NEWS June 18, 1997
MARKET-BASED SPECTRUM POLICIES
June 18, 1997
Hundt identified the following problems in pending spectrum legislation:
Hundt observed that the FCC's 14 spectrum auctions to date have resulted in the issuance of 4,377 new licenses and collected $11.7 billion for the Treasury. He also cited evidence showing how eliminating spectrum scarcity has resulted in price reductions of up to 25% in mobile telephony, unprecedented wireless investment, and the introduction of innovative new services.
REMARKS TO CITIZENS FOR A SOUND ECONOMY
JUNE 18, 1997
Spectrum Policy and Auctions: What's Right, What's Left
Thank you for inviting me to speak here today. I want to especially recognize and thank
James Gattuso for his thoughtful contributions to the public debate about spectrum policy and
auctions over the last five years.
I am delighted to be speaking at this event organized by Citizens for a Sound Economy.
I believe we share many fundamental values. For instance, I think of CSE as really
standing for Citizens for Sound Economics or Citizens for Smart Economists. Economists may
consider that a redundancy. Possibly they're correct. In any event, we need them and we need
FCC should stand for Fostering Competition in Communications. Sound economics
should be part of every dimension of our work. That's why I was glad to see the President
nominate a PhD Economist to be an FCC Commissioner. No one can remember that happening
before. It's about time.
You may remember that our motto from the day I arrived was "Read the Law/Study the
Economics/Do The Right Thing."
So we tripled the number of economists, brought in a trio of first rate Chief Economists
(Mike Katz, Joe Farrell and Mike Riordan) and literally reinvented the economic analysis of the
agency. Congress and the Administration also granted us authority to use auctions to award new
licenses. As a result, for the first time ever the FCC truly follows a market-based approach to the
allocation and use of spectrum.
I'm not the economist behind these ideas. I've cross examined and hired economists. I
respect them. And I rely on them.
I embraced their ideas and their discipline when I first got this job because sound
economics is the way to create the deregulatory, pro-competitive marketplace that we all want
and that Congress asked for when it passed the 1996 Telecommunications Reform Act.
I'd like to talk today about our country's new, de-regulatory, market-based policies
regarding the use of spectrum, and especially our spectrum auction program.
In particular, I'd like to talk about the extraordinary threat to these policies. These
policies work for the country. But in Washington many adhere to the view: If it ain't broke, let's
fix it. This is particularly true for spectrum issues. For decades Congress and the FCC have
managed spectrum uses to limit competition, to improve the engineering judgments of the private
sector and to grant benefits to special pleaders. Now there is a recidivist impulse to manage
spectrum. This is a predictable response to our new regime of rapid, efficient licensing through
auctions and market-reliant, flexible use. Now our auctions program is being jeopardized by
many of the provisions under consideration in the Budget Reconciliation process.
Now all is fair in love and war and congressional debate. So I hope my friends and
mentors on the Hill won't mind if I throw in my two cents concerning the events of this week in
the House and Senate Commerce Committee.
We all know what the lobbying is like during mark-ups. The worst ideas are argued with
passionate intensity; the best ideas lack advocates with conviction. Citizens can scarcely see what
is transpiring as many forces of darkness lobby against few beacons of light, and gloom, smoke,
and fog spread through the rooms.
Yet it appears that at least the following is true: the House and the Senate Commerce
Committees, over the objections of at least Congressman Markey and Senator McCain, went a
long way toward making sure that broadcasters receive another billion dollar handout of public
property, on top of the digital TV giveaway of last year.
CSE has been, or is being, disappointed again.
You remember the giveaway of digital TV licenses to today's broadcasters. It was the
largest single grant of public property to anyone in the private sector in this century. You and
Senator McCain and Bill Safire and the editorial boards of virtually every major newspaper in the
country said that this was awful, and that the licenses should have been auctioned.
Yet others asserted it was not gift, but merely a loan, because broadcasters would build
digital TV towers and promote digital TV and then return the analog licenses.
So, denied the authority to auction DTV licenses, that's what the FCC ordered in April.
