An Offer They Can't Refuse:
Spectrum Reallocation That Can
& the Mobile
Release 5.13 November 2009
by Adam Thierer & Barbara Esbin*
View as PDF
We are not referring to a horse's head between the sheets. Consider these two relatively uncontroversial statements:
(1) America needs more spectrum to feed its growing appetite for mobile
broadband: Consumer demand for high-speed wireless data services is
exploding and shows no sign of slowing in the near- or long-term.
Consequently, mobile network operators are clamoring for more spectrum to be
allocated by the Federal Communications Commission (FCC). And yet spectrum is
increasingly hard to come by.
(2) Traditional television broadcasters are facing unprecedented
marketplace competition and serious financial turmoil that threatens their
long-term viability: Never has competition for our eyeballs been more
intense, and, as a result traditional over-the-air broadcasters are losing
viewers, advertisers, shareholders, and money at a steady pace.
While most would accept the validity of those two
statements, what may be less obvious is how they can be reconciled to the
advantage of all the relevant players--broadcasters, wireless broadband providers, and consumers. The answer lies in a grand bargain.
Both sides offer consumers services of great value and both
have something of great value to offer one another. Broadcasters have their
underlying spectrum--hundreds of MHz worth of prime spectrum--some or all of
which could be used for a variety of other uses, including mobile broadband.
Meanwhile, wireless network operators have cash and would make eager buyers of
that broadcast spectrum. Could they make a deal? Or, could Congress or the
FCC help to broker a deal by buying out the broadcasters and then re-auctioning
that spectrum (or a portion of that spectrum) for mobile broadband services?
Blair Levin, the Executive Director of the FCC's Omnibus
Broadband Initiative, has been asking
such questions. Although no official proposal has yet been released by the FCC,
according to press reports, Levin has apparently pitched some television
broadcasters on a "cash-for-spectrum" deal that would entail broadcasters
voluntarily giving up a substantial portion of their current spectrum
holdings. TVNewsCheck reported that, at an October 8th meeting with the
board of the Association for Maximum Service Television (MSTV):
Levin suggested broadcasters might want to consider returning their
spectrum in exchange for a share in the billions of dollars that would come
from the auction of the spectrum to the wireless industry.
Broadcasting would retain just enough spectrum so that each station
could provide a lifeline standard-definition service to the millions of TV
viewers who still rely on over-the-air reception. Broadcasters could no longer
offer over-the-air HD and second channels and mobile video would be off the
table, but they could continue to provide a single channel of TV to every home
in their markets as they do today--in full-blown HD via cable and satellite
carriage and SD via the over-the-air lifeline service.
Subsequent press reports suggest that Levin's pitch didn't
get much traction with the MSTV board members. That doesn't necessarily mean that it's a bad idea, however, or even that other
broadcasters might not be willing to hear a more formal offer. MSTV has
traditionally been broadcasting's praetorian guard; the group has "endeavored
to ensure that the American public receive the highest quality, interference
free, over-the-air local television signals." That is a noble mission, but MSTV's approach to broadcast spectrum management
and its desire to continue, and improve, broadcast television service, does not
necessarily mean other broadcasters won't be willing to consider the FCC's
pitch. In this case, as in so many, where you stand is a function of where you
sit. Some local TV station or group owners may welcome a cash infusion that
allows them to repurpose their operations to better compete in the fragmented
digital media marketplace that much sooner. Moreover, this could have just been MSTV's opening move in a bargaining process
that is bound to continue in multiple rounds. Like any good negotiator, they
are wisely not giving away too much too soon.
And the FCC will likely be willing to bargain. The
working assumption behind Levin's pitch is that the short-term need for
high-value spectrum (that is, spectrum with excellent propagation
characteristics) can only be met by reallocating spectrum from the broadcast
band. That assumption is based on two undeniable realities:
At least in the short term, no other sufficient blocks of good spectrum
are scheduled to come up for auction; and,
The only other holder of such prime spectrum--the government (esp. the
military)--is unlikely to surrender much, if any, of the spectrum it holds.
Assuming these realities remain constant, the broadcast band
is where the action is at in the short-run. That's why the FCC is sending
signals to broadcasters that they'd like to make a deal. And it's even more
relevant that Blair Levin is the one making the pitch, since he is in charge of
formulating the FCC's plan to boost broadband deployment.
In 2005-6, The Progress & Freedom Foundation brought
together over 50 leading scholars--a non-partisan collection of lawyers,
economists, engineers and others--with the ultimate aim of crafting a regulatory
framework that is adaptive to the frequently changing communications landscape.
