Reclassification Proposal Means Years of Industry Uncertainty, McDowell Says

"There’s a great deal of concern,” McDowell said of his trip to Wall Street. “What I was directly told is that there is a tremendous amount of uncertainty as to, first of all, what the FCC is going to do and, second of all, what would be the appellate fate of those rules.” McDowell said if the FCC pushes broadband under Title II as proposed by Genachowski, the courts will reverse. The inevitable judicial review likely take two years, he predicted. “That’s two years of uncertainty,” he said. “I was explicitly told, again by investors of all providers, that checkbooks are being closed for investment. There are a lot of sell orders put in."

McDowell, who recently attended conferences in France and Italy, said many there expressed concerns about net neutrality regulations also proposed by Genachowski. The international consensus has been governments shouldn’t get involved in Internet governance issues, he said. “Once we cross that boundary, sort of break that sound barrier, we start to lose the moral high ground,” he said. “I was just traveling internationally last week and heard great concern about what the U.S. is possibly doing. The Europeans are taking a more cautious approach, based more on transparency and looking for evidence of systemic market failure before acting.” The fear is some countries could use net regulation to curb free access to the Internet, he said,

McDowell said he’s concerned that the current commission appears to be considering regulation in many areas. But that’s not unexpected, he said. “Democrats tend to be more regulatory and Republicans tend to be less regulatory and elections matter in that regard,” he said. “It should come as no great surprise that in a Democrat administration we are seeing ideas regarding more regulation proposed.” Asked if the FCC is focusing too much attention on net neutrality and reclassification, McDowell replied, “It’s the chairman’s prerogative to set the agenda, but there are certainly a lot of items we could be working on."

Asked about the possibility of a compromise between the FCC’s three Democrats, who support the reclassification proposal, and he and fellow Republican Meredith Baker, McDowell told us the FCC needs to find a “true middle ground.” That’s “not Title II classification, it’s using the FCC as a very bright spotlight to work in conjunctions with already established Internet governance groups,” he said. “We could spotlight allegations of anti-competitive conduct and get them resolved.”

McDowell said he continues to question whether changing how broadband is regulated is necessary to implement the National Broadband Plan. “I think the proponents of Title II classification are arguing that the Comcast case puts in jeopardy the implementation of many parts of the plan,” he said. “As a I look at that, that’s just not the case as a legal matter. The only part that it could arguably affect would be universal service reform, specifically supporting broadband through the Universal Service Fund. Spectrum reallocation is not affected by the Comcast decision in the slightest.”

McDowell said it’s time to wrap up the TV white spaces proceeding, following the 5-0 vote in November 2008 on an order that hasn’t led to use of that spectrum. “I am surprised with all of the energy and attention from Congress and the administration and industry and outside groups … that we wouldn’t have seen devices in the stores by now,” he said. “That is a big concern of mine. I think we've lost some opportunities.” Devices should be available by the end of 2011 at the latest, McDowell said. “I think we could do that, maybe even sooner,” he said. “But we all need to work together on that."

Unlicensed use of the spaces between TV channels could address many policy concerns, McDowell said. “Whether it’s anti-competitive conduct in the last mile for broadband, you would have an unlicensed ability to work around that. Whether it’s broadband deployment and adoption, as we saw with Wi-Fi, having unlicensed use of spectrum really can help that technology proliferate very quickly and adoption accordingly.” He wondered whether there are any business models for free access, much as there is for Wi-Fi, “that could obviate the need for any conditions on spectrum and sort of mandate for free access."

McDowell said he’s hopeful about USF reform, especially after commissioners were able to reach agreement, which ultimately died under former Chairman Kevin Martin in the last months of the Bush administration. “Of the four commissioners who were in agreement in principle on many of the issues, two of us are here -- myself and Commissioner [Michael] Copps. That is a pretty good critical mass. I'm hopeful that would be an area for broad consensus."

McDowell urged Genachowski to propose an auction of the 700 MHz D-block. “It’s my hope we would be able to vote on that sooner rather than later, such as this summer,” he said. “I would hope that such a notice would include a lengthy section on exploring the benefits of auctioning off the D-block clean, that is without encumbrances. … You want to maximize revenue to the Treasury. But even more important than that you want to maximize freedom for whoever the licensee is to use that spectrum in the most efficient means.” When the FCC put encumbrances on spectrum, “We're trying to guess what maybe six or 10 years from now the technology is going to be and what the marketplace is going to look like. That’s virtually impossible to predict with any certainty."

The FCC’s restrictions on the SkyTerra and Harbinger Capital Partners deal that prohibits leasing of SkyTerra spectrum to either of the nation’s biggest wireless carriers without explicit commission approval inhibit the secondary market and could make raising capital harder in the future, said McDowell. “At a minimum when you restrict freedom to have a healthy secondary marketplace for spectrum that’s going to devalue the spectrum and that has a couple of perhaps unintended consequences,” he said. “It can make it harder to raise capital for the licensees” for network buildout and “could result in spectrum lying fallow essentially for years if its harder for these carriers to be able to lease it or sell their companies to other companies. So if we're talking about more effective use of spectrum I think we need to have robust unencumbered secondary marketplace and such restrictions would undermine that goal."

Of some communications lawyers’ gripes the FCC isn’t moving quickly on many items beyond broadband as the current focus on reclassification saps attention, “that’s a legitimate question to ask,” McDowell said. “One does have to ask the question as to whether or not pursuit of Internet network management rules and classification of broadband under Title II isn’t distracting us from other core functions.” Resolving long-pending indecency complaints is an area where McDowell would like to see action, he said. “I do think there is more that we can do,” he said. “Not everyone in the building works on broadband issues. And I'm hopeful that now that the broadband plan is behind us, we can work on that.”

McDowell has seen no signs of staff morale sliding because the FCC hired an outsider to lead review of Comcast’s plan to buy control of NBC Universal, he said. “I have not heard of any concrete illustrations that it has been anything but positive” as “we have seen tremendous improvements” in morale in the past year and a half, he continued. “It is my hope that the reorganization only enhances their talents and maybe helps take some of the workload off their shoulders so they can cover more ground more quickly.” On the 2010 media ownership review, the FCC “did lose some time in preparation” for the 3rd U.S. Appeals Court in Philadelphia to consider challenges to last review, he said. “I'm hopeful we'll get guidance from them sooner rather than later.”

From speaking as recently as Monday with broadcasters on spectrum, McDowell sees “room for consensus,” he said. “I'm very hopeful it can be worked out in a cooperative, collaborative, voluntary way. At this point I'm not sure I could support any direction other than that.” Even if the agency were to now identify all spectrum to auction, it could take “the better part of a decade before it’s out there being built out,” he said. “So carriers really need to focus on efforts to improve their spectral efficiency. And there’s a lot of opportunity there” with software-defined and cognitive radio, smart antenna technology, femtocells and use of white spaces for backhaul.