The iPhone roared into the marketplace 10 years ago today, and overwhelmed the wireless world. The smartphone’s iconic social significance has been duly noted. What has escaped attention is that the device burst into a sector long insulated from the slightest threat of disruptive innovation. The iPhone’s victorious attack followed — and required — a long arc of liberalization in airwaves, itself a stunning regulatory and marketplace triumph.
Here’s why the iPhone was able to succeed.
The Radio Act of 1927
Radio began as a bit of magic. Albert Einstein is often quoted as having said (but did not) a version of: The telegraph is like a long cat — you pull its tail in Los Angeles, and it meows in New York. Wireless is the same, but without the cat. Guglielmo Marconi had tamed the beast by sending messages, one radio to another, across a river in England, in 1895.
Radio spectrum, the natural space that hosts electronic signals, was quiet for a quarter century because radios were few and traffic was light. That changed when Pittsburgh’s KDKA began “broad” casting on November 2, 1920. The Westinghouse-owned transmitter was attempting to seed demand for its radio receivers. It did.
By late 1922 some 500 broadcasting stations were blasting out programs. In 1924 Madison Avenue declared the holidays to be “Radio Christmas.” Stations traded for hundreds of thousands of dollars, with broadcast frequency rights attached. The Chicago Tribune, for instance, bought an outlet and switched its call sign to WGN — “World’s Greatest Newspaper.” By 1926 some 4 million households had radios, often large consoles costing well over $100.
The transmissions of one broadcaster might harm listeners tuning to competing stations. But the secretary of commerce, Herbert Hoover, had authority to maintain order. Using the Radio Act of 1912, which authorized the department to “minimize interference,” Hoover enforced “first come, first serve” rules adopted from common law.
The system worked. In 1925 Hoover offered that the system was enabling a “vastly increasing number of messages” to be “kept upon the air without destroying each other.”
Nonetheless, he claimed “an urgent need for radio legislation.” Hoover desired far broader discretion over who would broadcast and what programs they aired. The “radio men” owning the top commercial stations backed, or perhaps led, him. The National Association of Broadcasters, formed in 1925, proclaimed that new legislation should establish a federal agency to award broadcasting rights according to public interest. The process was said to protect against “etheric bedlam,” as a navy report warned, or a “cacaphony of competing voices,” as the Supreme Court later described, and misspelled, it. The political interest in influencing public opinion and the incumbents’ desire to silence competitive threats had merged.
They danced on February 23, 1927, when President Calvin Coolidge signed the new Radio Act, creating the Federal Radio Commission (FRC). Regulators would now decide how spectrum would be used, what technologies were permissible, and approve — or reject — the wireless services, networks, applications, and business models that might be introduced. The official story was that the FRC was thrust upon the government by conflicts in nature. The truth was that open competition was nixed by conflicts in Washington.
Crushing the “Propaganda Stations”
In considering radio license renewals in 1929, a certain station caught the attention of Hoover (now U.S. president) and his regulatory minions. WCFL, a Chicago station, was the MSNBC of its day. Owned by the Chicago Federation of Labor, which purchased the station, in 1926, for $250,000, the enterprise aimed to publicize its point of view. That might seem like a good thing — using new technology to engage the public in ideological debate.
But the free speech of WCFL did not much impress the FRC. The “public interest” was undermined when a station became a “mouth-piece in the ether,” gaining an “unfair advantage” over competing ideas. Such “propaganda stations” did not serve the average listener but pushed partisan agendas. The FRC restricted WCFL’s hours and reduced its power. The station, to avoid even worse, came to terms. It won its renewal but lost its brand, phasing out labor-oriented content and retransmitting NBC shows. Eventually it was acquired by Amway.
FCC licensing rules diminished freedom in the emerging electronic press. Homogenized content, with far less diversity than an open market would support, was the result. The policies that delivered such outcomes were not those of a “traffic cop.” The interference problem was the stated premise, but the object of regulators’ desire — and of the interests they loved (or feared) most — was control over wireless markets.
