On January 24 a strange transaction will take place. At least $4.6 billion dollars will change hands between one or more firms and the FCC. The likely payoff is estimated to be somewhere between $10 and $30 billion.
Up for grabs is the government-granted monopoly for "beach front" radio frequencies, which are being ceded over from analog transmission for digital use (channels 52–69).
So where does all of that money go? Prevention of wardrobe malfunctions? Censoring George Carlin?
Believe it or not, no and no.
Double Dipping
In terms of revenue generation, the FCC is second only perhaps to the IRS in extracting wealth from citizens and businesses.
In addition to the various USF-related taxes, the FCC is required to collect regulatory fees each year. In 2006 it collected $269 million in fees, or 99% of its taxpayer-financed budget.[1]
These fees were assessed on anybody who receives its monopolistic protection, namely radio and cable providers.
In addition, the fees vary depending on the size of market and transmission class. Thus KEYG AM in Grand Coulee, Washington, which resides in a market of less than 25,000 people, is levied a $400 fee. In contrast, KBIG FM in Los Angeles, a market of more than 3 million, is charged $9,125.[2]
Similarly, cable companies are also levied fees: 75¢ per subscriber and $185 per license.[3]
So if nearly all of the budgetary finances are covered, where do the billions of dollars in auctions go? Where every other tax goes: the general fund managed by the Treasury Department. Here it is doled out to fund various government programs.
For example, in 1993 the FCC auctioned off the infamous PCS licenses for roughly $23 billion. However, due to a number of factors (including nonexistent financers), the creditors only paid about $10 billion. Consequently, members of Congress believed that, "it now seems doubtful that future auctions will produce the huge windfall the Government has been counting on to help balance the budget."[4]
As a result, the situation snowballed into a political talking point, as then-Senator Bob Dole suggested that the FCC "should sell licenses for digital television to the highest bidder." He believed that "such an auction could raise $70 billion."
And while many of the digital licenses were eventually handed over freely to incumbents in the intervening years, the spectrum remained firmly in the hands of technocrats and the political class.[5][6]
Effective at Being Ineffective
Much as the USPTO creates a system that can be exploited by patent trolls, so too does the FCC create an arena filled with frequency squatters.[7] And unsurprisingly, arguably the biggest abuser is the government, which claimed the bulk of frequencies for itself decades ago, most of which remain unused (e.g., for military, emergency, public service announcements).
A key argument to justify the creation and continued existence of the FCC was that it would bring order to some kind of chaos.
However, perhaps one of the biggest injustices is that most of the gerrymandered spectrum is not used by its intended recipients. According to the FCC Spectrum Task Force Report most spectrum goes unused the majority of time. In fact, even under their antiquated classical model, at any given time roughly 5% of it is actually being used.[8]
So while the proponents of the FCC suggest that it efficiently allocates spectrum, the fact that large swaths of frequency go unused at anytime suggests the opposite.
Catch the Wave
Another example of unintended consequences caused by bureaucratic malfeasance is that of NextWave.
In the aforementioned 1993 PCS incident, to purportedly spur diverse competition, the FCC allowed bidding companies to place a mere 10% down payment. The winning firm could then pay by an installment plan over the subsequent decade.
Despite the fact that it was operating with a negative cash flow ($80 million in cash with $274 million in annual interest payments), NextWave placed the minimum down payment on several PCS licenses.
In 1996 NextWave began to default on the installment plan and two years later filed for bankruptcy. It had paid $504 million on the $4.7 billion bid.
The FCC attempted to nullify and re-auction the licenses, however, the Supreme Court stepped in and ruled in favor of ownership claims by NextWave.[9]
Their ruling came after a House investigation discovered that the FCC had secretly attempted to resell the frequencies to competitor Nextel. Thus, despite public claims to the contrary, the FCC seems to have believed NextWave was the rightful owner.
And over the intervening years, not only were those frequencies largely unused but interested third parties were unable to develop and utilize communication devices on the litigated frequencies due solely to the uncertain legal outcome and nebulous ownership claims.
