[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.
Thomas W. Hazlett is the H.H. Macaulay Endowed Professor of Economics at Clemson University.]
Disclosure: The one time I met Ajit Pai was when he presented a comment on my book, “The Political Spectrum,” at a Cato Institute forum in 2018. He was gracious, thorough, and complimentary. He said that while he had enjoyed the volume, he hoped not to appear in upcoming editions. I took that to imply that he read the book as harshly critical of the Federal Communications Commission. Well, when merited, I concede. But it left me to wonder if he had followed my story to its end, as I document the success of reforms launched in recent decades and advocate their extension. Inclusion in a future edition might work out well for a chairman’s legacy. Or…
While my comment here focuses on radio-spectrum allocation, there was a notable reform achieved during the Pai FCC that touches on the subject, even if far more general in scope. In January 2018, the commission voted to initiate an Office of Economics and Analytics.[1] The organizational change was expeditiously instituted that same year, with the new unit stood up under the leadership of FCC economist Giulia McHenry.[2] I long proposed an FCC “Office of Economic Analysis” on the grounds that it had a reasonable prospect of improving evidence-based policymaking, allowing cost-benefit calculations to be made in a more professional, independent, and less political context.[3] I welcome this initiative by the Pai FCC and look forward to the empirical test now underway.[4]
Big Picture
Spectrum policy had notable triumphs under Chairman Pai but was—as President Carter dubbed the Vietnam War—an “incomplete success.” The main cause for celebration was the campaign to push spectrum-access rights into the marketplace. Pai’s public position was straightforward: “Our spectrum strategy calls for making low-band, mid-band, and high-band airwaves available for flexible use,” he wrote in an FCC blog post on June 19, 2018. But the means used by regulators to pursue that policy agenda repeatedly, historically prove determinative. The Pai FCC traveled pathways both effective and ineffective, and we should learn from either. The basic theme is that regulators do better when they seek to create new rights that enable social coordination and entrepreneurial innovation, rather than enacting rules that specify what they find to be the “best” technologies or business models. The traditional spectrum-allocation approach is to permit exactly what the FCC finds to be the best use of spectrum, but this assumes knowledge about the value of alternatives the regulator does not possess. Moreover, it assumes away the costs of regulators imposing their solutions over and above a competitive process that might have less direction but more freedom. In a 2017 notice, the FCC displayed the progress we have made in departing from administrative control, when it sought guidance from private sector commenters this way:
“Are there opportunities to incentivize relocation or repacking of incumbent licensees to make spectrum available for flexible broadband use?
We seek comment on whether auctions … could be used to increase the availability of flexible use spectrum?”
By focusing on how rights—not markets—should be structured, the FCC may side-step useless food fights and let social progress flow.[5]
Progress
Spectrum-allocation results were realized. Indeed, when one looks at the pattern in licensed and unlicensed allocations for “flexible use” under 10 GHz, the recent four-year interval coincides with generous increases, both absolutely and from trend. See Figure 1. These data feature expansions in bandwidth via liberal licenses that include 70 MHz for CBRS (3.5 GHz band), with rights assigned in Auction 105 (2020), and 280 MHz (3.7 – 3.98 GHz) assigned in Auction 107 (2020-21, soon to conclude). The 70 MHz added via Auction 1002 (600 MHz) in 2017 was accounted for during the previous FCC, but substantial bandwidth in Auctions 101, 102, and 103 was added in the millimeter wave bands (not shown in Figure 1, which focuses on low- and mid-band rights).[6] Meanwhile, multiple increments of unlicensed spectrum allocations were made in 2020: 30 MHz shifted from the Intelligent Transportation Services set-aside (5.9 GHz) in 2020, 80 MHz of CBRS in 2020, and 1,200 MHz (6 GHz) dedicated to Wi-Fi type services in 2020.[7] Substantial millimeter wave frequency space was previously set aside for unlicensed operations in 2016.[8]
First, that’s not the elephant in the room. Auction 107 has assigned licenses allocated 280 MHz of flexible-use mid-band spectrum, producing at least $94 billion in gross bids (of which about $13 billion will be paid to incumbent satellite licensees to reconfigure their operations so as to occupy just 200 MHz, rather than 500 MHz, of the 3.7 – 4.2 GHz band).[9] This crushes previous FCC sales; indeed, it constitutes about 42% of all auction receipts:
- FCC auction receipts, 1994-2019: $117 billion[10]
- FCC auction receipts, 2020 (Auctions 103 and 105): $12.1 billion
- FCC auction winning bids, 2020 (Auction 107): $94 billion (gross bids including relocation costs, incentive payments, and before Assignment Phase payments)
The addition of the 280 MHz to existing flexible-use spectrum suitable for mobile (aka, Commercial Mobile Radio Services – CMRS) is the largest increment ever released. It will compose about one-fourth of the low- and mid-band frequencies available via liberal licenses. This constitutes a huge advance with respect to 5G deployments, but going much further—promoting competition, innovation in apps and devices, the Internet of Things, and pushing the technological envelope toward 6G and beyond. Notably, the U.S. has uniquely led this foray to a new frontier in spectrum allocation.
