May 22, 2003
Members will hear testimony on the various proposals to use spectrum to enhance the availability of broadband services in rural areas. Senator Burns will preside.
The Honorable Mary L. LandrieuU.S. SenatorLouisiana
Mr. Thomas W. Hazlett
My name is Thomas Hazlett, and I am senior fellow at the Manhattan Institute for Policy Research. I am a former Chief Economist of the Federal Communications Commission, and I have written extensively about spectrum allocation policies in the U.S. and around the world. The case of Northpoint Technology reveals ongoing infirmities in the U.S. spectrum allocation system. In a more efficient world, innovative wireless companies such as Northpoint would simply buy the spectrum they need, much as any company buys labor, raw materials, and capital inputs. Barriers to entry would be low, and new competitors could quickly test their technologies with consumers in the marketplace. But, despite license auctions, the U.S. does not have anything approaching competitive bidding for spectrum. Firms attempting to offer novel wireless services must first convince Federal Communications Commission planners that it would be in the public interest for spectrum to be allocated for their project. It is an understatement to say that this is a costly and time consuming process. In it, the applicant must reveal its business plan, negotiate endless regulatory details with agency staff, negotiate spectrum sharing rules with incumbent users, and do virtually all of the heavy lifting in surmounting regulatory barricades designed not to welcome rivals but to foreclose them. License auctions ironically lift the walls. Should a competitive technology, however improbably, get past the allocation contest, it must now buy back its business plan from the federal government. In this it will compete with established service providers which have strong incentives to outbid the potential entrant simply to lessen the impact of new competition. In Northpoint’s case, I have estimated that either of the two incumbent satellite TV suppliers would bid several billion dollars above the highest bid Northpoint might plausibly make for MVDDS licenses, owing to the economic gain associated with avoiding price reductions. On an annual basis, cable and DBS subscribers would expect to pay at least $2.75 billion less in subscription fees. It should also be noted that these gains have been lost for several years simply due to the delay imposed on Northpoint’s entry by the FCC rulemaking process. License auctions are very useful for assigning rights among roughly comparable applicants. The firm willing to pay the most to offer service is, all else equal, the firm that will likely do the best job of providing service to the public. But where applicants are distinguished, other assignment rules can be more efficient. Indeed, many if not most FCC licenses are still assigned by non-auction procedures because of the disruptive effect auctions would have on telecommunications investment. Specifically, the FCC does not invite competing bids for incumbents’ license renewals. To do so would destroy incentives for licensees to invest in technology, capital, or a reputation for high-quality service. All such investments could be substantially appropriated by others (including the government) were a license to be put up for bids at expiration. Policy makers realize this, and avoid economic losses by simply renewing licenses for law-abiding licensees. But FCC regulators do not recognize that the same economic misallocation occurs when new entrants are appropriated after investing substantial resources in gaining a spectrum allocation -- the case of Northpoint Technology. The message it sends to innovators is: give up early. If you seek to move the FCC to allocate spectrum to a new technology you will invest years of hard labor, and millions of dollars, for the right (if you succeed!) to bid for a license against other interests who contributed not a kopek. Innovation grinds to a halt while entrepreneurs wait for some one else to shoulder spectrum allocation burdens. This tragedy of the commons leads to under-investment, and consumers lose valuable new wireless options while paying higher prices for less competitive services. The long-term solution is to reform spectrum allocation, allowing markets to efficiently shift bandwidth from less useful enterprises without government approval. In the near-term, applicants who do invest substantial resources to bring about productive new uses of radio spectrum should not be appropriated but rewarded. I have outlined a simple two-part test in my paper, “Anticompetitive Uses of Competitive Bidding: The FCC’s MVDDS Rulemaking,” which would allow regulators to distinguish when license auctions are appropriate under the current spectrum allocation process. I am happy to make this paper available to any interested party today, or electronically. My address is: firstname.lastname@example.org.
