On Freeing Consumers, Innovators, and the iPhone

Members of Congress in the United States recently held a hearing that has come to be known as the iPhone hearing. Though the iPhone is the most popular keyword in the world, the hearing and what it could mean for society are much more far-reaching. Freeing the iPhone may be a catchphrase, but it popularizes a debate we should be having about how and whether we want to regulate the wireless space in the future.

Point
The idea is that the wireless spectrum is part of the commons—part of a public resource that the government tries to manage in order to maximize public gain. Whether through property rights, open competition, or obscure regulations, ultimately the question must be: is the net gain from enforcing property rights on the spectrum positive? Like open spaces, the skies, and so forth—these are important questions.

In the past, there may have been a positive net gain from enforcement—when technology was such that spectrum was, in fact, scarce. Now, as we have seen with WiFi, unregulated spectrum allows smart devices to co-exist, the way numerous groups of people speaking simultaneously in a large room manage to have conversations.

This would not be as big an issue on its own if there was large scale, open competition. When the market works, consumer interests are usually taken care of and innovation thrives. Unfortunately, there are areas where the market does not work or has not been allowed to. When multiple industries collude—as in, wireless providers, device manufacturers, and wireless services—the consumer interest is lost. When multiple competitors exist, but are dominated by few that act in the interest of protecting the status quo, innovation is nearly impossible.

Historically, this has been a difficult area but a precedent is clear:Carterfone. For decades, AT&T was the de facto monopoly in the Public Switched Telephone Network (PSTN), protected and propped up by the government. AT&T, publicly in order to secure their system but privately in order to secure their monopoly, had locked out all devices other than the ones they approved. Carterfone was a device that worked as a two-way radio through the PSTN, and was blocked by AT&T. In a landmark 1968 ruling, the FCC ruled to allow Carterfone and other devices to be connected to AT&Ts network as long as they did not cause damage. This ruling paved the way for a vast array of products and services including answering machines, fax machines, cordless phones, computer modems, and finally, dial-up Internet. The word landmark is thrown around quite often in legal precedent, but Carterfone was inarguably so.

Fast forward to 2007 and we now have a wireless industry, again propped up by government support and device manufacturer collusion, that is not exactly a monopoly but could more accurately be described as an oligopoly. An industry dominated by a very small number of players who may collude to defeat any pretense of competition.

In the face of all of this, some members of the media, of government, of Internet upstarts, citizens, corporations, and geek activists are asking for open access to the wireless spectrum. Starting with the iPhone, for maximum publicity, and starting with the 700MHz band of spectrum, because it comes up for auction very soon.

[An aside from the FCC: The recovery of the Lower 700 MHz Band will be made possible by the conversion of television broadcasting from the existing analog transmission system to a digital transmission system. Because the digital television (DTV) transmission system is more spectrally efficient than the analog system, less spectrum will be needed for broadcast television service after the transition to DTV on channels 2-51 is complete.]

So what is the idea behind open access, or more touchy-feely, wireless freedom? The freedom to use any device on any network, to choose providers in a competitive wholesale market, and to access any content or services through these devices.

In the context of the iPhone, this means very little, for government action to force Apple to renege on a contract is impossible and not productive. In the context of the 700MHz band, it means to allow any device to connect to it, to allow open competition among providers, and to restrict the ability of providers to control the sites, services, and content we use. The idea is to draw public attention to the disfunction in the current cellular space in order to help build a better market in the 700MHz.

The iPhone Hearing
The iPhone hearing, as it has been referred to, was held on the 11th of July before the Subcommittee on Telecommunications and the Internet Committee on Energy and Commerce. It was chaired by Rep. Ed Markey of Massachusetts, who opened the hearing by comparing the iPhone with Hotel California. “You can check out, but you can never leave.”

The hearing was actually on Wireless Innovation and Consumer Protection, not just the iPhone. To establish whether innovation was curtailed or consumer protection was upheld under the current scheme of wireless regulation. And while the iPhone was talked about, it was not the point. It is, in fact, unfortunate that the phrase ‘iPhone hearing’ stuck.

On Innovation and Consumer Protection
In other countries, the phones are not locked and people are free to use them as they choose within the limits of the law. Not so in the United States. Professor Tim Wu of Columbia Law School brought up this point at the hearing, stating that while the U.S. has historically led in all areas of technology, it lags in the wireless space. In addition to this, the rules of personal property do not seem to extend to cell phones. Using the protection of the depressing DMCA (more on the DMCA) and lengthy contracts, we are locked out of our own cell phones. The phones take MP3s as ring tones, but we are locked out. The phones can take third-party applications, but we are locked out. The phones can be used on any network in the world, but we are locked out. The phones have Bluetooth and WiFi capability, but our providers have chosen to disable them.

The CEO of the startup Skydeck made an interesting point. When you look at the number of devices, Vodafone in Europe offers 800 against a paltry 30 by Verizon in the United States. There are numerous applications that could revolutionize the wireless industry, the way fax and modems did for PSTN, Devitt argued, but since they have to ask for permission from the providers the barrier for entry is unbelievably high. The providers hold the key and compete with the people who ask their permission.

