How About an “Open” Auction?

by on July 30, 2007 · 8 comments

Tomorrow, the FCC is scheduled to meet and adopt rules regarding the upcoming auction of spectrum usage rights in 700 MHz band for wireless services. A number of interests have been crowding around, trying to get the FCC to slant the auction rules in their favor.

I’ve written a Cato TechKnowledge on the topic: “How About an Open Auction?

  • Doug Lay

    Sorry, I’ve gotta disagree here. I guess this is one of those (not too common) cases where I think the default libertarian position (or what appears to be the default libertarian position based on posts I see here) is just plain wrong. Spectrum of the quality available at this auction is not likely to be available again for a long time – likely decades. This gives incumbents a very strong incentive to keep the spectrum out of the hands of new entrants. And the FCC has a statutory mandate to increase competition in the telecom marketplace, which means that they SHOULD embrace rules that are stacked against the incumbents.

    On a nit-picky note, I don’t see anything whatsoever unseemly about public interest organizations siding with Google here. To me, this means these organizations recognize that the public interest can sometimes be best served by powerful private-sector players.

  • http://www.cato.org/people/harper.html Jim Harper

    Thanks for your interest and response, Doug. (We have a cavalcade of 700 MHz auction posts here today, don’t we!)

    You’re right that the spectrum market is awfully illiquid. This is a product of command and control regulation, under which – you’re right – it takes decades to move spectrum to higher and better uses.

    I’m with Tim Lee, believing that open networks are better than closed, but I’d be very reluctant to adopt open as a mandatory requirement of anyone using the spectrum. If open doesn’t work, as you’ve pointed out with regards to ownership, it could take decades to release the spectrum from the failed rules and find something better.

    Competition is a tricky thing to promote. Just disfavoring incumbents doesn’t necessarily promote competition, and I don’t think having the government choose a business model is a very good alternative.

    No, the better thing would be for Google to put its money where its mouth is – and it’s got the money. Buy the spectrum unfettered and create an open network on it. Nothing’s stopping them from doing that.

    Google’s returns will be lower if it pays full price, but the reason we have businesses is not to return money to shareholders but to deliver goods and services to the public. This is why I think it’s unseemly for consumer groups to work with a company that is seeking to extract higher returns on investment through government regulation. That kind of thing is part of what causes the rich to get richer while the poor – well, they don’t get poorer – they just rich more slowly.

    The point is getting the spectrum used well. Having the FCC and an Internet behemoth get together and choose a business model is not the process that will figure out the best use of the spectrum.

  • Doug Lay

    Sorry, I’ve gotta disagree here. I guess this is one of those (not too common) cases where I think the default libertarian position (or what appears to be the default libertarian position based on posts I see here) is just plain wrong. Spectrum of the quality available at this auction is not likely to be available again for a long time – likely decades. This gives incumbents a very strong incentive to keep the spectrum out of the hands of new entrants. And the FCC has a statutory mandate to increase competition in the telecom marketplace, which means that they SHOULD embrace rules that are stacked against the incumbents.

    On a nit-picky note, I don’t see anything whatsoever unseemly about public interest organizations siding with Google here. To me, this means these organizations recognize that the public interest can sometimes be best served by powerful private-sector players.

  • http://www.cato.org/people/harper.html Jim Harper

    Thanks for your interest and response, Doug. (We have a cavalcade of 700 MHz auction posts here today, don’t we!)

    You’re right that the spectrum market is awfully illiquid. This is a product of command and control regulation, under which – you’re right – it takes decades to move spectrum to higher and better uses.

    I’m with Tim Lee, believing that open networks are better than closed, but I’d be very reluctant to adopt open as a mandatory requirement of anyone using the spectrum. If open doesn’t work, as you’ve pointed out with regards to ownership, it could take decades to release the spectrum from the failed rules and find something better.

    Competition is a tricky thing to promote. Just disfavoring incumbents doesn’t necessarily promote competition, and I don’t think having the government choose a business model is a very good alternative.

