How the FCC went from "beauty contests" to spectrum auctions
Managing the airwaves is arguably the FCC's most important function. Nearly every commercial device that transmits a wireless signal on a radio frequency, from AM radios to satellites to 5G cell phones, must comply with our rules, from licensing to interference. The way the FCC manages and licenses the radio spectrum has changed dramatically since the agency's inception in 1934. And while today's spectrum auctions may seem logical and obvious to many, that wasn't always the case. How has spectrum management evolved over time and what has that meant for consumers and the development of technology in the U.S. and around the globe? Evan is joined by Evan Kwerel, Senior Economic Advisor in the FCC's Office of Economics and Analytics. (Disclaimer)
MR. SWARZTRAUBER: Welcome to "More Than 7 Dirty Words," the official FCC podcast. I'm Evan Swarztrauber.
Managing the airwaves is arguably the FCC's most important function. Nearly every commercial device that transmits a wireless signal on a radio frequency, from AM radios to satellites to 5G cell phones, must comply with our rules, from licensing to interference.
The way the FCC manages and licenses the radio spectrum has changed dramatically since the agency's inception in 1934. And while the way we do things today, like auctioning spectrum licenses, may seem logical and obvious to many, that wasn't always the case. So, how has spectrum management evolved over time and what has that meant for consumers and the development of technology in the U.S. and around the globe?
Joining me to discuss this is Evan Kwerel, Senior Economic Advisor in the FCC's Office of Economics and Analytics. Evan, thank you so much for joining the show.
MR. KWEREL: Well, thank you, and I must say that I'm glad you were named after me.
MR. SWARZTRAUBER: Exactly, yeah, my parents never told me why they named me Evan, but it's nice to finally found out after 29 years on this earth. So, Evan, like you said, great name you have there, but my second question is the same for all guests, which is how did you get to your current role at the FCC? Your name has been in the news a lot recently and I'm curious how you ended up becoming the superstar that you are today in the telecom world.
MR. KWEREL: Well, it was somewhat serendipitous. When I was a freshman in college, I thought I wanted to be a psychiatrist, so I took biology and tried to sign up for psychology, but I got closed out of psychology, so I thought, well, I'll take introductory economics, and I just fell in love with the idea that economic analysis could be used to make the world a better place on a large scale, not just one person at a time.
MR. SWARZTRAUBER: Well, it's pretty remarkable that basically due to a scheduling conflict, your entire career has played out the way that it has. Had you gotten into that, you know, whatever, 300-person introductory psychology class, this might have been a different interview. Maybe you'd be psychoanalyzing me, but I'm glad things worked out because things worked out for the American people as a result of your scheduling, your delinquency in signing up for classes. So, after that, you know, where did your career take you?
MR. KWEREL: Okay, well, so after college, I went to graduate school in economics at MIT, and then from MIT, I went to be an assistant professor in economics at Yale, but after five years at Yale, I concluded that academic research wasn't for me. So, I took a leave from Yale and applied for and received this Brookings Economic Policy Fellowship, which allowed you to spend 12 months with a government agency and two months at Brookings.
So, I ended up working in the policy office of the Department of the Interior, which incidentally dealt with offshore oil and gas auctions. So, towards the end of my time at the Interior Department, I got a call from the Chief of Staff of the President's Council of Economic Advisers asking if I'd be interested in working there. Well, of course I'd be interested in working there, but those are typically one or two-year jobs for visiting academics.
So, at the end of a year there, I actually needed a real job and I got several job offers, and I spoke to one of the council members, Bill Niskanen. I don't know if you're familiar with him. Yeah, he was a big deal --
MR. SWARZTRAUBER: I've heard the name.
MR. KWEREL: -- at Cato, and he suggested I take a job at the FCC, and he gave me one word of advice, spectrum. And I don't know if you're familiar with The Graduate. If you are, you may remember that Benjamin, who was played by Dustin Hoffman, his breakout role, was at this graduation party, and Mr. Robinson came up to him and put his arm around his shoulders and said, Ben, I've got one word for you, plastics. But anyway, these cultural references from 1968 may be a bit dated, but for that one person out there who may be listening and may be old enough or a movie buff, you --
MR. SWARZTRAUBER: Well, I'm glad you mentioned spectrum because that is mostly going to be the topic of the show. So, I mentioned earlier that, you know, for folks in telecom worlds who are fairly familiar with the FCC and wireless, you know, companies, and folks in the industry, they are now used to auctions. Auctions are a normal part of life, but that wasn't always the case. So, prior to the auctioning of licenses to transmit frequencies over the radio spectrum, how did the FCC manage spectrum?
MR. KWEREL: Well, the FCC used what economists pejoratively refer to as command and control, and the notion was that regulation, not markets, determined spectrum uses and users, and the big problem with it was that spectrum usage rights were narrowly defined. Basically, it was controlled administratively. Use was limited to specific uses, for example, broadcasting or satellite. You couldn't do anything else with it. So, everything was divided up because, you know, the government knew the best and wanted to, you know, fairly allocate the spectrum among these various uses.
Particularly damaging was that we used to specify the technologies. So, for example, the first cellular service, which was this AMPS, A-M-P standard, FCC said that's the only thing you can use. You can't use anything else. You didn't have -- there was like practically no technological flexibility. So, and one of the particular issues was that they specified services, the location, based on a point, not an area.
