Feds Should Free up Airwaves to Spur Wireless Growth

Every time you make a cell phone call, send a text message, or visit a website on your smartphone, you are using the airwaves. Collectively known at the “electromagnetic spectrum,” airwaves are the lifeblood of mobile communications – but there are only so much of them to go around. Unfortunately, the government agency tasked with governing the airwaves, the Federal Communications Commission (FCC), isn’t very good at managing them. As such, competition, prices, and service quality in the wireless market are suffering.

It gets worse. Over the next five years, wireless internet traffic is projected to increase 30 fold. Yet network capacity is only expected to grow by a factor of three. Unless lots of new spectrum is made available to mobile providers soon, innovation in the wireless space will likely face major roadblocks in coming years.

While the FCC is in charge of allocating spectrum, the agency has neither the right incentives nor the knowledge to properly micromanage it. Deciding how to allocate a scarce resource is never easy, particularly when a central planner is in control. How should spectrum be used? Which entities should have exclusive rights to use spectrum, if at all? How much spectrum should go toward television broadcasts, and how much towards cellular service?

Nobody has perfect answers to any of these questions. Fortunately, a system exists that generates good answers on a decentralized basis – namely, the system of property rights and private ownership.

The FCC picked up on this idea in 1994, when it began auctioning off spectrum for private use. Under this system, competing firms bid on various chunks of spectrum – known as “frequencies” – and the winning bidders earn the license to use those frequencies as they see fit. By granting flexible licenses, the FCC enabled a revolution in wireless communications. That revolution continues to this day.

The auction-based system was a major improvement over its predecessor, a command-and-control approach that Tim Wu of Columbia Law School has called a “Soviet-style” system. For decades, doling out airwaves to politically favored firms and agencies was the FCC’s modus operandi. Unfortunately, the old system remains partially intact.

Television and radio broadcasters were among the biggest beneficiaries of the old system. In the 1940s and 50s, broadcasters gained rights to airwaves that today are worth tens of billions of dollars. Even now, in 2009, enormous chunks of the spectrum remain cordoned off from the market, under the control of local broadcasters. In 2008, a large chunk of television spectrum was liberated in an FCC auction that generated over $19 billion in revenues. But huge swaths of spectrum remain devoted to narrow services like broadcasting.

The 2008 spectrum auction was a success. Verizon, AT&T, Qualcomm, and dozens of other firms won a plethora of spectrum licenses, both nationwide and region-specific. Thanks in no small part to the 2008 auction, Americans will over the next few years witness another transformation in mobile communications. A new technology called LTE, or Long-Term Evolution (also known as “4G”) promises vastly increased wireless speeds, which will make sluggish mobile video a thing of the past.

But the FCC still has a lot of work on its plate. While the agency has held several major spectrum auctions over the past few years, giant swaths of the airwaves remain restricted for particular purposes, both private and public. Freeing up these frequencies will be crucial if the future of wireless communications is to realize its awesome potential.

Fortunately, the FCC has acknowledged that too little spectrum is available for flexible, market-oriented use. Julius Genachowski, the Commission’s Chairman, told BusinessWeek in a recent interview that “it’s important for the country that we get long-term planning right here because it takes time to identify spectrum and put it on the market.”

As the FCC develops its plans for auctioning new blocks of spectrum, it should resist calls to impose onerous restrictions on the spectrum, as it did in the 2008 auction. Such rules, referred to as “encumbrances,” hurt both consumers and taxpayers. Taxpayers will suffer because inflexible spectrum rules depress license bids, depriving the government of proceeds that could otherwise go towards offsetting public spending. And consumers will lose because limits on how firms can use spectrum artificially constrain the innovative potential of the marketplace, thwarting the evolution of technologies.

Government bureaucrats aren’t very good at picking winners or losers, especially in frontier industries like wireless. Indeed, the original architects of our nation’s spectrum policies couldn’t possibly have foreseen the myriad revolutionary technologies that have emerged over the past half century. Competitive markets, not bureaucrats and politicians, should decide how our nation’s airwaves are allocated and used.