The hi-tech industry, led by Google Inc., scored a big victory over incumbent broadband providers this week as draft rules released by FCC Chairman Kevin Martin for a highly anticipated radio-spectrum auction have incorporated many of the hi-tech industry's demands.
According to a Federal Communications Commission official, who has seen the rules — which will be released shortly by Martin's office to the other four commissioners at the agency — the auction of 22 megahertz of spectrum, out of a total 60 megahertz, will have conditions attached to it which may pave the way for Google to acquire spectrum for the first time and would enable the company to begin competing with the large incumbent providers of broadband service to customers and businesses.
The rules will determine how the auction of radio spectrum to commercial wireless broadband operators, which, according to an official estimate, could raise as much as $20 billion, will proceed early next year.
In order to provide wireless broadband or cellular service, companies need spectrum, which allows them to carry their signals without the need to be connected by a wired network.
Companies like Google have been strongly advocating rules that would force the winner of a large chunk of spectrum to allow end-users and vendors the ability to attach any device or application to that spectrum.
Such a rule threatens to challenge the hegemony of incumbent providers of broadband service, such as AT&T Inc. and Verizon Wireless, a joint venture between Verizon Communications Inc. and the U.K.'s Vodafone PLC, and cable companies such as Comcast Corp and Time Warner Cable.
These companies, and particularly Verizon Wireless, have fiercely resisted the notion that having invested in the construction of a broadband network, they would have to cede control over the types of devices or applications that are used on it.
According to the FCC official, who would only speak on the condition of anonymity because the rules haven't been released to the other four commissioners for their consideration, Google and the other hi-tech companies may have their way, as a large chunk of spectrum is to be auctioned off with so-called open access requirements attached.
Open access means that the licensee of the spectrum would have less say over the type of handsets providers of broadband service could sell to their customers and what types of broadband service could be offered by those providers.
The open-access requirement would be attached to two blocks of spectrum that are each 11 megahertz in size. They could be pieced together to effectively form a national license.
Attaching open access conditions to the spectrum could dissuade a company like Verizon Wireless from aggressively pursuing the block. Current wireless operators like Verizon and AT&T tightly control what devices can be used on their networks. This is seen currently as companies will offer exclusive handsets to their customers, but in the future, different types of devices that haven't yet been developed could be offered to customers on a more open basis.
The draft rule fits in Google's plans. A person familiar with the company's thinking told Dow Jones Newswires that high-level discussions are occurring at the Mountainview, Calif., company over whether to participate in the auction, and on what terms.
Such a move would mark a considerable departure from Google's mainstream business of being a content, rather than network, provider
Besides Google, companies like Ebay Inc.'s Skype Internet phone service, Yahoo Inc. and Intel Corp. have all been lobbying the FCC, but it would seem most likely that Google might actually become involved in the spectrum auction.
It could also help alleviate concerns by content providers that the current dominant network providers, like AT&T and Verizon, could slow down the delivery of their content to customers in favor of their own. These content companies want more regulation to protect what has become known as network neutrality.
The person said that Google could contract out the building of a network to a third-party and then, in effect, act as a traffic cop, leasing use of the spectrum to potential market players who currently find it difficult to get into the broadband market, rather than offering service directly to customers itself.
The draft rules also effectively mark the end of the road for Frontline Wireless, which had hoped to combine some spectrum it acquired through the auction with some that will be controlled by public safety to build a broadband wireless network for use by the country's fire, police and emergency services workers and by commercial operators offering broadband service to the public.
According to the FCC official, Martin failed to include many of the conditions that Frontline, a group backed by former FCC Chairman Reed Hundt, prominent Republican telecommunications lawyer Janice Obuchowski and early wireless entrepreneur Haynes Griffin, had been lobbying for.
In the draft rules, Martin did fulfill part of Frontline's wish list by including a chunk of 10 megahertz of nationally licensed spectrum that would sit adjacent to spectrum already earmarked for control by public safety.
The rules state that whoever controls that spectrum will be obliged to work with public safety to provide the country's first responders with wireless broadband service. The licensee would be able to charge public safety entities for access to the network.
But without a series of other conditions that Frontline had hoped would be attached to the spectrum, Martin, in effect, paved the way for one of the large incumbent providers of broadband service, most likely Verizon or AT&T, to take control of the spectrum.
Verizon is known to be in negotiations with representatives of the public safety community, although details of these negotiations have not been made public.
The rest of the spectrum is to be divided into smaller regional and local licenses that could be bid for by a variety of companies.
The likes of MetroPCS Communications Inc., a provider of broadband service in selected cities across the U.S., as well as a large handful of smaller rural providers of broadband, are known to be keen to acquire spectrum in this area to expand their offerings.
Large companies like Verizon and AT&T could also use these smaller slivers of spectrum to fill gaps in their national footprints.
But the two key decisions by Martin — to pave the way for Google or another new entrant to come into the broadband market, and to close the door on Frontline — are the ones that will garner the most attention.
The auction will sell off arguably the most lucrative spectrum ever to come available to the commercial market. It is coming free as television broadcasters switch to a digital signal in 2009, which requires significantly less airwaves.
The auction is likely to begin in January 2008, and must be completed by the end of June.
Martin's proposed rules won't necessarily form the final structure underpinning the auction, but as chairman, it was up to him to determine the general framework.
He will now seek at least two votes from fellow commissioners and will try for unanimous support from all five.
He can almost certainly count on Republican Commissioner Deborah Taylor Tate, who rarely, if ever, dissents from him.
For the third, he will have to either win the support of the third Republican and newest member of the panel, Robert McDowell, or attempt to appease the Democratic Commissioners, Michael Copps and Jonathan Adelstein.
The final rules should be publicly released by the end of July or early August.