NEWS Report WT 97-11 WIRELESS TELECOMMUNICATIONS ACTION March 11, 1997 FCC ADOPTS SERVICE AND AUCTION RULES FOR LMDS (CC Docket 92-297) Today the FCC established service and competitive bidding rules for a Local Multipoint Distribution Service (LMDS), new service utilizing spectrum in the 27.5-28.35 GHz, 29.1-29.25 GHz, and 31.0-31.3 GHz bands. Our hope is that today's decision will open the door for a new broadband wireless service that will provide meaningful competition to cable and local exchange services and will allocate adequate spectrum for the development of new services to be available to consumers throughout the Nation. LMDS licensees will afford licensees the opportunity to offer a variety of services such as multichannel video programming, telephony, video communications and data services. The technology developed for use in this frequency band provides very high subscriber capacity for two-way video telecommunications. Thus there is sufficient capacity in the proposed LMDS system design to provide wireless competition to both local exchange carriers and cable television systems, even in urban areas. LMDS Service Rules and Related Decisions The following rules were adopted today: þ The LMDS spectrum will be licensed by Basic Trading Areas (BTAs), for a total of 984 authorizations and 1,300 megahertz of spectrum. þ Two licenses, one for 1150 megahertz and one for 150 megahertz, will be awarded for each BTA. þ All licensees will be permitted to disaggregate and partition their licenses. þ There are no restrictions on the number of licenses a given entity may acquire. þ Incumbent local exchange carriers and cable companies may not obtain in-region 1150 MHz licenses for three years. þ LMDS may be provided on either a common carrier or a non-common carrier basis, or both. þ Licensees will be required to provide "substantial service" in their service areas within 10 years. þ Incumbents in the 31 GHz band will be able to continue their operations, however will receive protection from LMDS operations only in the outer 75 MHz (31.0-31.075 and 31.225-31.300) of the band. Incumbents will be given 75 days from the date of the publication of this item in the Federal Register to apply to modify their licenses to operate in the outer 75 MHz of the band and an additional 18 months to implement those modifications. þ Bidding credits and installment payment plans will be available to small businesses and entities with average annual gross revenues of not more than $75 million. Action by the Commission March 11, 1997 by Second Report and Order, Order on Reconsideration, and Fifth Notice of Proposed Rulemaking (FCC 97-82). Chairman Hundt, Commissioners Quello and Ness, with Commissioner Chong dissenting in part. Chairman Hundt, Commissioners Quello, Chong, and Ness issuing separate statements. - FCC - News Media contact: Audrey Spivack (202) 418-0654 Wireless Telecommunications Bureau contact: Jane Phillips at (202 418-1310, Mark Bollinger or Jay Whaley at (202) 418-0660 or Bob James at (202) 418-0680 March 11, 1997 FCC CHAIRMAN REED HUNDT STATEMENT REGARDING COMMISSION ADOPTION OF LMDS SERVICE AND AUCTION RULES Re: Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and Policies for Local Multipoint Distribution Service and for Fixed Satellite Services, CC Docket No. 92-297; Petitions for Reconsideration of the Denial of Applications for Waiver of the Commission's Common Carrier Point-to-Point Microwave Radio Service Rules; Suite 12 Group Petition for Pioneer Preference, PP-22. The Commission today has affirmed the interest of the public in the new digital age, planting the flag of public interest on this new terrain. In this item we have said that we reserve the right at some future time to define specifically the public interest commitment in LMDS. This means that all bidders and future licensees are on notice that the public interest will be served. At the same time, the Commission has defined this service as broadly as possible opening the door to potential new sources of competition for cable television, local telephony and data services. The auction method is the right way to assign licenses to those who have the best plans. Our flexible rules are the best way to allow licensees freedom to design and implement those plans. This approach will introduce competition, allow the market to make decisions about business plans and preserve our ability to adopt specific and quantifiable public interest rules where necessary. -FCC- Separate Statement of Commissioner James H. Quello March 11, 1997 Re: Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and Policies for Local Multipoint Distribution Service and for Fixed Satellite Services, CC Docket No. 92-297; Petitions for Reconsideration of the Denial of Applications for Waiver of the Commission's Common Carrier Point-to-Point Microwave Radio Service Rules; Suite 12 Group Petition for Pioneer Preference, PP-22. I am pleased that, with the long awaited release of this item, the rules governing Local Multipoint Distribution Service (LMDS) are finally in place. Because I have publicly expressed my disappointment that this service has been delayed far too long by regulatory inaction, I write separately to state that I am heartened by the bottom-line cuts. The Order as a whole is well reasoned and well written. The decisions on particular issues are firmly grounded in the public interest. I support this Order because of the potential public interest benefits offered by an additional innovative transmission medium -- local multipoint distribution -- for communications services. I believe that it is likely that LMDS providers will become a positive competitive force in the near term. The panoply of services proposed under the expansive definition that we have given 'LMDS' hold the promise of jump-starting competition to traditional voice, video, and data communications service providers. The benefits of