The most pressing challenge in wireless telecommunications policy is transferring spectrum from inefficient legacy operators like federal agencies to the commercial sector for consumer use.

Reflecting high consumer demand for more wireless services, in early 2015 the FCC completed an auction for a small slice of prime spectrum–currently occupied by federal agencies and other non-federal incumbents–that grossed over $40 billion for the US Treasury. Increasing demand for mobile services such as Web browsing, streaming video, the Internet of Things, and gaming requires even more spectrum. Inaction means higher smartphone bills, more dropped calls, and stuttering downloads.

My latest research for the Mercatus Center, “Sweeten the Deal: Transfer of Federal Spectrum through Overlay Licenses,” was published recently and recommends the use of overlay licenses to transfer federal spectrum into commercial use. Purchasing an overlay license is like acquiring real property that contains a few tenants with unexpired leases. While those tenants have a superior possessory right to use the property, a high enough cash payment or trade will persuade them to vacate the property. The same dynamic applies for spectrum.

Overlay licenses have been used to reassign non-federal spectrum but never federal spectrum. The paper presents new evidence from a 2006 spectrum auction (AWS-1) that suggests that billions of dollars of underused federal spectrum could be deployed more quickly than other policy alternatives. Crucially, overlay licenses allow agencies to receive payment for spectrum sales and this reordering of spectrum rights would benefit taxpayers and wireless broadband users.

Policymakers are interested in spectrum policy because spectrum availability improves broadband access and generates substantial government revenues. Further, conservative estimates place the consumer surplus losses from misallocation of spectrum at hundreds of billions of dollars per year. Therefore, policymakers should favor reform proposals, like overlay licenses, that show promise in repurposing federal spectrum relatively quickly. The paper compares two policy proposals for spectrum reform: regulation-intensive dynamic spectrum sharing and market-oriented overlay licenses.

Regulation-Intensive Approach. A 2012 President’s Council of Advisors on Science and Technology (PCAST) report promotes complex spectrum-sharing technologies to enable consumer use of fallow federal spectrum in order to avoid clearing agencies from their spectrum.

• According to the PCAST report, widespread dynamic spectrum sharing would take decades to implement. The proposal relies on precise government planning and complex device requirements to enable intensive use of federal spectrum. However, the sharing technologies contemplated are in early development and will not be in routine deployment for many years. Social welfare losses mount quickly in the interim.
• Despite recognizing that agencies have no incentive to improve efficient use of their spectrum, this proposal does little to encourage efficient government use of spectrum. Dynamic spectrum sharing techniques allow wasteful legacy systems to operate indefinitely, and PCAST recommends against clearing inefficient federal users.
• Implementation of the PCAST proposal would likely degenerate into regulatory failure. Previous attempts at spectrum sharing between different wireless systems, like the TV White Spaces allocation that PCAST lauds, frequently resulted in rent seeking, severe deployment delays, and relatively few consumer benefits.

Market-Based Approach. A superior reform proposal is to auction off overlay licenses to certain federal spectrum bands. These winning overlay licensees can put unused federal spectrum into service rapidly. For the remaining spectrum that agencies are using, the winning licensee can pay the agency to vacate the bands or upgrade to more efficient systems. Agency resistance may be mitigated because agencies can negotiate compensation for selling rights to their spectrum.

• The FCC has conducted overlay auctions in the past and they represent an “off-the-shelf” tool to reorder spectrum rights. In previous overlay auctions, the process was effective and winning bidders compensated existing users like state public safety agencies and public utilities to vacate their valuable spectrum.
• Overlay license auctions and clearing deadlines transfer spectrum into the market and to its highest-valued uses. For example, in as few as two years after the 2006 AWS-1 auction, existing users and federal agencies vacated their spectrum, allowing carriers to invest billions of dollars into networks and deploy mobile broadband in cities like San Francisco and New York.
• A combination of clearing federal agencies from their spectrum and using overlays to clear nonfederal users has freed about 210 MHz of prime spectrum for mobile broadband use, supplying over one third of spectrum held by mobile carriers today.

