Subject: [NEXTEL-1] Thomas W. Hazlett, former chief economist at the FCC

From: [email-masked]
Date: Sat, 10 Jan 2004 15:00:38 -0500

9 Fourth Quarter 2003
t r e n d s
A half century on, the blissfully naïve have
switched sides. Today it is obvious to regulators
that they cannot fathom the countless
shapes and sizes of wireless services, or the
potentially limitless configurations of wireless
markets. Private entrepreneurs must be unleashed
to discover the efficiencies beyond. As
the FCC’s Spectrum Policy Task Force Report
noted last year, “the government has an
almost impossible task trying to keep pace
with the ever-increasing demand for spectrum
and the continuing advances in wireless
technology and applications.”
From their lips to God’s ears. Despite frequent
press references to our “crowded radio
waves,” most of the valuable frequencies are
barely used. Rather, it is the lobby of the FCC
that is crowded – jam-packed with applicants.
It is no anomaly that federal rules keep 67
television channels in reserve for Springfield,
Mass., a city with just three TV stations on the
air. Indeed, to get a sense of the pervasive misuse
of a valuable natural resource, one need
only look at the variety of wireless services
that petitioners at the FCC would like to
deliver to the good people of Springfield by
using those idle channels.
Were competitors free to offer any noninterfering
wireless service, via any business
model at any frequency, the productivity
gains would be enormous. Given flexible
rights, spectrum licensees would become de
facto spectrum owners, and the search for
property improvements would be on.
by thom a s w. h a z l e t t
stephen schudlich (all)
the chief economist of the Federal Communications Commission, dismissed law
student Leo Herzel’s proposal in the University of Chicago Law Review to auction
broadcast TV licenses.  Chiding Herzel’s blissful naïveté, Smythe scoffed that
markets could not possibly handle the complex task of coordinating airwave use.
In 1951,Dallas Smythe,
TOM HAZLETT is a senior fellow at the Manhattan
Institute for Policy Research and a columnist for the Financial Times’ New
Economic Policy Forum.
Consumer benefits would run the gamut:
better coverage (and fewer dropped calls) on
cellular phones, faster (and less expensive)
broadband access to the Internet, wireless
competition to cable and satellite TV. Perhaps
most important are the creative applications
yet unknown.
The long march to a consensus among
economists was set in motion in 1959 by an
influential article in the Journal of Law and
Economics on the value of making markets in
spectrum by the University of Chicago’s Ronald
Coase, who would later win a Nobel Prize
in economics. It took policymakers decades to
catch on, but in recent years they have joined
the ranks of believers in droves. Two years
ago, 37 “concerned economists,” including the
aforementioned Nobel Laureate Coase, petitioned
the FCC to “eliminate all wireless
license requirements unrelated to interference
or anticompetitive concentration.”
Yet, when the Spectrum Policy Task Force
reported its findings, the consensus promoting
spectrum markets had mysteriously vaporized.
In fact, the task force called on regulators
to continue to assign spectrum use in
much the same way that has deprived Spring-
field of most of the benefits of the airwaves.
While flexibility was endorsed in theory,
plans to extend flexible rights to licensees
were largely set aside. New emphasis was
placed on imposing technical standards on
spectrum users – precisely the function best
left to free markets.
allocating spectrum
and assigning licenses
FCC regulation of radio spectrum is a twostage
process. In the first, “block allocation,”
the Commission decides what specific frequencies
shall be used for. Zoning each band,
the Commission defines services, prescribes
technologies, dictates business models and
mandates emission standards. It also determines
market structure. If it sets the band
aside for unlicensed use, it also controls interference
by setting power limits and regulating
the equipment permitted. For licensed bands,
regulators decide how many firms shall compete
and how much bandwidth each licensee
shall have.
The Commission then doles out licenses.
Since 1994, this has primarily been done via
auctions. Through 2002, high bids totaled $41
billion, though, thanks to defaults and legal
wrangling, only $14 billion ended up in the
U.S. Treasury. The licenses do not convey
ownership rights to spectrum. For example,
if a company is licensed to deliver satellite
radio services, it may not decide on its own to
use the spectrum for terrestrial services. The
licensee enjoys exclusive use of the allocated
bandwidth – but only to operate as regulators
specify.
This sharply limits competition. For example,
satellite radio operators cannot confront
local radio stations with a truly competitive
product because they are not allowed to deliver
local news or other programs by means of
supplementary terrestrial broadcasts. And, no
surprise, such rigidities are strongly supported
by incumbent licensees.
