Genachowski: FCC inherited a “real mess” in net neutrality
On April 14, 2011 Fortune’s Adam Lashinsky interviewed Julius Genachowski, chairman of the Federal Communications Commission, in Mountain View, Calif., at an event sponsored by the Commonwealth Club of California. The chairman danced around the most prominent item on his agenda, the proposed acquisition of T-Mobile by AT&T. He also discussed spectrum re-allocation, his pragmatic approach, and what it was like being a law school classmate of President Obama. An unedited transcript follows, along with a video of the event.
ADAM LASHINSKY: Good evening, and welcome to our Commonwealth Club’s Silicon Valley program, brought to you from the Computer History Museum in Mountain View.
I’m Adam Lashinsky, Senior Editor at Large at Fortune Magazine. It is my pleasure to introduce this evening Julius Genachowski, Chairman of the Federal Communications Commission.
Julius Genachowski brings a diverse background to his leadership of the FCC. He studied history at Columbia College of Columbia University, where he dabbled in journalism as the editor of the Columbia Daily Spectator. He decided not to pursue a career in journalism, undoubtedly wisely, and instead studied law at Harvard Law School, where he was the notes editor under a later notable editor of the review, named Barack Obama, who graduated from Harvard Law School the same year.
He served several distinguished clerkships following law school, including for the honorable Abner J. Mikvah on the U.S. Court of Appeals for the D.C. circuit, as well as for two Supreme Court justices, William Brennan and David Souter. He served on the select committee investigating the Iran-Contra affair in the U.S. House of Representatives, and later was Chief Council to the FCC.
He then became one of you — he worked in the technology industry for IAC Interactive Corp. (IACI), and served on the boards of Expedia (EXPE) , Hotels.com, and Ticketmaster. He became a venture capitalist, founding a firm called Rock Creek Ventures, during which time he was on the board of several startups, including Motley Fool.
He currently serves on the board of Common Sense Media, a leading organization seeking to improve the media lives of children and their families. [Adam Lashinsky writes on April 27: Genachowski left the Common Sense board when he joined the government.] And in case there are any problems tonight, it is comforting to know that in college he was an EMT at Columbia.
Please join me in welcoming Julius Genachowski. (Applause.)
JULIUS GENACHOWSKI: Gavels. It’s impressive, isn’t it, that gavel? You wield it well.
ADAM LASHINSKY: Thank you. It’s my second time wielding the gavel. You get better as you go along.
So, I’m going to start, Julius, by throwing you a softball, by making an observation to you — two observations. Recently, the Wall Street Journal editorial page said of a rulemaking process at the FCC, referring to your boss, President Obama — excuse me, referring to President Obama, “Mr. Obama insists that he’s focused on economic growth and innovation. He could do that goal a favor by letting Congress override his politically driven FCC.” That’s one comment.
It’s also been observed to me that friends of yours in the progressive or consumer activist community feel that you have not been aggressive enough in pursuing their agenda.
So, I would submit to you that if you are being attacked by consumer advocates on one hand, and by the Wall Street Journal editorial page on the other hand, that you must be doing something right.
JULIUS GENACHOWSKI: Well, I’m not sure how to respond to that, other than to say, look, the area that the FCC operates in, the area of communications, technology, our information infrastructure, it’s just so important to our economic health, to our global competitiveness. The issues are incredibly challenging as technology is changing so fast, the markets are changing so fast. We’re competing against countries around the world. It’s really important that the FCC do what we have been trying to do, which is focus on the facts, the data, the technology, the real challenges and what we can do to help support and drive the kind of innovation that we see here in this part of the country.
ADAM LASHINSKY: So, I want to suggest to people that we keep in mind that one of the first things you said was about the facts and the data. You’ve been accused of, and I think you’ve acknowledged, being a pragmatist in your role as the FCC chairman. Let’s come back to that, let’s jump right into policy, and let’s tackle some of the big issues that the FCC is dealing with. Why don’t you start by explaining to everybody what the National Broadband Plan is, please?
JULIUS GENACHOWSKI: Sure. The broadband, of course, is high speed Internet. It’s this incredible platform. People around here know it well: wired and wireless. That’s increasingly becoming the main platform for economic activity in the United States, and very quickly around the world, for driving solutions to some very hard national challenges like education and health care and energy and public safety.
We are not where we should be as a country when it comes to our broadband infrastructure. We can get into some of that if you’d like. We’ve never, until we did this plan, looked at this the way a company would, and say, what are our goals, what are the challenges, how are we going to get there?
And that’s what we did with the National Broadband plan, and we completed it about a little over a year ago, and we’ve been hard at work implementing its key recommendations. The fundamental goal is to make sure that we harness the opportunities of high-speed Internet for our economy, and for driving innovation and solutions to the issues I mentioned.
ADAM LASHINSKY: Yeah, so please discuss a couple or three of the planks in the platform, and I’m curious — we’re far, far away from Washington here — for you to explain the difference between things that the FCC can do on its own versus things that it needs Congressional help to do.
JULIUS GENACHOWSKI: First, let me lay out something that kind of speaks to the overall challenge. There’s an organization called ITIF that did a study of 40 industrial countries, ranking each of the countries on the basis of their competitiveness and innovative capacity. And it looked at a relatively small number of metrics with broadband-related metrics, the deployment and adoption of high-speed Internet as key metrics.
