Net Neutrality day is here: a guide to today’s vote

What is the right way to run the internet? After months of pitched debate over so-called net neutrality, the FCC will finally vote on a proposal that will prevent broadband providers from slowing down or speeding up certain websites.

While there’s little doubt about the outcome of the vote, Thursday’s FCC hearing could still bring some surprises. Here’s an overview of how the process will unfold, key issues to watch, and what will happen next.

When is the vote taking place?

The hearing begins at 10:30am ET at the FCC in Washington, where the five Commissioners will vote on two items. The net neutrality proposal is the second item (the first is about municipal broadband – update: which has passed 3-2), and a vote is expected to occur in the early afternoon.

What are they voting on?

The crux of the proposal is new regulations that will replace the net neutrality rules that a court struck down in early 2014. The new rules themselves (contrary to recent rhetoric) are rumored to be 8 pages long and, under FCC convention, are an appendix to a larger document that contains the Commissioners’ positions.

The FCC staff will summarize the key parts of the new rules, but the document itself is not likely to be available to the public for several weeks. This is due to agency protocol, which gives the Commissioners time to add final comments (though the substance of the rules will not change between now and when they appear).

How exactly does the vote take place, and what will be the outcome?

After the staff summaries, each of the five Commissioner will offer their comments in order of seniority. Republican Commissioner Ajit Pai, who has been an outspoken critic, is expected to speak for an hour so this could take some time. They will then take a vote, and hold a press conference.

The outcome will be a 3-2 vote on partisan lines, with the two Democratic Commissioners siding with Chairman Tom Wheeler. (Update: that’s exactly what happened)

What are the key things to watch?

While the outcome of the vote is a sure thing, some key details of the proposal are still unknown. The most high profile of these concerns what the FCC will do about so-called interconnection, and what the rules will do to prevent ISPs from forcing sites like Netflix to pay a toll in return for not having their streams degraded.

There is also the issue of “zero rating,” which is when phone and companies exclude certain apps or services (such as music) from a customer’s monthly data cap. While this violates the general principle of net neutrality, Chairman Wheeler has yet to explain how strictly the new rules will prevent this. (Read my colleague Stacey Higginbottam’s excellent overview of potential loopholes here).

Finally, since much of the recent net neutrality debate has been about theater, it will be worth watching to see how far Commissioner Pai (who has been waging a nasty political and social media campaign against Wheeler) will go to stir the pot during the hearing.

So will the new net neutrality rules go into effect right away?

No. According to Harold Feld of Public Knowledge, the rules only go into effect 30 days after they appear in the Federal Register, which could take a few weeks.

Will there be lawsuits?

Yes, buckets of them. Expect big telecom companies like Verizon or AT&T to sue in the coming weeks. Meanwhile, it’s possible that activist groups on both the right and the left may bring suits of their own.

What will be the effect of the lawsuits?

Feld says, in the event of multiple lawsuits, the first order of business will be for various appeals courts to decide which of them will take the case. After that, the telecom companies are likely to receive a brief stay of the rules until they can file their first round of arguments. At that point, the stay will likely be lifted while the court hears the case.

The court cases are likely to kick off in March or April, and a ruling on whether the new FCC plan is legal will probably come in late 2015 or early 2016. In the meantime, the net neutrality rules will be in effect.

I just can’t get enough of this stuff! Where can I learn more?

Gigaom will have updates on the days proceedings through Thursday. The FCC will have a live stream here (if the internet holds up!).

I’ll be tweeting about it here. Other Twitter accounts to watch are those of Gigi Sohn (FCC lawyer), Commissioner Pai, Public Knowledge’s Feld and Professor Tim Wu (who coined “net neutrality” in the first place).

For political flavor: The New York Times has opined on the FCC’s “wise new rules” here while the Wall Street Journal, on the other hand, hates everything about the FCC (paywall).

This story was corrected at 10:05am to note the court decision was in 2014, not 2013.