Well, one consequence of defining licenses at a point instead of an area was that much of the spectrum was not available to any users because the geography was not exhaustively licensed, and this is what we in the industry refer to as white space. That was then and, you know, nothing, you know, happens discontinuously. It's more of an evolutionary process. So, in 1984, cellular service was introduced in the United States, and the nature of technology required a more flexible licensing structure, you know, covering large blocks of spectrum and within a large geographic area where cellular licensees could deploy multiple low power base stations and reuse assigned frequencies as needed to meet the demand.
MR. SWARZTRAUBER: Right, and you could imagine some of the problems that would have resulted had the FCC not changed the way it was doing things. I mean, when you say white space, you know, to folks who think that it's annoying when they see a dropped call or they lose service, you know, on a particular stretch of the highway, just imagine how much worse that problem would be if the FCC said to companies you can only have a tower here. You can only have a tower here, and then there are just large swaths of the United States that are not being covered by any signal, and the companies can't change where the tower is if we were still doing it like we did with the broadcast towers.
MR. KWEREL: Yeah, well, you know, and interestingly enough, initially the FCC licensed every single base station tower, so, I assume, but what happened was that cellular operators would decide where they want the towers and then they would request a license. Now -- and then the FCC would license it. So, it put some, you know, sand in the gears. You know, now cellular operators can put a tower wherever they want assuming that they meet the, you know, interference requirements that they don't interfere with adjacent operators.
MR. SWARZTRAUBER: So, the old system, is it fair to say that the government, you know, basically deciding what can be used on the spectrum, what technology could be used on the spectrum, where the physical transmitters could be did not result in the highest and best use of spectrum? And that's a value that we often talk about, you know, at the FCC and in tech policy and telecom policy is that this is a public resource. It's scarce. There's no way to make more of it.
There's ways to make more efficient use of it, but there's no way to make more of it, and it's physics, and that it should go to the highest and best use. And is it fair to say that the prior system of command and control was not resulting in the highest and best use?
MR. KWEREL: In a word, yes, and I think, you know, cellular is the poster child example because even though it was a much more efficient technology than the old mobile radio services, under the licensing structure, you couldn't provide it because you didn't have any flexibility in use. And for the point that we were just discussing, the operators didn't have area licenses, but rather we, you know, defined licenses at a point, and so, yes, it held back the introduction of really valuable services such as cellular.
MR. SWARZTRAUBER: Yeah, it's an interesting counterfactual that I've read about before which is that, you know, had the FCC changed the way it managed spectrum sooner, we might have actually seen the evolution of cell phone technology sooner than we would have. I mean, who's to say, right? You know, it's difficult to prove a counterfactual, but it's an interesting cautionary tale about what happens when government fails to move as quickly as it might have.
But getting back to, you know, the before time, before, you know, market-based spectrum policy, I love this term because we often hear about the way that licenses were awarded as being through beauty contests. And I, of course, was born two years before the FCC got auction authority, so I don't remember any of these beauty contests, but it's a funny image to think about. You know, maybe it's folks who want to use the spectrum getting dressed up to go talk to the government and giving a nice emotional spiel about how they're going to use the spectrum for the benefit of society, but what were these beauty contests like?
Is that an accurate description? Of course, it's pejorative, just like command and control, but is it accurate to say that these were essentially beauty contests?
MR. KWEREL: Yes, but I -- first, let me digress. I think the term beauty contest was used by the British because they're much more colorful in how they describe things. I mean, there's a reason why we fawn over people with British accents.
MR. SWARZTRAUBER: The command of the language is -- you know, it's almost like being --
MR. KWEREL: Yeah, a funny thing about that, isn't it? But so, you know, when I was first working on this stuff, they didn't even use that term. They just referred to the very boring term comparative hearings, and, yeah, I know. I know that --
MR. SWARZTRAUBER: That is exceedingly more boring of a term. I agree with you there.
MR. KWEREL: You know, leave it to the Americans, and American regulatory process to just refer to these things as comparative hearings as opposed to beauty contests. So, but I want to be fair, you know, to the FCC. You know, even though I spent most of my career, you know, trying to, you know, advocating for flexible licenses and market-based approaches, one thing, I think it's unfair to make it sound as though the process was corrupt in the sense, you know, you had, you know, these people dressed up in zoot suits to impress the FCC regulators and so on.
What they did was they, you know, did it the way you would do something administratively. They set up a set of criteria in advance, and then they had applications, and then they reviewed them and compared, you know, how the application compared to the criteria and they checked off things. I never heard any allegations of, you know, corruption, you know, that it was, you know, based on the, you know, sort of, you know, political lobbying process, but it was, frankly, a boring, slow, administrative process that, you know, often resulted in arbitrary results because the applications weren't very much different.
So, for example, you know, you had to distinguish yourself, I mean, you know, and not by, you know, graft or, you know, bribes, or wearing a fancy suit, but you had to come with your application. You know, you wanted to come up with something that distinguished yours from the next guys, so they had, you know, a lot of things. So, one story I heard was that in a, I don't know if it was radio, or television, or whatever, was that one of the applicants said, well, we're going to provide a hot standby transmitter at all times.
So, the idea is, you know, if the transmitter poops out, they can just flip a switch and another transmitter will go on. You know, you won't have a second, you know, more than a second of outage. And, you know, this just about never happens, but after that, so the lore goes, all future applications, they were always saying that, we're going to have a hot standby transmitter too. And with, you know, cellular, you know, the awards could be based on minuscule differences in the number of people. You know, these were all promises. We're going to cover, you know, ten more people. I mean, I'm exaggerating, you know, but, you know, in terms of --
MR. SWARZTRAUBER: Right.
