The Five Percent Solution

Policy Paper
May 1, 2002

In the emerging information economy, there is no more valuable public asset than the airwaves, or electromagnetic spectrum. Unfortunately, the prevailing regulatory model for allocating spectrum is grossly inefficient and inequitable to both the business sector and the public who own this valuable resource. Commercial broadcasters are the biggest beneficiaries of this policy failure. Broadcasters originally were granted free spectrum on the condition that they act as "public trustees" of the airwaves and deliver quality educational, civic, and other informational programming. However, for decades the industry has shirked its public interest obligations.

This old industrial policy deal -- giving broadcasters free spectrum in exchange for delivering PIOs -- remains the law's framework today. Although the frequencies controlled by broadcasters are worth more and more each year -- both as an asset and in terms of the opportunity cost because it is unavailable for other more valuable uses -- taxpayers are not receiving a sufficient return for use of this scarce natural resource. Less than 15% of U.S. households continue to rely on "free" (ad-supported) over-the-air TV, yet broadcasters actually doubled the share of prime spectrum under their control thanks to the 1996 Telecom Act. Reform of spectrum policy must ensure that the public airwaves are used with optimal efficiency and that all commercial users of spectrum pay a fair return to the public. This paper proposes relieving commercial broadcasters of their "public trustee" obligations, instead charging broadcasters a flat annual spectrum fee equal to five percent of gross advertising revenues as an important first step to achieving these goals. Ideally these spectrum rental fees would be earmarked to finance new public investments that fulfill the goals of the public interest obligations.

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