TechKnowledge No. 87

Sen. McCain’s Plan to Liberate the Broadcast Spectrum

By Adam D. Thierer
September 30, 2004

Last week, Sen. John McCain (R-AZ) introduced an important new bill dealing with the digital television (DTV) transition and the vexing question of how to get broadcasters to return their old analog spectrum. The bill, S. 2820, proposed a controversial new policy ($1 billion in subsidies for set-top converter boxes to help some households convert to DTV) to correct for a controversial old policy (the misguided giveaway of $10-$100 billion worth of free spectrum to the broadcast industry). The bill also demanded that broadcasters return their old analog spectrum by 2009, two years after the original deadline. While not the optimal policy approach, the new McCain bill offered a quick way out of the DTV industrial policy fiasco and would have helped free up massive amounts of valuable spectrum for other important wireless uses. Unfortunately, however, the Senate Commerce Committee has already voted 13-9 to water-down the McCain bill and let broadcasters hold onto most the spectrum they were suppose to return.

A Misguided Giveaway. By way of background, as part of the Telecommunications Act of 1996, every broadcaster in the U.S. was loaned free of charge a second 6 MHz block of spectrum to help them make the DTV transition. (Every broadcaster already possessed a 6 MHz license which they use to transmit analog broadcast signals to rooftop antennas). What was so scandalous about the award of the second 6 MHz license was that so many other high-tech companies were salivating at the prospect of bidding large sums for that spectrum and putting it to alternative uses. America might already have had a wireless broadband infrastructure if Congress had not given all this beach-front spectrum to the broadcasters for little more than a promise that they would return their old analog spectrum licenses by 2007.

But even the return of that old analog spectrum remains uncertain. A subsequent DTV decision gave broadcasters the right to transmit analog signals on their old 6 MHz license until 2007, or until 85 percent of Americans had made the migration to digital television. Only then would they have to return the old spectrum to the government. Getting to that 85 percent threshold is taking longer than most policy makers expected, with fewer than 10 percent of American homes possessing DTV receiving equipment. Consequently, barring additional government intervention to correct for this previous mistake, it is going to take a lot longer-some experts estimate perhaps until 2020-before the 85 percent threshold is met.

Meanwhile, the opportunity costs associated with this giveaway have grown larger with each passing year. Countless other wireless service providers are being denied the opportunity to use that same spectrum for alternative applications. Consequently, Americans are being denied access to important wireless services of both the commercial and public safety variety. Equally troubling is that fact that in an attempt to keep the DTV transition from derailing entirely, Congress and the FCC keep imposing additional mandates on other industries. For example, in August 2002, the FCC mandated that television set manufacturers include digital tuners in all their new sets by 2006, even though the tuners will add more than $200 to the cost of each new television. Likewise, there’s talk of new “digital must-carry” mandates on cable providers. And a new “broadcast flag” regulatory mechanism has been mandated by the FCC in the name of protecting digital TV signals from copyright infringement.

The Necessity of an Escape Plan. With this industrial policy fiasco spiraling out of control, Congress must find a way to get out of this mess. Policymakers need to realize that it is vital they find a way to free up at least some of the valuable spectrum they have given to the broadcasters as quickly as possible. Countless other wireless providers are starving for access to any spectrum they can get, and the broadcast spectrum is a mother lode of beach-front quality spectrum. But getting it back will be tricky since most broadcasters are now making a good faith effort to make the digital transition and many consumers have purchased the hardware (TVs, set-top boxes, antennas) needed to receive DTV. Congress can’t just pull the rug out from underneath the transition.

The good news is that there are two very reliable alternative DTV delivery paths available to which both broadcasters and the public can turn: cable and satellite. Almost 90 percent of American homes already subscribe to cable or satellite systems and these providers made a natural digital migration many years ago. Consequently, the DTV signals that traditional broadcasters want to get to the public can be delivered via those cable and satellite systems once retransmission deals are cut voluntarily. Must-carry mandates should not be imposed for this to occur. Cable and satellite operators want that valuable DTV programming that traditional broadcasters offer, so they will find a way to contract for carriage.

But there remains one big problem: What should Congress do about the small percentage of households, many of which are elderly or low-income, that do not have a cable or satellite subscription? Politicians will be extremely sensitive to the needs of this group, which continues to rely on over-the-air broadcast signals and rooftop antennas to receive television signals. And broadcasters will likely employ “leave no TV viewer behind” rhetoric to strike fear in the heart of Congress.

McCain’s Practical Solution. Sen. McCain-a long-standing critic of the DTV spectrum giveaway-is eager to reclaim the old spectrum for both commercial and public safety uses, but he understands the political problem of leaving some viewers stranded. Few members of Congress will sign off on any spectrum take-back plan that results in some homes losing their TV signals. To account for this, McCain’s bill would provide set-top box (STB) subsidies to low-income households who continue to rely on analog over-the-air signals, allowing them to move over to cable and satellite systems immediately. The price tag for the STB subsidy is steep-$1 billion-but the money would ultimately come from the revenues generated from auctioning the returned spectrum, which will generate tens of billions.

It is regrettable that it has come to this, but the McCain plan may be the only way out of an industrial policy fiasco that has cost America untold billions in terms of lost wireless innovation. Again, Congress’ top priority should be liberalization of the broadcast spectrum band to open up a vast new frontier of spectrum for wireless innovation. The only other realistic alternative is simply to let the broadcasters keep both licenses and use them-and more importantly, sell them-for whatever purpose they wish. Such a policy would encourage the broadcasters to eventually release much of their valuable spectrum on the secondary market. But many critics will find this additional giveaway to the broadcasters unconscionable, especially considering the princely sums sale of the spectrum will net. Just surrendering and giving the broadcasters all the spectrum will be viewed by many as an unjust windfall. But giving the broadcasters the equivalent of property rights in both licenses would allow them to realize the opportunity costs of hoarding that spectrum and then move it to its highest and best use.

The McCain bill offered a second-best way out of the DTV mess, but the Senate Commerce Committee’s recent vote to force only a few stations to return their old spectrum largely guts McCain’s effort. Consequently, the open-ended DTV transition remains intact and countless companies and consumers are again denied access to valuable spectrum needed for other purposes.

Adam Thierer (athierer [at] cato [dot] org) is the director of telecommunications studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.