Mr. Larry Roadman
Good afternoon, Chairman Burns and members of the subcommittee. I am honored to testify before you today on an issue of extreme importance to rural Americans and the rural telecommunications carriers that serve them. Mr. Chairman, I want to recognize and commend your ongoing effort to promote the economic health of rural areas. Specifically I want to recognize the LPTV Digital Data Services Pilot Project legislation passed in 2000 and your current bill proposing the expensing of rural broadband capital investments. My company, Margaretville Telephone Company, doing business as MTC, is an Independent Local Exchange Carrier (ILEC) serving the central Catskill region of upstate New York – an area that is indeed rural and economically challenged. MTC has been family owned and operated since 1916, though under an ESOP formed in 1985, the 17 non-family employees own 30% of the company. MTC serves over 4600 telephone access lines. In addition, MTC’s cable subsidiary serves over 1700 subscriber units and our ISP, Catskill On Line ( COL - a joint venture with a neighboring ILEC, Delhi Telephone Company) serves over 8300 Internet subscribers in four upstate New York counties. Within its telephone service territory, MTC offers DSL to 95% of its telephone subscribers and cable modems to all cable subscribers. Outside of its service territory, MTC offers cable modem service where it has built cable facilities to serve villages near Margaretville and wireless high speed data connections in Oneonta, New York, a tertiary market city 45 miles from Margaretville. Since early 2001, we have deployed equipment in the unlicensed 2.4Ghz spectrum and are currently using 802.11 equipment to create a “hot zone” service, covering much of the city of Oneonta. In anticipation of offering high speed services throughout the underserved central Catskill region, MTC has sought spectrum assets over the past eight years. Through FCC auctions, it has purchased whole or partnership interests in PCS, LMDS and 700Mhz licenses. In addition, it joined with several other companies to form Wireless Access, LLC, the owner of three low-power TV (LPTV) licenses designated as test stations under in the LPTV Services Pilot Project legislation of 2000. We are eager and ready to deploy LPTV and/or 700Mhz broadband services when equipment is readily and economically available. *********************** Policymakers, service providers and subscribers all recognize there is, or soon will be, a very real need for broadband accessibility wherever you live and work, whether it is in rural Montana, suburban New York or downtown Washington, D.C. The extent and actual location of the underserved areas in this country may not be as well understood. While my customers in Margaretville, 150 miles from New York City and in the northern reaches of the Appalachian poverty belt, have had access to DSL or cable modem broadband services, or both, for almost two years, I, living in Westchester County, just 28 miles from New York City and in one of the richest counties in the country, have only had access to cable modem service since early this year and have been told repeatedly not to expect DSL access any time soon. Interestingly, the latest survey by the National Telephone Cooperative Association shows that, by the end of this year (2003), 47% of its member companies plan to offer broadband services to all customers within twelve thousand feet of any fiber-fed nod in their systems. By that time only 5% of the companies intend to be offering only dial-up Internet service. By making broadband services to their customers, one thousand plus independent telephone companies are acting as very effective “economic engines” in rural America. By offering these services in areas outside their traditional territories, by actually “reaching out” into tertiary and, even, secondary markets, most often using wireless technologies, these companies are complimenting the efforts of the larger providers who are primarily focused on the urban, primary markets. *********************** Utilization of the LPTV and 700Mhz spectrum bands holds great promise for broadband delivery in secondary, tertiary and rural markets, and even in urban industrial areas not traditionally served by cable. These frequencies allow robust and non-line-of-site service provision, well-suited for use in sparsely populated plains or mountainous regions, as well as in built up large cities or suburban centers. Recognizing this promise ILECS were some of the first investors in early LPTV two-way data efforts (even before the supporting legislation) and ILECS makeup approximately 60% of the successful bidders in the initial 700Mhz auction in 2002. In addition to expanding and accelerating broadband deployment, opening up the use of these spectrum bands offers Congress and the FCC three other opportunities. First, the establishment of licensed-band data services will enable the development of a