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Event Transcript
February 13, 2003


Spectrum Policy Reform in the UK and the USA

[START TAPE 1 SIDE 1]

MR. THOMAS W. HAZLETT: Hi, Iím Tom Hazlett, and on behalf of The Manhattan Institute I'd like to welcome everybody. If you could please grab a seat and enjoy what remains of your continental breakfast there.

I'm very much looking forward to our session today on the hot topic of spectrum allocation, and I appreciate all of you joining us. We have a list of names of participants, some of whom will be coming a little later in the program. Some of the names are spelled correctly. And if you donít find your name on there just keep looking, interpreting. And I know that many of you called the New York number and did the telephone RSVP, and apparently some of you were not speaking to New York when you did this. The incredible thing to me is that Harold Fritchket [Phonetic] Rossí name is spelled correctly [laughter] so far as I can determine. I think maybe the spelling brain power was sort of exhausted after that and things fell apart. So we apologize for that.

But we also would like to point out that The Manhattan Institute has used some of its incredible behind-the-scenes clout to eliminate the competition for today which was this so-called FCC meeting on this highly controversial UNIPE [Phonetic] decision. We sort of rearranged the chairs and got that to be scheduled another day, and made sure that everybody could come and join us.

I'd also like to salute our Manhattan Institute friends in New York. They had the 25th anniversary yesterday. I'd love to take credit for all of this, but they had some very nice publicity, one of which was a wonderful long piece, and I just happen to have a few hundred Xerox copies of it, that Tom Wolfe, the novelist wrote about The Manhattan Institute and its 25 years. And theyíve been very big on social policy, and hopefully will be doing more now in economic policy and technology policy. Speaking of which, in a couple of weeks out at Stanford Law School we will be helping Larry Lessig [Phonetic] host what promises to be an interesting session on spectrum policy. Sort of a different aspect. Some of these issues about licensed, unlicensed property or commons will be discussed, debated, and in about a day-and-a-half out there at Stanford. So if you want to go on The Manhattan Institute Web site we have the information, and also Larry Lessigís Web site Cyberlaw.Stanford.edu.

And the important thing I think is that I have an announcement to make, and that is that Marilyn, age four-and-a-half there on the right did announce yesterday to her younger sister Lauren, age three, according to mommy, that she was going to be an economist just like her daddy. So [laughs] I know this bodes ill for many people who are getting a sinking feeling that some of these sorts of problems weíre going to be talking about today will persist in many dimensions. I mean that will persist when Marilyn becomes an economist just like her daddy.

But we have many great topics. And weíre going to start off with a report from sort of the front lines from three people who are intimately involved with the idea of new technology and regulation. And to introduce this panel is Christians Suellentrop whoís the Deputy Washington Editor of Slate magazine, and the author of Slateís Weekly Assessment column, as well as editor of the Technology Section of Slate. Heís a graduate of Tulane University and comes here by way of the University of Missouri School of Journalism. Chris?

MR. CHRIS SUELLENTROP: Thank you. I'll get out of your way real quickly. I'm just going to introduce our panelists here. We have -- I'm just going to grab the TRRS [Phonetic] citation here. I'm just going to -- are we going to go in the order that youíre listed here? So Gregg Skall is going to go first. Heís a member of the law firm of Womble Carlyle, Sandridge & Rice where heís the telecommunications practice group leader. He assists companies with emerging wireless products and has been recognized by the National journal as one of the leading radio spectrum lobbyists in Washington. Mr. Skall previously served as the chief counsel for the National Telecommunications and Information Administration and has taught telecommunications law and policy at the George Washington University. Go ahead.

MR. GREGG SKALL: [off mic, off topic comments] -- Saran wrap and duct tape is the answer, right? Well, thanks very much Chris. Tom asked me to talk about one of the recent technologies that weíve represented and our trials and travails, tribulations in trying to bring it to the public.

The technology is a personal location and monitoring service, or monitoring capability that was developed out of Harris Electronics, and weíre trying to bring it to the private sector through a new venture. It is -- the picture here, the opening slide shows you some of the potential uses and weíll get into that in a moment. But to give you an idea of its capabilities I've got a couple of screen shots here of what it does and then I'll give you an actual demonstration in a few moments.

We dubbed it Inside Tracks because itís capable of tracking and locating people and property inside of buildings as well as outside. It can be bodily worn. Itís a body-worn tag. Very, very low power. Hereís a picture of an aerial photograph of a Walmart store in Melbourne, Florida and the individuals inside of the Walmart store. And the capability is so good and so precise that you can actually -- if you had a layout of what the retail counters were inside the Walmart you would be able to tell which counter the person was standing in front of.

Down below -- okay, more Saran wrap lease. Down below you can see someone -- this is a screen shot of someone in the sub-basement stairwell of a seven-story building where cell phones -- the same person who was wearing the tag had a cell phone on them and the cell phone failed, but they were still able to locate them in the sub-basement. And in an emergency environment or a disaster where a building falls down, this could be very useful in finding people who happen to be subscribers to the service, and were under a bunch of concrete.

MALE VOICE:  And are paid up.

MR. GREGG SKALL: And are paid up. Right. Right. Well, they could pay by the find as well. Here is another screen shot that shows the ability to demonstrate the history and to show the tracking or where that tag is going, where it has been. Another screen shot plotted from the aerial photograph, it shows the person as they entered the car and drove out of the parking lot, outside and around and then got on the highway in front, as they went down to the Florida Institute of Technology campus. And then the green dot over there is another type, another iteration of the device which is like, itís attached to a pager. So it could be off. It wouldnít have to be on all the time. But married to another technology such as a pager or a cell phone, it could be activated remotely.

This is a record of that demonstration that I just showed you. These are the capabilities -- youíd be able, from a remote location, be able to pull down a map and take a look. This is showing you the distance between the terrestrial receivers that are set up. Theyíre the two, east and west, theyíre about four-and-a-half miles apart. The two north and south are about seven miles apart. This -- youíd be able to get the precise information about the particular tag by clicking on it. And this of course, would be available to the subscriber with appropriate pass codes and privacy protection type of technology.

And then from a kiosk or a laptop computer or a home computer or even from, youíd be able to pull down a bank of aerial photographs and get an actual view of the person or the piece of property, whatever it is, and watch it. And this is the same, this is a recorded demonstration, and the screen shots you saw before come from this. And if we were to allow this to run through its entire demonstration, which would take too long for this presentation, you would see this person get in their car, drive down, go around the street, get on the highway, go over to the Florida Institute of Technology, go down into the basement, and all of the things that we showed you. And the demonstration is still active and still ongoing, and anybody who happens to be in Melbourne, Florida, weíd be happy to show it to you.

The problem is that in order to be able to get this kind of clarity we need five megahertz of otherwise unused non-shared spectrum, because it requires a device that operates with very, very low power in order to be safe, to be worn next to the skin, next to small children and so on.

The device with a power supply can be down to about the size of a domino. And that would be with many, many months of battery life and for indoor-outdoor location. Of course, if it were to be married with a pager or with a cell phone or with some other device that had its own power supply, then youíre down to the size of just another chip.

When you compare this to the other possible technologies such as GPS satellite or cell-based triangulation, you can see quickly that there are a lot of advantages to this service. It works inside of buildings. Hence the name Inside Tracks. It works inside of buildings and sub-basements, whereas the other types of technologies would not be nearly as good. The battery life is much longer. Itís extremely resistant to jamming because itís not the transmitter that can be jammed; youíd have to actually get close to the receiving antenna in order to be able to do that.

The cost is very low. The design here is to try to get this available to people of everyday means. So that the device might cost somewhere between forty to sixty dollars. An annual service fee might be like a hundred and twenty-five dollars for someone. Or you could just, you could buy a lot of devices, put them on kidsí bikes and on dogs and on your children and so on, and just pay by the find when you actually needed it.

