“The Political Spectrum: The Hazletts and the Haz Nots?” (Two Think Minimum Podcast)

“The Political Spectrum: The Hazletts and the Haz Nots?” (Two Think Minimum Podcast)

Two Think Minimum Podcast Transcript
Episode 007: “The Political Spectrum with Thomas Hazlett”
Recorded on March 16, 2018

Chris: Hello, and welcome to another episode of the TPI podcast, Two Think Minimum. Today we’re going to continue our conversation with special guest, Professor Thomas Hazlett. Professor Hazlett is the H.H. Macauley Endowed Professor of Economics at Clemson University. Tom will talk about his book, The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone, published by Yale University Press. The professor is in town for a book forum at the Cato Institute with comments from FCC Chairman Ajit Pai. It should be mentioned that TPI’s fellow Sarah Oh was a former student and she and Professor Hazlett enjoyed getting caught up. We’re also joined today by TPI Senior Fellow and President Scott Wallsten, who will also join the conversation on all things political spectrum. Without further ado, I’ll hand it over to the three experts in the room and let them take it away.

Sarah: Thanks Chris. I’d like to start us off today by saying that I’m sitting here with my former boss and my current boss, so I better have my spectrum notes ready. I’m so glad to welcome Professor Hazlett to the podcast. I was the last student of his about 12 years ago in his course on economics for lawyers at Scalia Law School at George Mason. I worked for the Information Economy Project for a few years, writing and organizing conferences before studying economics and coming here to TPI. I wouldn’t be an economist without Professor Hazlett’s influence. So now on to the show. Tom, would you mind sharing some of your process and writing The Political Spectrum? Have you been collecting spectrum notes for decades in your desk drawer? You’re a leading scholar in spectrum property rights. What inspired you to write this particular book?

Tom: Thank you Sarah. It is a delight to see you producing wonderful academic work and popular articles and off to a great career in the economics and public policy realm and particularly in the tech field. As I look back on a more than 30 year career in academia, I think about my accomplishments, and that leads me to take credit for everything you do. It’s wonderful to see your trajectory and I’m sure we haven’t seen it hit the apex yet.

The book-writing process is interesting. People ask me, “How long have you been writing this book?” My standard answer is that, “I have been writing the book since I was five.” There is a long time of research, sometimes it seems to go faster than you might expect and you look back and all of a sudden you’ve got some decades of research that really do need you to put together into a story.

There’s a great story about how the U.S. and other countries regulate and allocate radio spectrum and the wireless sector, which is of great importance to the economy today, and of increasing importance to all of society. There is very little understanding, general understanding of course, of how the process of regulation works and how the rules to the “most valuable natural resource at the 21st century” radio spectrum are created, defined, and distributed. Being an economist who looked at this marketplace and looked at these regulatory structures for some time, I thought, I really need to write the book. That process, at some point, means you’re just going to sit down and start writing a book and that really took place in early 2013. There was a book by early 2014. There was a submission to academic presses and others and an acceptance of a book that was about 195,000 words. The Yale University Press says we’d be delighted to publish the best 120,000 words. Then you have another long editing process and the book comes out in 2017.

Scott: How did you decide which words were the 120,000 best?

Tom: There were two complete and thorough edits by a Yale editor who did a very nice job, William Frucht. I, of course, had to come in right behind them and do my revisions. The book was made better. Of course, it’s always painful to leave anything on the cutting room floor, so to speak. People don’t want to read 500 pages or 700 pages if you can talk to him about reading 300 pages, you’re lucky. There’s a lot in the book. There’s history, particularly at the Federal Communications Commission. There are episodes of regulatory failure and regulatory success. I’m trying to describe a historical arc in the liberation of wireless technology over time. There’s economics in there. There’s technology, there’s certainly history and political science, or if you will, public choice.

Scott: You said you’ve been writing this book since you were five. We can see all of your research in here. When you put it all together, did you learn something different than came from any one of your papers that you hadn’t really realized, until you put it all together?

Tom: I don’t think there was a single epiphany that I can give you right off the top of my head, but there is no question that writing forces you to think and rethink and understand in a way that you’ve never done before. It’s like when they say, “If you want to learn something, go teach it.” Writing is teaching. You’re putting words on paper, or on a screen that are going to try to explain something to somebody else. You are teaching what you think you know, and that forces you to test what you know or you think you know, and understand things in a different way now. In the writing process, if you have lots of articles, (and thank you for noticing that there is research that forms the basis of the book), you cannot just take those articles and basically rewrite them and put them together.

