This story is not a tale of a successful privatization program, but is instead a cautionary tale of how regulation has created a worse outcome than privatization could. Technological innovation is enabling us to use the radio spectrum more intensively than before. This innovation is placing pressure on regulation and property rights issues in the management and use of the radio spectrum. The current Federal Communications Commission (FCC) licensing system for spectrum, in which the government retains ownership rights to spectrum, is creating some conflicts and problems that would not arise in a privatized spectrum system. As a political process, it is also more prone to manipulation.

For most of the past century the federal government, usually through the FCC, has retained ownership of rights to transmit in various parts of the radio spectrum. For most of the twentieth century the FCC allocated spectrum use through either an application procedure or through a lottery; both of these allocation methods allowed the FCC to choose the potential licensees, in keeping with the FCC remit to govern broadcasts based on a public interest objective (this public interest remit for the FCC is increasingly coming into question, too).

As early as 1958, economists Ronald Coase and Arthur DeVany recommended privatizing the radio spectrum, selling it through an auction process. Privatization would create well-defined property rights in specific locations on the spectrum, and would enable spectrum owners to transfer rights, and importantly, to determine how much value they place on having adjacent owners far enough away to remove some, most, or all likely interference. Privatization could also involve a judicial system of legal recourse in the event that some owners believed that interference from someone elses spectrum property harmed their use of their spectrum.

Since 1994 the FCC has auctioned spectrum transmission rights. The FCC retains ownership of the spectrum itself, but has been auctioning ten-year licenses conveying the rights to use spectrum for specific purposes. These licenses are not transferable between uses or between license holders. Retaining spectrum ownership enables the FCC to continue regulating broadcast, cable, telephone, wireless cable, and two-way analog and digital (such as analog and digital telephones and pagers) communication uses. However, a turgid system of enabling but regulating radio spectrum use, such as the FCC has been following since its inception, could slow or deter technological change itself, particularly in the burgeoning wireless technology industry.

New wireless devices such as Wi-Fi, Bluetooth, and HomeRF have become popular over the past year as people expand their network capability with wireless access through laptops, phones, PDAs, and other new wireless devices. These devices transmit in the 2.4 GHz (gigahertz) frequency, 2.4-2.483 GHz across short ranges. This portion of the spectrum is popular for several reasons, including the fact that the 2.4 GHz frequency is unlicensed. Thus regulatory hurdles in using this frequency are minimal relative to the other parts of the spectrum. Devices in this frequency also do not generate a lot of interference for each other because of the short ranges over which they transmit and because they generally operate as spread spectrum devices, which decreases the potential for interference. Customers have received a lot of value out of the increased use of this frequency, and these wireless devices have brought information access to many rural and underserved communities.

The 2.4 GHz frequency is right next to a licensed slice of spectrum; the FCC has licensed it to satellite radio operators. One of these satellite radio operators, Sirius, is concerned that consumers who use a mobile device in their cars will create interference over short distances with their satellite radio transmissions to those consumers, particularly in urban areas where buildings can create problems for satellite radio transmissions to automobiles. In a privatized spectrum system, Sirius and the device makers in the 2.4 GHz neighborhood could negotiate a mutually beneficial compromise; in the FCC regulated hybrid system we have now, though, Sirius has petitioned the FCC to force mobile devices in the 2.4 GHz frequency to operate at the lowest possible wattage, which is below the electric energy of the engine running the car. If the FCC grants this petition, the market value of wireless devices to consumers would probably fall.

Sirius appears to be using the regulatory process to increase the value of satellite radio to consumers. The Sirius and 2.4 GHz interference situation is an illustration of the wasteful incentives inherent in using regulation and the political process to mediate spectrum border disputes. Regulation creates incentives for companies to engage in expensive rent seeking. Privatization would favor uses of the radio spectrum that make the most sense for consumers, while regulation favors uses whose developers are better at manipulating the political process. The FCCs continuing ownership and regulation of spectrum gives spectrum users an opportunity to use FCC petitions to mediate disputes instead of a judicial process based on law.

Because of the politics of spectrum rights and the lack of private spectrum ownership, resources might not get to move to higher-valued uses. The FCC is not going to be as impartial a rights arbiter as the combination of well-defined spectrum ownership and a court system using the rule of law. The absence of spectrum privatization may slow or deter potentially beneficial technological change, and leaves in place a political process more prone to financial and other manipulation than one based on markets and law.