Recently, Google weighed in on the possibility of open access to the soon-to-be available 700MHz bands. Their requests (submitted jointly with other Public Interest Groups and high tech companies) are similar to those mentioned above, but deserve a little elaboration:

• Open Devices: As mentioned above, to use any device on any wireless providers network- i.e. the freedom to leave AT&T and use the iPhone on any other network.
• Open Applications: The idea is that consumers should be able to use software and services of their choosing, as long as they do not harm the network, i.e., the freedom to use Google Maps and Safari once you’ve taken your iPhone to another provider.
• Open Services: This allows for third-party resellers to acquire wireless services on a wholesale basis.
• Open Networks: Again, this would allow third parties to interconnect with the wireless network where feasible.

It is clear where Google hopes to benefit from these changes, in addition to the fact that they are looking to bid for spectrum and are looking to lower the barrier for non-incumbents. All of these points together force the wireless provider to compete solely on wireless services. They would no longer be in a position to decide whether to rent space to a competitor on their network—for network interconnection (small ISPs), for application development (e.g. Skype, Google), or for selling services.

In fact, the FCC Chairman Kevin Martin himself is not averse to the idea of opening the new 700MHz band to devices and applications of the consumers’ picking. It does not, however, talk about opening the network to wholesale competition.

Counterpoint
The most popular arguments to this are:

• Property rights govern the spectrum and must be honored. The corporations that now control the spectrum did not create this spectrum, did not build it, did not allow competition with themselves. There is no such thing as spectrum—the property right is artificial designed solely to assign exclusive rights to certain entities. (Thanks, Lawrence Lessig.)
• Don’t the service providers have the right to earn back their infrastructure costs? Sure they do—which is why retroactive regulation of the current cellular space is very difficult. But it is possible to imagine, if we were to do this again, we could do it differently with a better outcome. Look at how WiFi has developed in unregulated bands and think about what is possible if we had a band that could travel through concrete buildings and cover large distances. Yeah, makes 700MHz sound like Superman. Also, the idea is to educate the U.S. consumer to ask for and expect more from their service providers.
• The consumer does not want all these open devices, says Verizon General Counsel. Call them and tell them they’re wrong!
• There already is open competition This is a seductive argument—that the consumer already has choices and if she wanted something, the market would provide it. This is a false choice—each competitor in the market owns a piece of the spectrum and can bar additional competitors from the space. Each competitor has to do well enough to compete with the existing players without disturbing the status quo. All players win without rocking the boat.
• It will raise prices The prices of devices bought without network tie-ins may rise, but since there will be a wider choice among devices and services this can hardly be a negative.
• You sign a contract, so you know what you are getting The contract is only part of the restriction—and the least contentious one. What freedoms you give up as a consumer for lower prices are your choice. There are other freedoms, however, for which the consumer has no choice, such as the locked devices, service and application restrictions, and crippled phones.
• It will make the network insecure This is a strong argument and a powerful one in recent times. We fear the unknown and the insecure—if we allow any service, application, and provider to roam the network, will it not be insecure? And what about first-responders in emergencies? This problem already exists in many places—on the roads, on the PSTN phone lines, and on the Internet, and is handled by a variety of methods including liability, technology, and minimally invasive laws. An entirely walled garden as a network to protect against this eventuality is clearly an extreme measure.
• It is against the free market True. A truly free market would not have any “ownership” of the spectrum and let all providers compete on the power of their applications, devices, and services. Sound familiar? That’s how the Internet works.

On Delamination

The big solution is delamination. As David Weinberger proposes in a fantastic 4th of July message, we need to separate the layers of the networks. To separate those who provide access to the Internet from those who provide content and services using it. To quote Weinberger:

The health of these two layers is reciprocal: customers will use more bits because there are more services and content available to them in the next layer. There will be more services and content because the market now has lots of bandwidth, enough to handle new types of applications.

This is exactly the business architecture our economy, democracy, and culture are thirsting for. We want to have companies competing to sell us more, better, faster access to the connected world. We want the services and the content of the things we can do, the ideas we can discuss, to grow like a crazy, bottom-up Renaissance.

This requires action from the industry, government, and most of all, from an engaged citizenry. But it can work.

Ultimately, this is not about the iPhone. The iPhone only makes this issue popular—it demonstrates a disfunctional wireless band, but the 700MHz auction gives us the chance to do things differently. This is a battle that is being fought in many forms in many parts of the world of technology. The old guard is protecting the old business model—on the Internet, in wireless services, and in old media. Things will change.

Note: There have been many studies that discuss what characteristics define a market where the free market works best, but I am not an economist and—again—this is not the argument being made. Indeed, some of the strongest arguments in this area have been made for pushing towards uses of the spectrum that don’t require regulation. The growth of WiFi is proof that such a system can work.