[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                  FULL COMMITTEE HEARING ON THE IMPACT
                     OF THE 700 MEGAHERTZ WIRELESS
                   SPECTRUM AUCTION ON SMALL BUSINESS

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 10, 2007

                               __________

                          Serial Number 110-51

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DEAN HELLER, Nevada
YVETTE CLARKE, New York              DAVID DAVIS, Tennessee
BRAD ELLSWORTH, Indiana              MARY FALLIN, Oklahoma
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES


PANEL I:
Martin, Hon. Kevin, Federal Communications Commission............     3

PANEL II:
Bond, Edward Kelly, Public Service Communications................    19
Spencer, Shelley, WIREFREE Partners, LLC.........................    21
Guttman-McCabe, Chris, CTIA - The Wireless Association...........    23
Libertelli, Christopher, Skype North America.....................    26
Black, Jeffery, Wireless Founders Coalition for Innovation.......    28

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    41
Chabot, Hon. Steve...............................................    43
Martin, Hon. Kevin, Federal Communications Commission............    44
Bond, Edward Kelly,Public Service Communications.................    55
Spencer, Shelley,WIREFREE Partners, LLC..........................    62
Guttman-McCabe, Chris, CTIA - The Wireless Association...........    70
Libertelli, Christopher, Skype North America.....................    83
Black, Jeffery, Wireless Founders Coalition for Innovation.......    89

                                  (v)

  


                       FULL COMMITTEE HEARING ON
                    THE IMPACT OF THE 700 MEGAHERTZ
                       WIRELESS SPECTRUM AUCTION
                           ON SMALL BUSINESS

                              ----------                              


                      Wednesday, October 10, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:30 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia M. Velazquez 
[Chairwoman of the committee] presiding.
    Present: Representatives Velazquez, Shuler, Gonzalez, 
Cuellar, Altmire, Ellsworth, Sestak, Hirono, Higgins, Chabot, 
Akin, and Fallin.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    ChairwomanVelazquez. Good morning. I call this hearing to 
order. This morning, the Committee will examine the Impact of 
the 700 Megahertz Wireless Spectrum Auction on Small 
Businesses. Access to the newest technology is a key ingredient 
for all companies to innovate and compete in a global economy. 
For smaller firms, however, it is critical for their success 
that they have access to cutting-edge equipment and 
infrastructure.
    This much anticipated Spectrum Auction provides a unique 
opportunity for entrepreneurs to acquire these tools. Small 
firms that win the right to purchase Spectrum licenses will be 
able to deploy high-speed Internet access services. This will 
spur greater innovation and lead to lower communications costs, 
and improvements in service quality. Entrepreneurs operating in 
under-served areas will also benefit as the new technology is 
brought to remote parts of the country. As a result, rural 
businesses will be better able to compete, and advance local 
economic revitalization efforts.
    I am pleased that the FCC has included in the Auction Rules 
a number of elements that should benefit small companies. In 
order to assist them, the rules provide certain advantages for 
small firms, mainly in the form of credits toward their bids. 
In addition, the FCC decision to offer licenses that cover 
smaller geographic areas may allow these companies to compete 
and win, despite having more limited resources than a large 
national carrier.
    Together, these rules will allow them to start or expand 
wireless business operations. Entrepreneurs also have the 
potential to benefit from the FCC's Open Platform Requirements. 
These requirements, which will allow any device to be used on 
the Spectrum will help level the playing field and permit for 
the wide-spread use of handsets. This will create new markets, 
and spur entrepreneurial activity in a wide range of 
industries.
    With all this potential, a downside does exist. Some small 
companies have raised concerns about whether the Auction Rules 
are fair, and whether the benefits of the auction will, in 
fact, extend to them. For example, rural wireless companies 
contend that the FCC's decision to assign population-based 
benchmarks to build out requirements will hurt under-served 
regions. The smallest wireless companies also argue that the 
new rules governing bidding credits make it difficult for them 
to raise money, and pursue a sustainable endeavor.
    Fortunately, we have two panels here today that will help 
us consider both sides of this issue. The witnesses will share 
with the Committee how they expect the auction to benefit small 
entities and concern they may have about certain aspects of the 
Auction Rules.
    Let me take this opportunity to thank in advance the 
Chairman, and all the witnesses for their time and insights on 
this very important issue.
    For entrepreneurs that use technology to make our firms 
more efficient and competitive, this auction offers great 
promise. It provides a unique opportunity to secure the so-
called beach-front real estate of the Spectrum. This can be 
used to launch a new endeavor, or strengthen an existing firm's 
operations. Small business, both service providers and 
communications consumers stand to benefit greatly.
    I now recognize Mr. Chabot for his opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr.Chabot. Thank you very much, Madam Chair. And I want to 
thank you for holding this hearing on the Federal Communication 
Commission's rules for the sale of Spectrum in the 700 
Megahertz Band.
    Although fairly technical, the Commission's regulations of 
the auction for this Spectrum will have a significant impact on 
small business providers, and users, wireless communications 
services.
    In 1934, Congress recognized that radio waves were a scare 
public resource, and authorized the FCC to award licenses for 
the use of radio waves, but only if the use would serve the 
public interest.
    Prior to 1993, the FCC simply gave this resource away. That 
did not represent good economics, or good public policy. 
Economics teaches us that the best way to determine the value 
of a resource is to sell it in the competitive market. That 
way, the entities that put the highest value on the resource 
will pay the most for the Spectrum. The basis for their bidding 
will be that they will provide consumers with services that the 
consumers are willing to purchase.
    Sale of Spectrum also represents good public management. It 
enables the Federal Treasury to recapture the value of this 
publicly-owned resource. Auctions also reduce transactions 
costs associated with the issuance of licenses, so it's 
important that the Commission's use of Spectrum Auctions--I 
also want to emphasize, however, that small businesses as 
innovators need to have their fair opportunity to obtain 
Spectrum. These innovators will provide new services and 
technologies that might not otherwise be developed.
    More importantly, small businesses tend to find niches that 
serve other small businesses, and may provide wireless services 
that large wireless companies may not. I am specifically 
interested in hearing from our witnesses whether the Commission 
adopted an appropriate balance between maximizing returns to 
the federal taxpayer, while ensuring that small business 
providers and users of wireless service will benefit from the 
auction in the 700 Megahertz Band. And with that, I yield back.

    ChairwomanVelazquez. Thank you. Now I welcome the Honorable 
Kevin J. Martin.
    Mr. Martin is the Chairman of the Federal Communications 
Commission. He was appointed to the FCC by President Bush on 
March 18th, 2001, and designed Chairman by President Bush on 
March 18th, 2005.
    Before joining the FCC, Chairman Martin was a Special 
Assistant to the President for Economic Policy. Prior to 
joining the Bush Administration, Chairman Martin worked at the 
FCC, and practiced law in Washington, D.C. Welcome.

  STATEMENT OF THE HONORABLE KEVIN MARTIN, CHAIRMAN, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr.Martin. Thank you, and good morning to Chairwoman 
Velazquez and Ranking Member Chabot, and all the Members of the 
Committee. Thank you for inviting me to be here with you this 
morning, and I look forward to answering any questions you have 
after my brief opening statement.
    I've had the privilege of serving at the Federal 
Communications Commission for over six years, including two 
years as the Agency's Chairman. During this period, my 
colleagues and I have overseen the telecommunications industry 
undergoing rapid and unprecedented change. These changes have 
seen the telecommunications industry transition from a period 
of sharp decline, to a time of significant growth.
    Ushered in by a broadband revolution, companies and 
consumers, alike, are finally finding the promise land of 
convergence. Telephone calls are now being made over the 
Internet and cable systems, cell phones are now mini-computers. 
They send e-mail, take pictures, surf the web, play songs and 
videos, and hopefully soon will send and receive emergency 
messages in times of a disaster.
    Businessmen and women are no longer tied to their desks 
from nine to five. They use handheld devices to access 
messages, files, and key information on the go. They can reach 
coworkers and clients from any location, and their customers 
are no longer just local, but global.
    These technological advances and converging business 
models, and the digitalization of services are creating 
unparalleled opportunities, and considerable challenges for 
both small businesses and the Commission.
    Almost all of this innovation is enabled by broadband 
deployment. Broadband technology is a key driver of economic 
growth. The ability to share increasing amounts of information 
at greater and greater speeds increases productivity, 
facilities interstate commerce, and helps drive innovation.
    Perhaps the most important factor spurring both increased 
broadband availability, and reduced prices for individual 
consumers, and for businesses, is competition among broadband 
platforms. The upcoming 700 Megahertz Auction presents the 
single-most important opportunity for us to increase 
competition by adding a third broadband platform to a 
marketplace served predominantly by two broadband services, 
cable and DSL.
    The Commission recently adopted rules that will allow the 
auction of more than 60 Megahertz of Spectrum in the 700 
Megahertz Band early next year. This is the part of the 
Spectrum that broadcasters have used for analog television 
channels, and that will be returned as part of the upcoming DTV 
transition. This Spectrum is well-suited for the provision of 
wireless broadband, and represents a critical opportunity to 
continue deploying broadband services, especially to rural 
communities.
    The rules the Commission has adopted for this Spectrum 
include several important provisions that will benefit small 
businesses, including promoting improved access to wireless 
broadband, facilitating the ability of small businesses to 
compete in the provision of wireless devices and software, and 
provide meaningful opportunities for small businesses to gain 
access to the Spectrum.
    Now, significantly, because this Spectrum is well-suited 
for the provision of wireless broadband, the Auction represents 
a critical opportunity to continue deploying wireless broadband 
services, especially to rural communities.
    The Commission has tried to ensure that these areas of the 
country have the same access to broadband enjoyed everywhere 
else. And, as such, we adopted some of the strictest build-out 
requirements ever implemented for wireless services.
    For example, at the urging of smaller service providers, 
the rules requires licensees in some blocks to serve at least 
70 percent of the geographic area covered by their licenses, 
and 35 percent within the first four years. And in the largest 
blocks, licensees must serve 75 percent of the population 
covered by their license, and 40 percent of the population 
within four years.
    Companies that do not meet their initial four-year 
benchmark will have their license terms reduced from ten years 
to eight years, and companies that fail to meet their final 
benchmark will lose the unserved portion of their license 
areas, which will then be made available to other potential 
users.
    This combination of geographic and population-based 
benchmarks will help ensure that even the most rural 
communities have broadband access.
    As a result, wireless broadband connections will be 
available to businesses of all size, and in nearly every 
location, not just the corporate headquarters in major 
metropolitan areas. Entrepreneurs and mom-and-pop shops located 
in small towns in rural areas will be able to communicate 
rapidly and efficiently with their suppliers, investors, and 
customers located around the world. And they will be able to 
make those connections wherever they are, at home, or at work, 
or on the road.
    Second, the auction rules will strengthen the ability of 
small businesses to compete in the provision of wireless 
devices and software. The license winner for about one-third of 
the Spectrum will be required to provide a platform that is 
more open to devices and applications. The companies that 
operate on this spectrum will not be allowed to prevent 
customers from using the wireless device or software of their 
choice on the licensee's network.
    It is our goal that this open platform requirement will 
allow smaller businesses, nascent wireless device 
manufacturers, and smaller application software developers to 
put their products directly into the hands of consumers, 
without having to seek prior permission from the wireless 
provider, as they do today.
    I had the opportunity to hear from some of these technology 
entrepreneurs about their struggles to bring new products to 
market during a recent trip to Silicon Valley. By providing for 
this open platform, the Commission removed some of the barriers 
imposed by the wireless carriers to foster greater opportunity 
and innovation for entrepreneurs, and, ultimately, customers 
alike.
    This open platform requirement is designed to foster 
innovation on the edge of the network. When the same 
requirement was applied decades ago to the wire line network, 
we saw an explosion of innovation and choice.
    AT&T subscribers went from renting expensive black rotary 
phones to purchasing inexpensive cordless phones with voicemail 
and caller I.D. Investment in the market increased, new phones 
and calling features were developed, and consumers, ultimately, 
benefited.
    Many of these innovations were driven by entrepreneurs, 
who, for the first time, were able to make their latest 
innovations available directly to consumers, and compete in the 
equipment market to which they had previously been denied 
access.
    Ultimately, these rules facilitated the development of the 
Internet, as consumers were able to attach modems to the 
network, and go anywhere the Internet could take them without 
interference from the network owners.
    The Commission hopes and expects that this model will 
provide similar benefits for wireless entrepreneurs, by 
allowing them to introduce an array of niche applications and 
devices for the open wireless platform, including those 
tailored to meet the unique needs of small businesses, and 
individual consumers.
    And, finally, the rules adopted by the Commission provide 
meaningful opportunities for small businesses to gain access to 
the Spectrum itself in the upcoming auction. The band plan 
makes nearly half of the Spectrum available over smaller and 
medium-sized geographic areas, 734 cellular market areas, or 
CMAs, and 176 economic areas. About one-third of the Spectrum 
will be available over larger regional areas, or 12 regional 
economic areas, and about one-sixth of the Spectrum is 
available on a nationwide basis that will be used exclusively 
as part of a public/private partnership with a National Public 
Safety licensee.
    This distribution of geographic distribution is very 
similar to the geographic distribution in the AWS-1 auction 
from 2006. And with these changes, the total amount of Spectrum 
in the 700 Megahertz Band assigned to the smallest geographic 
area will be more than one-third of the Spectrum available.
    Licensing over smaller geographic areas benefits small 
businesses by reducing the cost of acquiring a license. The 
cost of acquiring Spectrum licenses with small geographic areas 
is, on average, significantly lower than the cost of acquiring 
licenses with larger geographic areas.
    The availability of licenses divided into these smaller 
areas enables smaller wireless providers to fulfill business 
plans focused on serving smaller discreet areas of the country, 
including more remote, and/or rural areas. The availability of 
smaller licenses at auction also allows smaller providers to 
avoid a transaction cost associated with attaining portions of 
a larger license in the secondary market through partitioning 
or leasing Spectrum from the incumbent carriers.
    To further promote the participation of small business in 
the upcoming auction, the Commission has provided for bidding 
credits for eligible small businesses, also known as Designated 
Entities. The Commission applied these same bidding credits in 
last year's AWS-1 auction, in which a significant number of 
licenses were won by Designated Entities. Fifty-five percent of 
the winning bidders in the AWS-1 auction were Designated 
Entities, 57 out of 104, and those Designated Entities won more 
than 20 percent of all the licenses sold. In all, Designated 
Entities and the bidders won licenses valued at over half a 
billion dollars, and bidding credits made a significant 
difference, with Designated Entity bidders winning over half of 
their licenses by out-bidding a non-Designated Entity that 
placed the second highest bid without a bidding credit.
    Some entities have expressed some concern that the 
Commission's modification to the Competitive Bidding Rules 
governing Designated Entities had deterred some smaller 
companies from participating in the AWS-1 auction. However, 
Designated Entity participation and performance in the AWS-1 
auction was very similar to that in comparable past auctions, 
when partnerships with national wireless carriers are excluded.
    In addition to efforts to promote opportunities for small 
businesses through the upcoming 700 Megahertz Auction, the 
Commission has also undertaken a number of other initiatives to 
encourage small businesses to enter and compete in the 
telecommunications and media industries.
    The Commission is currently considering a Notice of 
Proposed Rulemaking that would allow small and independently 
owned entities to lease extra capacity of digital television 
station licenses in order to operate their own broadcast 
channel. This new programming station would then obtain all the 
accompanying rights and obligations of the underlying broadcast 
station, such as the public interest obligations and carriage 
rights.
    An example of this type of arrangement is the deal reached 
with Latino Alternative TV and Post-Newsweek that provides for 
carriage of LATV programming on multi-cast channels, and the 
Post-Newsweek stations in Miami, Orlando, Houston, San Antonio.
    In this same rulemaking, the Commission is also seeking 
comment on several other proposals to allow qualified 
Designated Entities to more easily get into broadcasting, by 
allowing them to purchase expired construction permits, and be 
allotted additional time to construct broadcast facilities.
    The Commission is working hard on several other areas, 
which we can end up discussing, but I do want to thank you for 
your time and attention today. And I certainly appreciate the 
opportunity to share with you the FCC's efforts to support the 
growth of small businesses, and foster their participation, 
both in the FCC's upcoming auctions, and the telecommunications 
and media industries, more generally. And with that, I'd be 
happy to answer any questions you may have.
    [The prepared statement of Kevin Martin may be found in the 
Appendix on page 45.]

