April 18 - Fred Upton (Mi.-R) and other members of the House telecommunications subcommittee have publicly alleged that Google “duped” the Federal Communications Commission into adopting various open network and open access requirements for spectrum licensees in the 700-megahertz auction. Google requested the FCC to mandate certain requirements for cell phone companies. In exchange Google would commit bid a certain number of billion dollars to the auction. The subcommittee essentially claims that Google never intended to win the spectrum, and instead used capital as leverage to force the FCC to comply with its requests. The FCC did comply, and Verizon now won the largest block of the spectrum auction and must comply with FCC open network requirements.

The Breakdown: Traditionally, cellular companies use spectrum space to initiate and transmit cellular calls. The cell companies must have a spectrum use license, which the FCC issues for a period of time (which is usually renewed). Recently, Federal legislation freed up portions of spectrum space. The FCC decided to auction of certain portions in various blocks to regional and national cellular companies. The C-Block was the most sought after portion for, among other reasons, the ability to build next-generation wireless internet.

Often times, the FCC requires licensees to comply with certain regulations to maintain their status and operate under that spectrum space legally. For example, cell phones now must comply with what is called “E-911″ (short for enhanced 911). This means that, for a cellular company to use spectrum and operate legally, all phones must have the technology for 911 operators to locate a caller within approximately six meters should they call 911. This is a public policy decision that the FCC implemented for faster response from emergency service personnel.

Also important for background is understanding how cellular phone companies control applications and software on their network phones. In the United States, cell companies generally have phones “locked” so as to only work on their networks. This keeps customers using their networks when purchasing specific phones. Cellular companies also lock out certain programs and applications from being installed. For example, many Verizon Wireless phones have “Get it Now,” a mock Internet data transfer platform developed by Verizon Wireless. Companies do this to ensure revenue on programs and applications they create. It also allows for companies to create exclusive contracts with developers. Verizon has since agreed voluntarily to move to an open-network business model.

When Google learned that the FCC planned to auction new spectrum space, Google wanted the FCC to take one step further in the license requirements. Google asked for several things:

• Open applications: Consumers should be able to download and utilize any software applications, content, or services they desire;
• Open devices: Consumers should be able to utilize a handheld communications device with whatever wireless network they prefer;
• Open services: Third parties (resellers) should be able to acquire wireless services from a 700 MHz licensee on a wholesale basis, based on reasonably nondiscriminatory commercial terms; and
• Open networks: Third parties (like internet service providers) should be able to interconnect at any technically feasible point in a 700 MHz licensee’s wireless network

In exchange, Google offered a pledge of $4.6 billion to the auction. Google justified this action as improvements for the consumer. More options and better choice in the cell phone market would improve innovation and consumer choice.

The FCC appreciated this gesture because it guaranteed, or at least made a strong promise that the auction would raise the reserve price amount for at least one portion of the auction licenses (the C-Block). Though the Commission did not adopt all of Google’s requests, it did agree (.pdf format) to most:

• The licensees must provide a platform that is more open to devices and applications. This would allow consumers to use the handset of their choice and download and use the applications of their choice in this spectrum block, subject to certain reasonable network management conditions that allow the licensee to protect the network from harm.
• C Block licensee have to publish device standards as soon as they are made to preferred vendors.
• They must provide potential customers notice of customers right to request attachment of device to network and notice of licensee’s process to make such request including network criteria.
• They must provide reasonable process for expeditiously reviewing request to put devices, consumers and applications to be on the network.

Also important: Within the last nine months, Google has announced the development of “Android,” an “open-network” operating system for cell phones. Google basically has created an open platform for software engineers to put on phones and then create programs of infinite varieties for customers to download and install. There is speculation as to what Google intends. There is certainty, however, that Google needed companies to have open-networks so people could freely take advantage of Android.