MR. KWEREL: -- you know, where their coverage is going to be. So, it often ended up in, you know, sort of arbitrary choices among effectively equivalent applications, which is partly why we went to these lotteries because they concluded that if it was arbitrary, you know, among qualified applications, if they were really effectively the same, why bother to, you know, make distinctions based on things that didn't matter, and they just randomly selected winners among those applicants that met basic qualifications.
MR. SWARZTRAUBER: And one of the reasons they were effectively the same as you say or had very trivial differences is because the government, I assume, had already kind of decided how the spectrum could be used, so that naturally led to homogenous applications, right? I mean, if the government is already saying, you know, this spectrum is going to be used for this particular service, that's naturally going to result in fairly similar applications, and that might be why you're getting into very trivial differences like, oh, I'm going to cover -- you know, like Price is Right, I'm going to go a dollar more. I'm going to cover ten more people, or my transmitter is going to be, you know, hot.
And is it fair to say that the very structure of the comparative hearing and because the government was already kind of deciding how the spectrum was going to be used, that the end result was always going to be similar applications?
MR. KWEREL: I think that's a very insightful point and I want to elaborate on sort of the relationship with auctions. I mean, you know, one of the things I'm emphasizing here, it's not just auctions that changed. It's a combination of, you know, how we define spectrum rights, spectrum flexibility, plus auctions, but your point really emphasizes the nexus between defining flexible rights and spectrum auctions. Say if you want to have flexible rights, well, how in the world are you going to, you know, select among those with, you know, with these, you know, rigidly defined criteria?
In other words, just think of the administrative difficulty of, you know, comparing things if there's real flexibility as opposed to if it's narrowly defined and you can use a checklist. The beauty of auctions is that they're -- one of the beauties of auctions is that they're compatible with flexible use because you don't have to have somebody, you know, compare this or that, you know, technology or whatever. It's just based on, you know, who is willing to pay the most with the presumption that that party is going to, you know, create the most value.
MR. SWARZTRAUBER: Right, it's a subjective judgment, and you can imagine if two entities came in with wildly different visions for how to use spectrum and the only determining factor was a judgment call by the government, that would be really tough. You know, if someone comes in and says I want to use the spectrum for robot vacuum cleaners and the other guy says I want to use it for cell phones, how do you possibly decide between those two without just making a subjective call?
Now, before we get to the wonderful world of spectrum auctions in 1993, folks who have, you know, some understanding of this world might think that the jump was simply from beauty contests to auctions, but there is this middle step that often gets glossed over when we talk about the history of telecom, which is the lottery system. So, you briefly touched on it in your remarks. How did we get to lotteries and, you know, what were some of the issues that arose? It seems like a more fair system, right? I mean, you identified the problem of trivial differences in applications and similarities in applications.
And if, you know, at the time, that was an issue, and we said why are we choosing between these trivial differences? All of these applications are the same. Why don't we just pick them out of a hat? That sounds like it's more fair given that it is a public resource. I mean, it's how we decide lottery winnings, you know, the gambling lottery, right? There's no more fair way to do that, right? So, what were some of the issues though? You know, did it end up being a better system than the beauty contest, and how did we then get from that '80s lottery system to the '90s auction system?
MR. KWEREL: Yeah, well, I think it's a matter of debate, you know, whether it's better. I mean, I think the traditional system was starting to get overwhelmed with the increasing value of spectrum that they just couldn't handle doing all of the comparative hearings. So, in some sense, it was better in that you could process more applications more quickly.
MR. SWARZTRAUBER: And less litigation risk, right, and less, you know, it takes less time --
MR. KWEREL: Right, but, you know --
MR. SWARZTRAUBER: -- than having a hearing. A hearing takes time, right?
MR. KWEREL: You know, we economists talk about unintended consequences. So, you know, one of the unintended consequences was that the number of applications skyrocketed once people realized that we were giving away lottery tickets for free for something that's worth millions of dollars. Creative lawyers and engineers realized that they could create standard applications, and well, here is a term that I think was coined in America. They developed what we refer to as application mills and --
MR. SWARZTRAUBER: All right, good job, America, for coming up with a --
MR. KWEREL: That's right, yes.
MR. SWARZTRAUBER: -- creative term for the lottery system.
MR. KWEREL: So, by 1988, you could get a complete application with all of the technical details for $650 per cellular market. So, what do you think happened when you could get an application for $650? Right, so the FCC --
MR. SWARZTRAUBER: For something that's worth millions of dollars.
MR. KWEREL: -- received about 400,000 lottery applications, you know, and this was for the small, not very valuable areas, but it, you know, it took a little time for people to catch on and it was very apparent, you know, obviously that it was random and that it wasn't awarding licenses to the people who were going to use it the most. In fact, it just awards licenses randomly, and then the winners would flip the license as soon as they could, and there were all sorts of stories that we used to argue against lotteries and for auctions.
And, you know, one that still sticks in my mind was a consortium of dentists in Cape Cod. Well, you know, it makes you smile, right, who --
MR. SWARZTRAUBER: Yeah.
MR. KWEREL: -- won the Cape Cod rural cellular area or rural service area, and then, you know, as soon as they were allowed to, they flipped it. So, it just seemed -- it just didn't seem that it was serving the purpose of quickly, you know, getting licenses to the party that could value it the most, and it was just a big giveaway of money.
