Where’s the pony?

[Editor’s note: FCC Chairman Kevin Martin got some positive press last week for saying he was going to “open” an important section of the wireless spectrum via an auction, but Reed Hundt, a former chairman of the FCC himself explains why the plan falls short.]

The draft order from the FCC of rules for the upcoming 700 MHz spectrum auction may have a pony in it somewhere. But on the basis of widespread media reports about its content, it appears to reflect a significant bias against entrepreneurship.

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The FCC will vote in public in a few weeks on what the final rules will look like for this auction, which is the last on the horizon for the kinds of radiowaves that are needed for wireless broadband services. In the meantime, details have started to leak out about what the draft order will mean for wireless innovation and competition.

First, the order proposes to sell spectrum in very large regional blocks and very large bandwidths. This combination — so-called megaHerz pops — makes for high prices. High prices are more easily paid by large companies than by entrepreneurs. This is good for incumbents, and bad for everyone else.

Second, the order proposes that small businesses that wish to engage in wholesale – a very effective entry strategy that promotes retail competition – would not be able to obtain a bidding credit. The bidding credit, on the other hand, could be obtained by firms that engage in retail activities.

However, it is very difficult to launch a large national retail business in wireless, given the vast scale of the reconstituted Bell companies. So effectively the FCC’s bizarre anti-competitive interpretation of the bidding credit provision of the 1993 statute in question is plainly intended to write the law out of existence.

Third, the order proposes that a public-private network be built so as to have the private sector pay for a national public safety wireless broadband network. This was the idea of Frontline, which I started along with other key Silicon Valley partners, including John Doerr, Ram Shriram and Jim Barksdale. It is still a good idea but then the FCC undercuts it by forcing the bidder to be a retailer, as stated above, even though public safety wants to launch its own retailer using the public/private network as a wholesaler. In a time of constant terror threats, one would think the FCC would want to have a national public safety network be built, as opposed to creating obstacles to its creation.

Fourth, the order reportedly proposes that if the spectrum as a whole is not sold for $10 billion then the whole auction is cancelled. This is ten times higher than any previous reserve price. The time delay of a cancellation adds to the advantages of incumbents and discourages new entrants. It raises the cost of new entry. The very high reserve price is effectively a tax on starting a new business. There is no other business in America where the government taxes new entrants anything, much less the billions proposed by this FCC. It’s hard to imagine a less venture-friendly proposal than this reserve price. Even more bizarrely, the order sets a specific price on a third of the spectrum that is 42% of the total $10 billion. This, not surprisingly, is the spectrum supposedly designed for new entrants, who plainly are discriminated against by this provision.

Moreover, even if the goal is maximizing revenue, the FCC plan does not do that. The right way to maximize revenue is to say no single firm should buy more than 22 megaherz out of the 60 that will be sold. That way more firms will raise capital to go into the auction. Moreover, any small business should get the bidding credit but be able to pursue any business plan, so that the number of small businesses formed is maximized.

Fifth, where the order should set reasonable use conditions on the spectrum it does not. It apparently says that the public-private network should be national but then says that the license holder does not actually have to offer a service nationally. If there is no regular commercial service, then the network has no extra channels for police and firefighters to use in an emergency when their demands soar. This is tragic. The safety of American police and firefighters apparently is not that much on the mind of the FCC.

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There is still time to hope the FCC will fix these policy blunders. There is still time to hope that rumors are wrong and the actual decision is not as bad as one hears. But there is not much time. The harm to the economy and society that this decision can inflict is likely to be immeasurable, unless the draft decision is corrected.