Tuesday, March 25, 2008

Thoughts on the D Block/Public Safety Broadband Network Auction: Policy Right; Business Wrong

By David Aylward, COMCARE Director

It is really a shame the FCC’s D Block/Public Safety auction didn’t work. But even in the failure, we should be delighted at the enormous policy progress it represents. Let’s hope the parties involved get the business side correct on the second round.

I taught a law school seminar recently, using this issue as an example of how change in communications policy occurs. My focus was on the extraordinary revolution in spectrum policy and emergency communications that Morgan O’Brien has brought about with his Cyren Call plan. I told the students Marx would be disappointed because change here was so clearly the work of a handful of individuals, not inexorable economic forces. When law enforcement leader Harlin McEwen recruited safety leaders to support O’Brien’s plan, the FCC adopted and applied many of its key principles to the pre-existing spectrum allocation. In doing so, the Commission basically followed the subsequent plan proposed and lobbied hard by Reed Hundt’s now-defunct Frontline. (There in two sentences is a year’s worth of intensive lobbying by scores of parties!) Morgan and Harlin touched off tectonic shifts in spectrum licensing policy and emergency communications architecture, and the FCC sought to implement them.

In a single year there was a huge policy break made from our emergency agencies’ current balkanized, compartmentalized and non-standardized communications to a modern, national Internet Protocol-based approach. From local everything, look at what happened. Thanks to these folks’ leadership, we have gone from local to national license, from local to national network, from self-owned to managed services, from narrow (and “wideband”) to IP broadband, from siloed access control and identity management to shared core services, from separate systems to sharing commercial spectrum and networks, and from separate technology to sharing in the benefits of commercial R&D. These are all extraordinary and positive developments, whatever happens next in the auction, and will help move emergency communications into the 21st century.

Where this approach is running into trouble is in the business issues of who does what (network details, service offerings) and who gets to make money – the issues at which regulatory lawyers in and out of government are generally awful. The key to this and any successful public/private deal is a marketplace test: can you finance it, and then make the numbers work over time? Notwithstanding its brilliance and innovation in inception, and an enormous amount of work in good faith by many parties in a short period of time, this plan didn’t even get out of the starting gate. It is a total failure on a business basis. Not even close.

The market enthusiastically embraced the other, adjoining beachfront spectrum and threw billions of dollars at it, substantially more than expected. But this adjoining spectrum was spurned, even with a floor price much, much lower than a comparable amount of spectrum (which lacked the advantage of access to the additional public safety spectrum and safety customers). How did the balance here between public and private interests get miscalculated so badly?

First, let’s not blame the entrepreneur who got this ball rolling. Morgan O’Brien never made any secret of his desire to run the public safety network as a business (versus acting as some sort of expert consultant to safety leaders). Congress would not change the auction rules as he proposed and hand over a larger block of 700 MHz spectrum in the form of a public safety license. At that point, he could have tried to bid on the D block in competition with Frontline and others, but his much smarter approach was to get the Public Safety Spectrum Trust (PSST) to become (or hire) a network operator – and to quickly give him that role.

Folks are focused on the $500 million payment from D Block bidders that Morgan allegedly asked for. To me that is frosting, and it creates an aura of back room deals when the important issues here were and are not hidden at all. The key document in this grand plan of a private sector/public safety broadband network is the Bidder Information Document (BID) for D Block bidders prepared by Cyren Call on behalf of PSST that was made public last November and is on PSST’s website (and includes at least one clear reference to the successful bidder paying up front for access to the safety spectrum). BID told potential D Block bidders what they would need to know and do to meet the Commission’s public safety obligation for the winning bidder. I encourage you to take 30 minutes and read it. What it describes is about as good as it could be from two perspectives: (1) the power of the PSST to have built and supervise a new, very high quality broadband network for public safety according to its desires and design, and (2) the ability of Cyren Call to run a very serious, large national business on behalf of all public safety clients -- effectively an MVNO for safety, but with some real power over the underlying provider. The architecture diagrams and explanations contained in this document describe in detail the extensive network operations and services by Cyren Call, including services and billing. This BID document says PSST/Cyren Call will “own the customer”. In looking at the income side of the ledger, therefore, a bidder would see Cyren Call/PSST taking the public safety business and paying some level of wholesale rate to the underlying carrier.

