Spectrum reallocation and the National Broadband Plan.

• Author: Eisenach, Jeffrey A.

1. INTRODUCTION II. THE SPECTRUM REFORM CONSENSUS A. The Spectrum Reform Movement B. The Limits of the Modern Consensus III. THE RISING COSTS OF SPECTRUM INFLEXIBILITY A. The Growing Demand for Wireless Services B. The Effects of Innovation and Market Dynamism IV. THE CHOICES AHEAD A. Repurposing Commercial Spectrum: Flexible Rights and Secondary Markets vs. Administrative Reallocation 1. Costs and Delays of Administrative Reallocation 2. Creating Incentives for Incumbent Licensees to Vacate Underutilized Spectrum 3. Facilitating (or Operating) Secondary Markets 4. Defining Interference Standards 5. Defining Success in Spectrum Reallocation: Market Outcomes vs. Administrative Goals B. Privatizing Government Spectrum C. Other Policy Goals V. CONCLUSION I. INTRODUCTION

   For more than fifty years, economists and other academics have been calling for a more flexible, dynamic, market-oriented approach to the allocation and assignment of wireless spectrum rights. Policymakers have responded by implementing some meaningful reforms, including the use of auctions for spectrum assignment and the creation of more flexible and tradable licenses to allow spectrum to flow dynamically to its highest value uses. Taken together, the academic literature and the statements (and, to a somewhat lesser extent, the actions) of policymakers suggest the existence of a fairly well-formed and comprehensive consensus about key aspects of spectrum policy.

   The National Broadband Plan ("NBP" or "Plan"), (1) released in March 2010, emphasizes the importance of spectrum policy, and focuses on the need to reallocate spectrum from less efficient to more efficient uses. The NBP notes in particular that demand for mobile broadband services is growing rapidly, and sets a goal of making 500 MHz of additional spectrum available for mobile broadband uses within the next ten years. (2) The NBP proposes several approaches, including improving market transparency, accelerating the process by which government spectrum is brought to market, increasing flexibility in certain bands (e.g., Mobile Satellite Service, or "MSS"), increasing reliance on unlicensed spectrum, and having the FCC conduct "incentive auctions" to facilitate spectrum repurposing (e.g., of spectrum currently allocated to broadcast television). The details of these proposed policies will be defined in rulemaking proceedings that will affect the markets for mobile broadband and other communications services for years, if not decades, to come.

   The purpose of this paper is to evaluate the NBP's spectrum policy proposals in the context of the modern spectrum policy consensus. As discussed further below, the key points of the modern consensus include the following: (a) spectrum should be allocated so as to maximize the net economic benefits (public as well as private) flowing from its use; (3) (b) spectrum licenses should be flexible with respect to the technologies used and the services provided, subject to the ability to police interference efficiently; (c) spectrum should be tradable, so that spectrum allocations can adjust dynamically to changes in markets and technologies; and, (d) government users should face the opportunity costs associated with spectrum used for public purposes, and have incentives to transfer underutilized spectrum to the private sector.

   To be sure, the spectrum reform consensus is neither all-encompassing nor fully complete. For example, the question of how much spectrum should be allocated for exclusive use, as opposed to being managed through an open or "commons" approach, is hotly debated; (4) and, as discussed at length below, there are important unanswered questions about government's proper role in facilitating dynamic spectrum reallocation (i.e., in secondary markets and repurposing). (5)

   Upon review, the NBP's spectrum reform proposals track closely with the modern consensus in some areas, especially with respect to the Plan's emphasis on the importance of spectrum flexibility and trading. In other areas, including its embrace of spectrum fees and build-out requirements, it seems to diverge from the consensus approach. In still other respects, including specifically its proposals for an active government role in "market-based" spectrum reallocation, the NBP raises issues around which a consensus has not yet formed.

   The remainder of this paper is organized as follows. Section II presents a brief overview of spectrum policy in the United States, including the development of a consensus around the need for market-oriented reforms. Section III details the primary factors that make reform of spectrum policy so urgent, including (as the NBP emphasizes) the growing demand for mobile wireless services and, most recently, mobile broadband. Section IV discusses the NBP's proposals from both a policy and a market perspective. Section V presents a brief conclusion.

