Verizon Wireless' Strange Change of Heart in FCC Auction

When Verizon Wireless filed an almost perfunctorily brief lawsuit against the FCC in a federal appeals court on Monday, analysts and wireless industry observers were baffled. With the FCC having written up the 700 MHz spectrum auction order in late July, didn't the company have enough time to complain then? Surprisingly, a clue to its motives comes not from itself or its lawsuit but from the FCC.

When Google first indicated it would be willing to bid as much as $4.6 billion for prime real estate in the 700 MHz band presently belonging to UHF channels, if the US Federal Communications Commission would impose stipulations on how the winning bidder would use that spectrum, Verizon Wireless was one of several prospective bidders expressing outrage. A battle was expected in front of commissioners, and then suddenly the objections subsided.

After the FCC decided only to adopt two of the rules Google supported, including one enabling customers to use any brand of equipment for services using that spectrum, it appeared the reason for that subsiding was clear. Google probably wouldn't bid as a result, analysts speculated. But since that time, with whispers of Google and even Apple placing competitive bids, suddenly Verizon Wireless is taking the offensive again, having filed suit against the FCC in a federal appeals court in Washington on Monday.

As first reported by RCR Wireless yesterday, Verizon filed a three-page brief. Released to the public just today, its legal language looked almost boilerplate, as though Verizon had assembled a kind of token rejection of the current auction rules.

The entirety of Verizon's legal argument portion of the brief (minus references to US Code) reads as follows: "Verizon Wireless seeks judicial review on the grounds that the Report and Order exceeds the Commission's authority under the Communications Act of 1934, as amended...violates the United States Constitution, violates the Administrative Procedure Act...and is arbitrary, capricious, unsupported by substantial evidence and otherwise contrary to law. Verizon Wireless challenges that part of the Report and Order which adopts what the Commission refers to as an 'Open Platforms for Devices and Applications' mandate as part of the service rules for the C Block of spectrum in the upcoming 700 MHz auction. Accordingly, Verizon Wireless respectfully requests that this Court hold unlawful, vacate, enjoin, and set aside the challenged portion of the Report and Order, and provide such additional relief as may be appropriate."

Ironically, Verizon's legal argument is actually made for it on its behalf by the very Report and Order that the company cites. In that section of the order Verizon named, Commissioners wrote the following: "Opponents also challenge open access requirements as a throwback to an obsolete 'command-and-control' regulatory regime, which they see as unnecessarily restricting mobile wireless licensees' flexibility to adapt to market conditions and effectively compete.

Verizon Wireless argues that imposing an open access business model undermines the auction process and competitive bidding, which is designed to identify those bidders who place the highest value on the licenses to ensure that this scarce resource is not wasted or underexploited.

"Verizon Wireless asserts that imposing open access regulations runs contrary to the Commission's 'light regulatory touch' for wireless services generally," the FCC continues, "and is inconsistent with the Commission's prior determinations regarding the regulation of broadband services. According to Verizon Wireless, requiring winners of licenses in the 22 MHz block to provide open access would impose an asymmetrical regulatory regime on only one segment of the industry, thus drawing arbitrary distinctions by treating those licensees differently than other 700 MHz licensees, other wireless providers and/or broadband Internet access providers. Also, according to Verizon Wireless, the Commission cannot impose access requirements without violating various sections of the Communications Act and affecting the First Amendment rights of existing providers."

So what on its surface appeared to be an objection in search of a relevant basis, may actually be the foundation of a true constitutional challenge. In the Order, the FCC said its compromise would be to impose the Open Access provisions to the C block only, while agreeing that no similar regulations should ever be imposed on any other block of spectrum, whether pre-existing or as part of the auction, at least for now. In making that compromise, the FCC may have actually left open the door for a Verizon challenge.

But Verizon's move Monday has many pondering why it waited until now to make its objections formal, and why it didn't challenge the rules sooner. Perhaps even more curious is that its objections come even in the midst of an added rule that may yet favor the company: If no one actually places a bid for any of the four blocks - which may yet be the case - then the rules elapse and the auction reverts to its typical form, with no stipulations attached.

Last July 31, dissenting FCC Commissioner Robert McDowell thought that escape clause was ridiculous. "To date, the Commission has received no assurances that any company is actually interested in bidding on the encumbered spectrum. Not one," McDowell said in his dissent speech. "The majority recognizes the risk that the encumbrances pose, yet has taken the unprecedented step of designing a fallback, 'Plan B' auction in the event the first auction fails. Perhaps the majority has only little more confidence in its plan than I do."

The move doesn't buy Verizon any friends among its customer base. Late this week, tech-savvy bloggers have taken the company to task for what appears to them to be a whiny, unappreciative attitude, as well as a stark opposition to openness in general.

Nonetheless, if the company is holding firm to the arguments it let the FCC itself make for it, there could very well be merit to its constitutional challenge: Since the stipulations are unprecedented, applying such requirements to this portion of the wireless communications industry without making similar applications in communications markets across the board, may very well be unconstitutional. And even if it's not, the challenge itself may have the effect of delaying the auction.

What would that accomplish? It might extend the lifetime and value of Verizon's existing wireless real estate, where it and just a few other players have a commanding presence. And that could very well be Verizon's entire motivation for its otherwise bewildering course of action.