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cable television
Page 292
37
Estimating the Costs of Telecommunications Regulation
Peter W. Huber, Manhattan Institute
Boban Mathew, Yale University
John Thorne, Bell Atlantic
The licensing schemes embodied in federal telecommunications
regulation forbid people to sell goods or services without the
say-so of a federal regulator. They frequently reflect the
conclusion that regulators can allocate goods and resources and set
prices more efficiently than can market forces. In some instances
(declining in number as new technology and the globalization of
most markets spur competition) this may be true. Unregulated
"natural monopolies," for example, may price too high and produce
too little.
But the beneficial effects of regulation (such as they are) can
only be realized if regulators perform their functions efficiently,
on schedule, on the basis of up-to-date information, and to protect
the public, not industry incumbents. The record of federal
telecommunications regulation is not good. Routine licensing
decisions take far longer than they should. When issued, licenses
are loaded up with restrictions and conditions that serve mainly to
promote bureaucratic control. Regulation often solidifies the
economic status quo, protects incumbents against would-be
competitors, and deprives the public of new services at lower
prices.
This paper examines the costs that restrictions on the use of
both the electromagnetic spectrum and the wireline impose. The
largest component of costs attributable to such zoning is the lost
opportunity cost of preventing higher-value uses of the airwaves,
and of restricting socially desirable uses of wireline media.
Outright restrictions and delays in approving new uses of the two
media also hamper competition in existing markets for
telecommunications services, to the detriment of consumers in those
markets. Finally, zoning often leads to the existence of large
economic rents actively sought by market players through socially
wasteful activities. It is, of course, impossible to measure
precisely the total social cost of zoning restrictions.1 But conservative calculations of
specific restrictions suggest that the costs are very high.
In this paper, we describe the zoning process and estimate the
economic costs that several of the restrictions entail.
Wireless Zoning
The airwaves are "owned" by the federal government. The
government licenses private users for fixed periods. With few
exceptions, the licenses are given away; they are not sold. For the
most part, the licenses strictly prescribe how the spectrum is to
be used.
NOTE: Peter Huber is a senior fellow, Manhattan
Institute for Policy Research; Boban Mathew, M.A./M.Phil Economics
1995, Yale University, is a J.D. candidate 1996, Harvard
University; John Thorne is vice president and associate general
counsel, Bell Atlantic. The authors wish to thank Evan Leo for
significant assistance and research in the preparation of this
paper. The views expressed in this paper are those of the
individual authors; they should not be attributed to any company or
client.
Page 293
The Modified Final Judgment (MFJ)—the consent decree that
broke up the old Bell system—imposes further zoning
requirements on the networks of the Bell operating companies.2
Zoning the Airwaves
The federal government began to nationalize the airwaves in
1912, when Congress gave the secretary of commerce authority to
license broadcasters.3 But most
empty airspace could still be occupied freely. "Homesteaders"
simply had to register their claims with the Department of
Commerce. No exclusive rights were assigned.4 By the mid-1920s, courts were
beginning to affirm private property rights in spectrum.5
The Radio Act of 1927, however, placed almost every aspect of
radio broadcasting under the control of the newly created Federal
Radio Commission (FRC).6 Seven years
later, the provisions of the 1927 act were rolled, largely intact,
into the Communications Act of 1934.7 The FRC became the Federal
Communications Commission.
The licensing of broadcasters is conceptually straightforward.
The FCC first zones the real estate, allocating blocks of spectrum
for particular uses such as AM radio, FM radio, VHF TV stations,
UHF TV stations, and so on. Within each block, it then assigns
licenses to particular users. The commission has virtually
unbounded discretion in both regards. The law simply requires
distribution of broadcast "licenses, frequencies, hours of
operation, and power among the several states and communities so as
to provide a fair, efficient and equitable distribution of radio
service to each of the same."8
However chosen, licensees do not get a formal property right in
their spectrum. The 1927 Radio Act expressly declared that
licensees were entitled to the "use of channels, but not [to] the
ownership thereof."9 Licenses were
to run for only "limited periods of time."10 (Only in 1981 were the original
3-year broadcasting license terms extended to 5 years for
television and 7 years for radio.11)
Licenses may not be transferred without commission approval.12 The commission may revoke a station
license for any reason that would have warranted refusing a license
in the first place.13
Zoning of Cellular
The provision of cellular service is zoned in several ways. The
allocation of spectrum for cellular services was originally split
between telcos and other nonwireline carriers.14 In 1981, the commission decided that
two (and only two) cellular carriers would be licensed in every
cellular service area.15
A quite different and independent set of zoning requirements has
come into existence by way of the MFJ. The MFJ's line of business
restrictions preclude Bell cellular affiliates from offering
"interexchange" services. Bell cellular affiliates thus may not
arrange with a particular interexchange carrier to provide
discounted service to their customers.
Wireline Zoning
In contrast to the airwaves, wireline networks are privately
owned. But wireline media are zoned even more strictly than the
airwaves. Local telephone facilities are still "zoned" to provide
mostly voice services. For years, cable television operators were
strictly "zoned" to supply simple carriage of broadcast video
signals; to this day they still operate under an array of
quasi-common-carrier and other zoning obligations that sharply
diminish the value of cable networks and greatly reduce economic
welfare.
Page 294
Zoning of Telephone
Section 214 of the 1934 Communications Act prevents phone
companies from constructing new facilities or discontinuing
existing service without advance permission.16 Section 201 of the act enables the
commission to regulate what sort of devices can be connected to the
telephone network, and thereby what kind of add-on services can be
offered over telephone lines.17 The
FCC has used its authority under both statutory provisions to zone
the telephone to provide basic voice services, and not much
else.