Government agencies sit on wireless spectrum worth hundreds of billions of dollars rent-free. This federal spectrum is often unused or underutilized and the misallocation of this valuable resource is socially costly. My paper proposes that Congress permit agencies to sell some of their spectrum to private parties after an overlay auction. No other reform proposal has enabled widespread consumer use and economic investment as rapidly as have overlay auctions combined with clearing deadlines. Overlays and clearing deadlines in the recent past have permitted commercial deployment of cutting-edge wireless technologies in encumbered spectrum within a few years.

Related Research Reclaiming Federal Spectrum: Proposals and Recommendations

Now that the broadband plan is out, and the FCC has its sights set on 500 MHz of broadcast spectrum, come listen to what it all means. In the latest episode of the Surprisingly Free Conversation podcast, Thomas Hazlett, Professor of Law & Economics and Director of the Information Economy Project at George Mason University School of Law, discusses the economics of spectrum. The discussion also turns to the history of spectrum regulation, ongoing inefficiencies in the current system, and suggestions for possible improvements.

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

What’s the right way to allocate the airwaves? For years and years and years, the governing policy of federal communications was that the electro-magnetic spectrum was too “scarce” to be left to the devices of the marketplace. This kind of reasoning has always lacked substance. As I wrote in a piece occoccasioned by the rise of indecency enforcement:

Congress began regulating broadcasters in 1927 on the grounds of scarcity. In return for free and exclusive use of a given wavelength, broadcasters agreed to serve the “public interest, convenience, and necessity” — or at least to do what Congress and the FCC ordered. One element of this agreement was a ban on obscene, indecent and profane language. This scarcity theory has always lacked substance. Nobel Prize-winning economist Ronald Coase’s reputation is based, in part, on a notable paper he wrote in 1959 that criticized the rationale behind the FCC’s command and control regime of licensing broadcasters. “It is a commonplace of economics that almost all resources in the economic system (and not simply radio and television frequencies) are limited in amount and scarce, in that people would like to use more than exists,” Coase argued in his seminal essay. From Shouldn’t FCC Rules Over Indecency Just Grow Up? Reflections on Free Speech and Converging Media

The FCC eventually came to realize that it could endow electromagnetic frequencies with property rights-like characteristics. In 1993, under Bill Clinton and a Democratic congress, the United States finally moved to such a system — at least in those frequencies used by cell-phone operators. As in so many other ways, broadcasters have remained immune from historical trends.

This backdrop is important to understand our current moment in wireless policy. Tomorrow, on Wednesday, November 12, at 4 p.m., those near Washington will be able to gain insight into how other nations have approached radio frequency regulation. The Information Economy Project at the George Mason University School of Law ( Disclosure: I’m the Assistant Director at the Information Economy Project, a part-time position that I currently hold) will host its next “Big Ideas About Information Lecture” featuring an address by Dr. William Webb, a top policy maker at OFCOM, the U.K. telecommunications regulator.

OFCOM’s ambitious liberalization strategy, announced in 2004, permits the large majority of valuable frequencies to be used freely by competitive licensees, offering an exciting and informative experiment in public policy.  Dr. Webb’s lecture, “Spectrum Reform: A U.K. Regulator’s Perspective,” will offer a timely progress report for the American audience.