The FCC deserves praise for pushing this proceeding to fruition. So, here it is. The C-Band is a very big deal and a major policy success. And more: in Auction 107, the commission very wisely sold overlay rights. It did not wait for administrative procedures to reconfigure wireless use, tightly supervising new “sharing” of the band, but (a) accepted the incumbents’ basic strategy for reallocation, (b) sold new prospective rights to high bidders, subject to protection of incumbents, (c) used a fraction of proceeds to fund incumbents cooperating with the reallocation, plussing-up payments when hitting deadlines, and (d) implicitly relied on the new licensees to push the relocation process forward.
Challenges
It is interesting that the FCC sort of articulated this useful model, and sort of did not:
For a successful public auction of overlay licenses in the 3.7-3.98 GHz band, bidders need to know before an auction commences when they will get access to that currently occupied spectrum as well as the costs they will incur as a condition of their overlay license. (FCC C-Band Order [Feb. 7, 2020], par. 110)
A germ of truth, but note: Auction 107 also demonstrated just the reverse. Rights were sold prior to clearing the airwaves and bidders—while liable for “incentive payments”—do not know with certainty when the frequencies will be available for their use. Risk is embedded, as it is widely in financial assets (corporate equity shares are efficiently traded despite wide disagreement on future earnings), and yet markets perform. Indeed, the “certainty” approach touted by the FCC in their language about a “successful public auction” has long deterred efficient reallocations, as the incumbents’ exiting process holds up arrival of the entrants. The central feature of the C-Band reallocation was not to create certainty, but to embed an overlay approach into the process. This draws incumbents and entrants together into positive-sum transactions (mediated by the FCC are party-to-party) where they cooperate to create new productive opportunities, sharing the gains.
The inspiration for the C-Band reallocation of satellite spectrum was bottom-up. As with so much of the radio spectrum, the band devoted to satellite distribution of video (relays to and from an array of broadcast and cable TV systems and networks) was old and tired. For decades, applications and systems were locked in by law. They consumed lots of bandwidth while ignoring the emergence of newer technologies like fiber optics (emphasis to underscore that products launched in the 1980s are still cutting-edge challenges for 2021 Spectrum Policy). Spying this mismatch, and seeking gains from trade, creative risk-takers petitioned the FCC.
In a mid-2017 request, computer chipmaker Intel and C-Band satellite carrier Intelsat (no corporate relationship) joined forces to ask for permission to expand the scope of satellite licenses. The proffered plan was for license holders to invest in spectrum economies by upgrading satellites and earth stations—magically creating new, unoccupied channels in prime mid-band frequencies perfect for highly valuable 5G services. All existing video transport services would continue, while society would enjoy way more advanced wireless broadband. All regulators had to do was allow “change of use” in existing licenses. Markets would do the rest: satellite operators would make efficient multi-billion-dollar investments, coordinating with each other and their customers, and then take bids from new users itching to access the prime 4 GHz spectrum. The transition to bold, new, more valuable applications would compensate legacy customers and service providers.
This “spectrum sharing” can spin gold – seizing on capitalist discovery and demand revelation in market bargains. Voila, the 21st century, delivered.