The franchising of telephones was initially a way of reducing
the confusion and hubbub of competition.18 The useless duplication of
facilities, Congress believed at the time, would lead to higher
charges to the users of the service.19 What started as a means of
suppressing excessive telephone competition in an industry marked
by declining average costs, however, has become a tool for
suppressing telco involvement in broadband services and, when such
services are permitted, regulating them in minute detail.
Video services are largely zoned out of the telephone franchise,
too, though phone companies have recently been successful in
challenging some of these regulations on First Amendment grounds.
In 1968, the FCC declared that cable television was an "interstate"
service and that telephone companies therefore needed FCC
permission to build or operate cable networks.20 In 1970, the commission barred
telephone companies from providing cable TV service.21 In 1984, Congress codified this
prohibition in the new Cable Act.22
The "cable television service" language of the 1970 rules was
replaced with "the provision of video programming."23 The prohibition extends to
everything that can be characterized as ''providing" video over the
telephone company's own network, including selection and packaging
for resale of programming created by others.24
A second sphere of telephone-wire zoning involves the FCC's
two-decade crusade against allowing "enhanced services" into the
telephone network. In 1966, the commission undertook to examine the
convergence of computers and communications.25 In an abundance of caution, the
commission insisted that "enhanced services" should not under any
circumstances be intermingled with basic phone service. For a
20-year period, from the mid-1960s to the mid-1980s, the commission
enforced a policy of "maximum separation" between familiar voice
services and network-based data processing, electronic services,
and computers.26 It has since
attempted to back off from that somewhat, but has been thwarted (so
far) by litigation.
Zoning of Cable
Cable operators may not operate without a franchise.27 For many years, the FCC sharply
curtailed cable's right to bid for programming, accept advertising,
and generally compete unhindered against broadcast television. To
this day, cable is required to devote one-third of its channels to
carry local TV stations28 and is
required to set aside additional channels for lease and "public
access.29 Like the rules that zone
telcos out of video, some of the cable-zoning rules are also under
First Amendment attack. For now, however, they remain in place.
Costs of Federal Zoning
Calculating the welfare consequences of zoning restrictions is
an inherently speculative task. The most potent criticism of such
calculations is that they generally entail a partial equilibrium
analysis. The introduction of new products and services and the
infusion of greater competition in existing markets will
necessarily affect other sectors of the economy. To be
theoretically sound, one ought to consider such effects. For
example, the introduction of electronic voice mail may adversely
affect the answering machine market. Competition-induced reduction
in the price of long-distance calls may reduce the demand for
overland mail services. To remain tractable, empirical welfare
calculations abstract from such considerations. If and when such
effects are large and observable, they ought to be included.
Otherwise, the welfare calculations must be interpreted
cautiously.
Page 295
The social costs of zoning restrictions can be broken down into
four categories:
1.
Use of spectrum by low-value users as dictated by
zoning artificially reduces social welfare by not allowing
higher-value users to employ the scarce resource. Analogous costs
do not result from restrictions on the use of wireline, which faces
no capacity constraint.
2.
Zoning restrictions reduce the extent of
competition in existing markets and thus reduce consumer welfare.
Spectrum zoning, for example, makes it extremely difficult for a
third cellular provider to enter most markets. The prohibition of
video delivery by Bell operating companies stunts competition in
cable television markets. Even if cost penalties due to scale
economies are present in these markets, greater competition would
likely improve social welfare (the sum of consumer and producer
surpluses).
3.
Zoning that prohibits or delays the provision of
innovative services reduces the welfare of consumers willing to
purchase these services.
4.
Zoning creates economic rents pursued by the
providers of telecommunications services through socially wasteful
rent-seeking activities and reduces government revenues that could
be generated through auctions by effectively excluding bids by
higher-value users of the spectrum.
Although these various costs are analytically separate, they are
not mutually exclusive. For example, a third cellular provider that
displaces a current low-value-use occupant of the spectrum could
spur competition in the cellular market. Similarly, an innovative
video delivery system could generate more competitive pricing in
the cable market.
Lower-Value Use of Spectrum
In 1992, the Office of Plans and Policy of the FCC completed a
study analyzing the welfare implications of reassigning spectrum
currently earmarked for use by a UHF channel in the Los Angeles
area for purposes of providing cellular phone services.30 The calculations are based on
alternative uses of spectrum during the years 1992 to 2000; numbers
are expressed in 1991 dollars. Under plausible assumptions, the
study estimates the welfare loss attributable to the loss of a
single UHF channel in the Los Angeles area to be approximately $139
million for the years 1992 to 2000. This figure is the sum of
welfare foregone by consumers and the producer of UHF television
services. The study also estimates that the welfare gains in the
absence of any competitive effects (no price or output effects) of
two incumbent cellular providers would be approximately $118
million. Reassignment of the spectrum under such a scenario would,
of course, not be welfare-enhancing.