An Invisible Hand
One of the hackneyed claims from both politicians and industries is that free markets cannot solve electromagnetic property transgressions.
For instance, William Webb, head of research for Ofcom noted
We are examining the cost-benefit equation and our statutory duties for UWB. There are very many license holders between 3 and 10 GHz, and UWB will have lots of uncoordinated users. The market can't fix that.
Can the market and courts effectively determine ownership?
Believe it or not, at one point they did, if only for a fleeting year.
I turn once again to the definitive critique of FCC interventionism by BK Marcus, who notes that
In April, 1926 — United States v. Zenith Radio Corp. — the court again denied Hoover the authority to regulate licensure and this time—contrary to Intercity—they explicitly denied him discretion over time and wavelength assignment as well. Because the Intercity and Zenith decisions conflicted, Hoover turned to the acting Attorney General of the United States for an interpretation of the law. The Attorney General declared that the federal government had no authority to define any rights to spectrum.
There you have it. Over 80 years ago, the court system was effectively able to assign property rights without reverting to new positive law. Furthermore,
[I]n the fall of 1926 the precedent for defining and defending those rights had been established in an Illinois court: Tribune Co. v. Oak Leaves Broadcasting Station. Writes Hazlett, "the classic interference problem was encountered, litigated, and overcome, using no more than existing common-law precedent."
And like other protectionist acts lobbied for by big business, the establishment fought back the following year with the Federal Radio Act:
The airwaves were declared public property and put under the guardianship of the Commission, which was given the authority to issue temporary licenses to those who were willing to broadcast "in the public interest" — just as the Big Broadcasters had proposed two years earlier.
From an accounting perspective it may seem odd that this practice began and continues to be lobbied for by numerous institutions. Cui bono? Both the political class and incumbent businesses in the form of Big Telecom have every incentive to maintain the status quo: they get to run the show, control it, and extract rents.
So while the multibillion-dollar price tag is seemingly stratospheric, telcos have and will continue to support an FCC-like system. It is a small price for them to pay as it prevents true competitive forces and enables them to hold on to their market share without threat of displacement.[10]
Of Bits and Bandwidth
Another quagmire caused by the top-down disbursement of spectrum surrounds buildout requirements. The FCC mandates various elements be fulfilled by the winning bidder.
For instance, the winner of the upcoming 700 MHz auction is required to set aside 20 MHz to create and deploy a nationwide network designed specifically for public safety.
Why shouldn't emergency services be required to take part in the bidding process? After all, these same emergency services must also pay for other scarce utilities (e.g., water, electricity) so why should they get a free ride with this one — especially when they have historically underutilized the spectrum they are given?
The irony, however, is that even if the government did bid on spectrum, it wouldn't use its own money (because it doesn't have any). Its funds come solely from the taxpayer. Thus the taxpayers are always at a financial disadvantage: competing against their very own wallets.
In the long run, these types of handouts act as artificial stumbling blocks for upstart entrepreneurs in every city. Thus, the buildouts inadvertently create the need for media consolidation due to capital constraints — because only large firms can accrue and raise the necessary funds to bid in the auction and deploy the required network.[11]
Interference and Transgression
Economist Murray Rothbard suggested that spectrum ownership should be defined in terms of a relevant technological unit, or rather, exclusive action. The Rothbardian view of property is not ownership of the physical entity, "but an exclusive claim to the use of a scarce resource, a claim to the means of human action."[12]
Adopting this view would have allowed a more organic, decentralized approach to technological rollouts. As long as your transmission is not interfering with anyone else's, there would be no need for any type of licensure or oversight. If interference occurs, the matter could be settled by the courts, based upon the simple concept of homesteading — who was there first?[13]
To counter the argument that the waves would immediately be filled with junk noise, broadcasters would have the incentive of profit to fulfill the demands of potential customers. Filling the spectrum with junk would be ineffective and would lead to bankruptcy.
While changing the political inertia is unlikely, there is still hope for the continued decentralization and deregulation of the spectrum.
