Briefing on the Sept. 11th Terrorst Attacks

While Nation Distracted by Sept. 11th, FCC Chairman Announces Corporate Giveaway of UHF Channel Revenues

By Norman Ornstein and Michael Calabrese , Washington Post
October 14, 2001

On Sept. 17, in the regulatory equivalent of the dead of night, the Federal Communications Commission (FCC) announced a change in policy that amounts to one of the most expensive and unjustifiable grants of corporate welfare in our nation's history. If it isn't reversed, it could set a precedent that will have a long-lasting and damaging effect on our pocketbooks and the U.S. economy.

The FCC's decision…virtually unreported in the aftermath of the Sept. 11 terrorist attacks, except by the trade press…gives 21 broadcast companies a green light to sell off a slice of the public airwaves and pocket billions of dollars that would otherwise go to the U.S. Treasury. The FCC wants these broadcasters…who operate more than 130 TV stations on UHF channels 60 to 69…to clear the band for use by the booming wireless industry. To speed things along, the agency is allowing any broadcaster on the 60 to 69 spectrum to negotiate its own deal with a wireless company. It remains unclear how much of the revenue, if any, will be shared with the public.

The FCC has described this break from tradition as an incentive for the broadcasters to vacate the band more quickly; ransom might be a better term.

Broadcast companies were given these channels five years ago…at no cost…with the understanding that they would use them temporarily while converting from an analog signal to digital and high-definition television (HDTV).

Many of the broadcasters on the 60 to 69 band, calling themselves the Spectrum Clearing Alliance and led by Paxson Communications, have been lobbying the FCC to let them negotiate their own deals with wireless companies. In short, a portion of the most precious public asset of the information age…the electromagnetic spectrum…is the captive of licensees who want a payoff to set free something they got for nothing in the first place. And due to congressional inaction and the pressing need to find enough frequencies for the wireless industry, the FCC seems all too willing to oblige. At a time when the federal government is borrowing from the Social Security trust funds, it is a costly mistake for the government to share the billions of dollars in revenue that it usually receives from the public auction of such frequencies.

How did we arrive at this turn of events? Under the Telecommunications Act of 1996, every TV station in the nation received a temporary license for a second channel at no charge. (An auction would have added between $37 billion and $70 billion to the government's coffers, some experts have said…and would bring in even more today.) Congress passed this provision because it wanted to expedite the transition from analog to digital and HDTV, which was said to be critical to U.S. economic competitiveness. Since broadcasters, unlike the phone companies, pay nothing to use the airwaves, the law required them to return the extra channel upon substantial completion of the conversion.

Congress instructed the FCC to auction the returned channels to the highest bidders.

This legislative approach was controversial at the time. Several leading conservatives…including then-Senate Majority Leader Bob Dole and Sen. John McCain…criticized the law as a violation of free market principles. Dole has continued to object to the law. We don't give away trees to newspaper publishers,' he wrote in 1997 after leaving the Senate. The airwaves are a natural resource. They do not belong to the broadcasters, phone companies or any other industry. They belong to the American people.'

The legislation's supporters insisted that the extra channels were no windfall, only a loan. By no later than 2006, they said, broadcasters would complete the conversion to digital and return the extra spectrum. The public would benefit by getting higher-quality TV signals…and the revenues, once the returned spectrum was auctioned.

Now fast-forward five years. Digital broadcasting is moving at the pace of a glacier, partly because of technical challenges, partly because broadcasters found little economic benefit in converting quickly to digital. Crisper digital pictures do not boost the number of viewing households…or ad dollars…especially when 85 percent of homes already receive a clear signal via a paid cable or satellite subscription. Moreover, as cell phone usage exploded, the growing shortage of spectrum inflated its value; the longer broadcasters delayed, the more leverage they gained to demand a payback for returning the extra spectrum they hoarded.

The financial stakes are enormous. While FCC auctions since 1994 have attracted more than $36 billion in bids from wireless phone companies, broadcasters and other incumbent licensees continue to use the spectrum rent-free. This spring, with wireless phone companies eager to further develop mobile Internet and e-mail services, Wall Street analysts told the National Association of Broadcasters Futures Summit that the private market value of all commercial TV frequencies may be as high as $367 billion, based on recent auctions here and in Europe…more than twice the stock market value of all local TV stations combined.

Two years ago, Congress directed the FCC to begin the exchange process by auctioning six channels in the 60 to 69 band. The broadcasters occupying 60 to 69 protested that they were unable to give up their space that quickly because so few households had purchased digital-capable television sets, which are quite expensive. Meanwhile, freeing up large swaths of scarce spectrum for wireless broadband services…known as 3G (for Third Generation)…suddenly became a high priority among government policymakers.

The wireless revolution was advancing rapidly in Europe and Japan, threatening U.S. dominance; pressure to get some spectrum out to the U.S. wireless industry rose rapidly.

Some broadcasters saw an opening. Lowell Paxson, chairman of Paxson Communications Corp., has been open about the Spectrum Clearing Alliance's intention. "We are not holding the spectrum as a hostage seeking ransom," he wrote in a letter to the editor of Barron's earlier this year. "We are entrepreneurs hoping to reward our shareholders who invested in our business of amassing spectrum." His "business of amassing spectrum" is about to pay off big time, thanks to the FCC. Paxson's company has 17 stations on the 60 to 69 band. In return for giving up space he received from the public for free, Paxson is likely to receive a check for $1 billion. After the FCC decision, he said, "The broadcasters are going to be in for a windfall."

FCC commissioners justify their decision by saying it gets spectrum faster into 3G hands and protects Americans who rely on free over-the-air TV from losing certain foreign-language and other niche channels. Privately, FCC officials say that Congress created this predicament when it allowed broadcasters to occupy both analog and digital channels until 85 percent of U.S. homes could receive a digital signal – which could take a decade or more.

Free TV is unquestionably a public good, and Congress understandably did not want to force Americans without cable or satellite to pay extra for a digital converter just to keep a television signal. But there was an obvious alternative: The federal government could hold to its original timetable and buy every household in America a digital tuner (with mass production costs likely to be $100 or less) and still have tens of billions left over from auction proceeds. Sound crazy? John Ashcroft, another critic of the 1996 giveaway, suggested just such a plan when he was in the Senate.

To be sure, this FCC decision can be interpreted narrowly, since it directly affects only one slice of broadcast spectrum. But if you were a broadcaster somewhere else on the spectrum, and you saw Paxson and his colleagues rewarded for their delay, what would you do? Congress needs to act before the rest of the broadcast industry decides to make money through their "amassing" of spectrum. That may be a good business plan, but it's a sorry way to manage the public airwaves.

Norman Ornstein is a resident scholar at the American Enterprise Institute. Michael Calabrese directs the Public Assets Program at the New America Foundation.

© 2001 The Washington Post Company