The study found that the U.S., on a snapshot basis, was sixth out of 40; it’s interesting to see people’s reaction to that. A lot of people have heard of the OECD numbers that rank the U.S. 16th or 17th when it comes to broadband. This ranked the U.S. sixth. To some people, after they hear the other numbers, they say, well, that’s a relief, it’s not good enough, we need to be number one, and it’s certainly disappointing not to be on the medal podium.
But in any event, that’s not what was most important about the study. The study then looked at each of the countries and measured the rate of change of each of the metrics, and all the countries were improving, so it was measuring rate of improvement. On that basis, it ranked the U.S. 40th out of 40, and that tells us that there’s a problem, that the country isn’t moving as fast as it should when it comes to high-speed Internet.
We identified a number of issues in the plan, but I’ll tell you the main ones, and we can jump into any of them. One is our mobile broadband infrastructure. So, we’re seeing just incredible innovation and opportunity around mobile broadband. Everything that we see around smartphones and tablets and machine-to-machine devices relies on an infrastructure that we can’t see, an invisible infrastructure, our airwaves, our spectrum, which is a central responsibility of the FCC.
Here’s the problem: The demand for use of spectrum from all of these devices is dramatically exceeding the supply of spectrum, and we need to tackle that challenge and free up more spectrum for mobile broadband, and do other things to make sure that we can fully seize the opportunities of mobile broadband. We can come back and talk about that, but that’s one major thing.
A second is we have a whole series of programs designed to accomplish the kind of universal service that we want for broadband, because we want every American, wherever they live, every business, wherever it is, to have access to and to use high-speed Internet service. The statistics are not where they should be. About 25 million Americans live in parts of the country that have no broadband access. Over 100 million Americans don’t subscribe when they could. So, our broadband adoption rate is 67% in the U.S. — 67%. That compares to, say, 90% for Singapore.
We have universal service programs. We spend about $9 billion a year as a country through programs that the FCC oversees. Those programs, by law and rule, are still focused on universalizing telephone service.
ADAM LASHINSKY: Which you’ve said is a 20th century issue, not a 21st century issue.
JULIUS GENACHOWSKI: So, we need to transform 20th century rules that focus on yesterday’s communications infrastructure, into smart, efficient programs that support our 21st century communications infrastructure broadband.
So, why don’t I stop there? Those are two of the central issues that we identified in the broadband plan.
ADAM LASHINSKY: Sure. So, the first part is part of the spectrum issue, which we’re going to come back to and spend a significant amount of time on. It’s one of your major initiatives. But what do we do about — where is the problem on this telephone versus broadband issue?
JULIUS GENACHOWSKI: Sure. Well, the program continues to wake up every day and fund and support old telephone service. It’s related to another set of policies and practices called inter-carrier compensation, and not worth going into the details other than to say we still kind of operate in the sort of payment system and the regulatory structure around communications based on old telephone service that assumed long-distance and local companies and money moving back and forth through that old system.
We need to update that for broadband. What’s happening now is the system is producing, in many cases, perverse incentives. It’s deterring some companies from upgrading their networks to digital IP networks, and the program has also become wasteful and inefficient. There are parts of the country that are receiving more money than makes sense under this program. Multiple companies are being funded in the same area. There are some parts of the country that are receiving nothing at all.
We need to bring efficiency to the program. We need to move to models for distribution of these funds that are based on basic market ideas. Reverse auctions is an idea, have people come and bid to serve a local area for broadband. So, it’s a very complex set of rules and policies.
The goals are simple: Where economics won’t support broadband infrastructure, which is in typically our least populated areas, let’s have efficient public-private partnerships that include those areas.
Similarly, on adoption, where it makes sense to have government programs that help move the needle on the adoption rate, let’s do that in a smart way.
We’re looking at all of those, and we’re looking at the parts of the program that also help schools connect to the Internet, and help health care facilities connect to the Internet.
ADAM LASHINSKY: From your comments — other than it sounds like maybe some companies are making money from the system the way it is, and making the system work better might make it more difficult to have them make money — other than that, this sounds like a technocratic problem that we should be able to study, analyze, come up with a solution, and make it happen. So, why are we looking at it instead of doing it?
JULIUS GENACHOWSKI: Well, we are doing it, but let me tell you why I think — a lens through which to look at some of these problems that helps explain the challenges and what we need to overcome to make some of these changes.
A lot of people here are probably familiar with a book called The Innovator’s Dilemma. It’s a Clayton Christensen book that looks at why market-leading companies can have a very hard time responding to disruptive technologies and disruptive competitors.
And the basic thesis is that as a market-leading company you develop practices, dependencies, on the existing ways of doing business that even when you know what you should do from a strategic perspective to deal with new technologies and competitors, it can be very hard, because you’re not operating on a blank slate. You have to make moves with employees, technologies, business practices, et cetera.
Well that’s a pretty good lens through which to look at the U.S. in this area.
ADAM LASHINSKY: You’re comparing the United States to an older, more mature company.
JULIUS GENACHOWSKI: The U.S. was the market leader in the global economy in the 20th century. We still are. We’re facing disruptive new technologies like high-speed Internet and broadband, disruptive new competitors in Asia and other parts of the world.
We know in some areas what we need to do. We’ll come and talk about spectrum, we just talked about universal service, but we don’t have the easy ability to draw on a whiteboard and say, ‘Well, tomorrow we’re going to start putting in place the new strategy,’ because, like a market-leading company, we have existing dependencies, processes, companies that are the consequences of our success.
