Successes and Failures of the 1996 Telecommunications Act
Contents
- Table of Contents
- Acknowledgments and Caveat
- Preface From LCEF
- Preface From MIT's CRCP
- Introduction: Off Course on a Long Dark Road
Part One
Part Two
- Section 202
- Media Mergers (1995-2001)
- A Brief Note on Mergers
- Telecom Mergers (1996-2001)
- Section 336
Part Three
Afterword
Appendix
Section 336 - Broadcast Spectrum Flexibility: Spectrum Auction Ideology Under the Microscope
by Bennett Z. Kobb
Debates over who shall receive, and who shall not receive, access to the airwaves have reached unusual intensity in Washington. This field, called "spectrum policy," may appear esoteric, though radio spectrum is the lifeblood of modern technologically aided discourse. Everything from the nightly news to distance education to plain-old telephone service depends on the availability of this invisible resource. The Federal Communications Commission -- five individuals -- and their staff of experts set aside, or "allocate," precisely carved pieces of this precious commodity. Spectrum allocation, though ostensibly a technical matter, has been highly political since the government first started to authorize radio stations in the 1930s.
Today, a cadre of influential academics, industry lobbyists, and consultants advocate turning the FCC's spectrum allocations responsibility over to market forces entirely. The government raises billions of dollars by auctioning temporary licenses that are still subject to federal controls. But proponents of "market-based allocations" urge the FCC to go the next step: to sell spectrum directly to private interests -- literally to auction public policy.
The public, through democratic institutions, would have no right to determine how the spectrum is used, to allot broadcast channels to communities, or to assure diverse viewpoints or fair entry for a variety of users and purposes. The notion that the airwaves are public property would be abandoned as "inefficient," a quaint relic of Big Government. Whether spectrum would remain available under such a scheme for important public uses is questionable.
The Fortune of the Market
The FCC of today avowedly relies on market forces to determine how spectrum should be allocated in many cases. But democratic forces, not market forces, had to be employed to obtain spectrum for an important health purpose, as in the following illustration.
On February 27, 1998, Dallas TV station WFAA began to broadcast a digital (DTV) signal on channel 9. DTV is the enhanced form of television to which all U. S. stations will convert over the next several years.
What the station did not know was that wireless "medical telemetry" devices, which monitor patient vital signs, were already using channel 9 in Dallas hospitals. The powerful DTV signals caused the devices to fail. Very fortunately, no one was hurt and the TV station stopped broadcasting until the problem could be fixed. But it led to nationwide news coverage and a PR disaster for the FCC, whose regulations are supposed to keep such things from happening.
This incident was not unforeseeable. Despite long-languishing requests, and the generous spectrum allocations made to TV and other purposes, the FCC never officially made allocations for medical telemetry devices. It forced them to become "secondary" tenants of TV spectrum where unused channels could be found locally. Health care facilities were warned that their telemetry could receive interference from TV stations, but they faced penalties if these tiny devices dared interfere with anyone's TV reception.
"The Dallas TV station shut down its transmissions temporarily, once the hospitals figured out where the interference was coming from and notified the station. The TV station had no obligation to do this," noted technology columnist Jeffrey Krauss. 1 The station had no responsibility because medical telemetry was, in the FCC's regulatory scheme, a kind of hanger-on without "primary" spectrum status.
Pushing for Legislation
Emboldened health care providers, and the Food and Drug Administration, redoubled their efforts to get spectrum for medical telemetry. They understood that the Commission might continue to sit on the idea without prodding from Congress.
They found an ally in Rep. Jay Inslee (D-WA), whose 1999 Critical Care Spectrum Act (HR 2379) observed that "in making prior allocation decisions, the FCC has not adequately considered the needs of hospitals and other health care providers for electromagnetic spectrum for biomedical telemetry that is free of interference from other sources." Without action, the bill stated, "the continued operation and growth of these critical health care systems may be seriously threatened."
Faced with Congressional interest in the incident, and the possible tarnishing of DTV and the broadcast industry, the FCC found three spectrum bands and allocated the frequencies to a new Wireless Medical Telemetry Service, where the devices could operate under favorable conditions. (" We wish to underscore that we do not anticipate any further allocations for medical telemetry devices," the FCC reassuringly said.)
The FCC is supposed to allocate spectrum when it is in the public interest to do so. Its proceedings involve proposals, public input, and an accessible trail of facts and agency decisions. But the current push by some spectrum reform advocates would eliminate these features and replace them with outright auctions of spectrum.