Well, yes and no. At first, the FCC filing was a yawner, the standard bureaucratic response. But this one took off took off when Chairman Pai—alertly, and in the public interest—embraced the proposal, putting it on the July 12, 2018 FCC meeting agenda. Intelsat’s market cap jumped from about $500 million to over $4.5 billion—the value of the spectrum it was using was worth far more than the service it was providing, and the prospect that it might realize some substantial fraction of the resource revaluation was visible evidence.[11]
While the Pai FCC leaned in the proper policy direction, politics soon blew the process down. Congress denounced the “private auction” as a “windfall,” bellowing against the unfairness of allowing corporations (some foreign-owned!) to cash out. The populist message was upside-down. The social damage created by mismanagement of spectrum—millions of Americans paying more and getting less from wireless than otherwise, robbing ordinary citizens of vast consumer surplus—was being fixed by entrepreneurial initiative. Moreover, the public gains (lower prices plus innovation externalities spun off from liberated bandwidth) was undoubtedly far greater than any rents captured by the incumbent licensees. And a great bonus to spur future progress: rewards for those parties initiating and securing efficiency-enhancing rights will unleash vastly more productive activity.
But the populist winds—gale force and bipartisan—spun the FCC.
It was legally correct that Intelsat and its rival satellite carriers did not own the spectrum allocated to the C-Band. Indeed, that was root of the problem. And here’s a fatal catch: in applying for broader spectrum property rights, they revealed a valuable discovery. The FCC, posing as referee, turned competitor and appropriated the proffered business plan on behalf of its client (the U.S. government), and then auctioned it to bidders. Regulators did tip the incumbents, whose help was still needed in reorganizing the C-Band, setting $3.3 billion as a fair price for “moving costs” (changing out technology to reduce their transmission footprints) and dangled another $9.7 billion in “incentive payments” not to dilly dally. In total, carriers have bid some $93.9 billion, or $1.02 per MHz-Pop.[12] This is 4.7 times the price paid for the Priority Access Licenses (PALs) allocated 70 MHz in Auction 105 earlier in 2020.
The TOTM assignment was not to evaluate Ajit Pai but to evaluate the Pai FCC and its spectrum policies. On that scale, great value was delivered by the Intel-Intelsat proposal, and the FCC’s alert endorsement, offset in some measure by the long-term losses that will likely flow from the dirigiste retreat to fossilized spectrum rights controlled by diktat.
Sharing Nicely
And that takes us to 2020’s Auction 105 (Citizens Broadband Radio Services, CBRS). The U.S. has lagged much of the world in allocating flexible-use spectrum rights in the 3.5 GHz band. Ireland auctioned rights to use 350 MHz in May 2017 and many countries did likewise between then and 2020, distributing far more than the 70 MHz allocated to the Priority Access Licenses (PALs); 150 MHz to 390 MHz is the range. The Pai FCC can plausibly assign the lag to “preexisting conditions.” Here, however, I will stress that the Pai FCC did not substantially further our understanding of the costs of “spectrum sharing” under coordinating devices imposed by the FCC.
All commercially valuable spectrum bands are shared. The most intensely shared, in the relevant economic sense, are those bands curated by mobile carriers. These frequencies are complemented by extensive network capital supplied by investors, and permit millions of users—including international roamers—to gain seamless connectivity. Unlicensed bands, alternatively, tend to separate users spatially, powering down devices to localize footprints. These limits work better in situations where users desire short transmissions, like a Bluetooth link from iPhone to headphone or when bits can be handed off to a wide area network by hopping 60 feet to a local “hot spot.” The application of “spectrum sharing” to imply a non-exclusive (or unlicensed) rights regime is, at best, highly misleading. Whenever conditions of scarcity exist, meaning that not all uses can be accommodated without conflict, some rationing follows. It is commonly done by price, behavioral restriction, or both.
