How Deregulation Gave Us FM Radio, HBO, and the iPhone
The FCC is designed to protect incumbents, enrich politicians, and screw consumers, says economist Thomas Hazlett.
"We've gone to a modern [broadcast] system that has a lot of places where stuff can happen without permission," says Thomas W. Hazlett, who's the FCC's former chief economist, a professor at Clemson University, and author of the new book The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone. "And we have seen that the smartphone revolution and some other great stuff in the wireless space has really burgeoned…That comes from deregulation."
So-called net neutrality rules are designed to solve a non-existent problem and threaten to restrict consumer choice, Hazlett tells Reason's Nick Gillespie. "The travesty is there's already a regulatory scheme [to address anti-competitive behavior]—it's called antitrust law."
Greater autonomy and consumer freedom led to the development of cable television, the smartphone revolution, and the modern internet. While we've come a long way from the old days of mother-may-I pleading with the FCC to grant licenses for new technology, Hazlett says, "there's a lot farther to go and there's a lot of stuff out there that's being suppressed."
He points to the history of radio and television. Herbert Hoover and Lyndon Johnson exercised extraordinary control over spectrum allocation, which they used for their own political and financial gain. With liberalization, we now have hundreds of hours of varied television programming as compared to the big three broadcast networks of the '60s, an abundance of choices in smartphone providers and networks as compared to the Ma Bell monopoly, and more to come.
Hazlett also discusses his views on current FCC Chairman Ajit Pai, how the FCC delayed the arrival of cable television to protect incumbent broadcasters, and "the most infamous statement ever made by an FCC regulator" in a 1981 Q&A with Reason magazine.
Interview by Nick Gillespie. Edited by Justin Monticello. Cameras by Todd Krainin and Mark McDaniel. Music by RW Smith.
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This is a rush transcript—check all quotes against the audio for accuracy.
Nick Gillespie: HI. I'm Nick Gillespie for Reason. Today, we're talking with Thomas Winslow Hazlett, an economics professor at Clemson, a long-time Reason contributor, former chief economist at the Federal Communications Commission, and author most recently of the epic new book, The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone.
Tom, thanks for talking to us.
Thomas Hazlett: Thanks for having me, Nick.
Nick Gillespie: Your book is a masterful counterblast, I think, to the intellectual status quo when it comes to broadcasting, cable, Internet, especially related to things like spectrum auctions and net neutrality and whatnot. Your large argument is that government inhibits innovation rather than encourages it. Is that accurate?
Thomas Hazlett: Yeah, that's the starting point, but I certainly go farther, a lot farther in this book, because there has been significant liberalization, and we learn a lot from the directions we've gone. We see the suppression through administrative allocations of spectrum, which just means that we have this Mother-may-I system where the government's in charge of who does what in wireless and has to give explicit permission. We've gone from a system like that to a modern system that has a lot of places where stuff can happen without permission.
Nick Gillespie: Right.
Thomas Hazlett: We have seen that what we call perhaps the smartphone revolution and some other great stuff in the wireless space has really burgeoned. We have these emerging networks and these ecosystems. That comes from deregulation.
Nick Gillespie: Is it deregulation or is it government … I guess and different examples, and we'll talk about those, but sometimes it's explicit deregulation, or the government saying, "We're going to get out of this. We're not going to do anything." Other times, is it benign neglect or innovators and entrepreneurs doing what some people call permissionless innovation, where they don't really care too much and they just go ahead and do something, then figure out how to explain it later and justify it?
Thomas Hazlett: Right. Yeah, great question. I think one of the problems we've had in spectrum is that you can't really have benign neglect. There are rules, and if you have an innovation that needs access to radio spectrum because it's a wireless device, you have to go and ask for some kind of authorization. We've had to make a lot of explicit rules, and some of them have been in the right direction. That's very important to state. It's not just, "Yeah, the government did this wrong and, boy, it's even worse over here. They did this wrong." It's not just bad, worse, worst. We have gone in some directions much better. There's a lot farther to go, though, and there's a lot of stuff out there that's being suppressed. We don't know what most of that is, but there's a lot of innovation that could come if we lowered those barriers still more.
Nick Gillespie: Tell us the story about Herbert Hoover and the creation of the Federal Radio Commission in 1927 and how that kind of undergirds … Obviously, it's the starting point of your book, but it's also the concept that spectrum is politicized in ways that are problematic.
Thomas Hazlett: Yeah. Here's a great historical story for you.
We got broadcasting in 1920 officially, when KDK in Pittsburgh started this new business of just putting up a tall transmitter and blasting everywhere around some programming. It could be received. It was a one-way communication, and radio receivers would pick up programming for news and entertainment.