The resulting "Digital Age Communications Act (DACA) Project" offered policy
recommendations and model legislation in five policy areas, including spectrum
reform. The "Report from the DACA Working Group on New Spectrum Policy," offered five "Transition Options for Encumbered Spectrum."
Several of the options would require the government to
define new property rights in spectrum. Each attempts to address two central
issues in making the transition from the current command-and-control spectrum
allocation system to a flexible and efficient market-driven one. First, to
what degree should current licensees, who may or may not have paid for their
licenses (payment could either have been at an initial spectrum auction, in a
secondary spectrum market, or through the purchase of an existing licensee) be
allowed to retain their licenses? Second, and closely related, if current
licensees do retain their licenses, should the government simply give existing
licensees broader rights, or should the government try to claim for itself the
new economic value of the expanded rights it will confer by charging the
incumbent licensees for the greater flexibility they receive? The options
developed by the DACA Working Group on New Spectrum Policy continue to serve as
useful models for thinking about how broadcast reallocation might work. They
are as follows:
- Option 1: Auction spectrum with the rights to clear incumbents
immediately without compensation. This option is closest to
starting de novo, giving incumbents some, but not much, leverage, and
would complicate the definition of the new property rights for auction winners
who would need to accommodate interim use by incumbents.
- Option 2: Auction spectrum with rights to clear incumbents with compensation. The FCC would auction spectrum, either under an FCC- or
applicant-driven process. Auction winners would have the right to clear
incumbents from the spectrum they have purchased, either by paying relocation
costs in the appropriate case, or paying the incumbent to cease operations.
- Option 3: Auction spectrum without rights to clear
incumbents from the auctioned spectrum. New entrants would purchase
property rights (i.e., overlay rights to the white space) consistent
with interference protections for incumbents. Negotiations would be required
to change the configuration for those rights, with incumbents initially
retaining their existing rights.
- Option 4: "Big Bang" auction with unassigned and encumbered
spectrum. There are two basic variants of this option, depending on how incumbents are
treated. The first variant permits incumbents to repurchase their existing
rights at no net cost to themselves. The second variant would permit the FCC
to repackage and auction the spectrum clear of any encumbrance.
- Option 5: Give incumbent licensees full property rights to the
spectrum they use. Spectrum owners would gain immediate flexibility in
terms of the inputs that they could employ and the uses to which they could put
their property (so long as any change did not generate interference with
another spectrum owner's existing property rights), as well as gaining the
immediate ability to add parcels and/or subdivide parcels. Spectrum
restructuring would take place through future negotiations and other
The DACA Working Group on New Spectrum Policy noted that
each option has advantages and disadvantages. After weighing each of them,
they ruled out Options 1 and 5 as impractical, since the first was unfair to
incumbent spectrum holders (because of lack of compensation) and the fifth gave
them too much control and didn't encourage them to reallocate their spectrum to
higher valued uses quickly enough.
Although the FCC's broadcast spectrum reallocation plan has
not yet been made public, it appears that Levin's pitch is a variant of Option
2 or 4. Option 2, as indicated above, entails clearing and paying either
relocation costs, or, if the value of the operation is less than relocation
costs, paying the incumbent to cease operations. The right to clear incumbents
can be immediate or delayed; the latter requires that the property rights for
new entrants be designed to prevent interference with interim use by
incumbents. Delaying the right to clear incumbents also potentially allocates
a share of the surplus market spectrum to incumbents, since they can bargain
for premiums in exchange for clearing earlier than is otherwise required.
Option 4, a "Big Bang" auction for unassigned and encumbered spectrum, has two
variants, as described above. One of its benefits is that it can potentially
accomplish major spectrum restructuring all at once--that is, more quickly.
Each variant forces incumbents to confront an explicit opportunity cost of
holding onto their spectrum while protecting incumbent rights and potentially
assigning them a share of the increased value of the spectrum that they clear.
The second variant of Option 4--giving incumbents transferable auction vouchers
(tradable cash) in return for spectrum-clearing--would give bidders more
certainty because potentially strategic hold-outs would be prevented. Greater
bidder certainty and lower transactions costs would translate into higher
One recent study prepared by Coleman Bazelon of The Brattle
Group, on behalf of the Consumer Electronics Association, estimates the market
value of the broadcasters' spectrum, if available for wireless broadband, to be
about $62 billion. Making that spectrum available, Bazelon writes, "would
require either paying broadcasters for their spectrum--estimated at about $12
billion to make them whole--or paying to migrate all households that rely on
over-the-air broadcasts to subscription services--estimated at a cost of about
$9 billion." Alternately, Bazelon posits, "broadcasters could continue to
provide over-the-air broadcasts on a smaller portion of their allocated
frequencies, freeing up a significant portion of the band for wireless
broadband." Bazelon estimates that the latter option, while less costly, at
about $6 billion in compensation to broadcasters, would free up only about $48
billion worth of spectrum.
