A Startup's Alternative Spectrum Plan

By Gerry Blackwell

January 08, 2008

When this company went before the FCC with an alternative way to manage spectrum, the incumbents fought back.

It's easy enough to see why established players in the broadband internet business wanted to block M2Z Networks Inc., the wireless broadband startup that proposed a novel and contentious way to exploit unused radio spectrum in the 2155-2175 MHz band.

If the FCC had allowed M2Z to use the spectrum to create a nationwide wireless broadband network providing free 384 Kbps and paid 3 Mbps access services, it would be a formidable competitor for the likes of AT&T and Verizon.

"Our vision," says M2Z founder and CEO John Muleta, "is to make available a service that has the same dynamics as television, with a free over-the-air component, and then subscription-based, higher-speed, value-added services."

The company is being bankrolled by three top high-tech venture capital firms.

It's also easy to see why independent ISPs supported M2Z—or should have if they didn't—because the company was proposing a completely open network that would allow ISPs to offer branded premium broadband services using the M2Z network facilities.

Critics and regulators

It's a bold strategy with the potential to remake the market. No wonder incumbents felt threatened. According to Muleta, AT&T, Verizon, and others leaned heavily on the federal regulator to turn down his company's May 2006 license application.

That proposal asked the FCC to grant M2Z rights to use the spectrum without going through the usual rule-making and auction process. In return, the company dangled an attractive package of public benefits, including revenue sharing with the government.

Critics argued that M2Z was asking for special treatment, that it was simply trying to avoid paying spectrum license fees which have in the recent past run to hundreds of millions or even billions of dollars.

"We never wanted to avoid paying for spectrum," Muleta insists. If the FCC had taken 5 percent of revenues from winning bidders in spectrum auctions between 1993 and 2005 instead of the fees it received, it would have cleared billions more than it did.

Some critics also suggested Muleta had an unfair advantage because he once worked for the FCC. He only worked for the commission for two years, though, Muleta points out, and already had strong credentials as an Internet entrepreneur.

Those opposed to the application asked the regulator to initiate a formal rule-making so everyone in the industry could have a crack at the spectrum.

Muleta argues that incumbents like AT&T and Verizon, which led the opposition, don't need the spectrum, can't use it, and only want it to prevent a new competitor, M2Z, from entering the market.

The incumbents won at least an interim victory when the FCC rejected the M2Z proposal in August 2007. It dismissed the application without prejudice, meaning it didn't comment one way or the other on its merits. The commission also announced it would begin a rule-making.

Earlier, in May, M2Z filed a civil suit against the regulator to force its hand after the FCC failed to meet a one-year deadline for responding to the application. That case remains before the courts.

The two processes, the litigation and the FCC rule-making, will now proceed in tandem, Muleta says. He believes little substantive movement is likely in either before September 2008, however.

Fallow spectrum

The frustrating thing for M2Z is that before it made its proposal, the FCC had no plan for the spectrum, and nobody else had expressed interest in it. The company's entire approach was designed to short-circuit the onerous rule-making and auction process.

"We said, 'Here's our idea. If you allow us to use the spectrum, we're willing to share revenue with you as a reward for putting the spectrum into the marketplace sooner rather than later,'" Muleta says.

The revenue sharing scheme—M2Z would deliver 5 percent annually to the government in lieu of up-front fees—was just one of several features of the proposal that were seemingly in the public interest, and which the company no doubt hoped would make it impossible for the FCC to turn it down.

The application also included a pledge to build, at a cost of $2 to $3 billion in private sector money, a nationwide network that could deliver broadband Internet service to 95 percent of the population.

The service would be free for access speeds equivalent to entry-level DSL service, and cost $20 to $30 a month for speeds comparable to near top-level cable modem service. Police, fire departments and other first responders would get free access.

The network could deliver these speeds without need of an external antenna, with an integrated network interface card and antenna similar to current Wi-Fi receivers. Users could access the service while mobile, though not while traveling at high speed in a car.