    No, the better thing would be for Google to put its money where its mouth is – and it’s got the money. Buy the spectrum unfettered and create an open network on it. Nothing’s stopping them from doing that.

    Google’s returns will be lower if it pays full price, but the reason we have businesses is not to return money to shareholders but to deliver goods and services to the public. This is why I think it’s unseemly for consumer groups to work with a company that is seeking to extract higher returns on investment through government regulation. That kind of thing is part of what causes the rich to get richer while the poor – well, they don’t get poorer – they just rich more slowly.

    The point is getting the spectrum used well. Having the FCC and an Internet behemoth get together and choose a business model is not the process that will figure out the best use of the spectrum.

  • Doug Lay

    >> You’re right that the spectrum market is awfully illiquid. This is a product of command and control regulation, under which – you’re right – it takes decades to move spectrum to higher and better uses.

    I’ll buy that in general, but with spectrum SOME regulation is almost certainly necessary until we get some (perhaps impossible) technical breakthrough allowing anyone to transmit at will on any spectrum without interfering with oher transmissions. So the very nature of the “good” drives us out of a free-market Garden of Eden right at the outset.

    >> I’m with Tim Lee, believing that open networks are better than closed, but I’d be very reluctant to adopt open as a mandatory requirement of anyone using the spectrum. If open doesn’t work, as you’ve pointed out with regards to ownership, it could take decades to release the spectrum from the failed rules and find something better.

    Perhaps true, although if open REALLY doesn’t work then the new provider will either go bankrupt or desperately try to unload the spectrum, and I suspect it would take a few years at most for the regulators (FCC, Congress or possibly the courts) to adopt new rules. The problem with the incumbent scenario is the closed model could work well enough as far as preserving acceptable profit margins, but would be sub-optimal for the public as choice and competition are reduced.

    >> Competition is a tricky thing to promote. Just disfavoring incumbents doesn’t necessarily promote competition, and I don’t think having the government choose a business model is a very good alternative.

    Disfavoring incumbents is likely to promote competition only if there is an entrant (or better yet, multiple entrants) with business models likely to work. The open network model has been proven to work on the Internet. Also, the government can’t choose business models; they can only adopt regulations favoring certain models over others. There will be time before the auction, and if other players (including the incumbents) want to bid against Google within the regulatory framework promoting open networks, more power to them.

    >> No, the better thing would be for Google to put its money where its mouth is – and it’s got the money. Buy the spectrum unfettered and create an open network on it. Nothing’s stopping them from doing that.

    Fiduciary responsibility to shareholders? Also, much as I like Google, regulated openness would provide a guarantee during the fledgling years of the wireless Internet that the network provider would not up and change the rules.

    >> Google’s returns will be lower if it pays full price, but the reason we have businesses is not to return money to shareholders but to deliver goods and services to the public. This is why I think it’s unseemly for consumer groups to work with a company that is seeking to extract higher returns on investment through government regulation. That kind of thing is part of what causes the rich to get richer while the poor – well, they don’t get poorer – they just rich more slowly.

    But there’s nothing unseemly about non-profit groups working with companies to reduce taxes and remove regulations, because that’s an inherent good? I think the word “misguided” might be better than “unseemly.” We’re talking about policy disagreement here – why bring hints of corruption into the argument?

    >> The point is getting the spectrum used well. Having the FCC and an Internet behemoth get together and choose a business model is not the process that will figure out the best use of the spectrum.

    Other folks certainly will have input. But Google has come up with an innovative and probably workable plan that appears to serve the primary statutory goal of fostering more competition. I realize I’m arguing against libertarian first principles here by not favoring the argument that absolutely minimizes regulation, but in this case I sincerely think the first principles are hihly likely to lead to a subobimal outcome.

  • Doug Lay

    >> You’re right that the spectrum market is awfully illiquid. This is a product of command and control regulation, under which – you’re right – it takes decades to move spectrum to higher and better uses.