So the problem here is to get the spectrum. It requires five megahertz of exclusive spectrum. There are many public good externalities that come readily to mind to anybody who sees this demonstration. But the problem is that with the intended audience, the intended target market of average, everyday people, itís not going to produce the kind of internal rate of return that will compete with yet another voice service or a high-speed data service or some of the competitors who are looking for spectrum. And of course, we all know spectrum is in very short supply. So what to do?

Well, we figured weíd go back to the good old days when the FCC felt that it was responsible for making public interest determinations as to how our natural resources, our valuable natural resources are to be used, and we would ask for a new service, a personal location, a monitoring service with some service rules so that it would be -- people who applied for the spectrum would have to provide this kind of a service, and we would demonstrate to the commission the need for this kind of a service. A task easier said than done.

We figured that we probably wouldnít be able to avoid an auction. But with this many public externalities, public good externalities, that at the very least we ought to be able to argue for a public safety bidding credit. And that this would give a bidding credit for parties who proposed the use of the spectrum in a way that would enhance public safety. The idea being here that we would ask the commission to temper the old principle that he who pays the most for spectrum gets the spectrum, with perhaps another principle that if you can provide a less profitable, but highly valuable public safety service you might also stand a chance of getting the spectrum. And we thought that hey, you know, thereís direct authority for this. Take a look at Section one of the Communications Act which requires the commission, charges the commission to make available to the people of the United States radio communications services with adequate facilities at reasonable charges, and specifically from the Communications Act that promotes safety of life and property. And of course, we know that a similar rationale was used in order to exempt from auctions public safety allocations of spectrum for specific public safety services that would be used by government agencies.

So here is what we went -- we went with the argument that a PLMS, a Personal Local Monitoring Service would provide public safety, law enforcement and consumer services that are not really available by any other means, and it will be an important adjunct to national security and homeland security. And we came with some pretty specific examples. Now, itís not hard to come up with examples because whenever you demonstrate this technology virtually every audience comes up with their own ideas. But we showed how it could be used for safety in emergency services, how police could use a wide area service, depending upon where they are when they converge on a scene and letís say thereís a firefight. Police kill each other sometimes in those situations just because they donít know where the other police are who are coming on the scene. It would be useful for finding lost Alzheimer's parents and perhaps even give them more freedom and more flexibility than they already have. It would be an ideal cross-platform enhanced 911 solution. Very inexpensive to deploy. And would give very, very precise location information.

Firefighters are lost every year fighting fires, approximately, based on statistics we were able to find, about 125 firefighters a year are lost because they succumb to smoke in burning buildings. Their comrades are not able to find them in those buildings, and they get lost that way.

Also the cost of housing prisoners, low-risk prisoners could be reduced by making more use of the house arrest principle. The current technology essentially lets you know when someone under house arrest or wearing an anklet leaves the location, but youíre not able to track them or to find them. The house arrest industry is very interested in this and it could really lower the cost to society of dealing with criminal offenders.

Certainly lost children. We talked to the Center for Missing and Exploited children. We talked to them. They thought that it would be a great technology that would be able to be used even though we know that someone abducting a child would be looking for the device -- in the time, the initial couple of hours are so crucial that it would still be very, very beneficial. And again, a benefit to society.

So we went to the commission with these arguments that we could improve the quality and make more efficient law enforcement functions that in a way are not easily quantified, but that you ought to know this. And if you donít believe us then you ought to do a study of it. Because frankly, we just didnít have the funds to go out and do the kind of exhaustive study that would have been required that provide a real quantification of that kind of savings. But it just seemed so obvious and so real that you could literally just take it for granted.

For example, the costs in mobilizing a large group of people to find missing people. We hear about those searches every year. There are a number of them. If weíre able to find that individual very quickly a great deal of the cost to society, millions of dollars to society could be saved. The house arrest, the firefighter examples, all of those things were examples that we cited.

And then when you realize that this is on the back of, or would operate also along with commercial applications such as hazardous materials, tracking inventory, being able to sell it to people who might want to find lost computers and so on, using it for test equipment and locating shipping containers, it just seemed like a natural idea. A way to marry the public sector and private sector interests.

In order to do this we asked for some very simple rules. We simply said that there ought to be a national service. The accuracy should be from one to thirty meters. The tag should be able to be worn on a personís body, so it has to be safe to be worn right next to the skin. And it should be useful for and capable of indoor and outdoor operation. And we went along and did the usual spectrum search, looking for available spectrum, and came up with a number of candidates. And out of the 27 megahertz that was yet to be allocated by the FCC, we found a perfect band, 1670 to 1675 would be excellent for this purpose. 2385 to 2390 would also be very good. Unfortunately, that carries the burden of the Thurmond amendment and that would substantially increase the cost of that spectrum to anyone. In fact we hardly believe that that spectrum will ever be used by the private sector.

So what happened at the commission? Well, they said, you know, we love your service. Itís a great service. This would be terrific if you guys could get this out in the public sector or private sector. Virtually everybody we talked to at the commission on the eighth floor at the staff level loved the service. But when push came to shove and some three years after we filed our petition, it actually came out combined with all other services in the 17 megahertz docket. We were set for auction. We were specifically tagged to be auctioned next to two other specific services. A satellite location service and a Raycom [Phonetic] which is essentially another data and voice service for individual use.

The principle again, turned out to be let the market decide, leave the commission neutral with respect to how spectrum will be allocated. Yet in the very same docket they took some very specific steps with respect to the 1.4 gigahertz band which they made a predetermined technical decision ought to be used for duplex operation, effectively making it unusable for folks like us, for folks like a Raycom, and anybody else that didnít need duplex paired channels.

The FCC felt apparently that it was okay to make a preference judgment based on the need for duplex technology, even though Raycom, for example, has an effective replacement for duplex technology that theyíre trying to demonstrate and might eliminate the need for paired channels going forward.

What we did was we responded to that by telling the FCC, you know what? You donít need to do duplex in 1.4. You could rearrange the way you want to auction these off and allow people to bid for duplex if thatís a service that they want, or bid for singles with -- we took that 1.4 band, rearranged it, suggested that they go to blocks of single spectrum and then allow people to bid for it in a combinatorial sort of fashion. And that would really take the FCC out of the business of making technology choices. But unfortunately, when it came to that band they didnít buy off on the idea that it ought to just be left to the private sector.

So the result again is that we put it at auction. With respect to -- we asked for the private bidding credit, the idea that we would balance the valuable public interest services and also combine it with commercial benefit. We were opposed by that by other parties who said that, you know, if you're looking for a way to provide public service, spectrum for that is already made available to government agencies. And since Inside Tracks is not a government agency, but a private sector company thatís seeking to provide services that would be useful to public agencies such as police and fire and so on, they should not be given any bidding credit because, you know, theyíre not a government agency. They ignored the argument that PLMS would be a private service that would be substantially contributing to public safety service.

So the commission said you know, what weíre going to do is weíre going to hold the auction first and then weíll decide the rules on how the service ought to be used. Basically again, the net result of that is whoever wins, whoever pays the most for the spectrum gets to make the rules for the spectrum, so thereís no preference, no bidding credit or anything else provided for someone who would offer a public benefit. An external benefit that could be quantified only for the public at large. The commission cited the arguments of our opponents that we were not a government public service agency. They totally ignored our band plan for 1.4, and even though that was dedicated to certain technologies. So that was all ignored. The current environment turned out to be, since they made that decision, that venture capital for a lot of this has pretty well dried up. And now the commission pulled the auction and the spectrum is still not being used. So the auction has been postponed. We have no new service. There is no public externalities benefits being provided. But I'm happy to say that we now can send photos over our cell phones.

Thanks very much, and thatís what I had to say about Inside Tracks and our experience in trying to get them spectrum.

