0227-0340_HAZLETT_081313_WEB (DO NOT DELETE) 8/13/2013 5:00 PM EXACTITUDE IN DEFINING RIGHTS: RADIO SPECTRUM AND THE “HARMFUL INTERFERENCE” CONUNDRUM Thomas W. Hazlett † and Sarah Oh †† ABSTRACT In the century since the Radio Act of 1912 initiated U.S. spectrum allocation rules, a precise definition of “harmful interference”—the control of which forms the rationale for regulation—has eluded policymakers. In one sense, that result is unsurprising; rights are always defined incompletely. In another sense, however, the regulatory system is dysfunctional, severely limiting the productive use of spectrum while locked down in years- long border disputes. These disagreements have, in turn, triggered calls to develop brighter lines and fuller engineering specifications of harmful interference. However, this emphasis on exact definitions is misguided. Spectrum use rights generate more robust market development when they feature technically fuzzy borders but are awarded in economically efficient bundles. The key ingredients are (a) exclusive, flexible rights; (b) frequency borders set via standardized edge emission limits; (c) large bundles of complementary rights that limit fragmentation; and (d) fluid secondary trading that allows mergers to end border disputes by eliminating borders. Regulators should focus less on delineating precise interference contours, and instead expeditiously distribute standard bandwidth rights to economically responsible agents, taking care to avoid undue fragmentation (and tragedy of the anti- commons). Many episodes illustrate these lessons, including those involving reallocation of the broadcast TV band, the emergence of HD radio, the Nextel/public safety “spectrum swap,” and the ongoing WCS/SDARS dispute. Each instance reveals that economic incentives, not engineering complexity, drive—or block—productive coordination of radio spectrum use. © 2013 Thomas W. Hazlett and Sarah Oh. All Rights Reserved. † Professor of Law and Economics, George Mason University School of Law; FCC Chief Economist, 1991–1992. This Article follows from a presentation on Creating Efficient Spectrum Property, Towards an Economic Definition of “Harmful Interference” in Radio Transmissions, Presentation at the Conference on Spectrum Markets: Challenges Ahead, Kellogg School of Management, Northwestern University (June 2–3, 2011). The author thanks Brent Skorup for excellent research assistance. †† Research Fellow, Information Economy Project. Ph.D. Student in Economics, George Mason University; J.D. George Mason University; B.S. Stanford University, Management Science & Engineering. 0227-0340_HAZLETT_081313_WEB (DO NOT DELETE) 8/13/2013 5:00 PM 228 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 28:227 TABLE OF CONTENTS I. INTRODUCTION ................................................................................................. 229 A. THE CRISIS IN U.S. SPECTRUM POLICY..................................................... 229 B. EXACTITUDE IN SPECTRUM USE RIGHTS BOUNDARIES AT THE FCC ............................................................................................................... 231 C. THE FCC’S APPROACH TO SPECTRUM USE RIGHTS DEFINITIONS ..... 232 D. LIBERAL LICENSES THAT REMEDY TRAGEDIES OF THE ANTI- COMMONS .................................................................................................... 236 E. DEFINING HARMFUL INTERFERENCE AS IF ECONOMICS MATTERS ..................................................................................................... 239 II. EXACTITUDE ...................................................................................................... 240 III. THE TROUBLE WITH EXACTITUDE: EXAMPLES ........................ 245 A. TV BAND REALLOCATION: PROBLEMS WITH RIGID RIGHTS .............. 245 B. HD RADIO: BUNDLING RIGHTS ................................................................ 247 C. LICENSED PCS VERSUS UNLICENSED PCS: ADMINISTRATIVE RULES VERSUS MARKET MECHANISMS ................................................. 251 D. WCS/SATELLITE RADIO: THE BENEFITS OF MERGER ........................ 254 E. NEXTEL/PUBLIC SAFETY RADIO: ELIMINATING BORDERS ................ 256 F. INTERFERENCE TEMPERATURE: A FAILED ATTEMPT AT GREATER CLARITY .................................................................................... 269 IV. BEYOND EXACTITUDE: ENABLING OPTIMAL COMBINATIONS ............................................................................................. 277 A. BASIC STRATEGY ........................................................................................... 277 B. LICENSED AND UNLICENSED DEPLOYMENTS IN AN EFFICIENT MIXED USE REGIME ............................................................. 282 C. RULES TO ENABLE MARKETS ..................................................................... 