No Profit, No Loss Concept Defies Logic

November 13, 2007

Editor’s Note: In September, Frontline Communications filed a proposal with the FCC suggesting the commission adopt a “no profit, no loss” framework for the 700 MHz D block license winner in the upcoming 700 MHz auction. The proposal stated the framework should “govern the fees collected from public-safety users by the commercial operator of the shared network and require the D block winner to establish a not-for-profit subsidiary within the operating company to provide service to public-safety agencies.”

Frontline is expected to bid for the D block license in the upcoming 700 MHz auction. Company officials declined to provide more detail on the benefits of a no profit, no loss requirement to MissionCritical Communications beyond the information included in the company’s filing with the FCC. The filing can be accessed here.

By Joe Hanna

Public-safety broadband — something not even in the mind of most public-safety communications officials three years ago — is now imminent. With the FCC’s latest report and order on 700 MHz, widespread, reliable broadband appears within reach of first responders throughout the United States. This promised, nationwide network can only become a reality if wise choices are made at the outset of the design-and-implementation process.

During the course of the past two years, multiple concepts and designs have been proposed to the FCC and the public-safety community. Free spectrum, auctioned spectrum, open access and shared spectrum are but a few of the concepts that have been proposed to meet the goals of various parties who have pursued this once-in-a-lifetime opportunity. One of the latest proposals to be made in this debate is a “no profit, no loss,” concept from Frontline Communications. The premise of the Frontline filing on the topic with the FCC is that a no profit, no loss fee structure similar to that long followed in utility and insurance markets would protect the interests of public safety and first responders who will depend on this network.

While this no profit, no loss concept has a modicum of sex appeal, it flies in the face of long-proven market factors that have allowed consumers in the United States to have the highest quality of wireless telecommunications services with some of the lowest costs in the world. The public-safety community has come to embrace the concept of commercially-based technologies primarily because of the advances that these technologies have made in the profit-driven commercial marketplace. Indeed, the ability to pursue profits has driven down the costs of wireless access, both device and service related, to some of the lowest levels in the world.

Public-safety entities buy goods and services every day from companies that are not restricted by no profit, no loss requirements. Police cars, fire trucks, computer systems, weapons, water meters, ambulances, medical supplies and thousands of products that enable first responders to perform their duties are all designed, manufactured, marketed and distributed by companies that thrive with a profit motive. It’s possible to argue that the profit motive generates technical advances; in fact, the lack of a profit motive often creates stagnation as providers in a no profit, no loss environment will ultimately generate the same guaranteed rate of return, regardless of the ability to deliver new and improved goods and services.

Equally, no profit, no loss doesn’t mean that no one makes money. There are numerous examples of “nonprofit” organizations making and spending millions of dollars. It’s doubtful that the FCC or any regulatory entity would set salary limits for the management or staff of a license winner. It’s also doubtful that any regulatory entity would be able to set limits on expenditures for office space, utilities, travel expenses, benefits or materials needed to perform duties of the provider.

One needs to look no further than the current 800 MHz rebanding program to realize that “cost recovery,” such as no profit, no loss, hasn’t limited Sprint Nextel executives, lawyers, consultants, engineers, manufacturers and even the parties that comprise the 800 MHz Transition Administrator (TA) from making money. The only parties not making money in this process are public-safety entities forced into the process. One might argue that no profit, no loss may actually increase costs, not reduce them. While it’s noble to propose an architecture that will protect public safety, experience to date doesn’t support the premise that no profit, no loss will provide this protection.

Under the current FCC regulatory structure, a process is already in place for developing fair and equitable remuneration for broadband services. This structure, the network sharing agreement (NSA), allows for the D block license winner and the public-safety broadband licensee (PSBL) to negotiate an arrangement equitable to both parties. There is considerable incentive within the report and order for the D block license winner and the PSBL to reach a mutually agreeable cost-recovery plan. Nothing prevents the selected D block licensee from negotiating a no profit, no loss agreement as part of the NSA negotiation. On the other hand, a regulatory prerequisite for a no profit, no loss model may well provide a disincentive from potential bidders from entering this arena.

Given the stringent requirements that have been placed on the proposed public-safety broadband network, flexibility is the operative word. With concerns already in place as to whether any party will be willing to bid for the D block license because of the stringent requirements for the license winner, it’s critical that the FCC allow maximum flexibility within the process to ensure that real competition for the license occurs. If potential bidders are to be attracted into this arena, incentives are required.

While no profit, no loss provides an attractive sound bite, FCC officials should ensure that they distinguish between good sound logic and logic that sounds good.

Joe Hanna is president of Directions and a private consultant in the public-safety wireless arena. He is a retired captain of the Richardson (Texas) Police Department and a past president and life member of Association of Public Safety Communications Officials (APCO) International, a member of the APCO Executive Council, a member of the National Emergency Number Association (NENA) and a fellow in the Radio Club of America. Hanna is an editorial advisor to MissionCritical Communications. Contact him at locatejoeh@aol.com.