Thomas Hazlett of Clemson University debates Ryan Cough of Public Knowledge on whether broadband networks should be regulated by common carrier rules. Federal policy makers have been going back and forth on the issue for over a decade. Who’s right? You be the judge.
A bitter controversy has engulfed Washington over the “UHF Discount.” But it is sound and fury over what are zombie rules governing phantom markets.
There are deep reasons to question TV regulations, which preserve airwave set-asides created prior to World War II and which now deprive wireless customers of bandwidth for their tablets, smartphones, flat panels and Fit Bits. But those protests have curiously yet to emerge. Continue reading
The Radio Act of 1927, the brainchild of then-Secretary of Commerce Herbert C. Hoover, created a regulatory regime for carefully parceling out airwaves according to a “public interest” standard. It was said to be necessary to prevent chaos—“etheric bedlam.”
In fact, it was not. Rather, it reflected Washington politics that favored incumbent interests—the first few visionaries who opened radio stations and enjoyed commercial…
By Thomas Hazlett
June 29, 2017
Ten years ago this week the Apple iPhone, described by Steve Jobs as a “revolutionary product” that “changes everything,” went on sale for the first time. A million flew off the shelves in just ten weeks and a decade later—with more than a billion sold worldwide—the iPhone has transformed the way we live, work and do business.
But even as the fanboys and girls were camping out to be at the front of the line, harsh critics queued. Columbia law professor Tim Wu denounced the iPhone as “anticompetitive.” Nested exclusively with AT&T and lurking in a “walled garden,” the iPhone rollout violated “network neutrality,” a term coined by Mr. Wu to describe his preferred platform for fixed and wireless communications.
The iPhone roared into the marketplace 10 years ago today, and overwhelmed the wireless world. The smartphone’s iconic social significance has been duly noted. What has escaped attention is that the device burst into a sector long insulated from the slightest threat of disruptive innovation. The iPhone’s victorious attack followed — and required — a long arc of liberalization in airwaves, itself a stunning regulatory and marketplace triumph.
Here’s why the iPhone was able to succeed.
In February 2009 the Federal Communications Commission began to draft a National Broadband Plan (NBP). Published in March 2010, the study asked how policymakers might improve broadband in the U.S.
The answer: use innovative market mechanisms to nudge more spectrum into the wireless sector. Cellular networks were exploding in popularity, hosting apps like Facebook and YouTube, and their capacities were being severely strained by the emerging mobile data tsunami. Yet, vast bandwidth was locked up under rigid allocations laid out for the technologies of yesteryear. More permissive rules would allow those frequencies to accommodate emerging networks and fuel robust competition in the mobile market.
By Thomas Hazlett
May 23, 2017
United’s passenger “re-accommodation” debacle was so easy to avoid. An auction would discover which passengers would be eager to step aside. United did dangle $800 in flight credits for seats, but that price was wrong. Bidding was curiously halted. And then United decided to acquire its desired seats the old-fashioned way, caveman style.
How did that work out? Rather than paying what four passengers considered appropriate compensation – say, $1,200 in UAL vouchers and a handful of Chik-fil-A coupons – United is now paying in reduced demand for its services, captured cleanly in a quick $500 million drop in company share prices. Counting that financial hit, the airline overpaid for the four seats it sought to re-acquire by something like $499,998,500.
The outrage of the incident is compounded by the elegant simplicity of the alternative. It is a wretched tooth cavity so painlessly flossed.
But it happens a lot.
Take radio spectrum, for example. The policy for how to distribute rights to this precious resource – central to the lives of Americans, as well as our wireless economy – was designed by Herbert Hoover in 1927. The Radio Act gave the Federal Radio Commission (renamed the Federal Communications Commission in 1934) full reign to determine the use of radio frequencies. Nothing new could be transmitted into the “ether” without this administrative stamp of approval. Getting that stamp was not a trivial task, as incumbent licensees were virtually certain to object. Strenuously.
In 1991, economist Ronald Coase won a Nobel Prize for pointing out that prices, as revealed in auctions, might yield far more intelligence about how resources like spectrum would best be used. The logic has been applied. Competitive bids have been registered for wireless rights and Coase’s conjecture has played out: Vast mobile networks have been built and some amazing new stuff created. Kids growing up today have access to the whole world, right in their pockets.
