Last month--lightning response time in the world of spectrum regulation--37 leading economists submitted a formal answer telling the FCChow to do just that.
The economists told the FCC that they have stumbled onto a superb idea--aNobel Prize-winning idea. In seminal papers written in 1959 and 1960,Ronald Coase began by pondering how society managed to waste hugely valuableradio spectrum. His discovery--that a lack of private ownership was theculprit--was an epiphany for Coase, who in 1991 became a Nobel Laureate inEconomics for his theorizing on the matter.
Yet, federal policy continues to deny the market permission to tradespectrum. This made Kennard's query a trick question. Indeed, just daysafter his challenge was issued, Commission staff commented to reporters thatthey wanted to move towards a "radical overhaul" of FCC policies to makewireless bandwidth markets possible. The story made the lead headline in The New York Times because trading radio spectrum like a commodity islargely illegal today.
Where it isn't--in bandwidth confined inside fiber optic cables--capacity exchanges are popping up everywhere. RateXchange, Arbinet, Enron,Pulver.com and Bandwidth Market operate domestically, with internationaltrading active at Band-X (London), Cape Saffron (London), and Interxion(Amsterdam). These markets materialize precisely because the airwaves arehoused in wires--"spectrum in a tube." While technically identical to wireless, wireline bandwidth is privately owned. Capacity can be sliced anddiced, bought or sold, rented or leased as the tube owner sees fit. Newusers can easily get access to the communications grid, instead of beingshut out while idle capacity is wasted.
Spectrum allocation and politics
Airwaves, on the other hand, cannot legally be owned. The FCC, in itsmandate to regulate airwaves according to "public interest, convenience ornecessity," maintains the exclusive right to determine what services go overwhat bands.
Upstart wireless competitors must queue up at the FCC to gain a spectrumallocation via a formal Rule Making, as there is no private band owner whocan sell, lease or rent airwaves to deliver these new services to customers.
While unused or under-utilization spectrum is to be found in all sorts ofprime locations on the electromagnetic dial, frequencies are walled off frommaking any economic contribution.
Wireless innovators must traverse the political world of spectrumallocation--a hostile, slow-moving environment where old technologies arefrozen in time, protected by a praetorian guard of bureaucrats and vestedinterests. At the urging of NBC and other AM broadcasters in 1934, the FCCgave FM radio the cold shoulder for twenty years after its inventor soughtaccess to radio spectrum. This set the stage for decades ofanti-competitive policies to follow.
Today, entrepreneurs fantasize about moving airwaves around to unleash the next 'killer app,' but instead shell out for lawyers, lobbyists and tuxedos--the latter for attending their quota of $1,000 a plate dinners.
Cracking the Berlin Wall in spectrum will still prove formidable. The FCC's1952 TV Allocation Table set aside a vast block of frequencies still largelyunused today. A dollop of the TV band was peeled off for cellulartelephones--that took over 21 years, and left oodles of under-utilized airspace untouched.
According to a 1992 FCC estimate, some UHF television stations in LosAngeles were only 1/20th as valuable as cellular telephone systems using thesame frequency space. The public got too many "Magnum P.I." reruns and toofew cell phone calls. But the UHF spectrum is still locked into low-ratedTV stations, even as Americans watch the Europeans and Japanese build new"3G" networks and innovate with new applications on the wireless Web.
A call for reform
A 1997 FCC staff paper conceded, "No government agency...can reliablypredict public demand for specific services or the future direction of newtechnologies." The study urged the Commission to attempt "substantialreplication in the spectrum context of the freedoms inherent in property rights (to) allow competition to function more effectively, much as it doesin those sectors of the economy where basic inputs are privately owned."
This call for reform was hugely controversial inside the Commission.Wireless operators tried to kill the report altogether. If truly liberalspectrum rules were adopted, the resulting competitive onslaught of newservices would be a boon for the consuming public, but a bust for manyestablished licensees.
The latter sport the more impressive lobby, as Ronald Coase found out inproposing bandwidth markets long ago. Called to testify at the FCC in 1959,a Commissioner opened the questioning with, "Is this all a big joke?"Shortly thereafter, Coase was retained by the Rand Corporation to write amajor spectrum report. The think tank declined to publish it when itsoutside reviewer stated: "I know of no country on the face of the globe--except for a few corrupt Latin American dictatorships--where the ?sale? ofthe spectrum could even be seriously proposed." An internal memo warned ofthe trouble publication would prompt in "Rand's 'public relations' inGovernment quarters and in Congress," anticipating the "fire and counterfireof CBS, FCC, Justice and--most of all--Congress."
The gentlest hint of a warmer breeze can now be felt. Television and radio stations pushed spectrum regulation into place, andthey still form its sharpest defenders. Yet, they are clearly declining ineconomic significance, as cable, satellite, and the Internet eclipse thelocal broadcast outlet. Even more important is the fact that the sectors hungry for more efficientCommunications--computers, networks and software--are ascending to dominancein the New Economy. As this continental shift proceeds, industry lobbyistswill tend to push for wireless competition. Indeed, the ancient spectrum regime is already beginning to wobble.
Perhaps the consensus among economic policy experts will help. The formalcomment filed this month at the FCC calls for liberating the airwaves,limiting federal regulation to interference rules and standard competitionpolicy. It urges lawmakers to refrain from spectrum zoning, standardsetting, or attempting to create bandwidth markets.
Such markets willspontaneously emerge if the FCC supplies the missing ingredient:flexible, exhaustive rights allowing competitors to determine spectrum use.
The policy statement was signed by former top economists at the FCC, FederalTrade Commission, the Justice Department's Antitrust Division, and theCouncil of Economic Advisers under administrations of either party. It wasalso signed by Ronald Coase.
Perhaps by now even the FCC understands: He's not joking.