competition to the consumers of communications services are beyond peradventure. The FCC has pursued an overarching deregulatory policy of encouraging competition for many years. Moreover, the development of real and demonstrable competition was the touchstone principle that pervades the sweeping changes to our enabling statute that were codified in the Telecommunications Reform Act of 1996. The licensing of LMDS will at last allow innovative communications entrepreneurs to begin to fulfill the regulatory and legislative vision of vigorous competition across a broad range of services. LMDS is a new family of services that will challenge the entrenched monopolies. For this reason, we have established only minimal rules. We have affirmatively declined to impose so- called "public interest obligations" on these fledgling services. Additionally, we have designed a competitive bidding schema that balances the competitive opportunities for incumbent monopoly providers of similar services in-region and new entrants. Although it has taken far too long, the result is carefully crafted. LMDS will benefit from the certainty gained by this Commission resolving the fundamental issues "up-front." March 11, 1997 Separate State ment of Commissioner S usan Ness Re: Rules and Policies for Local Distribution Service and for Fixed Satellite Services, CC Docket No. 92-297 I support the Commission's decision to place a limited, short-term eligibility restriction on in-region local exchange carriers (LECs) and cable companies. The rationale for this short-term eligibility restriction is based upon well-founded and sound economics and antitrust policy. Our record contains the informed views of the Antitrust Division of the U.S. Department of Justice, the Economic Staff of the Federal Trade Commission, the Attorneys General of seventeen states, and the National Telecommunications and Information Administration. All support eligibility restrictions, based upon their assessments of the status of competition in the local exchange and cable television markets, the potential pro-competitive impact that independent LMDS operators could have in these markets, and the adverse impact upon competition that would result from extending eligibility to incumbent LECs and cable firms. These parties speak for consumers of telecommunications services and no one else, and I am glad that the majority has heeded their opinions and advice. The Commission will be assigning an unprecedented amount of spectrum -- 1150 megahertz -- to a single licensee. By comparison, all of the PCS licenses together totalled 120 megahertz -- one-tenth the size of the LMDS license. The record indicates that licensees need broad bandwidth to offer a comprehensive LMDS service. Therefore, only one provider will be licensed in each geographic area. Because in most service areas LECs and cable are the sole providers of their services, they should not be permitted to further increase their market power by obtaining the exclusive LMDS license as well. There are substantial economic incentives for these monopoly providers to seek these licenses within their service areas. Therefore, this limited restriction is pro-competitive and in the public interest. LECs and cable will be eligible for licenses outside their service areas. We also have provided for waivers where it can be demonstrated that the local market for these services is competitive. Our eligibility rules constitute the least restrictive means available to accomplish our pro-competitive purposes. In her dissent, my colleague devotes a great portion of her argument to discussing the potential competitors to incumbent LECs and cable firms -- among them cellular, PCS, 38 and 18 GHz services, unbundled elements of the LECs' networks, DBS, MMDS, SMATVs, etc. However, listing these potential competitors does not alter the fact that these alternatives have not yet borne fruit, as the majority opinion notes. I agree that we are not likely to see substantial erosion of the market power of LECs and cable firms in the next three years, which is the relevant time horizon of this short-term restriction. I hope that all of these competitive alternatives will thrive. Where incumbents no longer exercise market power in the local exchange or multichannel video markets, it would not be appropriate to restrict in-region LECs and cable firms from participating in the LMDS service (or any other service, for that matter). That is why I am pleased that our Report and Order clearly outlines the circumstances under which we would waive the restriction prior to our general review of this rule in three years. Combined with the short-term nature of the restriction, the waiver process is an appropriate means of responding where competition has developed in some markets more rapidly than in others. Our decision today not only holds out the promise of a new source of competitive entry, but also recognizes the interests of incumbents by providing a mechanism for them to participate in this service once they no longer exercise market power. In the meantime, the short-term restriction will accelerate the day when the video and telephone markets become deconcentrated and competitive. This is the course that is most likely to bring benefits of increased choice, better service, and lower prices to American consumers. March 11, 1997 STATEMENT OF COMMISSIONER RACHELLE B. CHONG DISSENTING IN PART Re: Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to Establish Rules and Policies for Local Distribution Service and for Fixed Satellite Services, CC Docket No. 92-297, Second Report and Order, Order on Reconsideration, and Fifth Notice of Proposed Rulemaking I support the majority of our decision today to adopt service and competitive bidding rules for the new Local Multipoint Distribution Service ("LMDS"). I am pleased we have finally released this long overdue Second Report and Order launching