But these are auctions are special soirees, organized one by one, each taking years to design and execute. They leave the great majority of spectrum bands locked away. Huge space for broadcast TV, set aside between 1939 and 1953, remains walled off for more advanced applications, despite video broadcasting having been superseded by cable, satellite and broadband networks. An FCC license sale just concluded – after an eight-year planning cycle – managed to reclaim a nice slice of that, allowing wireless operators like T-Mobile to pay some $20 billion (in total) to shift the airwaves out of “I Love Lucy” and into 4G and 5G networks. But this involved just one-fourth of the TV band; three times as much spectrum remains languishing in the world of Lucy and Ricky, Fred and Ethel.
Then there’s the battle over the 5.9 GHz band, a generous space dedicated years ago to vehicle telematics such as crash avoidance and driverless cars. Proponents of wi-fi, including Comcast and Google, argue vociferously that this spectrum has been wasted while the auto companies have dithered. They would like to see the frequencies re-accommodated, as United might put it, and patched onto the adjacent 5.8 GHz wi-fi band. Car makers like GM and BMW, however, scream like evicted passengers. They have been developing technology and making progress — so they say.
Companies on either side of the debate craft their arguments according to their interests. That does not make them wrong, but what “alternative facts” can regulators believe? It is in this fuzzy space that political agents feast.
How much better the results might be were the rival factions to put some earnest money on the table. By bidding for the right to use the 5.9 GHz band, or its increments, the warring parties reveal their demands, no kicking and screaming required.
The policy tools are off-the-shelf regulatory gizmos. Take liberal airwave rights sold in the early 2000s, snapped up by multiple firms launching Mobile Television. This was considered (you may not recall) the Killer App of 2006. But when three rival systems were deployed – Qualcomm’s Media Flo, investing about $1 billion, was the most promising – consumers decided not to flock. With flexible use rights, however, the spectrum was not held hostage. Licenses could be flipped to provide other applications. They were. Qualcomm sold its space to AT&T in 2010 for about $2 billion, bolstering the mobile network’s 4G upgrade. Today, tens of millions of subscribers use that “Media Flo” spectrum to watch “mobile TV” — but via a more efficient network architecture.
When the rules do not support marketplace bargaining, stories about technological advance and consumer welfare tend to turn out differently.
Also in the early 2000s, the FCC (reasonably) okayed the use of satellite frequencies for terrestrial use, as with cellular phone technology. Satellite phones never caught on. The spectrum set aside was largely idle. The rule change could make the satellite band great again: a new nationwide LTE (4th Generation) mobile wireless network was being constructed with $14 billion in private funding.
Alas, the DoD and a battalion of companies (including airlines) alleged that their GPS devices, which used neighboring frequencies, would be adversely impacted. The argument was not that LTE phones would spill emissions into the GPS band, but that the GPS radios were obtaining signal information from the formerly quiet satellite band. The analogy is to a neighbor enjoying a vacant lot next door, and then objecting when a home is built there.
The kicking and screaming by powerful vested interests won the day. The FCC abruptly reversed course and revoked its permits. The new network went bankrupt, losing $4 billion already sunk. Silence yet reigns in airwaves that might have been brimming with productive activity.
And those GPS devices? They were protected, but to little effect. The vast majority of GPS functionality is embedded in smartphones, which would have been imperceptibly impacted; other gadgets could have adopted inexpensive filters in coming years as the new neighbors moved in. Mission critical locational monitors could have been upgraded at a tiny fraction of the billions lost. But because the new network had no way to pay for cooperation, the regulators’ flinch determined the outcome. U.S. mobile customers lost their chance for a fifth competing network.
Sadly no video went viral. The eviction debacle went unheralded.
The magic of a nice auction is that it reveals competing values. Efficiency forms of cooperation ease into focus. Deals can be made that make all concerned better off. Technological innovation and competitive rivalry are fostered. And no bloody noses need stain the Twitterverse.
Thomas Hazlett is the H.H. Macaulay Endowed Professor of Economics at Clemson University. His book, The Political Spectrum: The Tumultuous Liberation of of Wireless Technology, from Herbert Hoover to the Smartphone, is being published by Yale University Press on May 23.
