Friday, December 15, 2017

Hazlett on Spectrum

The public and media discussion of "net neutrality" seems to have degenerated to "we want stuff for free." In the end, it does cost something to deliver internet, and the bandwith is limited.

The (artfully named) "net neutrality" regulation was really a return to utility rate regulation, in which the regulators say who gets what, and how much they can charge. Just what a rosy success that was not, seems to have been forgotten.

In this context, it seems especially worth reporting on an event from last week. Tom Hazlett, former Chief Economist of the FCC, came to Hoover  to discuss his new book "Political Spectrum,"  which covers the history of the US government regulation of radio (TV, and cell phone) waves, largely through the same FCC that was in charge of "net neutrality." (I haven't read the book, this is a summary of the seminar discussion.)

Contrary to conventional wisdom, the market for spectrum worked well until 1927, in just the way economists might expect. Property rights to spectrum emerged, evolved, and worked well.

Radio was, at first, considered only for point to point communication. It stayed that way until 1920, when the first broadcast occurred.  Within 2 years there were 500 broadcasters.

Contrary to the common allegation of “etheric bedlam” the market was actually orderly through 1926.  Under the 1912 radio statute, the Department of Commerce enforced first-come first-serve rules, basically homesteader rights to spectrum in a geographic area and time. Those emergent property rights were registered with Department of Commerce, and easily bought and sold. If a new station encroached on your frequency/geography, you could quickly sue and stop it.

Regulation emerged in much the way a public choice economist might predict. The regulators wanted much more discretion — they wanted to control who got to broadcast and what was said. The  large commercial stations wanted to limit entry and competition. The National Association of Broadcasters quickly became a lobbying group and advocated “public interest, convenience, and necessity” to regulate. [Yes, in only 5 years an industry that nobody had ever heard of or thought of became an incumbent lobbying force for regulation to stop entry and competition.]  Herbert Hoover, (sadly) the commerce secretary at the time stopped enforcing enforcing first-come first-serve rights in 1926. Now there was indeed chaos, the “breakdown in the law.” According to Hazlett, this was a strategic breakdown to get regulation going. That regulation was formalized in the 1927 radio act. The first sentence of the act preempted private rights to spectrum.

Now, rather than property rights, spectrum was allocated by a “mother may I” system.  In 1932 FCC,  took over authority of wires to.

Regulation was quickly captured to stop competition and innovation.


Hazlett offered FM radio as the classic example. Howard Armstrong (famous inventor) in 1933 created FM radio, which as we know is technically much better than AM. He had to ask the FCC for spectrum. FCC experts said it wouldn’t work. In 1939 he finally got some spectrum  allocation for FM, and started selling FM radios. WWII stopped everything, as civilian radio production stopped. In 1945, broadcast TV lobbied the FCC for the FM spectrum, and the FCC moved FM from the 40 mhz range to 88-108 Mhz, making all existing radios obsolete. Armstrong had to start over. When finally in the 1960s FM was finally allowed, it immediately took over from AM for music; [as we know it has much wider frequency response, and “no static at all”.]

That’s a nutshell of “mother may I” regulation — it suppresses competition and deters innovative technologies, in this case for a quarter century.

Again in the 1960s, TV and cable repeated the story, regulation used to protect incumbents and stop innovation.

In likely the most famous speech by an American regulator, May 9 1961,  FCC chairman Newton N. Minow characterized TV as a “vast wasteland.”  He forced stations to show “public interest” to get a license renewal.

In the early 1960s, cable began to compete. Broadcasters naturally tried hard to stop it. From 1948-to the 1960s, cable only extended the range of broadcast TV signals. But in the 60s, cable started to offer competing broadcasts. The over the air broadcasters got Minnow to block cable, on the grounds that cable would destroy broadcasters’ profitability, and therefore their provision of public interest news and other public interest programming. This lasted until the late 1970s.

In an equally famous and vilified speech, FCC chairman Mark Fowler argued that “TV is just a toaster with pictures.” He argued for competition, free entry, entrepreneurship and letting people choose. He argued against the “public interest” standard, and for minimalist regulation.

Cable was deregulated. It immediately produced hundreds of channels, including CSPAN, and the all-news CNN. The result was, ironically much more news and public affairs, just what FCC said it was protecting, in place of networks’ 15 minute nightly news.

Hazlett covers the decades-long still-partial liberalization, and a lot of interesting detail on how spectrum auctions work (and don't work).

1st generation  wireless mobile got licenses in the 1980s, though the technology was announced in 1945. Getting this spectrum allocation was called the “30 years’ war.”

In the 1970s, the FCC decided that only a monopoly can do cell phone service, and  gave it to Bell. By the 1980s radicals said maybe there could be 2 cell phone companies. The Department of Justice had to sue the FCC to get more than one license.

