- Email: [email protected]
Riding the US wave: spectrum auctions in the digital age
Telecommunications Policy 25 (2001) 719–728
Riding the US wave: spectrum auctions in the digital age$ Andreas Grunwald . Institute for Information, Telecommunications and Media Law, University of Munster, Germany .
Abstract Given its significant technological advantages compared to analog broadcasting, digital television (DTV) will be the television system of the future. However, it requires a full replacement of analog television sets by digital receivers, as DTV can only be watched with special equipment. In order to make this transition happen smoothly without losing the analog television audience, both signals have to be simulcasted until a substantial coverage with DTV broadcasting has been achieved. Australia and the US meanwhile have established a regulatory framework to lead this transition towards the end of analog broadcasting, the socalled analog switch-off. Part of the US regime is the FCC’s obligation to reassign analog frequencies after the switch-off has taken place by means of auction. Spectrum auctions, however, originate not from the US but from New Zealand, where they have been used since the end of 1989 and ever since been subject to legal and political criticism. The article outlines the principles of both the DTV and spectrum auctions regulation and shows the links between both areas of telecommunications regulation. It concludes by suggesting that the analog switch-off is a unique opportunity to reconsider current spectrum policies, as it frees large amounts of the radio spectrum that are today occupied by analog broadcasting and will soon be subject to one of the biggest frequency reassignment processes in the history of telecommunications regulation. r 2001 Elsevier Science Ltd. All rights reserved. Keywords: Analog switch-off; Digital television; Spectrum auctions; Radio spectrum management; Media regulation; Convergence
1. Introduction The advent of digital technologies will significantly change television as we know it today, providing new interactive services that integrate features from both the broadcasting and the Internet world. Viewers will not only receive live and on-demand television programming, they $
Based on a previous version of this paper, the author gave a presentation at the Pacific Telecommunications Council’s 23rd Annual Conference, held during January 14–18, 2001, in Honolulu, Hawaii (http://www.ptc.org/ ptc2001/). E-mail address: [email protected] (A. Grunwald). . 0308-5961/01/$ - see front matter r 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 8 - 5 9 6 1 ( 0 1 ) 0 0 0 4 1 - 6
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A. Grunwald / Telecommunications Policy 25 (2001) 719–728 .
will also be able to access their e-mail accounts, web-based e-commerce sites and new egovernment services via their television sets. Although its introduction will not be without a cost to programmers, broadcasters and consumers, digital television (DTV) clearly is the medium of the future. Eventually, it will replace analog broadcasting. An analog switch-off in broadcasting will take place, fundamentally changing the television landscape, not only from a consumer’s, but also from a regulatory point of view. This paper examines the relevant regulatory challenges by looking at the experiences of Australia and New Zealand. Both countries can serve as role models not only for the Pacific region, but in a global context: While Australia has already presented a precise timeline for the conversion from analog to digital television, New Zealand became the first country in the world to use auctions to assign broadcasting frequencies. Before turning to these regulatory approaches, however, a brief technological overview of DTV is given in order to highlight its advantages and potential compared to an analog broadcasting system.
2. Bit by bitFtelevision’s turn to digital Bringing information handling to a new level of ease and efficiency, digitization underlies all the coming changes in the communications infrastructure, including television. It allows the transformation of diverse original materials, such as sound, still images and moving imageFall represented in a numerical formatFinto a universal, compact and transportable data stream that can be delivered via the Internet as well as by traditional broadcasting technology. (On DTV technologies, see Blair, 1999; de Bruin & Smits, 1999; van Tassel, 1996.) Compared to analog, there are many advantages to digital television. Compression reduces the information in the signal; so more signals can fit into the same bandwidth. Given that the electromagnetic spectrum is a scarce and valuable good, this brings down the high cost of bandwidth for every kind of over-the-air delivery of televisionFbroadcasting, satellite direct-tohome and cellular. Digital technology also features CD-quality sound and clearer images and enables the wide-screen 16 : 9-format. Finally, it enables convergence on the hardware level, the coming together of computer, telephone, and broadcast equipment. However, there are a few disadvantages to DTV as well, at least at the current stage of its development. Most of all, setting standards has proven to be problematic (see Brinkley, 1998; Flaherty, 1994). Currently, there are two different, non-compatible modes in existence: The US standard, ATSC,1 and DVB,2 which originates from Europe but has been adopted by countries like Australia, New Zealand and India, too. As a result, two separate markets for relevant consumer electronics will evolve. Also, the high cost of replacing the installed base of analog equipment for production, transmission and reception is a significant barrier to the full implementation of DTV. And finally, the economics of DTV are vague and risky. Especially when it comes to DTV in a high definition format (HDTV), the development of a market remains doubtful, as consumers will probably not be willing to pay extra fees just to receive a television picture of enhanced quality. 1 2
See http://www.atsc.org/. See http://www.dvb.org/.
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Thus, considering the enormous technological potential of DTV networks as a platform for home-shopping and other interactive electronic commerce activities, as well as for a variety of pay television services such as video-on-demand and pay-per-view, the future of television will be digital.