For instance, the rules of underlay and overlay essentially boil down to using unoccupied frequencies. In a nutshell, underlay and overlay devices broadcast on "owned" frequencies. However, they continuously jump, scan and detect when a channel is open or occupied; thus preventing any interference.
It is hoped that smart antennas, cognitive radios, ultra-wideband emitters and even white-space devices will be able to utilize unused spectrum in the near future.
Universal Standards and Lobbyists
Another argument in favor of maintaining an FCC is that it streamlines and unifies standards. They are charged with the task of approving handset rules such as frequency stability and power output.
With the FCC's $300 million budget, there is no reason to believe that organizations such as the Underwriters Laboratories (UL) or even the IEEE could not accomplish the same standardizations process. They too charge fees, but they are voluntary and do not result in coercive threats and penalties.[14]
For instance, IEEE membership dues range from $12.50 for semi-annual student rates to $165 for a full-time professional. Organizational fees and per-ballot fees also vary (typically $5 to $6,000).
Underwriters Laboratories also charges variable fees,
ranging from a couple hundred to several thousand dollars. And in 1997, Underwriters Laboratories alone had $351 million in sales and employed over 5,000 engineers and technicians. After a century of practice (founded in 1894) and international experience (located in dozens of countries), they seem as if they would have the managerial acumen to take on the challenge.[15]
Are private, politically disconnected firms inherently incapable of standardizing or producing best practices?[16][17]
If businesses are unable to satisfy customer demand, they go bankrupt. If government is unable to satisfy demand, they raise taxes.
At the end of the day, this is yet another battle of top-down control versus a voluntary, bottom-up approach.
How Are You Qualified for Your Position?
Among others, the case of the Telecommunications Development Fund (TDF) stands out. It was founded by Congress in 1996 and managed in part by then-FCC Chairman, Michael Powell.[18]
On paper, TDF is a venture capital firm that receives its money from the interest gained on the sale of spectrum auctions. Its mission is to supposedly invest seed money in new telecom enterprises.
Unsurprisingly, as it is staffed and managed by current and former bureaucrats, it continues to lobby Congress for additional funds.
While this smacks of conflict of interest, another unseen consequence is that whatever company it invests in is essentially receiving dishonest money. Neither the FCC nor TDF provided any service in exchange for the monies received.
As a result, the actual investments will undoubtedly artificially skew and redirect resources from other productive markets.[19]
Lady Bird Johnson
While most people know the wife of President Lyndon Johnson for her activism in promoting wild flowers, she also had her hands in manipulating the radio and TV market.
As noted by Jack Shafer this summer, one of the means by which the Johnson family acquired new wealth was with the purchase of an Austin-based radio station KTBC — by political means:
Once Lady Bird completed her purchase of KTBC, the "five years of delays and red tape, or delays and unfavorable rules" from the FCC that had stymied the previous owners "vanished … and slowness was replaced by speed," according to Caro. In short order she got permission to broadcast 24 hours a day (KTBC had been a sunrise-to-sunset station) and move it to 590 on the dial — "an uncluttered end of the dial" where it could be heard in 38 surrounding Texas counties. It was no coincidence. Lyndon and Lady Bird recruited a new station manager, promising 10 percent of the profits, and Lyndon told him that the changes in the license restrictions that would make KTBC a moneymaker were "all set." In 1945, the FCC OK'd KTBC's request to quintuple its power, which cast its signal over 63 counties.
The political maneuvering in the background was orchestrated by her husband the future president, then a Congressman of Texas. He was purportedly friends with FCC commissioner Clifford Durr who ultimately helped LBJ leapfrog the colossal paperwork and competition to acquire numerous properties.
The Johnsons earned thousands from their radio station but millions from their TV stations, writes former FCC official William B. Ray in his book, FCC: The Ups and Downs of Radio Regulation. The commission allocated one commercial station to Austin in the early 1950s, and the Johnsons were its sole applicant. "Filing a competing application would have been a waste of money," Ray writes, because of the Johnsons' political clout. "Whenever there was a business matter to be discussed between CBS and the LBJ stations, Johnson would summon the appropriate CBS personnel to the White House to discuss it," he continues.