So, in the universal service area, we know what an efficient smart program to support universal broadband service would look like. To transition on a dime to that new program would be very disruptive to existing companies that employ people, that rely on the existing system, and that also often have an interest in slowing down these processes.
So, from both a substantive and a political basis, we have to tackle all these innovator’s dilemma challenges, not ignore the fact that we have these challenges, and in fact recognizes that a lot of these challenges come from our successes in the 20th century, but we still have to make the changes.
ADAM LASHINSKY: Okay, so you’re making good sense about what the problem is. So, is it a combination of FCC rulemaking and congressional action to make that happen?
JULIUS GENACHOWSKI: It depends on the area. Our governing statute is the Communications Act. In many ways, it’s a flexible instrument that gives us the flexibility to address communications issues, even as technology and markets change. In some other areas it doesn’t. In the universal service area we have the authority that we need to make the changes in the program, and we’re deep into a process, and we’re going to keep working at it, and we think over the next few months we’ll be able to significantly reform this program, put it on a smart, healthy, efficient footing.
In the spectrum area, there are some areas where we have the authority under the statute to do what we need to do. There are other areas where we need congressional legislation.
ADAM LASHINSKY: So, on universal service I will play the role of venture capitalist, and ask you to play the role of a startup company in my portfolio. I’m your investor. When are you going to have this product ready for the market? You said in a few months you’ll have some action, but when will we have a satisfactory product?
JULIUS GENACHOWSKI: Well, we have said to all the companies and stakeholders involved in this — and we actually did this in an unprecedented way at the Commission — all five FCC commissioners did a joint blog to tell all the stakeholders with an interest in universal service programs to come to the table now, roll up their sleeves with us on these hard issues, focus with us on facts and data and the real problems, and to be on a track with us, because the train’s moving with or without them, to tackle this — to be ready to tackle this as early as August.
ADAM LASHINSKY: So, that means to have discussions by August, or —
JULIUS GENACHOWSKI: The discussions are now. The way the process works at the FCC is it’s generally a two-stage process where you propose a direction, there is public comment, and then the FCC acts. We have already issued what we call our notice of proposed rulemaking, and we’re now — our staff at the FCC is in the process of reviewing the record, engaging with stakeholders, and we’re on this summer track that I mentioned.
ADAM LASHINSKY: Okay. I want to remind everybody that you have question cards, and the questions are piling in. I’m not avoiding the AT&T/T-Mobile issue, we’re going to come to it, and perhaps more appropriately, you all are going to come to that. I think 90% of the cards so far — well, so I’ll just ask you that 17 times towards the end of the interview.
This spectrum reallocation issue is very confusing, it’s very wonky, yet it’s very important. So, let’s spend a few minutes on it, please. Explain to us what’s at stake, what needs to get fixed, and what your crystal ball is on how it will get fixed.
JULIUS GENACHOWSKI: So, we have this spectrum gap that I mention. The demand from smartphones, tablets, is rapidly exceeding supply, and when you think about it, it makes a lot of sense. If you think about a smartphone as compared to the old feature phones that people had — I’m guessing everyone in this room is a smartphone person — well, we know intuitively that those phones and the web access that they have are putting much more demand on the airwaves when you use it. Well, the numbers are about 24 times as much. Tablets, it’s actually about 140 times as much. Netbooks, if you plug in a wireless Internet access cards, are even more than that.
Spectrum is a scarce resource where physics places some real limits on how much data can travel over the airwaves, and to go to this level of increase, 24 times, 100 times, on the same amount of spectrum, it’s actually not doable.
Now we’re going to get increases in efficiencies of technology and software, but the gap is so large that we need to free up more spectrum, more capacity to carry all of these signals.
The problem is, it would be nice if you showed up at the FCC and congratulations, you’re chairman, here’s your secret warehouse of spectrum, and go and auction it off for broadband or put it out there as unlicensed spectrum. But that warehouse doesn’t exist, and, in fact, there are no easy pickings on the spectrum chart. What we need to do as a country is reallocate spectrum from existing uses to this new use that’s sucking up so much demand, very happily, mobile broadband.
ADAM LASHINSKY: And excuse me, to use your metaphor, your warehouse metaphor, actually the spectrum is sitting there in warehouses, and the warehouses aren’t being used, right, in some cases?
JULIUS GENACHOWSKI: Yes.
ADAM LASHINSKY: Before you go on, let me try to unpack my own metaphor there, which is: There are entities, including in, prominently, television broadcasters, who own spectrum or have leased spectrum. Would that be a better way of putting it?
JULIUS GENACHOWSKI: Licensed spectrum.
ADAM LASHINSKY: They have licensed spectrum, they are not using it. The rational thing would be to figure out a way to get them to sell it or give it to someone who does want to use it, right?
JULIUS GENACHOWSKI: Basically, yes. You know, we have an answer in this country to how we make sure that assets flow to their highest and best use: it’s called the free market. And by the way, since the early ’90s, free market principles, chiefly through the auction mechanism, have been introduced to the mobile space. So, until the mid-1990s, spectrum was allocated either by comparative hearings or lottery, and starting in the ’90s, spectrum was auctioned to the highest bidder, and there’s a direct relationship between that decision to implement auctions in the United States and the incredible innovation that we’re seeing now, by unleashing market forces on this area of the economy, on these assets.