MR. SWARZTRAUBER: I'm really shocked that those dentists weren't actually interested in building out a wireless network for the benefit of consumers. That is just shocking to me that they would speculate on this valuable public resource. But, yeah, I mean, like you said, if there's just going to be a lottery system, one of the issues you identified is that people who had absolutely no intention of building a wireless network using the spectrum or doing something technologically with it --
MR. KWEREL: Of course.
MR. SWARZTRAUBER: -- were simply speculating with it. I mean, it becomes a moral hazard, if you will.
MR. KWEREL: Well, actually the economist term for it is rent seeking, which is, you know, if you're giving away free money, lots of people will line up to get it.
MR. SWARZTRAUBER: And that's a, yeah, well-known term in Washington, D.C. for sure. So, obviously the big takeaway from the lottery system was not just that you had folks like dentists who were bidding on spectrum licenses, or not bidding, sorry, that's the problem is they weren't bidding, applying for spectrum licenses, but that these things really were tremendously valuable.
And maybe in the beauty contest days and at the early stages of the lottery system, the government didn't really understand just how valuable spectrum was and how valuable this public asset was. And it's no surprise, to me anyway, that the technology that demonstrated that value is mobile technology given where we are today, you know, with 5G and all of the hype and the tremendous demand for cellular data and cellular voice that we have in this country.
It's no surprise to me that that was kind of the technology that broke the old system, and so how did we get from that application mill, you know, less than ideal situation to put it mildly, to auctions?
MR. KWEREL: Well, I would like to tell you the story that it was diligent economists like me who advocated for years about the beauties of auctions in terms of increasing economic efficiency. And we did have many years of advocacy of that, and even, you know, Mark Fowler, who was the Chairman of the FCC, supported it, and we had hearings about it in the '80s, and nothing happened. So, what was the impetus for legislation? And I mentioned legislation. One of the points that many of your two listeners may not know --
MR. SWARZTRAUBER: Maybe three, maybe four.
MR. KWEREL: Okay.
MR. SWARZTRAUBER: My mom listens to every episode.
MR. KWEREL: Okay.
MR. SWARZTRAUBER: And I'm sure you have some family members who are going to listen, so maybe we'll even get up to ten.
MR. KWEREL: Okay, well, I'm sorry that I --
MR. KWEREL: -- exaggerated. But in any case, the key factor was not the economics in terms of economic efficiency, but rather it was the revenue, and there's a sort of interesting back story to why the revenue was so important. I mean, it turns out there was a particular feature that in 1990, Congress passed this what we insiders in Washington refer to PAYGO, which is the Pay-As-You-Go Act, which required new expenditures to be financed by new revenues.
So, when the Clinton Administration came in, you know, they had all sorts of ideas about things that they wanted to spend money on, but they were terribly constrained by this PAYGO regulation.
So, you know, they dusted off an idea which OMB, the Office of Management and Budget, had been pushing for years. I mean, it wasn't just, you know, the FCC and economists. You know, it was -- and the Budget Office thought this would be a good source of revenue, which it is, so the Clinton Administration supported it for budgetary reasons, and in 1993, Congress granted the FCC auction authority.
But, you know, from my perspective, it was a funny thing. You know, it went from being like the worst thing in the world, you know, to, you know, the best thing, I mean, because you had people like Congressman Dingell who had broadcasters as a major constituency and he was adamantly opposed to, and then, you know, once the new democratic administration came in, you know, he got on board. So, but not only did it become a good idea, but it had to be done immediately.
MR. SWARZTRAUBER: Immediately, and just to illustrate how hysterical it is, the sense of urgency in the early '90s, this idea was originally proposed in a famous paper by Ronald Coase in 1959.
MR. KWEREL: Right.
MR. SWARZTRAUBER: So, that's why I chuckle when Evan says it had to be done immediately, because this idea was over three decades old.
MR. KWEREL: Exactly, and when I say immediately, you, Evan, will appreciate this, and perhaps three out of our four listeners will not, but the legislation stated that we had to commence auctioning spectrum licenses within one year of the passage, oh, no, of the signing of the legislation.
Now, you know even when we're working at a breakneck speed at the Commission, you can't go through the full process of putting out a notice, and getting comment, and having an order, and implementing something in under a year, and this was something that we had never done before and we wanted to do it electronically, to have an electronic auction, so we had to hire contractors. Well, if you think the Administrative Procedures Act for notice and comment is bad, you know, try the contracting process.
MR. SWARZTRAUBER: Right, procurement.
MR. KWEREL: Procurement, it's a nightmare. So, amazingly, and much to the credit of Jerry Vaughn, who led the team to implement it, we actually started our first spectrum auction in under a year. You know, the legislation was signed in September of 1993 and I think in July of 1994, we actually began our first spectrum auction, so it was --
MR. SWARZTRAUBER: That is incredible.
MR. KWEREL: As I said, you're probably the only one of the four listeners that appreciates it, but at least I have an audience that knows something about how amazing that is.
MR. SWARZTRAUBER: So, tell me about this first auction, you know, as briefly as you can. I mean, you know, these days, we're auctioning off spectrum for 5G, next gen wireless. You know, we auctioned off recently subsidies to build out broadband in rural America. But, you know, I'd have to imagine that 27 years ago, the auction wasn't necessarily the same as what we see today at the current FCC, so anything interesting about this auction that might inform how the rest of the auctions that came after it were done?
