As appeared in The Washington Monthly, June 1995 (1739 words)

Halting the Air Raid

BY WARREN COHEN

The legacy of the great Manhattan swindle-when Dutch traders bought the island for just $24- haunts more than Native Americans. For centuries thereafter, swashbuckling entrepreneurs and massive corporations have paid only a pittance for public land rights. Even today, mining companies and ranchers pay far below fair value for the rights to public resources.

But with the inventions of radio, television, and the latest corporate toy, the cellular phone, it is no longer just the country's land being usurped by business, but its air as well. Last year, the industries that utilize electromagnetic airspace brought in roughly $100 billion in revenues.

Call it beachfront property in the sky-and it has been given away for next to nothing. In the early days of radio, broadcasters tried to jam this coastline, often blocking out each other's signals. In 1934, Congress authorized the government to dole out portions of the radiowave spectrum. This way, every user would have a unique frequency to operate. Any infringement on that signal was against the law, to be enforced by a new Federal Communications Commission.

Because of the enormous potential for profit, commercial interests have always fallen over themselves to obtain exclusive rights to frequencies. In the past, the government has parceled out these ethereal gold mines through legal hearings or lotteries. In each case, the government collected only negligible application fees while the recipients almost instantly began reaping profits.

But the Federal Communications Commission and Congress have finally come to their senses. Last year, the commission changed tack and began to auction portions of the spectrum to the highest bidder. The latest spectrum auction will clear a path for the creation of new wireless gizmos such as advanced paging systems and super-light portable telephones. The auction is the most efficient method of distributing spectrum space. And in the four auctions already completed (at least two more will follow), the government has collected nearly $9 billion. The billions more these new technologies are expected to earn in the coming years has led FCC chairman Reed Hundt to call the auction the biggest land deal since the Louisiana Purchase.

The crime here is that government auctions could have been-and should have been-started years ago. In 1959, Nobel laureate Ronald Coase first proposed that the government sell the frequencies through auctions like those held to distribute everything from offshore oil fights to Treasury bills. By giving in to the special interests who opposed the auctions, the government has foregone billions of dollars. One could grant that the feds did not know in the thirties how valuable the radio and television licenses would become. But what excuse was there for not auctioning cellular phone frequencies in the eighties?

The FCC's history on this matter has not been pretty. From 1934 until the early eighties, the FCC awarded licenses to broadcasters by a process known as "comparative hearings." The idea was to give licenses to upstanding citizens who would run their stations with the public's interests, as well as their own profits, in mind.

When it came to cellular phones, though, the government faced a quandary. It was always difficult to choose an applicant on merits, but with broadcast licenses, the FCC could at least evaluate an applicant's intended programming. But how do you evaluate the relative merits of cellular phone companies?

The FCC failed to make any strict guidelines for its licensing process, a mistake that opened the door to investors looking for an easy score. Plenty of speculators knew that the licenses would soon be quite valuable. They applied for licenses and then sat on them until they could resell them for a large profit. In the last 10 years, more than 85 percent of cellular licenses have turned over. In such sales, it is the license to operate-which cost the station virtually nothing-that accounts for approximately 60 percent of the sale price, more valuable than items such as a company's equipment.

For examples, in 1984, when her husband was governor of Arkansas, Hillary Rodham Clinton and a group of 17 other investors, mostly Little Rock attorneys, applied for a cellular phone license. Mrs. Clinton put up $2,014 for a 2.5 percent share in the business. Four years later, Mrs. Clinton's group peddled its license to McCaw Cellular Communications for $2 million. Hillary's $2,000 investment netted her a cool $46,000, a 2,200 percent profit in just four years.

The Little Rock group was just one of a wave of investors looking to get into the action in the mid-eighties. At first, FCC hearings attracted an average of five applicants per cellular license; in the second round, that figure jumped to 14; in the next, 25. Hearings to choose one winner became interminably long and complicated. And since the criteria for awarding the licenses were never clear in the first place, the FCC in 1982 decided to switch to a lottery system.

But lotteries suffered from the same problems as the hearings: slow distribution and profit-taking speculators. For the remaining 730 cellular licenses, the FCC received more than 300,000 applications. Applications with minor technical violations slowed the process, sandbagging the lotteries in court. The commission was occasionally forced to hold lotteries a second time when complications arose. Even today, 13 years after passing out the first cellular license, the FCC is still trying to finish up some of its licensing lotteries.