It caught on like wildfire. Within two years, there were 500 broadcasting stations in the United States. The issue of scarcity in the airwaves, congestion, conflict, actually comes up. This is really the first time that happens.
Nick Gillespie: That's that in those 500 stations, some of them are broadcasting on the same frequency or overlapping or getting in the way?
Thomas Hazlett: They could.
Nick Gillespie: Yeah.
Thomas Hazlett: There was a coordination mechanism under essentially common law rules for property that were first-come, first-serve enforcement of rules by the Department of Commerce. It had the authority to issue. It couldn't deny, but it could issue rights and then limit newcomers.
Under the system of first-come, first-serve, we do have the Department of Commerce be the first regulator. Herbert Hoover was secretary of commerce 1921 to 1928. He was very smart. He was an engineer. He met with the radio industry, knew a lot about the technology, and he was very savvy in terms of the politics of it.
The radio industry goes crazy. By 1924, it's radio Christmas. Madison Avenue's gotten ahold of this. Millions of people are buying radio sets. This is all without any new regulation for broadcasting, but Hoover wanted more. He said, "As an administrative matter, we know how to get rules in place where the market can develop. What we really want is the government to have a larger say in who broadcasts and what the content is."
Nick Gillespie: Where does that come from, though, because why wouldn't it be … The print press was unlicensed, newspapers were unlicensed. Why is there this belief that the government even has the right or the ability to start doing that?
Thomas Hazlett: That was the question. Hoover for years tried to get a bill passed that created a sort of commission-style regulation at the Department of Commerce under his aegis. He couldn't get it passed. He said, "People keep saying if the market's working, why do we have to legislate?" That was one problem. Another thing is that there was disagreement on exactly what to do and people were distrustful of Hoover. A lot of Republicans even said, "He's going to just use this to run for president."
By the way, the Senate didn't want regulation to be at the Department of Commerce. They wanted it to be an independent commission where the nominees by the president, confirmed by the Senate, to give the Senate power.
In the summer of 1926, Hoover explicitly takes the side of, "I don't have enough authority to continue policing the airwaves." He takes the position that all hands are off, there's no first-come, first-serve rule anymore, and everything's open. That does create some chaos, and now demand for regulation goes up.
There finally is a compromise, legislation passes, and Coolidge signs the bill February 23, 1927. We still have the same law today, 90 years later. Here we are operating under these public interest standard, no first-come, first-serve. In fact, there's an explicit section in the law that says, "No licensee using airwaves can claim a vested interest in the property." We eliminated this sort of property approach and we went in a different direction where, in fact, it is Mother, may I. We have to get explicit permission to use the airwaves.
Nick Gillespie: This is still in place. Obviously, people are probably familiar when they hear about FCC potentially pulling the license of a station that runs nudity or profanity or something like that or isn't representative enough of certain types of minority classes, et cetera. Licenses come up for renewal and you got to reapply and you got to meet the standards.
Thomas Hazlett: It's a public interest standard, public interest, convenience, or necessity.
Nick Gillespie: Yeah.
Thomas Hazlett: Now think about that for a while and ask yourself, what does that exclude? What could the government do that's not definitionally public interest, convenience, or a necessity. That gave this very vague standard to policymakers. Hoover liked that. Senator Dill, a Washington Democrat, C. C. Dill liked that, and he sponsored the legislation and was compromised.
Also, the incumbent radio stations loved it because they had gotten established stations, Westinghouse, RCA, and so forth, major innovators in the field, no doubt, but they also saw that under the first-come, first-serve rules new entry could take place and challenge them. They actually cut that off very successfully, arguing for the law and then arguing against any expansion under the Federal Radio Commission, which in 1934 became the Federal Communications Commission, the law just getting folded into the Communications Act of '34.
Nick Gillespie: Then as TV developed, TV was just kind of slotted into the same thing.
Thomas Hazlett: The TV licenses went to those licensees who proved they were operating in the public interest before they got the license.
Nick Gillespie: One of the things that's great about the book and your general approach is that, as you were saying earlier, it's not cowboys and Indians. All of these people are kind of suspect. It's big business and big government creating more and more restrictions and the ability of people to move into markets and innovate.
Fast forward a little bit to Lyndon Johnson. What happened under LBJ that was particularly … that undergirds your idea that spectrum, it's been turned into a political hot potato?
Thomas Hazlett: Some people, particularly on the left, today still write articles, paeans, to Lawrence Fly, the FCC chairman appointed by Franklin Roosevelt. Some people argue he might be the best FCC chairman in history, the cleanest, most stand-up guy there was.