Even in the first generation, there were only 2 competitors, and standards  were set by the government. By early 2000 though, the US and  many countries auctioned licenses and allowed liberal de-facto property rights. Regulators now allow mobile licensees to figure out networks, architecture (size, location, and  power of stations), and use their own applications. In 2005, the iPhone was like FM, and needed spectrum. But this time it didn’t have to ask permission. Apple negotiated with Verizon and AT&T, initially going with AT&T exclusive for the iphone. It ended up that the price was negative — carriers wanted the iPhone on their network enough to pay for it.

2- 5 G wireless and the “internet of things,” is built through private coordination. But it is fragile. The old law is in place.  Regulators have simply interpreted their mandate for “public interest,” and that liberalization and rights are working.

Most spectrum is still regulated. Of the “beach front”  under 4 Ghz ,15% (mobile) is largely unrestricted, assigned by auction. About half is allocated to government, military, and forestry, and a wide swath is still owned by broadcast TV.

Now, do you really want the FCC to decide who gets to put what on the internet, how much they get to charge, and to control its architecture?


27 comments:

  1. I lived in London in 1965. Several Rock and roll stations, owned by private individuals, broadcast to Britain from different ships. The stations were not illegal as the ships were in international water. The stations met the demand of millions for pop and rock music, not played by the BBC.

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    1. Yes, there is a fun movie about that. "the boat that rocked"
      Ordinary folks loved the "pirate" radio stations. But conservatives hated and reviled them.
      Border Radio, or Border Blasters, were a similar phenomenon for the USA.
      So, are regulations OK if they protect corporations? And not OK if they try to obligate corporations to do something useful for folks? Are they, in practice, not OK in the latter case simply because corporations won't do anything for folks when told to?
      --E5

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    2. Ironic that the corporation that spawned the the Radio Act of 1927 was the Chicago Tribune when it successfully sued Oak Leaves Broadcasting in Cook County.

      See:
      https://www.quimbee.com/cases/tribune-co-v-oak-leaves-broadcasting-station-inc

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  2. I have had an interview with Tom Hazlett 2 weeks ago. I really admire his analysis.

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  3. My point about Hoover and the depression, he caused the coordination failure. Once the NAB had their monopolies, we suddenly had national marketing, overnight, The city roads jammed and we stopped transacting. Had nothing to do with banking.

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    1. Several NAB's in the world. Do you mean National Association of Broadcasters?
      Could you elaborate on your theory explaining how Hoover caused the depression?
      --E5

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  4. There is a significant difference in infrastructure (and right-of-way) required between airwaves and cable.

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  5. The idea that the FCC should control anything has proven a complete failure as lies broadcasting everywhere is a lot worse than ever before. Too much money made filing lawsuits.

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  6. John,

    "If a new station encroached on your frequency/geography, you could quickly sue and stop it."

    No. Wrong!!

    https://en.wikipedia.org/wiki/Radio_Act_of_1912

    "Implementing and enforcing the Act was the responsibility of the United States Secretary of Commerce and Labor. The U.S. Department of Commerce and Labor was empowered to impose fines of not more than $500 and to revoke the licenses of those radio operators who violated the restrictions laid down by the Act."

    "Furthermore, the government could seize the equipment of the offending station, as well as suspending the radio license of the operator for one year."

    Or if you prefer, the Act in it's entirety can be found here:
    http://earlyradiohistory.us/1912act.htm

    There was no right to sue for damages in a civil court included in the 1912 act - offenses were treated as a criminal act only with penalties assessed by the federal government for instances that could be substantiated in a criminal court of law.

    Also, from section 2 of the Act:

    "That every such license shall be in such form as the Secretary of Commerce and Labor shall determine and shall contain the restrictions, pursuant to this Act, on and subject to which the license is granted; that every such license shall ... specify the ownership and location of the station in which said apparatus shall be used and other particulars for its identification and to enable its RANGE TO BE ESTIMATED ..."

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    1. According to Hazlett, stations could and did sue for encroachment, and the courts ruled accordingly. Also according to Hazlett there was a vibrant market in which stations bought and sold rights. It looks like one of us will actually have to read the book to trace down Hazlett's facts

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    2. John,

      I am just going by the verbiage in the act itself (see link above).

      That doesn't mean that civil suits did not occur - there could have been local / state laws that provided civil remedies for bandwidth infringement.

      Were the cases limited to local / state courts or was the federal court system involved in any of them regarding interstate transmissions?

      I would be interested in reading any of the court decisions that Hazlett brings up in his book. If you happen to have a link to any court decisions online, I am interested in reading them.

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    3. P. S.