To be fair, most stations and licenses have not been acquired through bribery or political clout. On the other hand, due to its inherent existence as a political entity, the FCC can and will continue to bend to political pressure and corporate lobbying.
Peeling Away the Onion
This is not a call for a privatization or reformation of the FCC; it is a recommendation for its abolition.[20] Along with alternative arbitration venues, the current court system could handle any disputes arising from this action.[21]
The FCC should not be in the business of gerrymandering the electromagnetic spectrum; rather, it should be left to private firms to homestead the infinitesimal frequencies and solve any and all problems in courts: just like property disputes on parcels of land.
The FCC sells something it neither created nor homesteaded and has historically been found incompetent at managing. Worse, it has necessarily been partisan in its actions. In addition, the Treasury Department (through the FCC) stands to make billions of dollars for something they never made, never homesteaded, and have shown gross incompetence at managing. And yet, in January, they will both make out like bandits.
Tim Swanson is a graduate of Texas A&M University and currently lives in Seoul, Korea. Send him mail. See his archive. Comment on the blog.
Notes
[1] Most urban customers are required to pay USF (Universal Service Fund) related taxes. According to "Taxes and Regulation: The Effects of Mandates on Wireless Consumers," as of 2004 the average wireless consumer pays 14.29% in taxes. And according to MyWireless.org, it is as high as 22% in places like New York and Florida. This amounts to approximately $7 billion a year.
[2] See "FY 2007 AM and FM Radio Station Regulatory Fees" and "Cable Television Systems" from the FCC. Other fees can be viewed at the FCC Regulatory Fees landing page.
[3] Despite receiving preferential treatment from various levels of government, the cable industry recently complained about being forced to carry both the digital and analog broadcasts,
The FCC's dual-carriage plan is "a completely unnecessary government intrusion into the marketplace," griped Kyle McSlarrow, president/CEO of the National Cable & Telecommunications Association, the cable industry lobby group. "Worse, it is unconstitutional."
While I can't help but philosophically side with this rhetoric, the actions of the NCTA have historically been opportunistic and exploitative of the taxpayer. Perhaps losing their monopoly status will move them to the road less traveled.
[4] See "Airwave Auctions Falter As Source of Funds for U.S.," The New York Times.
[5] In the late-1990s, the FCC gave existing license holders a second channel to spur the deployment of HDTV broadcast technology. Their rationale: "because it would smooth the transition." It is hard to see how giving away water, gas, or any other scarce resource would also be "smooth transitions" for their specific industries. The blasé statements made by Commissioner Susan Ness in 1997 sums up the technocratically controlled utopia the political class envisioned.
[6] While the FCC did actively build an alliance for HDTV technology, in retrospect, who is to say that private firms — without the use of taxpayer funds — would not have done the same thing? Who has since stood accountable and responsible for stymieing DTV deployment or that of FM? Like the FDA curtailing medical drugs, both the USPTO and FCC dictated what could and couldn't be done with the technology; what commissioner was fired as a result?
[7] For more on the unseen dangers created by the USPTO, see "Intellectual Property" by Stephan Kinsella
[8] Even that cited methodology is incorrect because, unlike other scarce resources (e.g., water), spectrum never actually runs out, it can only become more crowded. Thus the 5% number is misleading, because usable spectrum exists everywhere and is often never utilized (e.g., deserts, oceans, rural areas, even population centers).
[9] For a thorough overview, see "NextWave, FCC Settle Wireless Spectrum Battle" from eWeek and "Airwave Auctions Falter As Source of Funds for U.S." from The New York Times.
[10] The FCC is directly responsible for impeding competition over the years. Along with suppressing the adoption and use of FM, Declan McCullagh notes that
The FCC rejected long-distance telephone service competition in 1968, banned Americans from buying their own non-Bell telephones in 1956, dragged its feet in the 1970s when considering whether video telephones would be allowed and did not grant modern cellular telephone licenses until 1981— about four decades after Bell Labs invented the technology. Along the way, the FCC has preserved monopolistic practices that would have otherwise been illegal under antitrust law.
