We’ve Got it All on VHF
| Gabriel |
The Obama administration recently demonstrated that it knows the Coase theorem through a proposal for “incentivized” spectrum auctions to get buy-in from incumbent television licensees. I’m not completely sure why this proposal is part of the jobs bill but it strikes me as a great idea, albeit one that is aimed at a pragmatic solution to the long-standing terrible idea that is spectrum licensing.
The fundamental problem is that spectrum is a scarce resource that is currently allocated in a highly inefficient way. The best spectrum, VHF, is allocated to television, even though most people have cable or satellite and some of those who don’t may not watch broadcast tv. (My own digital tuner broke a few months ago and I haven’t bothered spending $30 to replace it since I mostly watch Amazon and Netflix on my Roku and Hulu on my Mac).
In contrast, there is a real scarcity of spectrum allocated to wireless telecom. This is the root cause of why people hated AT&T’s now defunct iPhone exclusivity and why a voice and data phone plan costs upwards of $60 a month. So basically, you’ve got a scarce resource being allocated to an activity which (because of good substitutes) is low valued and a real demand for the resource in another activity. In a free market the price signal would cause resources to flow from the low value activity to the high value activity and the problem would solve itself. Similarly, an efficient regulator would also strive to maximize welfare by this reallocation. The problem is that spectrum is subject to neither a free market nor an efficient regulator but a mixed regime of regulated allocation whose incumbent stakeholders have effective veto power and this provides the worst of both worlds.
Since the Radio Act of 1927, we’ve had a licensing regime for broadcasting. In principle this means that spectrum is public property that is licensed to private actors so long as they use it to serve the “public interest.” Although the licenses are theoretically short-term, they are habitually renewed except in extreme circumstances. In practice our regime is that the broadcaster has a restricted but perpetual property right to spectrum that grants the right to use the spectrum for a particular purpose but not to use it for other purposes nor to sell it to others who would use it for new purposes. This means that broadcasters can derive value from their spectrum but only so long as it is used for broadcasting as they have no right to sell it to telecoms.
Broadcasters thus have an incentive to squat on it no matter how much over-the-air viewership declines or how much cell phone rates go up, because, hey, why not?* Certainly the National Association of Broadcasters has taken an approach of kicking and screaming about any allocation of VHF to wireless telecom, while hinting that they do have a price at which they’d be willing to sell their spectrum if allowed to do so. Most notably, NAB raised hell about “interference” when the FCC proposed using “whitespace” between broadcasting signals. Given that such interference is likely to be minimal this is insane from the perspective of maximizing social welfare, but why would the broadcasters care about a massive opportunity cost given that the value created by utilizing whitespace goes to telecom providers and consumers and not to them?
Hence the administration’s recognition that the broadcasters need to be bought off in order to move forward. The administration’s understanding was effectively confirmed when the National Association of Broadcasters commented that “NAB does not oppose incentive auctions that are truly voluntary.” In other words, NAB supports a proposal that lets them alienate their property but would oppose a policy that merely revoked licenses to allow the state to reallocate them. Hence incentivized auctions, which effectively split the difference between the de jure “licensee” and de facto “property” understandings of what spectrum is. This grand bargain is exactly what law and economics folks have been proposing for decades and we’re now seeing it come into play.
Personally, I’m just hoping that we radically deregulate spectrum allocation one way or another and if compensating the incumbent stakeholders is what it takes, then I’m fine with that, especially since I never believed that they were just “licensees” rather than de facto property owners in the first place. More broadly, let this be a lesson as to why feudalism sucks. We’re only in this mess in the first place because since 1927 we’ve treated spectrum as public property to which broadcasters are granted contingent but effectively perpetual usage rights, much like a hereditary fief granted to a vassal. This is roughly equivalent to private ownership except that it makes medium (as compared to content) innovation illegal. If we’d auctioned off VHF as freehold property in the first place, a free market would have reallocated much of it to wireless voice and data usage ten or twenty years ago.
The reallocation of VHF to wireless would be a very good thing. In the short-term, it would mean cheaper cell phone bills and better cell phone reception, particularly indoors, which means that in a few years I will cease to be the last person in America who has good credit and is not a drug dealer but nonetheless uses a $20 pre-paid cell phone. But me personally finally getting a phone that can play Plants vs Zombies is less important to me than my country permanently shifting to a fully private property regime in spectrum. First, this means that the next time an innovative technical application for it comes along we won’t have to go through this nonsense again. Second it means the end to a few pernicious legal doctrines. One of the issues with a licensing regime is that it provides a pretext for censorship. Do a Google search for the phrase “public airwaves” and almost every search result is somebody attacking freedom of speech, usually with some variation along the lines of “I believe in the first amendment, but we shouldn’t be effectively subsidizing lies/stereotypes/immorality through allowing them on the public airwaves.” This is such a familiar rhetorical trope that you sometimes see
idiots people applying it to cable, which is private property and so isn’t relevant to the “public airwaves” argument on its own terms. I would love to see us make Red Lion a dead letter, and radical spectrum deregulation would accomplish this.
Moreover, VHF deregulation would solve the same problems as net neutrality but to do so with less potential for abuse by an overreaching and/or captured state. I have mixed feelings about net neutrality. On the one hand, I am extremely sympathetic to its goals of supporting content provider business model innovation and I’m a great cynic about Comcast’s long-term strategy to suppress this innovation. On the other hand, I worry a lot about this being the camel’s nose under the tent for an intrusive and/or cumbersome regulatory regime and in particular the structural problems with the FCC that Wu articulates in The Master Switch. (The first two-thirds of the book is a rather Stigler-esque history of how during the 20th century NBC and AT&T captured the FCC and used it to create barriers to entry, then in the last third of the book he argues that this same regulatory agency should expand its scope to regulate the internet. WTF Professor Wu, did you read your own book?) However I think we can have the upside of net neutrality without the downside simply through having more viable options for broadband such that if you don’t like your ISP screwing around with your access to Skype or Netflix then you can change ISPs. The reason this would work is that the broadband market is characterized by a last mile problem, which means natural monopoly (actually duopoly for largely historical reasons), which means telecom market power over consumers, which in turn provides the rationale for net neutrality. However abundant wireless spectrum solves the last mile problem which cascades through the argument to mean that net neutrality is superfluous in a world where ISPs on VHF compete with those on coax and fiber optic.
Cheaper cell phones, undermining dangerous extant and developing legal doctrines, and long-run openness to efficient resource allocation — what’s not to like?
* You can get even more cynical and say that broadcasters are opposed to ubiquitous broadband because they worry that streaming video is a disruptive innovation, but I’m not sure if they’re thinking that far ahead and in any case such a supposition isn’t necessary to see why they’d want to hold out for a better deal.