Sometimes “No” is the Right Answer for Market Transactions
|Topics:||Corporations, Securities & Antitrust • Law & Economics • Telecommunications & Electronic Media|
|Sponsors:||Telecommunications & Electronic Media Practice Group|
Over the years, U.S. commercial spectrum policy has moved away from a government command-and-control regime to a more market-based approach, largely informed by the groundbreaking work of Nobel laurate economist Ronald Coase. In addition to using auctions to allocate spectrum to its best and highest use, the Federal Communications Commission (“FCC”) has encouraged parties to enter into private negotiations to resolve interference disputes so that we can repurpose spectrum from low to high-value uses. While Americans have benefited tremendously from this market-based approach, it is important to recognize that market transactions do not always work out; sometimes “no-deal” is the market outcome. But when billions of dollars are at stake, parties dissatisfied with the market outcome are often drawn to use the regulatory system to get the government to step in and change that answer to “yes.”
Take, for example, the case of Ligado (formerly LightSquared) Networks, who holds licenses to 40 MHz of spectrum in the Mobile-Satellite Service (MSS) spectrum band. Since 2010, Ligado has sought permission from the FCC to use this spectrum for terrestrial wireless services. While terrestrial operations are permitted in the band, the FCC’s rules require that Ligado first demonstrate that its ground-based network is ancillary to its satellite offerings (which are negligible) and that these ground-based transmissions not interfere with existing satellite signals in the band. Ligado’s originally proposed network did interfere with existing services in the band, so permission was denied.
Subsequently, Ligado has allayed interference concerns for some affected parties, including some players in the GPS community who have lifted their objections as part of individual settlement agreements. Similarly, Ligado has compensated Inmarsat for years for the impact of its proposed operations on Inmarsat’s business. And recently, in response to an extensive technical report from the Department of Transportation, Ligado once again modified their technical plans.
While Ligado deserves credit for responding to some interference concerns, its problem is that the FCC’s rules do not require the company to reach agreements with some existing users: FCC rules require that Ligado resolve all interference concerns and, contrary to what Ligado might like the public to believe, there remain a number of significant residual disputes—including complaints from the aeronautical community, the National Oceanic and Atmospheric Administration (NOAA), and Iridium Communications, the nation’s largest satellite communications provider. As such, Ligado’s petition remains in limbo.
Ligado’s investors are understandably growing impatient and the company seemingly has no real existing business to support the ongoing and substantial costs of its speculative spectrum play. Apparently desperate, Ligado has now turned to the blame game, accusing the FCC and the National Telecommunications Information Administration (NTIA) of foot-dragging. Delay, the company and its advocates argue, is unwarranted and is costing Americas billions in foregone benefits.
The FCC and the NTIA, both on the hook to find more commercial spectrum, appear unmoved. Rightfully so. The success or failure of Ligado’s odyssey is in Ligado’s hands, not at the government’s feet.
Existing FCC rules for the MSS-band protect incumbent users from undue interference from terrestrial operations, thereby granting a property right (in non-interference) to the satellite services already operating in the band. Rather than have the government play favorites, by clearly assigning property rights the FCC has set the stage for marketplace negotiations, thereby letting the affected parties decide the best use of the MSS band.
Accordingly, Ligado not having its way is not a market failure, nor is it a failure of government. FCC rules set the conditions for market transactions. Markets do not guarantee that everyone gets their way, only that resources are assigned to their most valuable use. Sometimes—indeed, most times—the market outcome is no deal at all. No American consumes all the goods sold in the economy.
If the value of Ligado’s terrestrial operations is greater than the interference costs imposed on existing MSS users, then it is efficient for the FCC to grant Ligado’s petition. On the other hand, it is efficient to leave Ligado’s proposed terrestrial operations idle if the value of these operations is less than the costs of the interference. The affected parties are in the best position to determine these tradeoffs. As suggested by the logic of the Coase Theorem, the FCC’s clear grant of a property right—in this case to existing satellite users of the band—is necessary to ensure that the MSS band is allocated to its highest valued use, and that use need not be Ligado’s preferred outcome. If Ligado’s desired use of the spectrum is truly worth the tens of billions it claims and the interference costs are as low as it also claims, then Ligado is in a position to sufficiently compensate existing users, directly or indirectly, to operate its network.
It is tempting to conclude that the lack of agreements with all affected parties indicates that the private benefits of Ligado’s plan, at least in portions of the band, are below the harms to existing users. This may be true. But, in light of this new aggressive strategy of a blame game, it may be that Ligado believes it is cheaper and quicker to circumvent market negotiations with government action obtained through political force. With market-oriented leadership at both the FCC and NTIA, this strategy should fall on deaf ears. Ligado may be forced to set aside more spectrum and/or reduce power levels to reach consensus and, ultimately, even abandon its plans to provide ancillary terrestrial service altogether. If so, this would be no market failure; this is how markets work.
With U.S. mobile operators in desperate need of more commercial spectrum, it is in everyone’s interest for Ligado to reach agreements with incumbent users to resolve interference concerns. But if such agreements cannot be reached, then the government should not put its finger on the scale. Indeed, consumers are never served when aggressive lobbying campaigns result in crony capitalism; consumers are only served when markets work.
So if “no deal” is “the deal”, then the government must respect the market outcome.
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Dr. George S. Ford is Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (http://www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.