Returning to my piece about the oddity of broadcast regulation for a moment:

But now technology has created new electromagnetic spectrum. Higher wavelengths than those used by traditional radio and television systems have been pressed into service for digital cellular telephones, wireless data connections, and satellite television and radios. The XM and Sirius satellite radio companies each offer hundreds of channels with less spectrum than all FM radio broadcasters combined. And cellular carriers now pack thousands of conversations on a channel that once served a single voice conversation. Nonetheless, “scarcity” remains the foundation of a bifurcated jurisprudence. Newspapers, magazines, books and the Internet enjoy expansive First Amendment protections. Radio and broadcast television, defined as “public” properties, do not. The Supreme Court accepted the scarcity theory in a 1943 case, when it upheld the FCC’s power to grant or deny privileges to electronic speakers. In 1969, the court went further, ruling in Red Lion v. FCC that scarcity required a Pennsylvania radio station to give free reply time to an author whose book was criticized over the air. Thus, the “Fairness Doctrine” was affirmed. From Shouldn’t FCC Rules Over Indecency Just Grow Up? Reflections on Free Speech and Converging Media

Although “Fairness Doctrine” is dead, the legal rationale for regulating broadcasting differently from newspapers, magazines, books and the internet lives on.

Most people involved in this debate see that the “scarcity doctrine” was always a fallacy. But should something else take its place? Are there other reasons that government should refuse to license airwaves as private property — such as, for example, a perceived need to devote them to “white spaces” for wireless communications devices? This important debate is by no means settled, and I hope that all who are interested in the subject will RSVP and attend tomorrow’s event.

More information about the lecture, and about the Information Economy Project, is available at http://iep.gmu.edu

Event Details:

Where: George Mason University School of Law, Room 121, 3301 Fairfax Drive, Arlington, VA 22201 (Orange Line: Virginia Square-GMU Metro). When: Wednesday, November 12, 2008, 4 – 5:30 p.m., reception to follow. Admission is free, but seating is limited. Because of construction, parking is tight. See http://www.law.gmu.edu/geninfo/parking.

The event is free and open to the public, but reservations are requested. To reserve a spot, please e-mail Drew Clark at iep.gmu@gmail.com

About the Information Economy Project:

The Information Economy Project at George Mason University sits at the intersection of academic research and public policy, producing peer-reviewed scholarly research, as well as hosting conferences and lectures with prominent thinkers in the Information Economy. The project brings the discipline of law and economics to telecommunications policy. More information about the project is available at http://iep.gmu.edu

The conventional Beltway wisdom would be that net neutrality legislation should have a real chance now with the election of President-Elect Barack Obama and strengthened Democratic majorities in the Senate and House.

But there are two recent developments which make the case for net neutrality regulation less compelling.

Free Airwaves

The Federal Communications Commission approved the use of unlicensed wireless devices to operate in broadcast television spectrum on a secondary basis at locations where that spectrum is open, i.e., the television “white spaces.” In other words, a vast amount of spectrum will soon be available to provide broadband data and other services, and the spectrum will be free.

George Mason University Professor Thomas W. Hazlett notes that

[S]ome 250 million mobile subscribers in the US paid about $140 billion to make 2 trillion minutes’ worth of phone calls in 2007, accessing just 190MHz of radio spectrum. The digital TV band, in contrast, is allocated some 294MHz—and it’s more productive bandwidth. Tapping into this mother lode would unleash powerful waves of rivalry and innovation.

Most of the television spectrum is either unused or isn’t used efficiently. FCC Chairman Kevin Martin expects that devices using the spectrum could be on the market within a year to 18 months.

Hazlett laments that since 90 percent of consumers subscribe to cable service the broadcasters really don’t need their assigned frequencies, and suggests that if digital TV frequencies were auctioned off taxpayers could be compensated to the tune of $120 billion. This is a good point.

But, as an alternative, the government could also come back later and tax the unlicensed uses of the spectrum. Either way, the money would be collected from the same consumers who are also the taxpayers. The value of auctions lies in preventing politicians and bureaucrats from awarding spectrum to their friends and relatives or from picking winners and losers, not in sucking money from the private sector. Here, the spectrum is being awarded not to profit-making entities who hired the most gifted lobbyists, but to the public at large.

The real significance of the FCC’s decision is consumers who are dissatisfied with the broadband services provided by telephone, cable and cell phone companies or satellite providers will soon have even more options. This fact undermines the case for net neutrality regulation, which is premised on the false notion that most consumers of broadband services are captives of a single phone company and/or a single cable provider. Absent the validity of this false rationale, regulation which tells broadband providers who can use their networks and at what prices is an unjustified restraint on the free speech rights of broadband providers.