What happens is that there was a powerful Georgia Congressman, Congressman Cox, who ran into a little issue. When he was found actually operating as an attorney … He was a lawyer, and he actually had a representation of a radio station that was up for a license renewal and charged the radio station to help them on their renewal. This went to the newspapers, and it was unseemly for a Congressman to be taking money in this sort of fashion, milking the system. He thought nothing would happen, just a bad day in the newspaper, but the FCC actually scheduled hearings on this. That's to Chairman Fly's credit.
This Congressman went crazy, and he said, "Let's just X out the whole FCC budget." Brutal, brutal attack on the FCC.
A young Congressman from Texas who was close to the Speaker, Sam Rayburn, saw an opportunity. Johnson, at the end of the day, helped save the FCC. Johnson used that opportunity to ingratiate himself with FCC commissioners and staff, and at the end of the day, had come away with an Austin, Texas, radio license and an upgrade to full-time, 24/7 operations when it was a daytime-only station.
He bought the station cheap. He actually bought it and got this license modification when another group had been there for years trying to do this unsuccessfully. He and Lady Bird, who nominally owned the station, got the license. They ended up for years being essentially the most successful radio station, then the most successful television station licensee in Austin when that came. Of course, for years, they were the only television licensed in Austin, Texas.
Johnson died one of the wealthiest former presidents in the history of the United States, almost entirely because of his media fortune earned through FCC largesse. I will say that while he was president of the United States, he actually had broadcast company executives sitting in the Oval Office talking to him about affiliation agreements in terms that might be more favorable to the owner of the TV station in Austin, Texas. This is the process that breeds this kind of outcome even under the best of circumstances, and that's what that gives us.
Nick Gillespie: One alternative that shows up in your book, one of the chapters discussing the rise of cable TV, is titled Thank God for C-SPAN. A couple of quick questions. What's so great about C-SPAN in your estimation? How did the FCC work to screw over cable TV for so long, and why did they do that? It seems obvious.
Thomas Hazlett: I answer the first starting with the answer to the second. The most famous speech ever given by any US regulator, May 1961, National Association of Broadcasters Annual Convention, Las Vegas, Nevada, FCC Chairman Newton Minow tells the assembled executives from the broadcast television industry, "Your product sucks. We are the regulators, and we are going to hold your feet to the fire. Okay? I challenge you to watch television. I think that it's terrible."
Nick Gillespie: This is the vast wasteland speech?
Thomas Hazlett: Yeah, it's the vast wasteland. Cable, as it says, is not over-the-air broadcasting, and, in fact, there's nothing in the 1934 Communications Act or the 1927 Radio Act that says you have to regulate this or even that you can. The FCC had already decided it was outside the jurisdiction and, in fact, it was benign. Leave cable alone.
Nick Gillespie: How widespread is cable at this point in time?
Thomas Hazlett: Not widespread and, in fact, that's part of the story. It starts, by most accounts, 1948, Mahanoy City, Pennsylvania, places that can't get over-the-air broadcasting. Now, broadcasters are upset because some cable TV options are competing in areas where you can get over-the-air broadcast television.
In 1962, the FCC reversed, just dramatically reversed its policy and decide to protect broadcasters because without broadcast television to give us this news and information, our democracy will suffer. We're going to keep them from "siphoning," that was the FCC's word, "… siphoning audience …"
Nick Gillespie: Away from the vast wasteland.
Thomas Hazlett: Away from what they've already identified as the vast wasteland, precisely. At the same time, Minow's threatening the vast wasteland with regulation, he goes to Washington and protects them from regulation, from the competitive medium. For years, cable was suppressed and they had arcane rules, some of which are described in the book, about you couldn't have regular series on cable. They're just picking stuff out of the air.
Fast forward to 1979, when you get deregulation, actually. Ford, Carter, that kind of deregulation wave, and some court opinions started going against the FCC. All of a sudden now, there's this extra capacity rolling in the markets because these cable entrepreneurs are laying out basically more bandwidth. It's radio spectrum, but it's in a wire, it's in a tube, and it's not regulated the same way.
In 1962, when these anti-cable rules come in, there is literally 15 minutes a night for the national news on the three networks. They're not doing news programs or documentaries or anything like that. By the time you get deregulation and cable, there comes hundreds of hours a week, thousands of hours a week.
Why not one of the first things they put on there, Congressional hearings? Okay, public interest information, C-SPAN. C-SPAN comes in 1979, and the entire structure of C-SPAN and its possibility to flourish in the marketplace is due to that deregulation.
The way to get a rise on C-SPAN is to say, "Oh, you know, but you're a government operation or you're subsidized or something."
It was and is a non-profit that runs a private network. They're funded by the cable and satellite and broadband industries that pay to license fees and a normal market transaction to get the content that was supposedly only to come on broadcasting and was actually stymied for 15 years and now is unleashed into the market.