3. From analog to digitalFmaking the transition 3.1. The need for regulation As seen above, the digitization of broadcasting creates the necessary preconditions for the further development of broadcasting and the integration of information, communications and broadcasting technologies. It thereby opens up markets for new digital applications and a diversity of innovative processes. Specifically, the digitization of broadcasting provides the basic infrastructure for the market launch of new, digital products and services both in traditional broadcasting and in the field of new multimedia services, such as electronic commerce and home shopping applications or video on demand services. The faster the digitization takes place, the greater the market opportunities will be for these new technologies and products. Especially when it comes to the digitization of terrestrial broadcasting, where transmission capacities are especially scarce and therefore economically valuable, this requires appropriate regulatory efforts to facilitate the transition. These efforts have to deal with two main challenges. First, because the current analog radio spectrum is a scarce public good that by means of digital broadcasting technology can be used far more efficiently, the regulation of the analog switch-off has to deal with frequency management before, during, and after the conversion. Second, the analog switch-off requires the use of new or additional reception equipment. From a consumer’s perspective, this means that new devices such as set-top-boxes must be purchased, leased or rented. Regulators and policy makers, though, have to keep in mind that without suitable consumer devices, no one will be able to actually receive DTV. After all, a full switch-off of analog television is only feasible when, at the same time, a complete coverage by digital signals is guaranteed. 3.2. The Australian scenario In Australia, the Television Broadcasting Services (Digital Conversion) Act of 19983 introduced a new schedule to the Broadcasting Services Act of 1992.4 It provides for the conversion of transmission of broadcasting services from analog to digital and requires the Australian Broadcasting Authority (ABA) to develop legislative schemes for the analog switch-off. The ABA followed this provision in March 1999 and released the Commercial and Draft National Television Conversion Scheme. The new law also empowered the ABA to set up Digital Channel Plans (DCPs) to determine which channels are to be allotted in each area and assigned to each broadcaster, and which are the technical limitations and characteristics of those channels. So far, 3 4
Available at http://scaletext.law.gov.au/html/comact/10/5878/top.htm. Available at http://scaletext.law.gov.au/html/comact/8/4013/top.htm.
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the ABA has released DCPs for several metropolitan markets such as Canberra, Brisbane, Adelaide and Melbourne, as well as a regional DCP. (On Australian DTV regulation, see ABA, 1999.) The basic principles and policy objectives for the analog switch-off in Australia are outlined in Schedule 4 to the Broadcasting Services Act. Thereafter, each holder of a television broadcasting license in a metropolitan area is required to commence digital transmissions from January 2001. For regional broadcasters, a similar obligation has to be fulfilled by January 2004. Furthermore, broadcasters have to transmit their programs in both analog and digital mode during a simulcast period of at least eight years. In order to do so, they shall be authorized to use one or more additional channels for their digital transmissions which shall occupy the same amount of bandwidth as the channels used for analog broadcasting (7 MHz). During the simulcast period, the digital transmissions are required to achieve the same level of coverage and potential reception as soon as is practicable. Also, beginning in January 2003, networks in metropolitan areas are required to broadcast at least 20 h of high definition programming per week. At the end of the simulcast period, currently planned for 2008, analog transmissions are to cease. Broadcasters are then required to return the frequencies they no longer need for analog transmissions to the ABA, in order to allow for newFdigitalFtelevision broadcasting licenses to be issued. Under this regime, however, it is up to the broadcasters which one of their two channels they want to keep for their future digital transmissions and which one they want to return to the ABA for redistribution. 3.3. The US scenario The US route towards digital terrestrial began in 1997, when every existing analog broadcaster was assigned an additional 6 MHz frequency to allow additional digital transmissions (FCC, Fifth Report and Order, FCC 97-116. On US DTV regulation, see also Geller, 1998; Wiley, 1997). Raising many concerns especially from the Republican side, who strongly disagreed with the FCC’s ‘‘spectrum giveaway’’ policy, this assignment happened for free. Also, broadcasters were awarded a large amount of ‘‘spectrum flexibility’’, as there were only very limited simulcast requirements established.5 Essentially, it is not mandatory for US stations to broadcast HDTV programming over their digital frequencies. They only have to make sure that a certain amount of DTV programming is available for free, while at the same time they are allowed to use their new transmission capacities to offer additional and ancillary services such as Pay TV or datacasting. If they do so, however, the FCC shall establish a program to assess and collect an annual fee from the broadcasters that reflects the revenues they are generating from their additional free spectrum.6 This happened in late 1998 when the FCC issued a Report and Order in this matter that defined the annual fee at a rate of 5 percent of the broadcasters gross income from any additional service that requires a subscription fee to be received.7 As laid out in the US Communications Act, terrestrial transmissions of analog television broadcasting shall be determined in the US by December 31, 2006, if at this time at least 85% of 5
See 47 USC Section 336 (b)(2). See 47 USC Section 336 (e)(1). 7 FCC, Report and Order, FCC 98-303. 6
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US households have gone digital.8 In order to achieve this aim, the FCC has set up a DTV roll-out plan.9 First, it focused on the major television markets, but eventually required that by May 2003, all stations must have started their digital transmissions. As for the additional frequencies, they have to be returned to the FCC once the analog signal has been switched off in 2006. These frequencies will then be assigned to new usersFadditional DTV broadcasters as well as other wireless servicesFby auction. However, this auction was originally scheduled to happen as early as March 2001, although the spectrum in question will not be freed by its current users for at least another five years. Apparently, the FCC realized this dilemma in the meantime, too, and postponed the auction.10