MR. CHRIS SUELLENTROP: Thank you. Next up is Bert Halprin. Albert Halprin specializes in domestic and international telecommunications law with the firm of Halprin Temple. From 1984 to 1987 Mr. Halprin served as chief of the Federal Communications Commission Common Carrier Bureau. Say that five times fast. Where he was responsible for all national and international telephone, telex, satellite and fixed and mobile carrier radio service matters. In addition, Mr. Halprin has extensive experience in the communications practice area involving both domestic and international issues. Take it away.

MR. BERT HALPRIN:  Thank you very much. It is a pleasure to be here and I appreciate the invitation from Tom. And I just have to say at the beginning that our, you know, I'm not here to do a political commentary, but if you want to hear the saddest comment I have ever heard itís that when somebody comes up and makes a clever remark about duct tape and Saran wrap we donít really look at each other and say gee, thatís dirty. I mean, itís -- Tom did, because Brad Holmes was unable to come here, did give us two extra minutes and I'm going to take advantage of that before I get to what I was going to talk about. I have got to make one comment after hearing what Gregg said. I'm sure Inside Tracks is a wonderful service. I mean that absolutely sincerely. I donít have any doubt about that.

MR. GREGG SKALL: Thank you.

MR. BERT HALPRIN:  But my hope was that, I mean, the FCC, people in the administration and a series of successive administrations and people in Congress finally tried to get us away from asking the FCC to sit around and to evaluate dozens if not hundreds of wonderful services. I mean, I did it when I was at the FCC, I've done it on behalf of clients, to go in and talk about all the number of people, you know, whose lives could be saved if we could find abandoned skiers in avalanches on mountains. And it was real. Thereís no question about it. We have never had a more qualified FCC than we have today in terms of intelligence, abilities and backgrounds. But at the same time, to ask those four people, five people to sit there and to evaluate all of these and somehow they are supposed to be making judgments about the relative social, political and national security merits of these things based on conditions now, and then to give what are effectively lifetime allocations which a few years later somebody comes in and says gee, you know, circumstances have changed. The marketplace is changed. Other services have been developed. Please let us keep the spectrum and use it for something else. That is what we tried to get out of. We havenít gone far enough. Thereís no question the FCC through its spectrum modus understands the difficulty of transitioning from the world that I think they clearly would like to go in -- I mean, I see some of the people who worked for years and year and years to come here. The transition is not easy. But I think the goal is wonderful.

And even though I'm now taking thirty seconds of my ten minutes, let me just say that apart from government, I'm delighted to have private entrepreneurs going out here and doing it. And it does not have to be faith-based. We have people like the Rockefeller -- no, no, the Rockefeller Foundation, the Ford Foundation, people who are spending billions of dollars annually on things that the marketplace brings them that the government is not prepared to fund. If somebody cannot make a convincing case that because of the fact we have a rational spectrum policy, that somebody should devote a couple hundred million of this to saving all these lives or these kids rather than another art museum -- I mean, you know, this is the type of thing which the competition for those dollars there are places to go. Once you take care of that you donít have to go to the FCC. And the problem is that thereís never going to be a way that we can ask at any point in time the FCC to go back to what it was doing before. And I think the problems are that even if one service is good, I mean, if somebody picks this service, there is some other service that somebody has to day or will develop six months from now that might be better, but which is locked out.

Now, the other -- having -- yeah?

MALE VOICE:  Itís my omission, and I apologize, Bradley Holmes from ArrayComm was supposed to be on this panel and he did call me yesterday afternoon, a family emergency came up and he has an excused absence. My inclination, of course, was to take his time and to auction it. [laughter] To see what revenue we might generate from that. But we actually took a public comment, had a rule making, and we decided to allocate in sort of a top-down way, just to reallocate those minutes, as Chris has told the panel.

MR. BERT HALPRIN:  Although Norm [Phonetic] is closer to our unlicensed in that everybody has seized as much of it as they can. [laughter]

Let me now get to the main point that I wanted to make. I'm here with everybody else, you know, as Toni said, this is basically the Bash the FCC session. I think what the FCC is doing on spectrum allocation is noble. I support it, I think itís great. My problem with wireless regulation is even more basic than that. I have a total sincere problem with the way the FCC has over the past several years attempted to view wireless as some type of unique set of technologies which is entitled to be treated from a policy perspective by different people, different backgrounds, different sets of lobbyists. The separation that came with the creation of the wireless bureau and with the accompanying mental set that took place at the FCC I think has been one of the most destructive things imaginable. The fact is that the way we talk and the way we think and the way people organize themselves of necessity in government and in the private sector has a major impact on what happens in the real world in terms of productive activity.

I have never been able to understand how one decides whatís wireless and whatís not. I mean, even today if I make a telephone call to the Congo, some of its wireless, some of its wired. Itís like a voice over the Internet. You know, anybody who wants to can carry any portion of any call over any technology they want. You have in FCC, like other regulatory agencies, that insist that itís improper to regulate or think on the basis of technology and then does precisely that through this focus on wireless.

I want to focus on what I think is the single most destructive aspect of that. And in a way, I figured up until a couple days ago that the only people we were going to have here were going to be those people who were not interested in seeing what the FCC did on UNIPEs. A fairly small subsection of the communications industry. [laughter] From my perspective, the FCC has spent seven years now, has spent hundreds of millions, if not billions of dollars directly of government money Ė [Transcriber's note: sound of beeping device] Ė There must be a button, right.

MALE VOICE:  We located that one.

MR. BERT HALPRIN:  Thatís too high-powered, right. Itís next to his skin. There you go.

We have spent billions of dollars and the billions of dollars that have been wasted in this industry directly and in terms of the impact that itís had on tanking the overall economy because of the balloon, has as one of its aspects the fact that people have thought that wireless is somehow separate from wired. There are a lot of other bases for criticism. I could make them. You could make many of them. The other people up here could make them. But the fact is today, even today as we look at what the commission, certainly the chairman and many people on the Hill, I think all the commissioners announce as the ultimate goal of the Telecommunications Act with respect to local telephone service, is facilities-based competition. This is something which is good, and I'm not interested in getting into the arguments about what pricing patterns at this point are reasonable transitions to that. But even today, if we look at facilities-based competition for basic local telephone service, more so were we to look at telephone service in general, including long-distance telephone service, the overwhelming competitor is basic, simple cell phone service, with or without pictures.

Today we have maybe a million facilities-based lines that are wire line. And while the numbers vary, and depending on your incentive, theyíll vary by fairly large factors, virtually all the ranges for full substitution by wireless service are in the three to six million range. After six years and billions of dollars of pushing wire line competition, we still have dramatically more wireless full substitution.

But at the same time, if you go to a panel and you ask who here has substituted -- has anybody here dropped their wire line phone and taken a wireless phone exclusively -- if you go out and you talk to college students and to a lesser extent, young single professionals living in urban, you find a very high penetration. If you go and you talk to people like me, people with a family, people living in a home with a couple of floors, or even with quite a few rooms, you have zero. And the reason for that is simple. A cellular phone today is a good substitute for a single wire line phone for somebody who doesnít have multiple phones. It cannot substitute for a service in which the people want the ability to have a phone upstairs and downstairs. To have two members of a family get on a phone simultaneously. Or more and more in the real world, to be able to screen calls at home through use of a phone.

Now if seven years ago the FCC had thought about it and maybe had not had a wireless bureau, I'm not sure, but had had a bureau of looking at phone competition, communications competition, somebody might have thought that this was a good approach to take. And the fact is there are some quite technically simple approaches to reprogramming switches that would permit multiple phones to answer at the same time, and in many ways could produce a full substitute as a service for local telephone service as itís used by the 85, 90 percent of the people who are not students or single.

That didnít happen. I'm not sure if today, given where the FCC is, I donít know exactly what the costs are, whether itís going to happen. I'm not even a hundred percent certain whether it should happen, namely, that the FCC should tell cellular carriers, or maybe at least those cellular carriers who got the allocation originally for nothing, that as part of their public interest obligation they have to provide such a service. But I do know that a simple basic device that nobodyís providing out there could be probably, in my judgment, triple or quadruple the level of facilities-based competition, by which I mean full substitution of a non-IREC [Phonetic] facility for local telephone service and, you know, I talked about it a little bit in preparation for this because this is a prestigious group. I have talked to a number of the absolute top technologists in the private sector and the public sector, and thereís just no technical issue here.

