Going Beyond Spectrum Auctions

Eli M. Noam 1

Tel. 212-854-4222
Fax. 212-932-7816

When Congress passed the Telecommunications Act a week ago, one of the major unresolved issues left was the question whether broadcasters should pay for their licenses. Senator Dole, in particular, demanded that broadcasters, too, start paying for the spectrum they plan to use for next-generation digital TV. Broadcasters, who for decades had successfully fought off similar suggestions, were appalled, divining partisan motives lurking behind a legitimate policy question. But their problem is that right now, almost anyone, it seems, loves to auction off spectrum: liberals, because it makes communications companies pay their way; most conservatives, because it substitutes market mechanisms for government controls; economists, because it allocates spectrum quickly and efficiently; and budget balancers, because it can raise much money.

Those who oppose auctions are either existing broadcasters arguing on behalf of "free" as well as advanced digital TV; and public interest advocates who view the frequency spectrum as a public sphere subject to public service obligations.

On the whole, the arguments in favor of auctions are stronger than the arguments against, partly because most legitimate problems can be dealt with in other ways. But this does not make the present auctions system necessarily the best approach for the future. While it seems fair to make commercial firms pay for the use of a scarce resource, auctions are merely one technique for doing so. Before we barrel ahead, let us consider long term alternatives so we can preserve flexibility for the future.

Some auction enthusiasts believe that property rights in spectrum mean the end of government regulation. But this is naive. Property rights in spectrum, by themselves, would not end government intrusion any more than the private ownership of land stops government from regulating it in detail. Indeed, an auction could lead to future calls for regulation if the highest bids can be made by companies in anticipation of maintaining high prices through oligopolistic pricing. To maintain competitive markets it is therefore important to create the possibility of continuous entry by other firms, because high prices will then not be sustainable.

Auctions are good for now, especially if they are linked to flexibility of usage, but there is a still better free-market alternative: an open entry spectrum system. In certain frequency bands, nobody would control any particular frequency and anyone could enter at any time , without the need for a license. Instead, all users of spectrum would pay an access fee that is continuously and automatically determined by the demand and supply conditions at the time, i.e. by the existing congestion in the band. In that system, a broadcaster or any one else who transmits would pay a toll. They would transmit not on any particular frequency but on a much wider band. The TV sets of viewers, as well as other types of receivers would be smart enough to select those bits they want. From the viewer's perspective more providers can reach them, not just those who could afford a government license.

The present auction system compares spectrum to land. But that is based on the present relatively primitive state of technology in which information is basically coded onto a single frequency to prevent interference with other users. For similar reasons, most bands are dedicated to a single purpose, such as mobile phones, radio broadcasting, taxi dispatch, etc. It is as if a highway were divided into wide lanes for each type of usage--trucking, busing, touring, etc.-- and then further into narrow lanes, one for each transportation company. Once one accepts this model for spectrum one can argue about how to distribute the lanes, whether by economics, politics, luck, priority, ethnic diversity, etc. But it is important not to take this model as given. Why not intermingle the traffic of users? And if the highway begins to fill up, charge a toll to every user? And make that toll depend on traffic conditions, so that it is higher at rush hour than at midnight? In such a system, nobody buys ownership to a slice of the road, but rather pays for access to the road environment. A similar concept applies to access to the wireless "ether."

This is not a far-fetched idea. Evolving technology can squeeze much more information into a spectrum band by having the information bits seek temporarily unoccupied frequency slices and time slots rather than stick to one dedicated and protected frequency. And economics, through variations in the access price, can allocate the scarce spectrum most efficiently.

How would the price be set? The users of spectrum bands would run clearinghouses that function like commodity exchanges, not for orange juice and pork bellies but for spectrum. In practical terms, a clearinghouse would basically be a computer that sends out price signals. Those users who accept the price return a signal to that effect and transmit. When capacity is underutilized, prices drop and an updated signal is sent out.

This system need not be applied to every band. For example, some frequencies could be dedicated, to educational or governmental users, who could also resell parts of their capacity to raise operating revenues. Similarly, election candidates could get a "bit endowment" to access the spectrum.

Who gets the proceeds from the access charges? As in the auction, it would be the U.S. Treasury, but with the revenue flow smoothed, rather than dependent on oneshot deals. At present the auction money simply disappears into the black hole of the budget, taking money out of the telecommunications infrastructure just when there is a need to upgrade it. This suggests the need for some funds to be earmarked for re-investment in communications.

The concept of buying spectrum access as an input rather than holding an exclusive license is certainly unfamiliar. But it is not different from an independent gas station that cannot be certain of the price of its vital input, wholesale gasoline, but buys it at market prices. Where price certainty is deemed essential, markets for capacity futures will no doubt evolve just as they did for crude oil.

Is the concept practical? In the fifties, when a law student, Leo Herzel, and the future Nobel Economics laureate Ronald Coase proposed spectrum auctions, they were met with a host of make-weight objections on its impracticality. Technologically, the proposed next-generation system is not presently available, though its component parts either exist or are within reach. There is no reason to believe that the technical issues cannot be overcome. Unlicensed use of spectrum already exists for some bands for low-power industrial, scientific, and medical applications. Last year, an industry consortium designed common equipment protocols that have a built-in "spectrum etiquette" such as "listen-before-talk". Also last year, the computer company Apple petitioned for a spectrum band for new digital applications, with no license requirements. Why not expand this concept and dedicate bands to the open-access, access-price model?

The point is that spectrum allocation can take new forms, and tomorrow's best system might be different from today's. This suggests that Congress, instead of legislating this matter in detail now, should delegate instructions to its expert agency, the Federal Communications Commission, to flexibly devise systems of fees appropriate to various bands and uses. And it suggests that the FCC, whose auctions have been a success story so far, should not be content to repeat itself but to approach spectrum in a pragmatic and searching fashion than with the notion that the free market is served by one and only one particular technique. Auctions are fine for today, but we should be ready to explore the next step, and bring the invisible hand to the invisible resource.


Note 1 : Professor of Finance and Economics, Graduate School of Business, Columbia University. Director, Columbia Institute for Tele-Information. Former Public Service Commissioner, New York State. Back

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