4. Dividing the radio spectrumFthe case of auctions Efficiently managing the radio spectrum is a key to success for the analog switch-off to happen smoothly and for DTV regulation as a whole. Assigning additional channels to existing broadcasters for digital simulcasting purposes is an issue that has to be confronted today. Still, because it is more of a technical than a regulatory problem, it should be solved by broadcast engineers rather than by policy makers. The latter, however, will then have to decide how to deal with today’s broadcasting channels once they are no longer needed for analog transmissions. In Australia, broadcasters eventually have to return these channels to the ABA, which will then use them to authorize new DTV services. This regime, though, does not yet require the ABA to utilize a particular licensing procedure for the reassignment. In this regard, the US scenario for television’s conversion to digital took another step by making it mandatory for the FCC to auction off the additional channels after they have been returned in 2006. Regarding the significant amount of spectrum that is currently used for analog broadcasting and that will accordingly be returned in 2006, this auction will probably be the largest in the history of the regulation of the electromagnetic spectrum. From an academic, but also from a policy-making point of view, this raises the general question if spectrum auctions are a suitable way to regulate the electromagnetic spectrum. New Zealand was the first country in the world to utilize auctions for allocating spectrum. The New Zealand experience became a role model. Throughout the 1990s, numerous jurisdictions worldwide adopted the auctioning system to regulate the commercial use of their radio frequencies. One of these successors is the US, where since 1994, spectrum auctions have generated over 20 billion dollars for the federal budget. However, while the New Zealand model incorporates a true privatization of spectrum, the US approach is a regulatory one. 4.1. PrivatizationFthe New Zealand experience Prior to 1987, the New Zealand government maintained a virtual monopoly in the provision and regulation of telecommunications services. Under this regime, the management of the radio 8
See 47 USC Section 309 (j)(14)(A). See 47 CFR Section 73.624 (d). 10 FCC, Public Notice, DA 01-266. 9
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spectrum was handled by the post office. By the mid-1980s, however, the New Zealand economy was suffering from severe inflation and unemployment rates, because, according to some analysts (see NERA, 1988), heavy-handed regulation, cross-subsidies and protectionism had led to misallocation of resourcesFnot only in the telecommunications sector, but in numerous other areas of the country’s economy as well, such as the railroads, ports and hospitals. Against this background, New Zealand passed the Telecommunications Act of 1987 and opened up the telecommunications market. The goal of this initiative was to improve the efficiency with which new services were provided to the public (see Crandall, 1998; Pritchard-Kelly, 1996). The Telecommunications Act of 1987 was followed by the Radiocommunications Act in 1989. The new law established a market-based system to allocate electromagnetic spectrum and completed the reform of the New Zealand telecommunications sector. As a core element, the Radiocommunications Act of 1989 introduced the use of auctions to allocate spectrum. For that, it established property rights in the radio spectrum of two different kinds: management rights and licenses (see Spiller & Cardilli, 1999). Compared to a license, a management right is superior. Its owner has broad control over a certain frequency band and determines the use to which the band is to be put by granting licenses. For the most part, management rights are owned by the government, although at the time of privatization some management rights were owned by incumbent license holders, who would continue to hold them until the expiration of their license. Both kinds of property rights, management rights and licenses last for a period of 20 years and on expiry automatically revert to the government (see pritchard-Kelly, 1996). For the government, the radio spectrum is managed not by a special agency or authority, but by the Ministry of Commerce. Under the Radiocommunications Act of 1989, it has broad powers to decide which frequency bands shall be transferred to private management. However, the Ministry of Commerce still manages most of the spectrum in the traditional manner, keeping the management rights to itself and awarding licenses for special uses to individual licensees who are then not allowed to use this spectrum for other purposes. Thus far, only very few frequency bands have been transferred to private management authorities, and even these bands were initially designed for specific uses. All these transfers, though, were executed by way of auctioning. Interested bidders were invited into competitive ‘‘bid tenders’’, with equal information available to all bidders at each stage. A short list of bidders eligible to make a final bid for the spectrum was made on the basis of their initial bids. The spectrum was auctioned only if there was more than one expression of interest; otherwise the license was allocated for free on a first-come/first-served basis to the only applicant. The New Zealand auctions themselves followed the sealed-bid, second-price ‘‘Vickery’’ method (fundamentally Vickery, 1961), meaning that the bidder submitting the second highest bid would take precedence over the bidder submitting the highest bid (see Schroepfer, 1992). This model raised a great deal of criticism. Indeed, looking at the results of the first New Zealand auctions, the Vickery model proved to be unsuitable for such a small telecommunications market. For instance, there were only two participants in the mobile telephony auctionFNew Zealand Telecom and Bell South. As a consequence, the second price strategy caused the New Zealand government to lose hundreds of thousands of dollars in a handful of cases where the secondhighest bids were frivolously lowFas little as a few dollars. Eventually, this distortion in price moved the country to switch to a simple highest-bidder system. (For the results of the New Zealand auction see Pritchard-Kelly, 1996; Mueller, 1993).
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4.2. RegulationFthe US experience Since 1993, the FCC has had the authority to use auctions to assign licenses if mutually exclusive applications to operate a telecommunications service are filed. As part of his budget submitted to Congress, President Clinton proposed competitive bidding as a revenue source and as a means of improving the FCC’s licensing method. At this time, however, a number of exceptions from a pure auctioning scheme were made. First, broadcast services were excepted from the new law, as comparative hearings were continued to be used for radio and TV. Second, there were special rules for ‘‘designated entities’’, by which Congress directed the FCC to handicap certain license auctions so that particular licenses would be won by members of a certain group of ethnic minorities. Eventually, both factors helped to overcome the substantial criticism of those members of Congress who traditionally opposed any market-based spectrum policy. (On the 1993 legislation, see Allard, 1993; Hook, 1993; Kummel, 1996.) Only four years later, though, the FCC’s new auctioning power was already widened, as Congress passed the Balanced Budget Act of 1997. Under the new law, the FCC was now authorized to auction any kind of license including those for radio and television services. However, the overwhelming proportion of broadcast licensesFmeasured in economic valueFare unaffected by this provision, because DTV services are explicitly excepted from auctions, as are all license renewals. In practice, this leaves only very marginal AM or FM radio station service licenses to be subject of the FCC’s current auctioning authority. (On the 1997 legislation, see O’Brien Ham & Buchanan, 1998.) With digital broadcasting, the US decided to give an additional frequency to every existing broadcaster of analog television in 1997. This frequency was assigned free of charge and is to be used to simulcast the analog programming in digital format during the time of transition to a fully digital broadcasting system. After the switch-off of analog television, however, which is scheduled for the end of 2006, these additional frequencies are to be returned to the FCC which then will hold an auction to reallocate them, too. Therefore, although at the moment, the FCC’s auctioning authority does only affect a minority of US broadcasting services, this situation will change dramatically as soon as the analog switch-off has happened and vast portions of the electromagnetic spectrum that is currently used for analog broadcasting will be auctioned to new users. (On US DTV regulation and spectrum auctions, see Goodman, 1997.)