MR. KWEREL: You're asking me is anything interesting? Of course, there's something interesting. I've spent a --
MR. SWARZTRAUBER: Yeah, try to make it interesting for our --
MR. KWEREL: Yeah, okay.
MR. SWARZTRAUBER: -- the one person who is still listening. I think the other two stopped.
MR. KWEREL: Okay, well, let's just try to make it interesting for you. You know, how we should conduct the auction was a major source of controversy, and, you know, there are different ways of doing it. And, you know, in government, the traditional way was these sealed bid auctions like they used at the Department of the Interior for offshore oil and gas. And basically, you know, people would put in their bids for a lot, and they'd open up the bids, and the highest bid would win, and this was something that people thought the FCC could do. We could probably have a lockbox and take mail-in ballots and put them, you know, bids, and open them up and find out, you know, which was the highest, but --
MR. SWARZTRAUBER: Vice President Gore was a big fan of lockboxes --
MR. KWEREL: Yes.
MR. SWARZTRAUBER: -- if I remember correctly.
MR. KWEREL: But we got lots of proposals from academic economists in part, you know, I think, you know, to my credit, because I wrote the auction section of the NPRM and I laced it, and it wasn't window dressing, with all of these references to, you know, academic papers by, you know, famous auction economists. And I was told that when, you know, our stakeholders, you know, saw this, they said, ah, we need to hire our own economists, you know, to respond because the FCC is really interested in what economists think, so they went out and hired all of these expert economists who actually came in with some great ideas.
And, you know, like in the Land of the Blind, I was the one-eyed man because pretty much there was nobody else at the FCC that really knew much about auctions. And I thought that a particular proposal by Paul Milgrom and Bob Wilson really made a lot of sense, but it was completely novel, and this is the simultaneous multiple round auction design. And there was resistance to using something so novel, and my boss in the Office of Plans and Policy was opposed to it, and here is a good quote for you. I don't want the FCC to be a beta test site.
MR. SWARZTRAUBER: Right, I mean, it is risky. I mean, like you said, the sealed bid auction was already being used somewhere else in the government, and that might have been the easier route. You know, you have something to point to and say, look, someone else in the government is using it, so we can't get criticized or yelled at if this doesn't go super well because someone else came up with it. It wasn't our idea. So, I mean, I can see why your boss was maybe a little bit nervous about doing something brand new under enormous pressure from this legislation to do something quickly, something extremely valuable, and something as important as the first auction.
MR. KWEREL: So, you're exactly right, but, you know, my view was, well, it was twofold. One, you know, I wanted to do what I thought was the right thing in terms of economic efficiency, but two, having been around government even then long enough, I realized that whatever we did initially, if it wasn't a disaster, you know, if there wasn't some kind of obvious problem that got bad press, we'd be doing it for decades just the same way because now everybody knew how to do it. The lawyers are great at replicating whatever had been done before, and we'd be stuck with it.
So, I thought it was absolutely critical to do, you know, the best design, but in order to do that, we needed to do it on a really small scale, something that was small enough that we could actually manage it, but not so small that if it's successful, that nobody would care. And I think one of my contributions was to find the right place to apply it, which was these ten narrow band PCS licenses.
MR. SWARZTRAUBER: And what is a narrow band PCS license for our one remaining listener?
MR. KWEREL: Yeah, it's basically an enhanced paging system. It was like a, you know, sort of a two-way, you know, sort of like a broadband paging system. I mean, it's a narrow band thing, but it was -- To tell you the truth, it never was a very successful service, but, so that's why you don't know about it, but the auction was a big success. We got, I think we got like $638 million, you know, for ten licenses, which may have been only one --
MR. SWARZTRAUBER: Wow.
MR. KWEREL: -- megahertz each or something. So, it got a surprisingly large amount of money for a small amount of spectrum. It was considered a huge success, and my prediction was right. We kept using that simultaneous multiple round auction method for decades, pretty much until the broadcast incentive auction, even though the rest of the world was moving towards these clock auctions, but it just --
But anyway, the other point to make is that it became the adopted standard around the world. I mean, it was a novel idea that was developed in the United States that, you know, was a result of work by the Nobel Prize winners Paul Milgrom and Bob Wilson, and it became the world standard for auctions. But my other point is also true, that the United States, you know, clung to it, you know, you know, sort of, you know, past its due date, you know, when there were other things that were better for at least some situations.
MR. SWARZTRAUBER: Right, so, I mean, yeah, your prediction was correct, that as long as there wasn't a disaster, you said, which is the very high bar that you set for yourself at the time, that it would certainly have staying power for decades to come. Just, you know, you used a term of art there, you know, simultaneous multi round auction. We briefly explained how it's at least different than the sealed bid where you get one chance, and if someone else bids higher than you, then you're screwed, you know, to use a term of art again.
But how is your auction design different than an eBay auction, or an auctioneer who talks really fast maybe auctioning off cattle or, you know, grandma's estate sale? How is this auction different than, you know, the auctions that most folks are probably familiar with, which are generally like charities, or antiques, or whatever?
MR. KWEREL: Yeah, okay, so the key difference is that in the simultaneous ascending auction -- and simultaneous in the sense that all licenses are put up for bid at the same time and it's ascending. It's not like, you know, everything is bid on at one time and you just put it in a box and that's it. You can keep bidding up the price. So, everything is available for bid at the same time, and the prices for things keep rising as long as more people, you know, want it.
