FCC “Incentive Auction” marks progress and pitfalls towards freeing wireless spectrum







Thomas W. Hazlett

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.

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United Airlines’ ‘Re-Accommodation’ Could Have So Easily Been Avoided





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. 

From FM to the Smartphone: The Evolution of Radio Media

May 10, 2017

in Radio, Technology

Thomas Hazlett—

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

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.

| 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.

Chaos Theory

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.

Political Spectrum

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.

Unreality TV

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.

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Obama’s misguided plan to connect schools to the Internet

My new research shows that more Internet access funding doesn’t help students. And almost all U.S. schools are already online.

By Thomas Hazlett

Even during times of political gridlock, connecting schools to the Internet has always received bipartisan support. Politicians ranging from Bill Clinton to Newt Gingrich have endorsed the concept, and the federal government has funneled billions of dollars annually to boost Internet access for students under a twenty-year-old policy called “E-Rate.” Continue reading

Time for the Supremes to Decide ‘Net Neutrality’

rcm_logo_followTime for the Supremes to Decide ‘Net Neutrality’

By Thomas Hazlett & Joshua Wright

The FCC’s dramatic 2015 pivot on Internet regulation sought to envelope advanced broadband networks in the shroud of telephone company rules rolled out in the Mann Elkins Act of 1910. These historic common carriage “Title II” regulations – originally the province of the Interstate Commerce Commission, long ago antiquated and finally abolished in 1995 — were cited as exemplars by the Commission in last year’s Open Internet Order. Continue reading

Data-Driven Modernization of E-rate for Wi-Fi in Schools

By: Sarah Oh

Around the time of the modernization order of the E-rate program in 2014, I published an empirical study[1] on distribution effects of program rules between 1998 and 2012.  I found that the old rules, particularly the discount rate matrix, had distribution effects that perhaps needed reform.  Since the Universal Service Administrative Company (USAC) abides by administrative order to run the E-rate program, it was a natural question to ask whether the rules were causing particular outcomes.

My data analysis showed that per-student and per-school estimates of cumulative internal connection funds were higher in New York, California and Texas than the other 48 states, including Washington D.C.  I chose to study “internal connection funds” which supports payments for new Wi-Fi equipment.  I found that large school districts in major cities benefited more than the smaller districts in suburb, town, and rural schools.

For instance, my estimates showed that funds to New York, California and Texas recipients amounted to an estimated $826 per student enrolled in the National School Lunch Program.  In the other 48 states, students in the same lunch program received less than half, at an estimated $302 per student.  The rules created disparities at the per-school level as well.  In New York, California, and Texas, schools received an average of $251,399 in cumulative funds, while the other 48 states received an average of $75,340 each.  These three states enroll approximately 14 million children in over 27,000 schools each year, which is less than half of the 38 million children in over 91,000 schools in the other 48 states.

There is greater need in New York, California and Texas than the other 48 jurisdictions.  For those familiar with the E-rate rules, an average discount rate of 80 in those states shows a higher level of need compared to 76 in the rest of the country.  However, New York students with a discount rate of 77 reaped far more funds than students in the other 48 states with a slightly better discount rate of 76.  For every pupil enrolled in the school lunch program in New York, an estimated $1,285 has been spent, while an estimated $302 has been spent per student enrolled in the same national school lunch program in the other 48 jurisdictions.

Funding discrepancies do not disappear by simply increasing E-rate funds.  The rules created distribution effects even though the discount matrix carefully incorporated school lunch program demographics and urban and rural locations.  Perhaps administrative resources at the school district level contributed to these outcomes.  The New York City Department of Education applied for and received $1.7 billion in E-rate internal connection funds over fifteen years, Los Angeles Unified School District $738 million, San Diego Unified $114 million, Dallas, Houston, and Laredo Independent School Districts $145, $141, and $89 million each.  School districts with larger operations perhaps benefited from greater administrative know-how and organizational resources able to navigate a complicated process.  Perhaps smaller school districts in other states are limited by smaller economies of scale.  Might an intermediary be created to help these smaller schools?

The FCC’s data-driven modernization order of December 2014 will improve broadband connectivity in schools and libraries.  A recent annual target by the FCC to distribute $1 billion for Wi-Fi internal connections infrastructure will connect more schools and school districts around the country.  Continued scrutiny could increase the effectiveness of Universal Service Funds by making sure funds are sent to smaller school districts around the country.

Sarah Oh is a graduate student at George Mason University, where she studies economics.   

The opinions expressed in this piece are those of the author and may not necessarily represent the view of the Aspen Institute.


Hazlett on The Rationality of U.S. Regulation of the Broadcast Spectrum in the 1934 Communications Act

On the 80th anniversary of the Communications Act, the November 2014 issue of The Review of Industrial Organization looks back at the landmark legislation and ahead to the future of broadcast regulation. The journal features an article by Thomas W. Hazlett, “The Rationality of U.S. Regulation of the Broadcast Spectrum in the 1934 Communications Act.”

Thomas W. Hazlett,
H.H. Macaulay Endowed Professor of Economics
Clemson University

Review of Industrial Organization
Volume 45, Issue 3 (November 2014), 203-220
© Springer Science+Business Media New York 2014

Published on-line: August 27, 2014

Hazlett’s paper is available here:

Download PDF (367 KB)

Here is the abstract:


The Federal Radio Commission regulated radio broadcasting, 1927–1934. With the passage of the Communications Act of 1934, the 1927 Radio Act (enabling the Commission) was re-enacted in whole. This congressional endorsement yields key evidence as to what policy outcomes were intended, differentiating competing theories for the origins of spectrum allocation law: Coase (J Law Econ 2(1):1–40, 1959), emphasizing policy error; Hazlett (J Law Econ 33:133–175, 1990), focusing on “franchise rents” in a public choice framework; and the “public interest” hypothesis, reconstructed by Moss and Fein (J Policy Hist 15(4):389–416, 2003). Congress’ revealed preferences prove consistent with the franchise rents theory, while contradicting the other two.


Skorup Op-Ed on Net Neutrality Appears in Real Clear Markets

IEP Scholar Brent Skorup penned an op-ed on the net neutrality debate. In it, he examines the origins of net neutrality, specifically the first violator of the FCC’s net neutrality rules. The FCC forced a small wireless carrier to abandon their two tier pricing scheme that was offered to their customers as a means to offer a more basic service for those who couldn’t pay the high price required for a 4G LTE plan. Skorup examines how the FCC’s rigid net neutrality plan penalized a small wireless carrier for its efforts to meet the demands of all their customers.

The full op-ed can be read at Real Clear Markets.

Skorup and Thierer Op-ed on Cronyism Published by US News and World Report

IEP’s Brent Skorup, along with co-author Adam Thierer of the Mercatus Center, published an op-ed in US News and World Report, detailing the threats posed by increased cronyism in the IT sector. The op-ed, featured in the Economic Intelligence Blog, details specific harms caused by cronyism while also posing solutions designed to alleviate this issue.

The op-ed, which can be found here, is based on a working paper recently released by the duo on the same subject. This paper offers an in-depth analysis of cronyism.