Well, with respect to older allocations of spectrum, they’re still governed by the original FCC allocations, and the core proposal that we’ve made is to bring the auction methodology not only to the demand side, I’d call it, where you auction off spectrum to companies that want to use it, but to the supply side.
And so what we’ve proposed to do is run something called an incentive auction, where the supply of spectrum in the auction would come from existing license holders, who would contribute their spectrum to the auction in exchange for a share of the proceeds from the auction, so that it becomes an incentive-based, market-based methodology.
ADAM LASHINSKY: Voluntarily?
JULIUS GENACHOWSKI: Voluntarily. So, that’s what we propose to do. We have the authority at the FCC to simply reallocate spectrum. We have the authority to take it back and auction it. We don’t have the authority to steer some of the auction proceeds to the current license holders, to make it a market-based, incentive-based process.
This is actually the best way to answer the question of how to make sure the spectrum is being used for its highest and best use. We can do this finally in a way that, as the FCC has done in a number of areas, realigns, reorganizes the spectrum in a way to free up contiguous blocks of spectrum that are most conducive to mobile broadband.
So, you mentioned broadcasting. Broadcasting has been allocated in a checkerboard manner, separated 6 megahertz channels — I know I’m lapsing into geek talk so I apologize for that, but —
ADAM LASHINSKY: It’s important to somebody, undoubtedly.
JULIUS GENACHOWSKI: But fundamentally, what we need to do is bring market forces to spectrum allocation. We need this tool.
Just last week, 112 economists from across the spectrum, so to speak, Nobel Prize winners, economists who served in both republican and democratic administrations, endorsed this idea and said we need to do it. Technology companies, consumer electronics companies, the wireless industry has all said we need to do it. There’s been bipartisan legislation introduced in both houses. The President has endorsed this.
So, we’re hopeful that this is something that can happen soon. It takes time to reallocate spectrum, even through a mechanism like this, and every day that we wait imposes real costs, and we’re going to experience those costs if we don’t tackle this, through more congestions, dropped Internet connections, and just real frustrations for consumers and businesses who rely on mobile broadband and who need robust mobile broadband to do what they’re doing, and to drive our economy.
ADAM LASHINSKY: And listening to you explain this, again, it sounds reasonable, and it also sounds hopeful, like this could happen. Would the Chinese do this better than we do, and have they done this better than we do?
JULIUS GENACHOWSKI: It’s a great question. This is the innovator’s dilemma issue, because countries like China don’t have a history of 20th century allocations to deal with.
ADAM LASHINSKY: But they also don’t have the democratic rulemaking process and congressional process, which is quite tedious, right?
JULIUS GENACHOWSKI: True enough, but you know what, I prefer our system every day of the week.
But we should recognize, as we wrestle with an issue like this, that our global competitors like China, even putting aside the issue that you mentioned, can just — they don’t have to free up existing uses to meet mobile broadband needs. That’s the race that we’re in. That’s why we can’t wait.
One of the things that, as an example of what we should worry about in this area, is this. This is all about making sure that we take advantage of all the unique advantages that we have in the U.S. — that’s produced a Silicon Valley, that produces the most entrepreneurial system in the world — and make sure that in the 21st century, like in the 20th century, we’re the world leader in innovation.
Well, here’s something that should make us nervous: A company from this part of the world, a company called Applied Materials, based here, very important technology company, last year moved its CTO and its technology operations from right here in Silicon Valley, to Beijing. They’re focused in the energy technology space, and they made the decision that that’s where the action was in energy technology.
To me, that’s a canary in the coal mine, and we have to ask ourselves how many technology companies have to make the decision to move their center of gravity and technology someplace else before we declare a crisis.
We’re leading the world in mobile broadband. We’re by far the most innovative country in the world. If we take care of our infrastructure, we’ll be fine. If we don’t, other countries will have stronger platforms for innovation, more robust markets than we do, and we’ll regret it, and it’s why we’re pushing this as hard as we are.
ADAM LASHINSKY: And just for clarity’s sake, this sounds like motherhood, apple pie and Chevrolet, which leads me to ask, who would possibly be against this?
JULIUS GENACHOWSKI: Well, you know, I ask that question a lot, and this is — it’s the kind of thing that I think should have bipartisan support and happen quickly. I spent a couple of days in Las Vegas earlier this week at the National Association of Broadcasters, and I said to that group the same thing that I’m saying here: let’s bring market forces to this area. We’ll end up with both a stronger broadcasting industry, and spectrum freed up for mobile broadband. I would say that the broadcasting industry continues to study the issue, and — but it’s important for —
ADAM LASHINSKY: Continues to study is a Washington euphemism for they’re obstructing progress.
JULIUS GENACHOWSKI: You know, listen, I think that this is a win-win for broadband and for broadcasters. We’re going to keep working every day. We’re having productive, practical conversations with broadcasters. I’m an optimist, and I think this is the right answer for the country and the right answer for the broadcasting industry, and we’re going to keep working on it.
ADAM LASHINSKY: Good. One last thing before we leave this issue of spectrum allocation. Is there an industrialized country that’s done it well already?
JULIUS GENACHOWSKI: You know, we led the world in the U.S. when it came to adopting auctions. Other countries all followed. We led the world when it came to transitioning over the broadcasting from analog to digital. The rest of the world is following. This is the next step. If we get this right, we will lead the world in adopting two-sided auctions, these incentive auctions, and the rest of the world will follow. If we don’t get it right, other countries will go first and they will pass us in terms of their mobile infrastructure. That’s what we’re trying to prevent.