stable, quality of service high speed data marketplace. Second, the addition of these two bands to the market will firmly establish a broad, competitive marketplace in high speed data. The active LPTV option and straight purchase market will determine what portion of the LPTV spectrum will be used for broadcast and what portion for two-way data. Third, unlike the expanding use of unlicensed spectrum, the expanding use of these two frequency bands will offer the opportunity of expanding government revenues through increased auction values and the growth of usage based fee revenues. *********************** At least four actions by Congress and the FCC will significantly accelerate and enhance the development of a broadbased, healthily competitive broadband marketplace. 1) Legislation: Legislation like Senator Burns’ current bill proposing the expensing capital costs for broadband deployment will make business plans more achievable, aiding in the currently uphill battle for funding. 2) Focus on Licensed Spectrum: Furthering the deployment of licensed bsustainable, higher quality, economically efficient broadband marketplace. 3) LPTV Spectrum Availability: The current economic situation has blocked efforts to raise funding necessary for progress on the Pilot Project, though an improving investment climate holds the promise of testing and development action in 2003. Robust development of the LPTV spectrum band will depend on a clear awareness that the FCC will expand two-way data usage past the initial 13 legislative test stations. I call on Congress to exact that commitment from the FCC 4) Clearing of 700 Mhz Spectrum: A significant portion of one 700Mhz license block was acuctioned in 2002. The remainder of that block (along with one other block) will be auctioned in the next several months. Current license holders await the delivery of equipment from manufacturers. However manufacturers, as well as investors, are hesitant to move forward while broadcasters remain incumbent on many of the stations sold in the auction. The dates set for broadcasters to vacate these stations seem to be loosely administered and do not appear to be “dates certain”. In order to assure the ability of license holders to use the 700Mhz for broadband deployment, i.e. to move manufacturers and investors forward, I call on Congress to investigate what actions Congress and the FCC might take in either or both the broadcast and broadband markets to enhance and accelerate the viability of broadcasters vacating and licensees using the auctioned 700Mhz and then to ensure that “dates certain” for vacating are both set and enforced.
Ms. Antoinette Bush
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Mr. Andrew S. Wright
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Mr. Harold Kirkpatrick
Chairman Burns, Senator Hollings, and distinguished Members of the Subcommittee: Good afternoon and thank you for this opportunity to testify on behalf of MDS America. My name is Kirk Kirkpatrick and I am the President and Chief Executive Officer of MDS America. I wish to personally thank you both, as well as your outstanding staff, for your collective willingness to include MDS America as a witness at this very important hearing. We hope you will benefit from our point of view in this proceeding. We at MDS America fully support the FCC’s plan to auction the Multi-channel Video Data and Distribution Service (“MVDDS”) spectrum that is the subject of this hearing today. We believe that going forward with an auction will fulfill the public policy objectives that Congress meant to accomplish when adopting auctions as the FCC’s primary spectrum licensing mechanism: an auction of the MVDDS spectrum will ensure that this spectrum is promptly licensed to the parties who value it most highly, with the added benefit of bringing millions of dollars into the U.S. Treasury. More importantly, competition among MVDDS providers will result from an auction; that competition will ensure that facilities will be built expeditiously and services will be made available to the public as quickly as possible. This competition will especially benefit rural America – MVDDS spectrum is particularly well suited to providing broadband services in rural areas that are not served or underserved by cable, local telephone, and broadband Internet access service providers. MDS America hopes to be one of those competitors in the MVDDS market. We are based in Stuart, Florida, and we are the North American licensee of MDS International, the leading designer of terrestrial broadband transmission equipment in the Direct Broadcast Satellite (“DBS”) band. MDS International has deployed terrestrial broadband systems in numerous locations overseas, providing video programming and high-speed Internet services to many delighted subscribers. Some of these systems share frequencies on an interference-free basis with DBS-DTH satellite services in their areas. MDS America hopes to introduce this