Enter the auction: Google bid the pledged $4.6 billion for the spectrum, but did not end up winning the C-Block license. The House telecommunications subcommittee is accusing the Internet giant of “playing fast and loose” with the FCC in asking for the Commission to mandate these open-access requirements. The comments fall short of saying that the request was self-serving, rather than for the public benefit as Google has contended all along. They further claim that Google’s “did a horrible thing by bidding” and cost the taxpayers billions in lost revenue that the auction would have yielded absent these requirements. (Less restrictions on a license makes it more desirable because companies have less with which to comply and more freedom to develop the spectrum under their own business model.) The FCC testified before the subcommittee this week. FCC Commissioner Kevin J. Martin stated that he had not “been duped” and that his goal “was to make sure that whoever won the C-Block had an open platform.”

First, Congressman Upton and other critics seem to have a warped sense of how much the auction would yield absent these open-access requirements. The FCC set the reserve price before Google requested open-access requirements. Google bid at or above the reserve price as per its agreement. Any guess that auction participants would have gone exponentially above the reserve is speculation at best. If the price had gone up much higher, there is nothing to suggest it would have reigned in statistically significant amounts more. The total auction went for around $20 billion; the C-Block went for $4.7 billion. Even if it went for $1 billion more, that is less than 5 percent increase in the total cost of the entire auction.

Second, Google’s track record, as a general matter, does not support these allegations. Google has worked to promote the public interest in innovation, access to information, and supporting revolutions in the Internet software-developing world. To suggest that they did a horrible thing or even imply that their efforts were self-serving is absurd.

Congress is playing the hindsight game and failing miserably. After several pieces of the auction failed (though many were unrelated to the C-Block), Congress is looking for someone to blame. They refuse to make the bed they slept in when they gave the FCC the authority to create the rules for this auction with such liberal constraints.

In the interest of transparency, portfolio.com reports that AT&T is the top career campaign contributor for each of the lawmakers on the telecommunications subcommittee. It has donated more than $200,000 to the candidates during their tenures in office. Verizon, BellSouth, and the National Cable and Telecommunications Association were other major campaign contributors. Information is available at www.openssecrets.org. Chairman Upton states that these contributions are not influencing his criticism of Google. Though the intent of this post is not to suggest any improper influence, it is always interesting to see who bankrolls the policy makers.

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April 3 – FCC Commissioner Kevin Martin announced (.pdf) recently that the Commission would not adopt Skype’s (an ebay company) request for open access requirements on 700-megahertz C block spectrum licenses. The C block licenses will be used primarily for next-generation wireless services.

Traditionally, certain cellular companies are permitted to block programs from being downloaded and used on their network’s phones. For example, T-Mobile generally does not allow customers to use an independent music downloading device or a third party web browser on certain phones, despite the phone having the capability to handle the application. Companies want users to have to use their download products, which increases the cellular company’s revenue. Essentially, Skype wanted the FCC to mandate that any cell phone companies using the C Block spectrum would be prohibited from excluding services, such as Skype’s voice over internet protocol (VOIP) technologies, on all of their mobile devices. Mobile users could place phone calls using Skype over the Internet rather than the cell company’s voice network technology.

Skype claimed that such a requirement would further the competition in the mobile industry for voice phone call technologies. The FCC denied this claim, based on the already existing open-access requirements on the C Block licenses.

First, in the Summer of 2007, the FCC required that certain C Block licenses allow for open network functions: licensees cannot charge extra for applications from third party developers (including ring tones and mp3 playback) and cannot deny use of applications solely because they require more bandwidth, such as Google Maps and likely Skype (list not exclusive). Second, Verizon Wireless voluntarily agreed in November to open up network access by the end of 2008. Third, Sprint and Google’s open handset alliance demonstrated efforts that mobile phone companies are making efforts to open up network access, rather than discriminate against third party applications and services.

Various critics wondered whether this petition was in the public interest or completely self-serving. Skype knew when filing the petition that these commitments to open network access were publicly made and would be available within the near future. Undoubtedly, promoting competition would be better than not. But, when the expense of this competition is more government regulation in the face of such redundancy, it might be worth it to save the petition and the company’s credibility.