That’s not the way this works. That’s why, at some point, you have to sit down and say, I’m going to write a book. You have to start over. You have to write the story yourself, because it forces you to relearn your own story, and to make it, so that it fits. Of course, you have to think about this.

The issue that’s interesting is, how did the liberalization come about? We started in such a captured and conservative fashion in the 1927 Radio Act. It’s clear that the interest groups, the incumbent radio broadcasters, and policymakers who wanted influence over the content that was broadcast, came together to restrict entry into a market, create rents, and then distribute those rents in a very standard way. We know in economics this happens in lots of places. Now, that system really does a lot of violence to innovation, competition, and consumer welfare over the ensuing decades.

Economists, when they came along and started paying attention to this in the 1950s, with Ronald Coase, were saying, “Wow, this is really inefficient,” or “We think it could be done much better, let’s try more competition. Let’s introduce market forces.” It seemed like a good idea, to a few people at the time. But, “How did it come about that some of those ideas eventually were tried?”

At the first round, Coase and these economic ideas were vilified. The established wisdom was very strong and resistant to change. In writing the story where we ended up, where we are now, where we’ve seen some really successful deregulation and unleashing of incredible technologies, we have to ask the question, “How did that happen? How can it happen again?” Still, as we sit here today, most spectrum, the great majority, is still squirreled away in these old allocations created by, now, dead regulators that have little or nothing to do with the modern world, and, in fact, are hostile to progress. How do we recreate those forces and that very progressive structure that actually moved the old spectrum system into the new world?

Scott: Tell us a little bit more about how that actually happened. You mentioned, Coase, who was one of the first to say what we were doing is stupid and we should do something more like auctions. Is this a story of great people who are able to push an agenda? Is it a story of potential entrants that became powerful enough to demand changes? What was it that allowed it to change?

Tom: That’s a great question and great minds grapple with it, not just in radio spectrum, but in terms of the course of history. Deirdre McCloskey talks about how economists are too focused on incentives and institutions, and they don’t give enough play to culture and ideas. I appreciate that debate. I like McCloskey’s critique, but it’s a hard answer in terms of really narrowing it down. It is clear that the inefficiencies of the old system and the suppression of innovation, in a certain sense, finally got to be too much. We broke through in ways that were important.

I’ve written previously, and try to extend in the book that – the old broadcasting system was fairly easy for the policymakers to jump on and regulate. It was easy because they knew – as Herbert Hoover at the Department of Commerce and members of the House and Senate in the United States, and this happens in roughly the same way with different institutions and other countries – these policymakers wanted to control the debate and the influence of the new media. The first companies that got involved and have broadcasting licenses, they wanted to restrict entry into the market. In that public choice story, the capture that takes place early on (the restrictions), they’re fairly straight forward to explain. What is harder is how that drifts away.

I claim that broadcasting is as easy as it was, because it was a technology where there’s a transmitter, put it in one spot and you blast out lots of energy to as many as far as you can go. You have 500 of those licenses nationwide. How simple that is to regulate and how clear it an advantage for the policymakers, as compared to something like years later, cellular, where you have thousands, tens of thousands of base stations. You’ve got much more complicated technological decisions. You certainly have the coordination between receivers, mobile receivers and base stations and sort of the networking function is a hugely complicated, relative to the old system and it’s a common carrier service.

There’s no real political angle to jumping into cellular. You’re not influencing content, you’re not doing anything directly to influence elections. Now, of course, a generation later, we see, as we sit here in 2018, Facebook, social media, all the discussion today about the 2016 election, and some of the influence there, in the long run, some of these things breakthrough.

But as decisions were being made in the 1970s and 1980s about what to do about the emerging medium, you don’t have the same political interests and you do have a much heavier lift for regulators.  Just licensing the over 1,000 cellular licenses turned out to be so much of a headache that the regulatory establishment did do something that was a step away from the old system. As crazy as it sounds, it was a step in the right direction. It was lotteries for issuing the licenses. It was just too much of a paperwork burden to do the whole beauty contest method to give out these 1,468 cellular licenses in the 1980s.[1] We actually went to a less political, even if, foolish system. An auction would have been so much more efficient. We ended up going that way decades later.