When we get back the analog licenses, we noted, the country would not only receive all that
analog spectrum (perhaps the most precious public property in this country), but due to a
wondrous engineering feat called "repacking", we would free 78 megahertz of spectrum for other
uses; a couple years ago we sold 60 megahertz for $7.7 billion. That gives you a feel of the size
for the taxpayer benefit if broadcasters really give back the analog licenses.
Then this week the House Commerce Committee undercut the obligation of the
broadcasters to give back the licenses and the Senate Commerce Committee undercut the duty of
the broadcasters even to build DTV towers.
If the law takes these two bad turns, a result that would be! Give the DTV licenses to broadcasters so no competitors could get them; tell broadcasters they don't really have to build the dtv systems; and then tell broadcasters their reward for not using this incredibly valuable public property is that they never have to give back the analog licenses.
In return for what? No specific, quantifiable, reliable public interest commitments have been made; no free time has been extended to reform political debate; no payment to the Treasury by fee or auction revenue has been promised; no new wireless industry has been promoted.
But the good ideas and policy heros need your help and support, and in a hurry.
Plus other bad ideas are on the march.
Some want the FCC not to use auction revenue to conduct auctions. Because we have no
appropriations money for conducting auctions, this idea would kill auctions.
Some want to frustrate new public safety uses of spectrum.
Some want the FCC to key auctions to budget targets, so that if a large percentage of CBO auction revenue estimates are not achieved, we cancel the auction. This defeats all the auction goals of trusting markets, promoting efficiencies, and distribution licenses quickly.
Some want to undercut our policy of permitting flexible use of spectrum. Some want us
to let license be tied up in Chapter 11 proceedings for years, thereby frustrating their commercial
Fortunately the fight for the right ain't over yet. Senator Hollings and Senator Stevens
saved the Comission's auction program by ensuring that we could continue to fund it out of
revenues. Senators McCain, Dorgan, and Kerry made many right points in the Senate Committee
debate and Congressman Markey had a great idea -- that all TV's after a certain date should have
digital and analog capability to facilitate the transition -- in the House Committee debate. The
smoke is still clearing, so I can't identify all the policy heroes at this time, but I'm sure there are
So I'm here to say that billions of dollars in growth and hundreds of thousands of jobs are
at stake. Let's hope that Congress orders us to continue auctions to award all licenses as
efficiently as possible. Let's hope that auctions not be delayed or used to fit arbitrary budget
goals. Let's let licenses be issued like tickets to compete when the correct number to be issued is
this: as many as the market can sustain.
In the last three years, we've run 14 auctions, issued 4,377 licenses, and collected over
With each auction, we learn something new. We've tried new techniques, such as
simultaneous, multiple round auctions, and sequential multiple round.
We occasionally ask Congress to grant us additional authority such as the power to take
back licenses and reauction them when a licensee is in bankruptcy. The Senate Commerce
Committee deleted this provision from the OMB draft.
But fundamentally, auctions are the most free-market, successful program ever designed
to promote competition in communications.
The debates about auctions, like all debates about spectrum policy since the 1920s revisit a
fundamental question: should spectrum be treated as public property to be used according to
government rule, or should spectrum be treated as private property with minimal government
On the one hand, usable radio spectrum is finite and it is highly desirable to guarantee that
some of its uses serve public purposes.
On the other hand, maximizing economic benefits from spectrum use requires extensive
reliance on the same market-based forces that lead to optimal use of private property. The
lessons we have learned over the 70 years since the Federal Radio Commission was created have
led to a "third way" that delivers public benefits from this key resource of the information age, but
deregulates and relies on private market mechanisms to develop that resource for the good of the
We have had two overriding goals during my tenure at the FCC: to increase competition in communications and to ensure that all Americans share in the benefits of the communications revolution.
Our New Spectrum Policy embraces all airwave licenses and has four basic principles:
Competition, not monopoly, in all uses of the airwaves; Flexible use of the airwaves for commercial purposes; Clearly defined guidelines for all uses of the airwaves that are not strictly commercial (i.e. public interest uses); The award of licenses through competitive, quantifiable, open and fair processes.