Skype should have waited to see if the open access commitments failed to work out properly. For example, recent reports have surfaced that Verizon’s petition for open network access may not be as “open” as they originally let the public believe. If complications arise in the future with this petition, Skype could point to this failure of the market moving towards open access and as further justification for its petition. This evidence would give Skype much more leverage with the FCC that their request is legitimate. Skype’s premature action, however, may have burned a bridge before even crossing it.

The New York Times reports here.

Skype’s request for public support is here.

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March 21 – The Federal Communications Commission released the winners’ identities of the 700-megahertz auction yesterday, announcing Verizon as the top bidder for C-block spectrum licenses. Verizon will pay $9.6 billion for 108 licenses, most from the highly valued national licenses in the “C Block.” AT&T came in second place, winning 227 licenses for $6.6 billion, mostly from the regional “B Block” of spectrum. Verizon Wireless is a joint venture between Verizon Communications and Vodaphone.

This spectrum is critical to developing new wireless data networks for cellular companies. Traditionally, cellular networks operate at higher frequencies, such as 850 and 1900 megahertz. Lower broadcast frequencies in the 700-megahertz range penetrate buildings much better, as allowing for easier data transmission. AT&T traditionally has the most diverse spectrum license portfolio. For Verizon to compete with next-generation wireless markets, this auction presented a must win situation.

As a general matter, a wireless communications company must have three components to remain the leader in the industry: A rock-solid network infrastructure, spectrum space, and a flagship end-user device (or even a few) for consumers to take advantage of the first two. Verizon has secured two with respect to the next-generation wireless services.

Verizon is either missing the third component or being very creative in the way it plans to fill that void: open-network access. In November 2007, Verizon announced it would open it’s networks to all devices, rather than having “locked” devices that are tied to one wireless carrier. Hopefully, other companies will follow suit and join much of the international community in allowing portable devices among multiple networks. Verizon first challenged this concept when the FCC ordered that a portion of the “C block” have open access. Verizon claimed this would furnish more competition for the market and better consumer choice. The wireless company’s about face was a voluntary recognition of how important open access was to the next generation wireless market.

This open network concept for Verizon could shift the focus on the consumer to find the best end-user device and bring it to the best network, rather than forcing Verizon to spend time on research and development to fulfill the third component of the puzzle. Being the first company to voluntarily open its network shows Verizon’s foresight into solving the end-user dilemma for next generation wireless services. Verizon certainly will still have to invest in network devices and keep a close pulse on consumer trends, but this decision, along with their success in the 700-megahertz auction aligns the potential for Verizon to take the lead in next generation wireless services.

The New York Times has more on the auction here.

FCC Commissioner Kevin J. Martin’s comments are available here (pdf format).

Verizon Wireless, AT&T Wireless, and T-Mobile recently waged a price war for unlimited use calling plans on their respective networks. The three cellular companies have unlimited calling plans starting at $99 a month. Verizon customers can upgrade to unlimited messaging an extra $20; that same customer can have unlimited messaging, email, and video to anywhere in the country for $40. AT&T’s customers can upgrade to unlimited data usage for $35 a month. T-Mobile left out any word of data plan add-ons. Sprint admitted they will not join the $99 unlimited calling plan bandwagon.

Putting aside Sprint’s decision to remain uncompetitive, this move signals a positive development for the cellular telephone market. Wireless carriers are beginning to realize that as technologies converge, price plans for services should follow suit. People are tired with the nickel and dime-ing that has taken place over the last few years based on varying usage of multiple features. The piecemeal approach of charging per text, per email, per web launch forces the customer to think more about if the can say something rather than what they can say. Bravo to unlimited calling and data plans for the everyday users on everyday phones.

As much of an epiphany as this business model shift ends up being, it may be a lateral shift in terms of price for now. For example, prior to the announcement, Verizon had 1350 minutes for $99 with $45 added on for unlimited data (on a blackberry). Unlimited calling plans started at $119, totaling $165 for unlimited usage. Is a $25 price drop earth-shattering? Maybe not when the user is willing to spend well over a hundred dollars each month for the service in the first place.

Overall, this is good news for the consumer and for the cellular usage market. Cheaper access to broadband wireless could spur higher demand and faster innovation in wireless devices.