Unlocking the Airwaves - WALL STREET JOURNAL Review of 'The Political Spectrum' (7/17/2017) Jul 17, 2017

Unlocking the Airwaves In regulating radio, the FCC enacted rules nominally in the public interest, but which actually enriched specific interest groups. Gregory L. Rosston reviews ‘The Political Spectrum’ by Thomas Winslow Hazlett. PHOTO: GETTY IMAGES Gregory L. Rosston July 16, 2017 3:15 p.m. ET 2 COMMENTS Americans enjoy unprecedented choice in communications technology. We have millions of options for digital entertainment, keep a universe of information in our back pockets and can call nearly anywhere on earth for a pittance. To most consumers, government seems a minor player. So what’s wrong with communications regulation? As Thomas Hazlett explains in “The Political Spectrum,” there are many problems, and they have enormous consequences. Economic activity is increasingly conducted wirelessly, under a regulatory regime developed nearly a century ago—one that favors well-heeled incumbents and does little to encourage efficient use of the spectrum. The difficulty that new entrants face in securing spectrum, along with a system that locks in existing technology, chills investment in next-generation infrastructure. Given the exciting promise of today’s technology, how did we end up hamstrung by such a backward regulatory regime? Mr. Hazlett provides a fascinating history. When radio technology began to spread around the turn of the 20th century, there was a need to ensure that signals sent over the wireless spectrum didn’t interfere with one another. When nearby ships did not hear the distress calls from the Titanic, government stepped in to control interference between transmitters and to make sure that seagoing vessels had radio priority. Secretary of Commerce Herbert Hoover built on these efforts in the 1920s, seeing in radio’s growing influence an opportunity to use government’s regulatory power as an instrument of political control. The result was the Radio Act of 1927, which established a system under which consumers have routinely taken a back seat to those with outsize influence in Washington. Mr. Hazlett cites as an example the 1930s-era drama surrounding FM radio. From the start, FM had much better sound fidelity than AM—and so threatened existing AM networks operated by NBC, CBS and AT&T’s wired long-distance telephone network. These companies used the Federal Communications Commission to hamper the development of FM and succeeded in having it moved to a different band after World War II. This rendered all existing FM equipment—purchased by consumers at no small expense—useless and limited stations’ transmission power such that their audiences became too small to sustain a competitive business. So distressing was the episode that the father of FM radio, Edwin Howard Armstrong, ended his own life in 1954. The sad saga was merely an early example of the FCC exhibiting the “capture theory” of regulation, according to which regulators and legislators enact rules nominally in the public interest but in fact designed to enrich specific interest groups. PHOTO: WSJ THE POLITICAL SPECTRUM By Thomas Winslow Hazlett Yale, 401 pages, $35 With informative vignettes, Mr. Hazlett elaborates on this flaw in our regulatory structure, exposing how inefficient, and perhaps corrupt, our spectrum policy really is. The regulatory process has blocked thousands of radio stations, delayed cellular service and propped up broadcast television. The cost has been borne by consumers, who have been denied the fruits of innovation, choice and competition. Mr. Hazlett devotes a substantial portion of his book to arguments for reforms, the most promising of which rest on the Nobel Prize-winning work of British economist Ronald Coase. Coase showed that, absent transaction costs, well-defined assets will wind up in the hands of the entities that value them most. By assigning property rights to frequencies—thereby turning them into assets and enabling the pricing mechanism—immense value can be created from the more efficient employment of bandwidth. For years, the concept of treating bandwidth like property and distributing it through competitive auctions seemed like a pipe dream. In the 1970s, two FCC commissioners said that the odds that this approach would be adopted “were equal to ‘those on the Easter Bunny in the Preakness.’ ” Well, the Easter Bunny won, and in 1994 the FCC started auctioning wireless licenses. While most traditional spectrum allocation continues under the longstanding discretionary regime, competitive bidding has raised more than $100 billion for the U.S. Treasury. More important, the competitively acquired licenses have brought much greater flexibility: Rather than having the FCC lock in the technologies and services for which the bandwidth can be used, license owners are allowed to decide how to use it, and they can change their technologies and business plans in response to a dynamic mobile wireless marketplace. While Mr. Hazlett covers other reform alternatives, his own preference is for strong, well-defined property rights. He is especially fond of auctioning broad “overlay” licenses, which allow their owners to transmit over unoccupied bands of spectrum near existing users and then bargain with the incumbents to entice them to vacate. An inefficient user of a particular band—a low-value television signal, say—might find that a proposed payment exceeds the value of remaining in business at that wavelength. The holder of the overlay license—a 4G wireless company, perhaps—thinks it can create more value from that band than it pays the TV station to clear it. Everybody wins. Mr. Hazlett may be overly sanguine about the potential for overlay auctions—he neglects, for example, the transaction costs associated with the thousands of contingent negotiations his approach would require. Nevertheless, “The Political Spectrum” is full of valuable instruction—especially for lawyers, economists and other students of regulation for whom the book provides example after example of the strategic use of the regulatory process. Potential entrepreneurs in fields where regulation may be a barrier—fintech, pharma and transportation, for example—will benefit too, finding cautionary tales about how to enter a market with a disruptive idea. And for consumers and the public, “The Political Spectrum” is a good reminder of how far we have come. Today few economists question the benefits of well-defined rights, flexible use and auctions. That we are debating how to implement these ideas, rather than whether to do so, is reason for cautious optimism about our wireless future. Mr. Rosston is director of the Public Policy Program at Stanford University.