Harvard Law Professor Laurence H. Tribe, a First Amendment scholar, addressed the question: “Can broadband providers be forced to act as common carriers”? at a 2007 conference sponsored by the Progress & Freedom Foundation. He concluded that the Supreme Court decision in Hurley v. Irish-American Gay, Lesbian & Bisexual Group of Boston, 515 U.S. 557 (1995) is the decision which “would probably apply here.” In that case, the the Supreme Court upheld the decision of the event’s organizers to exclude GLBG from marching in the parade.  The Court ruled that a parade is not merely a conduit for the speech of participants.

Alternatively, another Supreme Court precedent which might be applicable is Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994), which obligated cable operators to retransmit the signals of local broadcasters. But I agree with Tribe that this is less likely because cable franchises at the time conferred what the Supreme Court believed were a “monopolistic opportunity [for the cable operators] to shut out some speakers.” This is no longer true. Although the opportunity to exclude certain speakers still exists, cable operators are not monopoly providers. Telephone, cell phone and satellite providers — and unimagined services utilizing unlicensed white spaces — offer similar services. Disappointed speakers can seek other platforms.

Therefore, the FCC decision permitting unlicensed uses of television white spaces significantly improves the possibility that net neutrality legislation would be struck down by the courts as unconstitutional.

Verizon Wireless + Google vs. Microsoft

Another recent development are the talks Verizon Wireless is having with Google and Microsoft (see this and this), who are competing for the privilege of having their search bar featured as the default search feature on Verizon Wireless handsets. If Verizon Wireless features a default search bar, subscribers who want to use a competitive search service would have to navigate to the competitor’s web site. A lot of times consumers don’t bother to do that. Google has claimed in the past that when default search bars are available, they are the starting point for 30 to 50 percent of a user’s searches.

Only one search provider gets to be Verizon Wireless’s search partner. One search provider gets to sit at the end of a fast lane; the others don’t.

“Fast lane” may not be a perfect metaphor, because traffic may not actually be prioritized across the network; but from a consumer perspective there are fewer clicks and the search may seem faster overall. Fast lane is the favorite metaphor of net neutrality proponents, and I suspect it provides a clue as to why Google became such an enthusiastic supporter.

Google is making a massive investment in data centers to deliver faster results, including one in the home state of Sen. Ron Wyden (D-OR), and wanted to make sure its competitors couldn’t easily and cheaply duplicate that investment with the help of broadband providers. According to this source,

Google has found that for search engines, every millisecond longer it takes to give users their results leads to lower satisfaction. So the speed of light ends up being a constraint, and the company wants to put significant processing power close to all of its users.

A former Google executive is quoted as saying “Google wants to raise the barriers to entry by competitors by making the baseline service very expensive.”

The purpose of net neutrality regulation is to ensure “equal treatment” for all consumers and businesses. Sen. Wyden, sponsor of one of the earliest net neutrality proposals, reportedly explained he “didn’t oppose companies offering different speeds of service at different prices, a practice already undertaken by several major Internet providers, provided that content is treated equally within each level of service.”

If Wyden’s bill had become law, Verizon Wireless wouldn’t be able to provide Microsoft or Yahoo faster access than it offers Google — even if they need it and are willing to pay for it but Google doesn’t and isn’t.

Perhaps net neutrality regulation could be drafted more fairly — like allowing broadband providers to build a fast lane, but guaranteeing that anyone could pay an identical fee for the same fast access. This would mean that broadband providers couldn’t build fast lanes unless they could build them big enough to accommodate anyone who might seek to use them. The likely outcome is the fast lanes wouldn’t get built at all.

There may be yet other ways a net neutrality regulation could be structured, but they would all create uncertainty, complexity and pitfalls for broadband providers.