Consider, however, the strategy of Nextel (formerly "Fleet
Call"). The company purchased spectrum previously licensed for
other purposes—mostly dispatching taxis. In 1991, Nextel
persuaded the FCC to permit it to use that spectrum to provide
digital wireless telephone service.31 Nextel has aggressively developed
new digital radio services, and is now positioned to be the third
major wireless operator in many urban markets. It has already
launched its digital mobile network service in many regions of
California, including Los Angeles and San Francisco; in 1995 it
will roll out service in New York, Chicago, Dallas, and Houston.32 With its acquisition of several
regional SMR companies and Motorola SMR frequencies across the
country, Nextel will have the spectrum to serve all 50 of the
largest U.S. markets.33 In the Los
Angeles market, it purchased approximately 9 MHz of spectrum for
roughly $45 million.34
Assume that the two cellular incumbents in the Los Angeles
market rather than Nextel had purchased equal shares of the 9 MHz
of spectrum. If this spectrum had been evenly divided between the
two existing cellular providers, the increase in social welfare
(inclusive of the purchase price) would have been in the range of
$37 million and $73 million for the years 1992 to 2000. To the
extent that radio dispatching services were continued, one need not
consider the foregone welfare of those customers. If spectrum
zoning had prevented the use of the previously assigned frequencies
for cellular service, it would have reduced social welfare by
roughly $50 million for 9 years alone. Zoning of the spectrum may
prevent socially efficient transfers of a scarce resource from
low-value to high-value users even in the absence of any
competitive effects.
Page 296
Zoning-induced Reduction in
Competition
The case for allowing transfers from low-value users to
high-value ones becomes even more compelling if such transfers have
the effect of spurring competition in existing markets. Assuming
that Nextel faced no competitive disadvantage vis-à-vis
incumbent cellular providers, the presence of a third competitor
would likely increase competition and drive down prices. Assuming
unitary elasticity of demand for cellular services, the authors of
the FCC study estimate that a reduction in cellular prices of 25
percent would lead to an increase in total welfare in the Los
Angeles cellular market of $799 million for 6 MHz of additional
spectrum and $893 million for 12 MHz of spectrum. If such a price
reduction were indeed to occur because of competition from a third
supplier, net social welfare would increase by approximately $750
million to $850 million.
The Nextel story would be replayed hundreds of times if spectrum
were dezoned across the board. The FCC study that forms the basis
of the Nextel calculations also found that if a UHF television
station in Los Angeles were to shut down and transfer its spectrum
to a third cellular provider, the overall public gain would be
substantial. The FCC study explicitly took into account the
possibility of loss in scale economies in their estimates. Even
with duplication of vital inputs by the new entrant, the net
welfare gain is substantial: $63 million for a 5 percent reduction
in cellular prices and $783 million for a 25 percent decline.
Comparable gains are almost certainly possible by dezoning spectrum
licenses across the board. In other words, the simple deletion of a
few lines of legal boilerplate from FCC spectrum licenses could
create a substantial increase in social welfare nationwide.35 The case for transfers of rights in
spectrum is extremely compelling when such transfers are likely to
boost competition in existing markets.
Zoning of wireline media, including the cable-telephone
cross-ownership rules and the inter-LATA restrictions placed on the
Bell companies, has also imposed welfare losses. Cable and
telephone companies could make deep inroads into each other's
markets if freed to use their wires to compete. Cable operators
estimate that their telephone service could achieve a 30 percent
penetration rate of their basic cable subscribers within 5 to 7
years. Telephone companies estimate they could acquire 45 percent
of cable subscribers.36
Restrictions that ban Bell companies from providing video
program services have enabled cable television companies to
maintain a monopoly position in most markets. In the absence of
such zoning, the Bell companies could have provided viable
competition to the cable television companies to the benefit of
customers. In the few markets where duopolistic competition exists
in the provision of video programming, cable television rates have
been estimated to be 20 to 30 percent lower than in monopolistic
markets.37
Assuming demand elasticities of -1.0 to -2.5 and price
reductions of 15 to 25 percent, consumer welfare in the years 1983
to 1993 would have been higher by anywhere from $1.4 billion to
$2.9 billion (1993 dollars) annually in the absence of zoning
restrictions.38 Using average
revenue per subscriber yields even higher annual welfare loss
estimates ranging from $2.7 billion to $5.4 billion. Our
calculations are summarized in Table 1.
TABLE 1 Consumer Welfare Loss Attributable to
Cable Monopolies, 1983 to 1993
Dp=-15%
Dp=-20%
Dp=-25%
Basic Rate Calculation (1993 $billions)
e=-1.0
15.8
21.6
27.6
e=-1.5
16.4
22.6
29.1
e=-2.0
16.9
23.6
30.7
e=-2.5
17.5
24.5
32.2
Average Revenue Calculation (1993 $billions)
e=-1.0
29.3
40.0
51.2
e=-1.5
30.4
41.8
54.0
e=-2.0
31.4
43.7
56.8
e=-2.5
32.4
45.5
59.7
Dp, decline in prices; e, elasticity.
Assumptions most consistent with observed facts (20 percent
decline in basic rates and demand elasticity of -2.0)39 yield foregone consumer welfare of
approximately $2.1 billion annually (basic rates) for the years
Page 297
1983 to 1993. These savings account for approximately one-tenth
of the total revenues in the cable television market in 1993. Even
if overbuilding were to lead to nonsignificant cost penalties, it
is unlikely that total producer surplus would decrease by enough to
swamp the much larger savings to consumers. The true measure of
foregone consumer welfare should also take into account the
provision of more channels (greater variety of programming) in
competitive markets relative to monopolistic ones. Consumers lost
out during every year that the Bell companies were prohibited from
providing video programming services. Had phone companies been
authorized to provide such services two decades ago, they would
almost certainly be doing so by now absent the no-video zoning of
their networks.