    ChairwomanVelazquez. Thank you very much, Mr. Chairman.
    Chairman Martin, the objective of Section 309(j) of the 
Communication Act is to promote economic development and 
diversification. Do you expect that open platform requirements 
assigned to the C block licenses will advance these objectives?
    Mr.Martin. Well, I do think so. I think it's important not 
only from the perspective of an additional wireless business 
model, but for fostering additional innovation and 
opportunities for small businesses that are trying to develop 
software, and additional handsets.
    One of the things that the Commission had people raise with 
the Commission was the concern that small businesses that were 
developing new softwares and new applications were having a 
difficult time getting those applications placed on devices 
that were sold by the larger common carriers. And trying to 
have a new, more open platform I think will facilitate the 
opportunities for that kind of new innovation to occur.
    ChairwomanVelazquez. Could you tell me, specifically, how 
the open platform requirements may provide opportunity for 
small businesses, rural telephone companies, and business owned 
by members of minority groups, and women to offer wireless 
services?
    Mr.Martin. Well, I think that what it will allow, the open 
platform will allow for people that are small businesses that 
want to develop, like I said, a new application, or a new 
handset, to be able to get those services on to the wireless 
broadband networks.
    Currently, they're not able to do that, unless they 
convince one of the large incumbent providers to sell their 
handsets, or sell their services, or include them. So I think 
the open platform will allow for people that don't have to go 
get an agreement with the large incumbent providers to provide 
those kinds of applications and services, and I think that will 
be important, both to small businesses, and to consumers.
    ChairwomanVelazquez. How would you react to the fact that 
some rural telecommunications companies have suggested that 
larger entities seeking to avoid the open platform requirements 
of the C block licenses may opt to be on the smaller geographic 
licenses? Under this scenario, the smaller entities are 
concerned that they will be unable to compete, and win licenses 
as a result. Should the FCC take steps to address those 
concerns?
    Mr.Martin. Well, I think it was important for us to find a 
balance. And while the smaller carriers focused on rural areas, 
we're concerned about the fact that the open access requirement 
placed on some pieces of the Spectrum might make the pieces 
they're more interested in more attractive to larger providers.
    We could have applied the open access requirement 
everywhere, but the smaller carriers didn't want that, either, 
so they didn't want the open access requirements applied to the 
pieces of the Spectrum they were more interested in. And, 
ultimately, when we said we were going to apply it somewhere 
else, they were concerned it might drive some of the larger 
providers towards the Spectrum they were interested in. But I 
think we need to find an appropriate balance between not only 
making sure that there was Spectrum available for small 
telecommunications carriers who wanted to go buy Spectrum, but 
also make sure that we had a platform that was more open to 
small businesses in the development side of both handsets and 
applications. And I think that we are trying to find an 
appropriate balance with that.
    ChairwomanVelazquez. But, Mr. Chairman, our concern is to 
make sure that smaller entities will be able to compete and win 
those licenses. What actions have you taken to make sure that 
happens?
    Mr.Martin. What we've done to make sure that they're going 
to be able to--we can't make sure that they win. We can make 
sure they're able to participate.
    ChairwomanVelazquez. Sure. That there is a level playing 
field for them to compete.
    Mr.Martin. Right. And so, what we did is, first, we divided 
up a lot of the Spectrum into smaller geographic sizes, and 
smaller Spectrum blocks, so they could have an area where they 
could be able to participate, and be able to have a more 
realistic chance of winning, because they were smaller 
geographic areas, towns, as opposed to states and whole regions 
of the country. And, so, compared to what the Commission had 
previously proposed, we actually broke the Spectrum up into 
even smaller areas to allow them to participate.
    And then we do have the Designated Entity bidding credits, 
which would allow them, if you qualify as a small entity, to 
participate and receive bidding credits in the auction. And I 
think that's what's going to allow them to end up competing.
    Like I said, the only other alternative in the issue that 
you raised about the open platform, is that going to be bad for 
small providers, the only alternative was to do that on a level 
playing field everywhere, apply the open platform to everyone. 
And the smaller carriers said that was worse, they did not want 
that as an alternative. And that would have been another 
alternative I think the Commission could have considered. We 
were actually taking their views into account but not applying 
everywhere.
    ChairwomanVelazquez. Okay. In 2006, the FCC revised its 
rule for small businesses or Designated Entities, that utilize 
bidding credits in Spectrum auctions. The revised rule had made 
it very challenging for them to raise money, and imposed 
significant restraint on their ability to run a viable 
communication business.
    Despite these concerns, the 700 Megahertz Auction will 
employ the rules as they were revised in 2006. Why did the FCC 
decide not to act on these concerns? And I know that the 
revised rules responded to the case in New York with Mr. Mario 
Gabelli, and we have to make sure that this is not a give-away. 
But in the process, also, we have to make sure that legitimate 
small entities are able to win.
    Mr.Martin. Well, I think you're absolutely right, we need 
to find an appropriate balance to make sure that these rules 
not only protect against fraud, which is what some of the 
concerns that were expressed in the case up in New York that 
you were referring to with Gabelli, but also make sure that the 
legitimate small businesses have an opportunity to win as a 
part of the process. And I think that the changes the 
Commission made in 2006, which were done on a bipartisan basis 
by the Commission, were done to respond to the significant 
issues around fraud that had been raised.
    And I think that, actually, the changes from 2006 still 
allow small entities to actively participate and win in the 
auction that we had in 2006. So if you look, for example, in 
that auction, 55 percent of the winning bidders were Designated 
Entities, over half of the people who won licenses with the new 
rules you're talking about, were Designated Entities. So I 
think that that's a sign that despite the rule change we made, 
that they are still being very successful in the auction 
participation. They won 20 percent of the licenses, and over 
half of the licenses were awarded to smaller entities. And I 
think that's a demonstration that they were still able to be 
successful, and we were able to address some of the fraud 
concerns.
    ChairwomanVelazquez. But we still want new entrants into 
this process. My question is, did you consider the comments 
that were submitted regarding the 2006 revised rules?
    Mr.Martin. Oh, absolutely. And the comments that were 
submitted, in large part, wanted us to go back to the pre-2006 
rules, which had also facilitated, and/or allowed for some of 
the fraud that was occurring with the instances like Gabelli. 
And trying to make sure that these are legitimate small 
businesses that are interested in not just buying and flipping 
a license to a large provider, but that are interested in 
building a business, is what's important.
    The most significant change that we made that the small 
carriers, that some of the potential licensees who want bidding 
credits made was, we said you have to hold the license for ten 
years, instead of five years, so you can't just hold it for 
five years, and then flip it to a larger provider. And 
extending that time frame from five to ten years made it much 
more difficult for them to flip the license, as opposed to 
trying to build a legitimate business. And that was, frankly, 
the concern we had with some of the fraudulent activity that 
was going on. And I know that, as I said, some do not want 
that, some want to be able to flip it quicker to larger 
entities, but I think that's an important rule change that I 
think was a good change by the Commission. And I think that it 
still did not deter people from participating as a Designated 
Entity. Fifty-five percent of the licenses were won by new 
small entrants, and I think that's a demonstration that it was 
actually a successful balance.
    ChairwomanVelazquez. Thank you. Now I recognize Mr. Chabot. 
I have other questions, and when we finish here, we'll go to a 
second round.
    Mr.Chabot. Thank you, Madam Chair.
    Chairman Martin, could you describe again in some detail 
the procedures that the Commission used in evaluating the 
economic consequences of the auction rules on the Designated 
Entities?
    Mr.Martin. The economic consequences of all of the auction 
rules on the DEs? I mean, I think that we try to make sure 
we're determining--first, we focused on the Designated Entity 
bidding credits, because that was the most contentious issue as 
it related to small new entrants. And we did evaluate the 
concerns that had been raised about wanting to go back to the 
previous rules. We determined that the changes in the rules had 
still allowed Designated Entities to be successful in the 
auction, and at the same time, that we think it's a more 
appropriate means of preventing fraud, so we thought that was 
an appropriate rule change.
    We did look at the impact of the balance of rules, both 
auctioning off some of the licenses in larger areas, and made 
sure that we reserved a significant portion of the Spectrum for 
smaller bidders to be able to participate by having smaller 
geographic areas for them to be able to buy Spectrum in. So I 
think that we--every auction, we try to find a balance of some 
opportunities for small businesses to be able to participate on 
a smaller geographic area basis, but also some larger pieces of 
geographic areas and pieces of Spectrum to be sold, because 
that, at times, facilitates, for example, new entrants on a 
larger scale. And, so, I think that is appropriate balance that 
we had, but we certainly evaluated what the impact would be on 
small businesses.
    Mr.Chabot. Thank you. In developing auction rules, does the 
Commission perceive that the public interest is, essentially, 
equivalent to obtaining maximum revenue from the sale of the 
Spectrum? And would there be situations in which the Commission 
adopts rules that do not maximize revenue, but instead maximize 
other public interest values?
    Mr.Martin. Absolutely. I mean, we do not consider the 
public interest being simply maximizing revenue. And, indeed, 
the rules we adopted do not maximize revenue. If we wanted to 
maximize revenue, all of our studies show we would sell all of 
the Spectrum basically in the largest geographic area possible, 
if not nationwide, and all of it on a very large Spectrum-
basis, with no build-out requirements, whatsoever. And, so, all 
of those things, dividing up the country into smaller pieces, 
reduces the overall amount of money that's raised, but it 
provides an important opportunity for smaller players to get in 
and provide service.
    In addition, build-out requirements also decrease the value 
of the Spectrum. The economists would say that the way to 
achieve the most value for the Spectrum from the Treasury 
standpoint would be allowing an incumbent to buy it and not use 
it, because it would prevent entry by anybody else. So he might 
be willing to pay a premium for the opportunity to not even 
build it out. So strict build-out requirements, and dividing 
the Spectrum up into smaller geographic areas, both reduced the 
amount of money that the Treasury will receive from the 
auction, but they provide other very important public interest 
benefits, and so the Commission doesn't maximize revenue. And I 
think we do make sure that the Spectrum is being put to use, 
and that there's other opportunities.
    Mr.Chabot. Thank you. And, finally, Verizon has challenged 
the Commission's auction rules in the D.C. Circuit. What would 
be the impact on the auction if Verizon were to win its 
challenge?
    Mr.Martin. Obviously, it would depend upon, when the Court 
ended up hearing on it. Verizon has filed a lawsuit. They 
actually asked the court to consider hearing this on an 
expedited basis, because they said it was important as it 
related to the auction, and the court just ruled last week and 
denied that request, and said that they would not hear that 
request on an expedited basis.
    Mr.Chabot. So then relative to the impact, if they were to 
win the challenge, can you comment on that?
    Mr.Martin. Well, it, obviously, depends upon when they won 
the challenge, and whether that ended up ultimately being 
appealed. I mean, the Commission has had, in the past, its 
