In January, Greg Rosston and Jeff Steinberg released a staff working paper that clearly articulated how a market-based approach to spectrum management would maximize the public interest. That report informed my congressional testimony on spectrum management in February. The article below illustrates the principles from the staff paper and shows exactly why the market-based approach to spectrum management outlined in my testimony is superior to all other methods of spectrum management. It demonstrates how the marketplace approach unleashes innovation and competition to benefit consumers. The article also shows how the market-based approach avoids the pitfalls of administrative central planning for spectrum. It’s a brilliant article and I’m proud to work with its author.
Reed E. Hundt, Federal Communications Commission chairman
AT&T Corp. recently announced that it is developing PCS technology to be what Chairman Reed Hundt has termed the “Raiders of the Local Loop.” The hard-fought battle to get spectrum flexibility for personal communications services enabled this massive project to see the light of day. Because of flexibility, AT&T was able to develop its own technology and target marketing plans to provide services customers demand without revealing them to their competitors before the time was right.
Without flexibility, AT&T would have had to reveal its technology as it was being developed, and would have had to convince the FCC that not only was the technology appropriate and state of the art, but also that the service was something that consumers truly needed. Both of these steps would have had a chilling effect on the investment project. With flexibility, AT&T has been able to invest as any other business throughout the economy. While its technology and service may or may not succeed, that will be determined in the marketplace, not in the halls of the FCC. The beauty of flexibility is that there may be dozens of other PCS companies engaged in similar secret research projects that we do not know about, but may be the next whiz-bang technology. We all need the FCC’s mandate to ensure the spectrum is used for the benefit of all the nation’s citizens.
The best way to ensure this mandate is to rely primarily on marketplace forces to allocate spectrum to those uses that will meet consumers’ demands. These principles are outlined in a recent staff policy paper that a majority of the commissioners declined to adopt as general policy (the paper is available at www.fcc.gov). While marketplace forces are not perfect, they are the best alternative for the vast majority of goods and services provided through the economy. Comparisons to the command and control economies of the Soviet Republics are instructive to assess the productive and innovative potential of marketplace economies. There is no reason that we should sacrifice the marketplace innovativeness and competitiveness that is possible from spectrum. But that is exactly what the administrative process of spectrum management does.
The debate about spectrum management should not be based on whether marketplace forces will work-even under the current administrative system they exert significant pressure, but are hog-tied by bureaucracy and regulatory delay, which hampers their effectiveness. The debate should be a comparison of the current administrative, centrally controlled system to a marketplace approach. In order to frame the debate this way, we will first show that the objections to the use of marketplace forces are generally misplaced, or that marketplace forces are superior to the current approach in terms of consumer benefits through competition and innovation.
Why is it so difficult to adopt such a system if the benefits are so clear? There are three main reasons. First, the incumbent users that have existing property rights-especially those with significant flexibility or those that would be unable to exploit additional flexibility, but might be subject to additional competition-would stand to lose from the introduction of a more market-based approach.
Second, many parties have benefited from the existing administratively controlled system. This includes those that have gotten spectrum for free in the past and hope to continue to do so, and those that are able to control the allocation of spectrum.
Third, in a marketplace system, it is extremely difficult to extract rents without taking a commensurate risk, therefore, arguing in favor of a marketplace approach is not of benefit to industry.
Finally, consumers-who are the major beneficiaries of such an approach-are not effectively organized and have difficulty in advocating their views. This is because the benefits are likely to be very diffuse, and relatively small on a per-customer basis, but large overall. As a result, apparent lack of political support should not indicate that this policy is misguided, rather it is a reflection of the interest groups that have profited from an inefficient system.
Those who argue against the use of marketplace forces make four main arguments. First, they argue the market will not provide the services that maximize the public interest. It seems clear the alternative methods of spectrum management that rely on administrative processes are no better and arguably much worse than the market is at determining the optimal service.
Essentially, the administrative process becomes a marketplace allocation with a delay as licensees are unable to respond directly to changes in demand, but rather are forced to appeal to the commission for permission to change services or technology. The commission did not grant flexibility in advance of the MDS auction because it wanted to promote competition to cable. But now, predictably, auction winners are returning to the commission to ask for flexibility so they can provide two-way services that will make construction of a system commercially viable. The commission should grant such flexibility as it is clearly in the public interest to allow them to provide the services the public wants rather than to handicap the spectrum.