In May 1985, an FCC economist, Evan Krewel, wrote a working paper about auctioning cellular phone licenses. Then-FCC Chairman Mark Fowler pitched the suggestion to Congress during hearings in October 1986. Various bills to institute auctions were proposed by Congress from 1987 to 1991 but were thwarted by resistance from the broadcasting lobby, which was quite happy getting its licenses at bargain-basement prices. It wasn't until the Clinton administration included auctions in its budget proposal that Congress, searching for ways to slice the deficit, finally passed a law in 1993 allowing auctions for paging services and the super-light phones. But never one to take a good idea quite far enough, Congress forbade the FCC from auctioning licenses for any other industry, such as new radio or TV stations, or high-definition television (HDTV).

The reason for the foot-dragging on auctions is clear: political pressure from broadcast companies. Today, after the auction's success, it's impossible to find a congressman who admits he opposed the idea that cut $9 billion from the deficit. But the fact remains that most of the Democratic telecommunications titans in Congress were opponents, including John Dingell, Edward Markey, Ernest Hollings, and Daniel Inouye.

Few Congressmen are willing to take on the broadcasters lobby, whose power extends far beyond its ability to hand out campaign contributions. "Broadcasters are renowned for being cheapskates," says Andrew Schwartzman of the Media Access Project. "But their power comes from controlling the content of what goes into every voting home."

The National Association of Broadcasters (NAB) peddled the most fatuous argument against the auctions, claiming that auctioning the spectrum would alter stations' roles as "trustees" of the licenses. In exchange for the privilege of airing television shows, for example, broadcasters agree to certain public interest obligations, such as news and children's programming, and can regulate against indecency. "The airwaves," NAB Vice-President Jeff Bauman wrote in Electronics magazine, "like the giant redwoods, are a public resource that should be managed wisely and protected from abuse."

Has the broadcasting industry become enlightened to the merits of government regulation? Of course not. Their real motivation is protecting a system that has awarded them valuable com- modities at virtually no cost.

Contrary to the broadcasters' claims, there is nothing in the auction process that precludes the FCC from imposing public interest obligations on the winning bidders. The FCC sold spectrum "rights," and not lifetime ownership of the frequencies. As with every license it distributes, the FCC requires renewal after a certain duration. Licenses for the new wireless devices will have to be renewed every 10 years. Phone companies will still be required to maintain public interest standards, such as permitting other carriers to access their phone network. While the FCC hasn't stripped many licenses over the years, the leverage it maintains ensures that the spectrum will indeed be managed as a public resource.

There is, however, the realistic fear that auctions would mean that only the largest corpora- tions could obtain the air rights. In many ways, telecommunications is for major players. It is estimated that $25 billion would be needed to construct the new wireless system. But ensuring a place for small companies is important. For example, McCaw Cellular grew from an upstart in Seattle, Washington to the largest cellular provider in the country.

To protect the small fry, and give entrepreneurs a shot in the new market, the FCC divided the new, superlight cellular phone auction into two stages. First, there were 99 licenses auctioned in the nation's 51 biggest markets. While small companies could try their luck among the giants, the FCC also will auction off 1,972 additional licenses in smaller slices throughout the country, to offer less expensive options for entrepreneurs looking to start in the industry. It is also giving bidding credits to small companies to offset costs. The existence of smaller markets will enable start-ups to succeed, without undercutting natural competitive forces.

Flush with this success, the FCC is already pondering how else to use auctions in the com- munications field, such as for digital television. Under a 1992 decision, the FCC has promised to give existing broadcasters new spectrum space rights free of charge. Broadcasters could use this space for one high-definition channel or six conventional analog channels. If Congress can make an end-run around the broadcast industry, the auction of this spectrum space could be extremely lucrative for the government. As it stands, the broadcast industry is set to receive yet another giveaway, while potential upstarts are kept down and the government is robbed of billions.

If they were true to their free market roots, the GOP would scrap the existing system in favor of auctions. But that's a big if. While the Republican telecommunications proposal removes most regulatory barriers from the industry, some Republicans continue to oppose auctions. "The practical fact is," Newt Gingrich admitted to Broadcasting & Cable magazine, "nobody's going to take on the broadcasters." The Dutch traders who bought Manhattan would be proud.

Copyright 1995, The Washington Monthly. All rights reserved.


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