auctions that have been appealed after they've already 
occurred. And if the Commission ends up winning those appeals, 
then there's no change. And if, ultimately, the person 
challenging the auction wins, the Commission has to go back and 
undo the auction, which is what occurred in the context of the 
one auction that had to be unwound, so to speak. And so that 
would depend upon when Verizon actually won their suit, if they 
win.
    Mr.Chabot. Thank you. Madam Chair, I yield back my time.
    ChairwomanVelazquez. Mr. Gonzalez.
    Mr.Gonzalez. Thank you very much, Madam Chair. And welcome, 
Mr. Chairman. And I know you probably think that we don't 
appreciate your service, but we do. And I've had the privilege 
of hearing you as a witness before, before Energy and Commerce.
    A couple of observations, first of all. When we talk about 
small businesses, and this is such a different environment 
here, because that is a first concern here, is where does the 
small business factor in the auction. It seems to me, despite 
your testimony, that it really isn't about owning Spectrum for 
small businesses. That somehow the benefits of this auction, 
and the conditions that have been attached in open platform 
will somehow benefit small businesses by having handset 
manufacturers, I really don't know the small business handset 
manufacturer, to be honest with you, or application providers, 
software providers. And, also, that certain areas, small 
businesses will have access to the Internet. And I think 
there's some legitimacy to that. But I really don't see the 
Spectrum rules benefiting small businesses, as far as 
ownership. And we're going to have a panel of witnesses a 
little later that may disagree or agree with me.
    Secondly, I do believe that maximizing the monies that will 
be derived from the auction is a primary concern to the FCC, 
because we've told you, Members of Congress, when we were 
debating the Deficit Reduction Act, we're placing $10 billion, 
and that's on the low-end of what you're going to get. Your 
reserve price probably adds up to about $10 billion, so I think 
the public owns the airwaves, you're the auctioneer. You have a 
fiduciary duty, in my opinion, to maximize the monies that will 
be realized from that sale.
    I'm going to be citing testimony from some of the witnesses 
in addressing different aspects of the auction, and the 
concerns that are expressed by some of these witnesses. First 
of all, the conditions, no leasing, reselling, wholesaling to 
other entities. And I will then refer to the testimony of 
Shelley Spencer at page 2.
    ``Another key to our success in acquiring the Spectrum in 
the former, or in previous auctions, which were recently 
rescinded, by the way, it permitted us to lease half of our 
Spectrum to Sprint and Nextel. This is Spectrum which we are 
not using in our own network, and for small businesses, the 
ability to lease a portion of the Spectrum can provide 
immediate revenue. And as for us, provide the collateral 
necessary to raise the capital to purchase Spectrum, and build 
our own network.'' So I do want you to be able to address that.
    The second area, ``That larger companies will be attracted 
to the smaller licenses that they don't see as being encumbered 
by the open platform conditions that you have placed on the 
Block C.'' And so I'll go to page 4 of Christopher Guttman-
McCabe's testimony, because I think he frames it very well.
    ``Incumbents that choose to participate in this auction and 
want a nationwide or regional presence will be left with a 
choice between bidding with a few large licenses with new and 
very specific service obligations, or bidding on the many 
licenses, as many as 734 in some Spectrum blocks, needed to 
achieve the same area of coverage. While this is an unfortunate 
choice for all carriers, it may have the greatest impact on 
small businesses. As a result of the new license conditions, if 
large incumbents choose to aggregate many of the smaller, less 
encumbered licenses, small businesses will be hard-pressed to 
raise the amount of capital needed to compete head-to-head in 
an auction with larger established carriers, particularly in 
the tighter credit markets that exist today.''
    Next, we'll go into, ``Open platforms will open markets for 
small handset manufacturers, small software companies, and 
small added-value resellers.'' And I'll go to page 3, and I can 
find it quickly, of Mr. Edward Kelly Bond, President of Public 
Communications, Incorporated, who, in essence:
    ``Unfortunately, the FCC's current plan for auction and 
licensing the 700 Megahertz Bands presents only limited 
opportunities for small businesses to participate. Small 
businesses have virtually no opportunity to participate in the 
provision of the anticipated high-speed service to be offered 
on the upper 700 Megahertz C Block Spectrum. Small businesses 
have no opportunity to acquire the huge C Block licenses in the 
auction, and the FCC's construction requirements do not 
encourage the large C Block licensees to work with small 
businesses. Since the open platform requirements apply only to 
the C Block licenses, the open platform requirements may be of 
little benefit to small carriers.''
    Lastly, on the Regulatory Flexibility Act, page 5 of Mr. 
Bond's testimony reads-
    ChairwomanVelazquez. Mr. Gonzalez, time has expired, so I'm 
going to give you 30 seconds.
    Mr.Gonzalez. I'm just-
    ChairwomanVelazquez. But I will allow for the Chairman to 
answer your question.
    Mr.Gonzalez. Well, the last thing, and I think this is dear 
to the Chairman's heart here, I mean, Chairwoman Velazquez. And 
this is what Mr. Bond states:
    ``There is a law that exists, which I know this Committee 
is all too familiar with. It is called the Regulatory 
Flexibility Act.''
    As a regulatory agency, the FCC under this Act is charged 
with giving particular consideration to whether or not its 
rules will negatively impact small carriers, and particularly 
rural telephone companies. We cannot honestly think of one 
instance in which the Commission ever outlined in a final order 
that had found circumstances that warranted adopting different 
rules for small rural carriers.''
    And I know that is multi-faceted, and I'll ask if Chairman 
Martin is not able to respond now, if he would in writing.
    Mr.Martin. I'd be happy to end up responding both in 
writing and now. Although, Chairwoman, if you want to go to the 
next questions, that's okay. No, I'm just kidding.
    Let me respond, and say a couple of things. First, I think 
that there are often conflicting and competing interests that 
are involved in the Commission's rules that we're trying to 
balance when we're trying to come up with their auction.
    There's no question about we want to try to develop 
opportunities for small businesses to participate. But you also 
indicated that you think it's important for us to maximize 
revenue. Those two are competing and conflicting interests that 
do not always coincide.
    Actually, to maximize revenue, we should provide less 
opportunities for small providers to participate, because they, 
in general, pay less for smaller pieces of Spectrum than if we 
sold a larger amount. So that's one example of how the 
competing and conflicting interests have to be balanced to come 
up with something that's fair to all the different parties.
    Another example is that you indicated that you were 
concerned about our limitations on wholesaling. Actually, we 
allow for a Designated Entity to wholesale up to 50 percent of 
the capacity that they've bought. What we don't do is what some 
who wanted to change our Designated Entities require, they 
wanted us to require wholesaling for pieces of the Spectrum. 
And what we determined was that requiring wholesaling would 
have too much of an adverse impact on the amount of money 
people would pay for that Spectrum, because incumbents would 
not want to participate if we required wholesaling. But they're 
allowed to wholesale up to 50 percent of what they buy, but 
they are not required to wholesale. And many of the small 
businesses, or some of them who had argued for us requiring 
wholesaling, understood that if we had a wholesale requirement, 
it would actually deter many of the larger providers from even 
playing, which would actually drive down the revenue that we 
would gain.
    So I think those are just two examples of how the interest 
that the Commission has, and the interest that I think everyone 
has, are often competing and conflicting, and we have to try to 
find a balance. But I think in our 700 Megahertz order, we have 
tried to provide a balance that allows them, for example, to 
wholesale a significant amount of what they buy, but they're 
not required to wholesale at all, that we sell off a large 
portion of the Spectrum in a large geographic area, that has 
some open platform requirements, which we think will facilitate 
some small businesses. And, at the same time, sell a 
significant amount of the Spectrum, with more than half of the 
Spectrum is sold in small and medium-size geographic areas, 
without any encumbrances, whatsoever, without any encumbrances 
on open access at all. And I think that's an example of how we 
tried to find an appropriate balance, and give small businesses 
an opportunity.
    ChairwomanVelazquez. Any answer on the Regulatory 
Flexibility analysis, because that was my next question. So we 
can take this opportunity for you to answer.
    Mr.Martin. Well, I think the Commission is both statutorily 
required to, and does, undergo a Regulatory Flexibility 
Analysis in all of our orders to determine the impact of our 
decisions on small businesses. And we do end up taking all that 
into account. I'm not aware, off the top of my head, of any 
court challenge that has said that have insufficiently done 
that Regulatory Flexibility Analysis in recent times, but I'll 
go back and try to get you any further answers. But the 
Commission is always open, if there's ways that the Committee 
thinks we might be able to improve that Flexibility Analysis. 
We'd be happy to work on that.
    ChairwomanVelazquez. So you're aware that you conducted-
    Mr.Martin. Oh, absolutely.
    ChairwomanVelazquez. So, I will ask that you submit to this 
Committee the economic analysis that you conducted on the 
impact that it will have on small businesses.
    Mr.Martin. Sure. We always end up having to, and we're 
happy to submit the Regulatory Flexibility Analysis.
    ChairwomanVelazquez. Thank you. Ms. Hirono. Mr. Sestak, 
he's gone. Mr. Higgins, he's gone. Mr. Shuler.
    Mr.Shuler. Thank you, Madam Chair.
    I simply have one question. We discussed that if a licensee 
doesn't perform the benchmarks with the build-out within 10 
years. Has the Commission explored, I know this is under new 
regulations, have you explored ways to kind of provide 
incentives after five years that maybe they could--I understand 
why they don't flip it, and I believe what you're saying, 
because that would create--obviously, people would be getting 
it just for flipping those. Is there any other ways that we can 
kind of expedite that, make it a little faster; especially, in 
rural areas. I mean, ten years can be a life time.
    Mr.Martin. No, no. Our rule on Designated Entities says, if 
you qualify for a bidding credit, you are not allowed to flip 
it. You have to keep it for 10 years. Our build-out 
requirements actually kick in earlier. So, for example, after 
four years, we have a benchmark, and we say if you don't--both 
geographic and population, depending upon which license you 
want. If you don't meet that benchmark after four years, we 
actually shorten the time of your license from ten years to 
eight years. And that's a significant deterrent to not building 
out over a large part of either your population or geographic 
area. So we actually have benchmarks along the way to make sure 
that people are progressing, and making progress towards 
getting to that. We don't want to just have a requirement that 
says you have to build it out over ten years, and get to the 
end of the ten years and say you didn't do anything. And that's 
why we have the benchmark actually less than halfway through, 
to make sure you're doing it, and meeting what's a very 
aggressive benchmark.
    And, indeed, the wireless industry was very opposed to, in 
general, that aggressive benchmark, because it's a more 
aggressive benchmarking along the way than we've ever used 
before, to make sure that those areas in rural areas are being 
built-out, because we can't afford to wait for ten years for it 
to be getting out to those people.
    Mr.Shuler. Chairman Martin, thank you. And, Madam Chair, I 
yield back.
    ChairwomanVelazquez. Mr. Ellsworth.
    Mr.Ellsworth. Thank you, Madam Chair.
    Chairman, could you discuss how the e911, how we can ensure 
the availability in the open platform for e911?
    Mr.Martin. Well, we end up having some very strict rules on 
wireless 911 capability, and indeed, increasing it on all the 
different platforms that we have, that the Commission 
regulates.
    Since I became Chairman, we've been very aggressive in 
making sure that all the different platforms have 911 
capability, so that when--voice over IP providers are now 
required to provide 911, and deliver every call to the local 
