Two Doors is One Door Too Many

FCC

Susan Crawford recently explained how Google has petitioned the FCC to ensure that Verizon Wireless doesn’t wiggle out of its obligation to make the network they build in the recently-auctioned 700mhz spectrum open to all devices and applications. I just want to add a few points about why a “two door” policy is bad for competitors, bad for the public, and, of course, against the terms of the license. If Verizon implements a two door policy (and the FCC lets them), they’ll have pulled off a phenomenal scam, hurting customers, other carriers, the FCC, and the public at large in the process.

What Is Two Door?

A “two door” policy is one in which people who acquire devices and services from Verizon Wireless itself are treated in one way, while those acquired from other providers who use the same underlying network are treated another way. In a two door world, how might Verizon differentiate the door with the Verizon Wireless logo from the “disfavored provider” brand?

  1. Verizon could lock Verizon-branded devices to the network, not allowing customers to switch the device to another provider.
  2. Verizon could not allow third-party devices on their Verizon-branded service, only allowing them on C-block services offered by others.
  3. Verizon could sell its customers devices which are restrict which applications their customers can use, leaving unrestricted application use to third-party unlocked devices.
  4. Verizon could offer different terms of service and different prices per minute and per bit to those who use non-Verizon devices.
  5. Verizon could offer devices which operate on both their 700mhz network and their existing network, but lock all features of the device.

It’s worth noting that Verizon’s Open Development Initiative looks like a combination of these: As I understand it, Verizon will continue to offer locked devices and special plans on the Verizon-branded network. Unlocked devices and other applications will only be available through third-party “mobile virtual network operators” (MVNOs) who use Verizon’s infrastructure but their own branded service. And service through MVNOs will have different pricing schemes and different rules than “Verizon” service. Of course, Verizon is free to do this on their existing network, which doesn’t have the C-block rules, but it shows us one possible model they could use on the 700mhz network.

The Rules

What does the FCC have to say about this? The relevant regulations say:

Licensees offering service on spectrum subject to this section shall not deny, limit, or restrict the ability of their customers to use the devices and applications of their choice on the licensee's C Block network . . .

Verizon is the licensee here, so #2 goes out the window (no restricting device use), as does #3 (no restricting applications). The regulations also say:

Handset locking prohibited. No licensee may disable features on handsets it provides to customers, . . . nor configure handsets it provides to prohibit use of such handsets on other providers' networks.

That kills #1 (no locking handsets).

This just leaves #4 and #5. The question of how to treat hybrid devices (#5) has been left open by the rules. And I’m afraid that those concerned may be underemphasizing the problem of differential pricing (#4). To paraphrase Chief Justice Marshall, the power to differentially charge is the power to destroy. If, for the sake of argument, Verizon lets any and all devices running any and all applications run on their network, but charges you 10x as much per byte of data if you are using a device or application without the Verizon logo on it, then the openness provisions will be meaningless.

I would say that both differential pricing and wholesale locking of hybrid devices “limit the ability of customers to use the devices and applications of their choice,” and that doing so would violate the above regulations. Customers must be given equal access to plans without regard to their choice of device, and devices must not be locked, at least to the extent that they operate on the 700mhz network. But the lack of specificity in the rules leaves wiggle room where Verizon could implement such a scheme, and argue about it later.

Verizon’s Position

What is Verizon’s position on all this? Therein lies the problem. On the one hand, it’s possible Verizon will follow the letter and the spirit of the C-block rules by not locking, blocking, or discriminating. In fact, this is Verizon’s primary response: “we will follow the rules, so the FCC doesn’t need to do anything.” But do we all agree that the rules mean what I think they mean? That’s not so clear. After the C-block rules were adopted, Verizon filed a letter with the FCC expressing its

position that the Commission should not (1) force C-block licensees to allow any and all lawful applications to be downloaded to any devices that licensees provide . . .; and (2) inhibit C-block licensees from differentially pricing a package of services provided with non-licensee-supplied devices . . .

To the extent that this was a request that the Commission change the rules, there’s no problem – the Commission clearly declined to do so. However, to the extent that this expresses Verizon’s understanding of the rules (and it sounds to me like it does), it presents a problem that needs to be stopped sooner rather than later. This is where the FCC needs to step in and make it clear that the regulations cover exactly this type of behavior – unless Verizon is willing to agree that this behavior is already prohibited and that they won’t engage in it.

The Consequences

What happens if Verizon implements this policy and the FCC does not stop it? Then Verizon has stolen spectrum right out from under the American public.

First, neither the public nor the treasury has gotten full value out of the spectrum auction. The spectrum belongs to the public. The FCC decided that it was worth it to the public to risk getting a smaller amount (just $5 billion) for the spectrum if they also got the benefits of an open network and the opportunity for innovation that comes along with it. But here, Verizon would have paid for a network with openness provisions but actually failed to provide that openness to the public. The public would get neither the money nor the innovation.

If I was another carrier who bid (or chose not to bid) on the C-block based on this fairly clear understanding of the rules, I’d also feel cheated. After all, everyone was bidding based on one understanding of the value and costs of the spectrum, and Verizon would be getting all that value while evading some of the major pro-consumer responsibilities. This goes doubly so for carriers like AT&T who already do a lot of what the C-block mandates by allowing customers to bring any GSM-compatible device to the network, use any applications on that device, and pay the same rates as customers who bought an AT&T phone. (The exception, of course, is that AT&T still sells devices like the iPhone which are locked to AT&T.) Why haven’t the other carriers weighed in on this issue? I’d love to hear what they have to say.

It also makes the announcement that FCC Chairman Kevin Martin wants to dismiss Skype’s petition look premature. Skype has asked the Commission to declare that wireless carriers must allow customers to attach the devices of their choice and run the applications of their choice on the carriers’ networks. When Chairman Martin announced his intention to dismiss this petition, he relied heavily on the 700mhz auction and the openness rules it provided. But if those rules turn out to be easily circumvented, he has lost a major point in his argument that the market is already taking us where we want to go: to an open world.

We at Public Knowledge will be keeping our eyes on the C-block, and doing our best to ensure that the positive, pro-consumer provisions of the C-block license are not rendered meaningless through clever maneuvering. I hope that this will blow over, and that Verizon will do as they claim and truly comply with the C-block rules. But if they don’t, we’ll be here waiting.

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