    I’ll buy that in general, but with spectrum SOME regulation is almost certainly necessary until we get some (perhaps impossible) technical breakthrough allowing anyone to transmit at will on any spectrum without interfering with oher transmissions. So the very nature of the “good” drives us out of a free-market Garden of Eden right at the outset.

    >> I’m with Tim Lee, believing that open networks are better than closed, but I’d be very reluctant to adopt open as a mandatory requirement of anyone using the spectrum. If open doesn’t work, as you’ve pointed out with regards to ownership, it could take decades to release the spectrum from the failed rules and find something better.

    Perhaps true, although if open REALLY doesn’t work then the new provider will either go bankrupt or desperately try to unload the spectrum, and I suspect it would take a few years at most for the regulators (FCC, Congress or possibly the courts) to adopt new rules. The problem with the incumbent scenario is the closed model could work well enough as far as preserving acceptable profit margins, but would be sub-optimal for the public as choice and competition are reduced.

    >> Competition is a tricky thing to promote. Just disfavoring incumbents doesn’t necessarily promote competition, and I don’t think having the government choose a business model is a very good alternative.

    Disfavoring incumbents is likely to promote competition only if there is an entrant (or better yet, multiple entrants) with business models likely to work. The open network model has been proven to work on the Internet. Also, the government can’t choose business models; they can only adopt regulations favoring certain models over others. There will be time before the auction, and if other players (including the incumbents) want to bid against Google within the regulatory framework promoting open networks, more power to them.

    >> No, the better thing would be for Google to put its money where its mouth is – and it’s got the money. Buy the spectrum unfettered and create an open network on it. Nothing’s stopping them from doing that.

    Fiduciary responsibility to shareholders? Also, much as I like Google, regulated openness would provide a guarantee during the fledgling years of the wireless Internet that the network provider would not up and change the rules.

    >> Google’s returns will be lower if it pays full price, but the reason we have businesses is not to return money to shareholders but to deliver goods and services to the public. This is why I think it’s unseemly for consumer groups to work with a company that is seeking to extract higher returns on investment through government regulation. That kind of thing is part of what causes the rich to get richer while the poor – well, they don’t get poorer – they just rich more slowly.

    But there’s nothing unseemly about non-profit groups working with companies to reduce taxes and remove regulations, because that’s an inherent good? I think the word “misguided” might be better than “unseemly.” We’re talking about policy disagreement here – why bring hints of corruption into the argument?

    >> The point is getting the spectrum used well. Having the FCC and an Internet behemoth get together and choose a business model is not the process that will figure out the best use of the spectrum.

    Other folks certainly will have input. But Google has come up with an innovative and probably workable plan that appears to serve the primary statutory goal of fostering more competition. I realize I’m arguing against libertarian first principles here by not favoring the argument that absolutely minimizes regulation, but in this case I sincerely think the first principles are hihly likely to lead to a subobimal outcome.

  • http://www.cato.org/people/harper.html Jim Harper

    >> with spectrum SOME regulation is almost certainly necessary until we get some (perhaps impossible) technical breakthrough allowing anyone to transmit at will on any spectrum without interfering with oher transmissions. So the very nature of the “good” drives us out of a free-market Garden of Eden right at the outset.

    There’s disagreement among experts about whether radio design can elminate interference or just come really close, but I think the problem of scarcity in radio spectrum can be solved. (Indeed, it may have been perpetuated to maintain federal control of the airwaves and communications).

    Command-and-control regulation like we have now is the least efficient way to allocate spectrum. “Propertyization” and the buying and selling of spectrum use rights, which are divisible along many different dimensions, would be preferable. The idea of a spectrum commons has become more appealing to me as I recognize that the lack of scarcity created by good radio technology might even make the buying and selling of spectrum rights too costly given its abundance.
    The regulation that might still be needed under a commons model would be to prevent people from “spamming” – blasting high-powered signals on all parts of the spectrum in the hopes of getting their communications heard by some of the receivers out there. But the need for that regulation at some point in the future doesn’t justify mandating a certain business model be used for a network operating in one part of the spectrum. Indeed, doing that is a step away from the ownership and regulation models that will be the most “open” – to experimentation, risk, competition, and progress.