If you took your cellular phone and when you came home you just plugged it into a little device, or if you bought for ten dollars from Verizon a different cellular phone and pumped it into a little device, which using exactly the same technology as WIFI [Phonetic] uses, distributed that voice call to any phones in your house that you wanted, including any answering machines, you could for a one time price that, you know, for three, four phones for a single price that would be two hundred dollars or less -- it might be a lot less if we achieve those economies of scale -- have a service that was a hundred percent fully substitutable for what you get today.

MALE VOICE:  [off mic]

MR. BERT HALPRIN:  Well, that -- I mean, I've talked to a number of the big consumer electronics manufacturers and, you know, I mean, I donít know where I can walk in and get it, but the fact is, given what we have seen with pricing -- I mean, I try and pay as little for a local phone service as possible, and I pay about forty bucks a month in Virginia. Thatís with all these taxes and fees and everything like that. By buying unlimited cell phone service I basically get a local service at home for free. Were this viewed as the best path for competition for local phone service, I have little doubt -- I mean, whatever that product is, I mean, itís certainly not being pushed aggressively out there because we have a sophisticated group of people who are not that familiar with it. I'm certainly not, and I looked for it.

But I do think that as we look at regulation, to wrap up, I wasnít planning on saying this, I do hope the commission continues to push for the anti-allocation by judgment approach. But I also hope that less and less do they think about wireless as being separate from anything else, and more and more do they pay attention to what they have said, quite appropriately, which is regulation based on technology, was never right. And in an era of rapidly dynamically changing technologies, can be deadly. Thank you very much.

MR. CHRIS SUELLENTROP: And now we have Toni Cook Bush who is Executive Vice-President of Northpoint Technology. From 1993 until 2000 Ms. Bush was a senior partner in Communications Practice Group at the law firm of Skadden Arps. Ms. Bush previously served as senior counsel to the communications sub-committee of the U.S. Senate Commerce Committee.

MS. TONI COOK BUSH:  Thank you. I want to thank Tom for organizing this panel and the other panelists today. I'm very pleased to be here. I mean, itís nice to be here where thereís so many people that I know. And itís particularly nice that I get to follow on Bert because, you know, I essentially agree with what Bert had to say, which is the biggest issue at the FCC is the fact that the FCC has allocated all these different buckets when there really isnít a difference between them and the concept of wireless. You know, what Bert didnít mention when he said, you know, if you make a phone call to the Congo you donít know if itís going wirelessly or through a wire line system or some combination of both, and that also includes not just terrestrial technologies, but satellite technologies.

And in the case of Northpoint Technology the disparity in the regulation of satellite companies and terrestrial companies is what is holding back new technologies and new terrestrial technologies such as Northpoint which can share with satellite companies.

First I'm going to spend a minute just describing Northpointís technology because Northpoint is fundamentally a technology company. We have a technology that was invented in the early nineties by a husband and wife engineering team in Austin, Texas. And what our technology can do is what we call a triple play. It enables the re-use of satellite spectrum in the same time, place and frequency. Which is different from other terrestrial sharing technologies that have been based on band segmentation or, you know, some geographic segmentation of how they use it. Our technology can re-use the exact same spectrum used by satellite systems, both geo-stationary satellites and non-geo-stationary satellites. And it can be used for many applications.

The first application for which we applied at the FCC was to provide a service that would share spectrum with DBS systems. And actually, the original plan was to combine the technology with a DBS system and so we have actually also filed for two of the western slots -- the only two available slots at the FCC, 157 and 166 with our compass satellite system. And we would combine that with our terrestrial system to provide a service that would compete with DBS. We would provide multiple channels of video programming and Internet access. We would provide the local channels and the Internet access using the terrestrial system. The terrestrial system is capable of re-using the same 500 megahertz allocated for DBS in the twelve two to twelve seven band in every television market in the United States. So that we re-use that 500 megahertz 210 times throughout the United States. And thatís the system we would use for the Internet access and to carry the local channels.

The satellite capacity, which as everybody knows is uniquely qualified to provide national programming or the same information to large quantities of people across the country, would be used to provide your national programming. And so thatís the business plan, is that weíd have, you know, 300-plus channels of national programming, weíd have, you know, 96 channels of video programming, local programming. You could carry, you know, programming from colleges and universities and Internet access in every television market through the United States.

The other thing is is that one of the great benefits of having a technology thatís capable of re-using spectrum used by satellite systems is that you get to re-use the consumer equipment. So for example, in rolling out our technology, even if you just built a terrestrial system, use the exact same set-top box and the same dish for the set-top box. Itís the same electronics. I mean, you just needed to be able to say receive Northpoint instead of DirecTV or Echostar. For the dish, it is the exact same dish. If you had a dish on your house you could turn it around and point it north and receive our signal. And so thatís a great benefit to a new technology, that you can roll it out with customer premise equipment on day one.

So why donít we have this technology? And I have to say that I do now have a, you know, hindsight is 20/20 and I recognize a lot of the mistakes that Northpoint made through the regulatory process, but what I'm going to do is just walk you through the timeline of the Northpoint experience at the FCC. So in í94 Northpoint first came to the FCC. Nobody believed the technology worked so they applied for experimental licenses which they were not awarded until 1997. And then subsequently had three experimental licenses, the last one being in Washington, D.C.

In 1998 Skybridge came to the FCC with a plan for a non-geo-stationary satellite system and they filed a petition for rule making. Northpoint also filed a petition for rule making, and they were consolidated into one proceeding by the FCC. The FCC at the end of í98 called for satellite applications, but they did not call for terrestrial applications, the concept being that, you know, the way the FCC licenses satellite systems even though theyíre wireless technologies --

[END TAPE 1 SIDE 1]

[START TAPE 1 SIDE 2]

-- then they call for applications and then they schedule an auction. In the satellite context they call for applications, they give all the applicants an opportunity to see if they can share the spectrum, and then in 99% of the cases they give them all licenses. The one exception were the two DBS auctions in í96 and the auctions for the XM and Ceres [Phonetic] systems. But the majority of the satellite spectrum, the parties are given the opportunity to work out their differences.

Northpoint filed its application at the same time the satellite application. The FCC did not reject its application in í99. It did not reject it in 2000. It did not reject it in 2001. It waited until 2002 to finally decide that it was going to subject Northpointís application to an auction while it went ahead and gave the spectrum to the seven NGSO applicants who had applied on the same day to use the same spectrum. Many of which are going to provide services that would compete with the service Northpointís going to provide. Some of them said they were going to provide video programming, some of them said they were going to provide Internet access. But it just goes to the point that Bert made, which is that the issue is not how you deliver it or what you deliver, but itís the fact that we want to use the same spectrum as seven other companies and we want to be licensed in the same way that they are. And that in a nutshell is the case that Northpoint has had before the FCC. And it really is the core of our problem. I mean, I can go through -- and I donít want to take up all the time with my presentation because many of you here have heard this before, but you know, obviously the failure to call for terrestrial applications at the same time that the FCC called for satellite applications irreparably harmed Northpoint. The likelihood that anybody would have filed was probably small, but even if there had been other applicants, we then like the satellite applicants would have had the opportunity to figure out if there was an opportunity to share the spectrum instead of being forced into an auction as we have been.

We have demonstrated that we could share with the seven other satellite applicants who applied on the same day and I mean, I think thereís no disagreement that the auction statute is premised on the concept that you have more applicants per spectrum than you have spectrum to give and therefore you auction it off. And I'm not saying that thatís a bad way of licensing. And I think itís a perfectly fine way. But I donít think itís fair for the FCC and appropriate, if the FCC wants to encourage new technologies, for there to be disparate licensing between companies purely based on what mechanism you're going to use to deliver your service.