In deciding which spectrum reallocation approach to adopt,
it is vital that neither the FCC nor Congress underestimate the concerns
broadcasters will raise about any plan to have them vacate some or all of the
Broadcasters continue to provide a service important to tens
of millions of Americans and need to be willing partners in any deal and come
to the bargaining table voluntarily. A property rights scheme would get
broadcasters there quickly, but as noted above, it would raise questions about
an unjust "giveaway" to them. In reality, this is not entirely the case since
the overwhelming majority of broadcast licenses have been traded in the
secondary market for huge sums of money. It's just that none of that money
went into federal coffers; it went to the previous owner of the broadcast
license once they sold it to someone else. Regardless, any perceived
"windfall" will lead to accusations of a spectrum give-away.
More importantly, a property rights scheme would not
necessarily encourage broadcasters to reallocate spectrum as quickly as other
plans would. Again, the whole point of the FCC's plan is to clear a large
portion of the broadcast band as rapidly as possible to open that spectrum up
for more highly valued alternative uses, such as mobile broadband. If
broadcasters were granted unencumbered property rights, the stubbornness of
enough "hold-outs" could retard the reallocation process.
For these reasons, a full-blown property rights regime for
spectrum is unlikely to fly politically. However, it is worth noting that the
"bundle of sticks" that broadcasters hold has grown over time as they bought
their spectrum from previous owners, invested in their stations, built
relationships in their communities, and so on. If, therefore, Congress or the
FCC attempted to strip them of their spectrum without just compensation, the
broadcasters would likely be able to mount a formidable legal challenge to such
Congress and the FCC must do everything they can to avoid
such a legal fight. Again, it is essential that broadcasters be willing
partners in a reallocation plan and see clear benefits for themselves, their
shareholders, and the viewing public. If legal battles ensue, they will take
years to resolve and that would defeat the entire purpose of this exercise:
getting good spectrum reallocated as quickly as possible--but on terms that both sides accept.
Of course, it remains to be seen whether all broadcasters
would accept a "grand bargain," even on such terms. And there are other thorny
issues to be worked out. As former broadcaster John Hane has noted:
many of the legal constructs that help make television stations
valuable--including must carry, compulsory copyright and even network
non-duplication and syndicated exclusivity--are tied to the spectrum one way or
another, and if you take the spectrum away, those legal constructs are more
vulnerable to being dismantled by the FCC, Congress or the courts.
But, again, we are working on the assumption that if the
deal is right, broadcasters will come to the table voluntarily and help resolve
those challenges in a mutually beneficial fashion.
The wildcard in this process is Congress. If the FCC manages
to craft a reallocation plan that most broadcasters find acceptable, it will
likely be because the price is right for the broadcasters. That is, the
economic inducement will be great enough to encourage them to vacate a portion
(or potentially all) of their spectrum. But Congress is obviously going to be
looking for their "fair share" of any deal to reallocate broadcast spectrum.
Lawmakers will likely bemoan the loss of "public interest" regulation and trot
out a variety of fears about the loss of local programming and community
But those concerns can be dealt with in a variety of other
ways. If the broadcasters retain a small chunk of their existing
allocation--enough for a single standard definition video stream--then there's
nothing stopping them from providing the same content services they do today,
albeit in lower resolution. And with roughly 90 percent of U.S. households
currently subscribing to multichannel video services, the argument for
broadcasting's uniqueness, or ability to inform communities about local affairs
or emergencies, seems less relevant than it did in years past.
Some lawmakers might also lament the loss of control they
current hold over broadcast speech. Although the constitutional foundations of
indecency regulations are on increasingly shaky ground--and
the old rules do not apply to pay television--some
legislators may resist the move based on a fear of surrendering what little
control they have left over content. (On the other hand, free speech advocates
would likely celebrate the transition to services that are given full First
But these considerations will likely be secondary to what
will likely become the biggest legislative impediment to broadcast spectrum
reallocation: Money. Congress is looking to plug mammoth budgetary shortfalls
and shrink gaping deficits in tough economic times. Another spectrum auction
becomes an attractive target for cash-starved legislators.
If legistlators give into the temptation of asking for too
big of a cut, however, broadcasters will never come to the table to negotiate.