And by the way, in the early 1990s, there were debates very similar to this about whether Congress should give the FCC auctions authority, and it took a while, but it eventually happened.
One of the points that I think is important to consider, looking at the world today, the costs of delay are much greater now than they were 20 years ago when auctions were first debated, because of the changes in the global competitive landscape. So, back then, we didn’t have as much to worry about with respect to our global competitors in the communications space. I can tell you from my interchanges with my counterparts in other countries around the world, they are looking at communications, they are looking at mobile, they understand that this is a key to economic growth and innovation. And if we’re adopting policy on the assumption that we’re the only country that’s unlocked this little secret, we’re wrong. The rest of the world knows, and they’re moving very aggressively.
ADAM LASHINSKY: Now, at the outset, I encouraged the audience to ask challenging questions, and I was going to ask you my own net neutrality question, but the following just popped up at the top of my list, which is serious: how much political pressure did Verizon (VZ) and Google throw at you — and let’s just assume that by you they mean the FCC — on net neutrality castration? Now, can you explain the hostility behind this question?
JULIUS GENACHOWSKI: You know, I won’t try to do that, but I do — let me start where you started, which is that every day, the FCC is under pressure from all sides who would like to see the FCC do one thing or the other, and one of the things that I learned quickly in the job is that if you try to tackle policy issues by optimizing for what makes a particular group happy, you’ll fail. Because one is, by definition, you can’t make everyone happy. There are many sides to these issues and what we have to do, and this is our responsibility, is focus on getting the right answers to support the goals that we’ve articulated.
ADAM LASHINSKY: And this is where you’re being a pragmatist again, right? So, some of your supporters are appalled that the FCC allowed the Comcast acquisition of NBCUniversal to go along. Others are appalled that any sort of — that you did any sort of net neutrality rulemaking. Can you talk a little bit — can you summarize where net neutrality stands?
JULIUS GENACHOWSKI: Sure. You know, when I was confirmed, we inherited a real mess around net neutrality. The agency had been enforcing net neutrality principles, but without ever adopting them as formal rules, and without any clarity on what the rules actually were. And it was a mess. Companies in any part of the broadband economy didn’t have certainty. The rules in fact were a mess and were subsequently struck down by a court.
I wanted to make sure that we had a framework to preserve the freedom and openness of the Internet that has led to the incredible innovation that we’ve seen, that’s empowered both businesses and speakers in the way that we all know for the last period of time, and that also encouraged the massive amount of investment we need in the infrastructure to have high speed broadband.
And we ran quite a long process, 14 months, from notice of proposed rulemaking to decision. In December we adopted a framework, open Internet rules on the books. You can read them — a little more than a page — that lay out basic protections for Internet freedom and openness, and that bring certainty and predictability to an area that was a mess.
So, the core issues are, from an FCC perspective, behind us. We’ve moved forward onto other issues. Basic protections for Internet freedom and openness are now in place.
ADAM LASHINSKY: That means they’re law. These are rules that have been written and are in effect.
JULIUS GENACHOWSKI: Yes.
ADAM LASHINSKY: And so, if I could, I want to paraphrase what that means, and tell me if it’s a fair paraphrase. So, the balance you struck is that all companies, Internet users, have a right to access to the Internet, but the companies that own the backbone, that own the networks, have an ability to make money off it. Is that a fair–
JULIUS GENACHOWSKI: You know, it’s actually — it’s not unfair. We protected the core right that we’re all used to, and that needs to be enforced, to send and receive information on the Internet, to put up, whether it’s a content that you want, messages that you want to get out, or businesses that you want to start, and reach the audience. We protected those basic fundamental rights, and we did it in a way that didn’t remove the incentives for the infrastructure companies to invest in our broadband networks. We need both.
What do we need in this country? We need massive investment, private investment at the edge of the network, the kind of thing that we see here in Silicon Valley. It was very important to us to make sure that our rules incentivized not just the same levels of investment but even more. It’s an enormous competitive advantage for the United States–
ADAM LASHINSKY: Excuse me, the edge of the network? An example of that would be a company that puts up a website, right, everything from a Google to microphones.com.
JULIUS GENACHOWSKI: And thanks for keeping me out of the jargon, but absolutely right, the companies that are building applications, content, services on the platform —
ADAM LASHINSKY: That are using the Internet.
JULIUS GENACHOWSKI: Exactly, we need massive investment in those companies. We also need massive private investment in the infrastructure, wired and wireless, because guess what, the government’s not going to pay for 100 megabits to everyone’s home. That’s going to come from private investment on the part of infrastructure companies.
The wonderful thing is that these investments help each other, so the more investment in content services applications of the sort that you mentioned, the more consumer demand there is for bandwidth, the more return the infrastructure companies can get to make the infrastructure faster and more robust. The faster and more robust the infrastructure is, the more that a new generation of entrepreneurs say, hey wait a minute, let me see what I can do with 5 megabits, with 25 megabits, with 100 megabits.
So, in success, and I believe we did succeed, what we’ll see is a virtuous cycle of massive private investment throughout the broadband economy. What we wanted to avoid was a world in which the Internet, we lost the openness and freedom of the Internet and the kind of investment that we see here in Silicon Valley would be dried up, because you wouldn’t be sure — it’s one thing to say, let’s put something on the Internet, a new business, and see how the market does with it. That’s fine, used to that in Silicon Valley. But to have artificial restrictions on the success of companies like that would have dried up investment here.