Scott: It’s only inefficient if the secondary markets aren’t working, which at the time, weren’t as well developed.[2] Right?

Tom: No, there’s also the fact that there are rents that are squandered when you have this set up. The way we did the lottery, we have the fiction that every entrant to the lottery had to be a real phone company. But that rule was overcome through paperwork where entrants claimed, “Oh yes, we’re a phone company because we’ve got Nortel to certify in these papers that we will be.”

There was paperwork, there was rent-seeking. There were transaction costs in the reassignments. At the end, revenue was left on the table. If there are pure rents, it’s efficient for the government to go ahead and sell the license, take the rents and for that portion of public spending, you have an efficiency over a tax, a tax that has some inefficiencies associated with it, that sort of a public finance dividend.

There really are efficiency savings to what we later went to, in terms of auctions and sales of the licenses. But what I’m saying is, is that, how we got to the more liberal position in the emerging mobile market, in particular, was driven by the lack of political incentive for the regulators to block and control, on the one side, and the much higher level of complexity, and literally, administrative expense.

You go back to the 1970s and 1980s, and you will see the FCC arguing that it, just as an administrative manner, is going to have a terrible time doing hearings for 1,468 cellular licenses. Of course, they would have a terrible time. It would be a log jam for years. The way that worked out is that they did get Congressional authority to do lotteries, then they use that authority, and that cleared the log jam. It still took much too long. It took 1984 to 1989 to get the big bundled licenses out.

Scott: It couldn’t be complexity on its own that caused the change to happen, though. Japan still doesn’t do auctions, right? They still use the same old beauty contest approach. I’m sure there are loss of efficiencies there, but nobody’s ever said there are cellular networks aren’t very good.

Tom: Well, I don’t say it’s just the complexity issue. It’s also the political demand for regulation by the policymakers and then the cost of regulation to the policy authority. But no, auctions are basically the tip of the iceberg on liberalization.[3] People talk about it, Coase talked about it. But the real liberalization without any question is relaxing the rules for those who have rights to use spectrum – delegating authority, if you will – from the regulatory agency to the market and letting the forces of competition, including, most importantly, customer feedback, govern the public interest.

That was a proposal from 1951[4] by a law student at the University of Chicago named Leo Herzel[5] who said at the time, you know, “The auction, the license is important, but the real thing is just making sure that these rights are broad, liberal, flexible use spectrum rights, so that you can really have allocation decisions, where to get airwaves that are in low-valued uses moved over into high-valued uses that needs to be in the market and subject to competition, not to regulatory fiat.”

That’s in Japan, in China, in Nigeria, in the United States, that’s the change over the last 30 years that’s been phenomenally successful. Some countries haven’t gone as far on that as the U.S., but I think they are over 50 countries[6] that use auctions now and certainly another big chunk and certainly more important than auctions, is just, the idea of competition – that there can be parallel networks  authorized by rival licenses. That’s essentially every country in the world with the exception of North Korea.

Scott: Four things to note, then. One, is recognizing that it’s not a natural monopoly and you should have competing networks. Second, is that the licenses need to allow for flexible use. Third, is that they should be freely tradable. Then, the fourth, auctions are a compliment to all of this as the way to start the initial allocation.

Tom: Absolutely. One of the points in my book is, we haven’t taken the extra mile to liberalize the actual underlying allocation process. We still use the same old regulatory fiat – you can even call it the beauty contest approach – where regulators make an explicit determination to liberalize. In some cases they do, and in most cases yet, they have not, or they haven’t gotten to it. That’s what we have to speed up. We have to get more spectrum subject to market reallocation. The way to do that, is to figure out ways to loosen up the underlying regulatory system.

Scott: How far do you think they’ve gone down that road? I know it depends, how far up the spectrum band you define the relevant band to be. How far have we gone relative to how far we should go?

Tom: One quick and dirty way that has been used to estimate it is to say, well, in the prime beachfront properties,[7] around 600 MHz, that we like to use for things like mobile telecommunications, which is certainly the dominant sector today, in wireless, where you have maybe 20 percent, as a top end estimate, of how much is assigned to liberal licenses[8] and can be freely turned from one use into another use, without an authorization by a regulator.