innovative terrestrial broadband technology into the U.S. market. As I noted previously, we strongly support the FCC’s May 2002 decision to auction the MVDDS spectrum for terrestrial use. By establishing a level playing field, the FCC will encourage the most efficient and rapid introduction of the MVDDS spectrum-sharing technology throughout the United States. If S. 564 were to pass, however, MDS America and other hopeful-MVDDS providers could be delayed or denied the opportunity to compete, because the MVDDS spectrum at issue in this hearing today could be given away, for free, to one company, Northpoint Technology, or to an arbitrarily limited number of potential operators. This one company, Northpoint Technology, curiously has never built or deployed a broadband system anywhere in the world. The only “systems” ever built by Northpoint, to our knowledge, involve one or perhaps two transmitters with limited bandwidth. MDS America seriously questions whether Northpoint even has the ability to deploy a commercially viable broadband system of any type. In any event, should S. 564 become law the selection of MVDDS spectrum “winners” pursuant to this legislation will be subject to further regulatory scrutiny and delays, and, inevitably the losers in that FCC proceeding will seek legal relief in the courts, resulting in even further delays in deploying these critical services. Northpoint has been seeking legislative relief for years to circumvent the FCC’s normal spectrum licensing procedures, which, of course, were put in place by Congress. In January 1999, Northpoint submitted to the FCC applications and waiver requests for terrestrial use of the 12 GHz band, arguing that the FCC should waive its rules and grant it an uncontested license to operate terrestrially on the DBS spectrum. Northpoint claimed that it was the only company in existence with a non-interfering terrestrial technology in the 12.2 to 12.7 GHz band. It also argued to the FCC that its “unique” technology justified its demand that the FCC waive its established procedures and grant its license applications without consideration of other potential applicants. We beg to differ, and so did the FCC. The FCC denied Northpoint’s request and scheduled the 12.2 to 12.7 GHz spectrum for auction, noting “several parties have indicated that they have the ability to reuse spectrum in the 12.2 to 12.7 GHz band and seek the opportunity to do so as well.” As you know, the MVDDS radio channels were scheduled to be auctioned by the FCC commencing on June 25, 2003, but the auction was recently postponed due to the FCC’s consideration of changes to its MVDDS licensing rules. Despite the FCC’s denial of Northpoint’s waiver request, Northpoint continues to urge passage of S. 564 which, if adopted, would prevent the spectrum from being auctioned, literally give the spectrum away, for free, and result in the loss of millions of dollars to the U.S. Treasury. Moreover, passage of S. 564 could mean no competition in the MVDDS market, and the denial or further delay of broadband services precisely where such services are needed the most: rural and underserved areas. MDS America asks you to oppose Northpoint’s unprecedented spectrum grab through supporting the FCC’s decision to auction this very valuable spectrum under the FCC’s normal licensing procedures. We are not asking for special treatment: MDS America simply wants the opportunity to bid on the MVDDS spectrum in an FCC auction. MDS America asks you to consider the following with respect to Northpoint’s efforts seeking passage of S. 564: Point 1: Northpoint’s argument for special treatment is based on the inaccurate premise that it alone has technology capable of interference-free use of the 12.2 to 12.7 GHz band. Through a technology license granted by MDS International, MDS America holds the exclusive U.S. rights to MDS International’s innovative technology, including terrestrial broadband wireless technology capable of transmitting video and very high-speed Internet data at 12.2 to 12.7 GHz, without causing interference to satellite services sharing the same frequency band. In addition, MDS International has granted MDS America ownership of any present or future patents it may hold or apply for. MDS International’s systems have achieved a remarkably robust data delivery speed of 12 MBPS to the individual consumer. MDS International has been developing its terrestrial broadband wireless systems since 1986, which it operates successfully in other parts of the world. MDS International sold its first terrestrial broadband wireless system to the U.S. government in 1996 to provide video services to U.S. armed forces stationed in Oman. In fact, to the best of our knowledge, MDS International is the only company in the world today with operational terrestrial systems of this type. Many of these systems use the same KU-band frequencies as satellites serving the same localities without any significant interference. A recent tender in the United Arab Emirates for the largest MVDDS system ever built was won by MDS International over six other companies. MDS International subsequently built the first phase of this system beaming 154 digital TV channels to the entire area of Al-Ain in the UAE. The signal has been reliably received at a distance over 70 kilometers from the transmission site at Jabel Hafite. This system has a total channel capacity of 500 digital channels spanning 700 MHz of radio bandwidth (by comparison, the FCC’s MVDDS rules will allow 500 MHz of bandwidth for each licensed system). This means that the MDS International system is larger than any system that could be built in the US under present FCC licensure rules and is the largest system of its type in the world. The UAE company, Etisalat, that owns this system is owned by the government of the UAE who would field complaints of DBS interference by Emirati citizens had there been any. At this writing, this MVDDS system has been operational for over seven months without a single interference complaint. In addition, Etisalat has ordered three additional systems of the same size for the emirates of Dubai, Sharjah, and the city of Abu-Dhabi from MDS International. They have announced intentions for ordering eight more in the near future. The Northpoint system, if it indeed exists, has never been commercially deployed anywhere in the world. In the above-mentioned tender, Northpoint was not even qualified to bid. Point 2: Northpoint’s legal claims were rejected by the FCC. After a lengthy rulemaking proceeding at the FCC during which a wide variety of views and concerns were expressed, the FCC rejected Northpoint’s request for an exclusive nationwide license for the terrestrial use of the DBS spectrum. Upon a close examination of all relevant statutes and citing Congressional intent, the FCC explicitly rejected Northpoint’s legal claim that both the ORBIT Act and the LOCAL TV Act bar the use of competitive bidding procedures to assign licenses for MVDDS in the DBS band. The FCC’s decision to license competitive MVDDS services, reached after years’ worth of deliberation, reflects a “carefully crafted balance of technical and policy concerns.” Point 3: The MDS America Position: Pro-Competition, Pro-Consumer, Pro-Taxpayer. Northpoint’s anticompetitive effort to get MVDDS licenses without an auction, through the adoption of S.564, should be rejected. Instead, the spectrum auction should proceed as planned. In this way, potential MVDDS providers will have the opportunity to compete to offer the best products, technologies, and services at the best prices. This is pro-consumer, pro-taxpayer, and consistent with the goals of the Communications Act. The FCC’s rules are “technologically neutral,” which is how it should be. The carriers with the best technologies will compete to offer the best services. Point 4: The MDS America system has been successfully tested. In May 2001, the FCC granted MDS America an experimental license to demonstrate that its MVDDS technology, already successful in other parts of the world, would not cause harmful interference with DBS transmissions in the U.S. Pursuant to this license, LCC International, an internationally recognized engineering and consulting firm working independently of MDS America, conducted a series of tests of the MDS system in 12 separate locations around Florida. In its written report, which has been submitted to the FCC and which has not been questioned by any interested party other than Northpoint, LCC concluded that the MDS system can be successfully deployed without causing harmful interference with DBS systems operating at the same frequencies. A copy of the LCC report is available on MDS America’s website at www.mdsamerica.com. Moreover, the FCC’s rules have been carefully designed to guard against harmful interference to satellite systems. Point 5: The MDS America System is economically viable in Rural America. MDS America’s MVDDS system, as deployed elsewhere, is particularly well suited for deployment in rural areas untouched by cable and served exclusively by DBS operators. MDS MVDDS cells, using technology like that used in the UAE, can reach the curve of the earth, allowing MDS America to deliver signal over thousands of square miles. With their extensive coverage capabilities, MDS America’s cells are likely to reach enough of the population in rural areas of the U.S. to actually pay for the deployment of an MVDDS system. According to Northpoint’s own press filings, the cell range of their system is only 100 square miles, not enough to make it an economically viable venture in the least populated areas of the U.S. Conclusion In closing, we at MDS America urge you to support the FCC’s decision to auction this very valuable spectrum under the FCC’s normal spectrum auction procedures. I would like to thank you again for the opportunity to testify here today in this hearing on behalf of MDS America.