Perspective: What does 'open access' mean?

On July 31, the Bush administration's Federal Communications Commission voted to impose a burdensome 1960s-era regulatory regime on currently unregulated wireless broadband operators.

Republicans Kevin Martin and Deborah Tate joined with the two always pro-regulatory Democrat commissioners to require whichever entity wins the bidding on soon-to-be auctioned 700MHz radio spectrum to operate on an "open access" basis. The fifth commissioner, Republican Robert McDowell dissented, stating that he favored "a market-based pro-competition solution...over a prescriptive regulatory approach."

What does open access mean? According to the commission, the auction winner "will be required to allow customers, device manufacturers, third-party application providers, and others to use any device or application of their choice" on its network. In other words, the nondiscrimination principle at the core of open access means traditional common carrier type regulation.

While the FCC casts its action as pro-consumer, in fact, it will harm consumers by deterring investment in new networks and innovative new services. And it will cost taxpayers to boot.

FCC Chairman Martin equated the agency's decision to one rendered "decades ago" that allowed AT&T's subscribers to go from renting black rotary phones to purchasing new telephone sets and services. He's referring to the FCC's 1969 Carterfone decision ordering Ma Bell to allow non-AT&T equipment to be attached to AT&T's ubiquitous telephone network.

Of course, the difference between the communications marketplace in 1969 and today is the difference between night and day, or between the 1960-ish black rotary phone and the latest BlackBerry or iPhone. As Commissioner McDowell explained, "the AT&T of the 1960s was nearly 100-year-old government protected and subsidized market monopoly."

And the veritable economic theorem that no one wants to buy a "pig in a poke" holds true, even for the FCC. Not knowing the full extent of the new regulatory obligations at the time of bid further ensures the forthcoming auction will realize less than if the spectrum were auctioned on an unencumbered basis.

The wireless market was deregulated more than a decade ago. Since then, the FCC consistently has determined that it is vibrantly competitive. In a September 2006 report, the FCC concluded "effective competition" exists in the wireless marketplace, with 98 percent of the U.S. population living in counties with access to three or more providers and nearly 94 percent in counties with four or more operators. Not surprising to anyone who has trouble keeping up with the latest cool wireless devices and services, the commission determined "the record indicates that competitive pressure continues to drive carriers to introduce innovative pricing plans and service offerings."

In the face of this evidence, the decision to impose the open access regulation is wrongheaded. In competitive markets, service providers have all the incentives they need to be responsive to consumer demands for new products and services. If there is a market demand for consumers to be able to access any application or use any device on a wireless provider's network, the operators will respond. Indeed, as Commissioner McDowell pointed out, the wireless market already is moving toward greater device and application portability "because it has been allowed to function freely."

There are costs to forced access mandates the FCC does not acknowledge. First, there are often efficiencies realized when service providers are allowed to negotiate voluntary business arrangements that prefer one firm over another. The cost savings realized from such non-neutral integrated business arrangements fuel the investment in networks and innovative new services that the FCC, in its September 2006 report, recognized is currently occurring. Conversely, because the forced standardization that inheres in open access mandates hinders service providers from differentiating their services from those of competitors, the operators lack incentives to invest in new network infrastructure.

Second, an open access mandate requires the commission to develop and implement detailed rules if it is to be enforced. In 1999, William Kennard, the Clinton administration's FCC chairman rejected pleas to impose a similar open access mandate on cable operators. Fearing what he called the "morass of regulation" that always follows an open access mandate, his reasoning then is fully applicable now: "It is easy to say that government should write a regulation...It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access."

This is why, immediately after the FCC's action, the telecom analysts at Stifel Nicolaus' research arm adroitly advised that "much of the meaning of the open access rules will be determined by the (2008) election (which will determine the leadership of the FCC) and the courts." The uncertainty engendered during the period before the new regulatory obligations are eventually sorted out through the interminable litigation is yet another reason why investment will be deterred.

Finally, taxpayers will be stiffed too. The simple fact that the spectrum is encumbered at all diminishes the amount that will be bid at auction. And the veritable economic theorem that no one wants to buy a "pig in a poke" holds true, even for the FCC. Not knowing the full extent of the new regulatory obligations at the time of bid further ensures the forthcoming auction will realize less than if the spectrum were auctioned on an unencumbered basis.

So, not only do consumers lose as a result of wireless operators' diminished incentives to invest and innovate, but so do Uncle Sam and the taxpayers who support him.

Biography
Randolph J. May is president of the Free State Foundation, a Maryland-based think tank. The views expressed here are his own.

More Perspectives

[cptobviouser]

Build your house upon the sand

You have to love an argument based on false assumptions.

"Not surprising to anyone who has trouble keeping up with the latest cool wireless devices and services, the commission determined "the record indicates that competitive pressure continues to drive carriers to introduce innovative pricing plans and service offerings."

Let's not forget here that the US is significantly behind the rest of the industrialized world in access to wireless technologies. Also, consumer choice is severely limited in the US with very little (if any) portability. Just because the FCC says things are okay doesn't make it so.

In the end the wireless spectrum is a public asset and allowing monopolistic practices only hurts the public. If manufactures and operators are allowed greater access to this public asset then more companies will flourish resulting in more jobs and more taxes. *If* the purchase price is lower because of open access requirements (which of course it most likely won't) this will be more than made up for in tax revenues from a more diverse and distributed economy.

