In deciding the pending spectrum issues, the FCC is facing two key issues. The first is the nation needs more spectrum to feed the growing demand for mobile broadband communications. The second is over-the-air broadcasting is facing unprecedented marketplace competition, with serious financial turmoil threatening its long-term viability.
With those issues framing the debate, the FCC is considering five options. Sources said the commission would probably choose one of the five. Blair Levin, the executive director of the FCC’s Omnibus Broadband Initiative, is the government’s man in charge. He’s been asking questions and trying to determine an appropriate solution that works for everyone.
Each of the five options was outlined in a paper published by the Progress and Freedom Foundation, a digital think tank sponsored by industry giants including Apple, Comcast, Disney, Microsoft, Google, AT&T, Verizon, Sony, Time Warner and News Corp.
The five options include:
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 permits incumbents to repurchase their existing rights at no net cost to themselves. The second 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 group’s 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, the foundation said 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, because 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.
The FCC and Congress want to avoid a major battle with broadcasters over the spectrum issue. They are seeking a deal that broadcasters will find acceptable. “When we speak of an offer [broadcasters] can’t refuse, we mean one so attractive that no rational businessperson or investor would pass it up,” said the report. “It is essential broadcasters be willing partners in the deal, and be full participants in the process of shaping its contours.”
Perhaps a sour economy, new competition in the television business and the large handwriting on the wall will give over-the-air broadcasters a way out they would have never considered in a previous, more profitable era.