And I'm going to stop it there and leave time for questions.

MR. CHRIS SUELLENTROP: I mean, I can ask questions, but I'd rather have you all ask questions if you have any. So if anybody wants to go, because your questions are probably more interesting than mine. But if nobody has, we can just --

FEMALE VOICE:  Thereís a question.

MR. CHRIS SUELLENTROP: Oh, where? Whoís got --

FEMALE VOICE:  Right in front of you.

MR. CHRIS SUELLENTROP: There -- go right ahead.

MALE VOICE:  Say your name and affiliation before you jump in, if you could.

MR. JIM SNYDER:  Jim Snyder from the New America Foundation. [off mic] -- the question. The comment is, I believe, the next generation of GPS does allow you to provide GPS service in an indoors environment, and my understanding is also that the next generation of cell phones will incorporate this type of GPS technology in it so that it would be similar functionality to what you're proposing, economies of scale and one consumer handset [Phonetic]. So I just wanted to make that point.

My question to Toni is, to what extent is your technology which re-uses the same spectrum in a given geographic area, really, a radically new concept, I think, extensible to other allocations? I mean, if it works with your allocation, why canít it work with all other allocations? In fact, why canít we have licenses in general be directional-specific as opposed to just geographical and frequency and time specific? Is this a whole new way of thinking about allocation that your technology represents?

MS. TONI COOK BUSH:  Well, I'm not an engineer so I canít answer that. But I can say that the technology does work in any band where you have satellite allocations. Because of the way that the system has been developed. Itís not going to work in an environment where you have other -- itís a heavily used band for terrestrial services that are currently existing because of the way that terrestrial technologies operate. But it does, I mean, our, you know, plan is to, you know, deploy this in many other bands other than just the DBS plan. You know, as I said, thatís just a business plan for our technology. But I do think that it is an important concept that the commission needs to look at.

And one of the things that I neglected to mention is to me the most recent outrage in the case of Northpoint, is the MSS allocation where, you know, the NTSO applicants in the L [Phonetic] band, the two gigahertz band, are all being given the right to use the terrestrial use of satellite spectrum without going to an auction. And to me itís just another example of the disparity and treatment of, you know, companies by the FCC that does not encourage innovators of new technologies to come to the commission.

MR. JIM SNYDER:  [off mic] -- they were not re-using the same spectrum, they were just using it for [off mic] purposes. Are you saying that the new like McGraw [Phonetic], you know, [off mic] allows them to re-use the same spectrum [off mic] satellite as opposed to choosing one or the other? Is that --

MS. TONI COOK BUSH:  I mean, I guess my reading of the order does permit them to do that. Whether that is what, you know, I mean, some of them said weíre going to provide, you know, satellite service in rural areas and use the cellular system in, you know, populated areas, but the order does not mandate. That it mandates that you have a satellite system operating and that, you know, you invested that money, but once you do that you have the right to re-use that same spectrum for terrestrial uses as well.

MR. CHRIS SUELLENTROP: Bert?

MR. BERT HALPRIN:  I just want to say youíve come up with an absolutely excellent concept. I think this is one of the things the commission is focusing on in its spectrum allocation. A very, very important transitional issue. I could not agree more with what Toni said. The fact is I criticize the FCC a lot. This is an honorable, decent, probably the most qualified group of FCC people ever. But they make their -- if people didnít think that a way to influence their decisions was to go out and pay millions of dollars to well-connected smart, clever people, no, I mean, there wouldnít be a major industry which at least a couple, you know, this is not focussed there. Thatís inevitable when you have those type of decisions.

Having said that, the interesting transitional question is -- and I think the FCC is, I know the FCC is looking at it and is aware of it, is we all know that new technologies permit us to make better use, to re-use, to fit in this. The question is, who should have control over that? In other words, when the FCC auctions off spectrum should they have, have they in the past auctioned off a full use of that spectrum which would then permit the spectrum holder to not only use it for their primary purpose, but to go out and sub-license it to anybody else? Or is it the case that what the FCC has licensed in the past is a certain use of it, and if thereís a better use that could be made or an additional use or somebody can come in, that the FCC then can go out and re-license it or something like that. Very important question. But the technology question, which youíve asked, isnít this applicable elsewhere? Could be vitally important to new services, and the FCC is well-aware of it and is looking at it.

MR. CHRIS SUELLENTROP: Go ahead.

MR. REED ABOCKER:  Reed Abocker [Phonetic], Precursor [Phonetic] Group. If I can take it from the thirty thousand foot level to the fifty thousand foot level, as much as we all enjoy bashing the FCC, especially those of us who actually worked there, they are making an attempt at reforming spectrum policy. If you really want a target to bash, the ITU. I mean, how is all of these efforts by the U.S. and the U.K. going to fit in with an institution that prides itself on being more bureaucratic than the U.N.? you know, they are all about process. How is this going to work and how is it going to fit?

MS. TONI COOK BUSH:  Iím not an ITU expert so I'm not going to comment on that.

MR. BERT HALPRIN:  I, you know, I mean, I've worked with the ITU for many years. And there are two different ways. One is that there is such a thing as the power of ideas, you know, which may not always win and frequently doesnít against a bureaucracy, but we are seeing more and more countries and, you know, weíll hear from Martin Cave about whatís going on in that progressive country in England. But as more and more countries insist on the notion of flexible use and for example, whether itís perfect or not, the temperature approach, the notion that what governments should be looking at is insuring not certain services except for public interest services. You know, national security, defense services which have to be done on a government to government basis. So I think weíre seeing some progress there and will continue to do so.

But having said that, you know, I mean, itís hard for me to -- the fact is the U.S. within this region, anything that we do that does not go outside and does not bother it, we have never taken the position in contrast to other countries that ITU regulations are binding on any government agency here.

And once again, in deferring to [Phonetic] the power of our persuasive officials at the ITU, when we do something and it works brilliantly, as a lot of what we have done does, it influences people. Indeed, when we have a mammoth failure it influences people as well, if only in the opposite direction.

MR. GREGG SKALL: Let me, in describing what we did with Inside Tracks, we were prepared to go either way, really. I mean, obviously and for obvious reasons, our first choice was to get an allocation for a public location and monitoring service, but we also felt that if we were going to be subjected to an auction with everyone else, that the commission really ought to -- and itís not the idea of commission bashing, itís just the idea of the frustrations, expressing the frustrations that you have in trying to obtain your objective and your goal. But weíre prepared to go with the full auction as well. But under those circumstances what we said is free up all the spectrum. Donít make predetermined technology choices for, you know, for 90% of what you're going to be dealing with and then adopt a high principle that it ought to be open to everyone for the other 10%.

Ultimately I think internationally the pressure on spectrum use is going to lead people around the globe to, at least in many of the countries that are the higher [Phonetic] users to the same conclusion, that theyíre going to need to adopt more flexible and more innovative approaches to the allocation of spectrum in order to get the utility out of it that we need and that they need.

MR. BOB CRANDALL:  Iím Bob Crandall [Phonetic] from the Brookings Institution and I want to address Bertís point about wireless wire line substitutions. When I raised a similar point in a meeting where Chairman Powell, who was giving the address, his response to me was oh my God, this would undermine universal service. And by that I donít think he means that anyone would lose telephone service. What he means is that it would undermine what the University of Chicago economists have told us all along, is the principal goal of regulation, which is to redistribute income. That is, it would undermine the goodies that go to some groups and because enormous problems for the regulators. So it seems to me, Bert, that your problem is not technology, but the problem is getting the pricing of wire line services right.