5. Spectrum auctionsFthe future? Following the example of New Zealand, auctions are increasingly becoming the prime administrative method to allocate radio frequencies. As the US situation shows, they will sooner or later strongly affect the regulation of broadcast media as well. Given this background, a closer look at their advantages and disadvantages should be worth taking. 5.1. Advantages Auctions are a fast way to assign authorizations to use the electromagnetic spectrum. Compared to the so-called beauty contests, they minimize regulatory delay and inefficiency.
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Studies from the US show that in the case of Personal Communications Services (PCS), assigning those licenses by comparative hearing took at least three times longer as auctioning the same kind of licenses.11 Secondly, auctions are transparent, with clearly established rules and definite outcomes. They avoid potential and actual government decisions that are biased towards or against individual industry players, providing a basis that allows any potential licensee to determine the licensing decision. Thirdly, auctions help to avoid a wasteful use of scarce spectrum resources, as they ensure that spectrum ends up in the hands of those who value it the most. This, in turn, ensures that services and technologies are made available more rapidly because the spectrum has been assigned at a cost that is based on the expected return for its use. Accordingly, by getting radio licenses into the hands of those who value them the most, the public gets a chance to recover their full value. (As advocates of market-based spectrum assignments methods, see Cramton (1998), de Vany (1998), Hazlett (1998), and the classic critique of the FCC’s comparative hearings by Coase, 1959; based on Herzel, 1951.) 5.2. Disadvantages Despite the advantages of spectrum auctions, they may not be appropriate under all circumstances. First, there may be issues such as public safety and national defense where fundamental public policy goals might not be well served by using a competitive bidding mechanism. Furthermore, an auctioning system creates additional entry barriers to the telecommunications market. Auctions might help to put telecommunications licenses in the hands of those who value them the most, but this valuation is one based purely on financial grounds. Given the fact that under an auctioning regime, the assignment criteria are limited to the highest financial bid, auctions may prove to be inefficient in terms of failing to reflect the full potential of an applicant. Especially when it comes to auctioning broadcast licenses, this implies the risk that an applicant who offers a high quality programming concept that might serve the public interest, does not get a chance to broadcast this program simply because he is outbid by another applicant with greater financial standing. Especially with smaller and minority-owned businesses, auctions can therefore turn out to limit access to the radio market and thereby to seriously restrict the freedom of broadcasting. (For a critique of the US spectrum auctions regime, see also Benkler (1998) and Noam (1998). Both authors argue in favor of an open access model to radio waves.)
6. Conclusion The digitization of broadcast television requires a number of regulatory efforts especially in the field of spectrum management. In order to provide for a smooth and fast transition from analog to digital transmissions, regulators are asked to set out a precise timeline offering a considerable amount of planning certainty to both consumer and industry groups. The Australian example illustrates how such a timeline can be designed. Additionally, it has to be taken into account that after the analog switch-off has eventually happened, significant amounts of the radio 11
See FCC, Report to Congress on Spectrum Auctions, FCC 97-353.
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spectrumFthe same frequencies that today are used for analog transmissionsFwill be available for reassignment to new services. Regarding the licensing process, however, the use of auctions should be critically evaluated. Not only the New Zealand experience, but also the examples of the US and the ongoing 3G/UMTS licensing procedures in Europe indicate that there is a strong movement in communications (and budget) politics towards this kind of regulation. Nevertheless, competitive bidding standards may prove to be inappropriate to meet the actual needs of the communications and especially the broadcasting industry, in particular when it comes to safeguarding the public interest in the use of radio frequencies. On the other hand, auctions may help to facilitate the analog switch-off: Spectrum no longer required for analog terrestrial broadcasting could be auctioned, either before or after the actual closure of the analog transmission network. The proceeds from such an auction could then be used to subsidize the supply of digital reception equipment in areas that may not have had the benefit of a number of years of analog and digital simulcasting of the qualifying services.
References Australian Broadcasting Authority (ABA). (1999). Digital terrestrial television broadcasting planning handbook (July 1999). Allard, N. W. (1993). The new spectrum auction law. Seton Hall Legislative Journal, 18, 13. Benkler, Y. (1998). Overcoming agoraphobia: Building the commons of the digitally networked environment. Harvard Journal of Law & Technology, 11, 287. Blair, R. (1999). Digital techniques in broadcast transmission. Woburn: Butterworth–Heinemann. Brinkley, J. (1998). Defining vision. San Diego: Harvest. Coase, R. H. (1959). Journal of Law & Economics, 2, 1. Cramton, P. (1998). The efficiency of the FCC spectrum auctions. Journal of Law & Economics, 41, 727. Crandall, R. W. (1998). Journal of Law & Economics, 41, 821. de Bruin, R., & Smits, J. (1999). Digital video broadcasting. Boston: Artech House. de Vany, A. S. (1998). Implementing a market-based spectrum policy. Journal of Law & Economics, 41, 627–646. Flaherty, J. A. (1994). Digital advanced television in the U.S.A.: Standardization and implementation, a progress report. PLI/Pat, 402, 303. Geller, H. (1998). Public interest regulation in the digital TV era. Cardozo Arts & Entertainment Law Journal, 16, 341. Goodman, E. P. (1997). Federal Communications Law Journal, 49, 517. Hazlett, T. (1998). Assigning property rights to radio spectrum users: Why did FCC license auctions take 67 years? Journal of Law & Economics, 41, 529. Herzel, L. (1951). ‘‘Public interest’’ and the market in color television regulation. Chicago Law Review, 18, 802. Hook, S. A. (1993). Allocation of the radio spectrum: Is the sky the limit? Indiana International & Comparative Law Review, 3, 319. Kummel, W. (1996). Spectrum bids, bets, and budgets: Seeking an optimal allocation and assignment process for domestic commercial electromagnetic spectrum products, services, and technology. Federal Communications Law Journal, 48, 511. Mueller, M. (1993). New Zealand’s revolution in spectrum management. Information Economics & Policy, 5, 159. NERA. (1988). Management of the radio frequency spectrum in New Zealand. Report. Noam, E. M. (1998). Spectrum auctions: Yesterday’s heresy, today’s orthodoxy, tomorrow’s anachronism. Taking the next step to open spectrum access. Journal of Law & Economics, 41, 765. O’Brien Ham, K., & Buchanan, J. C. (1998). From one end of the spectrum to the other: The FCC’S auction authority under the balanced budget act of 1997. Adminstrative Law Review, 50, 771.
