700 MHz Endgame: Wholesale Open Access Down, But Not Quite Out.

Yesterday, the House Commerce Committee held its FCC Oversight hearing. As expected, the 700 MHz auction attracted a great deal of attention. As I wrote in previous entries, this was make or break time for wholesale open access. If Commerce Committee Chair John Dingell (D-Michigan) and Telecom Subcommittee Chair Ed Markey (D-MA) voiced strong support, that might push Martin to adopt full wholesale open access in light of Google’s commitment to bid. OTOH, if the House Dems did not back wholesale, then Martin would be unlikely to budge.

Dingel and Markey did not back wholesale open access. Indeed, Dingell backed off slightly from his previous hard-line stance on even device open access (aka, “open access-lite” aka the “Martin plan”), asking for assurances that including such a condition would not hurt auction revenue or limit bidding. Markey, while enthusiastically supporting device open access and suggesting ways to improve it and make it effective, did not mention wholesale at all.

The biggest supporter of wholesale open access was Mike Doyle (D-PA), who gets a huge Sausage Factory cheer for stepping up to the challenge. You can see a clip of him asking the Commissioners where they stand on wholesale open access here. The good news is that Democratic Commissioners Michael Copps and Jonathon Adelstein remained staunch in their defense of wholesale open access as a means of encouraging competition and deployment. Intriguingly, Martin did not slam the idea, but said this was not the place to do it because he had concerns about the incentives for network build out of wholesalers. McDowell remained adamant against (as he did against even Martin’s device open access proposal), although McDowell praised the pending FCC proceeding to open the broadcast “white spaces” for unlicensed use (which I hope he remembers when the time comes). Tate did not answer Doyle’s question (no time), but elsewhere said she was keeping an “open mind” on device open access.

Republicans, with the exception of Pickering (R-Miss) slammed Martin hard for supporting even device open access. To his credit, Martin defended the idea that the auction was not about maximizing revenue but about getting the best policy. But the near-uniform opposition to any conditions on licenses by Republicans, combined with the silence of key Democrats on wholesale, puts Martin in a real bind.

So what happens now? Are there any cards left to play, rabbits to pull out of hats, or Corbemite maneuvers to run that could still save wholesale open access. Yes, but they are very long odds indeed. With the vote now scheduled for July 31, we are just after the two minute warning and down a touchdown and a field goal.

More analysis below . . . .

First, as an aside, I will echo Markey’s expression of sympathy for Kevin Martin. In the last two months, Martin has had the birth of a second son, that same son hospitalized in the neonatal intensive care unit (NICU), and now had eye surgery. Through all this, he has still found time to meet with the public interest community four times, given our arguments and filings his full consideration, and shown us every respect. Whatever the ultimate outcome, Martin has behaved with what we Jews would call in Yiddish menchlicheit, appropriate behavior worthy of respect.

O.K., enough with the sympathy and nice talk. On to the analysis.

If Martin wants a political career in the Republican party after he leaves the FCC, and if he doesn’t want tohave his remaining term a living Hell from his own party, he faces real limits. Already Martin has gotten chaff from high-ranking Republicans for trying to reign in cable market power and apply existing federal law against the cable industry. Good grief, say Republicans, how much protection from industry can consumers need. If high-ranking Congressional Dems provided political cover, especially in the face of stiff resistance demands from Democratic Commissioners, then Martin could go further out. But that hasn’t happened.

But Martin doesn’t yet have 3 votes. He needs to get either a Democrat (preferably both) or McDowell. In addition to the wholesale issue, there is a huge conflict on license size. Martin wants a large block of spectrum (the 22 MHz C Block). This is a big demand of Verizon and AT&T, as well as the tech companies and the public interest groups — albeit for separate reasons. McDowell, Adelstein, and Copps have all shown a strong preference for smaller license blocks rather than larger license blocks.

What Next?
Martin now must try to play the Dems against McDowell. If the Dems hold out for wholesale, Martin can try to get McDowell togo along with the large C Block by removing any conditions. While something of a defeat for Martin, who has put a great deal of personal prestige on the line by pushing for device open access, Martin can blame the Dems for being too greedy and insisting on wholesale despite a complete lack of Congressional support for such an idea. Martin can also threaten to deny the pending Skype Petition to apply device open access to all cellular spectrum on the grounds that the Dems “blew their chance” by not backing the experiment in the 700 MHz auction. Given that Dingel and Markey have embraced device open access, but not wholesale open access, the Dems need to worry about political support in their own party. Meanwhile, Martin can push McDowell to accept device open access (perhaps even in weaker form) rather than see Martin side with the Democrats on wholesale — since Martin has left the door open to having his stated concerns about build out resolved.

