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The High Cost of Lowering Broadband Prices

WASHINGTON -- This is a story about Washington power politics, a debate where facts are obscured by overheated, overblown rhetoric, finely spun by deep-pocketed, well-connected interests -- in other words, just another day in your nation's capital.

Depending on whom you believe, it's about influence-peddling, richer-than-Bill Gates Texans shamelessly manipulating the system at the expense, of you, the taxpayer.

Or, it's about dauntless, far-sighted entrepreneurs with a technology that will change the world, or at least lower your cable rates and broadband bills.

The truth? Well, that's what Congress is currently trying to divine. In the meantime, the matter is spilling over into the courts and the Federal Communications Commission (FCC).

And though lawmakers and regulators are looking at a specific company's case, the issue is much larger: Who gets rights to spectrum and at what price?

Pointing North

In the early 1990s, Austin, Tex.-based engineers Carmen and Saleem Tawil developed a land-based wireless system using spectrum occupied by satellite TV companies called the Video Distribution and Data Service (MVDDS).

By attaching wireless transmitters to towers around the country, the Tawils said the system could offer consumers a low-cost alternative to cable and satellite television services that could be rolled out nationwide in two years.

Since slapping transmitters on towers is considerably cheaper than building, launching and maintaining satellites, MVDDS proponents claim the technology can deliver more than 90 channels for $20 a month. They also contend it can offer broadband for another $20 per month.

By 1994, the first patent applications were filed and the Tawils began attracting investors including Katherine B. "Chula" Reynolds, a member of the powerful Texas King Ranch family, which has interests in ranching, agribusiness and energy enterprises.

Testing of the system began on the bleak South Texas prairies of the massive King Ranch spread. When results proved promising, Northpoint Technology was founded in 1996. Besides Reynolds, other founders included J. Bonnie Newman, former aide to the first President Bush and current executive dean of Harvard's Kennedy School of Government; and Mitchell A. Johnson, a former senior executive at Sallie Mae.

Why Northpoint for a name? As North American subscribers of DirectTV and EchoStar's Dish Network know, their reception dishes must face south to receive signals from satellites orbiting over the Equator. By using land-based towers, Northpoint's technology will allow dishes to face in the opposite direction.

That simple fact, Northpoint said, would eliminate signal interference claims by the satellite television industry and create a "bandwidth revolution." Within a few years, Northpoint was issued five patents with more patents in both the United States and 50 other countries.

The fledgling rival to cable companies and satellite firms knew it would face a bruising regulatory battle and hired two of the savviest political women in the United States to run the company. Heading Northpoint is Chair Sophia Collier, former treasurer of the New Hampshire Democratic party. Its executive vice president Antoinette "Toni" Cook Bush, a serious contender to head the FCC during the Clinton administration and the stepdaughter of Democratic power broker Vernon Jordan. Bush also served as senior counsel to the Senate Commerce Committee's communications subcommittee.

The Northpoint business plan calls for 68 affiliates in all major television markets. Affiliate owners include Hollywood producer David Salzman, comedienne Lily Tomlin, former U.S. Reps Louis Stokes and Samuel Coopersmith, relatives of Sen. Joseph R. Biden (D.-Del.), the wife of a former aide to Sen. Conrad Burns (R.-Mont.) and Betsey Wright, a former aide to President Clinton.

Later, when the mudslinging began, the term "major Democractic moneymen" would be used to deride Northpoint's affiliates.

Armed with its test results, patents and powerful backers, Northpoint was ready to go Washington.

A Surprising Turn of Events

The satellite TV industry was not eager to share its spectrum with what it correctly viewed as new competition. Its first defense was to claim the MVDDS technology would jam its signals and urged the FCC to reject Northpoint's application. The FCC, for its part, seemed somewhat baffled by an application that proposed to use land-based facilities to broadcast through spectrum reserved for satellite transmissions.

Independent testing subsequently proved there would be no interference problems and the FCC approved the Northpoint technology. In 1999, Northpoint applied to participate in an FCC spectrum auction along with seven satellite companies.

And then a funny thing happened. After intense lobbying by the satellite industry, Congress passed the Open-Market Reorganization for the Betterment of International Telecommunications Act (ORBIT), exempting satellite companies from having to bid for spectrum.

Congress said it wanted to protect the American satellite industry from being forced to bid for the same spectrum in multiple countries. It also reasoned that the enormous cost of launching the big birds, combined with the high cost that a spectrum auction generates, would discourage future attempts to lob communications satellites into space.

In effect, Congress ordered the FCC to simply grant the satellite companies a license at no cost. All six of the satellite companies Northpoint had been prepared to bid against were granted exemptions. Northpoint, on the other hand, the FCC said, was not exempt under the ORBIT Act since it did not use satellites. The company was still welcome to use the spectrum, but it would have to competitively bid for the space.