Our philosophy relies on markets to allocate goods efficiently and to produce innovation,
consumer choice, lower prices and better services. Surely most economists would agree with this.
Where markets fail, specific, quantifiable public interest obligations should be placed on licensees
in a competitive neutral way.
If we license sufficient quantities of spectrum, markets will cause spectrum to be used in
ways that best serve consumers. Markets will stimulate competition, innovation and promote
spectrum efficiency. Government-created spectrum scarcity serves only to block these forces.
For example, for over 10 years, government entry barriers limited to two the number of
companies that could hold a license to provide fully mobile telephone service. Even worse, one of
the two licenses was given to an incumbent telephone company which had no incentive to use the
license to provide a competitive service. These catastrophic, but redeemable mistakes led to a
duopoly market structure in cellular telephony, that kept competition down, delayed digital
development, and kept usage low and prices up.
In the last 3 years we reversed years of Commission policy and adopted a marketbased
approach. The FCC released new spectrum for mobile telephony to compete with the incumbent
cellular operators, promoted competition by adopting spectrum caps that prevented this new
spectrum from being captured by the incumbents and repeatedly voted for flexible use.
The evidence is overwhelming that eliminating artificial spectrum scarcity has clearly
benefitted the public. According to a recent study by The Yankee Group, competition (and the
prospect of future competition) has already sparked price reductions of up to 25 percent in mobile
And the new PCS entrants have introduced innovative new services that were never before
offered with mobile phones. Wireless investment has increased more than 250% since 1993 and
over the next ten years will total more than $50 billion. It is the largest single investment in a
new, non-military technology in American history.
The new spectrum policy represents a significant change in policy. It means among other
things, that some holders of licenses, of tickets to ride the information highway, will crash and
burn in the fast lanes of competition. And we should be willing to tolerate such results.
But the new paradigm should allow new entrants to succeed or fail based on their business
plans and their ability to attract customers, not because of the weight of their debt burden. This
means we should offer to restructure the debt of licensees who still owe the government money
for their licenses -- because that's what any commercial lender would do -- but our offer should be
no less than the current dollar value of the licenses. If the licensees in financial trouble can't pay
this amount we should foreclose. Further, Congress should give us authority to reclaim and
reauction the licenses that are held by licensees in bankruptcy. We don't guarantee success -- only
the opportunity to compete; if licensees in financial trouble can't accept our market-based terms,
we should let them transfer the licenses, or take them back, and reauction them promptly.
The engine of this revolution in spectrum management has been our auction program.
From the 30's through the 70's, the Commission used a byzantine comparative hearing
process to award licenses. Obtaining a license through comparative hearings was a painful,
protracted, lawyer-intensive, largely subjective process that usually took years and rarely
In the 1980s, Congress authorized the FCC to use lotteries to award licenses, but lotteries
only fueled speculation and allowed for windfalls for the lucky winners, who in most cases
conducted their own private auctions after obtaining the licenses.
Auctions are superior in every way to all other forms of licensing. Using our unique
auction methodology, we grant new spectrum licenses in months, not years. New technologies
and services are deployed much more rapidly. The public is better served both from the increase
in marketplace competition and from obtaining value for granting the right to use the spectrum.
In a May 1997 paper by the Hudson Institute, titled "Wireless Services, Spectrum
Auctions, and Competition in Modern Telecommunications," Tom Duesterberg and Peter Pitsch
recognize that the innovative market-based auction methods developed by the FCC facilitated
"getting new technologies to the market more quickly, promoting the deployment of efficient
nationwide and regional networks and bringing new entrants into the wireless market for PCS
In three years we've had 14 auctions. We've issued 4,377 licenses pursuant to auctions.
We've examined dozens of spectrum bands for the possibility of more auctions. I've asked
Wireless Telecommunications Bureau to examine all bands for auction possibility and asked them
to report to me on the results by not later than August 1. I beseech you to insist that this task be
The Commission could not have accomplished what it has in bringing new wireless
services like PCS to the marketplace quickly without the statutory authorization to use auctions.
