The 700 MHz Club: Verizon’s Challenge to the FCC’s Open Access Requirements

I. Introduction

With the passing of the Deficit Reduction Act of 2005, Congress amended Section
309(j)(14) of the Communications Act of 1934, setting a February 17,
2009 deadline for the switchover from analog television to digital
television.[1] After this deadline, all full-power television station licensees that hold a license to operate on a frequency
between 698 and 806 megahertz (MHz) may no longer operate on that frequency.[2] On a television, these frequencies encompass channels 52 to 69.[3]

As a result of this freed up bandwidth going back
to the government, Congress instructed the Federal Communications
Commission (FCC) to auction off licenses to operate on these
frequencies.[4]
The purpose of these auctions is to encourage the development of new
technology, to encourage competition, to recover a portion of the value
of the spectrum for public use, and to encourage efficient and
intensive use of the electromagnetic spectrum.[5] According to some estimates, the auction of these frequencies could raise in excess of $10 billion.[6]

The
700 MHz spectrum has a number of characteristics which will make it
quite attractive to prospective bidders. Current cellular bands in the
United States operate between 800 MHz and 1900 MHz.[7]
Because of the 700 MHz spectrum’s lower frequency on the
electromagnetic spectrum than those bands, it can more easily penetrate
objects such as buildings.[8] Moreover, a tower broadcasting at 700 MHz can cover twice the area as a tower broadcasting at 1900 MHz.[9]
While the cost of building a 1900 MHz nationwide network would likely
cost approximately $4 billion, the projected cost of building a 700 MHz
nationwide network would likely cost about $2 billion.[10]

As a result of these characteristics, this
spectrum presents a number of innovative possibilities for companies
who land licenses on the 700 MHz spectrum. While wireless phones are
one possibility, other possible uses of the 700 MHz spectrum include
mobile television, portable satellite radio, and high speed internet.[11]
Furthermore, the FCC has evaluated the possibilities this spectrum has
for public safety and has set aside portions of the 700 MHz to be used
exclusively for public safety purposes.[12]

II. The Fight Over Open Access and the FCC’s Compromise

While the FCC was determining how to most
effectively auction off portions of the 700 MHz spectrum, a number of
potential entrants began squabbling over what kinds of restrictions
should be placed on the licenses auctioned off. Two sides took shape
during this time. On one side, companies such as Google advocated for
more flexible rules that would make it easier for new broadband
companies to enter the market.[13]
In particular, Google has adamantly stated that the current broadband
market suffers from a lack of competition, lacks choices and
innovations to the detriment of consumers, has a number of considerable
barriers to entry for new competition, and prevents consumers from
easily moving to other providers with high switching costs.[14] For these reasons, Google wrote a letter to the FCC requesting that winning bidders would have to provide wholesale
service, open access to any devices and software applications, and interconnection with third parties.[15]

On the other side, companies such as Verizon
oppose Google’s propositions for restrictions on the winners of the 700
MHz spectrum bidding. Verizon shot back against the claims of market
deficiencies, claiming that wireless prices have plummeted and that
innovation has not suffered in the current market.[16]
Naturally, Verizon and their supporters opposed Google’s proposed
restrictions. These restrictions have been attacked as being
anti-competitive and essentially life support for struggling entrants
in the current wireless market.[17]

The FCC had a difficult decision to make between
these two sides. Traditionally, the FCC has used open auctions without
restrictions in selling off licenses for the electromagnetic spectrum.[18]
However, the FCC was not faced with an all or nothing decision
regarding how to auction off the various parts of the 700 MHz spectrum.
It had the power to break up the spectrum and auction off each part
separately. Thus, in crafting its service rules, the FCC broke up the
remainder of the spectrum to be auctioned off into different parts.[19] One of those parts, a 22 MHz section, was designated as 700 MHz Block C.[20]
Licensees who win the bidding for portions of this block would have to
provide open access to any devices and software applications; they
could not block access to these services even if they compete with the
licensees’ own services.[21]
However, wireless service providers may use reasonable certification
standards and processes to approve of the use of these devices and
applications.[22] Finally, the FCC anticipates the reserve price of 700 MHz Block C to be set at $4.6 billion.[23] If this price is not met, 700 MHz will be auctioned off once again without the open access requirements.[24]

In essence, the FCC attempted to create a
compromise between the competing viewpoints. In Google’s favor, they
created an open access requirement for devices and applications within
this portion of the 700 MHz spectrum. However, this requirement is only
limited to 700 MHz Block C; no other part of the spectrum will have
this requirement.[25]
Moreover, as mentioned above, licensees can place reasonable boundaries
on what programs and devices can be accessed. Google did not get the
wholesale and third party interconnection it was looking for. Despite
winning on only a few fronts, Google sees this as progress and has not
ruled out the possibility of bidding in the upcoming auction.[26] However, rather than content itself with its victories, Verizon opted to take the battle into federal court.