Legislators need to appreciate and accommodate the unique situation
broadcasters find themselves in as the media marketplace shifts online. Many
of them will be extremely skeptical about any reallocation plan, especially
after just completing a challenging, time-consuming and expensive digital
television (DTV) transition. The only possible way to get them to the table is
for the FCC to make them a generous offer that either permits them to continue
to serve the public or exit the field in a manner consistent with shareholder
interests. But that requires Congress to be willing to let the FCC make the
deal generous enough that broadcasters are willing to listen. If legislators
want to effectuate the rapid redeployment of spectrum to meet the mobile
broadband needs of a nation with a seemingly insatiable appetite for more
high-speed wireless services, they will need to be willing to make the
broadcasters a deal they can't refuse.
To be clear, the
benefits of such a deal could be enormous for wireless broadband providers,
developers of digital technologies, and consumers. Expanding the pool of
spectrum available for next-generation wireless broadband offerings will ensure
that innovative new networks, devices, and services are made available to the
public on a timely basis. Ultimately, that will mean more high-speed choices
for consumers, especially those in rural areas harder to reach with high-speed
wireline networks. Finally, more generally, anything that moves us in the
direction of a freer market in spectrum is a good thing.
But fairness to broadcasters lies at the heart of this spectrum
reallocation plan. If a deal can't be structured that broadcasters would find
acceptable, they should not be forced to come to the table. When we speak of
an offer they can't refuse, we mean one so attractive that no rational
businessperson or investor would pass it up. It is essential broadcasters be
willing partners in the deal, and be full participants in the process of
shaping its contours.
Related PFF Publications
from the DACA Working Group on New Spectrum Policy, March 2006.
- Adam Thierer, Cash-For-TV-Spectrum
Scheme vs. A Property Rights Solution, PFF Blog, Oct. 21, 2009.
- Adam Thierer, Will
Traditional OTA Broadcast Networks Go Cable-Exclusive? PFF Blog, Nov.
- Adam Thierer & Berin Szoka, What's
Worse Than Rigged Auctions & Internet Censorship? How About Both in One
Package! Progress Snapshot 4.12, June 2008.
- Lenard, Thomas, Robert Atkinson, Chris Guttman-McCabe, John
Muleta, Lawrence White, Allocating
the Electromagnetic Spectrum: A Discussion of the M2Z Proposal,
Progress on Point 14.11. The Progress & Freedom Foundation, May 2007.
- Lawrence J. White, Spectrum
Management Reform, Testimony before the Committee on Commerce, Science,
and Transportation, U.S. Senate, March 14, 2006.
- Stuart M. Benjamin, Does
Spectrum Abundance Justify Public Control? Progress on Point 11.9. The
Progress & Freedom Foundation, April 2004.
Thierer is President and Barbara Esbin is a Senior Fellow at The Progress &
Freedom Foundation. The views expressed in this report are their own, and are
not necessarily the views of the PFF board, fellows or staff.
 We refer, of course, to the famous scene from Francis Ford Coppola's "The Godfather" in
which a character initially reluctant to cut a deal with the mob awakes one
morning to find the severed head of his horse in his bed.
 Testimony of Adam D. Thierer, The Progress & Freedom Foundation, Hearing on
"Video Competition in a Digital Age," Before the Subcommittee on
Communications, Technology, and the Internet, Committee on Energy and Commerce,
U.S. House of Representatives, Oct. 22, 2009, available at www.pff.org/issues-pubs/testimony/2009/10-22-09-thierer-testimony-video-competition-digital-age.pdf.
 At least one veteran broadcaster acknowledged that some broadcasters are not
using their spectrum efficiently, and some groups would want an exit strategy,
a strategy that could prove attractive to some of the private-equity firms
looking to cash out their station holdings. John Eggerton, Broadcasters
Defend Their Spectrum, Broadcasting & Cable, Nov. 1, 2009, www.broadcastingcable.com/article/366470-Broadcasters_Defend_Spectrum_From_Reclamation_Proposals.php.FCC Commissioner Michael Copps is reported to have recently lamented
that if the FCC "can't rejuvenate shuttered newsrooms, put the brakes on
‘mind-numbing monoprogramming' and otherwise turn the tide (he calls it
a ‘tsunami'), of consolidation, then ‘maybe those who want the spectrum back
have the better of the argument after all." John Eggerton, Copps: Maybe
Broadcasters Deserve to Lose Their Spectrum, Broadcasting & Cable, Nov.
 John Hane, Be Wary of FCC's Cash-For-Spectrum Plan, TV News Check, Nov.
2, 2009, www.tvnewscheck.com/articles/2009/11/02/daily.8.
The question how to treat must carry and retransmission consent rights will
inevitably involve another set of players -- multichannel video programming
distributors (MVPDs) such as cable operators and direct broadcast satellite
service providers. Any serious reallocation effort would have to respect the
rights and interests of MVPDs and should involve them early-on.