MR. BERT HALPRIN:  Well, I mean, I couldnít agree with you more. And one of the issues here, I mean, the reason that I think this is going to come about from consumer technologies who are unaffiliated, is the cannibalization issue. I mean, right now wire line service is totally messed up. Weíre seeing wireless service driven in exploratory directions, interesting directions, ones that people predicted in part, didnít predict in part. The day that type of market-driven pricing takes over and is an adequate substitute for wire line, the ability to totally misprice wire line that many people thought was going to go away with the Telecom Act but has only gotten worse -- maybe itís gone in a good direction, but the ability to price rationally for most basic services has gotten worse. Maybe for broadband we have made some progress. Itís there. There is a resistance to this. Thatís why I have less optimism and, you know, generally I donít like the commission to make decisions if they can help it, just because itís hard to do so. But I focus less on a commission rule about what you have to do in a cellular switch, and more on what can be done by the consumer electronics business to just make this happen without paying any attention to the FCC or any wire line or wireless carrier.

MR. CHRIS SUELLENTROP: Weíll take one more. Is there one more? All right, then, thank you, panel. [Applause] I think we have scheduled break time now. Am I right? See you back here in fifteen minutes.

MR. THOMAS W. HAZLETT: As some of you may know, the original seminar title, as I was putting this together, was the Spectrum Policy Reform in the U.S. and Europe. But first Germany dropped out. [laughter] Then, you know, Belgium said they didnít want to get involved. And then France. So I just found that the only real interested party over there was the U.K. [laughter] And so we [laughs] -- Hence, Spectrum Policy Reform in the U.K. and the U.S.A. And in fact, we have a lot to learn from the U.K. and are delighted to have that very interesting and parallel set of issues being discussed in a very serious way. And the U.K. Government actually commissioned Martin Cave, a very prominent British communications expert and economist, to head up a study that was published last year. Itís available online. You can -- I donít have the Web address, the URL, but you can just Google Martin Caveís big giant spectrum report [laughter] and itíll get you there. And the report was accepted by the U.K. Government in October and is now leading the way to some reform. So thereís a lot we can learn from this.

Professor Cave is at the Warwick Business School and as I said, is a very prominent British economist. Some of us refer to him as editor. Heís the editor virtually of every important telecommunications economics book or reference book, including the Handbook of Telecommunications Economics, Volumes I, II, and maybe more to come. And itís with great pride that weíre happy to welcome Professor Cave who just got in from the U.K. last night. [Applause]

MR. MARTIN CAVE: Well, just doing a mental calculation, I think my reportís about 60% as long as one of Tomís articles [laughter] so that gives you some kind of sense of the massive nature of the task I confronted. I'm very glad to be here. As I say, I flew in from Heathrow last night. Thereís a special sense of excitement for the first few minutes of that flight as you may know, because our governmentís told us there may be some guys on the ground with a surface to air missile, and intending to pluck you out of the sky. But that didnít in fact take place on this occasion.

Now what I'd like to do is just run through some of the recommendations of the report and give you an account of how the government is responding to it. And of course, as youíve guessed, from my point of view itís sort of too slow, too little, et cetera, et cetera, and I'll be able to adumbrate on that a little bit. But apart from that niggling criticism I think generally speaking the U.K. Government has done quite well in accepting the ideas, many of which had of course, already been in the report which had already been developed by the policy community in the U.K.

And it may also be of interest that thereís a lot of increasing enthusiasm in the rest of Europe despite Tomís remarks. Even the French and the Germans. Even Old Europe have commissioned studies on spectrum trading. [laughter] Heaven knows what theyíre doing in the Czech Republic and Lithuania. But I havenít quite established that yet.

But perhaps more importantly, the European Commission itself is recognizing the fact that from July the 25th of this year spectrum trading will actually be lawful. At the moment, within the European Union, itís unlawful. But from July the 25th it will be lawful. And they therefore have to take a view on it. And naturally, their view on it is a standard European Commission one, which is this is a process which is going ahead, but it requires some kind of control by us. Because otherwise thereíll be some people whoíll be going faster than others, and this will lead to a lack of harmonization and ultimately be detrimental to European consumers. Itís an argument which figures in many contexts and no doubt it will figure in this one as well, although whether theyíll be able to get away with it, I donít know.

Now, the title Tomís given me is The Economics & Politics of U.K. Spectrum Reform. And, you know, one point which is absolutely fundamental to understanding the differences between the U.S. and the U.K. is that we, like many European countries, effectively have a sort of an elected dictatorship. Thatís to say we vote in a government and if itís got a big majority for five years then it can, broadly speaking, do what it likes. It doesnít have to worry about appeasing the legislature because it is the legislature. It doesnít have to worry about the states because we have no states. We have a very centralized administration. So once you can convince in a way youíre okay. I mean, this is generally observed. In fact, the population vote for parties and then the legislators vote for whichever party leadership they belong to. And, you know, there has been speculation in the past that if you put up as a candidate for our constituencies a sort of a medium-sized domestic animal under the flag of, you know, the Labor Party or Conservative Party, youíll probably be successful in getting that person elected. And then it would sort of troop through the lobbies, I mean, the same way to vote according to the party line. And there has been some speculation about whether in fact this has been tried [laughter] in the case of some legislators. But nothing has been proven on this.

Anyway, moving swiftly on, in case thereís anybody from the British Embassy here, I'll just tell you a little bit, very briefly about my review which was published about eleven months ago. The government then undertook a fairly lengthy consultation period, most of which was occupied by cutting deals with broadcasters, as I'll describe in a moment. But then in October they accepted quite a lot of the recommendations.

Now, there is an interesting complication here which is that the governmentís currently promoting legislation to create a new communications regulator, OffComm [Phonetic], which will combine something that will be horribly familiar to most of the people in this room, which will combine spectrum, broadcasting and telecommunications within a single body. And this means that the organization which has to implement the governmentís proposals is in a state of flux. At the moment the radio communications agency is part of the Department of Trade and Industry which is a ministry. But that responsibility is going to be transferred to the new independently regulated body of the Office of Communications. And this obviously has quite a big impact upon the transition. OffComm wonít come into operation until the end of this year at the earliest. So weíre at the moment in a rather sort of awkward interregnum in which the, you know, the heirs to power, that is to say, the OffComm board members whoíve already been appointed, are trying to seize control of the process from the radio communications agency, and the radio communications agency is naturally tempted to try and carry on until the last moment when its power is removed. Bearing in mind, however, that those very selfsame officials will then be within OffComm. And so it probably isnít very smart for most of them to try and be too obstructive. But this is quite a big background situation which is causing some problems, I think, and itís a matter of regret. I'm convinced that itís quite right to shove spectrum in with the other things and keeping it as a government function would be detrimental. Unfortunately, the government still has some power to intervene, as I shall discuss in a moment.

Well, the starting point for the review is basically pretty obvious. That the U.K. spectrum of allocation is a mess. Perhaps not quite as public a mess as the impression thatís been created in my mind in the United States. But a mess just the same. You know, with command and control mechanisms, lots of very powerful vested interests who are even more determined to make sure that no competitor gets access to spectrum and therefore want to sit on whatever spectrum that theyíve got.

And so in the course of the review one of the things that we tried to sort of get across was in some sense a demystification of spectrum. You know, the notion that spectrum is not some sort of product with magical properties. It was just another boring input, and what weíre really talking about was regulating not a service which people use, but an input which can be used to make a whole variety of different services as has already been discussed. An input with many competitors. And that therefore sort of a standard market approach to regulating an input is you look at the market situation with that input, you try and identify whether there are any kind of market failures, and absent those market failures then you step back with your regulation and you try and allow markets to operate in their normal way. Of course, that involves overcoming very important property rights issues, as I shall discuss in a moment. And also, dealing with the comments [Phonetic] questions which I shall also say something rather inadequate about in a moment as well.