But this “problem” could easily have been solved in a much better way by issuing the licenses with flexibility before the auction and relying on the marketplace rather than pursuing an industrial policy trying to promote narrow competition to cable.
Another argument against complete reliance on marketplace forces is the presence of “public goods.” Public goods have two important characteristics. First, the consumption by one person does not affect the enjoyment of the good by any other consumer. Second, is that it is impossible to exclude people from consuming. Because of the inability to exclude consumers or force them to pay to enjoy the service, the market is likely to underprovide public goods.
But because there is positive consumer surplus from other spectrum using services, they also may be underprovided. In order to determine the proper amount of public goods requires comparing the consumer surplus from each service. The government is ill-equipped to do such a study and the FCC has never to our knowledge done such a study in the allocation of spectrum.
Some argue that free over-the-air television is an example of a public good, even though it would be possible to encrypt transmissions. Accepting the argument that television is a public good, it is still impossible for the FCC to conclude whether there is too much or too little spectrum allocated for broadcast television under the administrative system. In addition, it is unclear whether the marketplace approach would provide more or less free television.
There also are arguments that we need to reserve spectrum for public safety because it is a public good. While public safety is a public good, spectrum used to provide public safety is an input just like cars and radios and not a public good itself. If the commission decides to reserve spectrum, it should balance the valu
e of spectrum in that service against its value for other uses. In general, explic
it financial subsidies are better than set-asides because they are more narrowly targeted and their costs can be more easily evaluated. By contrast, it is difficult to determine the cost of reserving spectrum, and set-asides create disincentives for the adoption of possibly efficient tradeoffs between equipment and spectrum.
Options such as redirecting some portion of auction revenues for public safety might prove to be a more efficient subsidy mechanism than set-asides because then public safety agencies would realize the opportunity cost of their spectrum usage and make more efficient choices.
Some argue the marketplace will lead to chaos because of interference concerns. Just like the property system, clear rules and strict enforcement are required to control interference in a marketplace system. If it is protected from interference, a microwave system does not care if it is “next to” a paging system, cellular provider or broadcast television station. Under either the administrative process or the marketplace approach, clear rules about interference are required.
However, the administrative process requires companies to come to the commission to apply for changes to their system, even when it does not cause any change in interference to any other licensee. This is why the commission had such an enormous backlog of applications for 800 MHz private radio licenses and modifications. Under the marketplace approach, companies would be required to protect other licensees, but would be able to change the characteristics of their systems without waiting for commission approval. The marketplace approach would reduce delays while at the same time providing the same level of protection from interference.
In addition, the marketplace approach would give additional flexibility for licensees to determine if the initference.
In addition, the marketplace approach would give additional flexibility for licensees to determine if the initial interference levels were incorrect and they could negotiate amongst themselves to arrive at mutually-beneficial interference parameters. Currently, applicants have little incentive to minimize their demands for protection from interference since they receive little benefit in the administrative process other than increased use restrictions. Under a marketplace approach, users have the incentive to make efficient tradeoffs between equipment and interference. For example, a point-to-point microwave licensee might have the incentive to install a more expensive receiver if it could benefit from allowing another system to be installed nearby.
However, the current administrative process makes this much more difficult than it needs to be and restricts the efficient use of the spectrum without creating any additional interference controls.
Third, some argue that we should look for international “harmonization” so that equipment manufacturers can achieve economies of scale. A marketplace approach would facilitate the achievement of economies of scale if those were important. If economies of scale were significant, it might make the value of one service higher than any other and licensees would realize this and take advantage of the economies of scale by offering compatible services.
But, if economies of scale turned out not to be significant or not to lead to the highest value service, then the licensee would have the ability to provide the more highly demanded service.
The commission recently mandated technical efficiency standards in the 220 MHz band and this decision is likely to lead to significant inefficiencies and harm to consumers. In the 220 MHz band, the commission tried to provide an “incubator” for very narrowband technology and mandated the use of 5 kHz channels for voice services.
Essentially, we may have mandated that users receive poor quality service and expensive equipment. In a marketplace approach, users and manufacturers have the incentive and ability to determine the efficient tradeoffs between acquiring more spectrum or using more efficient equipment. We are mandating the use of more efficient equipment.