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Pritchard-Kelly, R. W. (1996). A comparison between spectrum auctions in the United States and New Zealand. Maryland Journal of International Law & Trade, 20, 155. Schroepfer, T. J. (1992). Allocating spectrum through the use of auctions. Hastings Communications & Entertainment Law Journal, 14, 35. Spiller, P. T., & Cardilli, C. (1999). Towards a property rights approach to communications spectrum. Yale Journal on Regulation, 16, 53. van Tassel, J. (1996). Advanced television systems. Woburn: Focal Press. Vickery, W. (1961). Journal of Finance, 16, 8. Wiley, R. (1997). Developments in communications law. PLI/Patent, 498, 73.
Riding the US wave: spectrum auctions in the digital age$ Andreas Grunwald . Institute for Information, Telecommunications and Media Law, University of Munster, Germany .
Abstract Given its significant technological advantages compared to analog broadcasting, digital television (DTV) will be the television system of the future. However, it requires a full replacement of analog television sets by digital receivers, as DTV can only be watched with special equipment. In order to make this transition happen smoothly without losing the analog television audience, both signals have to be simulcasted until a substantial coverage with DTV broadcasting has been achieved. Australia and the US meanwhile have established a regulatory framework to lead this transition towards the end of analog broadcasting, the socalled analog switch-off. Part of the US regime is the FCC’s obligation to reassign analog frequencies after the switch-off has taken place by means of auction. Spectrum auctions, however, originate not from the US but from New Zealand, where they have been used since the end of 1989 and ever since been subject to legal and political criticism. The article outlines the principles of both the DTV and spectrum auctions regulation and shows the links between both areas of telecommunications regulation. It concludes by suggesting that the analog switch-off is a unique opportunity to reconsider current spectrum policies, as it frees large amounts of the radio spectrum that are today occupied by analog broadcasting and will soon be subject to one of the biggest frequency reassignment processes in the history of telecommunications regulation. r 2001 Elsevier Science Ltd. All rights reserved. Keywords: Analog switch-off; Digital television; Spectrum auctions; Radio spectrum management; Media regulation; Convergence
1. Introduction The advent of digital technologies will significantly change television as we know it today, providing new interactive services that integrate features from both the broadcasting and the Internet world. Viewers will not only receive live and on-demand television programming, they $
Based on a previous version of this paper, the author gave a presentation at the Pacific Telecommunications Council’s 23rd Annual Conference, held during January 14–18, 2001, in Honolulu, Hawaii (http://www.ptc.org/ ptc2001/). E-mail address: [email protected] (A. Grunwald). . 0308-5961/01/$ - see front matter r 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 8 - 5 9 6 1 ( 0 1 ) 0 0 0 4 1 - 6
720
A. Grunwald / Telecommunications Policy 25 (2001) 719–728 .
will also be able to access their e-mail accounts, web-based e-commerce sites and new egovernment services via their television sets. Although its introduction will not be without a cost to programmers, broadcasters and consumers, digital television (DTV) clearly is the medium of the future. Eventually, it will replace analog broadcasting. An analog switch-off in broadcasting will take place, fundamentally changing the television landscape, not only from a consumer’s, but also from a regulatory point of view. This paper examines the relevant regulatory challenges by looking at the experiences of Australia and New Zealand. Both countries can serve as role models not only for the Pacific region, but in a global context: While Australia has already presented a precise timeline for the conversion from analog to digital television, New Zealand became the first country in the world to use auctions to assign broadcasting frequencies. Before turning to these regulatory approaches, however, a brief technological overview of DTV is given in order to highlight its advantages and potential compared to an analog broadcasting system.
2. Bit by bitFtelevision’s turn to digital Bringing information handling to a new level of ease and efficiency, digitization underlies all the coming changes in the communications infrastructure, including television. It allows the transformation of diverse original materials, such as sound, still images and moving imageFall represented in a numerical formatFinto a universal, compact and transportable data stream that can be delivered via the Internet as well as by traditional broadcasting technology. (On DTV technologies, see Blair, 1999; de Bruin & Smits, 1999; van Tassel, 1996.) Compared to analog, there are many advantages to digital television. Compression reduces the information in the signal; so more signals can fit into the same bandwidth. Given that the electromagnetic spectrum is a scarce and valuable good, this brings down the high cost of bandwidth for every kind of over-the-air delivery of televisionFbroadcasting, satellite direct-tohome and cellular. Digital technology also features CD-quality sound and clearer images and enables the wide-screen 16 : 9-format. Finally, it enables convergence on the hardware level, the coming together of computer, telephone, and broadcast equipment. However, there are a few disadvantages to DTV as well, at least at the current stage of its development. Most of all, setting standards has proven to be problematic (see Brinkley, 1998; Flaherty, 1994). Currently, there are two different, non-compatible modes in existence: The US standard, ATSC,1 and DVB,2 which originates from Europe but has been adopted by countries like Australia, New Zealand and India, too. As a result, two separate markets for relevant consumer electronics will evolve. Also, the high cost of replacing the installed base of analog equipment for production, transmission and reception is a significant barrier to the full implementation of DTV. And finally, the economics of DTV are vague and risky. Especially when it comes to DTV in a high definition format (HDTV), the development of a market remains doubtful, as consumers will probably not be willing to pay extra fees just to receive a television picture of enhanced quality. 1 2
See http://www.atsc.org/. See http://www.dvb.org/.