288 D. OBSERVED EFFICIENCIES IN EMERGING SPECTRUM MARKETS ......... 292 E. MOBILE OPERATORS AS SPECTRUM OWNERS AND NEIGHBORS ........ 301 F. THE COSTLY AND UNPRODUCTIVE SEARCH FOR ADDITIONAL SPECIFICITY ................................................................................................. 305 G. THE AM RADIO CRITIQUE ......................................................................... 314 H. LIABILITY RULES VERSUS PROPERTY RULES .......................................... 320 I. OPTIMAL SPECTRUM RIGHTS DEFINED ................................................... 323 J. AUCTIONS AS INTERFERENCE CONTROL MECHANISMS ....................... 324 K. OVERLAYS ...................................................................................................... 327 V. CONCLUSION ...................................................................................................... 335 0227-0340_HAZLETT_081313_WEB (DO NOT DELETE) 8/13/2013 5:00 PM 2013] RADIO SPECTRUM AND HARMFUL INTERFERENCE 229 I. INTRODUCTION “Regardless of how or to whom particular rights are assigned, ensuring that all rights are clearly delineated is important to avoiding disputes, and provides a clear common framework from which spectrum users can negotiate alternative arrangements.” –Federal Communications Commission (2002)1 “Commenters . almost uniformly cited the FCC’s interference rules as the prime example of rules that are not clearly defined. A common refrain was that the FCC rules speak of the right to be protected from “harmful interference,” but this term is not defined in technical terms . .” –Federal Communications Commission (2002)2 A. THE CRISIS IN U.S. SPECTRUM POLICY There is officially a crisis in U.S. spectrum policy. Congressionally chartered studies,3 top U.S. policymakers,4 and the Presidential Administration,5 citing the need for additional wireless bandwidth for economic growth, have pushed for dramatic improvements in the process whereby the Federal Communications Commission (“FCC”) allocates the radio spectrum. The emergence of wireless 3G and 4G data networks, as well as a slew of popular handsets and applications after the 2007 introduction of 1. FCC, SPECTRUM POLICY TASK FORCE REPORT, ET DOCKET NO. 02-135, 18 (Nov. 2002) [hereinafter SPTFR 2002] (emphasis added), available at http://hraunfoss.fcc.gov/ edocs_public/attachmatch/DOC-228542A1.pdf. 2. Id. (emphasis added). 3. The National Broadband Plan, issued by the FCC, was mandated in the American Recovery and Reconstruction Act of 2009 (also known as “the stimulus bill”). The FCC issued its report in March 2010; Chapter 5, “Spectrum,” deals with the issues discussed in this Article. FCC, CONNECTING AMERICA: THE NATIONAL BROADBAND PLAN, CH. 5: SPECTRUM 73 (2010) [hereinafter NBP 2010], available at http://www.broadband.gov/ download-plan/. 4. Lawrence H. Summers, Technological Opportunities, Job Creation, and Economic Growth, Remarks at the New America Foundation on the President’s Spectrum Initiative (June 28, 2010), http://www.whitehouse.gov/administration/eop/nec/speeches/ technological-opportunities-job-creation-economic-growth; Julius Genachowski, Chairman, Federal Communications Commission, Prepared Remarks for the 2011 International Consumer Electronics Show (Jan. 7, 2011), http://hraunfoss.fcc.gov/edocs_public/ attachmatch/DOC-303984A1.pdf. 5. White House, Office of the Press Secretary, Presidential Memorandum: Unleashing the Wireless Broadband Revolution (June 28, 2010), http://www.whitehouse.gov/the-press- office/presidential-memorandum-unleashing-wireless-broadband-revolution. 0227-0340_HAZLETT_081313_WEB (DO NOT DELETE) 8/13/2013 5:00 PM 230 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 28:227 the iPhone, triggered a “mobile data tsunami” that has prompted policy makers to respond to the demands of the market.6 But institutional stasis hampers this effort at virtually every step. In March 2010, the National Broadband Plan set a goal of making available another 300 MHz of spectrum (a bit more than one-half of that currently available to mobile carriers) by 2015.7 Yet today, every one of the proceedings comprising that plan is either behind schedule or has been abandoned.8 Scholars are unshaken in their assessment that “[t]he FCC’s traditional system for managing the radio spectrum is a paradigm of economic inefficiency.”9 Prominent communications experts advance the following diagnosis of the underlying problem: Regulators have failed in the century of radio regulation since the Radio Act of 191210 to precisely define radio “interference.”11 Such conflicts have been of central importance to regulators, who are charged with creating rules for wireless operations that avoid the “tragedy of the commons.”12 Arguably,