Spectrum licensing and broadband

Back in 1927 when Congress established the Federal Radio Commission, the predecessor to today's Federal Communications Commission, it precluded a full property rights regime in the radio spectrum by declaring its purpose to maintain government control of the airwaves. Today, almost seventy years later, the Communications Act continues to bar private ownership of the spectrum.

At the same time, it generally grants the FCC authority to allocate the use of frequency bands for whatever services the agency deems appropriate and to issue licenses to particular applicants for use of the allocated frequencies.

You don't have to be steeped in either 17th century Enlightenment property rights philosophy or contemporary public choice theory to understand that this scheme of managing the overall spectrum resource and assigning valuable licenses is an open invitation to rent-seeking and political maneuvering par excellence.

It is not surprising that over the years controversies have erupted when politicians ranging from Lyndon Johnson to Richard Nixon have attempted to influence FCC licensing decisions for their own benefit.

While we are stuck with a regime that precludes private ownership of the spectrum, there nevertheless is some flexibility consistent with the Communications Act for movement in the direction of a property rights approach to spectrum licensing. Making licenses more easily transferable in secondary markets and giving licensees more leeway in deciding what kinds of services they want to offer over their assigned frequencies are two steps recently taken by the FCC to implement a more market-oriented, property rights-like approach.

Another important step, explicitly authorized by Congress, has been the use of auctions as the default means of assigning licenses when more than one applicant requests the same spectrum.

Now a company called Northpoint, in a furious lobbying campaign, is asking Congress to reverse an FCC decision requiring that spectrum it wants to use to provide land-based wireless broadband services be put up for auction among competing bidders.

In a May 2002 decision, Northpoint failed to persuade the FCC that it should be awarded this spectrum on an exclusive basis by administrative fiat, and it filed a court appeal that remains pending. If Northpoint convinces Congress to intervene, the movement toward a more market-oriented approach--one less dependent on the skills of politically connected lawyers and lobbyists--will be set back considerably.

Northpoint's claims
Northpoint makes several points in arguing that it should not have to bid at auction for the desired frequencies.

• It claims it pioneered the development of new technology that allows its proposed terrestrial service to share spectrum with satellite services like EchoStar Communications's Dish Network and Hughes' DirecTV.

• And it claims that if it gets its service up and running it will provide competition not only to the satellite firms, but to the telephone and cable companies as well, by making available a package of video, telephony and Internet services.

• And, to add further spice to its congressional entreaties, Northpoint suggests its service especially will be a boon in rural areas.

Controversies have erupted when politicians ranging from Lyndon Johnson to Richard Nixon have attempted to influence FCC licensing decisions for their own benefit.

While Northpoint's arguments may be superficially appealing, they are not ultimately persuasive. First, although for a brief period the FCC did have a policy authorizing the award of spectrum auction-free based on claims of innovative technology, Congress abolished this so-called pioneer's preference because it encouraged interminable litigation concerning preferences entitlements. Making licensing decisions turn on bureaucratic judgments concerning innovativeness proved to be a real roadblock toward the quick assignment of spectrum.

It is true that Northpoint--and other companies that propose to use similar technologies to share the same satellite spectrum Northpoint wants--may provide additional broadband competition. The more competition for video, telephony and Internet access services the better. But the direct-to-home satellite providers with which Northpoint wishes to compete, as well as the terrestrial mobile wireless companies that compete in some of the same market segments, already have paid many millions of dollars at auction for their spectrum. And both of these types of "wireless" services have brought new services to underserved rural areas.

Some argue that the primary benefit of spectrum auctions is that, as opposed to, say, a lottery, they raise millions of dollars for the U.S. Treasury. While this may be true, it is not the primary rationale supporting auctions. Rather, as the FCC stated in denying Northpoint's request for spectrum on an exclusive no-bid basis, assigning licenses "through competitive bidding also promotes efficient and intensive use of the spectrum...because (the winning) bidders are more likely to rapidly introduce new and valuable services and deploy those services quickly."

Even though spectrum auctions may not always be appropriate, for example, for frequencies reserved for public safety functions, and do not--absent other changes in law and policy--create a fully functioning property rights regime, they are useful in moving in a free market direction. The prime reason: They are ways to place spectrum in the hands of those entities that value it most highly.

As long as the government takes the position that it owns the spectrum and private parties use it only at its sufferance through limited licenses, spectrum allocation and assignment decisions will be subject to a certain degree of political maneuvering. But if Congress accepts Northpoint's pleas to overturn legislatively the FCC's decision, it will deal an unfortunate blow to the FCC's efforts to move toward a more market-oriented and flexible spectrum regime that benefits the public at large.