Economic Issues in Wireless Communications

Economic Issues in Wireless Communications.

Radio spectrum is a natural resource, but one with rather unusual properties. As noted above, it is non-homogeneous, with different parts of the spectrum being best used for different purposes. It is finite in the sense that only part of the electromagnetic spectrum is suitable for wireless communications, although both the available frequencies and the carrying capacity of any transmission system depend on technology. The radio spectrum is non-depletable; using spectrum today does not reduce the amount available for use in the future. But it is non-storable. Under ITU guidance, spectrum has been allocated to specific uses and then assigned to particular users given the relevant use. Traditionally, user assignment was by government fiat. Not infrequently, the user was government owned. Privatizations in the 1980s and 1990s, and the success of (at least limited) mobile telephone competition in some countries, resulted in a more arms-length process of spectrum allocation developing in the 1990s. Users of radio spectrum, and particularly users of 2G and 3G mobile telephone spectrum, have generally been chosen by one of two broad approaches since the early 1990s – a ‘beauty contest’ or an auction.

A ‘beauty contest’ involves potential users submitting business plans to the government (or its appointed committee). The winners are then chosen from those firms submitting plans. There may be some payment to the government by the winners, although the potential user most willing to pay for the spectrum need not be among the winners. For example, the U.K. used a beauty contest approach to assign 2G mobile telephone licenses in the 1990s. Sweden and Spain have used beauty contests to assign France used a beauty contest to assign four 3G licenses. The national telecommunications regulator required firms to submit applications by the end of January 2001. These applications were then evaluated according to preset criteria and given a mark out of 500. Criteria included employment (worth up to 25 points), service offerings (up to 50 points) and speed of deployment (up to 100 points). Winning applicants faced a relatively high license fee set by the government. As a result, there were only two applicants. These firms received their licenses in June 2001, with the remaining two licenses unallocated (Penard, 2002). The concept of using a market mechanism to assign property rights over spectrum and to deal with issues such as interference goes back to at least the 1950s when it was canvassed by Herzel (1951) and then by Coase (1959). But it was more than thirty years before spectrum auctions became common. New Zealand altered its laws to allow spectrum auctions in 1989 and in the early 1990s auctions were used to assign blocks of spectrum relating to mobile telephones, television, radio broadcasting and other smaller services to private management (Crandall, 1998). In August 1993, U.S. law was modified to allow the FCC to use auctions to assign radio spectrum licenses and by July 1996 the FCC had conducted seven auctions and assigned over 2,100 licenses (Moreton and Spiller, 1998). This included the assignment of two new 2G mobile telephone licenses in each region of the U.S. through two auctions.9 In 2000, the U.K. auctioned off five 3G Auctions have involved a variety of formats including ‘second price sealed bid’ in New Zealand, modified ascending bid in the U.S. and a mixed ascending bid and Dutch auction format in the U.K.11 Bidders may have to satisfy certain criteria, such as service guarantees and participation deposits, before they can participate in the auctions. Limits may also be placed on the number of licenses a single firm can win in a particular geographic area, so that the auction does not create a monopoly supplier. From an economic perspective, using an auction to assign spectrum helps ensure that the spectrum goes to the highest value user. While auctions have been used to assign spectrum to different users, they still involve a prior centralized allocation of bands of spectrum to particular uses. Economically, this can lead to an inefficient use of spectrum. A user of a particular frequency band (e.g. for 3G services) might have a much higher willingness-to-pay for neighboring spectrum than the current user of that neighboring spectrum (e.g. a broadcaster or the military). But the prior allocation of frequency bands means that these parties are unable to benefit from mutually advantageous trade. It would violate the existing license conditions to move spectrum allocated to one use into another use even if this is mutually advantageous. Building on the work of Coase (1959), Valletti (2001) proposes a system of tradable spectrum rights, using the market to both allocate spectrum to uses and simultaneously assign it to users. Interference can be dealt with through the assignment of property rights and negotiation between owners of neighboring spectrum. Valletti notes that both competition issues and issues of mandated standards would need to be addressed in a market for spectrum rights. We deal with the issue of standards later in this section while competition issues are considered in section 5 below. Noam (1997) takes the concept of tradable spectrum assignment one stage further. Technological advancements, such as the ability for a signal to be broken into numerous separate digital packets for the purposes of transmission and then reassembled on reception, means that the concept of permanent spectrum assignment may become redundant in the near future. As technology advances, Noam argues, spot and forward markets can be used to assign use within designated bands of spectrum. The price of spectrum use would then alter to reflect congestion of use. DeVany (1998) also discusses market-based spectrum policies, including the potential for a future “open, commoditized, unbundled spectrum market system.” (p.641) Conflicts in the allocation of spectrum allocation arose in the FCC auctions in the U.S. The 1850-1910 MHz and 1930-1990MHz bands to be allocated by these auctions already had private fixed point-to-point users. The FCC ruled that existing users had a period of up to three years to negotiate alternative spectrum location and compensation with new users. If negotiations failed, the existing user could be involuntarily relocated. Cramton, Kwerel and Williams (1998) examine a variety of alternative ‘property rights’ regimes for negotiated reallocation of existing spectrum and conclude that the experience of the U.S. reallocations is roughly consistent with simple bargaining theory.