police and fire department. And we have very aggressive 
requirements on the wireless industry, that they're having to 
do, as well.
    And we will enforce those, and the Commission was clear, 
they would provide to all of the providers who win in the 700 
Megahertz Auction, as well. So it would apply to whoever is 
winning all the different pieces of Spectrum.
    Mr.Ellsworth. Thank you. I have no other questions.
    ChairwomanVelazquez. Mr. Altmire.
    Mr.Altmire. Chairman Martin, thank you for being here 
today.
    I'm encouraged by the prospect that wireless broadband 
services might expand the service areas where reliable 
broadband is available, and provide more options for consumers 
in areas served by a limited number of providers, rural, and 
under-served areas. So when would you expect the entities that 
win licenses at next year's auction to begin to roll-out 
wireless broadband services?
    Mr.Martin. Well, whenever you're talking about rolling out 
a service that requires you to put up new infrastructure, go 
out actually in the communities and put up towers, and turn on 
service, that takes a while, turning on the services. That's 
actually the reason why people were so concerned about that 
four-year benchmark, where we're saying you've got to be 
providing service, for example, to about 40 percent of your 
population, and a significant portion of your geographic area 
with those four years. So, certainly, within four years, you're 
going to be having to be serving more than about a third of the 
area already, so they'll start turning it on, I would think, 
once you've bought the Spectrum, paid a lot for it, you want to 
turn it on as quickly as you can. But it does take a while to 
go get the approval from the local communities to put a new 
antenna, and put that antenna up, and get power to it, and turn 
it on, and begin selling handsets, so that takes a while.
    I would think within a year they might be able to start 
serving some places, but that four-year benchmark is a good 
sign for how far along they should be.
    Mr.Altmire. Are there any areas of the country that you 
feel might be lagging behind, or similarly, that are further 
ahead in the process, and maybe would be used as a model for 
other areas to look at?
    Mr.Martin. Well, unfortunately, because this Spectrum is 
currently utilized by television signals, it's been very 
difficult for anybody to--even for some of the pieces of the 
Spectrum were sold, for them to utilize it very effectively. So 
in this piece of Spectrum, in these frequencies, I can't say 
that I think anybody's really that much further ahead.
    Probably the one furthest ahead is a company called 
Qualcomm has rolled out service media flow, which is a mobile 
video service to telephones, that is provided by Verizon and 
several other providers. And they're using actually some of the 
frequencies from digital television channels that they have 
actually either won, or negotiated with television channels to 
let them begin providing service. So they're probably the most 
aggressive, and already utilizing some of the 700 Megahertz 
today. But I think that was a somewhat unique service, so I'm 
not sure how comparable that would be for others to follow.
    Mr.Altmire. For my last question, I wanted to follow-up on 
what Mr. Chabot had talked to you about. And the FCC has 
proposed reserve prices for Spectrum licenses which amount to 
more than $10 billion.
    Mr.Martin. That's right.
    Mr.Altmire. As, of course, you know. At these prices, small 
businesses cannot participate without access to significant 
capital. Are you concerned that rules governing Designated 
Entities may inhibit their ability to raise capital?
    Mr.Martin. As I said, I think they were able to be very 
successful in raising capital, and still winning effectively in 
the last auction we had for similar kinds of Spectrum. And in 
that auction, over half of the winners were Designated 
Entities. And we based that reserve price on the amount of 
money that was garnered in this auction, where they effectively 
participated. So what we did is, we said that to try to get an 
estimate for how much this Spectrum should be worth, we looked 
at what was the most recent auction we had, and let's utilize 
that as a benchmark for how much this Spectrum should be worth. 
And in that auction, that was the auction in which Designated 
Entities were able to win more than half the licenses. So I 
think that is a sign that they will be able to effectively 
compete.
    Mr.Altmire. Thank you. I have no further questions.
    ChairwomanVelazquez. Yes. Ms. Hirono.
    Ms.Hirono. Thank you, Madam Chair.
    I'm referring to the testimony of Mr. Edward Bond, Mr. 
Chairman. And I think that we want to allow small companies to 
directly bid for these bands, and then also to encourage the 
larger licensees to work with the small businesses. And, so, 
I'm referring to his testimony on it looks like page 4 or 5 of 
Mr. Bond's testimony, where he says that:
    ``A better approach would be for the FCC in trying to 
promote the direct bidding by small businesses to license the 
Spectrum based on smaller license areas, rather than huge 
regional areas.''
    Can you respond to that part of my question?
    Mr.Martin. Sure. In the 700 Megahertz Band, in all of the 
television, in all of the frequencies we're to sell, that the 
Commission is going to get back as a result of the DTV 
transition, a third of those channels are going to be sold in 
the smallest geographic areas. I haven't seen Mr. Bond's 
testimony, but in the smallest geographic areas that anybody 
propose, the cellular market areas or towns. So I think that is 
a significant opportunity for them to be participating.
    Are we doing it all on a small basis? No, but I think 
that's a lot of Spectrum to be offering on a very small basis.
    Ms.Hirono. Then his second point has to do with, you want 
to encourage the larger licensees to work with the smaller 
providers. And that, currently, your proposed rules provide few 
or no incentives for this to happen, because you're allowing 
the large companies to basically focus on serving the urban or 
populated areas. So can you respond to how you can better 
encourage partnership between the large bidders and the smaller 
companies that want to get into the market?
    Mr.Martin. Well, I'm not sure exactly what he's referring 
to on trying to encourage them to work together. But I will say 
that I think the most important thing that we can end up doing 
to try to facilitate that, is to make clear, if in the larger 
geographic areas that we sell, you have an obligation to serve 
that whole area, and all of those communities in there. And you 
can't just serve the urban are, as you said in your question. 
You've got to go serve all of those areas, which is why we have 
very strict build-out requirements.
    Now one of the ways they can meet those build-out 
requirements is working with other providers, if they would 
like to. I think that would allow them, and encourage them to 
do that, but I think that's the most important thing that we 
can do to encourage it, is to say, if you win a large 
geographic area, you've got to serve the smaller communities in 
that area, as well. You can't just serve the big urban area.
    Ms.Hirono. Just one clarification. I think, as I recall in 
your testimony, that you said that they would have to serve 75 
percent of the population.
    Mr.Martin. That's right.
    Ms.Hirono. That's not 100 percent. But at some point, do 
they need to serve 100 percent, including the rural areas?
    Mr.Martin. In areas where--if they haven't met their 
benchmarks, we take back away the areas they haven't served. 
But to be clear, and this is an important, I guess, important 
to put in context. The Commission has never had a requirement 
as high as the requirements we put in this auction on what they 
should end up providing service to. And, indeed, the industry 
in total, and I think this would probably be both the smaller 
providers, and the largest providers, were opposed to the very 
requirements you're talking about, of being able to serve at 
least 75 percent of the population and a very high percentage 
of the geographic area. And, so, the Commission was trying to 
find a balance with that, but this was the most aggressive the 
Commission had ever been in what we were requiring people to 
provide service to.
    Ms.Hirono. Thank you.
    ChairwomanVelazquez. Let me follow-up on Ms. Hirono's 
question to you.
    In the next panel, some of the witnesses, like Mr. Bond, 
raised the issue of how--it's going to be more expensive for a 
small entity to cover rural areas, because they are more spread 
out, they don't the resources and the infrastructure. So rural 
communication companies have raised concerns about the 
population-based build-out requirements that the FCC assigned 
to the larger licenses. This company contends that population-
based benchmarks will not encourage licensees to provide 
service to rural areas. How do you respond to that?
    Mr.Martin. That's the very reason why we have actually a 
mix of our requirements. Some of the licenses are required to 
be built out on a population-basis, and some are required to be 
built-out on a geographic basis, to make sure that all of the 
different areas are covered. And, so, some of the small 
carriers wanted to make sure that we had a geographic basis, to 
make sure that all the rural communities were covered.
    Some small carriers were concerned that would actually 
become too difficult for them to end up doing, and wanted a 
population everywhere. And, so, the Commission, again, tried to 
find a mix where we've said some of the licenses can be built-
out on a geographic area-basis, and some need to be built-out 
on a population-basis, to try to provide opportunities both 
ways, to different carriers who wanted to be in different-
    ChairwomanVelazquez. In 2006, the FCC conducted the 
Advanced Wireless Services Auction. Fifty-seven of the 104 
winning bids were submitted by small businesses. According to 
one of the witnesses that will be testifying today, due to 
government user's needs, small entities may have to wait as 
long as five years before they begin to benefit from the 
Spectrum. Mr. Chairman, for a small business, small entity, 
five years is a long time, so what steps are you taking, or you 
will be taking to accelerate the relocation process, so that 
these firms are not impacted by extended delays?
    Mr.Martin. The Spectrum that we were auctioning off in that 
AWS-1 auction was actually Spectrum that we were taking back 
from government users, and NTIA, which is a division of the 
Department of Commerce, is responsible for moving government 
users off of those pieces. They've got a schedule for when the 
government users are supposed to be off, but the Commission 
regulates commercial private users, not the government users, 
themselves.
    So to the extent that there's concerns about the government 
users moving off, the Commission has very little that they can 
end up doing. NTIA is the one responsible for making sure that 
government users exit according to the schedule that has been 
laid out. But the auction was conducted with a schedule of when 
people were going to be leaving, and I assume that everything 
is on track with that. I haven't heard, in particular, anything 
that that's not.
    I think, though, the fact that the Spectrum was going to be 
unavailable for such a long period of time, because there were 
current government users who were going to be leaving over a 
certain period of time, only highlights why this Spectrum 
should be worth significantly more, because this Spectrum is 
going to be available at a date certain. We know on the DTV 
transition in 2009. And that's the very reason why I think us 
using that Spectrum as an example of how much we should be able 
to raise, and using that as a benchmark, is why that's a 
reasonable benchmark for us to be using, because this Spectrum 
should be worth more, because it's available even quicker.
    ChairwomanVelazquez. Thank you very much. Mr. Chabot, do 
you have anything? Well, with that, the gentleman is excused, 
and I thank you for your time, and your cooperation, and your 
insights into this issue.
    Mr.Martin. Thank you very much.
    ChairwomanVelazquez. And we'll expect for some of the 
questions that you were not able to provide some of the 
answers, to be sent to this Committee.
    Mr.Martin. Sure. Thank you.
    ChairwomanVelazquez. I will ask the second panel to please 
take your seats.
    Mr. Chairman, would you please name for the record a staff 
person who will stay at this hearing?
    Mr.Martin. Oh, sure. Aaron Goldberger will stay.
    ChairwomanVelazquez. Thank you.
    Okay. We're going to start with our second panel. And each 
of the witnesses will have five minutes to make your testimony. 
And we're going to start with Mr. E. Kelly Bond. He is CEO and 
President of Public Service Communications, based in Reynolds, 
Georgia. Public Service, through its subsidiaries, holds 
Spectrum in regions of Alabama and Georgia. Mr. Bond is Chair 
of the Wireless Committee of the National Telecommunications 
Cooperative Association, and is a member of the Rural 
Telecommunications Group.
    Welcome, sir.

