Many readers will recall the telecom soap opera featuring the GPS industry and LightSquared and the subsequent bankruptcy of LightSquared. Economist Thomas W. Hazlett (who is now at Clemson, after a long tenure at the GMU School of Law) and I wrote an article published in the Duke Law & Technology Review titled Tragedy of the Regulatory Commons: Lightsquared and the Missing Spectrum Rights. The piece documents LightSquared’s ambitions and dramatic collapse. Contrary to popular reporting on this story, this was not a failure of technology. We make the case that, instead, the FCC’s method of rights assignment led to the demise of LightSquared and deprived American consumers of a new nationwide wireless network. Our analysis has important implications as the FCC and Congress seek to make wide swaths of spectrum available for unlicensed devices. Namely, our paper suggests that the top-down administrative planning model is increasingly harming consumers and delaying new technologies.

Read commentary from the GPS community about LightSquared and you’ll get the impression LightSquared is run by rapacious financiers (namely CEO Phil Falcone) who were willing to flaunt FCC rules and endanger thousands of American lives with their proposed LTE network. LightSquared filings, on the other hand, paint the GPS community as defense-backed dinosaurs who abused the political process to protect their deficient devices from an innovative entrant. As is often the case, it’s more complicated than these morality plays. We don’t find villains in this tale–simply destructive rent-seeking triggered by poor FCC spectrum policy.

We avoid assigning fault to either LightSquared or GPS, but we stipulate that there were serious interference problems between LightSquared’s network and GPS devices. Interference is not an intractable problem, however. Interference is resolved everyday in other circumstances. The problem here was intractable because GPS users are dispersed and unlicensed (including government users), and could not coordinate and bargain with LightSquared when problems arose. There is no feasible way for GPS companies to track down and compel users to use more efficient devices, for instance, if LightSquared compensated them for the hassle. Knowing that GPS mitigation was unfeasible, LightSquared’s only recourse after GPS users objected to the new LTE network was through the political and regulatory process, a fight LightSquared lost badly. The biggest losers, however, were consumers, who were deprived of another wireless broadband network because FCC spectrum assignment prevented win-win bargaining between licensees.

Our paper provides critical background to this dispute. Around 2004, because satellite phone spectrum was underused, the FCC permitted satellite phone licensees flexibility to repurpose some of their spectrum for use in traditional cellular phone networks. (Many people are appalled to learn that spectrum policy still largely resembles Soviet-style command-and-control. The FCC tells the wireless industry, essentially: “You can operate satellite phones only in band X. You can operate satellite TV in band Y. You can operate broadcast TV in band Z.” and assigns spectrum to industry players accordingly.) Seeing this underused satellite phone spectrum, LightSquared acquired some of this flexible satellite spectrum so that LightSquared could deploy a nationwide cellular phone network in competition with Verizon Wireless and AT&T Mobility. LightSquared had spent $4 billion in developing its network and reportedly had plans to spend $10 billion more when things ground to a halt.

In early 2012, the Department of Commerce objected to LightSquared’s network on the grounds that the network would interfere with GPS units (including, reportedly, DOD and FAA instruments). Immediately, the FCC suspended LightSquared’s authorization to deploy a cellular network and backtracked on the 2004 rules permitting cellular phones in that band. Three months later, LightSquared declared bankruptcy. This was a non-market failure, not a market failure. This regulatory failure obtains because virtually any interference to existing wireless operations is prohibited even if the social benefits of a new wireless network are vast.

This analysis is not simply scholarly theory about the nature of regulation and property rights. We provide real-world evidence that supports our notion that, had the FCC assigned flexible, de facto property rights to GPS licensees like the FCC does in some other bands, rather than fragmented unlicensed users, LightSquared might be in operation today serving millions with wireless broadband. Our evidence comes, in fact, from LightSquared’s deals with non-GPS parties. Namely, LightSquared had interference problems with another satellite licensee on adjacent spectrum–Inmarsat.

Inmarsat provides public safety, aviation, and national security applications and hundreds of thousands of devices to government and commercial users. The LightSquared-Inmarsat interference problems were unavoidable but because Inmarsat had de facto property rights to its spectrum, it could internalize financial gains and coordinate with LightSquared. The result was classic Coasian bargaining. The two companies swapped spectrum and activated an agreement in 2010 in which LightSquared would pay Inmarsat over $300 million. Flush with cash and spectrum, Inmarsat could rationalize its spectrum and replace devices that wouldn’t play nicely with LightSquared LTE operations.

