Spectrum Lords

In late March, when the National Association of Broadcasters held its annual Futures Summit in Pebble Beach, California, the assembled pack of Wall Street financial-analyst invitees presented the broadcasters with an astonishing but presumably welcome fact: Recent auctions in Europe and the United States indicated that the market value of the spectrum space--the airwaves over which television and radio are broadcast--that the license holders currently occupy could be as much as $367 billion. (To put that in perspective, the entire local broadcasting industry itself is worth only $100 billion.)

The owners of the roughly 1,600 local television stations across the country are no longer just broadcasters. Rather, they are spectrum lords, rentiers of the digital age, sitting atop hundreds of billions of dollars' worth of prized spectrum space, which many plan to use not only for traditional broadcasting but for new, nonbroadcasting, high-tech services like wireless phones and computers, or which they plan to sell to the highest third-party bidders.

What makes this so appalling is that the spectrum is public property. It was given to broadcasters--on loan--in exchange for the transmission of programming in the public interest; as part of long-established law, broadcasters must explicitly forgo any claims to ownership of the spectrum they use. The already absurdly minimal requirements for public-interest broadcasting--such as offering a certain number of hours per week of "educational" or public affairs shows--are routinely abrogated or honored only in the most technical sense, as with product-shilling cartoons that are designated educational kids' programming. But at least in the old days the stations were using the spectrum for broadcasting, the purpose for which it had been granted them.

Not anymore. Two converging technological trends have changed the economics of the spectrum and multiplied the number of its possible uses. The first trend is the move toward digital television broadcasting. DTV, as it is commonly called, requires new television sets and new broadcasting equipment but can transmit TV signals on much less spectrum space and send signals with much sharper resolution and clarity. Beginning in the mid-1980s, broadcasters began clamoring for more spectrum space in order to start broadcasting standard-definition digital signals and eventually to begin transmitting in the super-sharp format now known as high-definition TV (HDTV). Each local-broadcast licensee already held six megahertz of spectrum space to broadcast its analog signal. Then, as part of the legislative logrolling that accompanied the Telecommunications Act of 1996, the federal government agreed to give each broadcaster an additional six megahertz. In order for viewers who had yet to buy digital televisions not to get cut off, the Telecommunications Act stipulated that broadcasters could hold on to their extra six megahertz until 2006. The understanding was that in 2006, both the industry and the viewing public would have switched over to digital broadcasting--so at that point, the analog spectrum would be returned to the government, which would then be able to deploy that portion of the spectrum for other uses.

But there was a catch: If DTV hadn't penetrated 85 percent of the market by 2006, the broadcasters could hold their double allotment of spectrum space until it did. Currently, less than 1 percent of the U.S. population has all-digital TV; market penetration probably won't reach 85 percent for many, many years. So broadcasters will be able to hold on to their extra spectrum space more or less indefinitely, according to Michael Calabrase, director of the Public Assets Program at the New America Foundation.

Why would they want to keep so much spectrum? Here's where the second technological trend comes in. Even as demand for digital television is lagging, demand for wireless communications--mobile phones, laptops, palm computers, and other hybrid technologies--is exploding. And these high-bandwidth communications require space on the same spectrum currently occupied by the broadcasters. Thus, the demand by wireless communication services (and their consumers) to take hold of the old analog space has been immense.

If all had gone as originally planned, the broadcasters would simply have returned their analog spectrum to the government as they started using their digital spectrum instead; the government, in turn, could have auctioned the spectrum to wireless-service providers. But with the development of digital television effectively stalled, the broadcasters don't have to leave. And many of them are now arguing that they should not only receive compensation for the expense of moving off their analog space (which might be reasonable) but actually get paid something close to the market value of the spectrum the government loaned them. (Never mind that this is akin to your loaning me your car and my selling it to someone else.) And the broadcasters are so politically powerful, it looks like this is what they're going to get.

But the scandal doesn't end there. When Congress agreed in 1996 to give the broadcasters another six megahertz of spectrum space, it was with the understanding that they would be broadcasting HDTV--one channel of which takes up the full six megahertz. Some stations will do that or will fill up their allotment with several standard-digital signals. But it's likely that many will broadcast one or two standard-digital signals, which take up only one megahertz each, and then farm out the remaining space to nonbroadcast services at an enormous profit. The broadcasters do have to pay 5 percent of their gross revenue to the government for selling nonbroadcast services. But this is a nominal price when you consider that the government gave them the product they're selling, on the condition that it would be used for a different purpose entirely.

The first allotment of analog space that will be auctioned off is now occupied by channels 60 through 69 on your UHF television dial. Some of those stations are niche broadcasters, such as foreign-language stations; but most show infomercials and reruns of old sitcoms. With cable television now prevalent, only about 15 percent to 20 percent of viewers even get channels 60 to 69 over the airwaves as opposed to via cable, satellite, or some other subscription service. Almost everyone agrees that the benefits of turning this spectrum space over to wireless services outweigh the costs of denying a small number of viewers the ability to watch reruns of Eight Is Enough. The question is, who should get all the money the wireless services are willing to pay at auction for that spectrum? By rights, it should go to the government, since the airwaves are public property. But the stations in the 60–69 channel range are demanding that most of it go to them.

The man who'll likely be the first to cash in is Lowell W. "Bud" Paxson, chairman of Paxson Communications Corporation, which owns 18 stations nationwide in the 60–69 range. The company also owns PAX TV, "the nation's seventh broadcast television network" and "America's only family friendly TV network." Paxson Communications and about 60 percent of the other license holders in the 60–69 range are willing to move exclusively over to digital--for a price.

The market value of spectrum space used for those channels is between $15 billion and $30 billion. Paxson proposes an auction in which most of the money goes to the broadcaster-occupants. He is currently working with Spectrum Exchange Group, a company that specializes in coordinating private spectrum auctions, on an auction that would allow bidders simultaneously to buy out the individual broadcasters and pay the federal government for the rights to use the space. If Paxson and his partners are able to pull this off, they will make billions of dollars. When Paxson was charged with extorting a ransom in exchange for giving back what he never owned in the first place, he responded with a startling candor that made a mockery of broadcasters' claim to operating in the public interest: "We are entrepreneurs hoping to reward our shareholders who invested in our business of amassing spectrum."

As this column goes to press, Paxson, his fellow broadcasters, and Spectrum Exchange are trying to bring their auction concept to fruition. Meanwhile, the Bush administration's recently released budget proposed a delay of the next spectrum auction from September 2001 until as late as 2004. But given the political clout of the broadcaster lobby and the intense pressure on all sides to get spectrum space into the hands of the wireless-service providers, Paxson and his cronies look like they are holding all of the cards.