I'd like to outline the essential elements for our continued success with spectrum auctions, and
then talk about some concerns I have about some provisions in the pending bills that are threaten
to kill the auction program.
Any new legislation extending the FCC's auction authority should embrace five principles.
First, with only limited exceptions for spectrum used by public safety agencies, and where
international allocations are involved, auctions should be used for allocating all spectrum.
Second, Congress should not mandate a particular timetable for auctioning new spectrum
licenses. The limited number of bidders in the recent Wireless Communications Service auction
proves that prospective bidders need time to develop their business plans and arrange financing.
We should not establish artificial delays -- to the contrary, spectrum should be assigned as quickly
as possible -- but the FCC should be permitted to afford adequate time for prospective bidders,
equipment manufacturers and investors to assess the marketplace potential of new spectrum
opportunities. Congress should not -- as it did for WCS -- mandate the beginning and ending date
of the auction.
Third, Congress got it right in the 1993 Budget Reconciliation Act -- maximizing auction
revenues should not be considered in making spectrum policy. In none of our 14 auctions have
revenue predictions proved accurate. The WCS auction would not have been regarded as a bust
if it had been scored for $10 million rather than $1.8 billion. All other auctions were successes
because they beat CBO scoring. But spectrum auctions are always good regardless of whether
they meet green eyeshaded accountants' predictions.
Moreover, the nation's economy benefits far more from the consumer welfare gains and
tax revenues generated from authorizing new services through auctions than from the direct
revenues generated from the auctions themselves.
Fourth, imposing, equipment standards, channel loading rules, efficiency standards, or any
similar performance requirements, is generally unnecessary when flexible spectrum licenses are
awarded through auctions.
Fifth, auction winners should make payment for their licenses when they are awarded.
The FCC should not be placed in the conflicting roles of regulator of, and creditor to, its
These are principles based on sound economic thinking.
They maximize competition in the marketplace and minimize competition in the regulatory
These are principles you have advocated for years.
I hope they are not rejected now in rush to meet budget targets or protect incumbent
Let me go over again in a little more detail some of the problems emerging on the Hill.
First, the House committee bill prohibits the Commission from assigning spectrum in
channels 60-69 for public safety or commercial use unless the Commission finds a vacant channel
for each qualifying low power TV station. As much as everyone would like to preserve service of
these local, low-power operators, as a practical matter there simply is not sufficient spectrum
today to accommodate each and everyone, although their audiences are immensely small. As a
result, this provision effectively precludes the use of the highly valuable channels 60-69 for new
services, including critical public safety applications. If we read the bill right, the public safety
community has been dealt a terrible blow; lives that can be saved through new wireless technology
are now at risk.
Second, the House Committee adopted a provision that would allow broadcasters to keep
analog spectrum channels indefinitely if "more than five percent of households in [a] market
continue to rely exclusively on over-the-air terrestrial analog TV signals."
At a time when many major newspapers were editorializing for an auction of the digital
broadcast spectrum, advocates of providing broadcasters a new channel defended it on the
grounds that it wasn't a giveaway; it was called a loan.
Precluding a return until fewer than five percent of households rely on analog signals
would convert that loan to a gift.
If broadcasters promote DTV, the great majority of Americans will have converted to
digital by buying set top boxes, digital cable, digital satellite, digital tv, or personal computers set
up to receive DTV. But if five percent of the audience doesn't have the capacity to receive the
new signal, then broadcasters can keep both channels under the proposed legislation. Where does
this number come from? Almost five percent of the country doesn't have active telephone service.
This is regarded as a small percentage that does not drive our telephone policies. Apologies to
NBC, but more than five percent of the country probably thinks there is no such thing as "Must
See TV." Why should that block of book readers drive TV policy?
But the Congress threatens to undercut all incentives to promote DTV. Rather, they may
create disincentives for broadcasters to fulfill the commitment to provide digital service.
Congress would have done well to adopt the proposal of Congressman Ed Markey which
required that all TVs manufactured after July 1, 2001 have the capability to receive digital
This proposal would have created an incentive to have transition and to have kept the
promise of a return of the analog spectrum.
