In an uncharacteristic move, the FCC tries its hand at innovation.

Anyone who holds to the notion that government agencies cannot be innovative should reconsider after the FCC’s July 31 announcement of final rules for the hugely anticipated 700 MHz spectrum auction. Pulled in many different directions by lobbyists for competing commercial and public safety interests, the FCC has ventured outside its usual regulatory box in defining both the structure and use of the five commercial channel blocks it has defined.

At stake in the 700 MHz auction, scheduled to begin on Jan. 16, are a total of 1,099 licenses for five commercial channel blocks covering a total of 62 MHz. The 700 MHz band allocation also includes 24 MHz to be dedicated to nationwide public safety networks. A unique and unprecedented aspect of the auction is the association of one of the commercial channel blocks with part of the public safety spectrum. The anticipated public/private collaboration raises a host of interesting technical issues that I will address in next month’s column. For now, I want to focus on the auction feature that has generated the most buzz in both the industry and mainstream press. I refer, of course, to the “open network” requirement for C block licensees.

The rules governing licenses for C block open networks (or, as the FCC more precisely refers to them, “open access networks”) require that customers be allowed to operate any wireless devices they want on the networks, subject to “reasonable network management conditions” that allow the licensee to “protect the network from harm.” How this regulatory language is interpreted could have a huge effect on the auction and on deployment and operation of C block networks. Much has been written about how open network rules will remove the barriers, imposed by network operators, that prevent handset vendors and data applications providers from selling directly to end users. But the biggest effects of open network rules may well be ones which aren’t yet widely appreciated.

To understand what open network operation might mean from a technical perspective, you have to consider why, and in what ways, today’s wireless networks are “closed.” The primary mechanism that restricts open access is that operators generally control selection and distribution of the user devices – handsets, modems and various other terminal types – that are allowed to operate on their wireless networks. The carriers do not impose this restriction to secure a monopoly on lucrative device sales. Quite the contrary, in most cases, the retail cost of devices is subsidized by the carrier. The most important reason network operators want to keep tight control on user devices is because the real and perceived performance and efficiency of their networks is hugely impacted by the functionality and performance of the terminals being carried around by their customers. This is particularly true in CDMA networks, where a single malfunctioning handset could potentially impact service in a large area.

What’s more, evolutionary network enhancement usually entails changes to air interface protocols that can only be effective with changes to handset functionality. Without the ability to require, or at least encourage, their customers to periodically upgrade their handsets, operators would find that network evolution would be difficult, if not impossible.

Having accepted the competitive subsidization of handsets and other user devices as a cost of assuring network integrity, carriers can take advantage of this control by limiting data features and applications to those that provide them some content revenues. They also can avoid offering hybrid devices, such as phones that include built-in Wi-Fi capability, which would allow their customers to use lower cost connectivity where available. These very visible restrictions, rather than the need for carriers to assure proper air interface functionality of user devices, that most rankle users and advocates of “open networks.”

In the long run, the open network rules imposed on just one channel block in the 700 MHz auction may have a major impact on the industry or may simply accelerate inevitable industry trends. It is hard to imagine that an operator will invest billions of dollars on networks without being able to assure their operational integrity, so it is likely that the “reasonable network management conditions” that allow the licensee to “protect the network from harm” will take the form of strict adherence to minimum performance standards, possibly through some sort of industry certification. But there is nothing in the auction rules that will prevent C block licensees from also offering subsidized user devices. If competitive pressure continues to dictate such subsidization, the legal right of a customer to use a compatible device bought on the open market at an unsubsidized price may have little network-wide impact. But it is at least possible that the “opening” of 700 MHz C block networks will trigger an industrywide end to user device subsidization, which would indeed be a significant change in the way carriers do business.

Even if widespread subsidization continues, it is possible that the FCC would prohibit C block licensees from artificially restricting the features and applications that work on the devices they sell. If so, it wouldn’t be long before other carriers are forced to remove such restrictions. In my opinion, the trend to at least this sort of “openness” is inevitable anyway as a natural result of competition among carriers.

The same competitive pressure should eventually force all major operators to embrace whatever sort of “openness” that the rules impose on C block licensees. For that reason, I’m betting that bids for C block licenses will not be depressed by the open network rules. We’ll see if I’m right in January.

Drucker is president of Drucker Associates.
He may be contacted at edrucker@drucker-associates.com