That’s how the iPhone gets on the market. They don’t go to the FCC, and say, “Mother, may I?” No, they actually go to the carriers and say, “We’ve got a new radio, but, by the way, it will really hog spectrum. It interferes with everything else on your network, but we want your spectrum to use it.” They literally make market deals. The iPhone being the iPhone and being the iconic consumer innovation, they actually got paid – Apple didn’t have to pay a positive price. They got paid –

Scott: – in their initial exclusive deal with AT&T –

Tom: Exactly. And they’re still getting paid to make the iPhone for networks. In 2011, plus or minus, is the year when Sprint finally got the iPhone and they had to commit to paying a $20 billion for iPhones over the next three or four years.[9] That was significantly greater than the market capitalization of Sprint at the time. The companies want the iPhone because it’s so good. The iPhone has to buy spectrum for the iPhone. The whole point is that they can buy spectrum for the iPhone.

They’re not like Edwin Howard Armstrong in 1934 when he needed spectrum for his FM radio and had to ask, “Mother, may I?” He ended up through a very traumatic process, basically being denied by the FCC in a cruel and nasty way, that led them to commit suicide. One of the great inventors of the 20th century, and even though his invention finally liberated in the 1960s by the regulators just totally overtook the AM market because of the superior high-fidelity quality of FM, you couldn’t get out to market.

Now with more liberal rules in the mobile space, the carriers compete against each other to make these kinds of interference decisions that are involved with every new application and every new device and every new network use. That is just a level of complexity that is phenomenal, relative to what we were dealing with in the 1920s when it was said, “The market couldn’t possibly handle this, only regulators could figure out the coordination between the different broadcasters.”

It that turns out, it’s just the opposite.[10] Only the market can configure out how much burden does an iPhone put on a network, and how much new investment, and how much different technology, and how much pricing.

Scott: That was a point actually that comes through, that I really liked in the book, that usually the opposition to doing something new with spectrum, or allowing a new device, was always, “There are a lot of technical problems that make it impossible.” From your book, we learned that anytime someone said there was a “technical problem,” it was just an excuse to protect the existing system.

Tom: It’s a great point.

Scott: It’s a great point. You made it!

Tom: Maybe I didn’t make it enough yesterday, at the Cato book forum. In fact, Ajit Pai noted that he liked the “technical reasons” as a reason to deny anything. It is amazing if you appreciate what has been done. People show up with something new and different, and have to ask for permission because that’s the system. They are told, “You can’t do that for ‘technical reasons.’” Some of us who have worked at the FCC sort of laugh about that because it’s such a cynical ploy.

Technical reasons” is usually launched by a lawyer, who has no understanding of what the “technical reasons” might be. It’s a great conversation stopper. It means, “It’s too complicated for me to explain it to you, but it’s not going to happen.”

Look over at the wireless market place today. There are millions of apps that come onto your smartphones. They all interfere with each other. The devices all interfere with each other. The networks potentially interfere with each other. It gets worked out with fairly simple regulatory rules and competitive forces.

It is impossible to think about that system being run top-down under the old, “Mother, may I?” rules where the FCC says, “No, there’s going to be one setup here and we’re going to define what happens in every licensed space in terms of the service, the technology, and the business model.”

Your head explodes to even try to consider that possibility.[11] There wouldn’t be these possibilities, there would be suppression to the innovation. That’s what happens when “technical reasons,” go away, we can’t deal with this under the current system. The complexity that Silicon Valley and the carriers deal with every day is orders of magnitude above what people were told was problematic and just couldn’t be dealt with in the old structure.

That is extremely powerful in terms of the progress, the social progress, it’s led to, in the economy, in health, in social media, and in so many other areas of society.  Even in a personal security, crime rates going down as a result of this innovation, or Uber and Lyft, entirely new sectors of the economy that are built without even a second thought today. Nobody thinks about Uber and Lyft as wireless companies, but they’re impossible without the liberalization of spectrum policy.

Sarah: Related to innovation, would you say that there is market demand for liberalizing like let’s say the other 80 percent of the 600 MHz band, or are innovators just deterred by a closed door at the FCC. Why don’t we see a rush to the FCC to say, “Hey, open up the rest of the 80 percent.” At some point, is the “No” so strong that people aren’t even trying to access that spectrum?

Tom: Another great question. There is a demand there. You must have had good professors to ask a question of that quality!

Scott: She has to keep asking the questions!