In CBRS, the FCC has imposed three layers of “priority” access across the 3550-3700 MHz band. Certain government radars are assumed to be fixed and must be protected. When in use, these systems demand other wireless services stay silent on particular channels. Next in line are PAL owners, parties which have paid for exclusivity, but which are not guaranteed access to a given channel. These rights, which sold for about $4.5 billion, are allocated dynamically by a controller (a Spectrum Access System, or SAS). The radios and networks used automatically and continuously check in to obtain spectrum space permissions. Seven PALs, allocated 10 MHz each, have been assigned, 70 MHz in total. Finally, General Access Authorizations (GAA) are given without limit or exclusivity to radio devices across the 80 MHz remaining in the band plus any PALs not in use. Some 5G phones are already equipped to use such bands on an unlicensed basis.
We shall see how the U.S. system works in comparison to alternatives. What is important to note is that the particular form of “spectrum sharing” is neither necessary nor free. As is standard outside the U.S., exclusive rights analogous to CMRS licenses could have been auctioned here, with U.S. government radars given vested rights.
One point that is routinely missed is that the decision to have the U.S. government partition the rights in three layers immediately conceded that U.S. government priority applications (for radar) would never shift. That is asserted as though it is a proposition that needs no justification, but it is precisely the sort of impediment to efficiency that has plagued spectrum reallocations for decades. It was, for instance, the 2002 assumption behind TV “white spaces”—that 402 MHz of TV Band frequencies was fixed in place, that the unused channels could never be repackaged and sold as exclusive rights and diverted to higher-valued uses. That unexamined assertion was boldly run then, as seen in the reduction of the band from 402 MHz to 235 MHz following Auctions 73 (2008) and 1001/1002 (2016-17), as well as in the clear possibility that remaining TV broadcasts could today be entirely transferred to cable, satellite, and OTT broadband (as they have already, effectively, been). The problem in CBRS is that the rights now distributed for the 80 MHz of unlicensed, with its protections of certain priority services, does not sprinkle the proper rights into the market such that positive-sum transitions can be negotiated. We’re stuck with whatever inefficiencies this “preexisting condition” of the 3.5 GHz might endow, unless another decadelong FCC spectrum allocation can move things forward.[13]
Already visible is that the rights sold as PALs in CBRS are only about 20% of the value of rights sold in the C-Band. This differential reflects the power restrictions and overhead costs embedded in the FCC’s sharing rules for CBRS (involving dynamic allocation of the exclusive access rights conveyed in PALs) but avoided in C-Band. In the latter, the sharing arrangements are delegated to the licensees. Their owners reveal that they see these rights as more productive, with opportunities to host more services.
There should be greater recognition of the relevant trade-offs in imposing coexistence rules. Yet, the Pai FCC succumbed in 5.9 GHz and in the 6 GHz bands to the tried-and-true options of Regulation Past. This was hugely ironic in the former, where the FCC had in 1999 imposed unlicensed access under rules that favored specific automotive informatics—Dedicated Short-Range Communications (DSRC)—that proved a 20-year bust. In diagnosing this policy blunder, the FCC then repeated it, splitting off a 45 MHz band with Wi-Fi-friendly unlicensed rules, and leaving 30 MHz to continue as the 1999 set-aside for DSRC. A liberalization of rights that would have allowed for a “private auction” to change the use of the band would have been the preferred approach. Instead, we are left with a partition of the band into rival rule regimes again established by administrative fiat.
This approach was then again imposed in the large 1.2 GHz unlicensed allocation surrounding 6 GHz, making a big 2020 splash. The FCC here assumed, categorically, that unlicensed rules are the best way to sponsor spectrum coordination. It ignores the costs of that coordination. And the commission appears to forget the progress it has made with innovative policy solutions, pulling in market forces through “overlay” licenses. These useful devices were used, in one form or another, to reallocate spectrum in for 2G in Auction 4, AWS in Auction 66, millimeter bands in Auctions 102 and 103, the “TV Incentive Auction,” the satellite C-Band in Auction 107, and have recently appeared as star players in the January 2021 FCC plan to rationalize the complex mix of rights scattered around the 2.5 GHz band.[14] Too complicated for administrators to figure out, it could be transactionally more efficient to let market competitors figure this out.