this innovative new service. What I find most exciting about LMDS is that its licensees may provide new competition in the local exchange telephone market, the multichannel video programming distribution ("MVPD") market, or the Internet access market. I write separately, however, to dissent from the portion of the Second Report and Order restricting the eligibility of in-region cable companies and local exchange carriers ("LECs") from bidding on the 1,150 MHz block of LMDS spectrum in their authorized or franchised service areas. I also write separately to clarify the portion of our decision related to public interest obligations. In my view, an eligibility restriction is a very drastic regulatory measure. It acts as a complete ban to an industry's participation in an innovative new service within its service area. It would be my preference to reserve eligibility restrictions for those instances where the record shows that extreme measures are clearly warranted to prevent a substantial competitive harm to a specific market. I do not believe this is one of those instances. Here, eligibility restrictions are imposed not to prevent a specific and predictable harm, but in an attempt to enhance the mere possibility of competition in the local exchange and MVPD markets. When viewed in light of our decision for a flexible use allocation for LMDS, the decision to impose eligibility restrictions simply does not make sense. To the contrary, by precluding the participation of incumbent LEC and cable operators, competition in those markets may well be harmed by arbitrarily denying some of the strongest potential competitors the ability to branch out into new markets. For example, today's decision would preclude an incumbent LEC from buying the LMDS spectrum to offer a new wireless video programming service that could provide much needed competition in the MVPD market. Similarly, this decision would preclude an incumbent cable operator from buying the spectrum to make a bold move into the wireless telephony market. The Order justifies its eligibility restrictions because incumbent LECs and cable operators allegedly have an incentive to preempt local competition by buying an LMDS license. At best, this argument is speculative. While LECs and cable operators may have an incentive to preclude competition in their markets, this argument succeeds only if one of two things are true. Either LMDS spectrum must provide a unique opportunity for enhancing competition in both of the markets, or, if the LMDS opportunity is not unique, then LECs and cable operators must have the resources and the ability to preclude all other potential competitors. In this case, neither situation is true. As an initial matter, LMDS does not provide a unique opportunity for cable or telephone competition. On the local exchange side, there are a large number of likely alternative sources of competition besides LMDS. As one LEC commenter has noted: Competition can be expected from a variety of sources: cable system operators reconditioning their networks to permit two-way networked communications, mobile telephone operations (viz., e.g. cellular and PCS), various workgroup wireless offerings based on rationalization of current spectrum assignments, various new satellite-based services, 38 GHz licensees like WinStar, and 18 GHz DEMS licensees like the Associated Group (which just hired Alex Mandl to run its operations in 31 individual markets). Obviously a number of operators with substantial financial backing (MFS, Teleport, MCI Metro) are deploying conventional networks and taking advantage of profit opportunities wherever they exist under the current "crazy quilt" of regulated prices. Many new competitors (including AT&T) will be availing themselves of opportunities to compete by purchasing unbundled offerings and reselling LEC retail offerings. Similarly, on the cable side, there are a number of actual competitors already. Competitors in the MVPD market include Direct Broadcast Service ("DBS") operators, MMDS operators, wireless cable, SMATVs, home satellite dishes, and over the air broadcast television. Many of these competitors are making significant inroads to compete with the cable operators. For example, our recent Video Competition Report finds that DBS subscribership has increased substantially since 1995, and some observers project that DBS operators will offer service to "over 20% of all MVPD subscribers by the year 2000." Electric utilities and Internet access providers also will pose competitive challenges to cable operators in the coming years. In the face of all of this budding competition, the argument that in-region LECs and cable companies will invest in LMDS spectrum merely to preempt competition seems quite speculative. Our record is bare of evidence indicating that incumbent LECs and cable operators will indeed use such a strategy for LMDS. Nor does our recent experience with the PCS spectrum auctions show that incumbent LECs will make concerted efforts to buy the spectrum in their areas to preempt competition. The majority recognizes that these other sources of potential and actual competition to LECs and cable operators remove the anticompetitive incentives for incumbents bidding on 150 MHz LMDS licenses. Unfortunately, this reasoning was not extended to the 1150 MHz block. The majority asserts that, "these various competitive prospects, taken together, do not mean that an incumbent LEC or cable TV firm will be unable to preserve substantial market power or delay significantly the development competition by acquiring in-region [1150 MHz] LMDS licenses." I disagree. LMDS has great potential, but as noted above, LMDS is not the only path to a competitive cable and local telephone marketplace. Thus, I believe that substantial anticompetitive effects from open eligibility for LMDS are unlikely, because the relevant markets are in fact becoming increasingly competitive. The