   STATEMENT OF EDWARD KELLY BOND, CEO AND PRESIDENT, PUBLIC 
           SERVICE COMMUNICATIONS, REYNOLDS, GEORGIA

    Mr.Bond. Thank you, Madam Chair.
    Good morning, and thank you for the invitation to be here.
    The upcoming 700 Megahertz Auction, if structured and 
managed appropriately, represents a tremendous opportunity for 
the FCC to help deliver broadband capabilities to all areas of 
the United States.
    Because of the characteristics of the 700 Megahertz 
Spectrum, I believe it will be economical to deploy broadband 
services to many rural areas that would otherwise have been 
uneconomical to serve. That's why the segment of our industry 
has argued so strenuously that it's essential for Congress and 
the FCC to develop policies that will ensure rural carriers 
have access to 700 Megahertz Spectrum, and, in particular, the 
700 Megahertz Auction.
    My fear is that consistent with past practices, large 
nationwide telecommunications carriers will be in the best 
position to win many of these licenses that will soon be 
auctioned, and they will once again overlook rural towns, and 
their outlying areas, concentrating on the most profitable, 
highly populated areas.
    While such a market-based approach to the provision of 
broadband is understandable, it is not justifiable when there 
are small and rural companies ready and willing to provide 
service to such rural areas. And I suggest that rural carriers 
and rural businesses have different incentives when it comes to 
their regions' economic survival. Bringing new businesses and 
jobs to my service area is a win-win situation.
    The FCC's current plan for auctioning and licensing the 
700-megahertz band by design limits opportunities for small 
businesses to participate. Small businesses have no opportunity 
to acquire the huge C block licenses in the auction. And the 
FCC's construction requirements do not encourage the large C 
block licenses to work with small business.
    And if I may interject, the discussion just now about the 
build-out requirements, as proposed, the build-out requirements 
are more burdensome on the small carrier than the large 
carrier.
    A far better approach for small business would be for the 
FCC to license the spectrum based on smaller license areas and 
the huge regional areas. Instead of creating licenses so large 
that only multi billion-dollar companies can bid on them, 
division of the spectrum across the smaller CMA divisions would 
allow for fair and equal participation by all size companies.
    Also, the FCC should change the current construction 
requirements for the C block from population-based benchmarks 
to geographic based-benchmarks. This would encourage large 
licensees to work with small businesses to maximize employment 
of service to secondary and rural markets.
    In addition, the FCC and Congress should ensure that to the 
extent services provided using 700-megahertz spectrum are 
mobile or portable, the customers of small carriers are able to 
roam on the networks to be built by the nationwide carriers.
    The FCC and Congress should ensure that nationwide carriers 
do not deny their own customers the ability to roam in rural 
areas where there is a small business carrier that is providing 
technically compatible services.
    Another way that FCC can ensure that rural citizens have 
access to new 700-megahertz-based applications is to require 
open access on the entire 700-megahertz platform and all future 
auctions of spectrum intended for personal communications 
services.
    If large nationwide carriers are allowed to dominate the 
700-megahertz auction, they will control massive amounts of 
spectrum. Such concentration in the hands of a few goes against 
the entire grain of section 309(j) of the Communications Act 
and seems contrary to congressional intent.
    We question the benefit to the public of allowing large 
carriers with huge budgets to gather spectrum with the 
potential purpose of preventing its use by others.
    There is no question that rural carriers, more than others, 
need less burdensome regulations. As a regulatory agency, the 
FCC under this Act, is charged with giving particular 
consideration to whether or not its rules will negatively 
impact small carriers and particularly rural telephone 
companies.
    We cannot honestly think of one instance in which the 
Commission ever outlined in a final order that it had found 
circumstances that warranted adopting different rules for small 
carriers. We ask how can this be?
    Instead of discouraging small businesses, the FCC should 
carefully study the impact of its regulations on small 
businesses, and should ensure that rules and policies encourage 
small and rural businesses to deploy broadband services.
    By instituting the suggestions I have outlined today, which 
we have repeatedly made in formal presentations and filings 
with the FCC, policy-makers could encourage the deployment of 
broadband connectivity to rural citizens and rural businesses 
with high-speed connections throughout America.
    I thank you for the opportunity to speak. And I invite your 
questions.
    [The prepared statement of Mr. Bond may be found in the 
Appendix on page 56.]

    ChairwomanVelazquez. Thank you, Mr. Bond.
    Our next witness is Ms. Shelley Spencer. Ms. Spencer is 
President of WIREFREE Partners, based in Vero Beach, Florida. 
WIREFREE Partners currently deploy wireless networks in 16 
metropolitan markets, where it holds spectrum licenses.
    Prior to joining WIREFREE Partners, Ms. Spencer was General 
Counsel and founder of Airgate, a wireless company that built, 
owned, and operated a network in the southern Eastern U.S. 
covering more than 6.5 million people.
    Welcome.

  STATEMENT OF SHELLEY SPENCER, PRESIDENT, WIREFREE PARTNERS, 
                   LLC, LAYTONVILLE, MARYLAND

    Ms.Spencer. Thank you, Madam Chairwoman, Ranking Member 
Chabot. And let me also thank you for your leadership. I think 
it is very timely since we just found out on Friday the auction 
is going to start January 24th and significant dollars will be 
due from all bidders by December 28th. So thank you for keeping 
this on the radar screen.
    As I sit here today, we are constructing a state-of-the-art 
network in our 16 markets. And that network I think shows the 
story of what small businesses can do.
    We are not a rural telephone company. So I think we have a 
different story here today. And I hope that the message doesn't 
get lost that small businesses can also serve urban markets.
    We have Cincinnati as our market. We have Austin, Texas. We 
also have McAllen, Texas. So there is a variety of markets. And 
small businesses can bring value to every one of those markets, 
be they rural or urban, but that all counts on the FCC and the 
FCC's rules.
    My companies have participated for ten years in spectrum 
auctions, each time as a small business. And we have seen the 
rules go back and forth. Significantly, the network that we are 
building today operates on spectrum 1 in 2005.
    We chose not to participate in the AWS auction in 2006 
precisely because the rules changed and we didn't feel we could 
raise the capital. We are likely to sit on the sidelines in 700 
megahertz because, again, we don't think we can raise the 
capital.
    But the story for small businesses can be bright. Just like 
other industries, small businesses in wireless generate new 
jobs, bring new competition, and bring innovative services. My 
companies over the years have created over 250 new jobs.
    We are bringing service to business customers that aren't 
being provided today by the national carriers. As a small 
company, we can pay attention. We can bring those niche 
services that other people like. But we need to have access to 
spectrum.
    I think it is important to recognize that small businesses 
in wireless are unique in two very important ways. First, we 
have to get access to spectrum. And the only way to do that is 
to buy it from somebody else or go to an auction. And that is 
expensive.
    Second, we have to raise a lot of capital, not just to buy 
the spectrum but to build the network. My company in the 2005 
auction paid 152 million for spectrum. That is a lot for a 
small business.
    That included, significantly, a $44 million bidding credit, 
without which we wouldn't have been able to purchase the 
spectrum. It also included our ability to lease half of our 
spectrum to Sprint-Nextel, as mentioned by Congressman 
Gonzalez. That today is not available, Congressman. We can 
lease a portion of the spectrum, 25 percent, but being able to 
lease 50 percent to a single entity is not permitted. Nor is 
wholesaling of 50 percent to a single entity. So small 
businesses have to face, how do we raise the money to 
participate in this business?
    The 700-megahertz auction will require small businesses to 
raise millions of dollars in the next 3 months. As it is been 
noted today by the Committee, the auction will have to produce 
$10 billion in revenue.
    Just to bid on the small markets that the Chairman pointed 
out are key to small business opportunity takes huge dollars. 
For example, the minimum opening bid in New York City for the 
smallest market is $59 million. That is to place one bid, the 
first bid.
    The Cincinnati minimum first bid for the smallest market is 
$2.9 million. And San Antonio will cost you 767 million if you 
win it on the first bid, but no one wins it on the first bid.
    The capital requirements are staggering for small business. 
And it requires that the rules be flexible so that we can be 
innovative in our strategies and our finances in attract the 
capital.
    The AWS auction was not a bright spot for small businesses, 
although I think the FCC chairman would quote you different 
statistics. If you look at the half a billion dollars that he 
cites that small businesses won, that is out of 13.5 billion 
that was spent. So half a billion was spent by small 
businesses. And since everything is priced on population and 
size of megahertz, that means that the smaller markets were 
what the small businesses were winning.
    Also, the rural telephone companies, although they don't 
like the rules, did okay if you look at the percentage that 
they won by DEs, but the small businesses that are true 
entrants won less than that. We attribute the poor showing in 
that auction, frankly, to the rule changes. And we would expect 
the same in the next auction unless there is significant 
change, which doesn't seem to be underway.
    So the future can be different, but we think small 
businesses really need three things. One, we need bidding 
credits, which are in place and are available for small 
businesses. But those have to be tied to flexibility to run our 
business.

    We should be able to wholesale. We should be able to 
retail. We should be able to lease. We shouldn't have 
straitjackets because we are small businesses that other 
carriers don't face.

    And also we can't live with a ten-year restriction of 
holding the business. It isn't just selling the business. We 
can't change our board. We can't have strategic relationships 
because all of a sudden we fall out of the small business 
category. In ten years, that is a long time in the wireless 
industry.

    Just open the paper this morning, and you will see 700 
megahertz was bought by AT&T from a small carrier. That happens 
every day. And to say a small business can't have that but must 
raise millions of dollars to participate in the auction is the 
death knell for small businesses.

    So we appreciate your leadership and your continued 
support. And we hope the auction goes well. Thank you.
    [The prepared statement of Ms. Spencer may be found in the 
Appendix on page 63.]

    ChairwomanVelazquez. Thank you very much.
    Our next witness is Mr. Chris Guttman-McCabe. Mr. McCabe is 
Vice President, Regulatory Affairs, for the CTIA - The Wireless 
Association. CTIA is an international trade association 
representing all sectors of wireless communications, including 
service providers, manufacturers in wireless data and Internet 
companies.
    Prior to joining CTIA, Mr. Guttman-McCabe practiced law in 
Washington, D.C.
    Welcome, sir.
    Mr.Guttman-McCabe. Thank you.

STATEMENT OF CHRIS GUTTMAN-MC CABE, VICE PRESIDENT, REGULATORY 
             POLICY, CTIA-THE WIRELESS ASSOCIATION

    Mr.Guttman-McCabe. Good morning, Chairwoman Velazquez, 
Ranking Member Chabot, and distinguished members of the 
Committee. On behalf of CTIA and its hundreds of carriers and 
manufacturer members, I want to thank the Committee for 
focusing its attention on the upcoming 700-megahertz auction. 
This spectrum and the recently auctioned AWS spectrum will 
continue to facilitate the wireless industry's provision of 
broadband to the person.
    Over 150 wireless companies provide service to more than 
243 million Americans today. These companies have in excess of 
25 billion in capital expenditures each year and account for 
over 253,000 jobs in America. Last year there were 1.8 trillion 
minutes of use in the United States. There currently are 18.7 
billion SMS text messages issued per month.
    From a public safety perspective, there are 291,000 
wireless calls to e911 each day. More than 15 companies 
manufacture handsets for use in the United States market. There 
are hundreds and hundreds of handsets available to American 
consumers. And perhaps even more staggering, there are over 
1,000 companies that display their products and services at 
CTIA's annual shows each year.
    All of these products and services are provided to the 
American consumer for one-fourth of the average price per 
minute that consumers in Europe experience. In addition, U.S. 
subscribers use 834 minutes per month. That is 500 minutes more 
than the next closest country in Europe.
    In addition, U.S. subscribers enjoy benefits involving less 
cost, more minutes, more offerings, more carrier choices than 
anyone on the planet. Other countries envy this market, the 
market that has developed in the United States. And the 
country, its regulators and legislators should be proud.
    The 700-megahertz spectrum referred by some as beach-front 
property could help to continue that trend. Unfortunately, when 
the Commission sought comment on the potential service rules 
for the spectrum, a small subset of new entrants promoted 
proposals designed to tailor the auction to their own unique 
business models and promoted proposals that were designed to 
prevent access by some incumbents.
    Much of the debate during this process has centered on 
proposals put forth by a group of well-funded companies with a 
combined market capitalization of one-half trillion dollars. 
Companies will spend the next few months reviewing the rules 
and making decisions whether to participate in the auction, but 
it is arguable that these new conditions, which contradict the 
FCC's past policies of supporting license flexibility, could 
have a negative effect on the ability of small businesses to 
take part in and ultimately win licenses in 700 megahertz.
    Specifically, the Commission's open platform and geographic 
build-out requirements could place 700-megahertz licenses out 
of the reach of small businesses.
    As referenced in the letters that we attached to my written 
testimony, a coalition of 139 companies, all of which would 
qualify as small businesses, oppose the open access 
requirement. Additionally, 55 companies and organizations, 
again the majority of which would qualify as small businesses, 
oppose the geographic build-out requirement.
    In setting the ban plan and service rules for the 700-
megahertz spectrum, the Commission adopted a mix of spectrum 
and license sizes as well as regulatory requirements. For 
example, in the upper C block, a 22-megahertz block of 
spectrum, the Commission has imposed an open platform 
condition.
    CTIA and many large and small incumbent carriers argued 
that removing carriers' ability to control the handsets 
permitted on its network limits the ability of the carrier to 
manage the security, the quality, and the viability of its 
wireless networks.
    Further, with the fast pace of innovation in this industry, 
having the government try to predict or direct where the 
industry should go is a troubling concept.
    Similarly, the upper D block is subject to a public-private 
partnership obligation. The additional obligations this 
condition places on the D block licensee will likely make it 
less attractive to small businesses.
    In the lower band licenses, the Commission adopted a 
geographic build-out that potentially limits the desire of 
small businesses to purchase that spectrum.
    Requiring carriers to serve those areas where there are 
few, if any, people may require small business licenses to 
build sites that they cannot afford to maintain. Specifically 
licensers will need to reach 35 percent of the geographic area 
in 4 years and 70 percent by the end of the license term.
    To put this into perspective, according to the U.S. census, 
87 percent of our population lives in 8 percent of the 
geography. Taken collectively, the Commission's decision to 
encumber the 700-megahertz license with new service obligations 
could significantly impact small business opportunities.
    On the spectrum front, this Committee also could help 
licensees that won spectrum in the recent AWS auction. Some of 
the 104 winners, many of whom were small businesses, may have 
to wait as long as four years to begin operation. Companies 
purchase license in the AWS auction and have been unable to 
begin serving customers as government incumbents have yet to 
clear the spectrum. And the process of coordinating operation 
prior to relocation has proven difficult.
    We urge this Committee to help small businesses with AWS 
licenses by working with those agencies to ensure the timely 
relocation or prior to relocation the coordination of the use 
of that spectrum.
    In addition to asking and investigating issues regarding 
small business access to spectrum, this Committee also could 
aid small businesses by helping to ensure that unnecessary, 
unfunded mandates are not placed on wireless carriers. This was 
referenced in Mr. Bond's testimony.
    In the last 18 months alone, carriers large and small have 
faced the prospect of having to upgrade their networks to face 
new CALEA, e911, CPNI, Emergency Alert, Katrina, and other 
unfunded mandates. Perhaps even more than access to spectrum, 
these additional burdens on the provision of wireless service 
threaten to significantly impact the viability of small 
carriers.
    Finally, I commend the Committee for its recent hearing on 
the need to extend the Internet tax moratorium. CTIA urges the 
Committee to continue to press for lower, simplified taxation, 
not only for Internet service but also for wireless service. 
It, too, is a critical input for many small businesses.
    Thank you, Madam Chair. And I look forward to your 
questions.
    [The prepared statement of Mr. Guttman-McCabe may be found 
in the Appendix on page 71.]