The costs imposed by the cable/telco cross-ownership restriction
can be independently estimated using an event study. On the day
Judge Ellis of the U.S. District Court in Alexandria, Virginia,
declared the telco/cable cross-ownership restriction
unconstitutional, the stock price of the plaintiff, Bell Atlantic,
rose 4.6 percent above the previous day's close.40 On the day of the court decision,
Reuters released a story about the decision in which it stated that
"shares of Bell Atlantic and other Baby Bells soared."41 On the day after the court decision,
a Dow Jones News Wire headline announced, "Cable, Telecom
Equip[ment] Stocks Soar on Bell Atlantic Ruling."42 An event study of the effect of the
ruling on the value of Bell Atlantic stock suggests that the market
believes Bell companies to be viable competitors in the provision
of services provided by cable companies.
Assuming that the judge's decision was unanticipated (a
reasonable assumption considering that no other phone company had
prevailed in any remotely comparable First Amendment suit before),
that the market absorbed the implications of the ruling in a single
day, and that no other significant value-affecting information was
revealed that day, the excess return attributable to the ruling was
roughly 4 percent and accounted for roughly $856 million of the
day's increase in Bell Atlantic's value.43 Despite the imperfection of this
estimate, the rise in the company's value suggests two facts.
First, Bell companies can be profitable entrants in the cable
market. Second, the restrictions on cross-ownership unduly
suppressed viable and potentially welfare-enhancing
competition.
Cellular zoning also imposes great welfare losses as well.
Richard Higgins and James Miller have calculated that if the MFJ
restrictions were removed, Bell cellular customers alone would
potentially realize annual savings of $200 million in long-distance
charges.44 They arrive at this
estimate by comparing the prices of toll long-distance and cluster
services. They demonstrate that retail prices for toll
long-distance services exceed bulk wholesale prices by at least 110
percent.45
The Wharton Econometric Forecasting Associates (WEFA) Group has
independently estimated that if MFJ restrictions were eliminated,
over the next 10 years cellular consumers would save $107
billion.46 WEFA estimates that
monthly wireless bills would fall 30 percent within 10 years.47 They base the estimate on the
following three factors. First, Bell cellular customers currently
pay about 40 percent more for long-distance calls than customers of
independent cellular companies.48
Second, in metropolitan service areas (MSAs) where neither cellular
provider is a Bell company subject to inter-LATA restrictions,
local cellular service is 7 percent cheaper (because of
unrestricted competition) than in MSAs where there is a Bell
cellular provider.49 Third, Bell
cellular providers are unable to cluster service areas and offer
large local calling areas as can independents.50 For example, an 84-mile, 10-minute
cellular call from Indianapolis to Terre Haute is $2.10 cheaper
using GTE than using BellSouth.51
One further example of the costs of cellular zoning involves
AirTouch. In 1994, Pacific Telesis spun off its wireless affiliate
into a wholly separate entity, renamed AirTouch. A primary reason
for the spin-off was to free AirTouch from the MFJ's
restrictions.
When Pacific Telesis announced it was considering the move,
investment analysts predicted that spin would increase shareholder
value. Before the spin, one analyst valued PacTel's cellular
business at $140 per point of presence (POP),52 while comparable independent
cellular companies traded at an asset valuation of $160 per POP.53 Using the difference ($20) between
Morgan Stanley's $140 valuation of PacTel's cellular interests and
its valuation of independent cellular companies at $160 per POP,
the domestic cellular operation as an independent company is worth
$700 million ($20 × 34,893,721 POPs54) more than the cellular operation as
a part of PacTel. Assuming that half of the valuation increase is
the result of AirTouch's superior financial standing relative to
the other independent cellular providers, the company is worth $350
million (6.25 percent) more when freed from the MFJ.
Page 298
The MFJ's ban on Bell provision of interexchange services has
further facilitated tacit collusion among the three major suppliers
of such services—AT&T, MCI, and Sprint. Evidence of high
price-cost margins in various interexchange services supports the
hypothesis of tacit collusion among these firms.55 The FCC's tariff process has also
facilitated such collusion by allowing competitors to monitor and
to match each other's pricing strategies, thereby reducing the
value of deviating from a collusive outcome.
Removing the restrictions on Bell provision of long-distance
services—even just to permit Bell entry out of
region—would eliminate several of the conditions facilitating
such tacit collusion. First, the number of viable competitors would
rise from three to nine. Second, the current stability of market
shares among the three dominant suppliers would be destroyed; Bell
companies would likely pursue new customers through aggressive
pricing strategies. Finally, the regulation-imposed barrier to
entry in long-distance services would simply be eliminated.
The welfare costs of the inter-LATA restrictions imposed on Bell
companies are substantial. Such entry would stimulate more
competitive pricing of long-distance services, driving down the
price-cost margins. The FTC estimates that if Bell entry caused
prices to fall to marginal cost, it could lead to the elimination
of deadweight loss.56 The welfare
gain would then be between $17 million and $119 million per year
(0.03 percent and 0.36 percent of industry revenue). Consumer
welfare gains would be many times more this reduction in deadweight
loss. Furthermore, Bell companies might enjoy cost advantages for
some routes because of economies of scope with their existing local
networks.
Restrictions and Delays in the
Provision of New Services
Potentially the greatest cost imposed by zoning restrictions is
the opportunity cost of the inability to introduce unhampered new
services for which consumers are willing to pay. That cost is also
the most difficult to quantify with precision. Nevertheless, it is
useful to highlight those services and provide rough measures of
foregone consumer surplus. One has to estimate not only demand for
a service that has never existed but also the "virtual" or
"reservation" price at which demand is choked before proceeding
with consumer welfare calculations.
Relying on survey data on demand for advanced services that
could be offered by Bell companies, WEFA estimated the loss in
consumer welfare attributable to zoning restrictions for a number
of services.57 We summarize below
their estimates of foregone yearly consumer welfare for services
that Bell companies can but may not provide under MFJ
restrictions:
•
Residential Customers
1.
