Property Rights Should Apply to Spectrum, Too

Published September 1, 2007

The upcoming FCC auction of key 700 MHz spectrum has generated intense controversy in the past months, and more than its fair share of political infighting and surprises. [See story, page 1.]

The current parameters of the debate concern the conditions the FCC has attached to the auction, including proposals that certain portions of this space be dedicated to bidders who agree to observe certain key “open access/net neutrality” provisions. We know that the attachment of any conditions to any auction item can only reduce its value, so the burden should be on those who impose the conditions to explain why they are needed.

The point here is not to look at the detailed specifications for the auction, but to ask this question: Why is it that all the spectrum is not just sold off with no conditions at all? Those rules sensibly give the owner the power to determine its use so long as there is no interference with the like use of others, and to decide whether to use the block of spectrum intact, or to divide it among others.

‘Scarcity’ Argument Misapplied

In this modern age, it is hard to remember that, before government regulation, there was some judicial authority to the effect that spectrum allocation was made under common law rules to the first party to occupy a particular frequency. That early effort was shoved aside by the aggressive intervention, first, of the Department of Commerce (under Herbert Hoover) and then the nascent Federal Radio Commission.

Both were premised on the dubious assumption that administrative allocation of frequencies beat the bottom-up approach. The argument was that scarcity of spectrum required special government-devised rules, to which the proper response was, and is, that scarcity is not just a spectrum problem. Everywhere, property rules are the best way to deal with scarcity because they promise the quickest path to a voluntary market.

Writers like Leo Herzl and Ronald Coase saw this in the 1950s, but the world believed in a different wisdom. The point of government action was not, to paraphrase Supreme Court Justice Felix Frankfurter, merely to set the rules of the road but to determine the composition of the traffic. So the FCC, in addition to administering spectrum allocation, designated specific blocks for specific applications: broadcast TV, FM radio, public safety, and, more recently, wireless telecommunications.

The irony of the upcoming auction, which reallocates frequencies once used for UHF TV to wireless services, is that in the past if a broadcaster, sensing greater demand for wireless services, on its own had tried to sell or lease its licensed block of 700 MHz spectrum to a service provider, it would have likely had that license revoked.

Applications Agnosticism

When it comes to spectrum allocation today, applications agnosticism is a virtue, not a weakness. Right now the best way to allocate bandwidth, including bandwidth used for broadband, is to sell it outright, with no restrictions on use. Let the competitive bids in an unencumbered auction constitute the evidence of value. In applying conditions, the FCC will reduce both market and social value of the spectrum.

There is, of course, one exception to this rule, which is misapplied far too often. In those cases in which there is a strong monopoly with respect to a particular service, then the standard rule for regulated industries–the use of reasonable and nondiscriminatory terms–might be a sensible way to proceed.

But even in the pure case of monopoly, the real danger is that clever use of the regulatory process is more harmful than no regulation at all, by stifling long-term innovation that would quickly render the short-term fixes unwise or unnecessary.

Common Law Rules

It follows, therefore, that once the monopoly ghost is exorcised, as has been the case with telecommunications, the older, common law rules of property should dominate the game. They allow for quick responses to changes in both cost and demand.

The history of the industry teaches us that the advance and convergence of technology makes monopolies ever harder to maintain. The often troubled history of FCC regulation should make it clear that a simple common law property rights approach will do best by everyone in the long run.

This is one case in which the fewer the conditions, the stronger the property right. The stronger the property right, the greater the return from the spectrum to be auctioned, and the greater the enhancement of long-term consumer welfare.

Richard A. Epstein ([email protected]) is distinguished adjunct senior scholar at the Free State Foundation and James Parker Hall distinguished service professor of law at the University of Chicago. This article, excerpted from “Net Neutrality and Spectrum Auctions: Lessons from History,” is reprinted with permission of The Free State Foundation.

For more information …

Full text available at Richard A. Epstein, “Net Neutrality and Spectrum Auctions: Lessons from History,” July 25, 2007: