Transcripts For CSPAN3 Radio Spectrum Regulation History 201

He handles telecommunications and regulatory issues. Prior to joining us here he was Vice President for policy of the competitive and reprise institute. He also served as deputy chief at the office of lands and policy at the fcc and was at one time associate director of the president s council on competitiveness in the office of Vice President dan quayle. Please join me in welcoming james gattuso. James . [applause] mr. Gattuso i will speak from here. A more casual approach. We are here to talk about spectrum policy. If you want to talk about Net Neutrality you are in the wrong place. This is probably the only gathering of people today on key fcc issues that are not talking about Net Neutrality. We will see that as a good thing. It is hard to believe just a few decades ago spectrum in the , United States, and around the world was one of the most constrained resources on earth. Every detail of the use of radio frequency was dictated by the fcc or directed by the u. S. Government. You had taxi radios allocated by the fcc. Signaling allocated by the fcc. Firefighters, forest firefighters had their walkietalkies regulated by the fcc. In fact, at one time it was commonplace to see unused firefighting frequencies in manhattan while there were unused taxi radio frequencies in wyoming. That is what we learned to live with. These are the inefficiencies of the system. It was abused. The System Limited competition. It subjected them to political interference, as hard as it is to believe. In the fair use doctrine. Today the system has been freed from this frankly sovietlike system. It is largely put that in largely allowed to be in markets direct. It has been the largest and most successful privatization in u. S. History. Think about that. When i first came to the heritage foundation, i was working on transportation issues. The sale of conrail was a big privatization item on the agenda. That raised about 1. 7 billion, i think. That is nothing compared to what was achieved in spectrum. And remarkably, this revolution in public policy, which is so rare in washington nothing gets done, especially this big to goh through through was achieved with very little partisan acrimony. There was acrimony between industries, between us. [laughter] mr. Gattuso but it was largely partisan. This was something that was flexibility, liberalization, democratic and republican administrations, both. Our speaker today has written a book on all of this. Actually knows about the things i am raising here. Most of what i know comes from tom, anyway. He will speak for about 20 minutes, then we have some commenters who will correct what he says afterwards. For those of you who dont know tom, he currently is at clemson university. Before that he was at george mason university, wharton school, American Enterprise institute all following telecommunications and spectrum policy. And he also served as chief economist with the federal Communications Commission, which was the highlight of his career. [laughter] mr. Gattuso just as an aside because i have gone off script already, i still remember when he was first appointed. He said that the chairman who a who was a good conservative but not wanted to take things one step at a time. He said, has tom said anything that would be embarrassing . [laughter] mr. Gattuso you passed on that question. Every one of his opeds for two years i dont know how he got through. But it was one of i count that as one of the major accomplishments in my short career at the fcc. [laughter] tussaud gattuso anyway, let me turn it over to tom hazlett. Mr. Hazlett thank you very much, james, and i do fondly recall working with you at the fcc with bob pepper and i am delighted that heritage has invited me here today and it invited some of you to be here. I am a professor now at clemson university, and so i must start with a shout out to clemson university. This is last january, in case you missed it. Go tigers. I did live here for 15 years until 2014, so we have gotten lucky on the sports front, and it is great being at a fun school. But in my spare time when im not worried about the Football Team ive been working on this book. The political spectrum, i hope you get a chance to buy it and read it, in reverse order, if you will. But it is officially published on may 23. Going this way . Oops, there we go. Ok, it was a little sticky. Ok. In brief, what were going to talk about today, Herbert Hoover and the 1927 radio act. Dont get too excited. The vast wasteland. The price system is suggested by an economist. Not taken too seriously at the outset. Then the toaster model. And then the liberalization that came after that. I will give a story from the book in part about the gentleman on the innovative front, Edwin Howard Armstrong and steve jobs, who i assume most of you know. More spectrum, please. The story on radio spectrum starts in about 1895, when two radios were put together by an inventor over in england and communications took place over some distance. And the radio was here and not too much happened, although there were applications , certainly. In world war i, radio became an important application and of some interest. In the marketplace, there was not a lot of reason to be concerned about wireless because there were very few radios and very little interference that would take place for one user versus another. That starts to change, and quickly, in 1920 when a Radio Station in pittsburgh, pennsylvania decided to blast out at high power over an entire area broadcasting, trying to hit thousands, if not more, receivers. It was not pointtopoint anymore to communicate say from ship to shore, now radio became what the stations hoped was a Mass Media Service and that change in Business Model really changed everything. There were conflicts. The transmissions of one station could make it more difficult for the listeners of another station to conduct their business, to hear the signals they wanted to hear. And there has been a lot of commentary over the years and even 100 years later about what was called and i love this phrase from the United States navy etheric bedlam. It turns out there was a gaseous ,ubstance, either, ether through which these signals traveled, but anyway etheric , bedlam, was the phrase they chose to show there was chaos. They came to be a standard view of what developed in the marketplace. In the 1920s, u. S. Radio broadcasting world. And it comes from most notably the United States Supreme Court. I call this mythcalculation, because there was a stylized set of facts put together and they can be captured here in the United States court decision. Supreme court decision. In the court said the allegation 1927, of frequencies was left to the private sector and the result was chaos. Without government control, the medium would be of little use because of the cacophony of competing voices. So, one of the things i like about that is the United States Supreme Court misspelled cacophony. But there was more wrong, it was pretty spellcheck prespell check, so you have to give them a break on that. But there was more wrong than just a spelling. Prior to the 1927 radio act, there was a very robust market in new technology. And there are rules of the road. There is not generic stearic bedlam, thereric are rules. The rules of the road were forced by Herbert Hoover, secretary of commerce. He had authority under a 1912 radio act to minimize interference and the department use what is a very standard technique in commonlaw, priority in use. To say that when a broadcaster had an established service that encroachment from others would be stopped. Just on that simple set of rules, a burgeoning market develops. In fact by 1926, this was all pre1927 radio act, they were about 5 million u. S. Radio households. They were buying radio consoles, not like these little sets or receiver chips we know today. These are multihundred dollar sets in current dollars. These are very expensive investments, but there is a craze. Radio is part of it. I could show you the numbers of sales and so forth, but this is better. Art deco covers from news newsmagazine, and you can see it has already entered the world of romance. By 1926, things are starting to fall apart in the social scheme of things. This looks like a contemporary situation where on the wedding night, the newly married couple is now apparently on their honeymoon and she is already crying because he is preoccupied with his radio. So you look at this and say, we have made a lot of progress. Over 90 years we now have gender equity. Maybe today he would likely to be crying because she is on her phone. But this was the world of radio. Already developing quickly and impressively in the preregulation era. What happens . The system was working. In fact, it worked too well for Herbert Hoover. Hoover was very entrepreneurial and intelligent government official. He had been one of the most successful government engineers in the early part of the century and had famously and joined famously joined government in world war i in the relief belgian relief effort and became prized for his skill and efficiency. He also know a lot about the emerging Radio Technology into technology. In fact the rules he put into , place were important in sponsoring development of the industry. But as a regulator, hoover made it clear he did not care about limiting interference. He wanted more jurisdiction, more authority to determine actually not just how markets developed but who got to , broadcast and what they said. This was a popular view of amongst other policymakers, republicans and democrats alike , because they wanted this obviously influential medium of Public Opinion to have some regulatory component that could be influenced from washington. At the same time, the industry as it was developing exhibited some pronounced, standard in , hindsight, standard elements of what has come to be known as industry capture. They wanted protection. These are major commercial Radio Stations that pop up and become they wanted protection from entry. They thought the firstcome, firstserved rules was fine for what was then. But it could ban entry on new bands as the industry extended. So strategically, hoover stopped enforcing these priority in use rules. This actually occurs on a particular day when he puts out a press announcement saying there will be no more enforcement, and that does invite entry of a couple hundred stations. There were about 550 stations and 200 more quickly entered the market. There is a lot of moving around amongst the stations. And there is some complaint. In fact they called it at the time the period of the breaking of the law. So you do get some of what the navy might call etheric bedlam. It could be fixed by restoring the law in various means. Either through Court Litigation or of course by a statute that revisits the questions and established rule of the road that adopts the mechanisms already in place. During the breakdown of the law, septembernovember 1926, there is a court case in the state of illinois. It is not the top headline. This is the next headline, court fixes radio rights in air. Wgn wins. That was a headline from the paper that owned that station in 1926. They actually go to court because interloper during the breakdown period when congress was not enforcing the rules, and interloper comes in and starts to lose their frequency assignment and broadcasts, in wgns eyes, too close. Wgn owned by the Chicago Tribune means worlds greatest newspaper. So they go to court. A judge a cook county judge gets this case. First impression reviews radio