Particularly since FCC Chairman Kevin Martin started circulating his plan for “open access lite,” there's been a lot of confusion about what Open Access is, and why different groups are calling for it. In a recent letter, the Public Interest Spectrum Coalition and several high-tech companies united around a single definition of what Open Access is–you can read our letter here. In this post, we're going to talk about some myths that have grown up around Open Access–pieces of propaganda that have been put forth by the incumbents and which are sometimes recycled as fact. Here's a document we've put together that addresses some of these Open Access myths.
It is understandable why public interest groups would want service rules imposed on spectrum–we're looking to make sure that robust broadband competition emerges on the 700 MHz band, regardless of what company or companies end up controlling the licenses. But why are so many private companies and entrepreneurs also seeking to promote service rules? After all, if they win the spectrum, they can voluntarily adopt whatever business plans they want. If a company thinks it can make money off of wholesale, nothing would stop it from becoming a wholesaler. A lot of myths and distortions seem to be based on misunderstandings of these companies' motivations.
The incumbents refer to Open Access requirements as “legislating a business plan,” or a “poison pill” designed to make the spectrum less attractive to incumbents. Presumably, this “poison pill” would reduce the bidding on the spectrum and make it easier for the new companies that advocate for the service rules to win the spectrum. They also hint darkly that a company might what to have the rules imposed on the spectrum, and then deliberately lose the auction–and then still be able to buy its way into the wireless business from the eventual wholesaler.
But there is a very good reason why Google only wants to bid on spectrum if the service rules are adopted. Its motivation in owning a spectrum license would be to make money off of that license. But incumbents are willing to bid on spectrum just to keep anyone else from having it. They can afford to bid unreasonable amounts on the spectrum because of the value in keeping out new competitors–even if they lose money on this spectrum and these licenses, they still figure it is worthwhile to maintain their monopoly-like control over valuable spectrum real estate.
In other words, even though Google has a positively supernatural amount of money, it would be outbid by an incumbent wireless provider. It's not looking to LOSE money on the spectrum. Rick Whitt at Google explains this much better than I can over at the Google Public Policy Blog.
Compare wireless to other businesses. Very few other businesses can totally shut out competitors by buying up every possible license to operate in that field. McDonald's can't buy the rights to every cow on Earth. But the wireless guys can control all the spectrum, and they sure try to.
The proposed service rules on the spectrum–particularly the wholesale requirement–make it so that, no matter who controls the spectrum, they can't use their control over that government-backed monopoly license to hog the ball and keep the other kids from playing. Open Access makes it so that in a bidding war, people only bid an amount equal to a reasonable rate of return on that spectrum.
But, but, you say–doesn't that mean that auction revenues will decrease under Google's rules?
Nope. Without rules like Google has asked for, it won't bid at all. Very likely, neither will FrontLine, or the DBS guys. Why should they bid when their opponents are willing to do the corporate equivalent of selling their kidneys in order to maintain control of their limited market? This means that the bidding would just be between incumbents–and, just like what happened with the AWS auction, the total revenue raised would actually be LOWER than it otherwise would be. The spectrum is worth more to the incumbents than it is to everyone else, as it enables them to limit competition. As a result, fewer organizations even try to bid against them. The result is a quieter, more gentlemanly auction where the incumbents yet again politely divide the spectrum among themselves. Meanwhile, companies like Frontline and Google that have genuinely innovative and disruptive business models are left out in the cold. The way to maximize revenue is to increase participation, not to set rules that make sure only the usual suspects participate.
For more background on this point, New America Foundation published today a great study by Simon Wilkie, available here, called “Open Access for the 700 MHz Auction: Wholesale Access Licensing Promotes Competition and Could Increase Auction Revenue.”
The incumbent wireless providers have had a decades-long head start, and were given their initial allocations of spectrum free of charge. They want to set the rules of the game to make sure that they remain the only players. Open Access rules try to set things right in a distorted marketplace by increasing competition and allowing participation by new entrants. Don't be swayed by the incumbents' Open Access myth-making.