Testimony of Thomas W. Hazlett

Before the United States Senate Commerce Committee

The Digital Television Transition

June 9, 2004

EXIT STRATEGIES FOR THE DIGITAL TV TRANSITION

Thomas W. Hazlett[^1]

The official opening of the Advanced Television proceeding at the
Federal Communications Commission occurred in 1987. It was a rather rude
response to requests made by cellular equipment manufacturers (such as
Motorola) and public safety organizations to reallocate some part of the
little-used TV band for other services. Yet, that spectrum -- an
extremely productive block of frequencies that is more than twice the
bandwidth of all the airwaves allotted mobile phone service -- continues
to support traditional broadcast TV service and virtually nothing else.
That constitutes a regulatory debacle for two reasons.

The first is that U.S. consumers would absolutely love the wireless
services that the TV band could host. We know, from analyzing the
intense usage of the commercial mobile radio services (CMRS) bands, that
there is huge pent-up demand to utilize additional bandwidth for voice
and data. Currently, wireless phone service in the United States
generates about \$90 billion in annual revenues, and historical data
indicate that consumer surplus is at least another \$80 annually.[^2]

In recent economic research, Roberto Muñoz and I have found that the
price of mobile phone service is strongly related to two important
variables: the degree of competition among suppliers, and the amount of
bandwidth made available to wireless networks. Based on a model
calibrated with data from 29 countries, we estimate that allowing
another 80 MHz of radio spectrum to be used by cellular operators would
lower per-minute wireless charges nearly 25%, increasing usage by about
47% and generating over \$30 billion annually in consumer benefits.
Allowing operators to make productive use of greater TV band radio
spectrum would result in still higher social gains. See Figure 1.
(Please note that these are gains accruing to consumers rather than
suppliers. They should not be confused with license values or expected
auction receipts, which are relatively small.)

+---------+------+-------+-------+-------+---------+-------+---------+
| T       |      |       |       |       |         |       |         |
| able 1. |      |       |       |       |         |       |         |
| Annual  |      |       |       |       |         |       |         |
| C       |      |       |       |       |         |       |         |
| onsumer |      |       |       |       |         |       |         |
| Gains   |      |       |       |       |         |       |         |
| from    |      |       |       |       |         |       |         |
| In      |      |       |       |       |         |       |         |
| creased |      |       |       |       |         |       |         |
| Avail   |      |       |       |       |         |       |         |
| ability |      |       |       |       |         |       |         |
| of CMRS |      |       |       |       |         |       |         |
| S       |      |       |       |       |         |       |         |
| pectrum |      |       |       |       |         |       |         |
+---------+------+-------+-------+-------+---------+-------+---------+
|         |      | *Inc  |       |       |         |       |         |
|         |      | rease |       |       |         |       |         |
|         |      | in    |       |       |         |       |         |
|         |      | Spe   |       |       |         |       |         |
|         |      | ctrum |       |       |         |       |         |
|         |      | Avai  |       |       |         |       |         |
|         |      | lable |       |       |         |       |         |
|         |      | for   |       |       |         |       |         |
|         |      | CMRS* |       |       |         |       |         |
+---------+------+-------+-------+-------+---------+-------+---------+
|         |      | 80    |       | 140   |         | 200   |         |
|         |      | MHz   |       | MHz   |         | MHz   |         |
+---------+------+-------+-------+-------+---------+-------+---------+
| V       | Ini  | Final | \%    | Final | \%      | Final | \%      |
| ariable | tial | Value | C     | Value | Change  | Value | Change  |
|         | V    |       | hange |       |         |       |         |
|         | alue |       |       |       |         |       |         |
+---------+------+-------+-------+-------+---------+-------+---------+
| Average | 0    | 0.084 | -2    | 0.069 | -38.42% | 0.056 | -49.97% |
|         | .112 |       | 4.59% |       |         |       |         |
| Pri     |      |       |       |       |         |       |         |
| ce/min. |      |       |       |       |         |       |         |
+---------+------+-------+-------+-------+---------+-------+---------+
| Min. of | 78   | 11    | 4     | 13    | 73.30%  | 15    | 95.35%  |
| us      | ,340 | 5,098 | 6.92% | 5,763 |         | 3,038 |         |
| e/month |      |       |       |       |         |       |         |
|         |      |       |       |       |         |       |         |
| (mi     |      |       |       |       |         |       |         |
| llions) |      |       |       |       |         |       |         |
+---------+------+-------+-------+-------+---------+-------+---------+
| Change  |      | \$3   |       | \$5   |         | \$7   |         |
| in      |      | 1,850 |       | 5,072 |         | 7,419 |         |
| C       |      |       |       |       |         |       |         |
| onsumer |      |       |       |       |         |       |         |
| Surplus |      |       |       |       |         |       |         |
| (mi     |      |       |       |       |         |       |         |
| llions) |      |       |       |       |         |       |         |
+---------+------+-------+-------+-------+---------+-------+---------+

Source: Results are estimates based on empirical model calibrated in:
Thomas W. Hazlett and Roberto Muñoz, *Welfare Effects of Spectrum
Policy*, Manhattan Institute for Policy Research (June 2004).