Potential users must petition the agency to
gain a spectrum allocation, proving that their
new wireless systems serve “the public interest.”
The claims are, of course, challenged –
and rechallenged – by incumbents bearing
lawyers. In the rare case in which an entrepreneur
wins FCC support to provide a novel
wireless service, he or she wins thanks – but
not a license. The innovator must, instead,
buy one at auction. In the final humiliation of
the upstart, the FCC pockets much of the
expected economic profit from new use of
spectrum, while rival firms are given an
10 The Milken Institute Review
t r e n d s
opportunity to outbid the innovator and
appropriate the business model.
Multiply this maze of roadblocks and disincentives
by an order of worldly magnitude.
Scores of new wireless technologies are stifled
as their inventors struggle to scale regulatory
walls; scores more remain undiscovered as
economic incentives to research and development
are eviscerated. Inefficiencies
plague technical progress – for example,
Americans view TV pixels
arrayed as per the state-ofthe-
art standard of 1941.
Billions of dollars in consumer
benefits are lost as
U.S. wireless operators utilize
just 150 megahertz
(MHz) of bandwidth,
scarcely half the average
allocation in countries of
the European Union.
the task force
punts
In the Spectrum Policy Task
Force Report, the misallocation
problem is outlined in
standard terms.Curiously, however,
new technology is cited as the
villain. Until the wonders of the digital
era, we are told, demand for spectrum access
was low and the old regime worked reasonably
well. Now, new rules are needed for new
times. Policymakers should understand that
“one size does not fit all,” and pick their regulatory
models with care. Their choices, the
report states, are three:
1. Exclusive use, in which a licensee has
exclusive, flexible and transferable rights to
use specified spectrum. Think cellular telephone
services.
2. The commons, which allows unlimited
numbers to share frequencies set aside for
unlicensed use, with operations restricted
through power limits and technical standards,
but with no right to protection from
interference. Think cordless phones.
3. Command-and-control, traditional spectrum
management in the U.S. in which regulators
mandate spectrum for specific uses via
regulated technologies. Think over-the-airTV.
The report builds its assessment on this
taxonomy, arguing that models 1 and 2
should be extended, and model 3 attenuated.
It offers only vague criteria for selecting the
appropriate model, advising that the Commission
must not forget that “one size does
not fit all.” The hoary “public interest” standard
almost looks definitive by comparison.
The report offers a sort of false trichotomy,
with very costly implications. By quarantining
property rights to the “exclusive use”
slot, it misses the essential fact that private
economic incentives drive spectrum use
11 Fourth Quarter 2003
everywhere. Unlicensed bands prosper not by
abolishing exclusivity, but by giving users the
ability to assert very localized rights. The Starbucks
Wi-Fi hotspot network uses unlicensed
frequencies, but Starbucks and its partner, TMobile,
only invest to create their network in
the expectation that they will be able to prevent
free-riding.
This expectation rests in part on TMobile’s
exclusion of non-subscribers, and in
part on the Commission’s tight limits on
transmission power, which keeps neighboring
frequencies apart. But by ignoring the potential
for exclusivity embedded in the electromagnetic
commons, the Commission stops
short of seeing how entrepreneurial initiative
could be extended.Why not allow Starbucks –
or university and corporate networks – to
exclude interlopers or to enjoin malicious
interference?
The Commission’s taxonomy also misses
the huge importance of the “commons” embedded
within the “exclusive.” The most successful
spectrum-sharing now takes place
under the auspices of cellular and personal
communications services (PCS) licensees –
the closest we have to spectrum owners –
which organize collective use of airwaves for
more than 150 million mobile phone subscribers,
thousands of manufacturers (from
chipmakers to handset suppliers) and scores
of virtual networks (from personal digital
assistants to text-based wireless Web applications).
The average consumer cost is 10 cents
a minute, including long distance and roaming.
If these networks were allowed to use
additional spectrum, they would undoubtedly
expand into high-speed data, providing
ubiquitous coverage for Internet access
(now lacking with Wi-Fi hotspots).
Indeed, a company called Monet
Networks now provides 300 kbps to
700 kbps wireless access to subscribers
at prices comparable to
cable modems and DSL. Monet is
licensed to operate on PCS frequencies
in the upper Midwest, where
wireless voice traffic is less dense.