We didn’t do that, and in fact, we’re seeing just ongoing increases in private investment. We’re also seeing more investment on the infrastructure side, too. Measured that way, which is what we were looking to accomplish, the framework we adopted I think was a great success.
ADAM LASHINSKY: Now this is, on the subject of infrastructure, a perfect segue to talk about AT&T’s (T) plan, $39 billion acquisition of T-Mobile. Maybe let’s start on a non-controversial aspect of that. Could you explain very briefly, there’s two federal agencies that have a say in this, correct, the FCC and the Justice Department. What’s the difference in how the two agencies will look at that proposed deal?
JULIUS GENACHOWSKI: So, you’ve asked probably the only question I can’t answer —
ADAM LASHINSKY: I wanted to try to achieve that.
JULIUS GENACHOWSKI: Because I can’t — it’s a pending transaction and I can’t talk about specific reviews, but the Justice Department is charged with enforcing the antitrust laws. We have the responsibility of determining that transactions that trigger FCC review are in the public interest. That’s the language of the statute.
ADAM LASHINSKY: And so the way that’s been paraphrased to me, or interpreted to me, is that the FCC can look at behavioral issues, how the technology is used, how consumers use the technology, or use the product, whereas the Justice Department looks at structural issues, is that right?
JULIUS GENACHOWSKI: Well, here’s where — I hope you have other questions, because this is an area where it’s a pending review, and we’re going to do our work, but beyond that, I can’t talk about it.
ADAM LASHINSKY: I do want to give you a flavor of the public’s mood on this by asking the following: How can we make sure we don’t get suckered by the AT&T intent to acquire T-Mobile, by AT&T offering a spurious carrot of helping with broadband deployment that AT&T already is doing, to compete with Comcast and the Dish Satellite TV network? Now, I know you’re not going to answer that. Maybe we can have — am I correct, you’re not going to answer that?
JULIUS GENACHOWSKI: I’m not going to answer that.
ADAM LASHINSKY: Can we figure out a way to have a conversation? One of the publicly stated tenets, AT&T’s publicly state tenets, is that this is a way, by acquiring T-Mobile, AT&T can solve some of its own spectrum reallocation desires. So, help me out here. Is there a non-rulemaking or congressional way to achieve spectrum reallocation, such as private market asset transfers?
JULIUS GENACHOWSKI: So, two points. One is the FCC transaction review process is an open process. We seek public comment, we seek input. Of course we’ll do that here, and so there’s going to be ample opportunity as part of the process that we’ll run for the public, for any interested party to have input into our process. And we’ve been working hard at the FCC actually to open up our processes so that you don’t have to hire a lawyer in Washington in order to express your view to us. We have channels for people to comment online. We’ve changed our rules so that online comments become an official part of the record, and I’d encourage anyone and everyone to participate in our proceedings.
The second point that I’d make is that the spectrum crunch relates to the overall demand for spectrum capacity that we have from all consumers and businesses in the United States against the overall supply of spectrum. That gap exists and can only be closed by freeing up more spectrum to meet the demands on an aggregate basis. So, nothing that happens in the marketplace changes the fundamental math of the spectrum gap, and the fundamental solution, which is that to address the challenges of aggregate demand in the United States, we need to add to the aggregate supply of spectrum.
ADAM LASHINSKY: And of course there’s — spectrum swapping happens all the time, right? It’s allowed for licensees to swap spectrum with each other?
JULIUS GENACHOWSKI: Subject to FCC review.
ADAM LASHINSKY: I’ll proceed with a question from the audience: Does the FCC work closely with the military to assign and encrypt bandwidth specific for military communications and transmissions?
JULIUS GENACHOWSKI: No. There’s a significant amount of spectrum that’s allocated to the military. It’s managed by an agency inside the Commerce Department called the NTIA. So, the answer to that question is no.
ADAM LASHINSKY: It’s a shame that people left the room for the following question: Because my husband has a brain tumor attributed to cell phone use, I testified with the FCC to Congress two years ago. The FCC said they don’t have scientific expertise to set the non-ionizing exposure limit. What can we do to finally get these exposure limits revised?
JULIUS GENACHOWSKI: Well, there are FCC standards on emissions. They’re set based on work that health agencies like the FDA and the WHO do, and they’re constantly doing their work. We look to them, and these are open processes and that’s how the system works.
ADAM LASHINSKY: A similar question — I’m not sure I’ll get every word, but if I don’t get every word, we’ll just paraphrase. People are wearing and using their cell phones while radioactivity in a pocket, which is against FCC compliance guidelines — is it —
JULIUS GENACHOWSKI: I think it’s the same question. Again, the health agencies have looked at this, they continue to look at it. The emissions standards are based on the health research that has been done. I’m confident that our standards are protecting the health of people, and we continue to look to the FDA and World Health Organization on these kinds of issues.
ADAM LASHINSKY: How do you use your cell phone, Julius?
JULIUS GENACHOWSKI: I use it like a lot of other people, I use it a lot.
ADAM LASHINSKY: But I mean, do you hold it up to your head for long periods of time?
JULIUS GENACHOWSKI: Not when I’m driving.
ADAM LASHINSKY: There’s no federal law on that, right?