MR. SWARZTRAUBER: Right, that's in stark contrast to, you know, an auction, a live auction where generally it's one item at a time, and once that item is sold --
MR. KWEREL: Exactly, the problem with those auctions is that when you're bidding on an item that's sold early in the auction, you have to guess what the prices are going to be on items that are sold later in the auction, particularly if the items are substitutes or complements. In other words, you know, imagine, you know, that you want to put together -- there's a way -- if you want to put together a bunch of items that would like nice together in your house, if they sell them one at a time and you're hoping to get all of them, you know, you don't know whether to even start bidding on the first one because you don't know what the ones are going to sell for later.
MR. SWARZTRAUBER: Right.
MR. KWEREL: And alternatively, you know, if they, you know, if they're selling things that are -- that complements, but, and substitutes, you know, like if they're selling, to give a stupid example, you know, garden rakes, you know, if they put them up separately, you know, they do first one garden rake and then the next. You know, you don't know, you know, if they're slightly different, you know, what to bid on the first one because you don't know what, you know, what the price is going to be for the second one. Maybe you would have rather bid on the second one if you knew. So, this avoids those problems because everything is available to bid on until there are no bids on anything.
MR. SWARZTRAUBER: So, the auction goes until there's no bid on any of the licenses that are available.
MR. KWEREL: That's right.
MR. SWARZTRAUBER: And until that point, everything can keep going up, and you can see what the prices are for everything else, and that allows you to kind of compare and see, you know, if I want, like you said, a bunch of nice things together, I can still see that, and I don't have to guess and try to plan for multiple things in the future. Everything is happening at the same time, and until there is not one bid, it's still going.
MR. KWEREL: Yeah, and there's a reason. This is not just, you know, the abstract idea. This is a problem that the FCC really faces with their auctions because, you know, what the FCC -- the problem is that people want to aggregate licenses. You know, like if you're putting together a cellular service and we've split up the country into lots of small pieces, you know, you'd want to make sure that you have got contiguous pieces geographically.
MR. SWARZTRAUBER: Right.
MR. KWEREL: Also, it's more efficient to have continuous spectrum frequencies that are next to one another. And just to give an example of how many pieces there can be, in the ongoing c-band auction -- for aficionados, it's auction 107 in the 3.7 gigahertz band. How many people did we lose on that? There are 14 blocks in each of 406 geographic areas, so there's a total of 5,684 licenses. And so, you know, you won't want to be bidding on them one at a time, and you'd want to kind of --
MR. SWARZTRAUBER: That would take forever.
MR. KWEREL: Yeah, and you'd also want a system that allows you to aggregate them efficiently. So, anyway, you know, to circle back to our Nobel Prize winners in economics (audio interference) or to choose efficiently between similar licenses, and their solution was what I just said, an ascending bid auction where all licenses are put up for bid at the same time and the auction doesn't close until there is no bidding on any license. This seems like an obvious idea, but nobody had thought about it before.
MR. SWARZTRAUBER: Yeah, and recently, you know, this Nobel Prize was awarded this year, and a lot of folks, you know, at the FCC and others were talking about it because it's a real, you know, honor, and it's fantastic to see this particular type of work being recognized by the Nobel Committee, and your name came up in all of the news articles, and I thought I can't believe I work with this guy and I haven't interviewed him for a podcast.
So, you know, your name came up in particular in the context of a more recent auction than 1993, the broadcast incentive auction, and this one was even more unique than all of the things you've already described about how FCC auctions are unique, you know, different from eBay or different from, you know, a cattle auction. But, you know, tell us a little bit about the broadcast incentive auction. You know, I did an episode with the incentive auction task force's excellent staffers, Jean Kiddoo and Hillary DeNigro, about the, you know, the repack, the things that had to happen after the auction.
MR. KWEREL: Right.
MR. SWARZTRAUBER: But tell us a little bit about the auction itself and why it was so innovative and interesting, and how, you know, it led to this great recognition that you and the Nobel Prize winners are getting today.
MR. KWEREL: Yeah, well, to be modest about it, it was a revolutionary change in market-based spectrum policy. So, you know, in previous spectrum reallocations -- and a reallocation is where you have spectrum currently in one use, and then you, as time goes on and technology changes and taste changes, the most valuable use changes, as was the case with broadcasting, over the air broadcasting.
Over the air broadcasting used to be the only way that people would get, you know, video, you know, their video, and then over time, it became like, you know, ten percent of the households were relying on it, and then the other 90 percent were getting it, you know, through cable or direct broadcast satellite, but they weren't getting it through traditional terrestrial over the air, and a lot of spectrum was tied up in broadcasting, so, you know --
MR. SWARZTRAUBER: Right, they weren't using an antenna --
MR. KWEREL: Right.
MR. SWARZTRAUBER: -- you know, which, you know, millennials are now discovering and Generation Z are discovering antennas for the first time and saying how is this legal that I'm getting television for free? But that's been the case forever that you could get television for free using an antenna.
But as you said, so many folks are either accessing those broadcast channels via their cable box or their satellite box, or increasingly, as we've seen particularly in recent years, they're getting it through their cell phone or through an over the top provider on their, you know, streaming device.
MR. KWEREL: No, you're absolutely right, and you can cut this out, but it reminds me of my daughters who, one of my daughters when she moved into an apartment at college and said, the cable is not working. What can I do? I said, well, you know, you could use an antenna, and she says, what's an antenna?
MR. SWARZTRAUBER: That's why the Wall Street Journal called it a life hack, this concept of purchasing an antenna to get free television, including some great stuff like football games.