Armstrong’s Killer App
Edwin Howard Armstrong was a science prodigy. By the time he graduated from Columbia University, in 1913, he owned a portfolio of radio patents. In the early 1920s, then a professor at Columbia and a major in the U.S. Army, he was the largest shareholder in the Radio Corporation of America. The firm had been buying his intellectual property with stock.
In 1934, the same year that the FRC became the Federal Communications Commission (FCC), Armstrong was perfecting a new radio technology that offered superior reception: “high fidelity.” It was not established AM, but FM. Engineers gave it rave reviews, and investors were lined up. All Armstrong needed was a radio spectrum for his radios.
The FCC was skeptical and slow, but Armstrong was relentless. By 1940 he had secured a frequency allocation for FM. He began building stations and selling radios. By December 1941, FM broadcasts were heard throughout the Northeast U.S., and some 500,000 homes had receivers.
Then he paused. With the attack on Pearl Harbor, civilian radio production was halted for World War II. Armstrong returned to service, developing FM radios for the Army, and was promoted to the rank of Colonel.
As the war concluded, expectations were sky-high for FM. It had built a loyal following, and all the ducks were lined up for a national build-out of transmission towers. Projections were that 5 million FM radios would be sold annually.
But nature, broadly construed, intervened.
NBC and CBS petitioned the FCC to reconsider the FM band, placed at 42–50 MHz. They pressed regulators to uproot the existing service and replace it with TV Channel 1. The FCC quickly developed a “public interest” rationale for the move: sunspots. The band was said to be uniquely susceptible to solar flares that, for some reason, would devastate FM radios but not confuse TV sets. The federal government’s own (non-FCC) experts rejected the argument as laughable. Armstrong, apoplectic, presented voluminous scientific evidence to disprove the theory.
But the champions of FM were swamped. The FCC crossed out the FM’s assigned frequency bloc in mid-1945, soon rendering every FM radio and broadcasting facility inoperative. New FM channels were designated at 88–108 MHz, but it would take years to develop a new standard, let alone produce equipment, let alone sell receivers. Buyers might be slow to (re-)invest in a technology that had left them with worthless cabinets in its last go-around.
FM was destroyed. Broadcast TV gained Channel 1, soon itself abandoned, and the FCC moved on.
Edward Howard Armstrong — scientist, entrepreneur, and military officer — could not. Flummoxed by the FCC’s administrative betrayal, he became despondent. Battered as well by patent suits against rivals, he gave up the fight. In January 1954, he wrote a loving note to his wife, and jumped to his death from their 13th-floor New York City apartment.
Apple Invents a Radio
In the 1960s FM radio was finally set free of counterproductive regulatory constraints. It quickly overcame AM radio in content quality, coverage, and audience share. By the mid-1970s, some four decades after Armstrong proudly introduced the idea, FM was rockin’ and rollin’ as the dominant radio broadcasting mode.
Steve Jobs was the Baby Boomer version of Armstrong. A free-spirited college drop-out, he imagined awesome in the realm of electronics. He then maneuvered nerdy engineers to build his sexy devices. By 2005 smartphones were already popular, but the Cupertino visionary saw something much cooler than a “Crackberry.”
The bright, shiny object featured smooth metal and glass, beautiful graphics, and a revolutionary touch screen. It would make teenagers — and business executives — drool. It would do everything a phone could do, and perform any trick a computer might. And it traveled in your pocket.
But not unless it could connect to networks via radio spectrum.
It was at this stage that Armstrong’s invention fell into its death spiral, thwarted by incumbents, bureaucrats, and junk science. Yet by the iPhone’s day, reforms had crept in to revise Hoover’s regulation. Jobs did not have to play “Mother May I?” Instead, he shopped for bandwidth in the marketplace.
How did that happen? It was a long road that may have started in 1959, when economist Ronald Coase suggested that frequency rights be assigned by auction, with competitors allowed to probe new markets, technologies, or business models without permission from administrators. “Interference” need not require micromanagement of devices, networks, or applications. Spectrum holders could instead utilize their own judgement in farming their frequencies. Policy makers and industry experts had mocked Coase’s naiveté. When testifying at the FCC, the lead question from a commissioner was, “Is this all a big joke?” In 1962 the Rand Corporation commissioned a spectrum study by Coase but refused to publish its own report when referees savaged his proposal.