Tom: Yes, there is demand to open up the spectrum, but we still have the 1927 Radio Act governing the process. That creates, what some have called, and I like to quote it, an “attractive nuisance.” That is to say, if you really want, as an innovator, access to radio spectrum and the current system forecloses that, you could invest in a campaign to convince Congress, interest groups, FCC regulators, the president, whoever is in a position of power to affect this outcome. You could really lobby for liberal access that opened up the market to everybody. That’s the way to spend a lifetime and probably not make much money because you’re investing in a public good.

The alternative with this “attractive nuisance” is to go and figure out a way that opens up a little bit of spectrum that can create gains that are captured by your effort to lobby the agency. That’s the bias of the system. Need I say, that’s a problem!

I was recently at the Public Choice Society meetings and gave a little paper on the battle over the 5.9 GHz band. Now that’s maybe worth about $3 billion. It’s 75 MHz that was set aside about 20 years ago by the regulators specifically for autonomous driving vehicles and other telematics that have to do with automobiles and trucks.[12] Certainly, the automobile companies have used that spectrum, want to use that spectrum, they didn’t pay for it, there wasn’t an auction, there’s no liberal use. This was an allocation for a specific purpose with unlicensed rules. You don’t have to have a license to operate. You have to conform to the power levels and the technology rules.[13]

There are other people who would like to use that perfectly valuable spectrum. [14]  It’s right next to the 5.8 GHz Wi-Fi band. Some other companies have challenged the FCC allocation and the automakers’ use of it, saying that “They haven’t made much use. And we ought to peel off, well maybe 45 out of the 75 MHz and allow Wi-Fi radios that are using 5.8 next door anyway to just extend over and use more bandwidth and get better throughput and more traffic on their systems.”

The automakers literally say, “People will die,” and literally say, “[reallocation] will create a direct and immediate threat to human life because of these mission critical aspects to the vehicle in telematics and informatics.”[15]

Scott: They’re making the technical argument. It’s exactly the same technical argument. We need all the spectrum to do these, all these various things, that we want our cars to do, and if somebody else can use that spectrum at all, for “technical reasons,” none of this will work. It’s exactly the same argument.

Tom: That’s exactly right. On the other hand, we don’t know how valuable a shift away from the automobile industry to the Wi-Fi sector is, if you will. We don’t know how valuable that shift is and how costly it is, what we give up. In my 5.9 GHz paper, I say, let’s think about doing something like this.

There’s 75 MHz. The Wi-Fi champions want 45 of it to be available for access for Wi-Fi systems and 30 to then be reserved exclusively for the auto industry. The auto industry, says, “No.” And there’s a standoff. It’s been going on for years, I assume it’ll go on for more. Nobody knows the answer to the question of what the social value is. Nobody knows the answer. The automobile industry and some kind of a consortium are identified because they’ve been lobbying on this for a long time and they have their groups that come in front of the regulators to present their views. We know the car companies that are specifically involved.

Let them own that band. In other words, give them a license for liberal rights over the 75 MHz. Now you say, well, that’s unfair.  There’s a windfall.[16] Scott, my co-author, certainly knows that we can fix that. We can say that we will sell you this for we could or we could be partners and take 50 percent of what happens later.  Now, we’re just quibbling over the price that’s the site issue. But I, as an economist here, just trying to move society forward, I’m perfectly willing to entertain the possibility.

We literally give this windfall, if you will, to the auto industry. Now I like that approach because the auto industry, the instant that they become owners, they ask themselves the question, “Now, what about those technical reasons?”[17] It is 75 MHz, maybe if we got to, keep 20 or 30 or 40 for our applications here, or maybe there’s a different configuration.

How much is it worth to us on the other side of that? You do have companies like Google and, Comcast, I’ve heard that they’re well capitalized and might be able to afford some kind of a transaction that opened up that band.

I do want to market test. I want some revelation of demand that involves more than paying an attorney to do a keyword search on flowery language in previous FCC proceedings and use that boilerplate to tell the Commission what a good idea a new reallocation is.

We know that the process does not reveal much about demand in terms of that legislative and regulatory tussle. You want to get to an auction where companies have to put up or shut up – skin in the game – so to speak. In that revelation, I’m pretty certain, you come to a much better optimization of that bandwidth and you can do it much, much quicker. You can open up 5.9 for other socially valuable uses and by the way, not just Wi-Fi, but whatever else might want to come in. Maybe satellite. Maybe some other services, plain old off the shelf mobile networks could be in there, you can have lots of mix in that outcome, but you can’t get it the way we’re doing it now.