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Thus, considering the enormous technological potential of DTV networks as a platform for home-shopping and other interactive electronic commerce activities, as well as for a variety of pay television services such as video-on-demand and pay-per-view, the future of television will be digital.
3. From analog to digitalFmaking the transition 3.1. The need for regulation As seen above, the digitization of broadcasting creates the necessary preconditions for the further development of broadcasting and the integration of information, communications and broadcasting technologies. It thereby opens up markets for new digital applications and a diversity of innovative processes. Specifically, the digitization of broadcasting provides the basic infrastructure for the market launch of new, digital products and services both in traditional broadcasting and in the field of new multimedia services, such as electronic commerce and home shopping applications or video on demand services. The faster the digitization takes place, the greater the market opportunities will be for these new technologies and products. Especially when it comes to the digitization of terrestrial broadcasting, where transmission capacities are especially scarce and therefore economically valuable, this requires appropriate regulatory efforts to facilitate the transition. These efforts have to deal with two main challenges. First, because the current analog radio spectrum is a scarce public good that by means of digital broadcasting technology can be used far more efficiently, the regulation of the analog switch-off has to deal with frequency management before, during, and after the conversion. Second, the analog switch-off requires the use of new or additional reception equipment. From a consumer’s perspective, this means that new devices such as set-top-boxes must be purchased, leased or rented. Regulators and policy makers, though, have to keep in mind that without suitable consumer devices, no one will be able to actually receive DTV. After all, a full switch-off of analog television is only feasible when, at the same time, a complete coverage by digital signals is guaranteed. 3.2. The Australian scenario In Australia, the Television Broadcasting Services (Digital Conversion) Act of 19983 introduced a new schedule to the Broadcasting Services Act of 1992.4 It provides for the conversion of transmission of broadcasting services from analog to digital and requires the Australian Broadcasting Authority (ABA) to develop legislative schemes for the analog switch-off. The ABA followed this provision in March 1999 and released the Commercial and Draft National Television Conversion Scheme. The new law also empowered the ABA to set up Digital Channel Plans (DCPs) to determine which channels are to be allotted in each area and assigned to each broadcaster, and which are the technical limitations and characteristics of those channels. So far, 3 4
Available at http://scaletext.law.gov.au/html/comact/10/5878/top.htm. Available at http://scaletext.law.gov.au/html/comact/8/4013/top.htm.
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the ABA has released DCPs for several metropolitan markets such as Canberra, Brisbane, Adelaide and Melbourne, as well as a regional DCP. (On Australian DTV regulation, see ABA, 1999.) The basic principles and policy objectives for the analog switch-off in Australia are outlined in Schedule 4 to the Broadcasting Services Act. Thereafter, each holder of a television broadcasting license in a metropolitan area is required to commence digital transmissions from January 2001. For regional broadcasters, a similar obligation has to be fulfilled by January 2004. Furthermore, broadcasters have to transmit their programs in both analog and digital mode during a simulcast period of at least eight years. In order to do so, they shall be authorized to use one or more additional channels for their digital transmissions which shall occupy the same amount of bandwidth as the channels used for analog broadcasting (7 MHz). During the simulcast period, the digital transmissions are required to achieve the same level of coverage and potential reception as soon as is practicable. Also, beginning in January 2003, networks in metropolitan areas are required to broadcast at least 20 h of high definition programming per week. At the end of the simulcast period, currently planned for 2008, analog transmissions are to cease. Broadcasters are then required to return the frequencies they no longer need for analog transmissions to the ABA, in order to allow for newFdigitalFtelevision broadcasting licenses to be issued. Under this regime, however, it is up to the broadcasters which one of their two channels they want to keep for their future digital transmissions and which one they want to return to the ABA for redistribution. 3.3. The US scenario The US route towards digital terrestrial began in 1997, when every existing analog broadcaster was assigned an additional 6 MHz frequency to allow additional digital transmissions (FCC, Fifth Report and Order, FCC 97-116. On US DTV regulation, see also Geller, 1998; Wiley, 1997). Raising many concerns especially from the Republican side, who strongly disagreed with the FCC’s ‘‘spectrum giveaway’’ policy, this assignment happened for free. Also, broadcasters were awarded a large amount of ‘‘spectrum flexibility’’, as there were only very limited simulcast requirements established.5 Essentially, it is not mandatory for US stations to broadcast HDTV programming over their digital frequencies. They only have to make sure that a certain amount of DTV programming is available for free, while at the same time they are allowed to use their new transmission capacities to offer additional and ancillary services such as Pay TV or datacasting. If they do so, however, the FCC shall establish a program to assess and collect an annual fee from the broadcasters that reflects the revenues they are generating from their additional free spectrum.6 This happened in late 1998 when the FCC issued a Report and Order in this matter that defined the annual fee at a rate of 5 percent of the broadcasters gross income from any additional service that requires a subscription fee to be received.7 As laid out in the US Communications Act, terrestrial transmissions of analog television broadcasting shall be determined in the US by December 31, 2006, if at this time at least 85% of 5
See 47 USC Section 336 (b)(2). See 47 USC Section 336 (e)(1). 7 FCC, Report and Order, FCC 98-303. 6