Just by way of background, we have a system of spectrum pricing in the U.K. which is really rather peculiar. Itís -- you probably have to have a pair of binoculars at the back to see this so I'll try and explain how it works. Whatís illustrated here are the amount that users of spectrum pay for different bits of spectrum. And as you can see on the right, thereís a huge spike. And that spike is what the providers of 3G Services [Phonetic] paid in an auction in the year 2000. That they appear to have suffered a sort of collective rush of blood to the head, at least that certainly appears to be the case in retrospect. Although the more stronger members of them, particularly Vodafone [Phonetic] and I see thereís somebody from Vodafone on the list here, which is interesting, Vodafone maintains that it was, you know, it was the position [Phonetic] properly made in the circumstances and that they can afford to pay for it even if none of their competitors can. So whatís the problem? [laughter]

Apart from that one, what you see is the much smaller spikes, and those represent charges, administrative prices which are levied from spectrum use on a large range of uses. Aeronautical spectrum, terrestrial radio, maritime defense and the emergency services. We even at the moment have a system in which the Department of Defense pays for spectrum. And of course, mobile. 2G Mobile [Phonetic]. So what we have in existence already, so to speak, is the two systems. We have an administration pricing system and we have a market pricing system. And perhaps contrary to the recommendation that many economists would make, it is in fact that system which we suggested in the report should be perpetuated, at least for a quite substantial interim period, for reasons which I shall explain in a moment.

So the ideas in the report basically were, as I have said, they flow from the notion of spectrum as an input. Thereís nothing magical about it. Letís try and free it up and insure that itís used in the most efficient ways. Those ways reflecting inevitably whatever interventions in output markets the government thinks itís appropriate to make. So by all means let the government decide we need the BBC. But then the BBC should be encouraged to economize on the spectrum that it uses in an appropriate way. By all means, let the government decide that we need emergency services which provide vital services to, you know, sort of search and rescue and so on. But then the people making the decisions how to deliver those services should be guided by some kind of efficient spectrum pricing mechanism in choosing which method to use.

So maximum flexibility, and then the two streams which I've mentioned because we didnít feel able to move straight away in relation to spectrum use for public service purposes. We didnít feel ALEJANDRO:  to move straight into a market mechanism. And so we therefore proposed, and the government had adopted, a two track system. With one track weíve got a commercial service and the spectrum should be trade din the normal way. The other track, there should be reserved allocation of spectrum. It should be priced in order to encourage some kind of economy. But just the same, there would be the guarantee of that spectrum being available to retain the services.

We also proposed that there should be some kind of cross-border trade which I wonít go into. But I think perhaps thatís the most, the defining characteristic of the new regime thatís been proposed. And clearly, it creates a scope for inefficiency. Because the administrative pricing will be guiding one set of users. Market prices will be guiding another set of users. The system of administrative pricing is basically not quite the same as the use of a random numbers table, but it does have something in common with it. But it does at least produce a positive number. You know, the alternative is just to have a number of zero. We are proposing a method which does produce a positive number even though a positive number with, I'm bound to say, a fairly substantial disturbance term [Phonetic].

Weíve already discussed, before the break, what should happen internationally. And in keeping with this, we proposed in the report -- and the governmentís backed away from this -- that flexibility of use is absolutely important and therefore generic allocations now to be preferred. And the logic in this is really straightforward. The existing ITU system is very ponderous and slow and subject to vested interest. People would then say well, this is going to be crazy because each country will be using spectrum for different purposes. Thereíll be no economies of scale, et cetera, et cetera. You know, Iceland will have to specially commission the purchase of the forty thousand handsets which use special Icelandic spectrum. But of course thatís complete nonsense.

What weíre really talking about here is removing the allocation decision away from a government type organization, the ITU, and handing it over to industry-led groups. That of course, has its own dangers, to put it mildly, but we thought that the dangers of loss of competition associated with that, in a system which was based upon consensus rather than prohibition and governmental power, was likely to be better.

Now, the government response on this has been cautious. I think thatís the right word. They have not been -- the other famous word -- brave. Theyíve done something which theyíve done in response to quite a lot of the detailed recommendations which is commission a study. Now, you know, one side of me says commission a study, you know, this is just a delaying tactic. Another side of me says commission a study -- well, thatís income. So [laughter] I do have slightly ambivalent views about this. And quite a lot of the studies which they have commissioned are interesting. Although this one, how you do a cost benefit analysis of harmonization, as the study which theyíre commissioning proposes to do, does rather beggar belief. But I shall look forward to the ingenuity of the consultants with some interest.

So theyíve taken some steps down this road, but perhaps understandably theyíve been cautious because we werenít able to offer any evidence in favor of greater flexibility except from first principles. Well perhaps a little bit more than that, but basically itís something where youíve either got to believe in the benefit of decentralizing decisions or youíve got to believe in the benefit of centralizing decisions. I mean, as somebody who used to study the Soviet economy for a number of years thatís become to me something of a no-brainer, but thatís not true always.

Now, as I've said, the instrument by which the government is going to bring many of these policies forward is through the Communication Bill which is not going through Parliament and is likely to complete its passage subject to the inevitably hectic debate about the powers of Rupert Murdoch which is going to preoccupy the country for the next four or five months. Itís going to come to an end in the fall of this year. Just one aspect of it which I think is quite important, it just shows how some little details can make a difference -- we proposed in the report that ministers should just stay out of spectrum assignment decisions completely. They should make strategic decisions about allocation and then leave it to OffComm to do the rest. So, you know, strategy here, implementation over here. Unfortunately, the government hasnít accepted that. So that theyíve maintained a power for ministers to intervene in anything they choose to intervene in. And this has sort of set in train and inevitable process, which is that because ministers can intervene, they have to have a bunch of public servants who decide whether they should intervene. And of course, because theyíve got a bunch of public servants who are deciding whether they should intervene, and whose careers, as it were, hinge upon them actually doing something rather than doing nothing, and theyíre quite likely to recommend interference. So I think this is a big of a worry. And it sort of removes the sort of cleanness of what might otherwise be there.

The other thing that the government has accepted is the necessity for publishing a database of licensees and licenses of frequency assignments which obviously is necessary to facilitate a kind of trading process.

Now, I just want to say something very briefly about the sort of the commercial side of it. Because I think this is the bit which has commanded the greatest assent, and of course, you know, dates back famously to discussions in the U.K. kin the 1940s even about the desirability of the trading spectrum. The U.K. Government is already sort of pretty wedded to auctions. They deny this is because they received about forty billion dollars in the year 2000. But that may have something to do with it. And they certainly need it now. But where there is excess demand for spectrum which is used for commercial purposes and being newly made available, then the auction method is proposed, with eliminated of current restrictions which are listed there. And all thatís accepted and itís all been quite hunky-dory.

As far as trading is concerned itís rather more difficult. You know, people have been assigned spectrum. They use it for commercial purposes. Theyíve been given it through beauty contests and things of that kind. Theyíre paying pretty low fees for it at the moment. So what do you do about that? Well, what weíve proposed is that basically you empower those people with ownership of those assets and you allow them to trade. And that involves specifying what the rights are associated with those licenses. And thatís quite tricky. And it also involves a really quite difficult problem, which I'll describe before I get on to this one, of windfall gains. Clearly, somebody whoís received 2G spectrum in 1886 through a traditional assignment process, a beauty contest, and then suddenly finds that itís worth a great deal more -- I mean, obviously a lot less of a problem now than it looked in the year 2000. Because itís not worth a great deal more perhaps. But they suddenly find themselves with this windfall gain. What do you do about it?

And our answer is well, you know, compared with the benefits youíre going to get from recycling it back into use, those windfall gains, you know, theyíre going to go into everybodyís pension funds, et cetera, et cetera, just forget about it. But unfortunately, the risk of the exposure of these huge windfall gains is seen as a political owned goal. And so I think itís quite likely that some attempts will be made to try and sort of pluck a proportion of those back through some kind of repayment regimes or taxation of capital gains associated with it. Which of course, is likely to chill the process of getting the trading process going because people will be reluctant to sell in certain circumstances.