Google has been a major proponent and — one suspects — has provided significant support for the enactment of net neutrality regulation. That the company is now bidding against Microsoft for the right to share some portion of its colossal advertising revenue with Verizon Wireless may indicate that Google thinks it has found a more acceptable way to limit the ability of its competitors to easily and cheaply duplicate its investment in data centers, that it is no longer banking on net neutrality becoming law, or both.

If Google is the successful bidder, it may have less of an incentive to provide support for net neutrality regulation.  Even if Google isn’t the successful bidder, the negotiations prove that there are mutually-beneficial and pro-competitive partnerships which are nevertheless discriminatory and could be outlawed by net neutrality regulation.

But these partnerships can be beneficial for consumers — if Verizon Wireless can obtain advertising revenue it may be able to reduce wireless subscription fees. Google CEO Eric Schmidt has even suggested that your mobile phone could be free, subsidized by targeted ads.

Permitting the unlicensed use of white spaces and participating in negotiations with Verizon Wireless to feature a default search bar both had Google’s full support.

These two events reduce the likelihood that net neutrality will become the permanent law of the land.

SAN JOSE, Nov. 7 – This morning I’ve posted two articles on BroadbandCensus.com about the Wireless Communications Association’s conference here.

With the Federal Communications Commission’s decision to allow “white spaces” devices at its open meeting on Election Day, it may make sense to ask: how are other nations approaching the issue of “white spaces”? Do other countries that make use of flexible and transferable spectrum licensing find that taking the approach that the FCC took on Tuesday — allowing unlicensed wireless devices to share vacant television frequencies — helps or hinders in getting more spectrum available for the “highest and best use”?

As readers of this blog are probably aware, I work part-time at the Information Economy Project at George Mason University School of Law, which sits at the intersection of academic research and telecommunications policy.

IEP is pleased to sponsor one of its “Big Ideas About Information” Lecture next Wednesday, November 12, at the law school in Arlington. The school is conveniently located at the Virginia Square/GMU Metro station, and is a short ride away from downtown Washington.

At 4 p.m. on November 12, William Webb, the head of research and development and the senior technologist at OFCOM, the British telecommunications regulator, will be speaking about this and other subjects. The title of his remarks is: “The Theory, Practice, Politics and Problems of Spectrum Reform: A U.K. Regulator’s Perspective,” and you can learn more about it here, or by clicking on the badge below.

Admission is free, but seating is limited. To reserve your spot, please email me, Drew Clark, at this address: iep.gmu@gmail.com

I’ve just posted two new entries over at BroadbandCensus.com (in addtion to the one about FCC v. Fox Televisions Stations) below. Now, I’ve got to go and vote.

The pieces at BroadbandCensus.com include a blog post about the real issue in white spaces: not broadcasters versus techies, but keeping the current Swiss-cheese arrangement in the airwaves versus clearing the broadcasters out of their radio frequencies entirely.

Also, in a special election day news report, myself and Drew Bennett have written about the delay in the vote over the universal service fund and intercarrier compensation overhauls.

William Webb, Head of Research and Development at OFCOM, to speak about ‘The Theory, Practice, Politics and Problems of Spectrum Reform’ on November 12

ARLINGTON, VA., October 23 – With the transition to digital television in the United States less than four months away, disputes about the airwaves used by broadcasters are raging here and around the globe.  A world-class expert will soon weigh in on how one country, the United Kingdom, views the challenges of bringing radio spectrum allocation into the 21st Century.

On Wednesday, November 12, 2008, the Information Economy Project at the George Mason University School of Law will host its next Big Ideas About Information Lecture, featuring an address by Dr. William Webb, a top policy maker at OFCOM, the U.K. telecommunications regulator.

OFCOM’s ambitious liberalization strategy, announced in 2004, permits the large majority of valuable frequencies to be used freely by competitive licensees, offering an exciting and informative experiment in public policy.  Dr. Webb’s lecture, “The Theory, Practice, Politics and Problems of Spectrum Reform,” will offer a timely progress report for the American audience.