MR. KWEREL: Yeah.
MR. SWARZTRAUBER: Amazing.
MR. KWEREL: So, I'm sorry for the digression, but it just proves the point. But anyway, so until the broadcast incentive auction, allocation of spectrum, which is allocation to say how the spectrum is going to be used broadly, was determined administratively. That's just until, you know, this is until, you know, 2017 or when we completed the auction, or 2012 when we got legislation to be able to do it. You know, if you wanted to move spectrum from broadcasting to mobile broadband, it was pure --
And it would be a decision that the engineers pretty much and people in the wireless bureau would, you know, weigh the various comments and determine how much spectrum should be moved from one use to another. The thing that was revolutionary about the broadcasting incentive auction was the first time that a market, or in specifically a two-sided auction, was used to determine how much spectrum would remain in broadcasting and how much spectrum would be moved to mobile broadband.
And actually, when I say mobile broadband, you know, the footnote is it's not narrowly defined as mobile broadband. It's defined as, you know, flexible use, and there's a lot of flexibility in exactly, you know, what you can do with it, but, you know, broadband is a pretty broad service and people understand --
MR. SWARZTRAUBER: Yeah, that's how --
MR. KWEREL: -- what it was, so.
MR. SWARZTRAUBER: And that's how it's being used today.
MR. KWEREL: Yeah, so the auction, you know, the amount of spectrum that was repurposed was determined by the supply from television broadcasters and a demand by wireless carriers, and so it really was a revolutionary extension of the use of a market mechanism in terms of managing the spectrum.
MR. SWARZTRAUBER: Right, and it wasn't greenfield, right? Like when we say greenfield spectrum, it's spectrum that's not being used currently, and there's very little, if any, of that left on the chart, for you folks that have a spectrum chart in your bedrooms because you're telecom nerds. But, you know, it's a lot easier when no one's using the spectrum. You can just auction it and say, okay, yeah, let's do it, like we're ready to auction it, but no, this was spectrum that was already being used by a different service, you know, broadcast television going back a long time.
And thanks to the advent of digital television, you know, you and others recognized that, you know, broadcasters might be willing to part with a lot of it, either because they could get more out of the spectrum they already had because of digital television using less spectrum, or because they wanted to get out of the business and they were happy to just sell their spectrum and take a pay out and move on and do something else with their lives. And that's what was really incredible about this auction is that it was really up to the broadcasters to decide how much they wanted to give up, but it was definitely more complicated than your average auction because it wasn't just the FCC saying this spectrum is not being used at all. Let's auction it.
It was the FCC saying this spectrum is already being used and we need to determine through a market mechanism how much the current user is willing to give up for a new user.
MR. KWEREL: Exactly, I couldn't have put it better.
MR. SWARZTRAUBER: Well, it's almost like working here, I've absorbed some actual knowledge, which will be a shock to people who know me. But so it's fair to say this auction was a success. I mean, it generated billions of dollars for the U.S. Treasury. That's after all of the money that went into, you know, repacking, quote, unquote, the broadcasters. You can go back and listen to my other episode to learn more about how, you know, broadcasters had to move to different frequencies and purchase new equipment, all of the tower work that went into that.
But as a result of this auction, the 600 megahertz band, this is the spectrum that was being used before this auction just for TV, that band is now being used to provide 5G and 4G cellular service to over 200 million Americans. So, I know I'm biased, but I would call that a success.
MR. KWEREL: Absolutely, I mean, it's not just about the money as we say.
MR. SWARZTRAUBER: Right, it's about the use. And so, you know, that seems like a good, you know, segue into one question, which is, you know, why should consumers care that we moved from, you know, the beauty contest, to the lottery, to the auction? I mean, yeah, it's great that they can use their cell phones, but maybe they would have been able to use their cell phones anyway. Maybe the comparative hearings would have figured out a way to grant licenses to wireless carriers and, you know, we still would have gotten these great innovations.
I mean, you know, yes, a Nobel Prize was awarded, so consumers should care about it for that reason, but more broadly, what has been the result of your work, of the work of Ronald Coase, Milgrom, and others to move to auctions, like what has this meant for the U.S. consumer and consumers worldwide?
MR. KWEREL: Well, my answer is going to be to poo-poo your well, it might have happened anyway.
MR. SWARZTRAUBER: Well, of course. I was setting that up to be knocked down.
MR. KWEREL: Yeah, well, okay, so I'm swinging at your strawman there --
MR. KWEREL: -- because the comparative hearings, you know, took years and years, you know, to decide through litigation. They couldn't deal with large numbers of licenses. I mean, you can have comparative hearings, you know, for 5,000 licenses that, you know, we're awarding so many licenses that, you know, comparative hearings, I mean, it wasn't even, you know, feasible.
And lotteries, I mean, the -- and, you know, lotteries, you know, not only are they arbitrary, but they're actually slow to get the spectrum to the people who value it the most because the people who win the lottery, there's no reason to think -- you know, they're not the mobile operators who are actually going to do something with it. So, there's actually --
MR. SWARZTRAUBER: It's the dentist and the dentist is not building a network.
MR. KWEREL: And, you know, the auction design really matters, you know, the stuff we talked about before. You want something that allows the people who are going to put it to the highest value use to be able to intelligently aggregate the spectrum in the way that they want, you know, so that they can serve the public the best, and they can make rational decisions, you know, in terms of which spectrum that they use when there's, you know, different spectrum that could be used.
