the earliest. The spectrum won’t get cleared until February 19, 2009. Meanwhile, licensees will need to build towers, develop authentication procedures for standards an equipment, and then actually manufacture equipment that uses the spectrum.

And thats if everything goes smoothly. If incumbents win these “open access” licenses (more on that below), then they will have many, many opportunities to drag their feet and screw things over. Heck, standard setting can take years even when people want to set a standard. How long do you think standard setting and development of authentication will take if the licensees actively don’t want to see compliance. Worse, because Martin’s proposed “open access” only applies to the 700 MHz spectrum (and even then only to the specific licenses in the designated blocks), it is relatively easy to keep devices locked by requiring most of the applications to run on the incumbent carrier’s pre-existing spectrum. So while I can take my iPhone from AT&T to Verizon, it still won’t work very well because it is designed to use not just 700 MHz spectrum, but AT&T’s other PCS spectrum simultaneously with the 700 Mhz spectrum. Oddly, when it can only access the 11 MHz that an “open licensee” will have (since there will be two 11 MHz “open access” licensees in the block), my supposedly “portable” iPhone won’t run, or it runs really, really slowly.

True, a determined FCC could make it work. But history doesn’t give me much reason to hope for a determined FCC. Typically, while incumbents drag their heals, they point to the difficulties that they themselves create as proof that the “open access” concept is “unworkable.” “Look,”the incumbents will tell the FCC. “No one is making these wonderful devices they promised. Maintaining an ‘open access’ network is an expensive pain in the neck for us. It will be ever so much more efficient — and benefit consumers too! — if you get rid of this silly ‘open access’ requirement.” And despite the fact that would be users of open access will be jumping up and down saying “if you’d just enforce the damn law we could actually provide some new devices and services!” the FCC will decide that enforcing the law is just too much of a bother and it is much easier to give the incumbents what they want.

Finally, to the extent that “open access” is supposed to make this spectrum less desirable for incumbents — as hoped for by potential new entrants Google and Frontline — it’s a big flop. I can’t believe that conditions this wussy will stop a determined incumbent like SpectrumCo or AT&T from bidding its little heart out and leveraging all its incumbent bidding advantages to snarf up the licenses at what SpectrumCo last time called “attractive prices.”

So the real win on this is the broader principle of applying network attachment rules/wireless Cartefone to wireless services and leveraging that for the future. As I said above, I rank this on the Red Sox scale as “getting into the playoffs on a wild card.” Winning the principle is an important incremental step forward. Since the anti-network attachment folks are going to refuse to do anything about wireless Cartefone no matter what, I’m inclined to give less weight to the possibility that this gives anti-wireless NN/Carterfone forces an excuse or additional political cover. Even so, this still amounts to a win on principle with no practical consequences. That’s not what I want to settle for, mind, but I need to be honest about where I feel we stand.

How Do We Improve From Here
“With all due respect sir, to get you out of Casablanca would take a miracle. And the Germans have outlawed miracles.” — Signore Ferrari, Casablanca

As I observed before, the smart money never even expected us to get this far. And while the situation has gotten better in some ways since April, it has also gotten worse. On the plus side, momentum has continued to grow for open access, with folks like Northrop Grumman and Citibank agreeing that wholesale open access presented no technical problems and would attract bidders. At the same time, as Gigi Sohn at Public Knowledge recently pointed out, the anti-open access side has also marshaled its forces.

Most notably, and most damningly, 37 Republican Congressmen sent a letter to the FCC opposing any open access wholesale requirement. This follows previous letters from Republican Senators and Republican House Commerce Committee members opposing wholesale open access requirements. This puts Kevin Martin — who is, after all, a Republican — in rather a quandary.

If the Democrats weighed in forcefully in favor of open access, that would change the political calculus. Republicans would recognize that Martin must keep the majority party happy, especially if the two Democratic Commissioners stand firm. Unfortunately (and rather annoyingly), with the notable exception of Senator John Kerry, the Senate and House Democrats have declined to weigh in with any vigor. Inoyue and Rockefeller made some vaguely positive statements at the Senate Hearing last month, but nothing nearly strong enough to provide political cover for Martin to buck his party of his own accord.