In this plan, "Competition and profit incentives would substitute for public interest determinations by the FCC," according to American Enterprise Institute economist Thomas Hazlett. 2 Such auction of spectrum allocations, we are told, will efficiently "depoliticize" the FCC. (I would welcome a "depoliticized" FCC as enthusiastically as I would read a "sanitized" newspaper.)
Auction History
Where more people wanted wireless licenses than there was spectrum to accommodate them (a condition of "mutual exclusivity") the FCC has used comparative hearings or, in some cases, random selection to pick license winners. Most radio and TV licenses and the fantastically profitable, initial cellular phone licenses were granted after the FCC compared competing proposals in detail. Finding this process slow and perhaps irrelevant to the broadcasts or services ultimately offered, the FCC later used "Powerball" style lotteries.
At the direction of Congress, the FCC stopped lotteries and started auctioning licenses in 1994. It has awarded more than 15,000 licenses by auction, with more than $40 billion in net amounts bid (it has actually collected a lesser amount). License auctions became a bonanza for governments ranging from Guatemala to Israel to New Zealand.
New commercial broadcast radio and TV licenses -- in the limited geographic areas where they are still available -- are now auctioned. Congress exempted, however, existing TV broadcasters from having to bid to obtain DTV licenses. The 1996 Telecommunications Act , Section 336, gave the FCC authority to grant each existing TV station a second channel for use in its transition to DTV.
The Act retained the obligation of broadcasters to "serve the public interest, convenience and necessity." Stations' performance with that requirement varies widely. The stations are supposed to return one of their two channels when the DTV transition is complete, someday.
The DTV second channel is often regarded as a "giveaway," in effect, of public spectrum to broadcasters when other users of the airwaves have to bid for licenses.
Allocations Not Auctioned -- Yet
The FCC does not auction allocations. The question of whether or not to allocate spectrum, and the amount to allocate, remains a matter for top policymakers and elected officials. Using comments in a public record, the FCC at least appears to evaluate all sides of the question before actually making or declining an allocation.
Such public consultation, required under the Administrative Procedures Act, is a responsible and necessary phase before government releases a valuable public resource. But advocates of market-based allocations portray these procedures as anachronisms, constraints on commercial flexibility that must be scrapped.
TechNet, an association of high-tech CEOs, called on the FCC to "utilize market-based approaches that reduce the artificial scarcity of spectrum." 3 TechNet urged the United States to "move quickly" because "Major European and Asian nations ... have developed comprehensive spectrum management plans," as if the U. S. does not have such a plan. In fact, with what is likely the world's most wireless- intensive economy, the U. S. administers a thorough spectrum management system.
But economists Gregory Rosston and Bruce Owen want the FCC to "adopt an explicit spectrum management philosophy that essentially abdicates most of the historical functions of the agency." 4
Rosston and Owen belong to a group of "37 Concerned Economists" that told the FCC in a February 2001 filing,
Auctions have proven a success in quickly moving licenses to those firms best able to provide service to the public. But auctions for licenses have not changed the underlying system of spectrum allocation. Radio frequencies are allocated to services by an FCC rule making. The opportunity cost of spectrum is evaluated not by market participants but by regulators. With few exceptions, spectrum continues to be offered to the market only as allocated and no price can be offered to reallocate it from the officially designated use. 5
Missing from that analysis is any consideration that a government role in spectrum allocation could be a legitimate exercise of the public's right to determine how, and for whose benefit, its property should be used. Missing also is any acknowledgment that spectrum licenses now carry flexibility so broad as to confer quasi-governmental powers on the lucky license winner. One recent allocation was called "a unique opportunity to be a private FCC." 6
Decrying what they called "artificial restrictions on ownership, services, and technology," Rosston and Owen addressed the claimed shortage of spectrum for 3G (third-generation) wireless phone services:
One area of spectrum is currently being used by wireless cable operators, schools and religious institutions. These groups, particularly churches, have vigorously protested any forced reallocation of 'their' spectrum for new advanced services. To an economist, the solution is simple -- let them sell their spectrum licenses to the wannabe 3G providers. As it stands, it appears that incumbent spectrum licensees have little choice but to use the political process to retain the benefits of their current licenses. 7
Yet with regard to commercial users of that spectrum, many of whom bought their Multipoint Distribution Service (MDS) licenses at auction, the FCC permits exactly what Rosston and Owen recommend. 3G operators are free to buy the licenses. No such sales have occurred. Moreover, Instructional TV Fixed Service (ITFS) licensees such as churches have leased their spare channels to MDS pay TV ventures for decades. They remain free to lease spectrum to advanced services.
