Editorial Board

FCC Should Stop Worrying and Learn to Love Spectrum Market: View

Julius Genachowski, the Federal Communications Commission chairman, thinks the end is near. His evangelizing isn’t spiritual but digital: The economy of the future depends on smartphones, tablet computers and other wireless devices, and yet the U.S. faces a crippling spectrum shortage, he says.

Genachowski is right to worry about the U.S.’s digital future. Nearly 70 million people have a smartphone, which can use 24 times more airwave capacity than a regular cell phone. Tablet computers, now owned by about 11 million people, can use 100 times more capacity. A spectrum crunch would mean slower connections, longer downloads and dropped calls.

He and his allies in this mission, the large mobile carriers Verizon Wireless and AT&T Inc., have a solution: Take back unused spectrum from television broadcasters and auction it to the highest bidders (most likely Verizon and AT&T). If Congress approves, the FCC would reward the TV broadcasters by letting them share in the proceeds.

We see two problems. Some broadcasters don’t want to give up their spectrum (even if they’re compensated), and it’s not clear that the spectrum crunch is real. The FCC’s critics say this is an old-fashioned war between two entrenched interests -- the TV guys versus the telecom guys -- and the FCC has chosen the telecom side.

Middleman Role

We’ll stay out of that fight, but we agree the FCC is confusing its role. Rather than play the middleman, the FCC should push for a true free market. All interested players, entrepreneurs included, should have an opportunity to license airwaves. To make this happen, the FCC should charge rent on the spectrum it licenses, then get out of the way.

Spectrum belongs to the public, but once the government auctions off parcels of megahertz to the highest bidders, it almost never takes them back, even if they’re not being used. That’s the case now with large blocks owned by broadcasters. The FCC wants to repurpose that spectrum, located in the airwaves’ silk-stocking district: It’s very high quality, and the broadcasters are generally using it for low-audience shows like home shopping and religious services, or not at all.

Carriers, meanwhile, are hungry for spectrum. They have ambitious plans to roll out next-generation networks. Meeting demand by building more cell-phone towers and microwave networks is laborious and costly. But carriers can’t order a year’s worth of airwaves from a warehouse. AT&T sought to acquire Deutsche Telekom AG’s T-Mobile USA for $39 billion in large part to get its hands on T-Mobile’s spectrum. Although the FCC rejected the merger, neither it nor AT&T is backing away from the spectrum-crunch prediction.

Congress Going Along

Congress appears willing to go along with the FCC’s request for incentive auctions. The House on Tuesday approved them as part of an extension of the payroll tax cut. The Senate voted down the House package, but the auction authority may get tacked onto whatever the Senate ultimately approves. Congress wants the $20 billion the auctions could raise to pay for other things.

A recent report by Citigroup analysts, however, says the real issue is spectrum hoarding by companies that won licenses at previous auctions and have been sitting on them since. The FCC agrees there is unused spectrum, but because it doesn’t collect usage data on licensed spectrum, it can’t say how much, and assumes owners eventually will put it to work.

The FCC does allow spectrum to trade in a secondary market, and points to the recent sale to Verizon Wireless of a large spectrum band by a group of cable companies, which no longer had use for it. That is an example of market forces at work, the FCC says. True, except that one sale doesn’t make a market, and the cable companies sat on the airwaves for five years before unloading them.

A debate is playing out over the Citi analysis, but it’s clear that sometimes spectrum sits idle to keep it out of competitors’ hands. It’s also clear that carriers often put it in deep freeze while waiting out poor market conditions before investing in new networks.

Instead of creating inducements for owners to give back spectrum that the FCC auctions, Congress should create market incentives for owners to offer services on their spectrum -- or sell it to someone who will. Economists call this increasing the opportunity cost.

The easiest way to do this is by charging annual rent, a form of user fee recommended in the 2010 National Broadband Plan commissioned by Genachowski. With fees, spectrum would no longer be cost-free, removing the hoarding incentive. Owners would have reason to offset the rent with a revenue stream or sell the airwaves to avoid the expense. And by making all spectrum licenses flexible, so they support wireless devices, streaming movies or whatever service an owner wishes to offer, the FCC could start a real spectrum market.

Rural Benefit

The first to benefit might be rural areas, where about 18 million residents are desperate for high-speed broadband connections. Carriers own licenses in rural areas but don’t use them because the long distances between population centers and the lack of scale make for unacceptable investment returns. Smaller, startup carriers with lower overhead might make better use of such spectrum -- and relieve the government of having to subsidize broadband Internet in rural areas.

The Government Accountability Office noted in 2006 that fees “promote the efficient use of spectrum by compelling spectrum users to recognize the value to society of the spectrum that they use. In other words, these fees mimic the functions of a market.” To that end, Australia, Canada and the U.K. charge spectrum fees.

President Bill Clinton and every president since has asked Congress for permission to impose rents. It’s time Congress granted that wish.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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