    ChairwomanVelazquez. Thank you, Mr. McCabe.
    Our next witness is Mr. Christopher Libertelli. Mr. 
Libertelli is Senior Director of Government and Regulatory 
Affairs for Skype, a global Internet communications company. 
Skype's software allows users to make telephone calls from 
their computer to other Skype users free of charge or to land 
lines and cell phones for a fee.
    Before joining Skype, Mr. Libertelli was senior legal 
adviser to FCC Chairman Michael Powell.
    Welcome.

     STATEMENT OF CHRISTOPHER LIBERTELLI, SENIOR DIRECTOR, 
    GOVERNMENT AND REGULATORY AFFAIRS, NORTH AMERICA, SKYPE 
                         COMMUNICATIONS

    Mr.Libertelli. Madam Chairwoman, Ranking Member Chabot, and 
members of the Committee, thank you very much for offering us 
the opportunity to testify before the Committee this morning on 
an issue that is central to Skype's future and the future of 
small business on the Internet.
    As the Committee knows well, during the 1990s, America 
began a transition from the dial-up to the broadband Internet 
access. Small business benefited enormously from this 
transition. The Internet empowered a small business with a good 
idea with the chance to become a corner store in the global 
information economy.
    Today policy-makers are presented with the next chapter in 
the development of the Internet: the transition to the mobile 
broadband Internet. If we get this transition right, the 
backbone of the U.S. economy, small business, will be in 
position to compete on a global scale with competitors in 
Europe, China, and India. If we get this wrong, one of the most 
important trends in Internet communications, mobility, will be 
less open to U.S. entrepreneurship and innovation.
    Unfortunately, the mobile Internet bears very few 
similarities to the Internet that allows small business to 
thrive. Today, openness on the wireless Internet is at risk, 
which is why the FCC's 700-megahertz auction and its open 
access provisions are crucial to Congress' innovation and small 
business policy.
    For Skype, business users are more than 30 percent of our 
global community of more than 220 million registered users. 
Skype allows people to communicate with their customers and 
colleagues using text, voice, and video, to communicate more 
affordably but also to change the way people think about 
communications.
    Take, for example, Anita Campbell, who is the editor of the 
popular Small Business Trends Web site based in Lynchburg, 
Virginia and Cleveland, Ohio. Controlling the costs of a mobile 
phone bill that kept creeping higher is a priority for her. So 
she uses Skype to make outbound telephone calls. She uses Skype 
to complement, not replace, her primary connection to the phone 
network. By doing so, she was able to cut her wireless plan 
down to 450 minutes from 1,000, saving approximately 40 
percent.
    But it is not merely about saving money, as important as 
that is to small businesses. Consider another company, Media 
Internet, based in New York City. In its New York office, they 
use Skype in a related program called Unyte to teleconference 
from one cubicle to another or with remote offices in 
Argentina. As a result, conveying an idea which used to take 
half an hour can take ten minutes or less.
    The impact of openness principles on small business is 
real. All of these innovations are taking place on the wired 
Internet.There is no reason why we can't have the same level of 
innovation on the wireless web.
    Shorthand for 700-megahertz open access policy is in our 
view a no blocking and no locking rule, something we refer to 
as Carterfone. By that we mean that a small business or any 
consumer should be able to use any wireless telephone handset 
or Internet device as long as that device is technically 
compatible with the network. It also means that small business 
users should be able to use any software on that device without 
the permission of the network operator. This is the rule in 
every other sector of the broadband market except wireless. And 
we should correct that.
    In testimony before the House Commerce Committee, FCC 
Chairman Kevin Martin updated the Carterfone story for the 
wireless environment by explaining that openness will ``ensure 
that the fruits of innovation swiftly pass to the hands of 
consumers.''
    Chairman Martin, Commissioner Copps, and Commissioner 
Adelstein made good on that vision a few months ago in the 700-
megahertz rule. And we fully support them.
    In the aftermath of the on-again/off-again Verizon 
restrictions on the political speech of an abortion interest 
group, the wasteful cat and mouse game over unlocked Apple 
iPhones, we need no further evidence of the importance of open 
access principles for the wireless market.
    I would like to close by stressing two major benefits that 
an open access policy has for small businesses. The first is 
that in the small businesses' role as a consumer of wireless 
services. In this respect, they will have more advanced, more 
affordable tools for their business needs with open access.
    For small business users, there is a second perhaps unique 
benefit. Small businesses will have the opportunity to build 
Internet applications and devices sold directly to consumers, 
subject only to the reasonable technical constraints, rather 
than the competitive concerns, of wireless operators.
    In short, small businesses are both consumers of Internet 
communications services and creators of mobile applications. 
Twelve years ago, eBay started as a small business. Four years 
ago, Skype started as a small software company. An 
unconstrained wireless marketplace offers almost unlimited 
potential for the next eBay, the next Skype.
    America's small businesses can have a pro-consumer, pro-
innovation policy in wireless if the FCC's 700-megahertz 
policies are implemented and carried forward throughout the 
wireless market.
    Thank you.
    [The prepared statement of Mr. Libertelli may be found in 
the Appendix on page 84.]

    ChairwomanVelazquez. Thank you, Mr. Libertelli.
    Our next witness is Mr. Jeffrey Black, who is the founder, 
Chairman and Chief Strategy Officer of TalkPlus. TalkPlus 
brings advanced mobile phone features to customers, including 
an application which allows users to add a second phone number 
to their mobile phone.
    Mr. Black is a member of the Wireless Founders Coalition 
for Innovation, a group of wireless industry entrepreneurs who 
have founded wireless companies that now generate billions of 
dollars of revenue and have created thousands of jobs.
    Thank you.

    STATEMENT OF JEFFREY BLACK, CHAIRMAN, FOUNDER AND CHIEF 
  STRATEGY OFFICER, TALKPLUS, INC., SAN MATEO, CALIFORNIA, ON 
    BEHALF OF THE WIRELESS FOUNDERS COALITION FOR INNOVATION

    Mr.Black. Thank you, Madam Chair and Ranking Member Chabot, 
and distinguished members of the Committee.
    The topic before the Committee is critically important to 
the future of business entrepreneurs in the wireless industry. 
I am here today as a member of the Wireless Founders Coalition 
for Innovation, which is a group of seasoned industry 
entrepreneurs who have founded wireless companies who have 
generated billions of dollars of revenue and have generated 
thousands of jobs.
    Many of us are now working in our second, third, and 
sometimes our fourth wireless start-ups. Many of those are 
actually still in the garage stage.
    I personally have built my career as a serial entrepreneurs 
with 27 years of experience in the high tech industry, founding 
several companies, including IMI, iAtlas, Hotels.com, and 
PartnerVision Ventures. Currently I am the founder, Chairman, 
and Chief Strategy Officer of TalkPlus, a next-generation 
mobile software company which develops advanced calling 
services for small businesses.
    These features are very critical for some of the things 
coming up. Imagine if you had the ability to have a phone 
locally somewhere and you can actually add a D.C. phone number 
onto your current phone right now. That is one of the types of 
services.
    So these types of innovations can flourish as a result of 
the upcoming spectrum auction because the FCC has wisely 
adopted the so-called open access conditions. Open access is a 
familiar idea that applies to everywhere except for the 
wireless industry. Those who build and maintain our highways 
don't get to dictate the type of cars that we drive. The 
electric company can't limit your type of choice of vacuum 
cleaners you buy. Nor can your ISPs tell you if you can launch 
a Web site.
    However, in the wireless world, wireless carriers dictate 
the devices and applications that can be used on their 
networks. We believe the wireless industry is ripe with 
opportunities for innovation and economic growth, but the large 
wireless carriers currently act as gatekeepers to block or 
deter many of these opportunities.
    From firsthand experience, we know that negotiating with 
the large carriers for access to their networks can be a 
difficult and time-consuming process that can add months, if 
not years, to the launch of a new venture.
    An open access framework, by contrast, would enable 
innovation at Internet speed. To make this auction a boon for 
small business and entrepreneurs, we urge this Committee to 
prod the FCC to take two important steps: one, strictly enforce 
the open access requirements; and, two, ensure that the rules 
will give small businesses and start-ups bidding credits to 
enter into the market and capitalize on these new rules.
    What start-ups and small businesses are looking for is 
equal access to the network, to the phone, and to all the 
features that carriers get access to. In short, what level of 
access a carrier gets to this new network, small business 
should get the same access. Let the consumers, not the 
carriers, dictate who can offer the best and the brightest 
applications.
    Carriers argue that they need absolute control over the 
consumer experience and which applications they have access to. 
But if a consumer wishes to use a free instant messaging 
service offered by a small business, instead of using the 
carrier's own messaging service, how will that harm the 
network?
    Simply put, there is no reason. Apart from commercial self-
interest, why a carrier needs to ban video streaming, voice 
over IP, and other applications makes no sense. The only 
devices and applications that should not be allowed are those 
that actually harm the network.
    Today's barriers significantly raise the costs and the 
risks of a start-up entrepreneur bringing a new mobile product 
or service to the market. The impact of this on American 
ingenuity is tragic.
    If you are a small business with a big idea, venture 
capitalists strongly urge you to target Europe and Asia before 
attempting to introduce your application in the United States. 
It is not because the other countries are more forward-thinking 
or their consumers are smarter or more tech-savvy. No. It is 
because these countries give consumers more choices and drives 
sales and innovation.
    Wireless entrepreneurship could take a huge step forward in 
the U.S. if the United States were to be more like the public 
Internet. What makes the Internet so friendly from an 
entrepreneur's perspective is openness. One does not have to 
ask Comcast or AT&T's DSL Division for permission to launch an 
application, a service, or a device. As Nike would say, we just 
do it. But in the wireless industry, we have to ask permission 
to innovate.
    So, in conclusion, America is not innovating in the 
wireless at nearly the rate that it could be. While all the 
ingredients for innovation, wireless broadband networks, IP 
network, IP network stacks, advanced multimedia devices, are 
readily available in other countries, the U.S. incumbent 
operators are too hesitant to try a new recipe for change.
    The upcoming spectrum auction gives small businesses a 
chance to compete in the wireless world and offer consumers new 
and exciting services. The FCC has taken small steps in this 
direction. And I urge the Committee to push the FCC to finish 
the job and enable small businesses to compete and innovate.
    [The prepared statement of Mr. Black may be found in the 
Appendix on page 90.]