May 10, 2017
The Age of Wireless has triggered excitement, disruption, and challenge. Debates rage on about the value of social media, how to deal with the threat of cyber hacking, and the regulation of emerging networks. But beneath it all lies a hardened policy structure that doles out radio spectrum rights. Continue reading
Observing trends in which Wi-Fi and Bluetooth have become widely popular, some argue that unlicensed allocations hosting such wireless technologies are increasingly valuable and that administrative spectrum allocations should shift accordingly. We challenge that policy conclusion. A core issue is that the social value of a given spectrum allocation is widely assumed to equal the gains of the applications it is likely to host. This thinking is faulty, as vividly seen in what we deem the Broadcast TV Spectrum Valuation Fallacy – the idea that because wireless video, or broadcast network programs are popular, TV channels are efficiently defined. This approach has been appropriately rejected, in key instances, by spectrum regulators, but is similarly applied in other instances regarding unlicensed allocations. While traditional allocations have garnered widespread criticism for imposing rigid barriers tending to block innovation, and flexible-use spectrum access rights have gained favor, the regulatory methods used to allocate (or reallocate) bandwidth remain embedded in a “command and control” process. Reconfiguring spectrum usage to enable emerging wireless markets often requires lengthy, costly rule makings. The expense of this administrative overhead is generally omitted from spectrum allocation policy analysis. Yet, it constitutes an essential component of the consumer welfare analysis. We propose a more fulsome policy approach, one that includes not only the appropriate measures of marginal value and opportunity cost for rival allocations, but incorporates transaction costs. Instead of regulators attempting to guess how much bandwidth should be allocated to various types of licensed and unlicensed services – and imposing different rules within and across these allocations – a more generic approach is called for. By better enabling spontaneous adjustments to changing consumer demands and technological innovation, spectrum allocations can be more efficiently brought into their most valuable employments.
Thomas W. Hazlett & Michael Honig, Valuing Spectrum Allocations, 23 Mich. Telecomm. & Tech. L. Rev. 45 (2016).
Available at: http://repository.law.umich.edu/mttlr/vol23/iss1/2
Herbert Hoover’s Radio Malware Turns 90
The Radio Act of 1927 has enjoyed a nice, long life. It’s past time for a retirement party.
Thomas Winslow Hazlett | February 24, 2017
On February 23, 1927, Babe Ruth had still to hit 60 home runs in a season. Yet President Calvin Coolidge would that day sign a bill that would establish how radio spectrum—the “economic oxygen” of the emerging information age—would still be governed 90 years later. Markets would be pre-empted, no ownership of the “ether” would be permitted. Public administrators would dole out privileges to deploy wireless networks according to the “public interest.”
Today, the Radio Act is gasping, choked by its contradictions. While the system continues to drip out dabs of bandwidth when far fatter dollops would spur great leaps forward, the members of the Federal Communications Commission are celebrating the close of a year-long auction of radio frequency rights, fetching $20 billion in winning bids. This is the sort of market-based process the Radio Act was designed to avoid.
Over time, regulatory failure has thankfully given way to more open markets. The evolution of vibrant mobile data networks—nowhere prescribed or mandated in law—is an emphatic endorsement of the power of policy liberalization. Yet the ghost of Herbert Hoover, the driving force behind the Radio Act, still haunts progress, frequently placing needless obstacles in the path of competitive forces.
The fake news of 1927 was later summarized (and promulgated) by the Supreme Court. “Before 1927, the allocation of frequencies was left entirely to the private sector, and the result was chaos…. It quickly became apparent that broadcast frequencies constituted a scarce resource whose use could be regulated and rationalized only by the Government.” In fact, a property system, with first-come rights enforced by the Department of Commerce under a 1912 statute, maintained order and allowed AM radio broadcasting to flourish from its introduction—by KDKA, a Westinghouse station—in 1920. Hoover, as Secretary of Commerce, 1921-1928, defined the rules using common law precedents.
What troubled Hoover was that he had precious little discretion over who broadcast or what they said.
For instance, when Los Angeles evangelist Rev. Aimee Semple McPherson (whose Foursquare Gospel Church owned a station reaching hundreds of thousands) strayed from her frequency slot, sanctions were swift. “Order your minions of Satan to… open my station at once,” the minister telegrammed Hoover. “You cannot expect the almighty to abide by your wave length nonsense.” Alas, He did. And so did Aimee, who returned to her spot on the dial.