In this scenario, the most likely outcome is that the Dems agree to support Martin provided that Martin includes conditions that make device open access more real and get a commitment that this will not impact the Skype Petition. Both Skype and Google filed last minute letters detailing how to improve the device open access proposal, so the Dems have something to work from as a list of demands. Given that Martin (a) wants to see what has become his signature proposal work, and (b) would like to see Google bid, Martin has incentive to strike such a deal without too much resistance. The Dems file a concurrence explaining that they wanted to go further, but the votes weren’t there.

Martin has further fortified his position by putting on the agenda for the same meeting a proposed Order on the obligation of carriers to enter into roaming agreements with other wireless carriers. This has been a big priority for smaller carriers and even larger carriers with footprint coverage problems, like Sprint/NexTel, that are having difficulty getting roaming from carriers in much better spectrum positions (such as AT&T and Verizon). The inclusion of the Order gives Martin another bargaining chip with both the Dems and the smaller carriers who would otherwise oppose his plan. “Look,” says Martin to the smaller carriers. “Whether you win 700 Mhz licenses or not, you will be taken care of through better roaming agreements.” Because getting more competitive roaming agreements has been a Dem issue, neither Copps or Adelstein will want to give Martin reason to withdraw the item because wholesale access “solves the roaming problem” (sometime in 2010 or so when these networks get built). It also blunts criticism of Martin as a shill for the Bells, since mandatory roaming agreements on fair terms will eat into their revenues and prevent them from squeezing out competitors.

What Could Change the Dynamic?

A few things could still change the dynamic, such as US Cellular’s most recent proposal, Google sitting out, and possible future Hill letters. But there are problems with each of these scenarios.

The US Cellular Offer
As a last ditch effort to get smaller geographic licenses, US Cellular filed a compromise proposal to break up the 22 MHz C Block back into two paired 11 MHz blocks, with one of these two blocks broken up into the smaller CMA and EA divisiuons rather than the proposed much larger REAG divisions. In exchange, US Cellular would support full wholesale open access on the remaining REAG block.

This creates the possibility of a McDowell/Adelstein/Copps troika voting for smaller licenses, possibly even dragging along Tate (who cares a great deal for rural providers and worries that larger providers will not build out to rural areas). Martin, facing a deadline to produce a final order, would be forced to go along. The difficulty with this scenario is that it is unclear that either McDowell or Tate would trade smaller licenses for wholesale open access. Furthermore, Martin can always stick it to the Dems by voting for the band plan with smaller licenses without wholesale open access. Faced with that threat, the Dems face the prospect of losing even device open access as the price of getting smaller licenses.

It is also not entirely clear that 11 MHz of open access wholesale is worth it as a “third pipe” solution. I personally believe that 11 MHz of wholesale is better than 22 MHz of device attachment, because even 11 MHz of wholesale opens up new ways for existing wireless IPS (WISPs) to combine unlicensed and licensed spectrum to become more competitive providers and 11 MHz of spectrum available nationally will allow for greater competition by small licensed carriers (who can lease spectrum rather than negotiate unfavorable roaming agreements). But that may not be enough to attract potential new entrants such as Google or Frontline. Given the skepticism expressed by Adelstein and others
in the past about betting the farm on this “if you build it they will come” philosophy, the Dems would want assurances that Google would still bid even on an 11 MHz block before going for broke.

Google’s Promise to Bid

Martin, on the other hand, faces a different problem. Last week’s declaration by Google they will meet the minimum reserve price if the C Block has wholesale presents Martin with a serious risk that he will end up with egg on his face if auction revenues are flat. The Dems will properly point out (even if they concur) that Martin rejected the opportunity to get a solid new bidder in and protect the auction revenue by his refusal to adopt the right policy of wholesale open access. As a result of Martin’s half-measures, the Dems will argue, Martin both compromised the auction revenue and denied Americans a real “third pipe” competitor.