Nick Gillespie: Also, when cable started going national and everybody … Things were deregulated. That introduced a different type of politics, too, because didn't every … Basically, every local jurisdiction would cut a deal with one monopoly cable operator, so even if more information is coming in, the wire through which it's coming, and this still causes problems or issues today.
Thomas Hazlett: Right.
Nick Gillespie: How does that fit into all of this type of stuff? It's like you get freed a little bit from the broadcasters, because now you have all these channels, but then you're stuck with your cable company, which is second only to used car salesmen as being hated.
Thomas Hazlett: Right. It's never over.
Nick Gillespie: Yeah.
Thomas Hazlett: Okay. The next generation has its own issues, its own problems and own challenges. Cable is the entrant in the 1970s, and by 1988, more than half US households subscribed to cable.
Nick Gillespie: Now, between cable and satellites. It's in the high 90s or something.
Thomas Hazlett: Yeah.
Nick Gillespie: Yep. In the 90s.
Thomas Hazlett: It got up to about 90%. Of course, with broadband now, it's declining some because broadband's taking over in the next generation. In fact, cable monopolies are a very big problem. I've written a lot about this, and some of it's in the book. Yeah, the cities, the municipalities, and the cable franchisees figured out ways to cut deals. It was very profitable for companies to cut those deals, and by the late '80s, people are talking about the monopoly problems in cable, the recent entrant.
Now it was a much better monopoly with C-SPAN and CNN and ESPN
Nick Gillespie: yeah.
Thomas Hazlett: All kinds of choice, and the net, of course, has evolved in the wake of this deregulation, of this more liberal environment. For electronic media that did evolve, and I think it's very, very important that we have opened up.
Nick Gillespie: Consistent with your analysis, which is … There's only villains in a lot of ways, and, hopefully, when the right villains are attacking the right villains, the customer wins.
Thomas Hazlett: Yeah, wish I could be as positive as you.
Nick Gillespie: Yeah, yeah.
Thomas Hazlett: Nobody's hands are clean in terms of political parties or whatnot. In fact, one of the interesting things you see by looking at the history is that the Fairness Doctrine, which was part of the content regulation that comes in almost instantly with radio, and the Radio Act of 1927 has essentially a Fairness Doctrine within a year or two that's really harassing leftwing radio stations.
Nick Gillespie: The Fairness Doctrine holds that you have to give equal time or you have to represent all points of view.
Thomas Hazlett: Yeah, two-pronged. First of all, you have to cover controversial topics of interest to your community, and secondly, do so from balanced perspectives.
Nick Gillespie: This may sound like an odd question, but in 21st century America, when most people hear something like the Fairness Doctrine, they're like, "That is so self-evidently a fake way of controlling the news in the name of being fair." We're cynical. Did people back then understand that as well, that the Fairness Doctrine, what it meant is that if you were too far to the left or too far to the right, you were going to be in trouble? Were they as cynical about kind of government-speak then as we may be now?
Thomas Hazlett: Oh, it's a great question. It doesn't look like it. Certainly, if you read the official record and even the criticisms of the official record, yeah, there was some criticism, but it certainly is taking it seriously because the law was so ensconced. In 1987 when the Fairness Doctrine was abolished by the FCC in a four-to-nothing vote, there was a lot of backlash on Capitol Hill. The Democratic majority in the House, in particular, went after the FCC and said that this was just wild deregulation.
By the way, I was going to mention that the Conservatives were actually in favor of the Fairness Doctrine and guys like Newt Gingrich and Jesse Helms liked the Fairness Doctrine. They thought that the Conservatives would not get a fair shake in a free market, and they wanted the government enforcement. Again, there's no clean hands here.
Nick Gillespie: Yeah. Right. Let's talk about cellular technology. You write, "Between 1985 and 2014, mobile characters invested $430 billion in network infrastructure and there's now hundreds of millions of subscribers for cell tech." You compare that to the slow moving transition from analog to digital broadcasting that was micromanaged by the FCC. What's the forward-looking policy lesson to be drawn from that kind of comparison?
Thomas Hazlett: Right. The most famous speech ever given by a regulator in the United States was the vast wasteland speech in 1961. Maybe the most infamous statement ever made by certainly an FCC regulator was 1981 by Mark Fowler, the incoming Reagan-appointed chairman of the FCC, who said in a Reason magazine interview that-
Nick Gillespie: Conducted by you, I'm assuming.
Thomas Hazlett: No.
Nick Gillespie: Okay.
