Civitium's Weblog

We don’t have to look far into the future to imagine the impact the 700 MHz auction will have. I joked with my wife recently that, when I was a teenager, personal computers didn’t exist. But, by the time our nine year old daughter is a teenager – one generation - she will be carrying a mobile device with a terabyte of data storage and a 100 Mbps wireless connection to the Internet. Wow, I can only imagine the kinds of innovation she will see, and the way this level of connectedness will affect the way she interacts with the world around her. My good friend, and most-times mentor, Jim Baller often quotes Dr. Jonas Salk as saying “our greatest responsibility is to be good ancestors.” Well, the decision about to be made by the FCC, and the long tail these decisions will have, demand that we think about the generations ahead, and not just about maximizing the auction proceeds that will flow in 2007.

As the FCC prepares to meet on Tuesday July 31st, it has the difficult job of reconciling the viewpoints and interest of incumbents, competitive ISPs, Internet companies, special interest groups, politicians, lobbyists and many other constituencies. With all the complex, inter-related issues; the arcane details; the economic theory; and the political jockeying, it must be difficult for the FCC to keep the will and interest of the public in mind. How can the average citizen be expected to form an opinion and raise their voice on things like C-block spectrum bands and blocking premiums? And I don’t think many Americans would react well to cocktail conversation about the “wireless Carterphone.”

Well, I believe I can demonstrate that local governments across the nation have spoken loudly and clearly – albeit indirectly - about one of the central issues being debated about the auction; whether to set a condition requiring the winner to provide wholesale open access to the network. In the estimated 400 municipal wireless initiatives underway, the overwhelming majority have incorporated very clear requirements that their private sector partner adhere to exactly the kind of wholesale open access condition being advocated by some, including me. Consider the following language from the Wireless Philadelphia RFP:

The network must provide basic wireless Internet access throughout the City on a wholesale basis to multiple Service Providers (“SPs”), who will be responsible for marketing services using the network, providing tier-one customer service and technical support, subscriber billing, and other similar services.

Consider the following language from the City of San Francisco’s RFP:

The Network Operator shall provide Open Access to its wireless broadband Internet access transport services to multiple unaffiliated Service Providers.

I could cite dozens of others, but will stop there and simply point out that the population represented in just ten of the metropolitan areas anchored by cities with wholesale open access conditions in their RFP is in the tens of millions. That’s a very loud and clear statement on the importance of wholesale open access.

Having advised many of these cities, I can tell you that macro-level telecommunications policy was not necessarily the driving force behind any of their decisions to demand wholesale open access. Local governments were not trying to maximize the revenue from auctioning their assets; they were trying to maximize “community value” from the use of their assets, a subtle but important distinction.

While there was often a belief that community value was increased when retail competition and consumer choice was introduced, it was also important for cities to ensure that local Internet businesses had an opportunity to participate in the initiative. In many cities we’ve worked with, we’ve found that dozens or hundreds of small, local Internet Service Providers existed in a market, but many were still surviving by hanging on to legacy dial-up subscribers; frustrated by the loss of access to cable and DSL networks through Brand X and the 2005 DSL decision by the FCC. In an era of tightening local government budgets and increasing global competitive pressures, keeping jobs local and stimulating small business growth is more than important; it’s critical.

Many cities also wanted to make sure that their efforts didn’t “create another monopoly” and wholesale was a mechanism to mitigate, if not prevent that. Cities viewed their public rights of way – the main bargaining leverage they have in creating a partnership – as a public asset. They didn’t want to grant this public asset to a single provider, on exclusive terms, and with excessive benefit that did not accrue to citizens. So, rights of way are to cities what spectrum is to the FCC, but in telecommunications, they’re being made available in very different ways. If municipalities were forming public-private-partnerships like the FCC is auctioning spectrum, they’d be granting it exclusively to one company – the company who’d pay them the most money. With wholesale as a condition of the auction, it doesn’t have to be that way.

Now, let’s consider one of the incumbents’ many arguments against wholesale open access conditions; that allowing competitors access to its facilities threatens the viability of the investment. Once again, the FCC can look to local government for the real story – but this requires digging deeper.

Consider the recent approval of AT&T’s municipal wireless partnership with the City of St. Louis. In that agreement, Exhibit E – entitled Wholesale Access Package – it states:

After completion of Phase II, Company [AT&T] will offer access to 3rd Party Service Providers.

The same wholesale condition exists in AT&T’s agreement with Riverside, CA. This speaks volumes about whether wholesale conditions are really viewed by incumbents as crippling to the business case.

The FCC has an amazing opportunity here; to learn from the micro-level experimentation of hundreds of municipal wireless projects and their innovative business models. Now, some will argue that the municipal wireless market hasn’t proven itself; that it faces substantial challenges; and they’d be right. The market has suffered from over-hyped, unrealistic expectations; an anemic supply of private investment; a lack of readiness by local government to take on the anchor tenancy commitment needed; political and bureaucratic headaches; and many other challenges. And it will likely get worse before it gets better. But sometimes, studying challenges in a market, or even failure, can be more valuable than studying successes, particularly when you have a sample-size of more than 400 projects to consider.

Let’s take the debate going on about whether a “blocking premium” exists that favors incumbent providers in the auction. I argue that the concept of a blocking premium can be studied in a very different, but still related context. Consider the fact that, in certain municipal wireless projects, incumbent providers have competed – and are competing - against competitive providers to win a partnership with local government to build citywide wireless networks. Even going back to the Philadelphia project is helpful to think about here. Could one not argue that, an incumbent provider could offer more favorable community-benefit terms to a municipality than could a competitive provider? Of course; the incumbent provider may view the negotiation with the city based on 1) the value of the partnership + 2) the value of protecting the market from a new competitive entrant. The competitive entrant may 1) only be able to value the partnership based on its face value and may 2) have the added disadvantage of having to build a new network from scratch, without the benefit of existing facilities to leverage.

Consider another part of the auction debate; whether placing conditions on the bidding process will have the affect of driving down the auction proceeds. I won’t pretend to be qualified on this one; the economists and game theorists may rule here. What I will say is that placing the maximum amount of auction proceeds in the U.S. Treasury can NOT be the only way that “taxpayer value” for this amazing public resource can be measured. The money received in this auction will be paid one time. The money paid by taxpayers for access to the resulting network will be paid over, and over, and over, for decades. A one dollar per month increase in subscriber fees resulting from awarding the license in a way that results in less competition – I feel, but can’t prove – will dwarf any loss in proceeds from the initial auction.

And a quick point on the “wireless Carterphone” open access condition that the FCC appears to be supporting. The loopholes in what has been proposed to allow any device to access the network are, in my opinion, large enough to drive a truck through. Since the condition only applies to one part of the band, a party wanting to exploit this loophole to protect a walled-garden has many options. They could choose to deploy services only in the bands not subject to this requirement. They could choose to charge subscribers more for a “Bring Your Own Phone” service. The wireless Carterphone condition would have to be strengthened substantially to achieve the intent behind the condition.

In summary, there is no better place for the FCC to look when trying to gain insight for predicting the impact of open access conditions than the municipal wireless market. And there is no louder voice that has spoken out in support of wholesale open access conditions than the hundreds of local governments involved in these projects, and the tens of millions of citizens they serve. Civitium does not speak for any of these cities; we believe they have spoken through their actions over the past few years.

Chairman Martin; we urge the Commission to place a wholesale open access condition on the upcoming 700 MHz spectrum auction. We urge the Commission to go further and fully enforce its 2005 policy statement on all four of the principles to “Preserve and Promote the Open and Interconnected Nature of the Public Internet.”