FCC Martin proposes corporate welfare for Google in 700 MHz auction

According to DowJones, FCC Chairman Kevin Martin is proposing some of the net neutrality/open access regulation that Google requested for 22 of the 60 MHz of prime 700 MHz of spectrum to be auctioned off by the FCC in early 2008 for use in about 2010.

• A similar USA Today cover story got a key part of the story wrong in implying that the net neutrality/open access conditions would apply to  the whole 700 MHz auction, not just to 22 of the 60 MHz being auctioned.

I have three points to make about Chairman Martin's reported net neutrality/open access proposal.

I.  Corporate welfare for Google:

Bottomline: FCC Chairman Martin's net neutrality regulation conditions amount to a multi-billion corporate welfare subsidy grant to Google, because the proposed rules apparently are specifically rigged to benefit Google's Open Internet Coalition.

• Why are these proposed rules obviously corporate welfare?
• If Google or any market player wanted to offer net neutrality/open access over this prime 700 MHz spectrum, Google could compete in the free market auction, bid the most and offer a net neutrality/open access service.
• There is absolutely no law or regulation prohibiting a company from choosing to pursue a net neutral/open access wireless offering.
• If it benefited consumers, market forces would make it happen.
• Google can clearly afford to bid competitively and win spectrum in a free and open auction, as Google's market capitalization is about 40% larger than Verizon's!
• At a ~$170 billion in market capitalization, Google is no poverty case, it is among the most financially powerful companies on the planet. 
• It is outrageous that the FCC Chairman fell for Google's poverty plea for a de facto auction subsidy and price break that will shortchange the American taxpayer the billions of dollars that a free and open competitive auction would raise.
• Chairman Martin's proposed regulatory restrictions will reduce competition for the spectrum, which in turn will greatly lower the potential price for the spectrum.  
• Let's get down to brass tacks here.
• The FCC Chairman apparently has been suckered by clever rhetoric because it is obvious that the FCC does not grasp the business model implications of their proposed net neutrality/open access regulations.
• What is the business reason why would Google and other advertising or transaction based business models would want spectrum to be massively devalued and would want to create a dumb wireless broadband pipe?
• Duh! Because Google does not make its money from paid subscriptions like wireless service, but gets paid through advertising and an advertising business model!
• Commoditizing spectrum competitively advantages advertising business models over subscription business models.
• Chairman Martin is picking Google as the de facto auction winner from the beginning. 
• Google is laughing all the way to the bank that the FCC didin't figure this out and that they could convince the FCC Chairman to specifically favor their advertising business model over wireless subscription models -- at the taxpayers expense no less.
• Google's appetite for corporate welfare knows no bounds but that is for another blog post.

II.  Nextwave Fiasco II?  Another big problem with these proposed rules is that Chairman Martin clearly did not learn from the Nextwave spectrum fiasco; and those that don't learn from the past are doomed to repeat it.

• Chairman Martin's proposed hyper-regulatory conditions for this 700 MHz spectrum are eerily similar to the hyper-regulatory conditions former FCC Chairman Reed Hundt forced on the PCS auction in 1993 that disastrously left 30 Mhz of prime spectrum fallow and in legal limbo for over a decade.
• The Chairman's well-known penchant for trying to nuance policy on the head of the pin, will suffer from the obvious flaw that his conditions undermine the purpose and spirit of the FCC's auction authority, which is to allow market forces competition determine the value and outcome of the auction, not pre-determine the outcome with rules that effectively rig the outcome for the benefit of special interests and to the detriment of the American taxpayer.
• I hope Chairman Martin is highly confident of his legal standing on this auction market manipulation, because as former FCC Chairman Reed Hundt lamented in the Washington Post yesterday, "When you hold an auction that is an economic catastrophe, you spend the rest of your life apologizing for it."  

III.  Regulating part of the Internet: Chairman Martin's backdoor regulation of this part of the Internet will also have a big problem with the Bush Administration, the Federal Trade Commission, and free marketeers who oppose regulation and taxation of the Internet.

• Proposing completely unnecessary net neutrality/open access regulations for part of the Internet, goes directly against the Bush Administration's policy position against net neutrality which was officially communicated to the House prior to the defeat of the Rep. Markey's net neutrality bill last year as part of consideration of telecom reform legislation.

Proposing net neutrality/open access regulations for part of the Internet also goes completely against the Federal Trade Commission's recent 170 page report on net neutrality which declared on pages 11 and 160: 

•  "To date we are unaware of any siginificant market failure or demonstrated consumer harm from conduct by broadband providers." [Bold emphasis added]

The big question for Chairman Martin is does he disagree with the FTC? What are the anti-competitive problems Chairman Martin is trying to solve that the FTC missed?

It seems from the quotes from the FTC report below, as if the FTC was speaking directly to Chairman Martin and he didn't listen.

• "We recommend policymakers proceed with caution in evaluating proposals to enact regulations in the area of broadband Internet access."
• "Policymakers also should carefully consider the potentially adverse and unintended effects of regulation in the area of broadband Internet accesss before enacting any such regulation."
• "Over time, competition produces the best results for consumers, providing them the lowest prices, the highest quality products and services, and the most choice."
• "The FTC will continue to devote substantial resources to maintaining competition and protecting consumers in the area of broadband Internet access, using a variety of tools."        

Is Chairman Martin stiff-arming the FTC and showing them that he will defend his policy turf?

It will be interesting to see how this market manipulation plays out. At this point, it certainly smells bad.