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Democracy & Technology Blog Will Procompetition Policy Work This Time?

Google wants the Federal Communications Commisison to make net neutrality a licensing requirement in the Upper 700 MHz spectrum band — “(1) open applications, (2) open devices, (3) open services, and (4) open access.” According to media reports, FCC Chairman Kevin Martin is circulating draft rules which would impose such a requirement (see: this, this and this).
What’s Martin’s agenda? I suspect he thinks he’s come up with a brilliant strategic maneuver — give Google the chance to acquire a nationwide broadband wireless footprint on the cheap and maybe the company will give up funding the advocates of net neutrality regulation. AOL ended its support for open access the minute it merged with Time Warner, didn’t it?
But as we learned from the 1996 Telecommunications Act, procompetition policy is tricky and unpredictable. That debacle proved Thomas Sowell’s observation that a self-equilibrating system like the market economy means a reduced role for intellectuals and politicians. Unfortunately, as Sowell added in an interview with Jason Riley, “even today many still haven’t accepted that their superior wisdom might be superfluous, if not damaging.” Nowhere is this more true than in communications policy.
It might be one thing if the FCC auctioned the spectrum with no strings attached, so the winning bidder could enter the market with the same advantages and disadvantages as the incumbents. That would offer the best hope for sustainable competition, the kind that doesn’t require extensive oversight and participation by regulators into the future. The artificial kind we saw in the aftermath of the 1996 law with the competitive local exchange carriers (CLECs), who endlessly clamored for more regulatory favors, precipitated years of rulemaking and litigation.
But I realize I’m missing the point: It wouldn’t be precompetitive if an incumbent bid for the spectrum and won, would it? As I’ve pointed out, the incumbents are effectively barred from the bidding by a requirement that the successful bidder must “adopt open access policies … on any other licensed spectrum it holds.” It would lead to less regulation if the FCC explicitly precluded AT&T, Alltel, Sprint, T-Mobile, Verizon et al. from participating in the upcoming auction instead of encumbering the successful bidder as a less transparent means of excluding the established carriers. Then we could expect the successful bidder to sink or swim without further regulatory intervention.
There doesn’t seem any prospect for sustainable competition in this instance, if a letter filed with the FCC by one of Google’s attorneys is any indication. In it, Google identifies itself as a “new entrant” (which is code for a client of procompetition policy) and cites a very long list of competitive “disadvantages” it apparently has belatedly discovered it will have to overcome with the help of regulators:

Since filing its comments some six weeks ago, Google has undertaken further internal analyses, including meeting with auction experts and conducting extensive game theory scenarios, to determine whether and how it makes sense to participate — and do so successfully — in the upcoming auction. Our analysis has confirmed the view that incumbent wireless carriers are likely to prevail in a spectrum auction when they compete head-on with a potential new entrant like Google. This especially appears to be the case when incumbents and would-be new entrants are bidding for large, unencumbered blocks of spectrum, such as the 22 MHz REAG Block proposed by the Coalition for 4G in America.
Simply put, large incumbents have significant built-in advantages that are very difficult to overcome. While some argue that Google could simply choose to outbid any single entity in the auction, the notion of “deep pockets” alone is not the correct measure in this particular instance. Instead, the decisive factors include other significant economic and operational barriers to entry, and the relative value and usefulness of spectrum to the bidders. In particular, Verizon and AT&T are well-established, vertically-integrated incumbent providers of wireless and wireline services. By contrast, Google is a Web-based software applications company, not a service provider, with little pertinent experience in the wireless market and no legacy business models to protect. The incumbent carriers have an embedded national network of towers, backhaul, customers, retail outlets, and advertising. The incumbents also have far more ready cash flow at hand, and the willingness to spend it in furtherance of existing business plans. Consequently, the spectrum simply has more economic value and overall usefulness to incumbents like Verizon or AT&T, than to a would-be new entrant like Google.

To overcome these disadvantages, Google is also asking the FCC for a dynamic auction mechanism,

where a designated entity would provide access to spectrum on an as-needed basis. Payments would be made in perpetuity as the spectrum is being used, rather than months or even years in advance. Such a dynamic auction would facilitate infrastructure build-outs, remove barriers to entry for smaller and more innovative infrastructure.

And, oh yes, the company has told the FCC that “overly stringent deployment mandates will only harm the very entities that offer the greatest promise for independent broadband platforms.” In other words, Google wants more time than the agency would normally allow a successful bidder to build out its network.
I’ll predict it won’t end here. If necessary to protect its investment, Google won’t hesitate to seek more special favors for itself or more obstacles for its rivals. The company’s track record demonstrates that it sees government as a tool, useful idiot or both. The letter cited above will serve down the road as a convenient “I told you” — the first step in laying the groundwork to petition the FCC in a year or two. But of course, by then Martin will be gone.
I’m old-fashioned, I confess. I believe the market will deliver open-access — if allowed to function freely — because that’s what consumers will demand.
Google obviously doesn’t believe a broadband wireless network operating on an open access principle would be competitive, or it wouldn’t seek regulatory advantages. I’d like to see Google put its money where its mouth is. Show the world that skeptics of net neutrality regulation don’t know what they’re talking about. Bid on the spectrum, with no strings attached, and voluntarily adopt an open-access model.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.