Republicans hate to (spectrum) share: How the election affects the FCC

The presidential election will have big impacts on our nation’s tax policies and spending plans over the next four years, but who wins or loses will also play a role in telecommunications policies that will affect every individual on their cell phone and their land lines.

What’s with AT&T’s weird response to the Sprint-Softbank deal?

AT&T isn’t against Softbank taking over Sprint. Ma Bell just wants to get something out of the deal, according to Public Knowledge’s Harold Feld. Also Sprint’s buying a majority stake in Clearwire doesn’t give it the direct control of the 4G operator that we thought.

Carriers, policy groups join up to (sort of) stop Verizon-cable deal

T-Mobile, Sprint, rural operatorsPublic Knowledge have teamed up to create a mobile version of the Super Friends, their sole mission to battle the Verizon-cable Legion of Doom, but they can’t seem to agree on exactly how they would plan to oppose their new sworn enemies.

Verizon is selling its spectrum, but is anyone buying?

On April 19, Verizon Wireless(s vz)(s vod) surprised many people by announcing that it would sell its 700MHz A-and B-block holdings if the Federal Communications Commission approves its proposed $3.9 billion purchase of SpectrumCo and Cox Communications’ Advanced Wireless Spectrum (AWS) holdings (as well as a smaller spectrum swap with Leap Wireless(s leap)). This comes despite Verizon’s recent well-publicized assertions that it will start running out of LTE capacity by 2013 if it doesn’t get approval for the SpectrumCo deal. That’s led some of us to wonder whether Verizon is really as short on spectrum as it claims.

However, what’s more intriguing is whether Verizon can actually pull off this sale and meet Verizon CFO Fran Shammo’s claims on its Q1 2012 results call that Verizon will be able to get a “return” on its original investment:

“I think there were some articles written that this is going to be a fire sale. This is nothing near a fire sale. We bought this spectrum back in 2008. We’ve had carrying costs, and we will be prudent to our shareholders to make sure we get the return our investments. We know what the value of this spectrum is in the free market, and obviously, we’re going to an auction to allow many different parties to participate through a third-party auctioneer. And look, if we don’t get the price that we think is a fair price, then we won’t go through with the sale, and that’s at our discretion.”

As Public Knowledge’s Harold Feld points out, Verizon is making as an incredibly smart move to wrong-foot both its competitors and the FCC. In as single stroke it can get its SpectrumCo transaction approved without allowing smaller competitors to close the “spectrum gap” between themselves and AT&T(s t) and Verizon. Moreover, if the FCC allows Verizon to set a reserve price on its 700 MHz licenses based on its apparent intention to make a profit over what was paid in 2008, it is possible that Verizon may be able to get its AWS while keeping many of the A-and B-block licenses it claims to be sacrificing. Verizon paid relatively high prices for those licenses in 2008, and it is far from clear whether smaller competitors are in a position to pay more for these licenses today than they were prepared to bid back in 2008.

Verizon’s spectrum, block by block

If we take out the Chicago A-block license that is being swapped with Leap, then Verizon is selling a total of 1.65 billion MHz-POPs (The total megahertz of spectrum multiplied by the population covered) of A-block spectrum, which cost $2.42 billion in the auction, or $1.46 per MHz-POP, plus a further 556 million MHz-POPs of B-block spectrum, which cost it $2.05 billon, or $3.69 per MHz-POP. The Leap transaction provides one potential benchmark for a sale of 700MHz A-block spectrum. Verizon is reportedly valuing it at $204M, or $1.65 per MHz-POP, which would be a 34 percent premium over the $152 million that Verizon Wireless paid for this license in the 2008 auction. But since this deal involves a spectrum swap, and not a cash transaction, neither side had any incentive to reduce the price of these assets. When looking at the much bigger sale now being proposed by Verizon, we need to consider who has a need for this spectrum and what they might be prepared to pay.