Unfortunately, some users already have come to the commission complaining that the existing 5 kHz equipment does not meet their needs.
Worse yet, the commission has not responded by changing the rules, which would only be a one-step administrative delay in getting service to the public. Rather, the commission intends to continue to mandate technology that does not necessarily meet consumers needs in order to protect manufacturers and sunset such rules sometime in the future.
This is a real loss for consumers from administrative decisions regarding technology. Now, 220 MHz licensees will not be unleashed as a fully capable competitive force in the wireless marketplace.
The marketplace approach, by contrast, clearly works. The commission finally gave cellular and SMR licensees sufficient technological flexibility so that they could choose their own system design.
They have responded by upgrading their systems with digital technology to increase system capacity, quality and features. And this occurred without the commission requiring performance standards or technologies. Rather, it was the marketplace that demanded such changes, and licensees have responded.
Fourth, some argue that certain services should not be subject to auctions even though they provide the most highly valued service. For example, many private radio users, both mobile and fixed, have argued that because they do not provide service to subscribers for a profit, they should not have to acquire spectrum at auction.
The distinction between “commercial” and “private” is anachronistic in a marketplace approach. Each use of spectrum precludes use by others, or in economic terms creates an “opportunity cost.” The opportunity cost of the spectrum is the value of the spectrum if used in its next highest value use. This is the cost to society of allocating spectrum to a specific use, and occurs whether that is private or commercial. Marketplace spectrum policy should give private radio users the ability to sell their assignments and make the efficient tradeoffs between wireline services, equipment, commercial service and spectrum.
Under the current administrative approach, the tradeoffs between these alternatives are skewed toward the use of free spectrum even though the use of spectrum imposes an opportunity cost.
But responding to these objections is only the beginning. The benefits of the marketplace approach go far beyond the objection in creating the efficient and competitive marketplace for wireless communications services and this approach will get rid of the significant infirmities of the administrative process.
The marketplace approach has several significant benefits. First, it provides incentives for innovation. Instead of the cumbersome, expensive, uncertain and incredibly lengthy regulatory process that requires public revelation of commercially sensitive information, innovators could guarantee access to spectrum through the marketplace.
In order to make this procompetitive process work, the commission should immediately rescind all construction requirements so that licensees can take the time necessary to invest in and develop technology rather than try to meet arbitrary deadlines that do nothing to promote public benefits. The commission has arbitrary construction requirements in a variety of services. For example, narrowband PCS licensees face looming construction deadlines, even though some manufacturers are still working to develop equipment to meet consumer demands.
Requiring service by an arbitrary administrative deadline may cause inefficient construction and the provision of inferior service to the public. With such small amounts of spectrum per licensee and a large amount of substitutable spectrum, no licensee could profitably engage in anticompetitive warehousing of spectrum in this b
and.
At the same time, the commission should be prepared to intervene directly in
the market where necessary to preserve or promote competitive conditions. Market forces do not ensure economic efficiency or maximize consumer welfare in markets that are not competitive because a dominant producer or group of producers has market power.
The commission should continue to consider the circumstances under which unlicensed uses of spectrum are appropriate. But with both unlicensed and “shared” spectrum, the commission should be wary of the bad incentives created and the opportunity cost of the spectrum allocated for such use. While there may be a case for allocating additional spectrum for unlicensed, shared use should be coordinated by private licensees that realize the opportunity cost of the spectrum rather than by allocating additional shared spectrum.
To implement the marketplace approach, the commission should take several steps. First, the commission should actively grant flexibility to all spectrum allocations. These grants should encompass minimally restrictive baseline rules governing interference and health effects.
Second, the commission should seek to maximize the amount of spectrum available to users and eliminate all buildout requirements. Third, the commission should monitor the market and undertake targeted intervention to ensure competitive conditions or advance important public interest goals. Finally, in determining whether to undertake any intervention, the commission should balance the benefits of intervention against the value of administrative certainty.
Gregory Rosston is deputy chief economist at the Federal Communications Commission. The opinions and conclusions expressed in this article are those of the author and do not necessarily reflect the views of the Federal Communications Commission or any of its commissioners, or other staff.
