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aside between 1939 and 1953, remains walled off for more advanced applications, despite video broadcasting having been superseded by cable, satellite and broadband networks.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.