      If I file a criminal complaint against someone because they stole something, I would expect them to be tried, convicted, and punished as the law allows.

      If I file a civil complaint (suit) against someone because they stole something, I would expect either that something to be returned or monetary compensation for whatever was stolen.

      I have no doubt that criminal complaints were filed by individual stations against each other over the time frame in question, but I presume that when you say "sue" you mean filing a civil suit (not a criminal complaint).

      If you meant "sue" to cover either circumstance, then I would say that being able to file a criminal complaint does not allow the damaged party / radio station to recoup lost resources (both time and money).

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    4. I was able to track down the case that spurred the 1927 Congressional Act.

      Tribune Company vs. Oak Leaves Broadcasting

      https://www.quimbee.com/cases/tribune-co-v-oak-leaves-broadcasting-station-inc

      This link is for a case brief (not the full court decision). After the court ruled in favor of the Chicago Tribune, both the House and Senate passed a resolution which ultimately led to the 1927 radio act.

      Ihttp://legisworks.org/congress/69/pubres-47.pdf

      "That until otherwise provided by law, no original license for the operation of any radio broadcasting station and no renewal of a license of any existing broadcasting station, shall be granted for periods longer than 90 days and no original license for the operation of any other class of radio station and no renewal of the license for an existing station of any other class than a broadcasting station shall be granted for longer periods than two years..."

      It was Judicial overreach by the Cook County court that tried to assign property rights where none were granted by Federal Law.

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    5. Sorry to be late to the party. The Oak Leaves case is discussed in my book, and in my article "The Rationality of US Regulation of the Broadcast Spectrum" (J Law & Econ 1990). Priority-in-use rules were enforced by the state court in Illinois, precisely because the Dept. of Commerce (which had been enforcing de facto property rights from 1921) withdrew its jurisdiction, announcing this change on July 9, 1926. This was Secretary Hoover's bid to induce additional demand for legislation, which he did. The Oak Leaves court did not overstep, but enforced common law in the legal vacuum created. That emerging state-level law was then over-turned by federal statute, the 1927 Radio Act, in a law largely written by the National Association of Broadcasters -- that per the explanation of Sen. C.C. Dill, D-WA, its legislative sponsor. The opinion in Oak Leaves was unpublished but is available to read, btw, as it was inserted into the Congressional Record (Senate) by Sen. Dill (Dec. 10, 1926).

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  7. What nation or region has the fastest and best internet and how do they do it?

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  8. I appreciate your animus for NN, but saying it boils down to "people want things for free," is just disingenuous. People want ISPs not to be able to discriminate between different websites. Enforcing impartiality on a utility company (unless you think internet isn't a necessary utility) hardly seems like such an imposition. Such a monopolized market isn't really going to foster competitive prices, as we can see now.

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  9. A good rule of thumb for whether to read a post on this blog: When Cochrane puts a concept (progressivism, net neutrality, liberal) in "scare quotes", stop right there.

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    1. I don't intend them as scare, but as an indication that a word has gained a political meaning quite different from its common usage, so putting it in quotes alerts readers to the ambiguities such a word can create. Should not reading and commenting focus on (heaven forbid, these days) logic and fact rather than typography?

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  10. Shouldn't Libertarians Like Net Neutrality?December 18, 2017 at 6:43 AM

    Honestly I'm bit surprised with this. If I understand correctly, net neutrality prevents ISP's from price discrimination, meaning bandwidth is sold at the same price to everyone, however this doesn't imply rationing, it's still a free market and ISP's are free to increase their prices if they're met with an increase of demand for bandwidth.

    Also from the point of view of internet companies, wouldn't repealing net neutrality be advantageous big incumbents? I mean new internet companies do not hold the same bargaining power as large incumbents such as google, amazon and friends, and the repeal of net neutrality would only increase barriers to entry of new internet companies stifling competition..

    I guess the key question here is, will this repeal competition in the ISP market? And is does the higher welfare for ISP's compensate the loss of welfare in other markets?

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  11. Net neutrality: providers don't discriminate (slow down, block, speed up) the internet usage (e.g. watch YouTube or Netflix vs read The Grumpy Economists blog).

    Of course, the YouTube or Netflix users take up more bandwidth and the bandwidth is scarce resources. But with all due respect, why this supports anti-NN? (Not very relevant here but I have enjoyed reading your blog and learned a lot for various topics.)

    There are already a range of internet products based on speed (and possible maximum data usage - wireless). And consumers are already sorted into their optimal contracts, subject to availability and budget. And the providers are selling price-discriminated products, just like airline industries selling first,business, economy classes, based on the revealed type.
    From ECO101, what I can read from anti-NN movement is that the ISP have realized that they can find the actual valuation of consumers if they can price their products based on the content use. This will allow them to extract (almost) 100% of the consumer surplus. Of course, this is efficient allocation. And this is also fantastic business, for ISPs.