majority asserts that the primary goal of the eligibility restriction is to encourage competition in both the telephony and MVPD markets. They seem to assume that the best use of the LMDS spectrum by any licensee would be for a combined offering of telephony and video services. What is ironic is that the Second Report and Order does not require licensees to use the LMDS spectrum for either telephony or video services. We have all agreed to give LMDS licensees discretion to choose how to use the spectrum. Given this flexible allocation decision, I cannot understand how it makes sense to allow some competitors to use the spectrum for some purposes while preventing others, specifically incumbent LECs and cable operators, from making that same decision. The majority acknowledges that the incumbent LEC's use of the LMDS spectrum to provide video services would increase competition in the MVPD market. However, they go on to assert that this increase in competition would not assuage their concerns because they have no way of knowing whether the LEC's use of the spectrum would be the most economically efficient use of the spectrum. What troubles me here is that the majority appears to distrust market forces to deliver the most efficient use of the spectrum, and instead, believes the government must second-guess the marketplace and impose heavy regulatory restrictions on the basis of sheer conjecture. It was exactly this type of speculation that caused the Sixth Circuit Court to reverse our decisions with regard to eligibility restrictions on PCS spectrum in Cincinnati Bell Telephone Co. v. FCC. In that decision, the Sixth Circuit rejected the FCC's eligibility restrictions that prevented certain cellular providers from buying PCS licenses in their service area. Since the eligibility restrictions had "such a profound effect on the ability of businesses to compete in the twenty-first century technology of wireless communications, it was incumbent upon the FCC to provide more than its own broadly stated fears to justify its rules." I believe that this case is no different. In my view, our order relies on only broadly stated fears --"general economic theory" -- to fix a market failure that has not occurred and is not likely to occur. What is overlooked is what the incumbent providers have to offer as competitors in the cable and local exchange telephone markets. The Commission has already acknowledged that cable operators could provide valuable facilities-based competition in the LEC market and vice versa. The concept of cross fertilization between telephone companies and cable operators is exactly what drove the Commission's policies on "video dialtone" and Congress' efforts to create "open video systems." Both were designed to encourage local telephone companies to enter the video business in their service areas to provide much needed competition to the cable TV market. Moreover, one of the main goals of the 1996 Act was to abolish outdated legal and barriers to allow current market players to compete in other lines of business previously prohibited to them. Yet, our action today will deny incumbent LECs and cable operators the ability to realize important efficiencies, gain economies of scale, and provide unfettered "one stop shopping" to consumers. By foreclosing the ability of incumbent LECs and cable operators to provide competition in the MVPD and telephony markets respectively, our decision also may run afoul of Congressional intent. At least with regard to telephone company entry into the video market, Congress has stated that there should be a number of options for that entry, including LMDS. In addressing the establishment of open video systems, Congress recognized that "telephone companies need to be able to choose from among multiple video entry options to encourage entry, and so systems under this section [are] allowed to tailor services to meet the unique competitive and consumer needs of individual markets." In addressing effective competition to cable companies, Congress recognized that LECs might provide video programming services 'by any means' and defined this to include "any medium (other than direct-to-home satellite service) for the delivery of comparable programming, including MMDS, LMDS, an open video system, or a cable system." Consistent with Congressional intent, I believe that we should have given incumbent LECs and cable operators the same opportunities and the same access to technology that we provide to all competitors in the MVPD and local exchange markets. Thus, I respectfully dissent to this portion of today's decision. With regard to public interest programming obligations for eventual LMDS licensees who use the spectrum to provide video services, the majority wisely chose not to impose quantified programming obligations. First, I believe it to be premature to impose programming obligations, especially when we do not know who the LMDS licensees will be and whether they will even provide video services such that a programming obligation would be relevant. Second, it is my view that a quantified programming obligation would improperly place the heavy hand of government on the programming decisions of the LMDS providers. While we have put the licensees on notice that the Commission could decide in the future to initiate a proceeding to consider programming obligations, such a proceeding is not imminent. Unlike other services in which Congress has made specific pronouncements requiring programming obligations, Congress has not directed the Commission to impose obligations on this nascent service; I see no evidence of a compelling need to do so at this time. Finally, I believe that the Commission should think long and hard before deciding to embark on such a regulatory course down a path that will have the Commission ordering all licensees who program content to air certain amounts of programming by government fiat.