Scott: Tell us about that more broadly because, for many years and decades, you have been having this argument about – overlays, with the FCC and others, as a complement to auctions to get spectrum back into the market more quickly. The incentive auction we just had was an example of not doing that. Tell people what overlays are and why you think it’s superior to something like the incentive auction.

Tom: I appreciate that. When you say I’ve been having an argument with the FCC about it, it really sounds so harsh.

Scott: It’s a productive argument.

Tom: Except that they haven’t listened to me. Let me give you a tiny little example of this is, where I take the victory lap. In the incentive auction, and Scott, you were part of the National Broadband Plan and 2009 and 2010, it actually was a very important direction and it was a key pivot in U.S. policy. I certainly talk about it in the book where the regulator, the FCC, looks at the TV allocation table and says, “Look, to deliver I Love Lucy but there’s too much there. We need to peel that off. Even though this is a public interest allocation and we have every legal authority according to the letter of the law, to just take these licenses and reallocate them or just change the use and allow the current licensees to do something different – that actually isn’t the way the system works.” That’s why the FCC says, “We’re going to have to pay the TV stations to sell their licenses back to us.”

Scott: They like Lucy but they don’t love Lucy.

Tom: That’s one way to put it. The FCC says, the broadcasters, if they get to sell a licensed back, they’ll cooperate. Their cooperation is being bought by the regulator.

I don’t like to crow about it, but that’s what some of us had been saying about the regulatory system for a long time. I absolutely agree that the FCC was right. They were intelligent and they were realistic in moving society forward to say we need to have a more market-oriented reform process. That led to this incentive auction, which is a two-sided auction. The bidding part took place in 2016 and 2017 and on the one side, the reverse auction TV stations said to the FCC, this is how much we will take and money to go off here to stop broadcasting. Then on the other side, after the FCC kind of figured out where the stations would move and what spectrum would be available and how to reallocate the available spectrum, newly available to liberalize licenses, it could be used by mobile operators. Then it held the second, basically standard, forward auction where parties lined up and bid to get these licenses to be used for mobile services. That auction raised $20 billion. T-Mobile was a big winner, $8 billion for about 31 MHz nationwide spectrum. That’s a big chunk. T-Mobile says it’s going make their network much better, 5G speeds go up, service coverage, all of the above. The great thing about that auction, FCC did accept the fact there had to be incentives for all parties to cooperate.[18]

The poor thing was that it only took about less than a quarter TV band and put it out into liberal licenses. The entire TV band has been subsumed by cable, satellite, and now over-the-top (OTT). Three generations later we are far away from getting I Love Lucy only by over-the-air (OTA) terrestrial TV. We have ways to get video.

Ask your teenager, “Have you watched TV today?” And she’ll say, “Yeah, I’m watching Netflix now,” and she’ll be looking at her Android. That’s the way video comes to people now. There’s no way that you can say it’s efficient to stop the process whereby consumers are voting to have spectrum used in the 2018 way and not the 1952 way. Only a quarter, less than a quarter, of the spectrum from the TV band was allowed to move this way in the incentive auction.

I say, have an overlay auction over the entire TV band, and they’d be competitive. You give out several licenses in every market and you allow the bidders to win the rights to use all the TV channels that aren’t in use today and they can use those immediately. Then pay the TV channels that are there, then they’re vested. The TV stations don’t have any change in their rights. They can stay and broadcast television, but they can sell rights to the new overlay owner. The overlay owner has technically secondary rights to use the TV spectrum. The overlay – what it does is put rights in the market so that self-interested parties can negotiate and cut deals and have partnerships and alliances so that they have gains from trade. They do something that’s tremendously efficient for society, which is to come past the 1952 TV allocation, get spectrum to where it’s in the highest-valued use today, and then split the gains. That’s all it is. It’s for the whole TV band.

Scott, you say the FCC doesn’t take my position. They will have take my position, they will have to use overlays. They can’t do what they’re doing without overlays. Right now in the market, mobile does not want to wait 30 years to 2020 to get access to all the spectrum.

