Riding the Wrong Wave

Why the U.S. government’s plans to auction off spectrum to wireless carriers won’t help innovation

Illustration by 731

By Brendan Greeley

Your television, cell phone, and GPS talk to the rest of the world over electromagnetic waves. All of the wave frequencies used for commerce and government communication—roughly from 9,000 cycles per second to 275 billion cycles per second—are together referred to in Washington as “the spectrum.” Two agencies manage it: The Federal Communications Commission handles commercial and state use, and the National Telecommunications and Information Administration runs federal applications. The FCC licenses pieces of the spectrum to private companies, such as radio and television broadcasters, but all of it belongs, legally speaking, to the U.S. There is a finite amount of it, and everybody wants some.

That is causing problems. Last February, Cisco Systems estimated that mobile data will increase 26-fold from 2010’s numbers by 2015. Almost one-third of this will move through Wi-Fi networks, which use unlicensed spectrum and don’t burden wireless carriers such as AT&T or Verizon Wireless. But the carriers have adopted the phrase “spectrum crunch,” designed to make vivid the pain of a hypothetical moment when there are more data than the available spectrum can handle.

The Obama Administration has decided that wireless carriers need more spectrum. Since the Radio Act of 1927, the U.S. has had, in what ultimately became the FCC and the NTIA, a kind of ministry of electromagnetism, allotting licenses for the specific, restricted use of spectrum among industries and government agencies. In 1994, rather than grant all licenses for free, the FCC began auctioning rights to pieces of spectrum, mostly to wireless carriers. Now all the easy pickings in spectrum have been auctioned off, according to Blair Levin, who headed last year’s national broadband plan for the FCC. And so the Administration has adopted Levin’s idea for opening up more spectrum to wireless companies: “incentive auctions.” Television broadcasters will be offered the chance to give up some of their spectrum in return for an as-yet-unknown percentage of the auction proceeds.

It’s a fair solution, but only if you think the FCC need operate within the narrow range of options encouraged by the companies it regulates. The FCC has decided to move spectrum to what it sees as a higher-value use, an ardently wished-for desire of the wireless carriers. What the commission should be trying to do instead is get out of the business of making decisions altogether. The problem is not that spectrum is in the wrong hands, but that there’s no real market for it.

When Larry Summers, then head of the President’s Council of Economic Advisers, delivered a speech in 2010 announcing the incentive-auction plan, he opened with a tribute to Ronald Coase.* In 1959, Coase, then an economist at the University of Virginia, wrote a paper titled “The Federal Communications Commission,” which essentially argued that the FCC didn’t need to exist. Before 1927, electromagnetic spectrum was akin to a piece of green prairie, where homesteading broadcasters created property rights by using it.

Spectrum, according to Coase, was like land, and Congress’s decision to nationalize it had shuttered a growing market. Free licenses were a subsidy, both to broadcasters and government users such as the Pentagon, and there was no incentive to use spectrum efficiently, since there was no opportunity cost to holding too much of it. The FCC, he concluded, should define a property right for spectrum, auction it to private holders, and let them trade among themselves. “It is true that some mechanism has to be employed to decide who, out of the many claimants, should be allowed to use the scarce resource,” he wrote, “but the way this is usually done in the American economic system is to employ the price mechanism.” Coase won the Nobel Prize for work that began with his 1959 paper on spectrum. He is the Adam Smith of spectrum; everyone who has followed him must somehow respond to his arguments.