2. THE SPECTRUM REFORM CONSENSUS

   The spectrum reform movement began with the publication of a little-noticed article by Leo Herzel in 1951. (6) More than fifty years later, it has produced a broad consensus around key principles that should govern spectrum policy. The first section below discusses the development of the spectrum reform consensus, and its impact, thus far, on policy. The second section discusses the limits of the consensus, and the extent to which its policy implications have not yet been adopted.

   1. The Spectrum Reform Movement

      For most of the twentieth century, the United States pursued a command and control approach to spectrum management. Spectrum licenses were assigned by administrative fiat, and their terms prescribed both the technologies that could be used and the services that could be provided. (7) Licenses could be transferred, (8) but only with the FCC's explicit approval, and generally only in the sizes and for the uses originally dictated by the FCC. Licensees could not disaggregate or partition their licenses into potentially more saleable units. Moreover, most licensees could not lease or share spectrum with third parties. (9) Overall, market forces played little if any role in determining who could use the electromagnetic spectrum or what they could do with it.

      Beginning in the late 1950s, the command and control regime came under increasing criticism from academics and policy analysts. (10) In dozens of articles and studies, they demonstrated that the traditional approach was failing to serve the public interest. The process of assigning spectrum by administrative hearings was not only slow and inefficient, but also created opportunities for politically powerful interests to "game" the process for their own benefit. (11) The lack of license flexibility locked licensees into inefficient technologies and prevented them from introducing new services. (12) Prohibitions against leasing or sharing prevented usage rights from getting into the hands of those most able to put them to productive use. Studies showed that the system's failings--most famously, the decades-long delay in the introduction of cellular telephone services--were slowing technological innovation and costing consumers billions of dollars. (13)

      Critics of the command and control approach recommended that spectrum policy be modified to incorporate market forces. (14) Under this approach, government, rather than licenses, would create property rights, auction those rights off to the highest bidder, and allow the owners to offer whatever services consumers demanded, so long as they did not cause interference for their spectrum "neighbors." (15) In cases where a pure property rights approach is inappropriate or politically unachievable (e.g., government uses), market-like incentives would be used to the maximum extent possible. (16)

      For many years, market-oriented reform proposals were limited to the academic journals. By the 1980s, however, the demand for spectrum to accommodate new wireless technologies, such as cell phones and direct broadcast satellite television, combined with a growing recognition of the inequities and inefficiencies of the current system, led to increasing pressure for reform. Initial efforts were mainly too timid to matter, or--as was the case with the FCC's brief experiment with assigning licenses by lottery rather than administrative hearings--simply unsuccessful in efficiently assigning spectrum to the highest and best use. (17)

      In 1991, the National Telecommunications and Information Administration ("NTIA") undertook a major review of U.S. spectrum policy. The resulting report--U.S. Spectrum Management Policy." Agenda for the Future (18)--concluded that the command and control approach should be replaced in favor of greater reliance on markets:

      NTIA believes that, for most purposes, a spectrum management system that provides users with both incentives and opportunities to use spectrum in ways that are economically efficient will produce greater benefits for society than a centrally planned, highly regulatory system that attempts a "top down" approach to managing spectrum use.... For most private-sector users, a choice mechanism suggests itself that could be much more efficient than the current system--the market. (19) Based on this finding, Agenda for the Future made a number of specific recommendations, including the following: spectrum should be assigned through the use of competitive bids; licensees should have increased flexibility in the technologies they use and the services they offer; trading, leasing, and sharing of spectrum among licensees should be permitted; and, incentives should be introduced to encourage more efficient use of spectrum by government agencies. (20) In an important sense, Agenda for the Future represented the first official embrace of the modern spectrum reform consensus.

      The NTIA's recommendations proved to be highly influential, forming the basis for a bipartisan reform effort during the 1990s and early 2000s, under which Congress, the FCC and the...