The FCC did not throw these licensees out of their spectrum allocations. It allows them the flexibility to continue their current activities, or to offer 3G services should they care to do so. This flexibility was immediately portrayed by the wireless phone industry as a type of inflexibility: "We are disappointed the Commission would limit its flexibility at this time as it seeks a solution to the spectrum shortage," said the Cellular Telecommunications and Internet Association.
Nationwide Impacts
To understand why auction of allocations has greater impact on the public, consider that the FCC normally assigns licenses to serve particular communities. An allocation, on the other hand, is nationwide. Unlike a local license, an allocation can affect the types and diversity of information available to the entire citizenry, as well as employment and the economy as a whole. It can spread to other countries, creating international markets and trends.
This suggests a continued need for a citizen voice, through strengthened public participation in FCC matters. But even if some culture of governmental humility were to emerge in Washington, regulators and elected officials could do little to change spectrum bands after they had been sold to special interests.
Thomas Hazlett listed "public interest advocates" among those who would "suffer negative returns" under a market allocation system, though, he said, the "general public would gain substantially from enhanced spectrum efficiency.... The essential reform is to abandon administrative authorizations to operate radio stations in favor of private ownership of frequencies." 8
Grassroots excursions around large spectrum owners could be throttled, with dim prospects for spectrum sharing or acquisition by community media. As media critic Jesse Walker wrote, "Freedom to create means more than that: not just the right to choose among 500 TV stations instead of three, but fewer barriers to setting up a station of your own; not just greater ease in joining the officially licensed elite, but the right to operate outside it." 9
Vital nonbusiness allocations -- for public safety communications, educational stations, and scientific frequencies, for example -- are worth preserving from commercial encroachment. Society also has an interest in spectrum access for new competitors, but auctioned allocations could exclude new licensees as well as unlicensed services such as the free wireless Internet connections appearing in public places.
"It is fantasy to think that market forces alone could allocate the entire radio spectrum with no regulatory guidance," writes business journalist Robert Kuttner. "For that to occur, government would first have to abandon the multiple social purposes that underlie the current spectrum allocation, and lock in place windfall 'possessions' of public spectrum." 10
Spectrum Crisis
We are supposed to be in a national "spectrum crisis," for which the certain cure is the granting of more licenses to the decreasing number of companies able to afford auctions. These are the same companies who, when the FCC considers creating new, competitive services, are the first to criticize the Commission for putting "too much spectrum on the market" and warning us not to "solve a problem by throwing more spectrum at it."
The rhetoric of crisis has reached the FCC's highest levels. "Our nation's approach to spectrum allocation is seriously fractured," according to FCC Chairman Michael Powell. "While we have made some major strides in how we assign spectrum, principally through auctions, allocation policy is not keeping pace with the relentless spectrum demands. ... The central problem with our current approach is that it is a command and control approach that requires government officials to determine the best use for spectrum and to constantly change the allocation table to accommodate new spectrum needs and new services." 11
Chairman Powell's pronouncement reminds this writer of the Gulf War GIs' joke that their unappetizing MREs --" Meals Ready to Eat" -- contained three separate lies. Let's examine three of the statements this military veteran would have us swallow:
1. If there are relentless spectrum demands on the FCC, they come from certain wireless phone carriers, whose aggressive promotions are sending phone usage soaring.
"[ F] lat-rate plans offering thousands of minutes of talk time a month have encouraged people to use their cell phones more frequently, and for longer periods of time," according to the Washington Post. "Allowing virtually unlimited local service poses technical and financial challenges for wireless carriers... The more [communications] traffic, the more airwaves or cell towers the carriers need, but airwave spectrum is very limited," it said. 12
While government considers their spectrum requests, these carriers are expanding anyway, via license acquisitions and new technologies. Verizon Wireless, the nation's largest wireless phone carrier, has announced that most of its network (covering 90% of the U. S. population) will be upgraded to new technology by mid-2002. This technology doubles voice capacity -- without additional spectrum allocations -- and increases Internet access speeds, as promised by 3G wireless services. A major Verizon competitor, Sprint PCS, announced that it will "make efficient use of spectrum so Sprint PCS can migrate to 3G using existing spectrum." 13
The rest of the wireless field is too busy contracting to make spectrum "demands." The once-mighty radio paging industry has been rocked by closures and failures including the ultra-flexible Narrowband PCS service. Leading equipment makers are exiting the paging business. Millimeter-wave broadband networks have lost billions. Global satellite ventures obtained substantial spectrum from the FCC, but failed to attract enough customers to support their staggering costs.