The Future
The re-allocations in 5.9 GHz and the 6 GHz bands may yet host productive services. One can hope. But how will regulators know that the options allowed, and taken, are superior to what alternatives—suppressed by law for the next five, 10, 20 years—might have emerged had competitors had the right to test business models or technologies disfavored by the regulators best laid plans. That is the thinking that locked in the TV band, the C-Band for Satellites, and the ITS Band. It’s what we learned to be problematic throughout the Political Radio Spectrum. We shall see, as Chairman Pai speculated, what future chapters these decisions leave for future editions.
[1] https://www.fcc.gov/document/fcc-votes-establish-office-economics-analytics-0
[2] https://www.fcc.gov/document/fcc-opens-office-economics-and-analytics
[3] Thomas Hazlett, Economic Analysis at the Federal Communications Commission: A Simple Proposal to Atone for Past Sins, Resources for the Future Discussion Paper 11-23(May 2011);David Honig, FCC Reorganization: How Replacing Silos with Functional Organization Would Advance Civil Rights, 3 University of Pennsylvania Journal of Law and Public Affairs 18 (Aug. 2018).
[4] It is with great sadness that Jerry Ellig, the 2017-18 FCC Chief Economist who might well offer the most careful analysis of such a structural reform, will not be available for the task – one which he had already begun, writing this recent essay with two other FCC Chief Economists: Babette Boliek, Jerry Ellig and Jeff Prince, Improved economic analysis should be lasting part of Pai’s FCC legacy, The Hill (Dec. 29, 2020). Jerry’s sudden passing, on January 21, 2021, is a deep tragedy. Our family weeps for his wonderful wife, Sandy, and his precious daughter, Kat.
[5] As argued in: Thomas Hazlett, “The best way for the FCC to enable a 5G future,” Reuters (Jan. 17, 2018).
[6] In 2018-19, FCC Auctions 101 and 102 offered licenses allocated 1,550 MHz of bandwidth in the 24 GHz and 28 GHz bands, although some of the bandwidth had previously been assigned and post-auction confusion over interference with adjacent frequency uses (in 24 GHz) has impeded some deployments. In 2020, Auction 103 allowed competitive bidding for licenses to use 37, 39, and 47 GHz frequencies, 3400 MHz in aggregate. Net proceeds to the FCC in 101, 102 and 103 were: $700.3 million, $2.02 billion, and $7.56 billion, respectively.
[7] I estimate that some 70 MHz of unlicensed bandwidth, allocated for television white space devices, was reduced pursuant to the Incentive Auction in 2017. This, however, was baked into spectrum policy prior to the Pai FCC.
[8] Notably, 64-71 GHz was allocated for unlicensed radio operations in the Spectrum Frontiers proceeding, adjacent to the 57-64 GHz unlicensed bands. See Use of Spectrum Bands Above 24 GHz For Mobile Radio Services, et al., Report and Order and Further Notice of Proposed Rulemaking, 31 FCC Rcd 8014 (2016), 8064-65, para. 130.
[9] The revenues reflect bids made in the Clock phase of Auction 107. An Assignment Phase has yet to occur as of this writing.
[10] The 2021 FCC Budget request, p. 34: “As of December 2019, the total amount collected for broader government use and deficit reduction since 1994 exceeds $117 billion.”
[11] Kerrisdale Management issued a June 2018 report that tied the proceeding to a dubious source: “to the market-oriented perspective on spectrum regulation – as articulated, for instance, by the recently published book The Political Spectrum by former FCC chief economist Thomas Winslow Hazlett – [that] the original sin of the FCC was attempting to dictate from on high what licensees should or shouldn’t do with their spectrum. By locking certain bands into certain uses, with no simple mechanism for change or renegotiation, the agency guaranteed that, as soon as technological and commercial realities shifted – as they do constantly – spectrum use would become inefficient.”
[12] Net proceeds will be reduced to reflect bidding credits extended small businesses, but additional bids will be received in the Assignment Phase of Auction 107, still to be held. Likely totals will remain somewhere around current levels.
[13] The CBRS band is composed of frequencies at 3550-3700 MHz. The top 50 MHz of that band was officially allocated in 2005 in a proceeding that started years earlier. It was then curious that the adjacent 100 MHz was not included.
[14] FCC Seeks Comment on Procedures for 2.5 GHz Reallocation (Jan. 13, 2021).
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