Hazlett on Spectrum

The public and media discussion of "net neutrality" seems to have degenerated to "we want stuff for free." In the end, it does cost something to deliver internet, and the bandwith is limited.

The (artfully named) "net neutrality" regulation was really a return to utility rate regulation, in which the regulators say who gets what, and how much they can charge. Just what a rosy success that was not, seems to have been forgotten.

In this context, it seems especially worth reporting on an event from last week. Tom Hazlett, former Chief Economist of the FCC, came to Hoover  to discuss his new book "Political Spectrum,"  which covers the history of the US government regulation of radio (TV, and cell phone) waves, largely through the same FCC that was in charge of "net neutrality." (I haven't read the book, this is a summary of the seminar discussion.)

Contrary to conventional wisdom, the market for spectrum worked well until 1927, in just the way economists might expect. Property rights to spectrum emerged, evolved, and worked well.

Radio was, at first, considered only for point to point communication. It stayed that way until 1920, when the first broadcast occurred.  Within 2 years there were 500 broadcasters.

Contrary to the common allegation of “etheric bedlam” the market was actually orderly through 1926.  Under the 1912 radio statute, the Department of Commerce enforced first-come first-serve rules, basically homesteader rights to spectrum in a geographic area and time. Those emergent property rights were registered with Department of Commerce, and easily bought and sold. If a new station encroached on your frequency/geography, you could quickly sue and stop it.

Regulation emerged in much the way a public choice economist might predict. The regulators wanted much more discretion — they wanted to control who got to broadcast and what was said. The  large commercial stations wanted to limit entry and competition. The National Association of Broadcasters quickly became a lobbying group and advocated “public interest, convenience, and necessity” to regulate. [Yes, in only 5 years an industry that nobody had ever heard of or thought of became an incumbent lobbying force for regulation to stop entry and competition.]  Herbert Hoover, (sadly) the commerce secretary at the time stopped enforcing enforcing first-come first-serve rights in 1926. Now there was indeed chaos, the “breakdown in the law.” According to Hazlett, this was a strategic breakdown to get regulation going. That regulation was formalized in the 1927 radio act. The first sentence of the act preempted private rights to spectrum.

Now, rather than property rights, spectrum was allocated by a “mother may I” system.  In 1932 FCC,  took over authority of wires to.

Regulation was quickly captured to stop competition and innovation.

Hazlett offered FM radio as the classic example. Howard Armstrong (famous inventor) in 1933 created FM radio, which as we know is technically much better than AM. He had to ask the FCC for spectrum. FCC experts said it wouldn’t work. In 1939 he finally got some spectrum  allocation for FM, and started selling FM radios. WWII stopped everything, as civilian radio production stopped. In 1945, broadcast TV lobbied the FCC for the FM spectrum, and the FCC moved FM from the 40 mhz range to 88-108 Mhz, making all existing radios obsolete. Armstrong had to start over. When finally in the 1960s FM was finally allowed, it immediately took over from AM for music; [as we know it has much wider frequency response, and “no static at all”.]

That’s a nutshell of “mother may I” regulation — it suppresses competition and deters innovative technologies, in this case for a quarter century.

Again in the 1960s, TV and cable repeated the story, regulation used to protect incumbents and stop innovation.

In likely the most famous speech by an American regulator, May 9 1961,  FCC chairman Newton N. Minow characterized TV as a “vast wasteland.”  He forced stations to show “public interest” to get a license renewal.

In the early 1960s, cable began to compete. Broadcasters naturally tried hard to stop it. From 1948-to the 1960s, cable only extended the range of broadcast TV signals. But in the 60s, cable started to offer competing broadcasts. The over the air broadcasters got Minnow to block cable, on the grounds that cable would destroy broadcasters’ profitability, and therefore their provision of public interest news and other public interest programming. This lasted until the late 1970s.

In an equally famous and vilified speech, FCC chairman Mark Fowler argued that “TV is just a toaster with pictures.” He argued for competition, free entry, entrepreneurship and letting people choose. He argued against the “public interest” standard, and for minimalist regulation.

Cable was deregulated. It immediately produced hundreds of channels, including CSPAN, and the all-news CNN. The result was, ironically much more news and public affairs, just what FCC said it was protecting, in place of networks’ 15 minute nightly news.

Hazlett covers the decades-long still-partial liberalization, and a lot of interesting detail on how spectrum auctions work (and don't work).

1st generation  wireless mobile got licenses in the 1980s, though the technology was announced in 1945. Getting this spectrum allocation was called the “30 years’ war.”

In the 1970s, the FCC decided that only a monopoly can do cell phone service, and  gave it to Bell. By the 1980s radicals said maybe there could be 2 cell phone companies. The Department of Justice had to sue the FCC to get more than one license.

Even in the first generation, there were only 2 competitors, and standards  were set by the government. By early 2000 though, the US and  many countries auctioned licenses and allowed liberal de-facto property rights. Regulators now allow mobile licensees to figure out networks, architecture (size, location, and  power of stations), and use their own applications. In 2005, the iPhone was like FM, and needed spectrum. But this time it didn’t have to ask permission. Apple negotiated with Verizon and AT&T, initially going with AT&T exclusive for the iphone. It ended up that the price was negative — carriers wanted the iPhone on their network enough to pay for it.

2- 5 G wireless and the “internet of things,” is built through private coordination. But it is fragile. The old law is in place.  Regulators have simply interpreted their mandate for “public interest,” and that liberalization and rights are working.

Most spectrum is still regulated. Of the “beach front”  under 4 Ghz ,15% (mobile) is largely unrestricted, assigned by auction. About half is allocated to government, military, and forestry, and a wide swath is still owned by broadcast TV.

Now, do you really want the FCC to decide who gets to put what on the internet, how much they get to charge, and to control its architecture?

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