That decision started a row that is still roiling Washington.

Northpoint claims its opponents are attempting to saddle the company with costs they do not bear in order to stifle competition. In fact, the FCC has sold only four satellite licenses via auction. DirecTV, the largest spectrum holder, has never paid the FCC for a license.

The FCC was unmoved.

More bad news appeared on the horizon for Northpoint when a new MVDDS rival emerged in the form of MDS America, a company owned by French-based MDS International. MDS said it was willing to bid for the spectrum.

Northpoint responded by taking both the FCC and MDS to court. The FCC, it claimed, was unfairly applying the law. MDS, it said, was infringing on its patents. The FCC case in pending in federal court while the patent case began this week in Florida.

Then, Northpoint really began to fight.

Taking a Punch, Throwing a Punch

With the extensive political connections of its founders and affiliates, Northpoint quickly found friends in the 108th Congress. Senators Kay Bailey Hutchinson (R.-Tex.) and Mary Landreau (D.-La.) attached an amendment to the Commerce-Justice-State Appropriation bill, which includes FCC funding, to force the FCC to grant a spectrum license for applicants who want to use MVDDS technology in the satellite spectrum.

In addition, Senators John Sununu (R.-N.H.) and Maria Cantwell (D.-Wash.) attached an amendment containing the same language as the Hutchinson-Landreau amendment to the Commercial Spectrum Enhancement Act.

"The identically worded amendments do one thing and one thing only: create a level playing field for licensing satellite companies and innovative new land-based providers that seek to share the same spectrum and compete against one another in the marketplace," said Northpoint Chair Sophia Collier.

The bills passed committee votes and are awaiting a full floor vote.

FCC Commissioner Michael Powell critically charged that, "Congress would potentially hand over this valuable public resource in what could amount to a potential multi-million-dollar government-created giveaway."

The FCC estimates an auction would bring $60 million to $100 million into the public coffers. Northpoint counters that former FCC Chief Economist Dr. Thomas Hazlett, who has worked as a Northpoint consultant, has said the lack of competition in the pay television market is costing consumers almost $3 billion a year.

More serious charges of influence peddling also surfaced. Media reports began to appear last month connecting Northpoint's backers with prominent Democrats and Republicans and portraying the company in a less than favorable light.

"The satellite industry went to Congress first and got the ORBIT Act passed," Northpoint's Toni Bush told internetnews.com, adding that the company's opposition was "trying to distract people from the facts."

Bush scoffed at accusations that Northpoint's financial firepower is subverting the political process.

"Has anyone focused on whom we are lobbying against? Hughes (the parent company of DirecTV) is owned by General Motors," Bush said.

Hughes' "campaign of distortion" against Northpoint so infuriated Collier she issued an open letter to DirecTV's CEO Eddy Hartenstein on Sept. 29.

"You say our company should not be licensed in the same manner as international and global satellites because the 'DBS (direct broadcast satellite) industry must participate in auctions to receive spectrum,'" Collier wrote. "This is totally disingenuous and you know it. You have paid nothing at auction for your DBS or any other spectrum. Zero. You must also know that 88 percent of all DBS spectrum was never auctioned and the FCC has not held a satellite auction of any kind in almost seven years."

In statement issued Wednesday, the sharp-tongued Collier said the satellite industry's opposition to Nothpoint was one of simple economics.

"It is cheaper for the satellite corporations to hire legions of lobbyists and PR firms than it is to lower their prices in the face of new competition: if the satellite TV industry is successful in defending regulatory barriers to entry here in Washington, they never have to compete on price and service in the free market," Collier said.

The charges and counter-charges prompted Senate Commerce Committee Chairman John McCain (R.-Ariz.) to ask Collier last week to "disclose information regarding who stands to gain from the assignment of free licenses." McCain asked Collier to provide the Senate with a list of all individuals, including all shareholders, affiliates and franchisees, who hold a financial interest in the company.

Collier supplied the list and added in a lengthy response, "First and foremost, I believe that consumers will benefit from the injection of MVDDS competition in terms of substantially lower prices and improved services. It is this very real competitive threat to the DBS industry's bottom line that motivates their opposition to the legislation."

She also noted, "Contrary to reports, the amendment at issue does not guarantee that the FCC will have to give the licenses to any one company. Other companies have expressed an interest on obtaining MVDDS licenses, and would thus have the same opportunity to be licensed as Northpoint."

Bush said, "What people are stunned about is that we are still here, still fighting."

And given the company's ability to take a punch and throw a punch, Northpoint is likely to be here quite a bit longer.

As Washington telecommunications analyst George Reed-Dillinger wrote last week, "The legislative and judicial developments outlined (in his newsletter) have, in our opinion, raised the odds above 50 percent that Northpoint will become a factor to be reckoned with."