T-Mobile, for instance, for $8 billion, they’re paying the TV stations sitting in what will be their spectrum. As for the licenses they purchased, their paying broadcasters to get out sooner. They’re having a transition that’s very much faster because essentially their licenses now our overlays and so it just works quicker and cleaner and faster. Yes, there are transaction costs. When you have the overlays going to the market and you have private negotiations, there are also transaction costs with the government doing this and its own structured way and the biggest transaction costs. That seems to be ignored by some is that 75 percent in this particular example of the incentive auction, 75 percent of the spectrum still is barricaded in the fortress that was put in in 1952 and, if you think really that this is 23 percent solution of the incentive auction is the end of it overlays are rejected, that is just wrong.

The FCC has had to rely on overlays in many instances. It is an off the shelf FCC technology and things like television where there has been an incentive auction but there’s not another one and the policy makers are committed to only one [auction] at a time. You have to go to something like overlays to get the other 75 percent.[19]

Scott: The broadcasters used to be feared group in Washington. You weren’t allowed to do anything to them, especially to take their spectrum, no matter how it was set up. Now, they still have 75 percent of it. Even after the incentive auction, what changed? Was it simply the fact that they didn’t need the spectrum much as they used to? Or was it something else that allowed this incentive auction to take place that wouldn’t have been possible a decade ago?

Tom: All of the above. Certainly the world has passed over-the-air (OTA) broadcasting by. Some broadcasters like Disney that owns ABC have very valuable programming, but they certainly do not rely on over-the-air (OTA) transmissions. For something valuable like ESPN, it goes on through cable and satellite and web distribution. What’s happened, is the market has passed them by.

In fact, the TV stations that have sold their licenses back to the FCC have (all the publicly held companies) have issued the same language in their public statements. They’re bragging how much money they got, hundreds of millions of dollars for their sale and it’s going to help the company and it says no material impact on revenues. Think about that. We’ve got still billions, tens of billions of dollars worth left in the spectrum of value. There’s no material impact when you take it away from the current allocation and put it into something else. That’s because cable and satellite and over-the-top (OTT) are the way they distribute the programs.

Scott: Are those payments a good measure of deadweight loss, if there’s no effect on revenues of the asset that they gave back? They received money for it with no changes to revenue. Does that reflect the deadweight loss that had been inherent that had been built into that business model?

Tom: That’s a lower bound, yes, it is a portion of that deadweight loss. I hadn’t been thinking about it from that side. So, Scott, when do you want to co-author?

Scott: I’m happy just being your muse.

Chris: That just about wraps up this a very enlightening conversation on where we’ve been and where we might be going regardless of if it’s more auctions or overlays. Do you want to close us out with any final thoughts or anything else you’d really want people to know about your book or spectrum process in general?

Tom: Very briefly, you’re involved in the marketplace of ideas here at the Technology Policy Institute. You’re talking to me today and you talk to people every day about interesting ideas that might have some impact in economics as we’ve been talking is so important. Technology is so important. As Scott was asking me earlier, yes, there are some visionaries and there are some people who actually can move the dial. It gets hard to calibrate. It’s even hard to document the fact that there is this change.

When you look back over years, you can see that people, like Ronald Coase, came in from the cold, were mocked and vilified by policymakers and experts in the industry for a long time. There are also some regulators who had forward-thinking ideas. Even FCC Commissioners like Glen O. Robinson in the 1970s who dared to talk about auctions were set to the side as a little bit off-the-wall for those views.[20] There have been people who have spent their time thinking through in a serious way, where we are and where we could be, if we did experiment with new and better ways of doing business in the regulatory world. This debate that you people are in the middle of, is an important one. I certainly applaud you and I thank you very much for having me talk about my book.

Scott: We really appreciate your being here. You’ve been in important part of this debate on engaging with the FCC, both in the FCC and out of the FCC and the book is fantastic. I commend it to everyone. Thanks a lot for coming down.

Sarah: Thank you very much, Professor Hazlett.

Chris: This concludes another episode of Two Think Minimum. You can find us on Soundcloud, iTunes, and Blubrry. See you next time.

And some bonus thoughts on counting cards…

Tom: I know how to count cards, by the way.

Scott: More than just up to 52?

Tom: There are card counting systems to win in blackjack.

Scott: For how many decks?

Tom: Your odds go down when you get more than two, and they try to play the big six, in recent years. When I got to Sacramento and started teaching at UC Davis, I didn’t know anybody up there. I finally got a little thing going out with some friends to Tahoe, and going to the casinos and I had my card counting down.

I would say things to the dealers, “I’m counting cards, are you going to throw me out?” They would say things like, “Well, if you start winning, sir.” Then I started arguing, “Just because I’m not winning, doesn’t mean I’m not cheating!”