Advanced portable phone—$1.6 billion
2.
Return voice mail—$1.7 billion
•
Small and Medium Size Businesses
1.
Fax overflow service—$1.4 billion
2.
Return voice mail service—$720 million
3.
Call manager service—$320 million
If one adds producer surplus from the provision of these
services, the total welfare gain will be substantially larger.
Furthermore, the above list is only illustrative, not
exhaustive.
As described above, one large obstacle to the provision of new
services has been the FCC's policy against allowing "enhanced
services" into the telephone network. Today, some 1.3 million
customers buy voice mail service from Bell Atlantic. The service
was first offered in 1988, when both Judge Greene and the FCC
finally agreed to dezone telephone company wires to permit them to
provide such services. At roughly $5 a month per mailbox, and 10
million mailboxes nationwide, it is reasonable to estimate that in
this single market, excluding Bell Atlantic from the market
needlessly suppressed over $460 million dollars of service a year
to willing consumers in Bell Atlantic's area alone. Unable to buy
the on-line service from U.S. enterprises and U.S. workers, most
consumers probably turned to stand-alone answering machines
manufactured in Singapore or
Page 299
Taiwan. Extrapolating this figure nationwide, the no-voice-mail
zoning (part of the much broader no-computer-services zoning) of
phone companies cost the U.S. economy some $600 million a year for
at least a decade.
Even if the restrictions are eventually lifted, the delay in the
provision of socially desirable services imposes enormous costs to
the economy.58 In 1985, an FCC OPP
working paper estimated the costs of a comparative hearing for a
cellular license application, breaking it down into cost of the
delay in awarding the license, cost to the government, and cost to
applicants.59 The paper found that
the typical 18-month delay in awarding cellular licenses eroded the
value of the license by $90,000 and cost the government $20,000 per
hearing and each applicant $130,000 per hearing.60
Finally, the possibly anticompetitive effects of lifting such
restrictions must be weighed against the foregone welfare of
consumers willing to purchase and of producers willing to provide
such services. The net welfare effect may indeed be positive in
many or most instances where zoning is imposed because of alleged
anticompetitive effects. Professor Paul Rubin, for example, has
analyzed the costs and benefits of the MFJ waiver process.61 Rubin estimated the cost of the
waiver process—the delay of waivers that would have had
procompetitive consequences, administrative burdens and
rent-seeking, and the deterrence of procompetitive activities due
to the waiver process—at over $1.5 billion since 1984.62
Rent-Seeking Activities
In addition to the opportunity costs described above, a number
of other social costs can be identified. Zoning has led to the
existence of substantial economic rent in a number of
telecommunications markets. Evidence of such rent includes
estimates of Tobin's Q-ratio for a number of markets as well as the
observed decline in stock value of incumbent firms in response to
announcements of regulatory measures that enhance competition in
their markets. To the extent that much of the economic rent results
from government protection from competition, one could expect
substantial resources devoted to gaining such protection. Although
the expenses directed at socially wasteful rent-seeking activities
are difficult to quantify precisely, they are certainly in the
hundreds of million of dollars.63
Models of Dezoning
The costs of telecommunications regulation are not immutable.
Limited dezoning has already begun. Recent direct broadcast
satellite (DBS) and broadcast regulation are small examples of what
can be applied. Moreover, a property-based system of spectrum
allocation could replace the current system of government
ownership.
DBS Dezoned
Regulation of the relatively new DBS services broke new
ground—it severely blurred the formerly clean lines between
private carriers, common carriers, and broadcasters.64 The owner of a DBS satellite can
lease under contract, or sell outright, transmission space to
private users. It may operate others on a common carrier basis for
independent programmers. And it may send its own programming over
others, either scrambled and paid for by subscribers, or "in the
clear" and paid for by advertisers.65 The owner is thus free to use its
satellite, and the spectrum the satellite uses, for any mix of
carriage, broadcast, or none-of-the-above activities like
subscription services or purely private transport. It may change
the mix as it pleases.
This is perfectly sensible; it is also a radical departure from
50 years of FCC regulation under the 1934 act. The satellite
broadcaster is the first spectrum licensee that has been told, in
effect, to use spectrum for any useful purpose it can find.
Spectrum licenses have been issued without cumbersome "zoning"
restrictions for the first time. No other spectrum licensee has
been this free since the enactment of the Radio Act of 1927.
Page 300
Broadcast Dezoned
Conventional broadcasters have crept forward in the deregulatory
wake of other wireless operators, one small step at a time. They
have begun, for example, overlaying some modest carrier-like
services on top of their basic broadcast operations. Radio
stations, for example, transmit paging services using the
"subcarrier"66 portions of their
assigned frequencies.67 Television
broadcasters broadcast video programming, but also broadcast
electronic newspapers, data, computer software, and paging services
within the otherwise unused "vertical blanking interval" of their
spectrum licenses.68
Market-based Allocation of
Spectrum
The most significant alternative to the current zoning approach
to spectrum allocation is a market-based one. The idea is not new.
As far back as 1959, Nobel economist Ronald Coase proposed that
property rights be accorded to radio licenses, that license owners
pay for the right to use spectrum, and that bidding for that right
was the most efficient way to allocate spectrum.69 In contrast to spectrum, the lack of
any substantial capacity constraints in the wireline medium
suggests that the costs of zoning can be alleviated by simply
lifting most of the restrictions on the medium's use.