One reason that these gains are so large is that the U.S. is
spectrum-hungry. European Union countries average between 250 and 300
MHz of allocated radio spectrum, while the U.S. struggles to allocate
189 MHz, nearly 30 MHz of which is involved in the NextWave licensing
fiasco and has yet to be productively utilized. In contrast, Germany
uses 302 MHz of spectrum, the United Kingdom 340, and the Netherlands
355. If the U.S. could come close to the spectrum allocations of these
nations, efficiency would dramatically increase. Consumers would enjoy
lower prices and much better service, with cellphone use and highspeed
wireless data being far more widely deployed. Additionally, American
business users would become much more competitive in both domestic and
international markets.

The second basic reason the TV band should be made available for
alternative uses is that it offers Americans very little value in its
current deployment. Let us be very clear here. The *programs* TV
broadcasters create are popular and generate substantial consumer value.
The 400 MHz *distribution channel* TV broadcasters plug up, however, is
hugely inefficient. Only about 10 million U.S. households remain without
subscription service. At \$300 for a cable "drop" or a satellite dish, a
price that includes installation, virtually all of these homes could be
added to existing networks at a one-time cost of under \$3 billion. From
there, the retransmission of broadcast programming has zero marginal
cost to society. While various details of an all-subscriber transition
are interesting, none bear costs that come close to the magnitude of the
benefits garnered in freeing up radio spectrum for advanced wireless
services.

Unfortunately, this re-harvesting of valuable frequency space has become
enmeshed in the digital TV transition, now playing in slow motion for
nearly two decades. There are hopeful signs, however, that there may be
light -- if not at the end of the tunnel -- at least gleaming through a
crack in the ceiling. The most important is that policy makers appear
willing to jettison the industrial policy goal of "high definition
television" in favor of pushing airwave reallocation forward. The
interminable waste of valuable resources is at long last receiving the
public frustration it deserves.

Yet, it is vital that we understand why the digital TV transition has
not worked if we are to chart a successful exit. Government has planned
this entire policy, and so politics, not market efficiencies, have
driven the process. There is nothing exceptional about the digital TV
transition -- it is a classic "tragedy of the commons." Nor is the
problem particularly challenging in technical terms; Americans are
constantly upgrading. But the economic incentives have to be right.

Such incentives are in place where well-defined rights to use radio
spectrum are found. Take the strikingly *un*disastrous analog-to-digital
transition in cellular. When FCC licenses were awarded in the 1980s,
mobile phone carriers were mandated to install analog systems. But the
advantages of digital transmissions were already apparent. In 1988,
cellular operators were belatedly allowed to use digital standards. By
this time, however, scores of major markets -- with millions of
subscribers \-- were offering analog cellular service.

Over a number of years, mobile phone carriers invested billions of
dollars to upgrade to digital. They carefully migrated customers,
coordinating shared use of cellular frequencies. Carriers gave away
digital handsets to customers, subsidizing technology adoption and
smoothing transition. This was very expensive but economically smart: by
getting customers to use better phones, calls spewed less interference,
leaving greater capacity for others. As network operators with
exclusively-assigned rights, cellular carriers captured some of the
increase in value.

You'll note that no calamities befell the transition to digital
cellular, a delicate and complex process that is nearing completion. The
situation contrasts sharply with that in television where rights to
control radio spectrum are extremely fragmented. Instead of seeking to
subsidize transition, incumbents actively seek to sabotage it. This is
not a matter of bad character but of poor public policy. Economic
incentives -- and the behavior of both incumbents and entrants \-- would
change instantly were two things to happen:

1\. Incumbent broadcasters were awarded flexible use rights to the
airspace implicitly defined by their TV station licenses;

2\. Similarly flexible rights to use the spectrum allocated to each
unoccupied TV channel were allocated to overlay licenses and sold at
auction.