Thomas Hazlett: Yeah, no, somebody good who got this comment on the record. It's become infamous, what to do about broadcasting. Mark Fowler said, "Well, you know, we're treating broadcasting so different than we … In other markets, we want to have a lot of competition. We let consumers vote, competition decide, and we really should look at this like it's a toaster with pictures." You can look at the citations today. That still gets blasted. It is inimical to the public interest. In the structure of public interest, licensing, it is inimical to the old Mother-may-I system. He's saying, "Let's regularize this. Okay, there are antitrust rules or competition policy things going on. Let's promote that competition, but let the market figure this out."
The toaster tsunami, as I talk about it, has just unleashed … Not just in content, because we've liberalized cable and the web and everything so much, but when you go to spectrum, pure spectrum allocations, starting with cellular in the '80s and coming through all the generations, 1G, 2G, 3G, 4G, now 5G coming upon us, we have gone much more towards a model where licenses are auctioned, meaning distributed by market mechanisms to the highest bidders and the winners get rights to radio spectrum. They don't get rights to just do one thing, a technology specified in Washington, a business model approved by regulators, only for services that pass the public interest test. Now, we say here's some radio spectrum. Stay in your spot.
Nick Gillespie: Do whatever you want, pretty much.
Thomas Hazlett: The ecosystem is yours to create, imagine, and play with.
Nick Gillespie: One of the people who comes up again, again in your book and in your footnotes is Ronald Coase, but is that … Talk a little bit about Coase and how is the forward-looking policy always give people … Auction stuff off and then let people figure out how to make a profit on whatever money they spent on something.
Thomas Hazlett: Yeah. In simple terms, yes. When he gets on the scene, he's actually studying this in the 1950s. He as an economist is trying to figure out why the government has to allocate radio waves, and there actually was a curious exchange in the early '50s with Leo Herzel, a law student at the University of Chicago, who actually considered himself a Socialist but had read about market socialism and how you could have auctions of government resources, and he thought, "Oh, let's just do that with spectrum."
He was attacked viciously by the FCC chief economist at the time, Dallas Smythe, who said, "Oh, it's ridiculous. You couldn't do this." Coase actually read that debate in the University of Chicago Law Review and thought long and hard about it. He investigated how the FCC operated and came to the conclusion that the expert, Smythe, that his comments were so incredibly feeble in defense of the system, there must be something to a market. These people have not thought this through.
Maybe property rights distributed in a competitive fashion would allow the market to figure out what interferes with what and what's the best way to utilize resources, because as Coase instantly saw, our job is not to minimize interference. We want to maximize the value. There's going to be a lot of interference in a good space where there's a lot of good stuff, but you want the low-cost interference to exist and the high-cost stuff not to, and you want to always make these clear. That's what markets do. That's what owners do. They want to maximize the value of the radio space.
Now Coase at first, he didn't really have experiments for this. He didn't know if a market in radio spectrum would work. Depending upon transaction cost is his term, but it just depends on whether or not private owners can really make this thing go. Coase thought it was certainly worth a try, given how inefficient the current system is. What we know now, 50 or more years later, is … Coase did win a Nobel Prize, some of his thinking that did attract attention, not just for how we allocate spectrum, but all kinds of resources.
Yeah, we run the experiments now, and that happened with this liberalization, particularly in what we call cellular. Those mobile markets that have evolved, yeah, we have competing ecosystems now, but just think about it. When Edwin Howard Armstrong comes up in 1934 with FM radio, in his mind a better broadcasting system than AM, he has to go to the commission and try to get radio spectrum allocated. Didn't work out very well for him. There's a nice long story in the book. It's fairly tragic. He ends up as one of the great inventors of the 20th century committing suicide in 1954, in considerable part due to the problems getting this FM allocation out. Finally, when FM is freed up by the regulators in the 1960s, it almost instantly dominates AM in quality and everything else.
In the early 2000s, Apple, the innovator, wants to go in the radio business. It creates an iPhone. It doesn't have to go to Washington and say, "Mother, may I?" It goes to the carriers who have individually the rights to use their spaces now for whatever device, whatever applications, whatever content, whatever business model they think works. The rest of the story is not only is Apple successful in buying access to radio spectrum. It's so valuable, what they're producing here as a complement to the networks, that they end up getting paid and they play the carriers off against each other and come in and revolutionize, 10 years ago when the iPhone's introduced, revolutionizes and disrupts that space and what we call the smartphone revolution today.
Nick Gillespie: Under the Mother-may-I standard, that would be virtually impossible.
Thomas Hazlett: Yeah, in one lifetime.
Nick Gillespie: Yeah.
Thomas Hazlett: It's the long delays. Look, this is endemic. People understand it. Regulators understand it, and getting spectrum into the market that can be turned around and taken out of something that's not working, not providing value, and putting it where it is, that's very difficult. Let me just point out, the iPhone comes in, it massively interferes with other wireless devices, and it's a bandwidth hog, but the carriers know that and they have to make the tradeoff. Is it worth it to our customers? Is it worth it to our investors to significantly upgrade the networks to be able to handle all this data? By the way, the current licenses don't say voice, text, data. They just give liberal rights to the operators, so it's not all specified. The operators are doing all the optimization, so to speak, and they compete with one another to try to provide better services.