But the bottom line is the point, you know, without this, we would not have nearly as much spectrum available to provide mobile and other services that the American people value highly. I really believe that, and, you know, people today could hardly conceive of spending a day without their smart phone, you know.
MR. SWARZTRAUBER: Right.
MR. KWEREL: And the other point is -- one of the other points. I mean, I could extoll the virtues of auctions. Let me count the ways, but --
MR. SWARZTRAUBER: As is your right, yeah.
MR. KWEREL: But it also, you know, generated over $100 billion for the U.S. Treasury, which is not peanuts, and it's a very efficient way to raise revenue because alternatively, if you raised it like, you know, with income tax or something like that, you know, there's an efficiency loss. I mean, some economists, you know, estimate that about, you know, $0.30 on the dollar is lost, you know, due to, you know, suppression of labor supply, you know, from, you know, the income tax. So, it gets -- it increases the efficiency of spectrum allocation and it doesn't cause another inefficiency in terms of raising revenue.
And then the $100 billion doesn't even begin to capture the value to the consumers, and economists have estimated that the benefits to consumers are at least ten times as large as the amount of revenue raised, so that's, you know, $1 trillion. I know that, you know, these days with COVID, a trillion here or a trillion there, it used to be a billion here, a billion there, you know, but it starts to add up.
MR. SWARZTRAUBER: Yeah, no, I mean, and really just think about your daily life. If you need any proof that what we've talked about today is important, just think about your daily life. Yeah, think about how you use a smart phone. Think about the spectrum that you use in your daily life when you make a phone call, or when you download a movie when you're standing in line at the airport and you forgot, and you need to watch something and you need to download it quickly, and you can because you're on a high speed network that uses this spectrum.
So, you know, before we sign off, you know, you've had a 40-year tenure at the FCC, which is really remarkable, and I think we're all grateful for your public service. I know I am, and I know that a lot of what I do in my daily life is a result of your public service, but you've done a lot, so, you know, what are you most proud of?
MR. KWEREL: Maybe it's because of my short memory, but I'm most proud of the broadcast incentive auction, and, you know, for the reasons I said before, but just to bore your one remaining listener, you know --
MR. SWARZTRAUBER: Half a listener.
MR. KWEREL: Okay.
MR. SWARZTRAUBER: They got one earphone still in.
MR. KWEREL: Okay, it was the world's first use of a market mechanism to determine how much spectrum should be reallocated for new higher value services, and those services are a big deal, you know, for the public, you know, and as I said --
MR. SWARZTRAUBER: And --
MR. KWEREL: Yeah.
MR. SWARZTRAUBER: Oh, yeah, go ahead.
MR. KWEREL: Yeah, and as I said, previously auctions only determined who got to use the spectrum. It was, you know, what the basic use was going to be, even if it was flexibly defined, was administratively determined, and then we would allocate, then we would assign spectrum by auctions that determined who used it. But what the broadcast incentive auction did, it determined, using a market, how much spectrum would be used for widely disparate uses, TV versus mobile, and it ended up with, you know, sort of the right answer, more mobile.
MR. SWARZTRAUBER: And it's no secret to me and many others who know you that you easily could have gone on to different jobs with your experience and expertise long before the broadcast auction, or maybe even long before the first auction in '93, so, you know, what kept you at the FCC for so long other than your incredible foresight that someday you would have the honor of being on this podcast?
MR. KWEREL: Yeah, well, actually, I did have great foresight and, you know, you hit the nail on the head. You know, when I first took the job, I was hoping that I would be interviewed by another Evan.
MR. KWEREL: And that was it. I just, I've hung on for all of this time, and now I can --
MR. SWARZTRAUBER: You're welcome.
MR. KWEREL: -- and now I can retire because this is it.
MR. SWARZTRAUBER: It's a real honor for you, yeah.
MR. KWEREL: I'm going to tell people I'm retiring. But, look, I mean, you know, on any job, you know, where you really like it, I mean, a big part is the people. I mean, I just, you know, I know it's a cliche, but it's true. You know, I've loved the people I've worked with, and also I love problem solving. And, you know, again, it's sort of a cliche, you know, but, you know, we have really interesting problems. It's a challenge to figure out ways to improve telecom policy using markets, and that's sort of been my thing.
You know, how can we make telecom policy, specifically spectrum use, better using markets? And I've had the great opportunity to collaborate with colleagues and academics, you know, like working with Paul Milgrom and Bob Wilson. I mean, it's just been a real pleasure to work with such brilliant other people solving these kind of problems.
And then I won't deny it, an extra bonus, there's an extra bonus when, you know, one of my ideas actually makes a difference, and, you know, like the broadcast incentive auction was something that I came up with and, you know, to see it go from an idea, to a legislative proposal, to legislation, to implementation was enormously gratifying.
MR. SWARZTRAUBER: Well, thank you for doing it. You know, one of my favorite aspects of working at the FCC is that folks like you work at the FCC, so, not just because your name is Evan, but it's been an honor to speak to you. Thank you for sharing your expertise with the half a listener who we still have on their podcast app, but really, thank you for your public service. Thank you for your contributions to the United States economy and the world, so thank you for joining the show.
We'll leave it there. My guest has been Evan Kwerel, Senior Economic Advisor in the FCC's Office of Economics and Analytics. Thank you very much. You can find this podcast in the iTunes store, or on Google Play, or wherever you get your podcasts. Please leave us a review because it will help others find the show. And we'll catch you next time.