development, radio law, analogs it to water rights in the west and you have a scarce resource that he says, well it might be pioneered or homesteaded by certain users and under the common law doctrine, priority of use, awards wgn Property Rights. That is what you see here being reported here on the newspaper. I think it is charming if you go back 100 years in a chicago newspaper and pick out a front page, it is not unlikely you will have a top headline that will have something to do with indicting a municipal official. So [chuckling] mr. Hazlett so there you have it. The other story is quite impressive. It did impress people at the time. Property rights maybe created. And it goes on and so forth. Congress takes it seriously and actually the decision is not published in illinois but it is published in the Senate Records december 10, 1926. There is urgency during this period. This adds to it. The house and senate after years of bickering about what the new regulation looks like, they get together compromise, and free the federal Radio Commission with the radio act february 23, 1927. The brainchild of Herbert Hoover, signed into law by president coolidge. Since that day we have had what i would call the political spectrum. There is a Public Interest standard for allocating radio waves. It is administrative allocation. The explicit nature of the program is that markets really cannot do this job. Government has to plan out what people do with radio spectrum and they have to planet in the Public Interest. A very vague standard that means many things to many administrations. And anybody with a new Radio Technology has to ask for permission and get radio spectrum rights assigned specifically or them. This has been called, mother may i. There was a commission created in 1934. On the wireless side we carried it forward and renamed it the federal Communications Commission. We had that regime 90 years later as we stand here today. Immediately there is output restriction on the market. Incumbent commercial stations are delighted for the next couple years. There are many small stations owned by nonprofit stations. They are knocked off the air. The Major Enterprises and commercial enterprises do very well. And ever since we have had this very protectionist system where new technology has had to pass the mother may i test, and things stretch out for years or decades and often entire new competitive opportunities are missed. That is called silence of the entrants, in the book. And there is another part of the story. The story takes a few twists. There are visionaries in the book. Here is one of them. A british economist who came to the u. S. Started nosing around in the 1950s and he thought these arguments given for why we have this special central allocation regime did not make a lot of sense. Yes, access to radio spectrum may be a scarce scarce right or resource but we had a lot of other things that are scarce and they are assigned by prices through competitive markets and it seems to work pretty well. Why not this . Well, it was not clear to coase that it would work, but he saw that there were a lot of the imperfections in the existing system. A lot of mother may i . And inefficiencies that resulted from competition and not take place. The advocated at least a test where we would have private ownership and frequencies and we would distribute the rights by auction to competitive bidders. In we would allow simple marketplace transactions, what he called the price system, to allocate radio spectrum. This id was mocked and savaged by the experts and by the regulators. They said, when coase testified at the federal Communications Commission in 1959, the first question, tell us professor, are you spoofing is . Is is a big joke . Then they awarded him a nobel prize in economics to sort of make up for it, and that was nice. One of the nice things about coase was he lived to be 102 years old. He sees a lot change in the world. If youre going to be castigated and treated with ridicule early in your career, that is my suggestion. Live a long time and see if it turns out better. Coase did. He passed away in 2013. Along the way, coase got to see markets take his suggestion. It wasnt that people said he was right, but they were a lot of factors that drove this. And certainly his enunciation of an alternative regime was among them. Most particularly we got away from mother may i, where we had a world in which everything done through wireless needed a specific authorization. We went to much more generic licenses, de facto Property Rights, where we allow private properties to figure out with their own networks are, what devices use those networks, and how interference is going to work between the users. In essence we delegated all this complexity about how to coordinate Economic Activity to competitors in the marketplace. We got rid of that. In particular, parts of the wireless world. Particular frequency and bands. Not generically. It is a very limited project but we now have very important slices of radio spectrum, proof of concept that the notion works pretty well and the rules are available to us to move forward in we had examples to prove it. And we will do that with the tale of two technologies. Meet professor Edwin Howard Armstrong. He preferred to go by the name of colonel because he served in the u. S. Military in both world wars. He literally graduated and was immediately added to the faculty to teach physics. Here is a picture of him in 1922. As a professor at columbia he opted out of taking a salary. He did not want to be on committees. He was the largest shareholder in the Radio Corporation of america in the 1920s with his patents. He decided to use the graduate students to do his research. It was a good deal for both parties. Anyway, i love this picture, which is in the book. The worlds