Yeah, we've just migrated within this space, within these allocations, very small part of the total spectrum space. We've actually gone into a different world, and so what Steve Jobs ended up achieving with iPhones can be contrasted directly to what Edwin Howard Armstrong tried to achieve with FM radio.
Nick Gillespie: A lot of the discussion in the current moment over kind of telecommunications policies in general, Internet policies, spectrum to a certain degree, has to do with net neutrality and related concepts. Net neutrality is typically defined to mean that Internet service providers commit to treating all data as equal and not prioritizing some streams or clients content over others and pledging not to block access to particular sites. Comcast, if Comcast is an ISP, they shouldn't be allowed to let NBC shows, which is owned by the same parent company, get to viewers faster or they shouldn't be able to slow down Netflix or Amazon Streaming, et cetera.
What's wrong with net neutrality?
Thomas Hazlett: In general, the government should be neutral with respect to technologies, business models, all these kinds of things. What you're talking about in terms of what's called net neutrality is regulation that particularly restricts certain types of business models, pricing, or agreements between firms and, in some cases, consumers. Now as a general development in the market, regulators, even the ones that are pro net, in fact, especially the ones that are pro net neutrality, are very clear. The market developed in a competitive sense with a lot of neutrality, and the competitors had to do this just to get customers. That's very well established. In fact, the argument for net neutrality is we don't want this to change. We're trying to freeze, but what they're freezing is the unregulated liberalized environment.
Now it's not completely neutral. There's a lot of non-neutrality in what they're calling neutrality, and I'll just give you one example here. We at our home have cable TV service and cable Internet service and cable telephone service. The cable telephone service competes directly with AT&T. When we have that phone service in the triple play from our cable operator, we have access, special, reserved, priority access to the bandwidth of the cable operator.
If I go out and get Vonage or do Skype calls, we don't get the same access for that call as is being reserved for us. There's an integration between the cable operator network and the application, which is phone, voice phone. Is there anything wrong with that? If you believe in net neutrality, there's a lot wrong with it, but the victory here is clearly the incumbent, the Ma Bell monopoly. This is the greatest victory, single victory in some sense for competition in the regulatory world of the last 100 years. We tried to get rid of the Bell monopoly, and now the cable operators for fixed-line phone service have decimated it because they do this customized, integrated service called digital phone.
Nick Gillespie: And is based on treating different streams of data differently.
Thomas Hazlett: Absolutely, because-
Nick Gillespie: Or play.
Thomas Hazlett: That bandwidth is reserved on a priority basis for the customers of the cable operator.
Nick Gillespie: One of the other things that is fascinating to me, because net neutrality, the phrasing is great, the way that it's pitched it seems, of course, who would be against net neutrality? Then you see people getting bent out of shape if you have a cell phone, you might have Verizon or T-Mobile or whatever. Hey, you can listen and you buy four gigabytes of data a month, and if you listen to music or watch TV on your phone, you go through that pretty quickly, but we won't count against your data cap if you watch Netflix streaming or you have Amazon or you listen to Rhapsody or Spotify. That's a violation of net neutrality.
Thomas Hazlett: Right.
Nick Gillespie: Is that the worst case scenario, because are there a lot of sites that are being blocked, or is Netflix being systematically slowed down by certain cable operators so they can shake them down for more money?
Thomas Hazlett: I just point out that there have been three rounds of FCC rules on instituting forms of net neutrality. The second round, which came out very late in 2010, had a very interesting outcome, and that was that the first complaint filed under those rules in 2011 was lodged against a small, relatively small, the number-five US mobile operator in the United States, MetroPCS. It's now been acquired by T-Mobile. Okay.
MetroPCS was doing the cheapest phone service around. It was like $40.00 a month, all you can eat, but they had some older technology and if there was unlimited streaming of particularly YouTube, which is very popular, I don't have to tell you, that didn't work very well for their network. What they did is they actually went to the owner of YouTube, which is Google, and said, "Can you help us on this? We really like to give our customers access, but our network being what it is." Google being what it is said, "Yeah, well, you know, we put some engineers on it. Here's a little way to help ease the pain for your network." Now MetroPCS comes back in the market and gives unlimited streaming, video streaming as part of its all-you-can-eat package, but it's to YouTube. These other things don't work as well.
