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.”

Liberalization

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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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

Hazlett and Wright Pen Wall Street Journal Op-Ed on FCC Over-Management of the Internet

Link

The-Wall-Street-Journal-LogoJoshua Wright, IEP Scholar on leave and current FTC Commissioner, joined Thomas Hazlett to write an Op-Ed in the Wall Street Journal titled “Micromanaging the Web Would Be a Macro Mistake.” The Op-Ed warns of the issues that arise when the FCC attempts to over manage internet regulations, such as net neutrality. In an attempt to prevent anti-competitive behavior by ISPs, net neutrality regulations have actually had an anti-consumer effect. A much more efficient means to control anti-competitive behavior already exists in the form of anti-trust law.

The full article follows:

Micromanaging the Web Would Be a Macro Mistake
The FCC doesn’t seem to realize that antitrust law is enough to ensure fairness.

Thomas W. Hazlett And
Joshua D. Wright
July 13, 2014

The cry for Internet regulation is familiar. “Net neutrality” rules are the most recent episode in a recurring story in which proponents seek to limit competition while claiming that nothing less than the future of the Internet is at stake.

More than a decade ago there was Open Access, a proposal for the Federal Communications Commission to let third parties use cable TV lines at regulated wholesale rates so they could offer competing broadband service. Proud corporate supporters included GTE, a large phone company competing with cable operators, and AOL, then the largest Internet service provider. Their argument mirrored that of net-neutrality proponents today: Without it, the major Internet service providers would create their own fast lanes and stifle competition. The Clinton administration’s FCC rejected the idea, and the fears proved groundless. The Internet continued to grow rapidly with innovations from Google to Facebook.

That history makes the current debate over network-neutrality rules seem surreal. Columbia Law professor Timothy Wu, for instance, declared during a June congressional hearing that the modern Internet was nurtured on principles of neutrality that the FCC is only trying to enshrine, protecting against “new rules that reportedly would put a price tag on climbing aboard the Internet.”

Not so. The modern, open Internet evolved in the marketplace, with customers and firms making unregulated deals. The government’s primary contribution has been to clear out the “public utility” regulations that would have stifled it. As FCC Commissioner Ajit Pai explained in February when the FCC announced its latest attempt to salvage net-neutrality rules: “The Internet was free and open before the FCC adopted net-neutrality rules. It remains free and open today. Net neutrality has always been a solution in search of a problem.”

Moreover, Internet access has always required parties to ante up, and those who have paid more have received superior terms. Consider backbone providers, which are data transport networks that form the core of the Internet. They connect with other large networks called “peers” free of charge. Smaller networks and Internet service providers, on the other hand, pay for the same service. Content suppliers such as Apple, MTV and Major League Baseball use private, high-capacity pipes to avoid jams and improve customer experience. They pay content delivery networks like Akamai to access these pipes; giant data pushers such as Google run their own. These fast lanes improve the web, wired and wireless. Fast lanes are features, not bugs.

The fear among net-neutrality supporters is that major Internet service providers such as Verizon or Comcast will engage in anticompetitive behavior known as vertical foreclosure. Comcast, for instance, might prevent customers from viewing Disney -owned programs like ESPN, so as to favor its own network, NBC Sports. This fear overlooks the fact that not only is ESPN’s content widely available via Comcast and competing services, but such behavior is already unlawful, if harmful to consumers, without net-neutrality rules, thanks to antitrust law.

Nevertheless, the FCC imposed neutrality regulations in 2007 and 2010. The D.C. Circuit vacated both sets of rules. FCC Chairman Tom Wheeler, who seems to believe the third time is the charm, is now advancing a proposal that would give the agency power to review individual agreements between Internet companies on a case-by-case basis. Such micromanagement is sure to be inimical to the Internet’s development.

Critics challenged the agency in 2010 to produce empirical evidence of vertical foreclosure by Internet service providers, and the FCC came up with what it claimed was a supportive econometric study. The study looked at cable video, not broadband markets. The FCC’s report, which relied entirely on anecdotes, was remarkable in one sense: It found but a handful of allegations. As FCC Chief Economist Gerald Faulhaber put it in a 2011 paper, “By any standard, four complaints about an entire industry in over a decade would seem to be cause for a commendation, not for restrictive regulations.”

There is evidence, however, that net-neutrality regulation harms Internet users. In 2011, the FCC filed a complaint against Metro PCS, a small company less than 1/10th the size of Verizon Wireless, for violating net neutrality. The provider offered “all you can eat” mobile service—voice, text and data—for just $40 a month. There was a twist: Though most video streaming was blocked to avoid network congestion, users could watch unlimited YouTube videos because Google (YouTube’s parent) had engineered a compression technique that prevented traffic jams.

MetroPCS had a neutrality “problem.” It favored Google’s content over other streaming sites. Yet Metro PCS had no financial stake in Google, customers got extra content and lost nothing, and no competitive harm occurred. The D.C. Circuit eventually struck down the FCC’s rules, mooting the complaint, but not before the agency revealed its suspicion of new technological fixes undertaken by upstart rivals offering consumers superior services.

The FCC claims that a neutrality mandate serves consumers, but overwhelming historical and economic evidence suggests otherwise. While antitrust law is not without its own history of abuse, it has developed a consumer-centric framework based on economic analysis and evidence. Antitrust law gives consumers a chance to reap the benefits from business arrangements like those between MetroPCS and Google while protecting them from those that truly harm competition.

If you think the Internet is broken today, wait until the FCC administers case-by-case approvals of traffic agreements to fix it.

Mr. Hazlett is a professor of economics at Clemson University and previously served as Chief Economist of the FCC. Mr. Wright, a lawyer and economist, is a member of the Federal Trade Commission.

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.

Hazlett and Wallsten write Op-Ed on USF in The Hill

Thomas Hazlett and Scott Wallsten, senior fellow at the Technology Policy Institute, wrote an op-ed published on TheHill.com. The piece, entitled “Taking From the poor and giving to the ConnectED,” criticizes the FCC’s high cost and low reward spending on the Universal Service Fund. $30 billion dollars have been spent on the E-Rate program (now ConnectED) since 1998, with no clear indication that the program is effective. The entire op-ed can be read here.

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.

Skorup Op-ed on Spectrum Crisis Appears in The Hill

IEP’s Brent Skorup recently had an op-ed piece published by the leading political newspaper The Hill. In the op-ed, entitled “The Spectrum Crisis is Upon Us,” Skorup identifies the excessive allocation of spectrum to federal government agencies, where such spectrum has been not used efficiently, as contributing to the current “spectrum crunch.” Skorup posits a few strategies for reallocating the misused spectrum to the private market. Skorup advocates for the current legislative efforts to “BRAC the spectrum,” a phrase referencing the Base Realignment and Closure Program that successfully closed underused hundreds of military bases. Additionally, Skorup suggests that creating a GSA-like agency to facilitate more efficient government use of spectrum could also serve as a viable method of freeing more spectrum for private use.

The op-ed can be found here. Additionally, Skorup has written a full-length paper on the same subject, available here.