    ChairwomanVelazquez. Thank you, Mr. Black.
    Ms. Spencer, I would like to address my first question to 
you. You stated in your testimony that in 2006, after the 
revised rules, you decided not to participate in that auction 
because you felt that it would be really difficult for you to 
raise the money.
    When I asked the Chairman the same question about how the 
revised rules will have unintended consequences for small 
entities, his answer was that out of 101, 57 competed and they 
won. But then I asked him out of the 57 how many were new 
entrants. I believe he didn't answer. Are you aware of how many 
of the 57 were new entrants?
    Ms.Spencer. Chairwoman, I don't know the exact number, but 
I can tell you of the DEs that one licenses, I think a few 
things are important. One, they want 20 percent of the 
licenses. So he is taking the best number.
    Maybe our four percent of the revenue is the worst number. 
And there are some numbers in between. And one is that 20 
percent of the licenses in that auction went to DE.
    Seventy percent of those went to rural telephone companies 
that claimed in their application. So the remaining 30 percent 
went to new entrants. However, of that, I believe there were a 
handful. Many companies that we had competed against in prior 
auctions, like myself, did not come to that auction.
    ChairwomanVelazquez. Mr. Bond, do you have any 
recommendations about how the Commission's rule could be 
refined to provide flexibility to pursue proven business models 
without undermining the safeguards against abuse? Ms. Spencer?
    Ms.Spencer. Oh, I am sorry. I thought you said Mr. Bond.
    ChairwomanVelazquez. I am sorry. Ms. Spencer?
    Ms.Spencer. Okay. Well, I think the fraud issue was what 
the Commission was concerned about. And we are concerned about 
that, too. But I think the rule changes actually didn't go to 
the Gabelli situation. With Gabelli, it was a question of, was 
the small business he was investing in a legitimate small 
business?
    There are ways to address that. The construction 
requirements are one way. You have to have a service. But what 
the Commission did is look and say, ``Well, we are not going to 
let you lease. We are not going to let you wholesale.'' Gabelli 
wasn't doing any of that. So it is kind of like we had the 
problem and we applied a Band-Aid somewhere else.
    So I think there are a lot of rules. The Commission gets 
applications. They can review applications. Challenges can be 
brought. And people do that. Other bidders bring that.
    But the construction requirements here are very severe, as 
has been pointed out. So there are ways to make sure people use 
the spectrum. But the answer of doing these other kind of line 
of business restrictions and the ten-year hold, you cannot talk 
to a venture capitalist.
    You can't talk to Wall Street and say, ``Lend me money'' 
because they get into the details of what you can and cannot 
do. And they don't see how you can navigate in the competitive 
market.
    ChairwomanVelazquez. Well, how would you react to the 
answer provided by the Chairman that the fact that 57 small 
entities were able to get the licenses compared to the 100--
    Ms.Spencer. Well, I congratulate them.
    ChairwomanVelazquez. Apparently they didn't have a problem 
raising the money.
    Ms.Spencer. Yes. Well, I think we are all tough on 
companies. And Mr. Bond can address this more. They have a 
base. You know, so what they are doing is they are buying 
spectrum to add onto their business. A new entrant has nothing. 
We are starting from zero. So I think that is part of it.
    And, frankly, the rule changes were late. So I think 
people, some people, may have had their money and it wasn't 
affected.
    ChairwomanVelazquez. Thank you.
    Mr. Bond, can you tell me and the Committee if any of the 
associations that your company is a part of have brought legal 
actions against the FCC regarding the regulatory flexibility 
analysis.
    Mr.Bond. I am aware, I was told of one as we were listening 
to the Chairman's testimony. And I understand that during the 
local number portability proceedings, that we did bring and 
rules were stayed as they applied to local telephone companies. 
So that is one that I am aware of.
    ChairwomanVelazquez. My concern is if there are concerns 
out there regarding the fact that the FCC didn't conduct a 
responsible analysis regarding the regulatory flexibility act, 
I didn't see the complaints and comments submitted to FCC. I 
don't see a big number.
    Mr.Bond. Yes, ma'am.
    ChairwomanVelazquez. Mr. Libertelli, Skype along with 
Google and other Internet companies have been strong supporters 
of the open platform requirement, which will allow individuals 
to use any device for the 700-megahertz frequencies.
    Looking forward, what will the wireless market look like 
after the auction? And why are the open platform rules 
important to you and your customers?
    Mr.Libertelli. Chairwoman Velazquez, I think there are two 
dimensions to the answer to your question. The first is we 
think that after the 700-megahertz auction is completed in 
these open device and application principles are put into the 
market, you will see consumers take greater control over the 
way they use communication services and wireless.
    So in the story I mentioned in my testimony, you will see 
small businesses take control over the amount of overage they 
typically have with a wireless service and try to reduce the 
cost of doing business.
    The other dimension to this, which I think is critically 
important, is that if the 700-megahertz rules are put in place 
and openness principles prevail, you will start to see more and 
more small--and I mean very small--companies, zero to ten 
people, build mobile applications that plug into applications 
like Skype.
    We try to approach this with some amount of humility. We 
can't always figure out what the next great Internet 
application will be, but we can partner with companies who are 
themselves small businesses to develop that application and 
jointly provide that choice to consumers.
    So we would expect to see more consumer empowerment on the 
service side and more innovation on the development side.
    ChairwomanVelazquez. Thank you.
    Mr. Bond, I share your concerns regarding the Regulatory 
Flexibility Act. And I just want for you and other associations 
that really represent small businesses to understand that the 
Regulatory Flexibility Act is an important tool of this 
Committee under the jurisdiction of the Small Business 
Committee.
    So when a federal agency is going to issue a regulation or 
a rule, they have to comply to do the proper economic impact on 
small businesses. And that we can use to bring the agency 
before this Committee.
    And so in helping us do our job, it is important for trade 
associations that represent small businesses to submit the 
comments and to raise the concerns in big numbers so that it 
will give us the arguments to bring those agencies before the 
Committee.
    Mr.Bond. Yes, ma'am. And we do make it a practice to 
comment. I thought the question was more tailored towards legal 
action. And it is very expensive to challenge legally.
    Small businesses don't have the resources to go down that 
path. And the associations being funded by small businesses are 
limited in resources as well. But we do make it a practice to 
comment.
    ChairwomanVelazquez. From your testimony, it sounds as 
though broader communication companies have a great deal of 
uncertainty about how the upcoming auction will impact their 
businesses.
    Mr.Bond. Yes, ma'am.
    ChairwomanVelazquez. Do you expect that your small business 
customers will benefit from the open platform requirements that 
the FCC assigned to the C block licenses?
    Mr.Bond. Absolutely. Small business customers--and I will 
speak as both a rural telephone company, rural carrier, and 
small business customer myself--need access to the high-end 
equipment.
    I mean, speaking as a carrier, a wireless carrier, one of 
the hard tasks that we had was to get equipment to sell to our 
customers. We are on the tail end of the supply chain. All of 
the new equipment, the stuff that is advertised, the stuff that 
is promoted is tailored for and sold by the large carriers. And 
in most cases, we can't get that equipment until it is 
generations old.
    ChairwomanVelazquez. Thank you.
    Mr. Chabot?
    Mr.Chabot. Thank you, Madam Chair.
    Mr. Black, you mentioned I think that regulations, among 
other things, make it more difficult to innovate in the 
wireless world versus the Internet. How would you change this? 
Are there any things that we could do that would remedy that or 
at least head in the right direction?
    Mr.Black. Well, the important part here is all about open 
access to both the networks and the phones. And there are some 
things that go beyond that also that would really help out, 
especially for start-ups and people building software. And that 
would be open access to the billing systems, too.
    So what we are looking for is the ability to bring a 
product to market without having to spend millions and millions 
of dollars to build a product just so the carrier can turn 
around and say, ``I am sorry. We are not interested.'' And that 
happens all the time.
    So a lot of start-ups are now looking at saying, ``Okay. I 
can build a product in Silicon Valley. Oh, but why don't I just 
go launch it in Europe and Asia?'' because it is easier to get 
onto the phones in those other countries because most other 
countries outside the United States, they are not locked 
phones.
    Mr.Chabot. Thank you very much.
    This is for the whole panel. Are there services that are 
available to large users of wireless services that are 
unavailable to small business users? And if so, what 
competitive disadvantage does it place the small business user 
in? And what could be done about that? I would invite anyone 
who wants to comment. Mr. McCabe?
    Mr.Guttman-McCabe. Yes. Thank you, Congressman. I can't 
picture services that are available to one category of users 
versus another, but I do think it's instrumental. And you've 
brought up the idea of looking at this 700-megahertz auction 
not only from the perspective of companies being able to access 
spectrum, small business entities, but also from the 
perspective of small business users.
    Part of our concern with regard go the open access concept 
is, as you hear Mr. Black talk about the benefits of Europe and 
Japan and how his company or others may benefit there, I don't 
think that's a model we want to replicate from the perspective 
of the small business user.
    In Japan, they charge five times the amount that they do in 
the United States per minute of use. And as a result, users in 
Japan use abut 130 to 150 minutes per month compared to 800 in 
America. So the small business user in the United States has 
access to a device that has opened up untold riches and rewards 
to that small business user. You look to Europe. Europe charges 
on average four times as much per minute, and they use one-
fourth the minutes of use.
    So I'm not sure. While that concept may benefit Mr. Black, 
I'm not sure it benefits consumers as a whole and particularly 
small business users. I think that the majority of small 
business users are moving away from their land line phones and 
moving to using at times solely a wireless phone. I think that 
benefits. We have 1.8 trillion minutes of use. And there's a 
reason for that. And so to me there are some concerns.
    Mr. Libertelli suggests that we should have some open 
access so that his devices can be used more regularly in the 
United States. I have two devices from two of our members. One 
is WiFi-based. One is not. One is used on the CMRS network. 
Both have Skype downloaded on it.
    I went to Skype's Web site, used Skype's instructions on 
how to do it. I bought the phones. I bought one phone online, 
not through the carrier. I bought the second phone at the 
carrier. And both are able to be used. In fact, it's almost 
going to be cute in an FCC meeting with the Chairman's advisers 
and call Chris from them and demonstrate.
    [Laughter.]
    Mr.Guttman-McCabe. But the reality is both of these work. 
They work on Skype's software. There is a reason some would 
argue why Skype isn't taking off as much in the United States, 
and that is because the settlement rates from Vermont to New 
Mexico to Washington, D.C. are not as cost-prohibitive as the 
settlement rates from Finland to Germany to the United Kingdom.
    So I would argue that as the Commission looks at expanding 
this to open access, we have WiMax and Sprint using an open 
access platform. We have T-Mobile that is using a WiFi at home 
product. We have Nokia that is taking out full-page ads in 
every major city saying they have open access devices to battle 
the Apple product. We have Motorola saying the same. I mean, 
you can go on the list again and again. And my concern is that 
the FCC is going to try to put an imprint on an industry that 
is taking off, and they are going to be behind.
    This is our phone 12 years ago. This is the wireless phone 
12 years ago. This is a year-old already, and it has everything 
we could want to do from our business office in it. And I am 
terribly troubled that we are going to trip up this industry. 
And we are going to have something like Japan and Germany and 
Great Britain. And I don't think that will benefit the small 
business community that you are so ably representing.
    Mr.Chabot. Let me tell you a very quick story related to 
what you are just saying. My daughter kept telling me years ago 
that I should watch the Seinfeld series. She said, ``Dad, it is 
just the kind of humor you would really find funny.''
    I never did it, never watched it. And she gave it to me for 
Christmas. I think it was the last year or something like that. 
So I have sort of started out in the first season. I think I am 
in the third or fourth season now.
    I think it started in '93 if I am not mistaken or something 
like that, year before I got elected up here. And you see them 
whip out these phones now.
    [Laughter.]
    Mr.Chabot. And, I mean, it is really humorous to see that. 
And it was a cutting-edge technology at the time.
    In any event, let me just ask one more. Were there any of 
the other witnesses who wanted to comment on that? Yes? You can 
both go, just whichever.
    Mr.Black. Okay. I am sorry. I have got to cut in here a 
little bit.
    We are talking apples to oranges. And we need to explain 
something, a real simple concept here. When you compare the 
United States with Europe and Asia and other countries, we are 
the only country in the world that every caller pays. I call 
you. I pay for my part of the call. You call, and you answer 
the phone, you are paying for your side.
    In Europe, it is a caller pays world. I call you. I pay for 
both legs of the call. All right? So let's not skew the numbers 
we are throwing out here because it does skew the numbers quite 
a bit. It also means that people are going to call less often.
    But wait a second. There is another concept. Everything in 
Europe is international. So it is like calling from Boston to 
San Francisco to Miami, and those are all international calls. 
That is why the rates are so much higher. I mean, if you call 
across the United States, we are the only country in the world 
that has unlimited calling plans. So we can skew the numbers 
all we want, but it is irrelevant.
    Now, if we take it to the other side, if we talk about 
Skype, since we are picking on Skype, here is a Verizon phone 
Skype has banned. Here is a T-Mobile phone, can't get it to 
work here. My Blackberry, the carriers all have it in their 
networks. If I use too much on here, they will cut me off. 
Skype is not a valid application on here. And, just for fun, 
here is an iPhone. I tried the best I could to get it to work.
    Now, it gets more interesting. We are talking about 