JULIUS GENACHOWSKI: No, it’s state laws, but this is a very serious safety issue. The number of injuries and fatalities from distracted driving is incredibly high, and my hat’s off to Ray LaHood, who’s the Secretary of Transportation, on this. We’ve worked with him to help make this a national issue, to inform people about the dangers of distracted driving. This is as important as the drunk driving campaigns have been. I have a 19 year-old young driver, and it’s a very serious issue. It’s also something that we’re making progress on as a country, but we need to make more.
ADAM LASHINSKY: Good. Are you concerned that an AT&T-T-Mobile merger will delay or impact in any way FCC progress on USF reform?
JULIUS GENACHOWSKI: No. USF reform is what we were talking about before, Universal Service Fund. No, I don’t think it will slow it down.
ADAM LASHINSKY: Regarding net neutrality, why did you abandon your proposal for a “third way?” Explain please what that is.
JULIUS GENACHOWSKI: There was a debate about where in the Communications Act we should rest open Internet rules, and there were some strong voices in the debate. We ran an open process, thought hard about the proper legal basis, and we ended up with an approach that I’m confident will be upheld in court.
ADAM LASHINSKY: It really is a shame that I guess people didn’t trust me to read their questions. Increasing numbers of people are experiencing health problems after smart meters are installed in their homes. When people complain about the problems, they are told that the meters meet the FCC limits. What are you doing to take these people’s experience into consideration? This is slightly different from what we were discussing before.
JULIUS GENACHOWSKI: Fundamentally, these are the same questions, which is concerns about emissions standards and their effect on people, and the answer is the same. We have standards, they’re based on the health work, the research that’s been done by the health agencies, and that’s how these standards are set.
ADAM LASHINSKY: I’d like to know if you can do anything about the dropped phone calls on Sand Hill Road in this area. (Laughter.)
JULIUS GENACHOWSKI: You know, I had exactly that experience today. We were in the car and there are a couple of terrific people from the FCC staff who were here, and actually I had that experience of having a dropped call on Sand Hill Road.
It actually gets to a larger issue that is something that we’ve been engaged in at the FCC, which is lowering — reducing barriers, speeding up the deployment of infrastructure for broadband wired and wireless communications.
Around the country, the ability of infrastructure companies to install the basic stuff that you need in order to get signals — antennas, et cetera — in some places it’s a lot harder than others, and we need to find a way as a country to both respect the interests and needs of local communities, but also make sure they take into account the desires of people to have communications equipment that works.
Now, I understand that there’s real progress being made here on Sand Hill Road. That’s what I was told. In the first instance, these are issues for local governments and municipalities. We do look at it from a national perspective and ask whether there are larger obstacles we can eliminate, ways that we can make sure that infrastructure is deployed everywhere in a way that gets people the service that they want. And there’s a lot of innovation going on now in the way the towers or antennas look, and I think, whether it’s antennas on flagpoles or antennas hidden among tress, there are a lot of answers to this. But there’s no way to deliver signals without the infrastructure that delivers signals.
ADAM LASHINSKY: You know, you travel around the country and confront these issues all the time. Is there another place in the United States where dropped calls could possibly be more ironic than there?
JULIUS GENACHOWSKI: Ironic is the word that comes to mind.
ADAM LASHINSKY: Okay, two political questions, and this first one may seem a little flip, but I think it’s a legitimate question. The questioner asks: Why have you made so many trips to the White House, and how, if at all, do those trips reflect on the FCC’s independence?
JULIUS GENACHOWSKI: You know, the FCC is the country’s expert agency for communications. We deal with public safety, we deal with issues that are central to our economy of the sort we’re talking about, like broadband. We consult with Congress, with the executive branch. It’s important for the FCC to be a resource to both Congress and the executive branch as policies are made, that affect one-sixth of the economy and the public safety of every American.
ADAM LASHINSKY: You’re saying there’s nothing unusual with the FCC Chairman visiting the White House, not only not unusual, but appropriate.
JULIUS GENACHOWSKI: It’s appropriate, and it’s recognized in the Communications Act.
ADAM LASHINSKY: Google (GOOG) recently showed a face recognition technology. Do you have any concern that this could violate privacy?
JULIUS GENACHOWSKI: You know, I don’t have a view on that. I think that it’s really important to encourage the incredible innovation that we’re seeing in Silicon Valley and elsewhere. It’s obviously also important to make sure that people’s basic fundamental privacy rights are protected. We’re in a period, as technology evolves so quickly, of sorting out what that means, and finding the right balance that encourages innovation and all the benefits to consumers from that, while making sure that people’s rights to control their information are honored in the new economy.
ADAM LASHINSKY: I promised you two political questions, and I left out the second one, which is, how will the federal budget and deficit crunches affect broadband deployment and adoption? And I might throw in there as well I’m curious to know how it will affect the FCC.
JULIUS GENACHOWSKI: The second question first. We have been, from the day I got there, and continue to be, very fiscally conscious when it comes to our budget and spending money. Now the FCC’s work has generated over $50 billion for the treasury through spectrum auctions, and I think there’s bipartisan support for the idea that we should continue to do our work, to generate not only that direct positive contribution to the budget, but also the very broad economic benefits that come from a healthy communications infrastructure, wireless communications. The benefits are tenfold or more.
And it’s one of the reasons, by the way, that I’m a very strong supporter of auctions as a methodology to allocate spectrum, and I’m also a very strong supporter of the other major policy innovation in the last 20 years around spectrum, which is unlicensed spectrum.
