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Wireless Auction Stacks the Deck Against Small Businesses

Posted on: October 11, 2007

All Business – Business Intelligence
By Keith Girard

When the federal government began making plans for the next, and perhaps most significant, phase of the telecommunications revolution, Congress made it clear that it wanted small businesses to be integral to the process.

To their credit, lawmakers appeared to have learned from past experience. They realized that small businesses are essential to competition, consumer choice, and innovation within an industry. But that lesson apparently has been lost on the Federal Communications Commission (FCC). More likely, it’s simply been ignored.

Early in 2008, the FCC is slated to conduct a multibillion dollar auction to award licenses for the 700 MHz band of the radio spectrum. The auction is historic because it will mark the long-awaited opening of the “third pipe” of broadband Internet service. Wireless transmission will join cable and DSL as a conduit for the information highway. But more than that, it will allow for the true convergence of telephone and Internet. The possibility for new products and services is tremendous.

As with previous advances in telecommunications, many of these innovations will come from small companies that are on the frontiers of technology. But don’t get your hopes up. Despite Congress’s best intentions, the FCC has drafted rules for the auction that stack the deck against small businesses.

The advantage in this case will go to the “Big Four” of wireless telecommunications: Verizon, AT&T, Sprint, and T-Mobile. From the billions of dollars these giants spend on marketing, you may think our wireless phone service is competitive and cutting edge. But compared to Europe and Japan, the U.S. market is tightly controlled and backward, according to Jeffrey Black, who represents the Wireless Founders Coalition for Innovation, a group of wireless industry entrepreneurs seeking open access for part of the radio spectrum in question.

“Imagine walking over to a Coke machine, pressing a few buttons on your mobile phone and a Coke can pops out. This is already in practice in both Europe and Asia,” he testified recently before the House Small Business Committee. Indeed, one of Japan’s major wireless companies already has 20 million phones in service that have “electronic wallets.” Users can purchase everything from subway tickets to retail goods in shopping malls, says Black.

That’s the future of wireless broadband. But the FCC’s proposed auction rules are taking us back to the 1950s when the phone company not only controlled the wires, but the telephones, too. Black rotary-dial phones were standard, and it was illegal to own one. You could only lease it (for a monthly fee, of course). If you canceled your service, the phone company came to your house and took the phone.

It sounds positively archaic, but today the wireless carriers do almost the same thing. In fact, we might still be talking on rotary phones, if a more enlightened FCC hadn’t made what’s known as the Carterfone decision in 1968. It wrenched control of the telephone handset from the phone company and allowed any device as long as it met certain standards.

The decision hastened the advent of touch-tone phones and led to an explosion in new devices such as fax machines, speaker phones, answering machines, and the Hayes Smartmodem. The latter, of course, gave birth to the modern Internet by allowing users to dial it up. All of these innovations depended on what’s known as an “open access network,” like the Internet is today.

“The companies or governments who build and maintain our highways don’t get to dictate what kind of car you drive. Your electric utility can’t limit your choice of a vacuum cleaner; and you don’t have to ask your broadband provider for permission to launch a Web site. However, the wireless carriers dictate the devices and applications that can be used on their network,” says Black.

You may recall all of the controversy over Apple’s new iPhone. It was designed to work only with AT&T’s wireless service. It took an artful hacker to crack the code and “unlock” the phone. That’s the future the FCC is planning for us. You may own the phone but someone else dictates where you can use it. It may be a sweet world for AT&T and Apple, but consumers and small businesses suffer.

“The impact of this on American ingenuity is tragic,” says Black. “If you’re a small business with a big idea, venture capitalists strongly urge you to target Europe and Asia before attempting to introduce an application in the United States. From firsthand experience, we know that negotiating with the large carriers for access to their networks can be a difficult and time-consuming process.”

When Congress set out its objectives for the FCC, one of its goals was to ensure that small businesses had ample access to FCC licenses. Don’t get me wrong — the FCC has complied with that intent, but in an artfully deceptive way that really works against small businesses.

For example, the FCC has adopted rules that provide “bidding credits” for small businesses. They can use the credits to enhance their bids to make them competitive with large companies. But to qualify, small businesses can only be retail providers of wireless service; they are prohibited from wholesaling bandwidth to other companies, which small firms often do to raise capital.

“This forces them to compete in the most competitive market in the wireless industry and is one of the most expensive forms of service delivery,” said Shelley Spencer, president of Wirefree Partners, who has competed and won licenses in earlier auctions.

In previous wireless auctions, small businesses historically have won 74 percent of licenses on average, said Spencer. In contrast, small businesses won only 4 percent of the licenses in the most recent auction under the FCC’s current rules. She expects even fewer licenses will be won this time around.

As for open access, the FCC is providing for that as well, but only on a small portion of the bandwidth. Large carriers are even fighting that. “Incumbent wireless carriers nearly uniformly opposed an open platform requirement because handsets are an integrated part of a wireless network,” said Christopher Guttman-McCabe, who testified on behalf of the CTIA-The Wireless Association, an international nonprofit membership organization that includes every major player in the market.

As Guttman-McCabe noted, the 700 MHz spectrum is considered the “beachfront” property of wireless communication. But unless Congress steps in and demands changes to the auction rules, it will be just as exclusive and restricted as real private beaches.

Many view this as the last major auction of wireless spectrum for the near future. The nation can’t afford to lose this opportunity to create a truly open wireless system that breeds innovation and new products. And those products won’t come to market nearly as fast without the active involvement of small businesses. Anything less and it will be back to the 1950s all over again for us — while the rest of the world races into the future.

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