Martin has hedged against this outcome by establishing the reserve price on the C Block and proposing to hold the auction over with no conditions on the C Block licenses if the reserve price is not met. But there is no guarantee that even a REAG block with no conditions will bring in $4.6 billion or ensure $10 billion or more for the auction as a whole. Smaller players won’t bid for REAGs, and the larger players will not bid too high if new entrants refuse to show up because they think they have no chance of winning. Given that Verizon and AT&T can choose between the national public safety “D Block” or (in a reauction) two REAG licenses, there is a real possibility that Martin’s plan will backfire and the incumbents will not only get the spectrum — but gets the spectrum dirt cheap.

The tough question for Martin is whether Google is merely posturing when it says it won’t bid absent wholesale. This is the classic “used car” information problem. Because everyone postures pre-auction, no one knows whether a threat to stay home means anything or not. So is Google serious about its line in the sand? Or will they show up anyway, even if they no longer commit to meeting the reserve price.

Google has good reason to show up. It still faces the cable/telco duopoly without network neutrality protections, and can therefore get squeezed over time as cable and DSL operators seek to offer “tiered” services. Google also wants network attachment/wireless Carterfone, and are aware that if they don’t show up and bid, they may well get told “well, you just want a free ride on someone else’s network” and see their chance of any relief on this go out the window (at least until 2009). OTOH, if they show up, bid, and lose, they get serious sympathy points and strengthen their demand for application of the principle across the board by arguing “we tried to buy our way in, and we couldn’t.”

Despite this, Google has much stronger incentives not to bid. Google never wanted to be in the ISP business. They are an applications provider. They got dragged into this kicking and screaming, because it got made clear to them by all the FCC Commissioners that if they didn’t promise to bid, they could never get what they wanted.

So now they face spending billions for licenses and then spending additional billions for infrastructure while learning a whole new business — or they can spend billions buying an infrastructure provider to do it for them. Meanwhile, they have to explain all that to Wall St., which has no patience or sympathy for expenditures that eat into profit margins. With some analysts already warning that Google may be overpriced, Google needs to worry that its vaunted market cap may evaporate like the proverbial snowball in Hades if it starts pouring billions into a risky wireless venture. Heck, Verizon’s stock took a beating for years when they made the decision to invest in FIOS, and that was a core upgrade in their area of competence.

The sad truth is that Wall St. is littered with the corpses of companies that bankrupted themselves trying to get into businesses they didn’t understand. Vivendi was a water company that tried to become a telecom and entertainment colossus. They ended up going belly up. The original AT&T did the same thing by trying to buy up cable companies, then ended up selling away pieces of itself until there was nothing left. Executives at Google know this and will logically ask “why should we commit billions to even showing up when we didn’t get what we want and therefore don’t think we can win?” Especially when even showing up may make investors nervous at a time when the market keeps bouncing between sadness and euphoria?

The Dems can exploit the danger of this scenario to their advantage by pressing Martin on the possibility of failure. Martin may well decide that a sure bid of $4.6 billion is worth the political heat, especially if the auction therefore becomes a major success. Much will be forgiven by Republicans if the auction brings in the promised revenue. By contrast, if Martin holds firm and the auction fails — despite the reserve price and reauction — he will take a huge political hit.

More Hill Pressure

Congressional Dems have been, by and large, silent. They still have time to weigh in if they feel motivated. Obviously, motivating them at this late date would take a huge grass roots effort. Still, there is time. I plan to raise the issue tomorrow night when Senator Durbin holds his open blogging session on wireless. If there is an enormous outcry, he may decide to send a letter. As the #2 man in the Senate, he carries considerable weight and may influence Dingel and Markey to jump on the bandwagon.

So, Harold, What Do You Think?

I think Copps and Adelstein should play boldly, rather than go for the safer compromise. Their hand is not strong, but it is not nearly as weak as it looks at first glance. Boldness served them well in the during the AT&T/BellSouth meregr, where they won major conditions by hanging tough. Certainly there is risk, but — in my opinion at least — the reward of real wholesale open access on 22 MHz (or even on an 11 MHz block) justifies the risk. While we constantly hear warnings that politics is “the art of the possible” and about not “letting the best be the enemy of the good,” there are times when these aphorisms must go by the wayside. Or, to substitute one of my own aphorisms, “if politics is the art of the possible, advocacy is about making the impossible possible.”

This is legacy time. History will reward Martin & the Democrats richly for daring something new rather than taking the safe course. By contrast, the safer course may minimize political backlash, but it will also ensure that this proceeding is chiefly remembered as the missed opportunity to create a brighter broadband future.

At the same time, I recognize it’s not my future on the line. I don’t envy the Commissioners their choices.

Stay tuned . . . .