Now MetroPCS had no interest in YouTube. They did not own Google. Google did not own them. They're just trying to attract customers. There is a policy analysis of this called antitrust law, and the first thing you'd … That's prevailing since 1890 at least, we've had antitrust law to govern anti-competitive behavior. There is no anti-competitive behavior. MetroPCS has no market power. They're just trying to get customers. They're not trying to flip people over to the YouTube site because they're trying to exclude Netflix. They got a network. They'd be happy to do for Netflix what they did for Google if Netflix would give them the same cooperation on the traffic problem.
You've got the government regulator saying, "We're going to enforce neutrality. We're not going to recognize the fact that neutrality came out of the market. That's the neutrality we like. We're not going to recognize the fact that there's some non-neutrality that's really pro-consumer, and we're going to have blanket rules against this." I think, really, the travesty is there's already a regulatory scheme for that. It's called antitrust law.
You can have the Department of Justice or a private suit filed under the antitrust laws if there really is discrimination. There is an anti-consumer discrimination on that. This zero rating stuff shows you how quickly, just instantly, you can get an anti-consumer behavior because a rule sounds good and a general behavioral outcome of the competitive market, which is broad neutrality, is turned into a law that doesn't understand the nuance.
Nick Gillespie: Trump, Donald Trump, President Trump has named Ajit Pai head of the FCC. There's a commissioner who was appointed on a Republican seat. Famously, he told us in an interview a couple of years ago that net neutrality is a bad idea to a problem that doesn't exist. It seems like the FCC is either going to rescind or massively de-prioritize net neutrality rules. Is that good? I assume you would say that is good. Are you hopeful for Pai's FCC? Do you think he'll push in a market direction that'll be beneficial to entrepreneurs, to innovation, and ultimately to customers?
Thomas Hazlett: I am hopeful that Pai is the best choice that President Trump could have made in the possible set and let me just say, a hundred years from now there won't be an FCC. You can't see the kinds of regulatory structure that's there now is going to fit with the world.
Nick Gillespie: It'll be part of the Department of Agriculture. I don't think we need that either.
Thomas Hazlett: That's my prediction. Okay, so the question is how much sooner, how much sooner can we get to … There'll still be disputes about spectrum and so forth. There might be a special spectrum court like we have maybe specialized bankruptcy courts or patent courts. There'll be a different structure. Now along the way, of course, we're still in the short run. We're still where we are, and a guy like Pai, who is very knowledgeable and I think has learned a lot of the lessons of regulation, deregulation, and what confronts us now, I think certainly out of this Administration, you could have done a lot worse.
Nick Gillespie: Yes.
Thomas Hazlett: Pai's on the right track. He's actually said that they're going to have some pro-economic reforms and get more economic decision-making in. That's the most recent release, and that's on the right track, too, because if there's more cost-benefit scrutiny and it's done right, it's taken seriously, and Pai might do that, then that'll be positive.
Nick Gillespie: Let's talk about reforms. You write that the spectrum policy answer here is auction overlay rights. Explain in layman terms what auction overlay rights are.
Thomas Hazlett: Okay, so 1952, plus or minus a year or two, we had a vast radio spectrum allocation for broadcast television. That was the killer app of 1952. Most of that spectrum is still sitting right where it was, despite the fact that essentially broadcast television spectrum as a useful application is gone away. It's all cable and satellite over the top now, broadband.
Nick Gillespie: It's the same people who, or the same corporate entities that got those rights in '52 basically still have them.
Thomas Hazlett: There's been a lot of trading-
Nick Gillespie: Right.
Thomas Hazlett: … in the.
Nick Gillespie: It's still four
Thomas Hazlett: That generation's gone. Those licenses themselves are restricted to one transmitter doing over the air, blasting through six megahertz of space on an advertising-only model. You can't do subscription, and you can't really do two-way communications. You have to do this specified Mother-may-I in Washington. It was 82 channels of TV to begin with. It's now down to 49. There's been a procedure at the SEC. It's going to reallocate about another 10 of those channels to the mobile operators in an auction that's just ending right now.
We're making progress, peeling TV band off, but it's slow and it takes years. In fact, the current auction was put forward in the early 2000s. It was officially adopted as a policy in 2009, 2010 in the National Broadband Plan. 2017 we're ending an auction to assign rights and then it's going to be potentially another three years or so to actually get the spectrum freed up for the new stuff. It takes a long time.
What you could do as an alternative is you could look at the TV band, just to use an example, and you could say, "Look, in all these markets we're just going to give out new rights, new licenses and call it an overlay."