"Excessive regulation" is the war cry for opponents to open market places like Mr. May. In reality forcing a closed approach on public assets is in itself excessive regulation. Free markets benefit the customer by fostering competition which in turn fosters innovation and lower prices.

The argument that monopolistic profits are necessary for innovation is a false argument contrary to the principles of a free and open market. Competition breeds innovation and low prices, not monopolies.

[atglabs]

Open Access does solve some problems!

Please tell me how market-driven access would prevent Verizon, for instance, from banning the use of VoIP-based cell phones using this new spectrum. The monolithic carriers aren't about to lose cell customers to their own less-monitizable high-speed wireless internet packages, and they would buy up the spectrum just to prevent such losses to new companies that can build a business model around it.

Why do the big guys want to buy all the available spectrum? So they can prevent a new company such as Google from having access to a national wireless network that can offer services which draw customers away from conventional wireless.

Finally, only a portion of the spectrum is required to be "open access". The remainder is available for the two or three giants to purchase and thus lock out upstarts and competitors.

The cost of regulations must be traded off against the benefits that can accrue to users when part of the playing field has been leveled by regulations that prevent the triumvirate monopolists from killing off the smaller players.

[wylbur]

"triumvirate monopolists" doesn't make sense

I do not see how three competing players can be triumvirate
monopolists. They compete fiercely for subscribers and are in a
heated battle for marketshare. Compared to these, a "new
company such as Google" is a real monopolist holding a
meaningful monopoly on keyword advertising. If there were truly
a clamor for a different way of doing business-- open network,
buy your own phone, switchable sims, etc., one of the
triumvirate would break rank and attract consumers that way.
Google has billions of dollars in cash and a great revenue stream
(which gives them access to credit on a massive scale) and is
well equiped to compete in a spectrum auction if they want to
create such a network on their own. Based on their revenue
stream, Google could easily get a credit line of $15B and buy up
all the spectrum.

[bobcode]

unlicensed is open access

WiFi IS Open Access. I don't have to pay my ISP for attach only their choice of WiFi router. I can use my own, whatever brand I want. You can even use AdHoc WiFi and do without the ISP, if that suits you. You don't have to limit yourself to IEEE 802.11 compatibility. It's be better if everyone boycotted the spectrum auction; more unlicensed spectrum goodness. Until Apple, there weren't good combo phones (Treo is okay). Trouble is, there's only one carrier, but it works with any WiFI, though.

[verbl800]

The analogy to ATT is valid...

While Mr. May theorized that the 1969 decision to allow non-ATT phone equipment to be attached to the phone network is not a good analogy, but he offers no evidence to the contrary. In fact, it's somewhat of an ideal analogy - the decision allowed consumer electronic manufacturers to flourish, and indeed introduced entirely new industries revolving arround access to analog telephone lines.

Much in the same fashion, enforcing an open access policy on wireless spectrum ranges allows for open inter-communication with different devices, thereby driving hardware, services, and other types of sales and industry.

Mr. May would do well to remember we live within a managed economy - while the conservative in me would prefer to enjoy near limitless freedom from goverment regulation and oversight, the pragmatist in me recognizes that if the government is going to regulate the wireless spectrums anyhow, they may as well do so in as logical and effeciant manner by ensuring open access to non-vendor-owned interfaces.

[RCharles]

We need new investment in separate networks

Mr. Mays wrote: "While the FCC casts its action as pro-consumer, in fact, it will harm consumers by deterring investment in new networks and innovative new services."

It is clear to most citizens that Verizon and ATT are operating as monopolies; they have not changed since the old ATT days. In PA, Verizon convinced the legislature (read: major contributions) to pass legislation making municipal wi-fi illegal. In other words, Verizon paid to eliminate competition.

So Mr. Mays arguement for additional investment needs to be focused on getting new investment from NEW WIRELESS Suppliers, not more Verizon or ATT access.

Another example: If I buy service and a phone from Verizon, some of the basic phone features, e.g., ring tone download, music download, are restricted and can only be used as a fee-based service within the Verizon network. Similarly, there are cell phones available that will use Wi-Fi for VoIP whenever it is available, reducing the minutes used for those calls. Verizon will NEVER offer such a phone; they force customers to use expensive wireless WWW access and then further limit the services available to capture www advertising revenue. All of this should be illegal; Verizon should be selling wireless access, both voice and Wi-Fi, that is open to all service suppliers. we need to put open access requirements on ALL wireless networks. ATT now offers the IPhone which, apparently, has open access to Wi-Fi; not clear if it will support VoIP. Only Sprint is marketing the new VoIP phones but they are a weaker vendor due to a smaller network.

In short, I should be able to buy a Wi-Fi enabled, VoIP equipped cell phone and use it on any network I want.

Ray

[wylbur]

try T-mobile

You need to try the new T-mobile hot spot phones.

[Quemann]

Mr.May should think outside his think tank

Since a lot of others already negated Mr.May's viewpoint, I'd like to suggest Mr.May should travel around to see Korea, Japan and other European countries so he can catch up with what is missing in USA and why USA is lagging behind such Asian and European telecom counterparts. In a blame game, motorists tend to blame pedestrians, while pedestrians tend to blame motorists. ATT and Verizon's monopolies should come to an end even by mandate, whih will enable American consumers get freedom from 2-year contracts and subsidized phones.