Anarchy did not reign. What troubled Hoover was that he had precious little discretion over who broadcast or what they said. Radio was scorching hot as a consumer product, with millions being sold and 1924 being declared “Radio Christmas” by Madison Avenue. It was universally seen as an explosive new social force, and its deep political importance—soon to play out in episodes as disparate as Franklin Roosevelt’s “fireside chats” and Adolf Hitler’s Third Reich mobilization—was instantly noted.
A coalition formed to seize the moment. Major commercial radio stations that had built-up impressive audiences and, by 1926, were forming networks such as NBC, saw a new “public interest” test for broadcasting to be money in the bank. Such barriers to entry could block upstarts and stifle extensions of the radio broadcasting band. At the same time, Hoover and other powerful policy makers, including the estimable Sen. Clarence C. Dill (D-Wash.), author of the 1927 Radio Act, sought to use licensing to gain leverage over broadcast content. In the asserted quest to control interference, regulators could impose an “equal time rule” and restrict various controversial views (by denying licenses when they were deemed to harm the “public interest”). Hoover spent years trying before finally succeeding in pushing through a Federal Radio Commission in the 1927 Radio Act.
In almost no time, 200 radio stations were forced off the air, nearly one-third of the total. They had flunked the “public interest” test despite being mostly non-profit, with owners including labor unions, universities, and municipalities. The new commission found that the commercial outlets were attracting broad, diverse audiences with uncontroversial entertainment, while owners with a point of view—like the activists behind WCFL in Chicago (with union ties) or WEVD in New York (dedicated to Socialist Party candidate Eugene V. Debs)—were creating “propaganda stations.” The latter were crushed.
As were new competitive technologies. When Edwin Howard Armstrong, a Columbia University professor and later a major in the U.S. Army, sought spectrum space for his revolutionary FM radio in 1934-35, the commission (identical in form, but operating with a name changed to the Federal Communications Commission) dragged its feet. The FCC professed concern that FM would not work as well as existing AM. While an initial and temporary FM band was assigned, it was abandoned in 1945 due to the FCC’s risible theory of sunspot interference. While Armstrong howled in protest, his invention was uprooted and destroyed. He committed suicide in 1954. Decades later, FM—when freed from its shackles—easily overtook AM in sound quality, content, and audience.
The chances of an auction for wireless rights, wrote two FCC members, were about equal to the odds on “the Easter Bunny in the Preakness.”
Economist Ronald Coase got interested in the spectrum question about the time that Major Armstrong was bidding it adieu. He found the government’s justification for central control “incredibly feeble” and theorized that a competitive market system would produce far greater efficiencies. He suggested regulators define private ownership in frequencies, and auction them.
When called to explain his ideas to the FCC, the first question was: “Tell us, Professor Coase, is this all a big joke?” There in the abyss of absurdity the proposal rested. In 1977, commission member Glen Robinson attempted to reprise it, but the idea was again mocked. The chances of an auction for wireless rights, wrote two other FCC members, were about equal to the odds on “the Easter Bunny in the Preakness.”
Alas, in 1994, the Bunny paid off big-time. Auctions, advocated by Presidents Carter, Reagan, Bush I, and Clinton, were finally authorized by Congress and launched by the FCC. As of the current bidding, the total government take is about $115 billion. But of greater importance, by orders of magnitude, is the expansion of spectrum use rights. What (some) wireless providers are allowed to do has been flat-out deregulated. “Flexible-use” rules permit rights holders to supply whatever technologies, applications, or business models their customers desire and shareholders will support. Competition selects out the winners. This has revolutionized, in particular, mobile wireless markets, where the reforms have gone furthest.
This comes as a blow to Herbert Hoover’s spectrum legacy, a regime of Mother May I? While Armstrong had to gain the favor of regulators for his techno-blast, and died trying, Steve Jobs had an easier path with the iconic iPhone, launched in June 2007. Apple did not have to beg the government for radio access. Instead, mobile carriers, by then equipped with flexible-use licenses, fell over themselves pitching offers to accommodate Apple. The tech innovator chose to effectively buy spectrum rights for its devices via partnerships with, first, AT&T USA, and then carriers around the globe.
Each network has jurisdiction over its airspace, and could approve or reject such offers. In this, it strives to protect radio users (i.e., its cellular subscribers). But, distinct from government actors, these private organizations suffer financially from over-protection.