In 1991, the National Telecommunications and Information
Administration (NTIA) studied the idea, reviewed the considerable
literature and past proposals on the subject, and concluded that a
"market-based system for spectrum management would improve
considerably the efficiency and fairness of the current U.S.
system, and, if properly designed and implemented, can fully
address concerns about such issues as competitive equity, spectrum
'warehousing,' and the preservation of socially desirable
services."70 As part of its
recommendation, NTIA supported private transfers and subleasing of
spectrum rights directly from one user to another.71
Australia and New Zealand are ahead of the United States in
selling spectrum. The Australian Federal Spectrum Management Agency
recently auctioned 196 wireless cable licenses.72 The government will also receive
yearly license fees on the auctioned spectrum.73 The Australian Broadcasting
Authority plans to auction new television and radio licenses.74 New Zealand has auctioned off
20-year rights to new radio spectrum and receives additional
revenues from user fees.75 It has
also auctioned off spectrum for cellular service76 and broadcast television.77
Conclusion
The social cost of zoning the electromagnetic spectrum and
wireline media is extremely high. While it is impossible to
quantify exactly the total social cost of such zoning, the welfare
effects of specific restrictions suggest that zoning imposes large
opportunity costs on society. Zoning misallocates resources; it
reduces competition; and it delays or prevents the provision of
desired services. These costs are rarely considered carefully when
restrictions are imposed.
Notes
1. A study by the Wharton Econometric
Forecasting Associates (WEFA) Group attempts to quantify the total
costs of all legal and regulatory barriers in the
telecommunications, information services, equipment manufacturing,
and video programming markets. The study compares a baseline
economic forecast with a forecast assuming that all legal and
regulatory barriers to competition are removed and that
rate-of-return regulation is replaced by pure price cap regulation
in all jurisdictions. The study concludes that "competition and the
expected lower prices that competition will bring result in nearly
$550 billion in consumer savings cumulatively over the next ten
years." In its analysis, WEFA first develops pricing models for
long-distance, local, cellular, and cable service, and then
estimates the impact that competitive entry will have on prices for
long-distance, local, cellular, and cable television service. The
study predicts that prices for these services will fall
dramatically over the study period (1995 to 2005), with both sharp
one-time price adjustments (to reduce prices to competitive levels)
and steadily decreasing prices over time due to technological
efficiencies. The main impetus
Page 301
for these price changes, WEFA asserts, will be entry of the Bell
operating companies into the various markets, after the lifting of
the video programming ban and the MFJ restrictions on inter-LATA
service. The WEFA Group, Economic Impact of Deregulating U.S.
Communications Industries, February 1995 (hereinafter 1995 WEFA
Study).
2. For further discussion on the federal
regulation of telecommunications, see generally Kellogg, Michael,
John Thorne, and Peter Huber. 1992. Federal Telecommunications
Law, Little, Brown & Company; Thorne, John, Peter Huber,
and Michael Kellogg. 1995. Federal Broadband Law, Little,
Brown & Company, New York.
3. Stat. 302 (Comp. St.
§10100–10109) (1912).
4. See Hazlett, T. 1990. "The Rationality
of U.S. Regulation of the Broadcast Spectrum," 33 J.L. &
Econ. 133.
5. See, for example, Tribune Co. v. Oak
Leaves (Cir. Ct., Cook County, Ill. 1926), reprinted in 68 Cong.
Rec. 216 (1926).
6. Radio Act of 1927, 44 Stat. 1162
(1927).
7. See Emord, Jonathan W. 1992. "The First
Amendment Invalidity of FCC Content Regulations," Notre Dame
Journal of Law, Ethics, and Public Policy 93, 185.
8. 47 U.S.C. §307(b).
9. Radio Act of 1927 §1. Cf. 47
U.S.C. §301; 47 U.S.C. §304; 47 U.S.C.
§309(h)(1).
10. Radio Act of 1927 §9.
11. See 47 U.S.C. §307(c).
12. 47 U.S.C. §312.
13. 47 U.S.C. §312 (a).
14. An Inquiry Relative to the Future Use
of the Frequency Band 806–960 MHz, 19 Rad. Reg. 2d (P &
F) 1663, 1676–1677 (1970).
15. An Inquiry into the Use of Bands
825–845 MHz & 870–890 MHz for Cellular
Communications Systems, 86 F.C.C.2d 469 (1981).
16. 47 U.S.C. §214(a).
17. 47 U.S.C. §201.
18. See 78 Cong. Rec. 10314
(1934).
19. See Robinson, Glen O. 1989. "The
Federal Communications Act: An Essay on Origins and Regulatory
Purpose," in A Legislative History of the Communications Act of
1934, Max Paglin (ed.), p. 40.
20. General Telephone Co. FCC 13 F.C.C.2d
448 (1968), aff'd sub nom. General Telephone Co. v. FCC, 413 F.2d
390 (D.C. Cir.), cert. denied, 396 U.S. 888 (1969).
21. Applications of Telephone Companies
for Section 214 Certificates for Channel Facilities Furnished to
Affiliated Community Antenna Television Systems, 21 FCC.2d 307, 325
(1970).
22. 47 U.S.C. §533(b).
23. Id.; see also, 47 C.F.R.
§63.54(a).
24. See Telephone Company-Cable Television
Cross-Ownership Rules, 7 FCC Rcd 5781, 5817–18 (1991); see
also H.R. Rep. No. 934, 98th Cong., 2d Sess. 57 (1984).
25. Regulatory Pricing Problems Presented
by the Interdependence of Computer and Communication Facilities,
Final Decision and Order, 28 F.C.C.2d 267, 269 (1970).
26. Amendment of §64,702 of the
Commission's Rules & Regulations, Second Computer Inquiry, 77
F.C.C.2d 512 (1981).