    Given where we could be, favoring a big corporation with regulations that match its business model is just so old-school, and disappointing. (As I write this, Google has gotten half of what it wanted from the FCC, and who knows what happens next.)

    >> if open REALLY doesn’t work then the new provider will either go bankrupt or desperately try to unload the spectrum, and I suspect it would take a few years at most for the regulators (FCC, Congress or possibly the courts) to adopt new rules. The problem with the incumbent scenario is the closed model could work well enough as far as preserving acceptable profit margins, but would be sub-optimal for the public as choice and competition are reduced.

    I think experience shows that reallocating spectrum using FCC, Congress, and the courts takes a lot more than a few years. Competitors throw everything they’ve got into sludging the process. Nothing suggests that the experience of the past is going to change going forward.

    I’m not arguing in favor of incumbents getting the spectrum (“the incumbent scenario”) – I’m arguing in favor of Google paying full price for the spectrum. If open works, it’s going to get full profits, after all.

    If a company like Google doesn’t believe enough in the open model to pay full price for the spectrum, that’s a signal to me that the model may not be ready for prime time. (I want it to be, believe me!) If the experts in the marketplace won’t place their own money on the line, I don’t think taxpayers should – and we will, by forgoing the revenue from a fully open auction.

    If open doesn’t work, and it takes a decade to redeploy the spectrum, that’s worse for the public than if an incumbent (or anyone else) builds a closed network and operates it either in competition or cooperation with existing wireless networks.

    >> [T]here’s nothing unseemly about non-profit groups working with companies to reduce taxes and remove regulations, because that’s an inherent good? I think the word “misguided” might be better than “unseemly.” We’re talking about policy disagreement here – why bring hints of corruption into the argument?

    I didn’t have corruption in mind when I used the word “unseemly” to describe collaboration between public interest groups and a $160 billion market cap corporation. Checking the definitions of the term (e.g. “not in keeping with established standards of taste or proper form”), I don’t see where there’s an implication of corruption. Public interest groups generally claim to serve the public interest. Whatever they may mean by that, they almost certainly don’t mean bringing greater than normal returns to corporate shareholders. It’s not proper form for them to work toward that end – it’s indecorous, ultra vires, perhaps?

    >> Google has come up with an innovative and probably workable plan that appears to serve the primary statutory goal of fostering more competition. I realize I’m arguing against libertarian first principles here by not favoring the argument that absolutely minimizes regulation, but in this case I sincerely think the first principles are hihly likely to lead to a subobimal outcome.

    Minimizing regulation is not so much a first principle as a means to an end. Government-structured “competition” rarely works out. Consider the burst of ‘competition’ created when “Competitive Local Exchange Carriers” came on the scene under the industrial policy of the ’96 Act. A lot of market cap was created and then destroyed in a government-structured business model that didn’t work. Part of the reason it didn’t work was because it wasn’t based on first-principle concepts like protection of property rights.

    Spectrum could be made subject to property rights, and that would fertilize competition. With advances in radio technology, spectrum could be treated as a commons, and that would fertilize competition. But I’m skeptical that a government-corporate “plan” for competition will work out. If it does, I don’t see why Google’s owners should enjoy windfall profits.

  • http://www.cato.org/people/harper.html Jim Harper

    >> with spectrum SOME regulation is almost certainly necessary until we get some (perhaps impossible) technical breakthrough allowing anyone to transmit at will on any spectrum without interfering with oher transmissions. So the very nature of the “good” drives us out of a free-market Garden of Eden right at the outset.

    There’s disagreement among experts about whether radio design can elminate interference or just come really close, but I think the problem of scarcity in radio spectrum can be solved. (Indeed, it may have been perpetuated to maintain federal control of the airwaves and communications).