Then, in 1991, the folks in Sweden awarded Coase a Nobel Prize in Economics.
Along the way, the liberal ideas he championed took hold in the United States and elsewhere. Wireless rights became more flexible, ceding spectrum management to the market. That environment welcomed new ideas, including those springing from a secret research project decades later in California.
In gestures at once subtle and dramatic, a broad liberalization took hold. In time and substance it was strongly associated with the decline of broadcasting and the rise of cellular mobile networks. Three bold steps were key.
First, rival networks were permitted. In the early 1970s, FCC officials initially divined that only one firm could survive in cellular: AT&T. But when licenses were finally distributed in the 1980s, two companies per market were authorized. Soon, multiple players were in the mix, offering “digital one-rate” plans and driving mobile prices from expensive to cheap (and bumping long-distance carriers from the market altogether). “Natural monopoly” was jettisoned as the operative assumption.
Second, wireless licenses were made flexible. Instead of having operations mandated, cellular carriers were given defined spectrum spaces. A new radio like the iPhone might blast other users off the air, but the network — not the FCC — managed the situation. Carriers had the incentive and ability to invest in new radios, technologies, and business models, limiting interference while squeezing more value out of each slice of bandwidth.
Third, competitive bidding was introduced to assign wireless rights. Since 1994 the U.S. has sold more than $120 billion of licenses. But the deposits to the Treasury are only a sideshow. The main event is in getting spectrum into the market faster and more efficiently, placing it into the hands of enterprises able to do the most for consumers.
These changes, applied to key segments of the political spectrum, toppled Secretary Hoover’s regimentation and opened the floodgates for entrepreneurs. When Jobs sought airwave access for his dream, the Spectrum Store was open for business. Indeed, the Apple iPhone generated such fantastic buzz that the carriers climbed over each other to get access, bidding for the right to host it. Verizon and Sprint made their pitches but AT&T won, rolling out the iPhone to all-night lines on June 29, 2007. Soon, carriers everywhere — and, by 2011, all four national networks in the U.S. — would feature iPhones.
Etheric Bedlam
The iPhone is a veritable interference machine. As British spectrum policy experts Martin Cave and William Webb note, the iPhone’s “touch screen led to dramatic increases in mobile data use, not helped by the iPhone being a rather profligate user of network resources…. a massive increase in demand [was] under way.”
What is good for society was bad under Hoover’s regime. When regulators micromanaged markets, blocking such interference was the goal. Overprotecting incumbents was the result.
The better approach is to let competition play out. The iPhone places huge new burdens on networks, but rivals balance the benefits generated against the costs (and extra investments) they incur. Apple fanboys shell out; mobile carriers build new capacity. Meanwhile, Apple churns out new icons: the iPhone 7 Plus, at last count. With its market capitalization shooting up from its 2005 level of $30 billion, Apple is now worth over $800 billion — the world’s most valuable firm.
But the profits for Apple shareholders are a pittance compared with consumer welfare gains from the emerging smartphone ecosystem. The iPhone launched the App Store. Try to imagine those software programs confronting “public interest” certification, one by one. Picture the countless arguments of incumbents objecting to Angry Birds, Uber, MapQuest, Snapchat, Spotify, or FaceTime as disruptive, or unable to work properly, or uniquely susceptible to sunspots.
Apple buried its smartphone predecessors, Nokia and Blackberry, and then instantly provoked fierce new rivalry. In 2007 zero of the world’s smartphones featured Google’s mobile operating system, Android. By 2012 some 75% did. Leveraging its enormously popular Google Search app, the Silicon Valley upstart became a giant in wireless almost overnight — like Apple, without owning a single license awarded in the “public interest.”
Mobile competition is transforming economies, governments, and cultures. Since 2007 Apple’s global platform has produced some 2.2 million separate applications, and has registered some 140 billion downloads. Google Play, linked to Android devices, features 2.8 million apps, with over 65 billion downloads recorded.
Sweet music for the power of competitive spectrum. If only Edwin Howard Armstrong had lived to hear it in high fidelity.
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