Broadcast Tv Spectrum Reallocation (thierer & Esbin - Pff)

Progress Snapshot Volume 5, Issue 13

November 2009

An Offer They Can’t Refuse: Spectrum Reallocation That Can Benefit Consumers, Broadcasters & the Mobile Broadband Sector By Adam Thierer & Barbara Esbin We are not referring to a horse’s head between the sheets.1 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.2 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.

Let’s Make a Deal 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 Adam 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. 1

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. 2

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/issuespubs/testimony/2009/10-22-09-thierer-testimony-video-competition-digital-age.pdf. 1444 EYE STREET, NW  SUITE 500  WASHINGTON, D.C. 20005 202-289-8928  [email protected]  www.pff.org

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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-forspectrum” 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.3 Subsequent press reports suggest that Levin’s pitch didn’t get much traction with the MSTV board members.4 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.”5 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.6 Moreover, this could have just been 3

Kim McAvoy, FCC Floats Cash-For-TV-Spectrum Scheme, TVNewsCheck, Oct. 21, 2009, www.tvnewscheck.com/articles/2009/10/21/daily.4/ 4

Harry A. Jessell, It's Too Early For Cash-For-Spectrum, TVNewsCheck, Oct. 23, 2009, www.tvnewscheck.com/articles/2009/10/23/daily.4/ 5 6

Association for Maximum Service Television, About Us, www.mstv.org/aboutus.html

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/366470Broadcasters_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-

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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: 1. At least in the short term, no other sufficient blocks of good spectrum are scheduled to come up for auction; and, 2. 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.

A Spectrum of Spectrum Reform Options 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.7 The “Report from the DACA Working Group on New Spectrum Policy,”8 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 marketdriven 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

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. 4, 2009, www.broadcastingcable.com/article/367367-Copps_Maybe_Broadcasters_Deserve_To_Lose_Their_Spectrum.php. 7 8

www.pff.org/daca/index.html

The Progress & Freedom Foundation, Report from the DACA Working Group on New Spectrum Policy, March 2006, www.pff.org/issues-pubs/books/060309dacaspectrum1.0.pdf

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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. 9 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 marketplace transactions. 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.

9

Evan Kwerel & John Williams, Federal Communications Commission, A Proposal for a Rapid Transition to Market Allocation of Spectrum, FCC Office of Plans and Policy Working Paper No. 38, Nov. 2002, http://wireless.fcc.gov/auctions/conferences/combin2003/papers/masterevanjohn.pdf

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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 auction revenues. 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 overthe-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.10

Fairness to Broadcasters 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 broadcast band. 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

10

Coleman Bazelon, The Brattle Group, The Need for Additional Spectrum for Wireless Broadband: The Economic Benefits and Costs of Reallocations, Oct. 23, 2009, at 2, www.brattle.com/_documents/UploadLibrary/Upload809.pdf

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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 a move. 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.11 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.

11

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.

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Congress Must Be Willing to Compromise 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 emergency services. 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 ground12—and the old rules do not apply to pay television13—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 Amendment protection.) 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

12

Adam Thierer, Why Regulate Broadcasting: Toward a Consistent First Amendment Standard for the Information Age, Catholic University Law School, 15 CommLaw Conspectus, Summer 2007, at 431-482; http://commlaw.cua.edu/articles/v15/15_2/Thierer.pdf 13

Robert Corn-Revere, The Progress & Freedom Foundation, Can Broadcast Indecency Regulations Be Extended to Cable Television and Satellite Radio, Progress on Point 12.8, May 2005, www.pff.org/issuespubs/pops/pop12.8indecency.pdf

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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.

Conclusion 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 Report 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. 23, 2008. 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. The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. Its mission is to educate policymakers, opinion leaders and the public about issues associated with technological change, based on a philosophy of limited government, free markets and civil liberties. Established in 1993, PFF is a private, non-profit, non-partisan research organization supported by tax-deductible donations from corporations, foundations and individuals. The views expressed here are those of the authors, and do not necessarily represent the views of PFF, its Board of Directors, officers or staff. The Progress & Freedom Foundation  1444 Eye Street, NW  Suite 500  Washington, DC 20005 202-289-8928  [email protected]  www.pff.org