December 20, 2016

The Importance of Spectrum Access to the Future of Innovation

Summary

Repurposing spectrum for new uses yields tremendous social benefits, but all too often, legacy laws and slow regulatory proceedings impede wireless innovation. These delays impose huge, but largely hidden, economic costs on consumers, and the social costs grow with every passing year.

Key materials

It would be hard to overstate the importance of the radio spectrum in the American economy. Most major industries rely on wireless technologies that depend on spectrum access to function. Agriculture requires precision GPS. Mass media is distributed via cellular, broadcast, and satellite networks. Public safety and national security require mobile communications and mobile video. Patients and hospitals rely on wireless medical devices.

Soon driverless cars, smart homes, drones, smart grocery labels, telemedicine, and smart cities will require swathes of spectrum and will add to the growing millions of workers directly employed in telecommunications fields. For economists who study this area, there is a clear consensus about the importance of allocating spectrum rights well: “The general key for the [Federal Communications] Commission is to get spectrum rights quickly and completely into the marketplace.”

However, the Federal Communications Commission (FCC) reported in its 2010 National Broadband Plan that it takes nearly a decade, from commencement to completion, to free spectrum for flexible uses. Consumers lose out on large social benefitsbecause of these regulatory delays. Spectrum values have increased, and therefore, unfortunately, the cost of regulatory delay is increasing.

The Immense Consumer Benefits of Flexible-Use Spectrum

In total, as figure 1 shows, about 650 MHz, or about 20 percent, of the high-value “beachfront spectrum” is licensed for commercial, flexible uses. Over half of this total the FCC auctioned, which raised about $100 billion (2015 dollars) in revenue, and the rest the FCC “de-zoned,” moving it from restricted uses (like educational broadcast television or taxi dispatch) to flexible uses. 

The vast majority of beachfront spectrum, however, is not in the market or has restricted uses. As figure 1 shows, around 55 percent of beachfront spectrum is dominated by federal users, who don’t pay market rates for spectrum use as they would for other critical inputs. The remaining spectrum is used commercially, but the FCC restricts its use to certain technologies.

Getting more federal spectrum into the marketplace and loosening restrictions on commercial spectrum would yield new wireless technologies and social benefits. Critically, the consumer value of flexible-use spectrum dwarfs the auction value of spectrum. Economists estimate that spectrum reallocated from a restricted use to flexible use generates annual consumer benefits in the same order of magnitude as auction value. The net present value of consumer benefits of that 650 MHz of existing flexible-use spectrum, according to a conservative estimate, exceeds $3.5 trillion.

Recommendations

Every year of inaction on a large auction or liberalization means billions of dollars of potential economic activity and consumer value evaporate. These consumer welfare losses appear to be an afterthought in spectrum policy—Congress tends to focus on auction revenues and CBO scoring—which is unfortunate because these losses cannot be regained in subsequent years. To ensure prompt use of high-value spectrum, the FCC and Congress should prioritize spectrum liberalization, disregard objections to financial “windfalls,” avoid complex actions and sharing rules, and repurpose and auction federal agency spectrum.

1. Prioritize Spectrum Liberalization

In the short term, the FCC needs to prioritize the “de-zoning” of high-value commercial spectrum so that it can be used for nearly any wireless service, not just legacy services. The FCC has broad authority under the Communications Act of 1934 to liberalize commercial spectrum. However, while many in the agency would like to liberalize spectrum, the FCC has prioritized other regulatory activities—like intervention in industry mergers, Internet regulation, TV apps regulation, and online privacy—in recent years. Unlike these other areas, where competition law is the primary instrument for protecting consumers and enhancing competition, the FCC has sole jurisdiction over commercial spectrum use. 

2. Disregard Objections to Financial “Windfalls”

The FCC has de-zoned nearly 300 MHz of beachfront spectrum for flexible use. Like a real estate developer who gains permission to replace a strip mall with a high-rise, liberalizing restricted-use spectrum means an underused asset gains value and creates economic rents. Competitors and advocacy groups often object to “economic windfalls” when the FCC considers liberalizing spectrum. Congress and the FCC should ignore these objections because whatever “windfall” may accrue to a licensee benefits consumers up to 10 times over.

3. Avoid Complex Auctions and Sharing Rules

One-off, “customized” allocations and sharing requirements, especially sharing between licensed and unlicensed users, are notoriously complicated and time-consuming to execute. For instance, in 2008 the FCC allowed unlicensed devices to share spectrum with TV stations in certain bands. As recently as 2012, tens of millions of unlicensed devices were predicted, yet today fewer than 1,000 are in operation. In contrast, the 2008 auction of similar spectrum, which does not require sharing with unlicensed devices, induced billions of dollars in investment and the construction and upgrade of mobile networks covering hundreds of millions of Americans within five years.

4. Repurpose and Auction Federal Agency Spectrum

Most beachfront spectrum is dominated by federal agency use. Further, those agencies “have no incentives to improve the efficiency with which they use their own spectrum.” Experts have proposed different ways of repurposing federal spectrum for commercial use, including a proposal from FCC Commissioner Jessica Rosenworcel to allow commercial operators to privately negotiate with and compensate agencies for use of federal spectrum.

Conclusion

Repurposing spectrum for new uses yields tremendous social benefits, but all too often, legacy laws and slow regulatory proceedings impede wireless innovation. These delays impose huge, but largely hidden, economic costs on consumers, and the social costs grow with every passing year. These processes can be corrected, however. Lawmakers and the FCC should, as much as is feasible, get spectrum rights quickly and completely into the market.