Economist article on markets vs. commons

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Gerry Faulhaber <gerry-faulhaber () mchsi com>
Date: Sun, 08 Jun 2003 10:02:43 -0400
To: dave () farber net
Subject: Economist article on markets vs. commons

A "both sides" article from the Economist on the spectrum debate [for IP].
 
Economics focus 

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 ships did not lead
to parcelling up the world's oceans but to something called free trade.



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