As many have indicated, AT&T is the most obvious potential buyer, but it is important to realize that AT&T didn’t buy any A-block spectrum in the 2008 auction and has objected vehemently to making its LTE phones compatible with the A block, due to interference concerns. As a result, AT&T would hardly be likely to undermine its arguments to the FCC by buying this spectrum. AT&T would clearly be interested in the B block, where it bought a total of 2.1 billion MHz-POPs of spectrum in the 2008 auction for $6.64 billion ($3.15/MHz-POP). Of course this was to complement the 2.4 billion MHz-POPs of Aloha 700 MHz spectrum that AT&T bought beforehand for only $2.5 billion ($1.06/MHz-POP).

In other words, AT&T’s current 700MHz spectrum holdings cost only $2.05 per MHz-POP (a 44 percent discount to what Verizon paid for the B-block) and even AT&T’s B-block auction purchases cost 15 percent less than Verizon paid. It’s easy to see why this is the case: Verizon’s auction strategy in the B-block involved pushing up the price AT&T had to pay, before switching to the much cheaper upper C-block (where the price of only $0.76 per MHz-POP was kept low by the open access conditions imposed by the FCC at Google’s(s goog) behest). So the licenses that Verizon was left with in the lower B-block were mainly the ones on which AT&T was unwilling to outbid it.

The classic example is Chicago. In the Windy City, Verizon paid $892M for a license covering 97M MHzPOPs, which works out to be $9.16 per MHz-POP, a substantial premium over other licenses. If AT&T wasn’t willing to exceed that price in 2008, it probably isn’t willing to do so today. While AT&T may be willing to pick up a number of the other B-block licenses at close to the prices Verizon paid, Verizon may well be left holding at least the expensive Chicago license unless it is prepared to sell this license at a substantial discount.

Do we have an A-block problem?

Verizon also faces a challenge to achieving a profitable sale in the A block. At this point in time there is uncertainty over the outcome of the FCC’s 700MHz interoperability proceeding, which could require AT&T to make its phones compatible with the A-block. That would boost the value of the A-block spectrum considerably, making it easier for smaller lower 700 MHz holders to get phones and roam on AT&T’s networks. However, Verizon paid far more than most other bidders those licenses back in the 2008 auction. While Verizon paid $1.46 per MHz-POP for it’s A-block spectrum, the other winners of A-block licenses paid only $0.79 per MHz-POP).

Of course, Verizon’s licenses cover far more attractive urban markets, but the big cities are the areas most subject to interference caused by neighboring Channel 51 TV broadcast stations. In addition there are relatively few bidders: T-Mobile has implicitly said that it is not interested, Sprint(s s) is not in a position to buy more spectrum, Leap probably can’t afford it, and Dish Network(s dish) has bought all the spectrum it needs for a network buildout. That leaves us with MetroPCS(s pcs) (which bought the Boston A-block license in the 2008 auction for $313M, or $3.28 per MHz-POP), but MetroPCS has little reason to pay a premium for this spectrum if it isn’t feeling any immediate competitive pressure from other wireless operators to up its bid.

The outcome of the auction may therefore be significantly affected by how the FCC decides to approach the proposed sale. The FCC could allow Verizon to make a voluntary sale (which may then be predicated Verizon turning a profit on the spectrum – potentially causing licenses to go unsold), or it could impose a condition that this spectrum must be sold within a defined period after completion of the AWS transactions. If it’s the former, Verizon may well get it’s cake and eat it, too. If it’s the latter, the dynamic would change significantly, giving bidders like AT&T and MetroPCS much more leverage to negotiate on price. As a result, if Verizon was forced to sell all of the 700 MHz spectrum within a certain time frame, it could wind up taking a significant loss, raising questions about whether buying this spectrum was really such a good investment after all.

Tim Farrar is President of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, CA, which specializes in technical and financial analysis across the satellite and telecom sectors.


Carriers, unions, policy groups agree: Stop Verizon’s cable deal

Verizon’s biggest critics have banded together to try and block its purchase of 4G airwaves from the cable providers – or at least delay it. Sprint, DirecTV, FairPoint and multiple consumer and industry policy groups have joined the CWA’s petition to halt regulatory proceedings over the deal.