Webb’s lecture will be the sixth in a prestigious series that has included Nobel Laureate Vernon Smith and noted economist David Porter on how FCC license auctions have worked; Martin Cooper, the “father of the cellphone,” on spectrum allocation; Brian Lamb, founder and CEO of C-SPAN, on the policies that enabled the cable network to launch;  former Federal Communications Commission Chairman Dennis Patrick, on the decision to abolish the “Fairness Doctrine” in 1987; and University of Minnesota Professor Andrew Odlyzko, on financial bubbles in high-technology industries.

Dr. Webb’s Lecture will review the century-long history of radio spectrum regulation. For almost all of that century, the policy-maker has micro-managed spectrum use, defining services, technologies and business models deployed by wireless operators. The inefficiencies embedded in this approach have triggered calls for liberalization since the pioneering work of economist Ronald Coase in the 1950s.

While efforts to relax administrative control have generally met great political resistance, some substantial progress has been made with the emergence of mobile telephone networks over the past two decades.  Policy makers in some nations are now seeking to achieve bolder changes. The regulator in the United Kingdom, OFCOM, has emerged as a leader in this campaign.

After the Labour Government commissioned a landmark 2002 study authored by economist Martin Cave, OFCOM moved aggressively to assist the emergence of property rights in frequencies, the institutional switch enabling market allocation of radio spectrum.

This lecture, delivered by a key OFCOM policy official and a noted spectrum technology expert in his own right, dissects the liberalization process in Great Britain and offers lessons learned. This experience promises great insight for the U.S. and other countries struggling to enact pro-consumer policy reforms.

More information about the lecture, and about the Information Economy Project, is available at http://iep.gmu.edu

Event Details:

Where: George Mason University School of Law, Room 120, 3301 Fairfax Drive, Arlington, VA 22201 (Orange Line: Virginia Square-GMU Metro). When: Wednesday, November 12, 2008, 4 – 5:30 p.m., reception to follow. Admission is free, but seating is limited. Because of construction, parking is tight. See http://www.law.gmu.edu/geninfo/parking.

The event is free and open to the public, but reservations are requested. To reserve a spot, please e-mail Drew Clark at iep.gmu@gmail.com

About the Information Economy Project:

The Information Economy Project at George Mason University sits at the intersection of academic research and public policy, producing peer-reviewed scholarly research, as well as hosting conferences and lectures with prominent thinkers in the Information Economy. The project brings the discipline of law and economics to telecommunications policy. More information about the project is available at http://iep.gmu.edu

Over at DrewClark.com, earlier today I reported today that television networks – which in recent years have had a strained relationship with local broadcasters on a variety of fronts – joined with the National Association of Broadcasters in calling for a time out on the politically simmering issue of “white spaces.” Here’s the start of the story, and you can read the full post at DrewClark.com

WASHINGTON, October 23 – The top executives of the four major broadcast networks on Thursday urged the head of the Federal Communications Commission to delay a vote on a politically simmering issue that pits broadcasters against Google and high-tech executives.

In the letter, the CEOs of CBS Corp., NBC Universal and Walt Disney, and the chief operating officer of News Corp., urge that the FCC exercise caution before taking irreparable action with regard to the vacant television channels known as “white spaces.”

Google and the other technology executives, including Microsoft, Motorola, Philips and others, want the FCC to authorize electronic devices that capable of transmitting internet signals over vacant television bands.

The network executives – CBS’s Leslie Moonves, Disney’s Robert Iger, NBC’s Jeffrey Zucker and Peter Chernin of News Corp. – want a time out.

They join their local broadcasting colleagues, as well as manufacturers and users of wireless microphones, like the National Football League and Boadway theater owners, who have been actively lobbying the issue.

[…]

Read the rest of the story at my blog, DrewClark.com – The Politics of Telecom, Media and Technology