So let us assume that Martin is actually sincere when he tells USA Today that he has “become increasingly concerned” about the ability of wireless device manufacturers to innovate, but that (as he apparently just told Corey Boles at Dow Jones) he doesn’t think we made the case for mandatory wholesale requirements. How far can Martin actually go in this political environment on his own? Only about as far as he has gone, and even going this far on his own buys him some political backlash.

Contrary to most of my friends in the spectrum reform movement, I’m inclined to think Martin is sincere when he says he has concerns about wireless innovation. Why? Because, given that the Senate and House Dems have not pressed for any action, and the Senate and House Rs have been toeing the incumbent line about how we live in the best of all possible wireless worlds, the easiest thing for Martin to do would be to do nothing at all. Martin would have had no trouble getting a 3-2 vote for no open access, he would have kept his own party happy, and would not have suffered any serious consequences from the Congressional Dems. Heck, the easiest thing for Martin to have done if he wanted to have done nothing was to have refused to include the PISC open access proposals, on the grounds that we had submitted them too late and they didn’t fall within the scope of this specific proceeding. Instead, he gave us the opportunity to get the issue out there and mobilize the public, which he never would have done if he hadn’t at least considered the debate worth having. So the only reason for Martin to say he has concerns about innovation is if he actually does have concerns about innovation.

That sincerity doesn’t make Martin any less political, mind. But it does mean that I don’t think he is trying to do as little as possible. Because, frankly, he could have done a lot less than he has done. So the question becomes, how do we push Martin to do more?

For starters CONGRESSIONAL DEMS NEED TO START MAKING SOME NOISE!!!! Yeah, I’m looking at you SENATORS RUNNING FOR PRESIDENT WHO HAVEN’T FOLLOWED JOHN EDWARDS LEAD (and you know who your are!). I’ll add that you House Democrats holding a hearing on wireless competition tomorrow (Wed. 7/11) will have an excellent chance to express your enthusiasm for wholesale open access and your utter rejection of the pro-incumbent stance of your Republican colleagues.

If Congressional Dems start weighing in, that helps the FCC Ds hang tough and gives Martin political cover to do the right thing. Martin can then tell his fellow Republicans that he needs to respond to pressure from the Congressional majority and that he needs to yield to the FCC’s Democratic Commissioners to get the needed votes. Even Martin doesn’t want to go farther than his initial proposal (and Martin is enough of a negotiator that he usually leaves himself some wiggle room), the need to get three votes for Martin’s desired band plan gives Adelstein (who has already committed to open access and Copps leverage to push for more substantive open access conditions (or at least broader application of the network attachment condition).

At the same time, however, this leverage has limits. Martin can always give up on trying to provide any relief for Silicon Valley and go back to a 3-2 party line vote (although it may cost Martin his choice of band plan if McDowell again holds out for smaller licenses, as he did at the April 25 meeting). So the Dems will need to run a constant calculation on how much to ask for and whether it is better to go for a lesser win than for a big dissent on an order that gets nothing and hands over the spectrum entirely to the incumbents.

So we wait and see what the House Commerce Committee members say tomorrow, and see if it significantly alters the political balance. Then we get to Part III, Field Guide to the 700 MHz Endgame.

Stay tuned . . . .

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8 Comments

  1. Tim Wu says:

    Great analysis – though I’m a blue jays fan

  2. Tom Coseven says:

    Harold – I think the analysis is excellent as well. You may have over estimated the support for wholesale in your quoted material. Go back and re-read the quotes from Adelstein and Kerry and the letter from Edwards. Not only is there no reference to wholesale, the actual statements could easily be interpreted to fit Martins definition of “open access.” Then go back and re-read the Northrop letter. Their definition of the Frontline proposal on Page 2 is IDENTICAL to Martins definition of open access. Maybe Northrop was being lazy and left out the wholesale part, or maybe they intentionally removed it.

    I agree with you that Martin could have done a lot less, and therefore is likely to be sincerely concerned about innovation. I also believe he is sincere when he singles out wholesale as a problem.

    The tone at the FCC is surprisingly favorable toward Carterfone principles for Internet, MVPD and now wireless. If you feel you need to continue to press for wholesale, please try to do it without denigrating open device and open application connectivity. Actually, I would prefer you would use this as an opportunity to press for Martin open access for the entire 700 MHz auction, or at least the “E” block.