Getting to design a network that meets their needs, without serious regard at this point to cost, is attractive to emergency responders. The bidding document describes requirements that are often substantially better than many if not most public safety networks and certainly better than most commercial networks today, e.g. build-out requirements, encryption, back-up power and geographic/in-building coverage. Just look at the huge fight over power back up requirements the FCC is now trying to impose on the wireless industry. The bidding document insists on a strong (and thus expensive) solution there, as it does in just about every area.

There is nothing inherently wrong with any of this. Indeed, from the perspective of the emergency responder interests, there is a lot to be said for it, although our experience (and the public’s) with single providers hasn’t always been a happy one.

But power over network design and operations is just one value, one part of the overall equation, for emergency agency constituents/consumers. They will be paying customers of this network if and when it gets built. So they have two very different other interests than power/authority: the first is getting someone to build it (i.e. getting a successful D Block winner that builds out the new broadband network fast), and then being able to buy service on the network at reasonable prices. For these purposes, public safety users’ interests ultimately may be quite different than the way they are being defined today in the start up, design process.

For those who care about this issue it is worth rapidly perusing the formal document circulated by the PSST to potential bidders for the D Block spectrum in November, before the current spectrum auction started. It describes in great detail what the commercial winner of the D Block auction would need to do with the adjoining public safety spectrum, and the relationship it would have with the PSST. As you read it, put yourself in the role of an investment bank deciding whether to finance Frontline, or Warren Buffett spending his own money. http://www.psst.org/documents/BID2_0.pdf

It’s a bit too easy to criticize public safety leaders for designing a “platinum network”. What do we expect them to do? Negotiate with themselves? After all, folks in our world are focused on safety, not business and finance. How could a first set of requirements developed by and for national safety leaders be anything other than an ideal network? (Although it is worth noting that they entirely missed the value of using the backbone network these wireless services will need for the inter-organizational emergency backbone many of us have been advocating as well). And why should they not support the expansive role Morgan wanted for Cyren Call? His hard work got them to the table in the first place. The problem here appears that there was no serious counterweight representing the other half of the partnership (those with experience and interest in building large wireless networks), and the FCC apparently made no effective effort to solve that problem before the auction.

The winner of the D Block auction would have to compete with commercial companies who won other parts of the spectrum, and incumbents with current spectrum. Presumably s/he would compensate for the increased expenses of the network to meet special public safety needs by charging them more, and by offering specialized applications (e.g. radio over internet protocol interoperability services) to them. Certainly, there should also be some attractiveness in the large, stable, recession-proof audience of public safety clients. But it looks like much of the upside was going to Cyren Call/PSST, while the costs of delivering the underlying network were clearly both high and highly uncertain for potential D Block bidders.

One could say, “Well, that was all negotiable after the auction”, but no one in their right mind can bid into that uncertainty at every level, even in the best of credit conditions, particularly with a very large auction down payment at risk if the FCC later decided the winner had not bargained in “good faith”.

I have raised money for start up communications companies, of my own and of others. Reading this Bidder Information Document, it is inconceivable to me how anyone could either bid, or raise the money to bid. But don’t fault Morgan O’Brien for trying to maximize the business he would get to run. Let’s thank him for starting a revolution, significantly advancing how regulators and traditional public safety groups think about meeting safety communications needs. And don’t blame Harlin McEwen for rushing to hire his ally and trying to design the best possible network for safety uses. The question is where was the FCC in supervising this to find the balance needed to make a public/private deal financeable, and viable long term?

Let’s hope the participants get it right the second time around.

David Aylward is a founder and Director of COMCARE Emergency Response Alliance (www.comcare.org), President of National Strategies, Inc., and former Chief Counsel and Staff Director of the US House of Representatives’ Subcommittee on Telecommunications, Consumer Protection and Finance. He also serves as a Director of the E9-1-1 Institute and is Vice Chair of the Network Centric Operations Industry Consortium’s Technical Committee on Net Enabled Emergency Response. The thoughts expressed here are his own.