Third, the bill the House Commerce Committee adopted last Tuesday as part of the
budget reconciliation contains provisions that establish budget-based revenue requirements for
auctions. It requires the Commission to "establish procedures to secure aggregate winning bids
totaling not less than two-thirds" of a budgeted amount. Worse it prevents us from granting
licenses unless the auction has in fact raised at least two-thirds of the budgeted amount.
This provision undermines the auction process because bidders would have no assurance that they would be awarded a license at the fair market price determined by auction. The uncertainty created by this provision would reduce auction participation, impede capital formation, depress spectrum values, create barriers to entry for small businesses and delay licensing of spectrum for new technologies.
Fourth, the House Committee proposed to take away the Commission's ability to use
auction revenues to run auctions. This provision would effectively eliminate all funding for our
auction program because the appropriations committees would, in all likelihood, be unable to
increase our appropriation in order to recover the shortfall. To date, our expenditures on auctions
have totaled less than a third of one percent of the total revenue raised in our auctions -- far less
than the two to three percent that private sector companies have proposed to charge for
performing these same tasks for the Commission.
Since no additional funds have been appropriated for this purpose, the Commission would
be forced to halt future auctions. We would also be unable to initiate or complete rulemakings to
determine whether additional spectrum should be auctioned, administer the collection of auction
revenues, implement enhancements to the bidding software, experiment with alternative auction
methods such as combinatorial bidding, pay outside consultants and contractors including
financial advisors, auction experts, software programmers and developers, bankruptcy counsel
and the Department of Treasury, who assists the FCC in administering its debt collection
Fifth, both the House and Senate measures fail to adopt an Office of Management and
Budget proposal giving the FCC authority to recover and reauction licenses held by bankrupt
licensees. The House never included this authority in its bill. The Senate, which relied upon
OMB's draft legislation for its mark-up, deleted this particular provision in committee.
Sixth the Senate bill makes it more difficult for the Commission to rely on marketforces to
determine the highest valued use of spectrum. The bill limits the Commission's ability to grant
flexible licenses -- potentially forcing the Commission to return to micromanaging the service,
delivery and technology offered by licensees.
Seventh, both the House and Senate bills expand the category of users exempt from
auctions by opening a loophole in the definition of "public safety" to include virtually every
private network. Under the new provision, an internal corporate network that might be used to
talk to a crane operator, for example, on a factory campus would be claimed to be an exempt
public safety use.
The good news is there are also several pro-auction provisions in each bill. The Senate
bill extends the authority of the Commission to auction spectrum until the year 2007; the House
until the year 2002. Both bills also make more government spectrum available for private use.
However, the provisions that limit flexible use of market mechanisms to award licenses
would reverse many aspects of the Commission's procompetitive spectrum policy.
Years ago, Republicans embraced auctions because they are consistent with the free-market philosophy.
I embraced auctions because, as a New Democrat, auctions are consistent with a
philosophy of reinventing government that uses market mechanisms to produce public goods,
such as competition.
I'm not here today asking you to embrace my philosophy. But shouldn't Congress
embrace free market competition.
As David Brooks writes in his essay in the Weekly Standard, June 23, on Teddy
Roosevelt, "corporations do seek unfair competitive advantage...by manipulating government.
They lobby for...programs that reduce the risks they have to take to create and design new
products and find new markets...They seek to entrench regulatory hurdles [for]...upstart
He preaches that a sound "governing philosophy" (italics in text) for Republicans would
recognize these realities of business-government relations and would pit Republicans against these
But he says that "[i]nstead, Republicans, overreliant on anti-statist rhetoric, have
encouraged people to despise government or to think of Washington as some alien malevolence."
That feels accurate to me. Certainly, I've felt characterized as an "alien malevolence" from
time to time.
But Brooks' point is a serious one. We need Congress to use government to promote
sound economics and good policies for competition. I know you agree with Mr. Brooks;
whatever your convictions, argue them with passionate intensity, please.
The country will be better for the debate.