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Why airwaves should be deregulated

Economists Thomas Hazlett and Gregory Rosston warn that a Washington, D.C., bureaucratic fiasco in the works will have dire consequences for telecommunications customers.

On Nov. 24, a much-touted regulatory initiative was put into effect by the Federal Communications Commission.

Called "number portability," the policy enables you to keep your cellular phone number, even if you switch carriers. It is designed to enhance competition among the six national wireless phone systems by making it easier for subscribers to jump ship for a better deal.

This is what passes for a big deal in Washington, D.C., but it is barely a blip on consumers' radar screens. On the other hand, allowing carriers to simply utilize idle airwaves would upgrade service and send usage fees plummeting.

Today, the U.S. cellular industry is allotted little more than half the radio spectrum used in European Union countries. Squeezed for bandwidth, costs inflate, and phone call quality declines. Moreover, advanced wireless networks are stymied, starved for spectrum.

Regulation blockades the market. Take the owner of an independent ultrahigh-frequency (UHF) TV station that's carried by cable and satellite operators to 95 percent of its viewers.

Regulators have taken only baby steps toward markets, and--under the current Bush administration--actually retreated from even these tentative initiatives.
This company might use frequencies assigned to its station to instead offer wireless broadband, competing with cable modems and digital subscriber lines. Internet-based networks would receive a huge boost, while TV viewers would continue to receive programs via subscription services. But broadcast license rigidities--Stalin-era regulations--thwart progress.

In February 2001, a group of 37 prominent economists, including Nobel Laureate Ronald Coase and many of the top advisers in the elder Bush and Clinton administrations (as well as both authors of this article), urged the Federal Communications Commission to liberalize spectrum policy.

Specifically, they asked the FCC to allow new and existing licensees the right to offer any service, using any technology that does not cause material damage to other spectrum users. Markets would then be empowered to move wireless bandwidth to where consumers, investors and risk-taking technologists want it to be. If heeded, wireless phones would work better at a lower cost, while nationwide networks that provide wireless Internet access would be challenging for supremacy in the broadband race.

Yet, regulators have taken only baby steps toward markets, and--under the current Bush administration--actually retreated from even these tentative initiatives. A spectrum report the FCC issued in November 2002 cut the bandwidth that a November 1999 FCC report (under Clinton) had proposed to allocate for flexible licensed use by 46 percent. It also failed to raise the question why none of the targeted frequencies had been made available to the marketplace in the intervening three years.

Still darker clouds threaten, as antireform (or pro-status quo) Republicans embrace Democratic friends that bear "public interest" rationales for restricting competition. Making licenses flexible yields new freedom.

Taxing the productive use of new technologies feeds political forces that prosper by blocking entry.
That's productive, because it allows more economic use of airwaves. But some see the new rights as "windfalls," arguing that the government should capture every penny of value that free markets bestow.

This, incredibly, leads them to champion policies that restrict the number of new rights issued. This artificial scarcity does force license bids higher, but only by inflicting mass casualties on the consuming public. By depriving markets of vital spectrum inputs, it forces consumers to continue to bear the needlessly high costs of a low-technology world.

An example illustrates. Wireless operators are typically licensed to offer specific services, according to technologies and business models bureaucrats prescribe. Government mandates, for instance, forced analog cellular phone systems on a 1980s world that yearned to be digital. Worse, restrictions keep licensees in one band from offering services to compete with those in another, as in the UHF TV mandate.

Spectrum deregulation has, in limited instances, stripped away such restrictions, and efficiency has broken out. Since a 1988 deregulation, wireless phone networks have been able to offer most any service or technology within the airspace defined by their licenses.

As a result of this laissez-faire regime, personal digital assistant networks have sprung up for which no government assembly is required. Carriers compete to create networks for the BlackBerry, the Palm Pilot, the Treo and the PocketPC. Additional spectrum deregulation would now allow these data networks to purchase bandwidth to zip along at broadband speeds.

When free markets lead to innovation, low prices and happy customers, what's not to like? The government's take from wireless license auctions. The more competition--and the lower the resulting retail prices--that wireless users enjoy, the less revenue the government extracts via license sales.

Incredibly, this has created a backlash against liberal reforms. Revenue hawks actively propose stopping "giveaways" via loosened government controls in order to obtain higher license auction receipts. The glitter is fool's gold. By suppressing market competition, consumers will pay through the nose for each dollar raised. And thanks to the gross inefficiencies such policies impose, government revenuers ultimately lose cash.

Consider wireless telephone licenses. When analog cellular systems were deregulated, operators invested billions to digitize their systems, carefully migrating tens of millions of customers to an upgraded platform while continuing analog service unabated. Because competitive networks were free to flexibly use spectrum, this massive technology switch was smooth and efficient. In contrast, the FCC's 20-year transition to digital television is in shambles, a monument to industrial policy.

Note that the cell phone operators got their "digital permission slips" gratis. Today, revenue hawks say, "Make them pay." In fact, to get top dollar, they advise the government to issue very few permission slips. Instead of six or more wireless competitors offering digital service, we might extract more license revenue by authorizing just one or two.

In truth, stifling cutting-edge technologies is about the most expensive way we could raise revenues. In the decade since license auctions began, the U.S. Treasury collected $14 billion--about $1.5 billion per year. These are one-time payments (no auctions for renewals), and they are trivial, compared to the value of wireless services.

U.S. cellular subscribers paid about $85 billion to chat for approximately 700 billion minutes in 2003 alone. Market forces have pushed down the average price per minute for cell phone use from 57 cents in 1993, when only two carriers competed in each market, to just 12 cents in 2002. Deliberately slowing new rivalry could easily cost consumers several billion dollars annually in higher charges.

But there is actually worse news. Taxing the productive use of new technologies feeds political forces that prosper by blocking entry. For instance, bureaucratic inertia kept cell phones off the market well over a decade after the technology was ready for prime time, resulting in an estimated $87 billion in lost productivity. Revenue hawks advocate such delays, along with the extraction of every dollar of profit available to innovators. This kills any political momentum to make spectrum available, ironically protecting incumbents with "windfalls" that will not be captured via auctions.

Windfalls can and should be eliminated by liberalizing markets. This would allow eager competitors and a multitude of new applications to pour over regulatory barriers. Conversely, consumers lose when monopoly is the aim of government, and regulators blindly trumpet the pocket change government seizes by selling spectrum serfdoms.