M2Z was also offering to provide royalty-free reference designs for user equipment to encourage manufacturers to make the network interface products in volume and at low prices.

"We think this is a way to put the asset [the spectrum] to work," Muleta says of the original application. "And we still think it's a good proposal."

The money plan

How would the company have recouped its billions in investments if the proposal had been accepted—or if it somehow still gets control of the spectrum?

Users of the free service would have to opt in to a scheme in which IP addresses are matched to zip codes. M2Z would deliver the user's zip code to search engines such as Google and Yahoo along with a search request so the search engine company could deliver local advertising.

"If you're looking for pizza, in Arlington, Virginia, say, the pizza shops there can bid for key words so they appear at or near the top of the search list," Muleta explains.

Everybody wins by this, he says. Users get more useful information when they're searching for local suppliers. Advertisers can address customers that are already interested in their products and services. And search companies can offer new advertising services.

"[Text search advertising] is a growth industry," Muleta points out, "and everybody has been trying to figure out how to make local search relevant. We think that having lots of users with their systems tuned to the M2Z network and us enabling our partners to do search text advertising on a local basis [is the way to do it]—and that would pay for part of the [free M2Z] service."

The company would also generate revenue from premium services. But it would not in all cases sell directly to users.

"We believe the premium service is something that local ISPs, satellite companies, national ISPs, rural phone companies, rural cable companies can use to extend the reach of their networks and upgrade their service levels," Muleta says. "They would become natural partners for us."

The business model hinges in part on M2Z network adapters being readily and cheaply available at retail. That will mean finding manufacturing partners committed enough to invest in ramping up to build the products in volume.

The company is "engaged in discussions" with potential partners, Muleta says, but no manufacturer will commit until the issue of whether and under what circumstances the spectrum will be available to M2Z has been settled. And barring an early and favorable decision from the courts, that could take awhile.

Muleta argues that by dismissing the M2Z application the FCC was flagrantly disregarding its Congressionally mandated public mission to work for the public good.

He claims the commission received 2,000 letters of support for its proposal from organizations such as police departments and the National Parent Teacher Association, which the regulator did not acknowledge in its public statements on the application.

He also claims financial analyses the company submitted with the application showed that public benefits would amount to between $18 and $32 billion in net present value (the present value of net cash flows from the project over its life). Each year of delay will cost a few billions in lost value, he says.

"None of these things was cited [in the FCC decision] and we think that's the definition of 'arbitrary and capricious,' which is the legal standard by which FCC commissions are reviewed," Muleta says. "The commission basically ignored the data."

He has no doubt the reason for this is that incumbents brought pressure to bear on the regulator. Their submissions to the FCC urging a full rule-making were "basically designed to forestall competition," Muleta charges.

The future remains

Now that the spectrum appears headed for a rule-making and probably auction, will M2Z stay in the hunt?

Absolutely, Muleta says. He points out, though, that since M2Z submitted its proposal, five "copy cats" have come forward with similar business plans. So it won't just be the big guns it has to contend with in an auction.

M2Z will certainly participate if the basic principles of its original proposal are retained in the new rules—nationwide coverage, free access for first responders, wholesale network provision for premium services and royalty-free network adapter designs.

The company's investors are in it for the long haul, Muleta insists.

"They're visionaries," he says. "They believe in the notion of free broadband wireless. They know that dealing with government can be a long, hard road, and that it might not necessarily always be rational. But they're willing to help us get there to the end of the process."

The investors are Kleiner, Perkins, Caufield and Byers, which funded both Google and Amazon, Redpoint Ventures, backers of TiVO and MySpace, and Charles River Ventures, which helped bankroll Excite, GOTV and other Internet ventures.

"These are companies that are phenomenal for the wealth they've created and the innovation they've helped bring to market," Muleta says.

But if the process lasts seven years? And if at the end of it they have to pony up mega millions for spectrum licenses? They would have to be visionaries indeed.

This story originally appeared at www.isp-planet.com. It is re-printed here with permission.



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