Telecom giants have sold, scaled back or canceled their fixed wireless services. The ballyhooed $1 billion Ricochet wireless Internet service provider sold for $8 million in a bankruptcy proceeding. The FCC even withdrew new spectrum, slated for auction, for lack of interest. Following audits of spectrum use, "entities are turning in spectrum that they no longer need," according to FCC wireless chief Thomas Sugrue. 14
2. Must government officials determine the best use of spectrum as Powell claims? The FCC increasingly leaves that decision to its licensees. With today's flexible allocations, licensees may make almost any use of the auctioned spectrum. "Here is some spectrum. Do what you want with it, with a few very minor exceptions. Our opinions mean nothing 15 seconds after you buy the spectrum," FCC executive Jerry Vaughn told auction bidders. 15
"The FCC, not the market, allocates frequencies to competing uses," Thomas Hazlett maintains. 16 Yet the FCC rarely does this today. "We are not inclined to allocate spectrum for particular kinds of services unless there is a clear and compelling public interest in doing so," the Commission has stated. 17 As this article was being written, the FCC allocated 27 MHz of spectrum to new uses without specifying them in detail, except for a small adjustment in the Wireless Medical Telemetry Service spectrum. 18
Far from Hazlett's "regulatory rigidities" that "continue to block new competition, frustrating wireless entrepreneurs," 19 this FCC action "is an important step toward bringing new wireless data services to America's consumers," said one such entrepreneur, Martin Cooper,
CEO of ArrayComm Inc. "There is an opportunity to deploy, in some of this spectrum, innovative and spectrally efficient wireless services," Cooper said. 20
Stung by criticism that it was stiffly imposing "industrial policy," the Commission adopted a nomenclature so nonprescriptive and permissive as to border on the humorous. Citizens who wish to understand how the FCC doles out public spectrum will have to comprehend the Commercial Wireless Radio Service, Commercial Mobile Radio Service, Miscellaneous Wireless Communications Service, General Wireless Communications Service, General Purpose Mobile Radio Service and General Mobile Radio Service, among other ambiguous categories.
The FCC's relaxed "buildout" requirements afford licensees as much as a decade before they must actually use the spectrum. Its liberal auction payment schedules, extended license terms, and minimal service rules permit licensees abundant leeway in using their licenses.
Recently too, the FCC reallocated the 698-- 746 MHz band to Fixed, Mobile and Broadcast purposes -- in other words, a carte blanche for almost any function anyone would care to offer. Those restrictions the FCC does impose are usually needed to protect "safety-of-life" services such as aviation, emergency, or sensitive federal operations. There are exceptions -- the apparent ban on local broadcasting in the satellite audio services is one -- but in the main, the FCC does not unreasonably dictate spectrum use.
3. The FCC must "constantly change the allocation table to accommodate new spectrum needs and new services," Chairman Powell said. Yet changes to the National Table of Frequency Allocations are hardly constant. These infrequent revisions typically accommodate, not "new needs and services," but technical adjustments or changes in terminology.
Even major service introductions, such as Low Power FM, need not require major changes to the Table. Much of the rest of the spectrum has already been so deregulated that requests to change the Table, plentiful in the pre-auction era, are relatively rare today.
Powell's solution for the problems he perceives is a "market-oriented allocation policy." The FCC already has a market-oriented assignment policy. It assigns licenses to the highest bidder. A market-oriented allocation policy would auction allocations: a solution in search of a problem, and an unprecedented policy leap that could discount or eliminate what opportunities for public input do exist.
FCC allocation policy typically allows a variety of uses, within the broad scope of today's generic radio services. Allocation auctions could narrow that flexibility. For such auctions to occur, a particular allocation must be able to outbid a variety of spectrum uses. All licensees in that allocation would have to comply with the type of use ordered by the auction outcome.
Deviating from the auction-allocated service could constitute "derogation" of the Table of Allocations, a transgression that invites FCC enforcement, and even regional and international concern. A licensee could be accused of illegal "narrowcasting" to particular audiences, using spectrum allocated to "broadcasting" in some long-forgotten auction.
In another scenario, bands that now serve both satellite and terrestrial needs could be turned over to one purpose, foreclosing the other; and threatening beneficial sharing arrangements between unlike interests.