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  12. If "net neutrality" meant just that everyone pays the same price, you should be equally concerned that nobody can get a discount. Business class for all isn't the greatest thing for people who are willing to give up some speed for a much lower price. Facebook was already blocked from giving away internet access in India. In reality "net neutrality" meant full on rate regulation so the FCC determines what everybody pays. Get your lobbyist ready.

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    1. Mr. Cochrane, I read your blog as part of a healthy ideological diet. I don't always agree with you, but I usually respect your input. Not so much when it comes to NN. In my opinion it's pretty clear you don't have a great understanding of what NN is in regards to modern ISPs and you frequently misinterpret the pro NN arguments as infantile whining.

      "In reality "net neutrality" meant full on rate regulation so the FCC determines what everybody pays."

      That isn't want it means and the FCC never rate regulated, nor has it ever proposed to do so. ISPs can charge whatever they want for whatever level of service they want. You're arguing a straw man.

      In a more perfect world there would be a dozen ISPs competing to give me the cheapest, most reliable, and well managed last-mile access to the mesh of networks we call the Internet. If I didn't like my ISPs service I could change it to one better suited to my needs and price point. As it stands, though, I have two less-than-stellar options that offer mostly the same service levels at the same price points.

      You're expecting monopolist utilities to act in the best interest of their customers when all of their long-term incentives are to their shareholders.

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    2. Net Neutrality doesn't impose any rate regulation. Indeed, the FCC regulations allowed ISPs to implement data caps and were fully compatible with ISPs offering consumers plans which allowed customers to vary their requested quality of service and the price to vary with that QoS. The reasons you didn't see such QoS based pricing were a result of technical issues (no good standard for consumers to indicate to the ISP their desired QoS for a given packet) and consumer dislike of such a complex pricing scheme.

      Net neutrality is just the internet analog of a law dictating that the price of cellular service can't depend on what kind of phone you slot your SIM card into. It simply defines the market in which the ISPs compete to be the market in 'blind' (i.e. content and destination ignorant) packet transmission.

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  13. On the one hand I enjoyed the story about radio spectrum (though a reader comment above makes me worry a bit about the historical accuracy).

    On the other, I almost stopped reading because I couldn’t for the life of me see how it was going to be a good analogy for Net Neutrality. I continued, but I still don't see it.

    The only way to make this historical case fit is to change the history. If, at the time, there had been regional monopolies who owned all the spectrum, then the analogy would be closer to NN, and even then it wouldn't be perfect. Notice the analysis of the problem changes in the presence of market power.

    John Cochrane, you are an astoundingly smart man when it comes to pushing around ideas within your system and I have learned a lot from your blog, but in this case you seem to have mis-judged how well your system fits.

    -JJ

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  14. As with much else, where one stands on net neutrality depends on where one sits. Consider the business model contrast between the pipeline system and internet backbone operators. Pipeline guys, according to my pipeline engineer neighbor, sell time on the line. They don't particularly care what product a customer is putting in there as long as it's non-corrosive and not so viscous as to over pressurize the pipe. If you need time on the line to move your product, you get on the schedule. Even if you don't put your product into the line, you still pay for the time. Internet Backbone operators, on the other hand, sell space on their network by the gigabyte, and in turn pay by the gigabyte to whomever their backbone hands off the packets. On a balanced network the number of packets coming into a section of network will equal the number of packets sent to the the next network, so the cost flows balance out. There have been examples of a backbone operator applying a lower priority to the packets of another, and it's generally happened because of a dispute over billing because someone like Netflix generates a great deal of one way traffic. Should the heavy users get a discount or pay a premium? There are arguments both ways, but it's important to remember the large but still limited capacity of a fiber network should generate enough revenue to build an additional increment of infrastructure. I have the feeling that regulators rarely get the rates right-sized, but maybe that's just me.

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  15. The problem here is bundling (as in the case of Microsoft with internet browsers). Cable companies provide internet access and programming. They can increase fees for people who get programming through the internet to push them back in the hands of mother cable. On top of that, programming itself is bundled, as consumers cannot shop for channels a-la-carte. In the past the government has acted to prevent companies from using their monopoly power in one service to restrict competition on complementary services. Microsoft was ordered to make it easier for software applications from competing companies to run on its OS. In energy and telephone land-lines, it forced companies engaged in both the production and transmission of services to provide non-discriminatory transmission access to companies competing with them on the production side. With all due respect to Hazlett, it will take a lot to convince me that these actions were in the wrong direction. And if they weren't, it is no different for NN.

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