  3. Harold says:

    Tom, your point on Northrup is valid and I may be overestimating their commitment (or, at the least, Martin can say that what is in the record is consistent with what they say) and Kerry merely called for “innovative methods” to promote innovation, which stops short of full wholesale. But Edwards was quite explicit in calling for the FCC to set aside “as much as half of the spectrum….for wholesalers who can lease access to smaller start-ups.” That’s clearly wholesale access, not network attachments.

    As for Adelstein, he understands what “open access” really means and I believe that when he said he beleived there should be “some open access” spectrum, he meant wholesale. Whether he can get it or not remains to be seen. But I do not think Adelstein would claim that what Martin has offered fits what he had in mind. Rather, I think that even if he votes for it, he will make clear (as he has done in the past) that it is less than what he wants but thinks that moving forward is important.

  4. Harold says:

    Also, Tom, I do not denigrate network attachment rules. At the same time, I think it is important to understand the limits of where we are. Take a look at my <a href=”_or_pdf=pdf&amp;id_document=6519552298″ rel=”nofollow”>http://gullfoss2.fcc.gov/pr…“><i>ex parte</i></a> from my meeting Monday with Fred Campbell and Erika Olsen and I would hope it will put your mind at ease on this point.

  5. Tom Coseven says:

    Harold — I wrote to you precisely because you have not denigrated open device and application attachment. There are MANY others that have called these capabilities “meaningless” in the last 24 hours because they are not coupled with wholesale (you know who they are). This runs the risk of passing up an oportunity to extend open connectivity to other markets when the FCC and congress is receptive. Clearly if others (not you) say it is meaningless, then how do you come back and say you need it later? Why not get in front of the parade and drive it to accelerate?

  6. Mitch Shapiro says:

    Howard,

    A good and helpful analysis. Thanks.

    Assuming the FCC’s “open access” focus is on device and applications vs. wholesale, might there be other provisions (e.g., anonymous bidding, restrictions on incumbents bidding on “open access” blocks, geographic scope of “open access” licenses, etc.) that could help encourage winning bids from the likes of Google or other entities relatively well positioned to fund and execute “disruptive” business models that could justify winning bids for the “open access” blocks?

    I agree that incumbents enjoy important bidding advantages, but perhaps there are combinations of bidding rules and alternative business models (the latter could include wholesale access even it its not mandated by the FCC) that could result in the deployment of new access pipes that can shake up the competitive dynamics in the wireless and broadband sectors.

    And, if the FCC also opens up large portions of the “white space” spectrum for unlicensed use (which I hope they do), it seems possible that new “open access” licensees could also leverage this potentially large amount of unlicensed spectrum to help it develop alternative business models based on the value/efficiency of more frictionless market dynamics (e.g., open access for devices and apps) vs. the control-based models preferred by incumbents. This raises the question of what’s happening on the white space front at the FCC. Do you have any clues on that?

    If there are particular bidding rules that would encourage serious bids from the “open device & app” camp, then any such rules seem important and worthy of a final push that could help attract FCC votes to implement them (perhaps even more so than a push for wholesale rules).

    At the same time, Adelstein’s comments about wanting to see serious signs of interest from this “open access” camp in advance of FCC rule-setting make sense here, as you’ve noted. When I look at the companies that joined together in the white space coalition (Google, Microsoft, Intel, HP, Dell, Philips, etc.), I’d like to think that, among them, there’s enough interest in creating a new pipe that’s more supportive of device and app innovation vs. incumbent models and that, if auction rules were less stacked in favor of incumbents, that some of these companies might be willing to step up to the plate at the auction.

  7. Mitch Shapiro says:

    Sorry Harold…not Howard.

  8. So, let’s assume that there are some policymakers who have an open mind on this topic, and are looking for some compelling guidance — what “exactly” would you tell them to engage their interest?

    Before you provide your short answer, please do keep in mind that most policymakers don’t know what you know, nor care about this level of detail.

    Is it possible to frame this issue in the same way as “Martin’s careful PR blitz” — simply and persuasively?

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