[11] Buildout requirements vary depending on the type of license and long-term plans crafted by the FCC. For instance, with regard to the 220 MHz wireless rollout back in 2000–1,
Phase I nationwide licensees must construct base stations having a minimum of five assigned nationwide channels, and must place those base stations into operation: (1) in at least 10% of the geographic areas designated in the application within two years of the initial license grant, including base stations in at least seven out of the "Top 100 Urban Areas for Phase I Nationwide Systems" listed in the FCC rules; (2) in at least 40% of the geographic areas designated in the application within four years of the initial license grant, including base stations in at least 28 of the 100 urban areas; (3) in at least 70% of the geographic areas designated in the application within six years of the initial license grant, including base stations in at least 28 of the 100 urban areas; and (4) in all geographic areas designated in the application within 10 years of the initial license grant, including base stations in at least 28 of the 100 urban areas.
Regarding the new 700 MHz issue, it turns out that despite all of the previous investments and existing antenna towers, in order to meet the required population areas mandated by the FCC, the winning bidders will have to update or rebuild the infrastructure.
In a hypothetical example, 25% of a target population has to be covered in five years, 75% of the population in ten.
Failure to successfully complete these goals can ultimately lead to licenses being revoked and loss of spectrum ownership. These plans and target numbers are entirely artificial and have caused malinvestment (i.e., diverting productive capital to areas that may be unprofitable).
[12] See "The Spectrum Should Be Private Property" by B.K. Marcus.
[13] As noted both by Rothbard and Marcus, this specific theory of property is in contrast to the prevailing Coasian viewpoint. The Chicago School promoted the Coasian view of "who has the most to gain or lose," replacing traditional property rights with that of social costs.
With regards to interference, Marcus states,
And when interference — and thus trespass — does take place, the result is property damage, a tort to be pursued through civil courts or arbitration, not something requiring the involvement of any central regulatory body.
[14] The FCC charges penalties (e.g., 25% late fee) and fines firms over politically controlled censorship rules. For more on politically motivated fines, see "Family Viewing Hour, Howard Stern," and "Seven Dirty Words."
[15] For more on the UL, see "What Keeps Us Safe?" by Mark Thornton.
[16] One example of politics dictating technological deployment: four years ago, Congressman Darrell Issa pushed for legislation that would have created a CDMA-based cell network in post-Saddam Iraq. Iraq was already using a GSM-based network. However, Rep. Issa did not believe foreign firms not involved in occupying the country should be allowed to develop and deploy technology there (they did not end up switching).
[17] By definition, every hi-tech company is guilty of restraining trade and obstructing competition vis-à-vis patents. Notable lobbyists include industry heavyweight Qualcomm, a firm that currently develops CDMA 3G technology. One particular lawsuit involves Nokia, which has attempted to bring a competing technology (GSM) into the North American market. Qualcomm has used the US International Trade Commission to ban the sale of these infringing phones.
Vonage, a popularizer of VoIP (a disruptive technology) has also been hard hit with patent litigation by Verizon.
[18] In the studio debate between Howard Stern and Michael Powell, Stern suggests that Powell was not only unqualified for his position, but the only reason he was appointed chairman was due to the political clout of his father, then–Secretary of State Colin Powell. This raises the question, exactly who is qualified to be a technocrat? Can there be any objective criteria?
[19] Other federal departments also lobby and invest money in dozens of tech firms. For instance, In-Q-Tel is the venture capital arm of the CIA. See "In-Q-Tel: The CIA's Silicon Valley Bridge" by Red Herring; "Former US West CEO to head CIA-funded start-up" at CNet; and "CIA venture group invests in Rhevision" by The Mercury News.
[20] See also "Why the FCC Should Die" by Declan McCullagh and "The case for killing the FCC and selling off spectrum" by Jack Shafer.
[21] For academic literature surrounding the field of law enforcement without state machinations, see Anarchy and the Law by Edward Stringham and The Enterprise of Law by Bruce Benson.