These trades avoided the non-market failure the FCC produced by giving GPS users fragmented, non-exclusive property rights. When de facto property rights are assigned to licensees, contentious spectrum border disputes typically give way to private ordering. The result is regular spectrum swaps and sales between competitors. Wireless licensees like Verizon, AT&T, Sprint, and T-Mobile deal with local interference and unauthorized operations daily because they have enforceable, exclusive rights to their spectrum. The FCC, unfortunately, never assigned these kinds of spectrum rights to the GPS industry.

The evaporation of billions of dollars of LightSquared funds was a non-market failure, not a market failure and not a technology failure. The economic loss to consumers was even greater than LightSquared’s. Different FCC rules could have permitted welfare-enhancing coordination between LightSquared and GPS. The FCC’s error was the nature of rights the agency assigned for GPS use. By authorizing the use of millions of unlicensed devices adjacent to LightSquared’s spectrum, the FCC virtually ensured that future attempts to reallocate spectrum in these bands would prove contentious. Going forward, the FCC should think far less about which technologies they want to promote and more about the nature of spectrum rights assigned. For tech entrepreneurs and policy entrepreneurs to create innovative new wireless products, they need well-functioning spectrum markets. The GPS experience shows vividly what to avoid.

When the government tells someone to shut up, we call it censorship and the First Amendment requires the government to defend its regulation. But what if the government just says, “Shhhh… could you please turn that down?” Rep. Anna Eshoo’s Commercial Advertisement Loudness Mitigation Act (“CALM Act” – HR 1084) would do just that: require the FCC to issue rules that broadcast and cable TV ads:

(1) … shall not be excessively noisy or strident; (2) … shall not be presented at modulation levels substantially higher than the program material that such advertisements accompany; and (3) [their] average maximum loudness…  shall not be substantially higher than the average maximum loudness of the program material that such advertisements accompany.

Now,  I understand where Ms. Eshoo is coming from: I have a very low tolerance for noise in general and for television in particular—and it’s not just about commercials. (I find TV news at least as “noisy” and “strident” as commercials. That’s why I opted-out from the whole TV thing in about 2000. Yup, that’s right: I found better things to do with my time and the supposedly all-powerful “gatekeepers” of Hollywood couldn’t do a damn thing about it. You should try it if you don’t like what’s on TV! To paraphrase Voltaire, “I disapprove of what you say watch,  but I will defend to the death your right to say watch it! You can get most of what’s worth watching on DVD or online anyway.) But do we really need bureaucrats in Washington micromanaging volume levels? Maybe Congressmen would have a little more time to read the bills they vote for if they they weren’t so busy fiddling with everyone else’s remote!

Eshoo’s bill has passed the House Energy & Commerce Committee’s Communications Subcommittee just as the TV industry is completing work on voluntary standards of their own. That’s one “less restrictive” alternative to regulation. What about technological empowerment? If Americans really hate loud commercials so much, why don’t they demand TVs with built-in volume normalization features? But this bill isn’t merely unnecessary, it would also set a disturbing precedent in at least six ways.

First, while it might seem that a regulation could draw clear lines with simple rules here about volume, Cliff Stearns (R-Fl) points out that “it is difficult to regulate volumes, since commercials are produced by a number of studios and companies that use different technologies and volume standards.” But this ambiguity merely increased the potential for selective enforcement, which would exist even where it were possible to craft precise rules.  Because the law makes no distinction about “non-commercial” (i.e., not-for-profit) advertisements, this means a politicized FCC could use volume controls as a weapon against opposing political advertising or other non-profit speech it did not like. Anyone who’s ever lived under a Home Owner’s Association should understand how easily an HOA president with a personal grudge could use hyper-technical rules about what shade of blue you have to paint your own mailbox to harass you. And isn’t “strident” the very adjective most commonly used to write off the arguments of those with whom we disagree?

Second, even though it does not exempt non-commercial ads, the bill does embody a recurrent presumption that it’s ok to regulate advertising in ways we wouldn’t accept for the “show” itself (i.e., non-advertising content). Of course, the show could be “commercial” (which, in First Amendment terms, means it would generally get only “intermediate” scrutiny) while the advertisement could be “non-commercial”—such as a political ad. But even if most ads are commercial, so what? If the government is going to protect us from “noisy or strident” commercials, why not all “noisy or strident” programming? Even the most annoying TV ad is probably less annoying than, say, the James Carvilles of the world debating the Glenn Becks of the world. (Of course, users really bothered by noise, but unwilling to give up TV, would probably much rather have a dynamic market for TVs with volume moderating features than rules that dull the din of commercials alone.)