27. 47 U.S.C. §541(b).
28. 47 U.S.C. §534(b)(1)(B).
29. 47 U.S.C. §§531, 532.
30. Kwerel, Evan, and John R. Williams.
1992. "Changing Channels: Voluntary Reallocation of UHF Television
Spectrum," Office of Plans and Policy Working Paper No. 27, Federal
Communications Commission, Washington, D.C., November.
31. Memorandum Opinion and Order, Request
of Fleet Call Inc. for a Waiver and Other Relief to Permit Creation
of Enhanced Specialized Mobile Radio System in Six Markets, 6
F.C.C. Rec. 1533 (1991).
32. Edge. 1993. "Fleet Call Becomes
Nextel; New Company Name Reflects New Business Designed to Serve
Broader Wireless Communications Market," March 29.
33. Business Wire. 1994. "Nextel
Reaches Agreement with U.S. Department of Justice," October 27.
34. Land Mobile Radio News. 1994.
"Motorola Gains Long-awaited Foothold in Los Angeles SMR Market,"
November 13, at Section No. 46.
35. As Janice Obuchowski, former
Department of Commerce assistant secretary for communications and
information and former NTIA administrator, has said, "Efficient use
of the spectrum will be maximized only if licensees are given the
widest possible latitude in determining which services to offer
within their assigned frequencies. In
Page 302
principle, the flexibility granted to licensees should be
limited only to the extent necessary to prevent radio frequency
signal interference with other users." Obuchowski, Janice. 1994.
"The Unfinished Task of Spectrum Policy Reform," 39 Fed. Com. L.
J. 325, pp. 328–329.
36. Yokell, Larry. 1994. "Cable TV Moves
into Telecom Markets," Business Communications Review,
November, p. 2.
37. Affidavit of Thomas W. Hazlett,
attached to Motion of Bell Atlantic Corporation, BellSouth
Corporation, NYNEX Corporation, and Southwestern Bell Corporation
to Vacate the Decree, No. 82-0192 (D.D.C. July 6, 1994).
38. Following is a brief summary of the
data and methodology we employed to make the consumer welfare
calculations. (1) We performed two sets of calculations—one
based on subscribers and prices of basic service and another based
on subscribers and average revenue per subscriber. (2) Basic rate
calculations were based on data found in the appendix to Hazlett
(July 3, 1994). Calculations were for the years 1983 (the year
after the MFJ) through 1993. We assumed that 98 percent of all
basic service subscribers were in monopoly markets. This assumption
was maintained for all the years under consideration, while in
reality competition did not exist every year in markets that were
competitive in 1992. This assumption therefore is likely to provide
a downward bias in the estimates. (3)
Average-revenue-per-subscriber calculations were also based on data
found in Hazlett. We assumed that the total number of subscribers
was the same as the number of basic service subscribers (since
premium service subscribers are also basic service subscribers). We
further assumed that 98 percent of total subscribers were in
monopoly markets. Again, downward bias should be expected. (4) We
used average basic service prices and average revenue per
subscriber as the monopoly price. The correct numbers to be used
are averages in monopoly markets only. (5) We assumed that income
effects due to decline in cable prices are negligible. The
assumption is generally valid if the share of cable television
expenses is small relative to total income. (6) We assumed demand
was locally linear. (7) We converted all calculations to constant
1993 dollars using the Consumer Price Index for all goods with 1993
equal to one. (8) We performed the welfare calculations assuming
various elasticities of demand and expected decline in prices due
to duopoly competition. We considered own-price elasticities of
-0.5, -1.0, -1.5, -2.0, and -2.5 and price declines of 15, 20, and
25 percent. To the extent that a monopolist always operates in the
region where elasticity of demand exceeds one, the first two
elasticities are valid only if monopoly pricing behavior is somehow
constrained.
39. Crandall, Robert. 1990. "Elasticity of
Demand for Cable Service and the Effect of Broadcast Signals on
Cable Prices," Attachment TCI Comments to the Federal
Communications Commission, MM Docket No. 90-4; Levin, Stanford L.,
and John B. Meisel. 1990. "Cable Television and Telecommunications:
Theory, Evidence and Policy," Telecommunications Policy,
December; Emmons, Willis, and Robin Prager. 1993. "The Effects of
Market Structure and Ownership on Prices and Service Offerings in
the U.S. Cable Television Industry," paper presented to the Western
Economics Association 68th Annual Conference (22 June); Federal
Communications Commission, FCC Cable Rate Survey Database (Feb. 24,
1993).
40. "Tradeline Database," Dow Jones News
Retrieval, April 21, 1995.
41. Talking Point/Bell Atlantic Court
Decision, Aug. 24, 1993.
42. Dow Jones News Wire. 1993.
"Cable, Telecom Equip[ment] Stocks Soar on Bell Atlantic Ruling,"
August 25.
43. This study assumed Bell Atlantic's
Beta to be 0.78 and that the relevant market was defined by the
S&P 500 basket of stocks. It used outstanding shares and prices
at the end of calendar year 1992 to calculate the benchmark
valuation. A one-day window using the previous day's valuation as
the benchmark yielded an increase in Bell Atlantic value
attributable to the ruling of roughly $950 million. Two-day and
three-day windows yielded a cumulative excess return of 7 percent
and increased valuation of roughly $1.5 billion. A longer window
would yield an even larger estimate of increased return and
valuation.
44. Affidavit of Richard S. Higgins and
James C. Miller III, attached to Motion of Bell Atlantic
Corporation, BellSouth Corporation, NYNEX Corporation, and
Southwestern Bell Corporation to Vacate the Decree, United States
v. Western Elec. Co., No. 82-0192 (D.D.C. July 6, 1994).