downloading an application onto the phone. I can actually do 
things in the world. With TalkPlus, we have a technology that 
allows us to add features to these phones that the carrier 
doesn't support and that the phone doesn't support.
    So let's use Skype as an example. I can actually make a 
Skype call on this phone. And the way I would do it is 
different than Skype would do it. Skype would do it 
predominantly using the data channel most of the time. It is 
how they would like to do it.
    I actually put the call in the voice channel, which means I 
work exactly the way a carrier wants to work. Yet, the carriers 
till won't let us on the deck. No harm, no foul to the network 
at all. Anything we do, all calls are held in the voice 
channel. There is no reason that should be cut off. They still 
won't let on the network.
    Mr.Chabot. Thank you.
    Mr. Libertelli?
    Mr.Libertelli. Just a brief response. I think you know you 
are making progress when your opposing side starts to make your 
argument for you.
    Mr. McCabe's phone that he held up indeed does run Skype. 
And the point is this. If you were to take that device and walk 
outside of a WiFi environment and try to use Skype, the terms 
of service for the major wireless operators, AT&T and Verizon, 
specifically block his ability to use Skype to have a 
conversation. That is what is at stake here. It is that kind of 
blocking behavior that needs to be corrected.
    Mr.Guttman-McCabe. If you don't mind, just to correct one 
thing.
    Mr.Chabot. Go ahead.
    Mr.Guttman-McCabe. The numbers that I stated are Merrill 
Lynch numbers. They are not CTIA. They are not industry 
numbers. They are adjusted for calling party pays. They are 
numbers that reflect the fact that the different countries have 
different ways of charging.
    Additionally, this is a T-Mobile phone. And T-Mobile 
doesn't prevent. This is a Sprint/Nextel phone. Sprint/Nextel 
doesn't prevent. And the idea that the 22-megahertz license 
would just be one more, it wouldn't be everyone else.
    What we argue is there are at least two here. The iPhone, 
you can download Skype onto the iPhone. And so the reality is 
there are services and produces available that counter the 
arguments that people are making, including Mr. Black, who has 
successfully built and some of his members have successfully 
built and sold small businesses in the wireless space.
    Mr.Chabot. Thank you all.
    ChairwomanVelazquez. Mr. Gonzalez?
    Mr.Gonzalez. Thank you very much, Madam Chair.
    I neglected to commend Committee staff for an excellent 
memorandum, by the way. I think we neglect at times to thank 
them for their hard work.
    The first observation--I am going to split my questioning 
in two categories. One is going to be spectrum ownership. I 
don't think that is going to happen for small business. So then 
the fall-back position is going to be this wonderful C block 
with open access, whatever that truly means.
    But the biggest fear--and I think that Mr. McCabe was the 
one that framed it best. And I repeat it basically from his 
testimony to the Chairman, to Chairman Martin. And I will pose 
this to Ms. Spencer.
    Do you believe that the big bidders' attention will be 
diverted from the encumbered block C spectrum, the open access, 
into other areas and that those other areas, where the big 
bidders will be putting their money, would be those areas that 
would be most attractive to the smaller bidders?
    Ms.Spencer. Well, I think that your kind of beginning here 
is right. Spectrum ownership has kind of gone away for small 
businesses, unfortunately. So I would hope that everybody could 
have an opportunity here. But I think unless the rules change, 
the small bidders aren't going to come in big numbers anyway. 
So it is somewhat they are going to play everywhere.
    I would say on the open access, you know, if we can't get 
spectrum directly, where are small businesses going to play? 
And it is probably with them. So I would guard that C block and 
say, ``Then that is okay.''
    Mr.Gonzalez. Okay.
    Ms.Spencer. You know, open access is a fall-back for small 
business if we can't get it ourselves.
    Mr.Gonzalez. It is a self-fulfilling prophecy. And if we 
really believe FCC is not thinking ahead, we are all kidding 
ourselves. They have set up this game in a way where I do 
believe this is going to transpire. So then you are going to 
have to fear where are your Verizons and AT&T's, the open 
platform on block C but in a way bleeds over to other areas. 
And then down the road we will be into access fees, special 
access fees, roaming fees, and all of that business. I mean, 
this is where it is all going. I don't know why we keep kidding 
ourselves.
    The bottom line is little, small business is not going to 
own spectrum. If you own spectrum, you build out networks, I 
mean, what you have done in your business life. So let's go 
into this open access, open platform, and all that means.
    Mr. Black, let me ask you, if you came up with an 
application for a way for Charlie Gonzalez to order something 
on eBay and pay for it that mimics and competes with PayPal, 
would eBay allow that? The answer is no.
    [Laughter.]
    Mr.Gonzalez. Because, you know, go and talk to Google or 
anyone. These are the big guys. Skype. You know, small 
business. You were bought for $2.6 billion by eBay. eBay has a 
policy. They own PayPal. They don't allow anyone else to 
compete in that little environment. Why don't we have an open 
platform, open access so that Mr. Black can come up with some 
sort of application and compete with what eBay basically 
monopolizes in their site?
    I mean, let's just say that is what is really going on. And 
I think that I am right on this evaluation. But for Mr. 
Libertelli and Mr. Black, who pays for the network? Does Skype 
pay for the network? Does eBay pay for the network? Does Mr. 
Black's enterprise pay for the network? I mean, what I am 
saying, who is building out the network?
    And so we do have special relationships. And I recognize 
that they can be problematic. But those contractual 
relationships are with device manufacturers, application 
providers, search engine providers, content aggregators, all of 
that in the business world.
    Now, you are asking government basically to come in and say 
that you shouldn't have exclusive relationships at a certain 
level of the Internet world, such as networks with devices and 
others, but we shouldn't be interfering with the other 
exclusive relationships that you are allowed to engage in at an 
entirely different level, such as PayPal and so on. And there 
are many other examples that would go beyond eBay and Skype.
    So I am just saying, who pays for the network? I mean, what 
you are telling me, Mr. Libertelli and Mr. Black, is, the 
AT&T's and the Verizons of this world have buses and you would 
like to get on that bus. Right? That is open access, open 
platforms. But you guys also have cars. But you are not going 
to let anyone else get in that car and hitch a ride because I 
do believe it is a monopoly.
    I just really have always had a problem with that argument. 
We will see how this works out. But I do believe it is going to 
move on spectrum because when it is all said and done, it is 
about the sale of spectrum.
    When it is all said and done, what we have is not an 
unintended consequence. I think it could have been anticipated 
that you are going to make that other spectrum that is 
unencumbered more attractive, which may have provided the best 
opportunities for small businesses to bid on it. I think that 
is gone. Now we have to live with what open access really 
means.
    So my real question comes down to, Mr. Black and Mr. 
Libertelli, what are you doing to build out a broadband network 
that is so desperately needed in this country in the way of the 
wireless Internet?
    ChairwomanVelazquez. Time has expired, but I will allow for 
the witnesses to answer.
    [Laughter.]
    Mr.Libertelli. If I could try to offer a response?
    ChairwomanVelazquez. Yes, sure.
    Mr.Libertelli. There is a lot in that question. And I 
understand some of the concerns you have expressed in there. 
The answer to your question is that AT&T doesn't pay for these 
networks. Consumers pay for these networks. That is the answer 
to who is funding the deployment of 700-megahertz spectrum or 
wireless spectrums generally.
    So we shouldn't be sort of under the notion that somehow 
the--
    Mr.Gonzalez. And I agree with you.
    Mr.Libertelli.--cost from consumers--
    Mr.Gonzalez. I think maybe content aggregators and 
application providers and such, maybe you should share some of 
that expense, rather than just the consumer.
    Mr.Libertelli. And a company like eBay pays millions of 
dollars to buy network services from network operators every 
year. So each part of the ecosystem as a consumer is 
contributing to the deployment of these networks.
    ChairwomanVelazquez. Mr. Black?
    Mr.Black. I would second that. If you look at what TalkPlus 
does, our users drive more minutes and more data plans for the 
carriers. So carriers in the United States have a very low 
amount. The threshold of the number of people who actually have 
a data plan is actually very low in the United States. So every 
time a TalkPlus user goes online with a carrier, no matter 
which carrier it is, we drive their data plans. So we are 
actually driving revenues for them, both on the data side and 
we are driving it on the voice side.
    If you treat this like the Internet in a way, which one is 
more valuable: the infrastructure people buying the pipes or 
all the e-commerce that goes across it? That is the first part.
    The second part is there is no place to innovate right now. 
And that is the part that is not being talked about here. If a 
start-up has an application and they want to go to a carrier 
and say, ``I have got a great application. Can I put it up in 
your catalog in the sky?'' and they look at you and they go, 
``Okay,'' one of two things. They can say, ``Yes.'' And on 
average, they will take 40 to 50 percent of your gross 
revenues.
    Could you imagine what the carriers would do if NAPA, where 
they get their phone numbers from, required them to pay 40 to 
50 percent of their gross revenues to get phone numbers, which 
is critical for any carrier to survive? Verizon, Sprint, T-
Mobile, every one of them, would go out of business in a year 
flat.
    So there is no place to innovate right now unless we can 
actually make this happen.
    ChairwomanVelazquez. Time has expired.
    Mr. McCabe, I would like to address my last question to 
you. Do you really think that there is a place in today's 
industry for small carriers given the fact that recently there 
have been several acquisitions announced that will consolidate 
mid-sized carriers into large national carriers?
    Mr.Guttman-McCabe. Madam Chair, let me take that from two 
different perspectives; second, address the question about 
consolidation and some concerns that I think those at this 
table and elsewhere share.
    But first I think there absolutely is a place for different 
size carriers, small, medium, or large. The FCC calls them tier 
1, 2, and 3. It makes sense from the perspective that carriers 
don't build out to the entire geographic area of the country. 
They don't build out generally to 100 percent of the population 
in areas. It is just cost-prohibitive.
    Some companies decide to build a business model around 
focusing on those high-cost areas and accordingly go to the FCC 
for universal service funding. And I know we have been in front 
of this Committee and others suggesting that wireless carriers 
should continue to have access to the Universal Service Fund as 
more and more people move towards a wireless device.
    So I think absolutely there is a place for it. I think that 
companies, contrary to Congressman, will continue to have 
access to spectrum. I think it will be difficult at times, 
particularly when you come to an auction like 700, where the 
hype has been built up so much that it is almost as if this 
spectrum has been designed for a specific purpose, which is 
sort of a fourth generation network.
    But you look at the previous 700-megahertz auction, and 
companies were able to secure some licenses. And I think going 
forward, this is certainly not the last time we will be looking 
for spectrum. I can assure you there have been discussions 
about this is the last great piece of spectrum.
    I am already in discussions with NTIA about where we can go 
next to get spectrum. It is part of my job. I have been doing 
it for six years. And I imagine that--
    ChairwomanVelazquez. Are you hopeful that there will be new 
entrants?
    Mr.Guttman-McCabe. Yes. I am hopeful that there will be new 
entrants. In the AWS, Action Spectrum Co., while it wasn't a 
small company, it was a brand new provider of the cable 
providers. Additionally, Metro PCS and Leaf, which were small 
companies, decided to participate on a grand scale and secured 
financing.
    With regard to the consolidation issue, I think--and I 
reference this in my testimony--I am concerned that in a 
competitive industry such as ours, where margins are thin, when 
you begin to pile on, almost like a Christmas tree and 
ornaments, regulatory requirements, you really start to squeeze 
that margin. That margin gets tighter and tighter. And Mr. Bond 
and Ms. Spencer can address this much better than I can. That 
margin gets tighter and tighter, particularly if you don't have 
the economies to spread those costs over.
    So when you look at issues like e911, CALEA, CPNI--we just 
ended up in a debate with the Commission over upgrades, over 
Katrina backup power issues. And we have played in the 
Regulatory Flexibility Act space to suggest that there should 
be a difference.
    But those areas do cause significant concern and do really 
press on the margins.
    ChairwomanVelazquez. Any other comment?
    Mr.Bond. Yes, ma'am.
    ChairwomanVelazquez. Mr. Bond?
    Mr.Bond. I think it is important to realize that this 
spectrum auction was tailored around specific applications and 
apparently tailored for specific carriers or specific sized 
carriers. Of the 20 percent of the spectrum that is allocated 
to CMA-sized geographic areas, where small carriers actually 
have an opportunity to bid, versus the much larger regions that 
the other 80 percent is allocated to, where you have to be a 
multi billion-dollar company to have a chance at bidding at 
those.
    The question was asked, is spectrum pretty much resigned 
now to the large carriers and the small carriers are left out? 
Unless the rules are changed and unless the designs for these 
auctions are set up in such a way that it is a level playing 
field for all size carriers, the answer is absolutely yes.
    But it is self-fulfilling. I mean, that is the path we are 
obviously taking. And that is one reason why I am here today to 
say possibly we need to stop going in that direction.
    ChairwomanVelazquez. We hear you.
    Ms.Spencer. The other thing, Madam Chairman, I would just 
point out is that when Congress gave the FCC auction authority, 
it included specifically in 309(j) that you cited at the 
beginning of this hearing a requirement that the auction be 
designed to give opportunity for small businesses and rural 
telephone companies and those owned by women and minorities.
    So the statute says it has got to work that way. The 
question I think we're posing is that it is not right now and 
will it change?
    ChairwomanVelazquez. Okay. Mr. Chabot, do you have any 
other question?
    [No response.]
    ChairwomanVelazquez. Well, with no further question, I 
would like to again thank the witnesses for your testimony. 
Members have five legislative days to submit additional 
material or statements for the record. Thank you again. This 
hearing is adjourned.
    [Whereupon, at 11:36 a.m., the foregoing matter was 
concluded.]

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