You don’t automatically win. I can tell you, you have to bring a pretty big stash because with all the variance, you can get like 51 percent, 52 percent odds in your favor. You’re always going to be subject to a lot of randomness.

Scott: I’m not big gambling guy. I don’t like gambling that much. The last time I was in Vegas, I took $50 to a blackjack table because you know what to do in any given situation. Five minutes later, I left the table with no money.

Tom: At the time, I would have a $300 budget. The reason for my $300 budget (a $300 budget is when you lose 300, you have to leave), well, I used to publish Wall Street Journal editorials at the time and when I would go there and lose $300, then I’d write a Wall Street Journal op-ed and they’d publish it. And, so, literally friends of mine who, I might not see for six months, would say, “Oh, you’ve been to Tahoe.” And I’d say, “Why, did you see me?” And they go, “Well, you had something in the Journal.”

[1] https://www.chapman.edu/ESI/wp/Porter-Smith-Hazlett-RadioSpectrum.pdf

[2] https://www.fcc.gov/wireless/bureau-divisions/technologies-systems-and-innovation-division/spectrum-leasing/secondary

[3] Assigning Property Rights to Radio Spectrum Users: Why Did Fcc License Auctions Take 67 Years?, Thomas W. Hazlett, The Journal of Law & Economics, Vol. 41, No. S2 (October 1998), pp. 529-576, http://www.jstor.org/stable/10.1086/467402.

[4] Leo Herzel, “Public Interest and the Market in Color Television Regulation,” University of Chicago Law Review 18 (1951), pp. 802-16.

[5] My 1951 Color Television Article, Leo Herzel, The Journal of Law & Economics, Vol. 41, No. S2 (October 1998), pp. 523-528, http://www.jstor.org/stable/10.1086/467401.

[6] http://mobilefuture.org/wp-content/uploads/2013/07/Spectrum-Auctions-Around-The-World.pdf

[7] https://www.mercatus.org/publications/importance-spectrum-access-future-innovation

[8] The Case for Liberal Spectrum Licenses: A Technical and Economic Perspective, Thomas Hazlett, George Mason Law & Economics Research Paper No. 10-19, https://papers.ssrn.com/soL3/papers.cfm?abstract_id=1585469.

[9] https://gizmodo.com/5846168/wsj-sprint-is-betting-20-billion-on-the-iphone

[10] Exactitude in Defining Rights: Radio Spectrum and the “Harmful Interference” Conundrum, Thomas Hazlett, Sarah Oh, 28 Berkeley Tech. L.J. (2013), https://scholarship.law.berkeley.edu/btlj/vol28/iss1/6/.

[11] https://reason.com/archives/2017/05/22/markets-spectrum-fcc-net-neutrality/print

[12] https://en.wikipedia.org/wiki/Dedicated_short-range_communications

[13] http://thehill.com/blogs/congress-blog/technology/271408-improving-the-59-ghz-band-to-enhance-unlicensed-and-wi-fi

[14] Valuing Spectrum Allocations, Thomas Hazlett and Michael Honig, 23 Michigan Telecommunications & Technology Law Review 45 (2016).

[15] https://www.broadcastingcable.com/news/ncta-fcc-car-companies-need-share-163067

[16] What Really Matters in Spectrum Allocation Design, Thomas Hazlett, Roberto Munoz, Diego Avanzini, 10 Northwestern Journal of Technology and Intellectual Property 93 (2012),  https://scholarlycommons.law.northwestern.edu/njtip/vol10/iss3/2.

[17] The Case for Liberal Spectrum Licenses: A Technical and Economic Perspective, Thomas Hazlett and Evan Leo, https://www.law.gmu.edu/assets/files/publications/working_papers/1019CaseforLiberalSpectrumLicenses20100412.pdf.

[18] Don’t Be Disappointed by the FCC’s Incentive Auction, Scott Wallsten, Jan. 17, 2017, https://techpolicyinstitute.org/2017/01/17/the-fccs-incentive-auction-is-not-a-disappointment/.

[19] Unleashing the DTV Band, A Proposal for an Overlay Auction, Comment – NBP Public Notice #26, Thomas Hazlett, https://ecfsapi.fcc.gov/file/7020353684.pdf

[20] Glen Robinson: Regulating Communications: Stories from the First Hundred Years, http://iep.clemson.edu/?p=633.

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