45. Because of the MFJ's interexchange and
equal access restrictions, the BOCs cannot obtain bulk wholesale
rates and therefore cannot offer these savings to their
customers.
46. 1995 WEFA Study, supra n. 1, at p.
4.
47. Id., p. 30.
48. Id., pp. 30–32.
49. Id., p. 32.
50. Id., pp. 32–33.
51. Id., p. 34.
52. A POP is derived by multiplying the
total population of a service area by an operator's interest in the
license.
53. Morgan Stanley & Co., Pacific
Telesis Group—Company Report, Report No. 1219882, Apr. 21,
1992.
Page 303
54. Donaldson, Lufkin & Jenrette.
1994. "The Wireless Communications Industry," Summer, p. 68.
55. MacAvoy, Paul W. 1994. "Tacit
Collusion by Regulation: Pricing of Interstate Long-Distance
Telephone Service," Working Paper #37, Yale School of Organization
and Management, August, pp. 37–47.
56. Ward, Michael R. 1995. "Measurements
of Market Power in Long Distance Telecommunications," Bureau of
Economics Staff Report, Federal Trade Commission, Washington, D.C.,
April.
57. 1995 WEFA Study, supra n. 1.
58. Milton Mueller has explained that "as
a barrier to entry, getting an allocation through the
administrative process can be far more formidable than paying for
access to spectrum." Mueller, Milton. 1988. "Technical Standards:
The Market and Radio Frequency Allocation," Telecommunications
Policy, March, p. 51.
59. Kwerel, E., and A.D. Felker. 1985.
"Using Auctions to Select FCC Licensees," FCC OPP Working Paper,
May, pp. 12 and 17.
60. Id.
61. Affidavit of Paul H. Rubin (June 14,
1994), attached to Motion of Bell Atlantic Corporation, BellSouth
Corporation, NYNEX Corporation, and Southwestern Bell Corporation
to Vacate the Decree, United States v. Western Elec. Co., No.
82-0192 (D.D.C. July 6, 1994).
62. Rubin averaged data provided in
several waiver requests on the fixed and annual costs of delaying
approval of the waiver, and extrapolated these costs over all
waivers. Because over 96 percent of waiver requests are approved,
and thus presumed to be procompetitive, and because individual
anticompetitive requests are less harmful than individual
procompetitive waivers are beneficial, the waiver process results
in significant wasted resources, time, and money. The costs due to
rent-seeking and deterrence of procompetitive activities are
specified in less exact terms, but Rubin's reasonable estimate
places them in the hundreds of millions of dollars.
63. Id.
64. Report and Order, Inquiry into the
Development of Regulatory Policy in Regard to Direct Broadcast
Satellites for the Period Following the 1983 Regional
Administrative Radio Conference, 90 F.C.C.2d 676 (1982), recon.
denied, Memorandum Opinion and Order, Regulatory Policy Regarding
the Direct Broadcast Satellite Service, 94 F.C.C.2d 741 (1983),
aff'd in part sub nom. National Association of Broadcasters v. FCC,
740 F.2d 1190 (D.C. Cir. 1984).
65. See World Communications v. FCC, 735
F.2d 1465 (D.C.Cir. 1984).
66. Spectrum can be subdivided into a main
channel and a number of "subchannels" or "subcarriers," both of
which can be transmitted simultaneously.
67. First Report and Order, Dkt. No.
82-536, 48 Fed. Reg. 28445 (1983); Second Report and Order,
Dkt. No. 21323, 49 Fed. Reg. 18100 (1984); Amendment of
Parts 2 and 73 of the Commission's AM Broadcast Rules Concerning
the Use of the AM Sub-carrier, 100 F.C.C.2d 5 (1984).
68. Amendment of Parts 2, 73, and 76 of
the Commission's Rules to Authorize the Offering of Data
Transmission Services on the Vertical Blanking Interval by TV
Stations, 101 F.C.C.2d 973 (1985).
69. Coase, R.H. 1959. "The Federal
Communications Commission," 2 J.L. & Econ. 1, pp. 14 and
25.
70. National Telecommunications and
Information Administration. 1991. U.S. Spectrum Management
Policy: Agenda for the Future, February, p. 7. Henry Geller,
former NTIA administrator and former general counsel for the FCC,
co-authored a report that explained that "charging for the spectrum
is particularly appropriate now in light of the weakness of
traditional broadcast public trustee regulation and the growing
demands on the spectrum overall." Geller, Henry, and Donna Lampert.
1989. "Charging for Spectrum Use," Benton Foundation Project on
Communications and Information Policy Options, p. ii.
71. National Telecommunications and
Information Administration. 1992. U.S. Spectrum Management
Policy: Agenda for the Future, February, p. 8.
72. Market Reports. 1994.
"Australia—Pay TV Overview," September, p. 19.
73. Ellis, Stephen. 1994. "Australia: MDS
Pay-TV Auctions Net $90.6M," Australian Financial Review,
August 19.
74. Davies, Anne. 1995. "Australia: Facts
Lay Groundwork for ABA Legal Challenge," Sydney Morning
Herald, January 27.
75. New Zealand Herald. 1991. "New
Zealand: Seven Radio Frequencies for Auckland," January 12.
76. New Zealand Herald. 1990. "New
Zealand: Telecom Free to Bid for Mobile Phones," May 17.
77. New Zealand Herald. 1990. "New
Zealand: Space on Airwaves Costs Sky $2.2M," March 28.
