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The FCC's Wireless Redial

Are the commission's new rules for an auction of a huge swath of airwaves enough to jump-start U.S. wireless innovation?

Kevin Martin, chairman of the Federal Communications Commission, compared it to Goldilocks and the Three Bears; he was referring to compromises made by the FCC as it set ground rules for an auction of a huge, valuable swath of airwaves for providing mobile-phone services. In the children's fairy tale, Martin joked during a July 31 hearing, every bear has something to complain about. "I only hope we are closer" to pleasing all sides, he said.

Not likely. While a group that includes Web-search giant Google (GOOG) got much of what it asked for, there's cause for grumbling by the nation's largest mobile-phone companies, including AT&T (T) and Verizon Wireless (VZ, VOD). Companies hoping to loosen the hold of entrenched players can point to such rules as the provision that earmarks certain airwaves where carriers would be barred from placing restrictions on what devices and services can be used on their networks. "The FCC has embraced important principles of openness," Richard Whitt, Google's Washington (D.C.) telecom and media counsel, wrote in a blog.

Tough Broadband Love

The aim of the new rules is to encourage new service providers to enter the wireless industry and jump-start innovation in wireless, where the U.S. has long lagged behind Asia and Europe. Martin likened the new rules to a landmark 1968 FCC ruling that for the first time enabled any equipment—not just gear supplied by phone companies—to be connected to phone lines. The decision paved the way for an explosion of new phone services, the proliferation of devices such as modems, and, ultimately, led to the rise of the Internet. "This auction provides a rare chance to promote [similar] innovation in wireless," Martin said.

Indeed, any regulations that wrest control of the customer experience from existing stalwarts such as Sprint Nextel (S) and Deutsche Telekom's (DT) T-Mobile could lead to new services, content, and payment plans (see, 7/25/07, "The New Wireless Playing Field").

In another nod to Google and its allies, including portal Yahoo! (YHOO), e-commerce provider eBay (EBAY), and satellite TV companies DirecTV (DTV) and EchoStar (DISH), the commission adopted a practice called package bidding. This will make it easier for bidders to acquire enough spectrum in one fell swoop to begin providing services nationwide. The auction for airwaves in the 700-Mhz band is due to happen no later than January, 2008.

New wireless networks could also rev up competition in broadband services, dominated by telecom companies and cable providers such as Comcast (CMCSA). In fact, the FCC had an eye toward reversing a slowdown in the pace of broadband adoption in the U.S. by mandating a use-it-or-lose-it schedule for network build-outs. Bidders that don't meet deadlines will have spectrum taken away.

Upping the Ante

How effective the rules will be in reshaping the wireless landscape will depend in part on which parties end up bidding for, and winning, the airwaves. Google and its ilk didn't get all of the rules they lobbied for. The FCC, for example, didn't mandate that spectrum holders must sell their network capacity to other service providers on a wholesale basis—another provision that would have fostered greater competition. Several new entrants had been expected to participate in a big auction last year, but few did. "This has been a truly monumental effort, and I truly hope it works," Commissioner Michael Copps said during the hearing. "But the end result could be same old, same old."

The big takers in last year's wireless auction, including AT&T, Leap (LEAP), MetroPCS (PCS), and Verizon Wireless, owned by Verizon Communications (VZ) and Vodafone (VOD) (see, 9/07/06, "Verizon's Wireless Airwaves Binge"), may emerge as the biggest bidders this time around, too, says John Hodulik of UBS (UBS). "The incumbents will still have a very strong incentive to go after this spectrum [to defend their existing business]," he says.

Some potential new entrants are reserving judgment. "We will need time to carefully study the actual text of the FCC's rules, due out in a few weeks, before we can make any definitive decisions [as to whether we'll participate in the auction]," says a Google spokesperson. But during a July 31 conference call hosted by advocacy group Public Knowledge, Google's Whitt was asked whether the ruling increases the company's chances of bidding. "It sounds like we're in somewhat better shape," he said. "We are encouraged."

And in the off chance that encouragement doesn't translate to sufficiently aggressive bidding by Google and other parties, the FCC has crafted a Plan B. It will redo the auction, under the more conventional rules that leave AT&T and Verizon Wireless far less cause for complaint.

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