Friday, August 19, 2011

The Relationship between Universal Service Reform and Incentive Auction Legislation

By Fred Campbell, President and CEO, WCAI

Reprinted from Bits on Broadband blog

"People love to categorize." Categorization helps us make sense of a complicated world. But, when categorization doesn't reflect substantial similarities, it obfuscates as much as it illuminates. So it is with communications policy, which is categorized primarily by the technologies used to deliver communications services ("stovepipes") rather than their impact on consumers. This approach to categorization obfuscates the relevant question - whether a particular regulatory approach maximizes consumer welfare (rather than the prospects of particular competitors).

The ongoing debates about broadcast incentive auctions and universal service reform offer a poignant example of such obfuscation. Because the services that are the subjects of these debates use different technologies, and are thus categorized separately, these debates are being conducted independently. When viewed from the perspective of consumer welfare, however, these debates are inherently interrelated. They both involve regulations that are intended to address the same concern - the widespread dissemination of information to consumers from a multiplicity of sources.

The core question in both debates is to what extent the government should subsidize consumer access to information. Because broadband service provides access to far more information than is possible through over the air broadcast, answering this question in the universal service debate informs the incentive auction debate: If the government subsidizes universal broadband, it would render government subsidization of over the air broadcast duplicative.

The Government Subsidizes Both Universal Service and Television Broadcast

The government subsidizes universal telephone service through mandatory fees. As I explained in a previous post, the broadcast industry is subsidized by the government through the imposition of must-carry obligations on cable providers:

As a result of the success of cable television, it had become clear by 1992 that broadcasters lacked a viable business plan. Because fewer and fewer people were watching broadcast television over the air, broadcasters were having a more difficult time selling advertisements. To prop up the dying broadcast industry, Congress decided to force cable providers to carry broadcast channels on their cable systems. Forced cable carriage ensures that broadcasters reach enough "eyeballs" to satisfy advertisers, which is how broadcasters make money.

Because only about 10% of the population actually watches television transmitted over-the-air, without government mandated must carry, most broadcasters couldn't sell enough advertisements to survive. Forced cable carriage of broadcast signals is thus an indirect government subsidy financed by cable consumers. (For a detailed must-carry discussion, see Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994) (Turner I).)

Television broadcasters also enjoy subsidized use of radio spectrum worth up to $33 billion. When Congress provided the FCC with auction authority in 1993, it required that FCC auctions promote multiple purposes (see 47 U.S.C. § 309(j)(3)), including:

  • development and rapid deployment of new technologies, products, and services;
  • recovery for the public of a portion of the value of the public spectrum resource and avoidance of unjust enrichment; and
  • efficient and intensive use of the electromagnetic spectrum.

Auctioning broadcast spectrum would support all of these Congressional objectives. For that reason, during the debates that preceded the 1996 Act, multiple bills were introduced proposing to auction digital broadcast channels. (For a detailed history, see Ellen P. Goodman, Digital Television and the Allure of Auctions: The Birth and Stillbirth of DTV Legislation, 49 FED. COMM. L.J. 517 (1997).) But Congress ultimately bowed to broadcast industry pressure and exempted from auction "initial licenses or construction permits for digital television service given to existing terrestrial broadcast licensees to replace their analog television service licenses." (See 47 U.S.C. § 309(j)(2).) As a result, broadcasters lacked economic incentives to transition to digital technology more quickly or use their spectrum more efficiently, and the public didn't recover any of the value of the public spectrum resource the broadcasters squatted on for over a decade.

These broadcast subsidies remain in place today even though "the social opportunity cost of using the TV Band for television broadcasting . . . is conservatively estimated to exceed $1 trillion (in present value)." (Thomas W. Hazlett, Unleashing the DTV BAND: A Proposal for an Overlay Auction (2009) at p. 5.) This opportunity cost dwarfs the benefits of over-the-air broadcast television. Only about 10% of the population actually watches television transmitted over the air and there is little evidence all of these viewers actually need subsidized television. Because over the air broadcast subsidies are not targeted to lower income Americans, the 10% of over the air TV watchers includes middle-class and wealthy Americans who have no need for government subsidies. Given the high opportunity costs and limited benefits of over the air broadcasting, it's hard to understand why there is any interest at all in subsidizing television.

Both Universal Broadband Service and Television Broadcast Serve the Same Purpose

Preservation of free over-the-air broadcasting was originally intended to promote the widespread dissemination of information from a multiplicity of sources. (See Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180 (1997) (Turner II).) In the Turner decisions, the Supreme Court upheld must carry legislation because broadcasting was "a principal source of information and entertainment for a great part of the Nation's population." When the Turner II decisions were issued in the 1990s, 40% of American households still relied on over the air signals for television programming. Although consumption of programming over the air had declined by the 1990s, broadcasting was still a significant source of information.

Over the last decade the facts have changed dramatically. As noted above, broadcasters now serve only about 10% of the population over the air. At the same time that over the air viewership has declined, broadband availability and subscription rates have exploded. Approximately 95% of the U.S. population has access at home to broadband service capable of delivering high quality video (4 mbps downloads) (see sixth broadband deployment report, available here), and approximately 66% of Americans use a high-speed connection at home. Because universal service reform would ensure that all Americans - regardless of their income - have access to broadband offering high quality video capabilities (just like TV), there would no longer be any rationale for subsidizing over the air television. The purpose served by over the air television - the widespread dissemination of information from a multiplicity of sources - would be served by universal broadband access.

Although government subsidies can promote consumer welfare, "[i]t is widely acknowledged that subsidies are generally economically inefficient." (Erwin H. Bulte, Richard Damania, and Ramón López, On the Gains of Committing to Inefficient Production: Corruption and Low Land Productivity in Latin America (2004) at p. 2.) Subsidizing duplicative programs that serve the same purpose would be blatantly wasteful. Such waste would be particularly egregious in this context due to the high opportunity cost of using spectrum for over the air television. Television programming can be (and primarily is) delivered via the wired Internet, cable, and fixed satellite systems; but the wired Internet, cable and fixed satellite systems cannot provide the mobility that broadcast spectrum can enable.

When universal service reform and incentive auction policies are viewed holistically, the best course of action is clear: enact both policies this year. Universal broadband service would give every American consumer access to more information from more sources than could ever be made available via broadcast television, and freeing broadcast spectrum for mobile use would help the United States meet its goal of leading the world in mobile broadband. The resulting win-win would boost the U.S. economy, create jobs, and spur innovation.

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