FREEING THE AIRWAVES

MAY 29TH 2003

Should radio spectrum be treated as property, or as a common resource?

WHAT is the best analogy for radio spectrum? Is it, as most people

intuitively believe, a palpable resource like land, best allocated

through property rights that can be bought and sold? Or is it, thanks

to technological progress, more like the sea, so vast that it doesn't

need to be parcelled out (at least for shipping traffic), in which case

general rules on how boats should behave are enough to ensure that it

is used efficiently.

Wireless folk have been discussing these questions for some time. Now,

regulators are starting to take an interest, because increasing demands

for wireless services require more efficient use of the spectrum.

Earlier this month, America's Federal Communications Commission (FCC)

decided to allow leasing and trading of frequency licences--the

property model--as a first step towards establishing a market in radio

spectrum. However, when regulators meet for the World

Radiocommunication Conference in Geneva, starting on June 9th, they

will try to harmonise their plans to expand the part of the spectrum

that can be used without a licence, treating it as a common resource.

These two different regulatory models are already competing across the

airwaves. On the one hand, telecoms companies have spent vast sums on

licences for third-generation (3G) wireless services--but are facing

serious financial and technical obstacles to building networks. On the

other, there are already many wireless local access networks, called

WiFi, which operate in unlicensed spectrum--and are growing at a

phenomenal rate.

The question of how best to allocate spectrum is not new. Over 40 years

ago Ronald Coase, who won the Nobel prize for economics in 1991, argued

that there is no reason why spectrum should be treated differently

from, for example, land. Both are scarce--so a market is the best way

to allocate their use. Although this seems blindingly obvious today, it

took the FCC more than two decades to start auctioning radio

frequencies.

The debate has since moved on. Auctions alone are now considered

unsatisfactory, because they do not change the traditional structure of

spectrum allocation. And even after last month's reforms allowing

leasing and trading, the FCC remains a DIRIGISTE bureaucracy which

decides, in most cases, how the spectrum is divvied up, who gets which

slice, and for what use.

So what is the best way to replace this command-and-control regime?

Proponents of the property approach want to create, as soon as

possible, a market in which rights to spectrum blocks can be freely

traded--rather in the way that pollution rights now are. Some have

already drawn up plans for a "big bang": a giant simultaneous auction

of as much spectrum as possible.

Hold hard, say the advocates of common access. If spectrum were scarce

by some law of nature, they argue, selling licences would certainly be

the best solution. But in fact it is scarce only in terms of old,

clunky technology. When radio equipment needed "channels", defined by

frequency and power, to allow communication without interference,

airwaves were indeed a scarce resource.

Now, however, thanks to the dramatic decline in the cost of computer

power, wireless devices are far cleverer, meaning that they can use

spectrum more efficiently and are more tolerant of interference. They

are able to communicate over a broad range of frequencies at once (this

is called "spread spectrum"), to help each other out ("mesh networks")

and to adapt to the local environment ("agile radio"). Instead of

creating a spectrum market, argues Yochai Benkler, a law professor at

New York University, it should now be possible to rely on the market in

smart radio equipment without anybody having to control the airwaves.

Technological progress is not the only reason why spectrum markets

would be a second-best solution, Mr Benkler argues. For one, they are

likely to come with high transaction costs. If spectrum is priced

efficiently in an increasingly dynamic wireless world, the necessary

overhead in network management and metering is likely to be quite

costly. Innovation could suffer as well: rights holders could ignore

technological improvement just because it does not fit their business

model. With spectrum as commons, anybody can innovate, as users do on

the internet.

KEEPING THE OPTIONS OPEN

Despite their differences, the two camps agree that they do not have

enough hard data to bet everything on one regime: they must experiment

with both. David Farber and Gerald Fulhaber, telecoms professors at the

University of Pennsylvania, for instance, want a big-bang auction. But

they also want to let others use spectrum freely, as long as they do

not "meaningfully" interfere with the owner's right to a clear

broadcast.

Despite its recent move toward a spectrum market, the FCC too prefers a

hybrid approach, saying in a recent report that "no single regulatory

model should be applied to all spectrum". Early last year, it

authorised systems using a technology called ultra-wideband to operate

at very low power to avoid interference. The agency is also looking

into expanding the part of the spectrum for which no licence is needed.

If experiences in other areas of technology are any guide, there is a

good chance that both approaches will be around for some time, although

the commons solution may eventually come to dominate. The internet, at

least from the perspective of the end-user, is a common resource, with

bandwidth allocated on a first-come-first-served basis. In software,

the commons is growing, in the form of free open-source programs

developed by volunteers.

Technology may thus help to create markets; but it also makes some of

them obsolete. In this case it has turned land into sea, metaphorically

speaking. To draw a historical parallel: the development of better