Market rivalry has welcomed the iPhone, and simultaneously prompted massive upgrades in network infrastructure, advanced devices, and complementary applications. The “dominant” smartphones in 2007—made by Nokia and Blackberry—endured the agony of defeat in the creative destruction that followed. The Apple App Store and Google Play, based on the wildly successful mobile operating system, Android, now serve billions.
The social payoffs are ginormous. More spectrum would make them more ginormous still. The message has leaked to policy makers. In its 2010 National Broadband Plan, the FCC proposed to shovel additional “flexible-use” licenses into the marketplace. Regulators documented that, historically, such efforts take somewhere between six and 13 years, and that these lengthy delays stymie technological progress. With everyone, Republican or Democrat, talking up “infrastructure,” allowing wireless networks to expand with infusions of perfectly excellent—and largely idle—radio spectrum, is manna from Policy Heaven. Where, by the way, Ronald Coase is smiling.
Slouching to Our Wireless Future
The FCC’s 2010 plan targeted the television band for liberalization. It was not a bad choice. Originally set aside in 1939-1953, today’s television dial consumes 49 broadcasting channels. That’s 294 MHz, as much as the total bandwidth held by America’s two largest networks, Verizon and AT&T, combined. But the value of broadcasting as a video delivery system is three generations out of date—displaced first by cable TV in the 1970s and 1980s, then by satellite TV in the 1990s and 2000s, and now by broadband Internet (“over the top”) in the 2010s. Broadcast TV frequencies could be shifted to alternative uses, unleashing amazing new services, at virtually no cost to society.
By auctioning broad “overlay” rights, or by loosening existing restrictions on licensees, markets could expeditiously reconfigure spectrum models.
But the FCC admitted it did not have the political cojones to simply reauthorize licenses, moving “TV spectrum” to new flexible-use licenses. That laid bare the fiction that regulators were actually setting the agenda according to independent, “public interest” criteria. To resolve the impasse, the Commission adopted a two-sided auction plan initially proposed by FCC policy analysts Evan Kwerel and John Williams in 2001. First, TV station owners would state the prices at which they would sell their licenses back to the FCC. Then the Commission would take bids for new flexible-use licenses (allocated TV spectrum). The bids for the new rights would have to at least cover the costs of the TV license buy-outs.
There was a lot more to the process, including an act of Congress (in 2012) and millions in consulting fees for top economic theorists to design rules, procedures, and software. The chairman of the Commission opined that the process was a “Rubik’s cube,” a curious boast given that complexity is so often the enemy of good public policy. Alas, the FCC fell short of its own goals, to put 120 MHz into liberal licenses by 2015. Now the Commission hopes for 70 MHz by mid-2020.
Until the auction officially ends March 30, key details are unknown to the public. (Disclosure: As an economist, I am a consultant to a participating party and, under FCC rules, may not openly discuss bidding specifics until the “quiet period” is lifted.) But the basic regulatory debate was joined back in 2009 when the FCC triggered the policy clock: the FCC has failed to beat the six-13 year policy lag it decried. And, crucially, only about one-fifth of the TV band will be peeled away for flexible-use licenses; the vast majority remains locked up, set aside for the Killer App of 1952.
Better tools for liberalization have been used, and could dramatically expand this incremental gain. By auctioning broad “overlay” rights, or by loosening existing restrictions on licensees, markets could expeditiously reconfigure spectrum models. State of the art technologies could be deployed and radio waves utilized far more productively. Business deals, with rewards for cooperation, would incentivize the efficiencies the government sees available—but which elude policy makers in their overly complicated, too-centralized, execution of spectrum reform.
Several TV station owners, including Sinclair, Tribune Media, Fox, and Gray, have revealed that they will be selling some of their licenses back to the FCC as per the current auction. They each declared that this would fail to cause “any material change” in their operations. This reflects the general unreality of TV off-air broadcasts. While new networks, including emerging 5G broadband systems, could turn TV channels into gold, the band remains largely walled off in allocations mapped out by administrators laid to rest years before the first Super Bowl was played.
Despite the cries when visionaries detailed the reforms that could rescue airwaves from such oblivion, Ronald Coase was right. Ambitious, market-oriented policies have worked. More would work better. They should not consume the “6-13 year delays” that the FCC has condemned in reports but has been unable to improve upon in practice. If the Easter Bunny can win the Preakness, it is time to bury Herbert Hoover’s big 1927 idea, and let the real sweepstakes begin.