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Spectrum Goldmine Often Proven Unrealistic
by Drew Clark
Ever since Congress first gave the FCC the right in 1993 to auction electromagnetic frequencies and recoup funds for the U.S. treasury, lawmakers have looked skyward toward the invisible airwaves and seen dollar signs.
As of the end of 2004, the FCC has raised a total of $14.4 billion since the first auction of spectrum for wireless service reaped $617 million on July 25, 1994. Last week it completed another auction for personal communications services that raised an additional $2 billion.
As high as those numbers are, however, they are considerably lower than the amounts envisioned by Congress and the Clinton administration under the last major expansion in FCC auction authority in 1997. In the fiscal 1998 budget proposal, the White House Office of Management and Budget estimated that the agency would get $36 billion over five years. The Congressional Budget Office (CBO), however, said the government was more likely to receive $24 billion.
Now multiple forces are converging again to put the issue squarely before Congress. House Energy and Commerce Committee Chairman Joe Barton, R-Texas, wants to put a fixed date of Dec. 31, 2006, to end the transition to digital television.
Skeptics say that would disenfranchise the owners of 73 million analog television sets, which would go dark with the cutoff of analog signals. But Barton said he will prevail because of the "billions and billions of dollars" that can be earned from auctioning airwaves now used by broadcasters. Congress also must consider whether it will approve a spectrum fee on the use of analog television urged by the Bush administration and whether -- as expected -- it will renew the FCC's authority to conduct spectrum auctions.
The Origin of Auctions
How much money can and should be raised from the use of the airwaves is a perpetually tricky question for federal budget mavens and spectrum policy wonks. But for many years, using auctions to generate revenue was not even a consideration.
Since the 1927 Radio Act, the U.S. airwaves have been controlled by the FCC and its predecessor, which have been tasked with allocating spectrum based on the "public interest, convenience and necessity." But economist Ronald Coase won a Nobel Prize for suggesting in 1959 that it might be more efficient to create a de facto property right in frequency space.
Radio and television stations received all the scarce licenses in the 1930s and 1940s. When those licenses faced renewal every three years, broadcast executives had to pledge their fealty to serve the public interest through programs they put on the airwaves. But as new technologies like microwave communications and cellular telephones became practical, the FCC needed a new mechanism to decide how to distribute spectrum.
They tried comparative hearings, during which each business pleaded its case for spectrum. Those took too long and were considered rife with favoritism. Then came lotteries, where average citizens could bid on and receive valuable airwaves. That process ceased in 1993, with a law aimed at helping to balance the budget. Former President Bill Clinton pushed spectrum auctions as a way to raise money for balancing the budget.
"One reason that Congress finally did auctions was that people had tried everything else and failed," said Evan Kwerel, a senior economic adviser and spectrum expert at the FCC. "There was a confluence of that with the budget deficit, which was taken very seriously."
"Clinton put a lot of emphasis on dealing with the budget deficit, and Clinton was concerned about communications policy," Kwerel said. "He got members of Congress who had had trouble [with auctions] on board during the honeymoon" of his early presidential administration.
Opportunity In The Digital Transition
The early auctions were a success. In less than three years, the cellular A and B blocks, the 60 megahertz of spectrum that form the basis for nearly all U.S. cellular calls, generated $7.7 billion in winning bids. The C block, an additional 30 megahertz, generated $10.2 billion in bids. The D, E and F blocks, 30 megahertz divided into smaller segments for designed entities like small and minority businesses, generated $2.5 billion in bids.
That $20 billion in revenues -- some of which the government did not receive -- prompted Congress to go even further, granting the FCC authority to auction whatever airwaves it wanted, except those needed for public-safety radio services, digital-television licenses, or educational and nonprofit services.
But even those dollars that were already booked proved overly optimistic. Some companies bid excessively for airwaves and could not meet installment payments.
During consideration of a 1997 law aimed at balancing the budget, Congress debated how much authority to give the FCC to auction spectrum and how much money could be generated from auctions. Lawmakers ultimately barred the agency from selling digital-television licenses. Still, CBO weighed six different proposals for what to do with television frequencies that would be freed when the transition to digital television was completed.
Because there is less interference from digital signals, broadcasters could locate their stations closer together. At least 18 channels, numbered 52 to 69 and yielding 104 megahertz of spectrum, then would become available for other purposes. Early versions of the 1997 law pegged the transition date at Dec. 31, 2006, but that was changed to force broadcasters to move only once 85 percent of U.S. households could receive digital broadcasts.
Extracting Money From Thin Air?
But the law required the FCC to auction those television frequencies by Sept. 30, 2002 -- even though broadcasters still would be using it. Some observers see that conflict as a key reason for the low revenue estimate that CBO placed on the frequencies at the time. The Clinton administration said those frequencies would fetch $18.3 billion; CBO's estimates was $6.1 billion.
Both estimates were wrong. The FCC put in place plans to conduct two auctions for the spectrum: one for the lower channels, 52 to 59, and one for the portion of the upper band from channels 60 to 69 that was reserved for cellular frequencies. (Four channels of that upper band, 63, 64, 68 and 69, were earmarked for use by public-safety agencies.)
But the FCC's plan for the upper-band auction aroused the ire of some lawmakers when it called for broadcasters to recoup billions of dollars in exchange for vacating the spectrum early. Concerned that broadcasters should not reap a windfall from digital channels they were granted for free, Congress cancelled that auction. The lower-band auction began Aug. 27, 2002, but it generated only $145 million.
Other projections have proved overly optimistic. When the telecommunications provider NextWave failed to make its payments on C-block frequencies, the FCC reclaimed the spectrum. But the company challenged the FCC's move and eventually prevailed when the matter went to the Supreme Court. In April 2004, the FCC settled with the company and recovered the spectrum that formed the basis for the most recent auction.
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