    Command-and-control regulation like we have now is the least efficient way to allocate spectrum. “Propertyization” and the buying and selling of spectrum use rights, which are divisible along many different dimensions, would be preferable. The idea of a spectrum commons has become more appealing to me as I recognize that the lack of scarcity created by good radio technology might even make the buying and selling of spectrum rights too costly given its abundance.
    The regulation that might still be needed under a commons model would be to prevent people from “spamming” – blasting high-powered signals on all parts of the spectrum in the hopes of getting their communications heard by some of the receivers out there. But the need for that regulation at some point in the future doesn’t justify mandating a certain business model be used for a network operating in one part of the spectrum. Indeed, doing that is a step away from the ownership and regulation models that will be the most “open” – to experimentation, risk, competition, and progress.

    Given where we could be, favoring a big corporation with regulations that match its business model is just so old-school, and disappointing. (As I write this, Google has gotten half of what it wanted from the FCC, and who knows what happens next.)

    >> if open REALLY doesn’t work then the new provider will either go bankrupt or desperately try to unload the spectrum, and I suspect it would take a few years at most for the regulators (FCC, Congress or possibly the courts) to adopt new rules. The problem with the incumbent scenario is the closed model could work well enough as far as preserving acceptable profit margins, but would be sub-optimal for the public as choice and competition are reduced.

    I think experience shows that reallocating spectrum using FCC, Congress, and the courts takes a lot more than a few years. Competitors throw everything they’ve got into sludging the process. Nothing suggests that the experience of the past is going to change going forward.

    I’m not arguing in favor of incumbents getting the spectrum (“the incumbent scenario”) – I’m arguing in favor of Google paying full price for the spectrum. If open works, it’s going to get full profits, after all.

    If a company like Google doesn’t believe enough in the open model to pay full price for the spectrum, that’s a signal to me that the model may not be ready for prime time. (I want it to be, believe me!) If the experts in the marketplace won’t place their own money on the line, I don’t think taxpayers should – and we will, by forgoing the revenue from a fully open auction.

    If open doesn’t work, and it takes a decade to redeploy the spectrum, that’s worse for the public than if an incumbent (or anyone else) builds a closed network and operates it either in competition or cooperation with existing wireless networks.

    >> [T]here’s nothing unseemly about non-profit groups working with companies to reduce taxes and remove regulations, because that’s an inherent good? I think the word “misguided” might be better than “unseemly.” We’re talking about policy disagreement here – why bring hints of corruption into the argument?

    I didn’t have corruption in mind when I used the word “unseemly” to describe collaboration between public interest groups and a $160 billion market cap corporation. Checking the definitions of the term (e.g. “not in keeping with established standards of taste or proper form”), I don’t see where there’s an implication of corruption. Public interest groups generally claim to serve the public interest. Whatever they may mean by that, they almost certainly don’t mean bringing greater than normal returns to corporate shareholders. It’s not proper form for them to work toward that end – it’s indecorous, ultra vires, perhaps?

    >> Google has come up with an innovative and probably workable plan that appears to serve the primary statutory goal of fostering more competition. I realize I’m arguing against libertarian first principles here by not favoring the argument that absolutely minimizes regulation, but in this case I sincerely think the first principles are hihly likely to lead to a subobimal outcome.

    Minimizing regulation is not so much a first principle as a means to an end. Government-structured “competition” rarely works out. Consider the burst of ‘competition’ created when “Competitive Local Exchange Carriers” came on the scene under the industrial policy of the ’96 Act. A lot of market cap was created and then destroyed in a government-structured business model that didn’t work. Part of the reason it didn’t work was because it wasn’t based on first-principle concepts like protection of property rights.

    Spectrum could be made subject to property rights, and that would fertilize competition. With advances in radio technology, spectrum could be treated as a commons, and that would fertilize competition. But I’m skeptical that a government-corporate “plan” for competition will work out. If it does, I don’t see why Google’s owners should enjoy windfall profits.

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