Market solutions, it seems, rush in
where licenses are flexible (as in
PCS), and spectrum access is cheap.
Injecting more flexible, exclusive-use
spectrum rights into the market would pump
up all kinds of wireless applications, including
those of the “commons.”
But on the question of freeing spectrum
for flexible, exclusive use, the report is a flop.
The FCC’s November 1999 spectrum policy
statement specifically targeted 183 MHz to be
transferred to five service categories, with
licensees awarded liberal use rights. The task
force provides no progress report on that
goal; if it had bothered, it might have noted
two salient points. First, none of the 183 MHz
services had been put into productive use in
the intervening three years. Second, this policy
failure is incessant – a reality that begs for
an explanation.Why does the FCC have such
a difficult time making good on its plans to
12 The Milken Institute Review
t r e n d s
expand market access to radio spectrum?
The problem lies in “command-and-control”
spectrum allocation, which the report
ignores altogether. Indeed, it embraces this
approach by arguing for administrative discretion
in avoiding “one size fits all,” and
using vague criteria to pick and choose
between more exclusive spectrum here, more
unlicensed spectrum there. A consumerfriendly
solution would allow markets to
determine how airwaves are used.
the fcc zones more spectrum
That command-and-control clings to life in
the Commission’s spectrum regime is illustrated
vividly in the first agency rulemaking
in response to the report. In December 2002,
a Notice of Inquiry was issued to consider
rules allowing unlicensed devices to share
television channels. The notice pats the
agency on the back, noting that:
The Commission’s rules for unlicensed
transmitters have been a tremendous success.
Awide varietyof devices have beendeveloped
and introduced under these rules for consumer
and business use, including cordless
telephones, home security systems, electronic
toys, antipilfering and inventory control
systems and computer local area networks.…
The success of our unlicensed device rules …
shows that there could be significant benefits
to the economy, businesses and the general
public in making additional spectrum available
for unlicensed transmitters.
Missing in the notice is any sense of what
unlicensed use may have cost. No mention is
made of the alternatives sacrificed so that the
2.4 GHz band could be reserved for cordless
phones, wireless local networks and other
applications. But let’s assume that the existing
band is every bit the smashing success the
Commission means to assert. This does not
imply that allocating the next band to unlicensed
use will produce similar results.
Indeed, an argument for unlicensed spectrum
cited by the report is to encourage users
to invest in equipment that overcomes crowding.
Perhaps the 2.4 GHz unlicensed band
should continue to develop on this margin,
using more sophisticated technology to permit
more intensive exploitation of the current
allocation.
It all depends. How much do the upgrades
cost? What other technologies are waiting to
use the TV band, and how important are
they? Which can be efficiently shared with
low-power applications, and which need
bandwidth all to themselves?
The FCC does not know and does not try
to learn. That, after all, would be to take on
what the task force called the “almost impossible
task of trying to keep pace with the everincreasing
demand for spectrum and the continuing
advances in wireless technology and
applications.”
Instead, the report simply assumes away
the issue. In advancing an allocation limiting
new TV band use to unlicensed devices selected
by regulators, government planners defoliate
the “almost impossible” thicket they profess
to fear. A vast array of wireless technologies
will be precluded by the FCC’s edict,
which mandates those systems most appealing
to commissioners.
But first, we wait. A long delay was officially
kicked off in December 2002. Champions
of unlicensed devices will now seek rules to
share channels with TV broadcasters. Insiders
familiar with the FCC’s interest group pecking
order may liken this to a nature documentary
featuring a pack of hyenas cornering
a gimpy antelope. Except these predators will
chew their meals very slowly.
a cheap spectrum policy
There is a market solution. In 1996, the then-
Chair of the Senate Commerce Committee,
13 Fourth Quarter 2003
South Dakota Republican Larry Pressler, proposed
issuing “overlays” to reallocate TV
spectrum. This approach would grandfather
existing TV stations, while allowing new
licensees to use the “white space” around
incumbents’ signals. Entrants could then
attempt to negotiate voluntary agreements in
which, for a price, the old users move and
release their spectrum for new services. The
idea builds on the overlays used in PCS,
where new licensees either avoided incumbents’
transmissions or paid them to relocate.
Such overlays would effectively establish
ownership, triggering market solutions.