FCC as Arms Dealer
Allocation auctions seem inconsistent with longstanding traditions of cooperation, openness, and dispute resolution in the radio spectrum, replacing them with a dispute-generating mechanism: inventing competitions that only government auctions can resolve.
Disputes over spectrum use are as old as radio itself. Congress empowered the FCC to resolve contested allocation and interference questions. In practice, parties can frequently handle such disputes privately with little government involvement. Mergers, buy-outs, spectrum-or time-sharing agreements, voluntary station relocation, and mutual technical compatibility are among the methods they use. Many spectrum allocations billed as "patch-works" of government "zoning" are based on hard-won consensus in scientific and international bodies.
In a widely misunderstood July 2001 action, the FCC assigned licenses to eight satellite companies without auction. Negotiations and engineering solutions made this achievement possible. 21 Each applicant received satisfactory spectrum. One commenter called this action a "return to an aggressive industrial policy of corporate welfare" by giving satellite providers free spectrum over the objections of wireless phone companies, which paid billions of dollars for their spectrum. 22 But the means the satellite applicants employed are available to all. For example, the early history of cellular telephony and radio paging is replete with extensive, nationwide settlements that avoided auctions.
When some competing applicants settle their differences, this should not worry public interest advocates. What should concern them is commercial use of public spectrum for free -- to benefit shareholders without returning a portion of revenues to public service purposes, except perhaps in the income taxes imposed on all enterprises.
Whatever the gains in efficiency they afford, license auctions entrench government as arms dealer, profiting from mutually exclusive, instead of widely accommodating, spectrum arrangements and high financial barriers to entry. Extending auctions beyond licenses, to allocations, will further extend the private capture of public spectrum assets.
Genuine reform would address perverse economic incentives in our spectrum system. It would reward cooperation while retaining for the public a fair share of money earned with its electromagnetic property. It will come from a clearer picture of communications policy, if voters demand it.
Endnotes
1. Jeffrey Krauss, May 1998 CED Magazine.
2. Thomas Hazlett, The Wireless Craze, The Unlimited Bandwidth Myth, The Spectrum Auction Faux Pas, and the Punchline to Ronald Coase's 'Big Joke': An Essay on Airwave Allocation Policy, AEI-Brookings Joint Center For Regulatory Studies, Jan. 2001, p. 173.
3. "TechNet CEOs Call for National Broadband Policy," Press Release, TechNet, Jan. 15, 2002.
4. "Spectrum Allocation and the Internet," Discussion Paper 01-09, Stanford Institute for Economic Policy Research, p. 8.
5. "Comments of 37 Concerned Economists," FCC Docket WT 00-230, Feb. 7, 2001.
6. Interview with Mark E. Crosby of Access Spectrum LLC, Private Wireless magazine, Vol. 9, No. 6, 2001, p. 17.
7. "Spectrum Allocation and the Internet," p. 8.
8. Hazlett, p. 173.
9. Jesse Walker, "Free Your Radio: Three Liberties We've Lost to the FCC," Reason, Dec. 2001.
10. Robert Kuttner, Everything for Sale: The Virtues and Limits of Markets, Knopf, 1997, p. 243.
11. Remarks of Chairman Michael Powell at FCC Press Conference, Oct. 23, 2001.
12. "More Cell Phone Users Cut Ties to Traditional Service," Washington Post, Dec. 28, 2001.
13. "Leading the Evolution to 3G," Sprint website, Jan. 16, 2002.
14. "Keeping Principals in the Forefront in Managing Private Wireless Spectrum," Private Wireless magazine, Vol. 9, Issue 6, 2001.
15. Bennett Z. Kobb, Wireless Spectrum Finder, McGraw-Hill, 2001, page 239.
16. Hazlett, p. 196.
17. FCC Notice of Proposed Rulemaking, FCC 00-395, Docket ET 00-221, Nov. 20, 2000, at 36.
18. FCC Report and Order and Memorandum Opinion and Order, ET Docket 00-221, Jan. 2, 2002.
19. Hazlett, p. 197.
20. "FCC Action Enables New Spectrally Efficient Broadband Wireless Technologies," Press Release, ArrayComm, Jan. 2, 2002.
21. "International Bureau Authorizes New Mobile Satellite Systems in the 2 GHz Band," Press Release, FCC, July 17, 2001.
22. Michael Calabrese, Principles for Spectrum Policy Reform, New America Foundation, Oct. 2001.