However, before we even get to that, the problem that everybody recognizes has to be faced. The problem of specifying the property rights, a problem which lots of people in the U.S. have contributed to in a very interesting way, such as Full-Heyber [Phonetic] and so forth, have to be resolved, and the radio communications agency has put a team of engineers on this to specify how property rights should be indicated. Unfortunately, they havenít recognized that this is, to some extent, what we call a legal problem, and that perhaps it might be necessary to have some lawyers taking part in this process as well. I hope that this deficiency will fade out fairly quickly because without this clear specification of rights, the fear is that the only tradability will be in connection with licenses which are associated with apparatus. Thatís to say the license will specify where you put the apparatus and what power it can be. And that of course, is no good for flexibility and use because the apparatus determines the use, and therefore youíll be restricting the trades from one provider of a service to another provider of virtually the same services. So trying to set out the regime for property rights in relation to spectrum access rather than apparatus licensing is the key next step, and I hope it will be solved. Itís obviously extremely difficult.

So this is whatís happening. The radio communications agency has put out a discussion paper which proposes a slow and gradual introduction of spectrum trading, first of all, within the same use and within very limited bands, and then you incorporate flexibility of use, change of use, and you extend the range across which the trades can take place. And of course, the big risk here, that itís just going to begin with a whimper and may possibly end with a whimper. Because if the marketís too thin, if the only stuff thatís available for trading is very limited, and the use to which you can put it is equally limited, then there wonít be a thick enough market to promote any kind of efficient pricing.

And so I have been trying to represent to the U.K. policymakers in a highly bawdlerized [phonetic] form, some of the ideas in the M. Querrell [Phonetic] Williams paper about a big bang. That is to say that you have to get the process off to a reasonable start. This has been translated by the British bureaucrats into the rather less worrying phrase, critical mass. And they are perhaps not less worrying, come to think about it, and they are in fact trying to identify what would be, I guess realistically, the minimum critical mass that would not make them look stupid when they introduce spectrum trading as an idea. This may not be the best way of achieving the policy benefits, but just the same, I suspect thatís whatís going to happen.

Now, we have a debate about unlicensed band. I'll just say one thing about that. We already have unlicensed bands. Thereís a huge amount of interest in them. In the U.K., as in the rest of Europe, thereís a great deal of enthusiasm for the results of 802-11B, and the apparent demonstration that this is a good way forward in introducing innovative new services. But nobodyís yet really addressed the idea of if you are going to have a license on unlicensed bands, how they actually run in parallel with one another. You know, what are the proportions you know, how do you balance the risks on one hand and that the unlicensed bands might turn out to be nonproductive, with the risk on the other, the unlicensed bands might turn out to be congested and therefore equally unproductive. How do you, as it were, create a regime in which the availability of unlicensed spectrum can either be expanded or contracted as circumstances require. Thatís obviously very difficult. I know there are some people like Tom who solved this problem. They cut through the Gordian knot by saying well, letís not have any of them. I think I'm right in saying that. You know, that always seems quite the arrogant solution, I mean, at one level, and itís obviously possible for some of the same characteristics of unlicensed bands to be replicated by intermediaries who buy spectrum and then make it available in small packets to people at prices which if the supply side of the equation is handled properly it might not in fact be such as to discourage innovative uses of the spectrum. So all these things have yet to be resolved.

I think the level of debate about it in the U.K. that I've observed so far has not been particularly startling. And thatís obviously a worry because I think this is one of the major issues.

Now, I said something about administrative pricing. I think the passage of time, going as it is, I wonít say more about that. I mean, I've already conveyed to you I think the notion that we do have administrative prices. Theyíre extremely low. They should be higher by almost every conceivable measure, but that thereís no way in which we can achieve any sort of perfect accuracy in trying to estimate the spectrum use for these services, without recourse to some kind of market mechanism. So thereís a lot to be done on this. And another of these blessed studies is currently being brought about to be undertaken which will try to improve, or as we used to say in studying the Soviet Union, which will try to perfect the system of administrative pricing. And so itíll be interesting to see how that actually pans out.

What I'll do instead though is I'll just mention just a couple of applications in which the administrative pricing could bite. One is defense. The Ministry of Defense in the U.K. currently pays about a hundred and fifty million dollars for the spectrum that it has, which considering it has about 40% of the spectrum is pretty much bargain basement price. The government, including the Secretary of State, and the Defense, have accepted the need of extending the pricing of defense spectrum. And also raising the prices. So that they might pay something maybe four or five times as large as that. You know, enough to persuade a general to get out of bed a bit earlier in the morning, we hope, in order to try and economize on some of the spectrum thatís being used.

But the difficulty of course, is to articulate this charge within the system of government spending. Because if they pay an extra half a billion dollars and then the Finance Ministry says okay, because youíre paying an extra half billion dollars, here it is. You can have it back. But obviously thatís going to eliminate the incentive effects. And so trying to introduce an incentive compatible system to discourage needless squandering of spectrum by the military has proved to be extremely difficult. And I donít think that problemís been solved.

What has been solved, however, which is really important, is that the ministry has accepted the need to conduct an audit of its spectrum. Because it had no idea whether it was using the spectrum that was allocated to it. And so theyíve hired an auditor to come in and look at the spectrum. And I understand that process is revealed, perhaps not surprisingly, quite a lot of underutilized or unutilized spectrum. And, you know, the mere existence of this in the current climate in the U.K. where thereís a lot of emphasis upon how the release of spectrum could improve competitiveness, may actually trigger quite substantial benefits. How this is going to play out in practice I donít know.

The other thing I just want to say something about very briefly is broadcasting. Our public service broadcasters in particular represent unsurprisingly, an extremely powerful lobby group. And they fought like anything to avoid paying any kind of spectrum charge. They have really been very aggressive in this, and theyíve been pretty aggressive with me. Theyíve probably been rather less aggressive with the government. And the government has in effect said to them well, in principle youíll pay, but donít worry, you wonít have to pay for a bit and weíll tell you when. You know, hence my reference to St. Augustan at the end. You know, may I repent Lord, but not yet. Thatís what effectively theyíve said. Theyíve said may I be good Lord, but not until after the next election or whatever the appropriate thing is. And itís a small problem, that aspect of it. The big problem is getting terrestrial broadcasters off analog transmission onto digital transmission. Spectrum pricing can play a small role in that, but it really is a pretty small role.

Well, I think I'll stop there. Rather eccentric spelling on these last two slides, I've just noticed. These are not punch points, but pinch points just demonstrating we are not a very aggressive people. [Laughter]. Let me just say what I think the key points are. The key things yet to be resolved.

Gaining critical mass in spectrum trading I think is substantively fundamental. Itís an interesting question what that is, but I think itís quite clear that just sort of spinning out the granting of tradability over a four-year period is not likely to be a very effective way of doing it. Something much bigger and sharper has to be undertaken.

Specifying the interference limits for the purposes of technology neutral licensing is absolutely fundamental as well. I mean, this is a problem everyone has whoís interested and engaged in this. You know, what you do about ultra-wide band and software defined radio. I have no idea what the solution is, but I'm sure that there are people with the requisite skills to be able to come up with that.

Defining the licensed and unlicensed relationship is a sort of a bit of a sleeper in terms of the debate. Because I think it hasnít been taken on board exactly how significant the implications of this might be. The implications of getting it wrong in particular.

And then finally, thereís a question of producing a better methodology for administrative price setting. As I've said, I think almost any sort of reasonable looking numbers are going to represent an improvement. But obviously the closer they come to what it is that the government Ė

[END TAPE 1 SIDE 2]

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Center for Digital Economy.

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CENTER FOR THE DIGITAL ECONOMY CONFERENCE

Participants:

Introductory Remarks:

Thomas Hazlett

Gregg Skall

Bert Halprin

Toni Cook Bush

Martin Cave

Greg Rosston

Coleman Bazelon

Conference Agenda

Powerpoint slide presentations:

Dr. Coleman Bazelon

Professor Martin Cave

THIS TRANSCRIPT HAS NOT BEEN EDITED, AND MAY CONTAIN TYPOGRAPHICAL OR PHONETIC ERRORS.


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