Third, I’m sure that the government would defend Eshoo’s bill, if signed into law, as a restriction on the “time, place and manner” of speech. Although such restrictions are much easier for the government to defend than most restrictions on speech, the government must still show that the regulation is “narrowly drawn” and “serves a significant government interest.” So… what’s the interest here? I’m a little disturbed by the idea that the government has a “significant interest” in what goes on in the space between Americans, their couches, and the electronic display of their choosing. (If we were talking about non-consensual “second-hand television” like TVs blaring in airports, I might be slightly more sympathetic: It’s awfully hard to escape the sound of TV when you’re stuck at the gate waiting for a flight. But commercials are only marginally more annoying to me than most TV, and airport TVs generally show news anyway—the height of annoyingness. I’d much rather see airports, bars, etc. adopt directional sound technologies so that users can move out of the “blast radius” and into peace and quiet simply by moving over a few seats.)

Fourth, I understand that most users probably do wish that commercials probably weren’t so loud. But, this very fact, combined with the ease with which users can now skip all commercials (36% of U.S. homes have a DVR), creates a pretty powerful incentive for the TV industry to self-regulate the volume level of advertising. “Noisy or strident” advertising is just another example of the “tragedy of the commons” at work: Absent any rules, every individual advertiser has an incentive to jack up the volume in order to attract attention, and doing so will probably work up to a certain point of increased annoyance by the user. But collectively, such ads hurt all advertisers because they increase ad blindness, ad deafness, and/or outright commercial skipping. The same dynamic plays out on the Internet, where flashing, blinking, bouncing, strobing dancing ads really drive users nuts and make them turn to tools like AdBlock Plus and Flashblock—which is why ad networks like Google have policies that implement their own “time, place and manner” rules out of pure self-interest. Such rules are useful and valuable. They benefit advertisers, consumers and the ad network alike, because there exists a basic harmony of interests between them: annoying ads don’t really benefit anyone in the long-term.  Do we really want government bureaucrats making these decisions instead?

Fifth, if the FCC has a “significant” interest in “protecting” us from annoying TV ads, why shouldn’t the F TC protect us from annoying ads online? Here, the problems of government making rules become even more obvious as the medium is far more dynamic. But users already have radical user empowerment tools.

Finally, what about the unintended consequences of such regulation? For example, will intermediaries be responsible for compliance?

Rep. Zack Space (D-Ohio), raised the issue of the impact of the bill on small cable operators. He said that while he was not disputing the need for uniform commercial volume, he said the bill, “perhaps unintentionally” was prejudiced [against] small operators. He pointed out that many of those operators did not insert ads themselves or have “the right to alter national feeds unilaterally, like some of the bigger cable companies.” He said that those operators “simply pass through broadcast signals and have no means of adjusting the volume of commercials on the stream.”

If the FCC were to hold ad-distributor intermediaries liable for the volume-compliance of ad-producers, that could certainly disadvantage small distributors and perhaps even promote consolidation—both horizontal and vertical. But isn’t media consolidation the great evil that “media reformistas” are constantly warning us about?

Stacey Higginbotham at GigaOm conducted a great interview with Verizon CTO Dick Lynch, in which he endorsed broadband metering:

We believe that you have to be allowed to have a level of service that is not on a public Internet. What you’re suggesting is different kind of IP service that’s not delivered over the public Internet and that needs to be part of the option set in the argument.

http://blip.tv/play/AYGjswkC

Such metering, if allowed by Washington, might lessen the need for some of the network management practices that so incense net neutrality fanatics.  So I’d really like to see Verizon and other ISPs explore using a “Ramsey two-part tariff,” as Adam has suggested again and again:

A two-part tariff (or price) would involve a flat fee for service up to a certain level and then a per-unit / metered fee over a certain level. I don’t know where the demarcation should be in terms of where the flat rate ends and the metering begins; that’s for market experimentation to sort out. But the clear advantage of this solution is that it preserves flat-rate, all-you-can-eat pricing for casual to moderate bandwidth users and only resorts to less popular metering pricing strategies when the usage is “excessive,” however that is defined.

ISPs would have an incentive to set the demarcation to a point where, roughly, the vast majority of users would never have to worry about their usage, but the small percentage of bandwidth hogs would have a real disincentive to cut back on bandwidth use—thus avoiding the “Tragedy of the Commons,” which is really the “Tragedy of the Unmetered Commons,” as I noted a year ago.