This is the plan put forth some eight years ago by U.S. Senator Larry
Pressler.[^3] It relies on the "overlay" concept successfully deployed
in the PCS band,[^4] where incumbent users in a band are grandfathered
while a new licensee obtains permission to use surrounding frequency
space. Vast bandwidth is available for productive use in the TV band.
There are only about 1600 full power TV stations for 210 TV markets \--
8 stations per market, compared to a total of between 49 and 67
allocated channels, depending on how one counts. With the right economic
incentives, broadcasters and other wireless companies would negotiate to
figure out reasonable interference rules, and a plan to rationally use
airspace in the new millennium. Rather than blocking new technologies,
broadcast stations would seek out more efficient video distribution
platforms, capturing part of the social gains created.

Getting these economic incentives in place, of course, is no mean task:
broadcast TV regulation is a public policy train wreck. Issuing
exclusively-assigned, flexible use spectrum rights -- similar to those
enjoyed by CMRS operators -- offers a reliable exit strategy. What is to
be avoided is to impose central planning to yet another generation of
wireless service. That is the approach represented by the FCC's current
rule making to consider authorization of unlicensed devices accessing
the TV band.

By imposing government-mandated sharing rules, the FCC would block
market forces from revealing the value of the band to entrepreneurs and
consumers. Technologies not fitting into the FCC's approved list of very
low powered devices -- including powerful 4G wireless broadband systems
now deployed in Australia and other countries \-- would be ruled out by
administrative fiat. This approach is the cause of the current problem.
The superior solution is to let technologies be selected by market
rivals.

The outcome would be that networks would compete to offer current
services at much lower prices, and jockey to introduce an array of
innovative applications. This is the pro-consumer way to reform, and it
is the one way to curb windfalls without punishing consumers with the
collateral damage of delay and inefficiency. Seventeen years of "digital
TV transition" have already inflicted quite enough of both.

[^1]: Senior Fellow, Manhattan Institute for Policy Research; former
    Chief Economist, Federal Communications Commission. Relevant
    research by the author includes, *The Rationality of U.S. Regulation
    of the Broadcast Spectrum*, 33 [Journal of Law &
    Economics]{.smallcaps} (April 1990); *Assigning Property Rights to
    Radio Spectrum Users: Why Did FCC License Auctions Take 67 Years?*
    41 [Journal of Law & Economics]{.smallcaps} (Oct. 1998); *An Essay
    on Airwave Allocation Policy*, 14 [Harvard Journal on Law &
    Technology]{.smallcaps} (Spring 2001); [*The U.S. Digital TV
    Transition: Time to Toss the Negroponte
    Switch*](http://www.aei.brookings.org/publications/working/working_01_15.pdf)\
    AEI-Brookings Joint Center for Regulatory Studies Working Paper
    01-15 (Nov. 2001); *[Property Rights and Wireless License
    Values](http://www.aei-brookings.org/publications/abstract.php?pid=631),*
    AEI-Brookings Joint Center for Regulatory Studies Working Paper
    04-08 (March 2004); We *Don't Want our DTV*, [Wall Street
    Journal]{.smallcaps} (Aug. 8, 2002); *Finally, Something Good on
    German Television*, [Slate]{.smallcaps} (Oct. 7, 2003); [*As
    Berlin\'s TVs Go Digital, Airwaves Lie
    Unused*](http://www.manhattan-institute.org/html/_wsj-as_berlins_tvs.htm),
    [Wall Street Journal Europe (Nov. 24, 20]{.smallcaps}03); [*Would
    Last TV Station Turn Out the
    Lights*](http://www.hillnews.com/news/032304/ss_hazlett.aspx) [The
    Hill (Mach 23, 2004).]{.smallcaps} These articles are available
    online:
    [www.manhattan-institute.org/scholars/hazlett.html](http://www.manhattan-institute.org/scholars/hazlett.html).
    Contact: twhazlett@yahoo.com

[^2]: This calculation is given in Thomas W. Hazlett and Matthew L.
    Spitzer, *Advanced Wireless Services, Spectrum Sharing, and the
    Economics of an Interference Temperature*, paper submitted to the
    Federal Communications Commission, *In the Matter of Establishment
    of an Interference Temperature Metric to Quantify and Manage
    Interference and to Expand Available Unlicensed Operation in Certain
    Fixed, Mobile and Satellite Frequency Bands*, ET Docket No. 03-237
    (April 5, 2004).

[^3]: 142 CONG. REC. 10672, 10672-76 (1996). See discussion in: Hazlett,
    *An Essay on Airwave Allocation Policy,* [14 Harvard Journal of Law
    & Technology]{.smallcaps} (2001), 442-43.

[^4]: See Peter Cramton, Evan Kwerel, and John Williams, *Efficient
    Relocation of Spectrum Incumbents*, 41 [Journal of Law &
    Economics]{.smallcaps} (Oct. 1998), 647-675.