The new overlay would be a right that we sold at auction, and the new owner, high bidder, would have the right to use all the TV channels that aren't being used, which is most of them, the great majority of them, and have a secondary right to use the occupied TV channels where there is TV broadcasting. What that does is it allows the new owner to negotiate with the TV station, "Here, take some money. Go away. Just go on cable and satellite. We'll see you later. Or go share a channel with somebody else, another assignment, or go … Do whatever you want. The great thing about this is there's very little regulatory overhead. You can do it fast. The FCC has actually done these overlays before. They have these off-the-shelf regulatory technology. The nice thing is you don't have to tell the incumbents to move, which is always a big political problem. That's the big holdup.
You have all the rights you used to have, okay, but you're going to have one extra right, and that is to make a deal with the overlay owner. Then you put a responsible party into the market that can negotiate and use all the stuff that's not being used and pay people to go away and do something more efficient and bring Wall Street, bring Silicon Valley. You got the technology, you got the financial capital. Let's do something that's really doing the most good for society with the spectrum. Do it in a competitive way.
You're going to migrate to a better world with great innovation much more rapidly, and there are many ways to do that and many places to do it, including where there are a lot of government uses and lots of spectrum. Probably 75, 80% is still walled off for very inefficient uses. You can come in there, and even where the government is there now, you can have private companies come in and make deals with government agencies. Maybe OMB as a referee or other … There are various and sundry institutional resources.
Nick Gillespie: What would you say the political odds of a reform along those lines moving forward?
Thomas Hazlett: Yeah. As I said, we have done this in some cases. The only reason we got 2G, which was called PCS in the 1990s, there were 4500 microwave users in that band, and the threat really coming from senators here in Washington. Ernest Hollings took up the, "People will die if you use the spectrum for anything other than these public utility uses that serve very few people." Nobody died. What we figured out, the commission … The regulators, to their credit, figured out they could give out new licenses and have the new licensees pay the existing licensees to go do something else and use other spectrum, and there was a cooperative system there.
In 2006, we actually had a big auction for what's called AWS, advanced wireless services, and there were government users that were there and companies like T-Mobile had to figure out ways to move them out rapidly to get 3G technologies into the market, and that worked pretty well. Now there are better ways to do it. We're learning about that. This is something that a Democratic commissioner, Jessica Rosenworcel, actually suggested that there be … She even calls them, I think, bounty rights to sell off the rights to bargain with government agencies.
This is exactly how you want to think about it. You want to think about these market incentives really liberalizing the process of spectrum allocation, because the trick here is that while we have liberalized the licenses in a lot of cases, we still have the spectrum allocation regime of 1927. We still go case by case, and when there's a liberalization, it's one here, it's one there. We want to just go much faster and much broader, and that's the way we get all this pretty amazing new stuff into the market.
Nick Gillespie: Final question, how did you get interested in spectrum as a subject of study?
Thomas Hazlett: I actually in a dissertation at UCLA a few semesters back did take a look at cable TV franchising. That was fascinating, because here was a new, sort of a public utility but it wasn't, and it was regulated as a public utility but it wasn't, lots of rent-seeking, politics, just fun stuff. I started looking at that, and then I became a professor at University of California Davis, and somehow I got invited to write a chapter for a book in England on American broadcasting, on the US broadcasting market. I wrote the chapter and it was never published. Somehow that fell through the cracks.
Along the way, I discovered that the origins of the US regulatory system were widely misunderstood by the Supreme Court, by legal scholars, and that there was this very rational system that was in place. In fact, I published an article in 1990 in the Journal of Law and Economics called The Rationality of US Regulation of the Broadcast Spectrum. I slightly criticized Ronald Coase for not seeing how much of a market had developed, how much people were relying on property rules early on in the radio market and how that was developing.
I just parenthetically note, Coase was predicted by many people to never get a Nobel Prize. As soon as I criticized him just a little bit, 1991, he got the prize, so I don't criticize people for free anymore.
Anyway, it was fascinating to me that the development of property rights was very well understood. There was no error, as Coase had about they didn't understand this. Oh, no, they understood completely, and there was a lot of rent-seeking going on between the incumbent radio stations and the politicians that wanted more influence over content and the favors that they were awarding. It was what we call shared capture in political science or economics, public choice.
They got together and actually had a very successful coalition that took over in the 1927 Radio Act and was public interest standard, but soon free speech and fun orthodox views were suffering in the error and, of course, there was this restriction and barriers going up so that people like Edwin Howard Armstrong and the FM technologies couldn't get in and compete with incumbents. That's been with us. It's still with us. We've done away with enough of it so that we've let in a huge part of the innovative world, and that's been tremendously successful. We have to build on that and really expand to the spectrum allocation structure those liberalization measures. That's the battle ahead.
Nick Gillespie: All right. You write about it at length and with great interest in your new book. We have been talking with Thomas Winslow Hazlett about his new book, The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone.
Tom, thanks so much.
Thomas Hazlett: Thank you.
Nick Gillespie: For Reason, I'm Nick Gillespie.