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US households have gone digital.8 In order to achieve this aim, the FCC has set up a DTV roll-out plan.9 First, it focused on the major television markets, but eventually required that by May 2003, all stations must have started their digital transmissions. As for the additional frequencies, they have to be returned to the FCC once the analog signal has been switched off in 2006. These frequencies will then be assigned to new usersFadditional DTV broadcasters as well as other wireless servicesFby auction. However, this auction was originally scheduled to happen as early as March 2001, although the spectrum in question will not be freed by its current users for at least another five years. Apparently, the FCC realized this dilemma in the meantime, too, and postponed the auction.10
4. Dividing the radio spectrumFthe case of auctions Efficiently managing the radio spectrum is a key to success for the analog switch-off to happen smoothly and for DTV regulation as a whole. Assigning additional channels to existing broadcasters for digital simulcasting purposes is an issue that has to be confronted today. Still, because it is more of a technical than a regulatory problem, it should be solved by broadcast engineers rather than by policy makers. The latter, however, will then have to decide how to deal with today’s broadcasting channels once they are no longer needed for analog transmissions. In Australia, broadcasters eventually have to return these channels to the ABA, which will then use them to authorize new DTV services. This regime, though, does not yet require the ABA to utilize a particular licensing procedure for the reassignment. In this regard, the US scenario for television’s conversion to digital took another step by making it mandatory for the FCC to auction off the additional channels after they have been returned in 2006. Regarding the significant amount of spectrum that is currently used for analog broadcasting and that will accordingly be returned in 2006, this auction will probably be the largest in the history of the regulation of the electromagnetic spectrum. From an academic, but also from a policy-making point of view, this raises the general question if spectrum auctions are a suitable way to regulate the electromagnetic spectrum. New Zealand was the first country in the world to utilize auctions for allocating spectrum. The New Zealand experience became a role model. Throughout the 1990s, numerous jurisdictions worldwide adopted the auctioning system to regulate the commercial use of their radio frequencies. One of these successors is the US, where since 1994, spectrum auctions have generated over 20 billion dollars for the federal budget. However, while the New Zealand model incorporates a true privatization of spectrum, the US approach is a regulatory one. 4.1. PrivatizationFthe New Zealand experience Prior to 1987, the New Zealand government maintained a virtual monopoly in the provision and regulation of telecommunications services. Under this regime, the management of the radio 8
See 47 USC Section 309 (j)(14)(A). See 47 CFR Section 73.624 (d). 10 FCC, Public Notice, DA 01-266. 9
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spectrum was handled by the post office. By the mid-1980s, however, the New Zealand economy was suffering from severe inflation and unemployment rates, because, according to some analysts (see NERA, 1988), heavy-handed regulation, cross-subsidies and protectionism had led to misallocation of resourcesFnot only in the telecommunications sector, but in numerous other areas of the country’s economy as well, such as the railroads, ports and hospitals. Against this background, New Zealand passed the Telecommunications Act of 1987 and opened up the telecommunications market. The goal of this initiative was to improve the efficiency with which new services were provided to the public (see Crandall, 1998; Pritchard-Kelly, 1996). The Telecommunications Act of 1987 was followed by the Radiocommunications Act in 1989. The new law established a market-based system to allocate electromagnetic spectrum and completed the reform of the New Zealand telecommunications sector. As a core element, the Radiocommunications Act of 1989 introduced the use of auctions to allocate spectrum. For that, it established property rights in the radio spectrum of two different kinds: management rights and licenses (see Spiller & Cardilli, 1999). Compared to a license, a management right is superior. Its owner has broad control over a certain frequency band and determines the use to which the band is to be put by granting licenses. For the most part, management rights are owned by the government, although at the time of privatization some management rights were owned by incumbent license holders, who would continue to hold them until the expiration of their license. Both kinds of property rights, management rights and licenses last for a period of 20 years and on expiry automatically revert to the government (see pritchard-Kelly, 1996). For the government, the radio spectrum is managed not by a special agency or authority, but by the Ministry of Commerce. Under the Radiocommunications Act of 1989, it has broad powers to decide which frequency bands shall be transferred to private management. However, the Ministry of Commerce still manages most of the spectrum in the traditional manner, keeping the management rights to itself and awarding licenses for special uses to individual licensees who are then not allowed to use this spectrum for other purposes. Thus far, only very few frequency bands have been transferred to private management authorities, and even these bands were initially designed for specific uses. All these transfers, though, were executed by way of auctioning. Interested bidders were invited into competitive ‘‘bid tenders’’, with equal information available to all bidders at each stage. A short list of bidders eligible to make a final bid for the spectrum was made on the basis of their initial bids. The spectrum was auctioned only if there was more than one expression of interest; otherwise the license was allocated for free on a first-come/first-served basis to the only applicant. The New Zealand auctions themselves followed the sealed-bid, second-price ‘‘Vickery’’ method (fundamentally Vickery, 1961), meaning that the bidder submitting the second highest bid would take precedence over the bidder submitting the highest bid (see Schroepfer, 1992). This model raised a great deal of criticism. Indeed, looking at the results of the first New Zealand auctions, the Vickery model proved to be unsuitable for such a small telecommunications market. For instance, there were only two participants in the mobile telephony auctionFNew Zealand Telecom and Bell South. As a consequence, the second price strategy caused the New Zealand government to lose hundreds of thousands of dollars in a handful of cases where the secondhighest bids were frivolously lowFas little as a few dollars. Eventually, this distortion in price moved the country to switch to a simple highest-bidder system. (For the results of the New Zealand auction see Pritchard-Kelly, 1996; Mueller, 1993).
