Paging the New Congress: Demand-Driven Spectrum Reform at the FCC

On November 9, the Federal Communications Commission announced new plans for the distribution of the electromagnetic spectrum used by wireless communications companies.  The FCC plans to encourage “secondary markets” in the spectrum.[1]  What does this mean for companies, consumers, and the new Congress? 

The freedom to innovate and build new economic ventures often depends on how easily we can abandon old ones.  In most markets—for houses or restaurants or other real property—if you own something that you do not want any more, you can sell it or rent it to someone else without the government’s permission.  If you have been losing money in a line of business, you can recover some of your losses and move on to the next project.  If the whole economy changes so that the service you’re providing is obsolete or unfashionable, you can sell out to somebody with enough capital to upgrade the whole operation, or switch to a new service entirely.       

Removing unnecessary barriers.  But wireless phone companies cannot make these changes so easily.  They can sell their operations, but only after satisfying the sometimes murky “public interest” standard in sections 214 and 310 of the Telecommunications Act.[2]  The FCC’s plan is to remove “unnecessary barriers”[3] to trading and selling licenses to the wireless spectrum, and to make it easier to lease licenses.  This should make it easier for struggling operations to attract new investors by offering them a partial stake in the business.  It will also increase the amount of spectrum available to new investors to provide other wireless services like phone service, data communications, or Internet access.  And, once leasing is allowed, an investor with money but no management experience can buy spectrum and turn it over to others to provide the service.     

The FCC’s release also announced its support for “spectrum flexibility” reforms.[4]  These would help licensees whose license restricts them to offering an obsolete or sub-optimal service. For example, a company with a fixed-radio license may desire to offer something that is technically a “mobile” service, but be uncertain of its right to do so under its license.  Petitioning the FCC for a waiver of restrictions in the license could take years, by which time the company might lose its competitive advantage—and its investors.

Doled out scrap by scrap.  The FCC took this step because the agency realizes the old-fashioned way of doling out spectrum scrap by scrap is decidedly too slow for the new economy.  Spectrum reform is being driven by overwhelming demand for more and more wireless devices.  In the 1990s, PCS drove the FCC to assign licenses by a more market-oriented auction process, to increase flexibility for licensees, and also to reallocate some spectrum.  But the wireless revolution was barely getting started.  New demand for spectrum for Internet access (perhaps even broadband), voice and video applications, and data services will drive policymakers toward more far-reaching reforms.  

The biggest question about the FCC’s latest step toward reform is, will it go far enough?  At this time, it is not clear how much red tape the FCC plans to remove.  In the 1996 Telecommunications Act, Congress gave the FCC the authority to take away all the rules—that is, the FCC now has the power of broad “forbearance.”  But the FCC’s announcement suggests the agency may still apply some rules against windfall profits, usage restrictions, and so on—the possibility remains that the agency is not quite ready to give up all the red tape. 

Broadcasting left out.  The FCC also stops short of applying its new policies to television and radio broadcasters.  But spectrum flexibility is a hot topic for broadcasters who want to use at least some of their ATV spectrum for data transmission in an attempt to shore up their financial health, which is threatened by the uncertainty of their massive, risky rollout of HDTV.[5]  And lifting restrictive rules would revitalize the radio industry, a process already begun by deregulation.  There is no more reason to allow old regulatory rules to freeze the broadcasting business in the form is has existed since the 1930s, than to allow the wireless phone business to be frozen in the 1980s.

Essentially, then, the FCC reforms are a small dollop in a large bucket.  Further spectrum reform remains vital to keep the new economy on track as demand continues to soar.  Broadcasting, too, should get more relief from barriers to lease, as well as more flexibility.  Another possibility would be for Congress and the FCC to make available for other uses any under-used spectrum now set aside for the government.  If the government were competing for spectrum with private buyers, both would have greater incentives to use the spectrum as efficiently as possible.  The Federal Aviation Administration, for example, is currently facing a serious shortage of radio frequencies for air-traffic control; the agency still uses more-wasteful analog technology.[6]

One of the most beneficial potential reforms is also the most radical.  Many years ago, economist Ronald Coase noted there is no reason that spectrum could not be property, transferred freely as real estate without restrictive licensing.[7]  The plan has had its supporters ever since.  The challenge facing these reformers now is to put forward a practical plan that does not threaten investors with unsettling risks.[8]

Policymakers don’t know.  As the variety and volume of wireless services expand, it will be hard to deny the economic harm of rules that prevent spectrum from reaching its highest- valued uses.  Policymakers do not know better than consumers or entrepreneurs that resources “should” be diverted to HDTV rather than to messaging or data.

The need for reform becomes more pressing as competition in local phone, Internet, or video access promises to come from wireless, even before the FCC’s earnest efforts to unbundle and discount carriage on the local loop bear fruit.  And the new Congress should hurry and jump on the spectrum reform train, as the FCC’s new policy pulls out of the station and threatens to leave lawmakers behind.