And this is worth pausing on for a minute, because it’s a great Silicon Valley success story. People may not realize that the Wi-Fi we use in our homes and businesses, it’s also based on spectrum like our smartphones and tablets, but it’s based not on licensed spectrum but on unlicensed spectrum, and it’s actually worth — you may not know this story, Adam, and so I’m going to — it’s worth telling the story, because it’s very interesting.
Before auctions, as I’ve mentioned before, the FCC allocated spectrum on the basis of being very concrete and saying, here’s some spectrum that should be used for this exact purpose. And there was a band of spectrum that no one could figure out what to do with. It was surrounded by a lot of other uses. You couldn’t use it at high power without interference, and it became known as the junk band. Sat there for awhile, and then one day, someone at the FCC said, you know, we don’t know what to do with this. Why don’t we just put this spectrum on the market. Without a specific allocation, and without handing it over to a specific company, let’s see what innovators can do with this unlicensed spectrum. We’ll put power limits on so that there can’t be interference, we’ll make it clear that it’s secondary, so if there is interference, they lose out. Let’s see what happens.
And interesting things happened. First, garage openers, based on unlicensed spectrum, then baby monitors, cordless phones. But then a group of innovators here in Silicon Valley said, you know, we might be able to use this unlicensed spectrum to connect to network computers in a small area. So, they developed the Wi-Fi standard, and on this unlicensed platform, developed something that’s not only a $1 trillion industry at this point, but that has provided just enormous benefits to all of us.
To me healthy spectrum strategy for our country incorporates both auctioned spectrum by license, and unlicensed spectrum, and in fact, a few months ago, we did the first release of unlicensed spectrum in 25 years at the FCC called White Spaces Spectrum, that will allow — think of it as super Wi-Fi, the next generation of Wi-Fi, with much better propagation characteristics. We’re very supportive of this, and very interested in what the next generation of innovators will come up with on this new platform, for mobile innovation.
ADAM LASHINSKY: I just had a great idea. Given our budget situation, why in the world would you release unlicensed spectrum? You had an opportunity to license it and make more money for the U.S. Treasury.
JULIUS GENACHOWSKI: Because we need to do both. And so the incentive auction proposal that I mentioned will generate literally billions of dollars for the treasury. It’s one of the many reasons we should move forward with it, but we also should recognize the economic benefits and the tax revenue that comes from the innovation, the unexpected innovation, on unlicensed platforms. That will, one, make a real contribution to our deficit over time, and two, it’s another area where it’s vital that those innovations happen here in the U.S., and then get exported to the rest of the world, as opposed to having those innovations happen someplace else and the associated job creation, economic benefits, and have us be a customer of someone else’s products.
ADAM LASHINSKY: This one is — I think I know the answer, but it’s of interest to me: Does the FCC have any jurisdiction when it comes to monopolization of media partisanship, and can the FCC help promote more balanced, fact-based media? I have no idea what this person’s talking about.
JULIUS GENACHOWSKI: You know, I’m a very strong supporter of the First Amendment and basic free speech principles, and I think it’s a really good thing that we don’t have a tradition in this country of interfering with political content, and it’s something that I am passionate about. Perhaps my brief history as a journalist that you alluded to has something to do with it. But we’re going to honor the First Amendment very strongly at the FCC.
ADAM LASHINSKY: But what role does the FCC have in that discussion of — really, this person’s asking about media concentration.
JULIUS GENACHOWSKI: So, there are transactions that have to come to the FCC for review. The Comcast-NBC transaction was one of them. It also went to the Justice Department. And we’ll do our work in connection with transactions like that, as we will other transactions.
ADAM LASHINSKY: I have a question from a dreamer who doesn’t want to listen to your description of the innovator’s dilemma in this country, and it is: if we were to look at demand for broadband, and we were to reengineer this supply, or reengineer the infrastructure, what and how would we build that infrastructure, if we could start from scratch?
JULIUS GENACHOWSKI: Well, if we could start from scratch, we’d have a very significant amount of spectrum licensed for flexible use by auction, and we’d have a significant amount of spectrum made available for unlicensed use, and we would let, in both cases, the market and innovators sort out the best and most productive uses of spectrum.
ADAM LASHINSKY: I have one last question, which is, can you share with us here an anecdote of an example of something that law student Barack Obama did as the editor at the Harvard Law Review?
JULIUS GENACHOWSKI: He was a tough editor, I’ll tell you that, and a very talented one. And I apologize, I don’t have any specific anecdotes other than that. He was the person in our class most likely to become President.
ADAM LASHINSKY: Literally. So, that vote was taken?
JULIUS GENACHOWSKI: Well, I think his election to become President of the Harvard Law Review I think was the first election that he won.
ADAM LASHINSKY: I’ll ask you a slightly different way. Writers and their editors are famous for fighting with each other like crazy. Did you two ever have a knock-down, drag-out fight over something in the review?
JULIUS GENACHOWSKI: Well, we were both editors, so —
ADAM LASHINSKY: I see, you were on the same side.
JULIUS GENACHOWSKI: We were on the same side.
ADAM LASHINSKY: All right. Well, I hope you all enjoyed this evening’s program, brought to you by the Commonwealth Club Silicon Valley. Again, we would like to thank Julius Genachowski, Chairman of the FCC, our audience here in Mountain View, and those of you joining us on the radio. I am Adam Lashinsky, Senior Editor at Large for Fortune Magazine, and now this meeting of the Commonwealth Club, celebrating over 100 years of enlightened discussion, is adjourned. Thank you.
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