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4.2. RegulationFthe US experience Since 1993, the FCC has had the authority to use auctions to assign licenses if mutually exclusive applications to operate a telecommunications service are filed. As part of his budget submitted to Congress, President Clinton proposed competitive bidding as a revenue source and as a means of improving the FCC’s licensing method. At this time, however, a number of exceptions from a pure auctioning scheme were made. First, broadcast services were excepted from the new law, as comparative hearings were continued to be used for radio and TV. Second, there were special rules for ‘‘designated entities’’, by which Congress directed the FCC to handicap certain license auctions so that particular licenses would be won by members of a certain group of ethnic minorities. Eventually, both factors helped to overcome the substantial criticism of those members of Congress who traditionally opposed any market-based spectrum policy. (On the 1993 legislation, see Allard, 1993; Hook, 1993; Kummel, 1996.) Only four years later, though, the FCC’s new auctioning power was already widened, as Congress passed the Balanced Budget Act of 1997. Under the new law, the FCC was now authorized to auction any kind of license including those for radio and television services. However, the overwhelming proportion of broadcast licensesFmeasured in economic valueFare unaffected by this provision, because DTV services are explicitly excepted from auctions, as are all license renewals. In practice, this leaves only very marginal AM or FM radio station service licenses to be subject of the FCC’s current auctioning authority. (On the 1997 legislation, see O’Brien Ham & Buchanan, 1998.) With digital broadcasting, the US decided to give an additional frequency to every existing broadcaster of analog television in 1997. This frequency was assigned free of charge and is to be used to simulcast the analog programming in digital format during the time of transition to a fully digital broadcasting system. After the switch-off of analog television, however, which is scheduled for the end of 2006, these additional frequencies are to be returned to the FCC which then will hold an auction to reallocate them, too. Therefore, although at the moment, the FCC’s auctioning authority does only affect a minority of US broadcasting services, this situation will change dramatically as soon as the analog switch-off has happened and vast portions of the electromagnetic spectrum that is currently used for analog broadcasting will be auctioned to new users. (On US DTV regulation and spectrum auctions, see Goodman, 1997.)
5. Spectrum auctionsFthe future? Following the example of New Zealand, auctions are increasingly becoming the prime administrative method to allocate radio frequencies. As the US situation shows, they will sooner or later strongly affect the regulation of broadcast media as well. Given this background, a closer look at their advantages and disadvantages should be worth taking. 5.1. Advantages Auctions are a fast way to assign authorizations to use the electromagnetic spectrum. Compared to the so-called beauty contests, they minimize regulatory delay and inefficiency.
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Studies from the US show that in the case of Personal Communications Services (PCS), assigning those licenses by comparative hearing took at least three times longer as auctioning the same kind of licenses.11 Secondly, auctions are transparent, with clearly established rules and definite outcomes. They avoid potential and actual government decisions that are biased towards or against individual industry players, providing a basis that allows any potential licensee to determine the licensing decision. Thirdly, auctions help to avoid a wasteful use of scarce spectrum resources, as they ensure that spectrum ends up in the hands of those who value it the most. This, in turn, ensures that services and technologies are made available more rapidly because the spectrum has been assigned at a cost that is based on the expected return for its use. Accordingly, by getting radio licenses into the hands of those who value them the most, the public gets a chance to recover their full value. (As advocates of market-based spectrum assignments methods, see Cramton (1998), de Vany (1998), Hazlett (1998), and the classic critique of the FCC’s comparative hearings by Coase, 1959; based on Herzel, 1951.) 5.2. Disadvantages Despite the advantages of spectrum auctions, they may not be appropriate under all circumstances. First, there may be issues such as public safety and national defense where fundamental public policy goals might not be well served by using a competitive bidding mechanism. Furthermore, an auctioning system creates additional entry barriers to the telecommunications market. Auctions might help to put telecommunications licenses in the hands of those who value them the most, but this valuation is one based purely on financial grounds. Given the fact that under an auctioning regime, the assignment criteria are limited to the highest financial bid, auctions may prove to be inefficient in terms of failing to reflect the full potential of an applicant. Especially when it comes to auctioning broadcast licenses, this implies the risk that an applicant who offers a high quality programming concept that might serve the public interest, does not get a chance to broadcast this program simply because he is outbid by another applicant with greater financial standing. Especially with smaller and minority-owned businesses, auctions can therefore turn out to limit access to the radio market and thereby to seriously restrict the freedom of broadcasting. (For a critique of the US spectrum auctions regime, see also Benkler (1998) and Noam (1998). Both authors argue in favor of an open access model to radio waves.)
6. Conclusion The digitization of broadcast television requires a number of regulatory efforts especially in the field of spectrum management. In order to provide for a smooth and fast transition from analog to digital transmissions, regulators are asked to set out a precise timeline offering a considerable amount of planning certainty to both consumer and industry groups. The Australian example illustrates how such a timeline can be designed. Additionally, it has to be taken into account that after the analog switch-off has eventually happened, significant amounts of the radio 11
See FCC, Report to Congress on Spectrum Auctions, FCC 97-353.
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spectrumFthe same frequencies that today are used for analog transmissionsFwill be available for reassignment to new services. Regarding the licensing process, however, the use of auctions should be critically evaluated. Not only the New Zealand experience, but also the examples of the US and the ongoing 3G/UMTS licensing procedures in Europe indicate that there is a strong movement in communications (and budget) politics towards this kind of regulation. Nevertheless, competitive bidding standards may prove to be inappropriate to meet the actual needs of the communications and especially the broadcasting industry, in particular when it comes to safeguarding the public interest in the use of radio frequencies. On the other hand, auctions may help to facilitate the analog switch-off: Spectrum no longer required for analog terrestrial broadcasting could be auctioned, either before or after the actual closure of the analog transmission network. The proceeds from such an auction could then be used to subsidize the supply of digital reception equipment in areas that may not have had the benefit of a number of years of analog and digital simulcasting of the qualifying services.
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