Economy / Politics / Technology

Let the Spectrum Market Work

In modern America the airwaves are continuously flooded with waves that we cannot see. Radio waves carry signals for everything from smartphones to televisions using bands of the electromagnetic spectrum. The use of spectrum for communication has a long and thorny history going back to the first radio broadcasters. Like any form of communication, the potential for interference causes problems. You can’t easily hear what I’m saying if there’s a siren blaring in your ears. The same kind of interference occurs in spectrum; if multiple broadcasters try to use the same frequency or send very powerful signals, then someone’s message won’t be clearly received. It did not take long for the U.S. government to recognize this problem and conclude that it needed to step in to fix it.

By granting licenses to users of spectrum, the federal government designated particular frequencies, power levels and types of content with the stated goal of preventing interference and ensuring that the airwaves were used for the “public interest.” The rules have often been challenged both as unconstitutional abridgments of free speech and press and as inefficient allocation of resources. The regulatory regime adapted and changed in numerous ways as a result of these challenges until our present situation was reached.

We have come a long way in our system of distributing spectrum. Twentieth century court decisions, legislation and FCC rulings all treated spectrum as a unique commodity because, they held, it was a scarce resource. It was Ronald Coase’s paper on the FCC which finally pointed out how vacuous this logic was. Scarcity, it turns out, is ironically common. Every economic good is scarce; gold, land, milk and spectrum are all limited in quantity. For every other good we recognized that prices are the best way to decide who gets what, yet spectrum was guarded against the wasteful abuses of the market. It was not until 1994, 35 years after Coase’s argument, that the FCC caught on and decided to hold its first “spectrum auction.” This system is undoubtedly far superior to the previous period of error, but it still preserves much of the inefficiencies which result from compromising property rights.

Even today, spectrum licensees often buy only the right to operate equipment which uses particular bands of spectrum; the FCC still owns and regulates the use of the airwaves, and only certain “permissible operations” are allowed in each band of spectrum. This system is unnecessarily inefficient. If a licensee has unused spectrum designated for use in television broadcasting, that spectrum could be sold to other users who could use it to provide, for example, mobile internet. The FCC currently prevents him from doing so.

The rigidity of the regulatory scheme which denies licensees any real property rights means that consumers are supplied with less bandwidth at higher prices. This is hardly allowing the market to distribute spectrum. While auctions do well to use the price system, they don’t sell the right to use a section of spectrum, they sell licenses to the narrow use specified by the FCC. While Coase’s proposal gets approving lip service, Thomas Hazlett has rejected even using the term, “spectrum auction,” to describe the new process as a “misnomer.”

There are certain sections of spectrum in which the FCC is experimenting with more property-like licenses. Hazlett examines these, which he calls “exclusive-access, flexible-use spectrum” (EAFUS) licenses in the paper linked above, and concludes that they work quite well. Licenses like those issued to mobile telephone service providers in the 800 and 900 MHz and 1.9GHz bands allow for licensees to share their spectrum with other users and keep the profits of doing so. The result has been an increase in capital investment and an increase in competition leading to better service for consumers at lower prices.

When licensees can gain revenue from sharing their spectrum, they not only have an incentive to economize and use as little as possible, they also are encouraged to develop new technologies which will allow more use of the same amount of spectrum while preventing excessive interference. As in other industries, allowing private control of resources usually creates dynamic, efficient markets which benefit all parties.

The FCC has recently recognized the enormous value of flexible use spectrum and has made increasing flexibility a goal in the National Broadband Plan. There is hope that flexible use will become the norm in spectrum licensing. An even better option would be to establish real, robust property rights in spectrum – either through homesteading, auction or some other method – so that all barriers to investment and innovation will be removed. The FCC has the opportunity to make these changes in the upcoming incentive auction of spectrum currently allocated for television broadcasting. As the FCC reallocates and redefines these licenses, it should seek to harness the price system and market incentives to allow for maximum flexibility which benefits producers and consumers.