III. Verizon’s Petition and Analysis of Potential Causes of Action

On September 10, 2007, Verizon petitioned the
United States Court of Appeals for the District of Columbia to review
the FCC’s open access requirements on 700 MHz Block C.[27]
The petition lays out a number of general grounds to overturn these
open access requirements. Namely, Verizon claims the FCC overstepped
the authority it was granted under the Communications Act of 1934, that
the FCC violated the United States Constitution, that the FCC violated
the Administrative Procedure Act (APA), and that the FCC’s decision was
arbitrary, capricious, unsupported by substantial evidence, and
otherwise contrary to the law.[28]
Verizon is only challenging the open access provision of the FCC’s
Service Rules. Verizon is not seeking to lay claim over the parts of
the 700 MHz spectrum up for auction; it only wants the open access
requirements removed.

While the petition does not specifically lay out
what portions of the relevant statutes and United States Constitution
the FCC violated, Verizon is clearly invoking the APA’s arbitrary and
capricious test. The APA provides that a reviewing court shall hold
unlawful and set aside agency action found to be arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with law.[29]
In reviewing this portion of the APA, the Supreme Court has held that
the decision must be made based on relevant factors and that it was not
a clear error of judgment.[30] Any inquiry into the facts is to be searching and careful, but it must also be narrow.[31]
Furthermore, the agency must articulate a satisfactory explanation for
its action and establish a rational basis for the choice it makes.[32]
The agency cannot operate against Congress’ mandate, ignore an
important part of the problem, offer an explanation for its action
counter to the facts, or offer an explanation so implausible as to
clearly go beyond a difference of opinion or expertise.[33] Even if the agency offers an explanation which is somewhat unclear, it will be upheld.[34] Furthermore, Verizon is invoking the substantial evidence provision of the APA.[35]
This provision requires that, in cases of formal rulemaking where a
rule or order cannot be issued except on consideration of the whole
record and in accordance with the reliable, probative, and substantial
evidence at hand.[36]
Substantial evidence means having enough relevant evidence that a
reasonable person can accept as adequate to support the conclusion.[37]

Verizon
faces an uphill battle with these two standards. Both accord wide
deference to the FCC. Verizon will basically have to show the FCC
either ignored its Congressional mandate or it will have to show the
FCC ignored Verizon’s facts and arguments. Congress’ mandate to the FCC
was to create a competitive bidding system which encourages the
development and deployment of new technologies, promotes economic
opportunity and competition, and efficient and intensive use of the 700
MHz spectrum.[38] Moreover, the FCC is supposed to test multiple alternative methodologies under appropriate circumstances.[39] Congress gave the FCC a number of broad objectives and told the FCC to pursue different avenues to accomplish those goals.

Given
that both sides of this debate have been publicly fighting over what to
do with the 700 MHz spectrum as well as fighting over things such as
competition and barriers to entry in the wireless market, this is an
issue which Congress would have been aware of in passing this mandate.
Congress was silent in its mandate to the FCC regarding the imposition
of licenses such as these. In fact, the mandate to test multiple
alternative methodologies could be seen as encouragement to let the FCC
experiment in how it auctions off these portions of the spectrum.

Finally, the FCC only placed these restrictions
on 700 MHz Block C. If the FCC had ignored the arguments of those
against open access requirements, they would have imposed those
requirements across the board. Instead, only a single portion of the
spectrum being auctioned off has these requirements. Congress gave the
FCC enough leeway to experiment and the FCC is putting that to use.

Unless Verizon is able to produce a large body of
evidence which would strongly prove that this would be harmful to
competition and innovation or that the FCC did not bother with their
assertions, these two claims in particular do not seem to be strong
enough to overturn the open access requirements. Those who follow free
market ideologies can be just as reasonable as those who follow
regulatory ideologies.

IV. Conclusion

While Verizon and Google have been fighting a
battle over the 700 MHz spectrum through the internet and the FCC, the
battle has spilled over into the courts. Considering the number of
technological possibilities that could come about from the 700 MHz
spectrum, billions of dollars are at stake. While this court battle
might delay the auctions and the innovation, access to the 700 MHz
spectrum will end up benefiting consumers, with or without the open
access requirements. Not only will it allow more people to gain
wireless access in rural areas because of the propagation potential of
this spectrum, it will also spur innovation and give consumers more
choices. However, with this legal battle picking up steam, the kinds of
choices consumers will receive remain to be seen.