Instead of government-imposed interference
standards determining if radio can share frequencies
used by a UHF TV station, the overlay
rights holder searches for a profitable
solution. In particular, these owners would
voluntarily select from a rich mix of interference
rules and spectrum-sharing arrangements
in a competitive quest for product
development. If new “software defined”
radios – or other technologies – can share
spectrum with TV broadcasters, market
incentives will drive implementation. The
degree of interference permitted would be
subject to negotiation between the parties.
ArrayComm – the provider of an innovative
technology offering high-speed wireless
Internet access in Australia – does not fit the
FCC’s preferred regulatory dress in the TV
band. The firm told the task force that it opposes
“the indiscriminate call for more unlicensed
spectrum” as the broadband solution.
With the power limits necessary to keep unlicensed
users in their own space, “one would
have to deploy hundreds of thousands of
access points” to rival the national coverage
they could deliver (using higher emission levels
in licensed spectrum) with about 20,000
sites. ArrayComm objects to the “uncritical
exaltation of unlicensed spectrum.” Yet, the
Spectrum Policy Task Force Report proposes
large new unlicensed allocations, while
planned licensed allocations are actually
reduced.
The task force report proposed just 100
MHz of bandwidth for new licensed services
over five years. This shrank the (entirely unfulfilled)
183 MHz proposal of three years
previous, and was tiny in comparison to an
FCC senior staff proposal issued the same
day. The latter asked the Commission to auction
flexible rights for the use of 438 MHz of
the most valuable portions of the spectrum in
a “big bang.” The policy would give spectrum
markets the scale and liquidity to invite substantial
risk capital.
commands and controls
With the tepid task force proposal for licensed
spectrum, however, innovative market structures
are destroyed even before they are imagined.
The result will not be mitigated by the
report’s misplaced attention on front-loading
interference standards. The report states that
the Commission must “[c]learly and exhaustively
define spectrum users’ rights and
responsibilities.” But trying to anticipate the
myriad dimensions of conflict merely delays
competition. The productive solution is to
authorize new users quickly while planning
14 The Milken Institute Review
t r e n d s
The call for regulation is a plea for help: Stop me
before I protect low quality receivers again.
for fair and efficient dispute resolution. New
rules are generally not needed; if the FCC
already has one thing going for it, it is an
abundance of administrative law. Historical
practice forms the basis of reasonable expectations.
Other countries have not found it
chaotic to define rights to radio spectrum in
sketchy fashion, allowing arbitrators and
courts to resolve issues as they arise.
In 1996, for example, Guatemala introduced
explicit spectrum property rights.
Spectrum users define their airspace with six
simple variables: frequency, location, hours of
operation, maximum transmission power,
maximum power emitted at the border of
adjacent frequencies, and duration of the
right. In such an environment, a thousand
market structures can bloom, along with
rules to accommodate them.
Even when advocating deregulation,
the report embraces command-andcontrol.
For instance, in its frustration
with rules that waste spectrum in the name
of protecting antiquated technologies, the
Commission recommends regulations
for receiving equipment – a major
extension of the Commission’s mandate.
But poor receivers do not cause interference;
they are a problem because the FCC continues
to block new uses that might make them
obsolete.
The call for regulation is a plea for help:
Stop me before I protect low quality receivers
again. The better approach, surely, is for
structural reforms that eliminate this interference
at its source – namely, at the FCC.
The “command-and-control” that the
report ostensibly schedules for phasing out is
continually resuscitated with technocratic
determination. Consider, for example, how a
receiver standard for transistor radios would
play out. With better radios, more stations
might be able to broadcast in a specific locality,
giving listeners more choices. Let us assume
that the new programs are worth the
extra cost of designing and manufacturing
better radios. Yet, some consumers, perhaps
in rural areas where the new stations are unlikely
to materialize, will not want to pay for
new equipment. Receiver standards set by
government bludgeon the resolution of these
differences, imposing a political one-size-fitsall
fix. This, according to the Spectrum Policy
Task Force Report, is just where we do not
want to be.
The FCC, it seems, is caught between an
acknowledgement of the compelling need to
let markets decide how spectrum is used and
an irresistible urge to force the market to
accept the Commission’s guesses about how
spectrum can be used most efficiently.
Consumers are paying the price for the contradiction
and – if this report is a forecast of
future Commission policies – will continue to
do so for years to come.
15 Fourth Quarter 2003
M
http://www.milkeninstitute.org/publications/review/2003_12/09_15mr20.pdf

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