SpectrumTalk

Applying Market Principles to Spectrum Management

[Reprinted with permission from Policy Tracker, a London-based European spectrum policy newsletter. Hence, the spelling used below.] A market-based approach is the way of the future according to a new book by three of the architects of the UK approach to liberalisation. Here Martin Cave, Chris Doyle, William Webb argue that obstacles like interference can be overcome:

The key purpose of spectrum management is to maximise the value that society gains from the radio spectrum. This can be achieved in principle by allowing as many of the highest value users as possible to access the spectrum while ensuring that the interference between different users remains manageable. However, achieving this in practice is difficult. Identifying the highest value users in advance is prone to error and the balance between allowing additional users while ensuring that interference remains within appropriate bounds is highly complex and changes over time. Most spectrum is currently managed under a “command and control” approach whereby the regulator decides on most, or all, aspects of the use of the spectrum, including the application and technologies allowed and the organisation of bands of spectrum. Such an approach is unlikely to achieve the overall objective set out above because the regulator is not well placed to understand which use of the spectrum will lead to the highest value nor which point of balance between interference and additional usage is economically optimal. Further, a command and control approach is becoming more difficult to manage as an ever expanding range of applications appears. An alternative is for regulators to make use of economic management methods to achieve their duties. This allows the market to make decisions as to optimal usage and interference rather than the regulator. The market often has more information and can make better decisions, and if established appropriately can rapidly modify its decisions in the light of new information. Our new book sets out in detail the way that economic management of radio spectrum can be implemented; the remainder of this paper provides a summary of its findings. Technology The advance of technology is having some impact on spectrum management. Multi-modal radios are gradually reducing the advantages of international harmonisation, making it easier for regulators to allow the use of market forces. Technologies that provide “overlays” (cognitive radio) may be best enabled simply by providing spectrum owners with sub-leasing capabilities while “underlays” (UWB) can be accommodated as an increased noise floor for existing owners. The key tools that a regulator needs to deploy in order to allow market forces to manage spectrum are auctions, trading and property rights. In addition, some powers to address anti-competitive behaviour may also be required. Spectrum auctions have been used extensively around the world for assigning many thousands of licenses covering many different uses and types of user. The design of auctions has evolved to accommodate a wide range of situations and new concepts continue to be developed. Trading Trading is likely to work well where no single player has market power, property rights are well defined, full information about previous trades and the current trade is available and there are no unforeseen externalities. Possible issues with trading include a lack of harmonisation and windfall profits, but we do not believe these are serious. Where the costs of regulation would outweigh the benefits, there may be more effective ways of managing the radio spectrum. For example, for some uses and frequency ranges it might be more effective to make radio spectrum a public good (i.e. licensed exempt spectrum). Property rights A set of property rights is critical to facilitate trading and enable change of use. The key technical components of property rights comprise limits on in-band, out-of-band and geographical emissions. From these limits, neighbours will be able to calculate their likely interference levels. These rights and obligations will need to be carefully defined since the interference experienced by one user depends on the rights granted to other users. Within these rights easements should not usually be allowed, but rights should be allocated in ways which take account of the economic value, and interference potential, of new technologies such as UWB. Licences should be perpetual but spectrum licensees should not pay any charge which discourages efficient trading. Competition issues Concentration of spectrum holdings in the hands of one or a small numbers of operators can provide a means to monopolise service markets. The extent of the risk depends on policies adopted at the time of a spectrum award and the rules governing spectrum holdings thereafter. There are grounds for designing award rules in ways which will prevent any operator from immediately gaining market power in a services market. Also, intervention by the spectrum regulator can reduce the risk of market failure associated with abuse of power in spectrum markets. For these reasons, concerns about competition are not a valid basis for rejecting spectrum markets. Sufficient instruments exist to combat monopolisation of spectrum in a market context, and the alternative command-and-control methods can have equally deleterious effects on end users. In addition to these basic tools, there are other areas of spectrum that might require a different management approach. These include spectrum commons and spectrum owned by public or Governmental bodies. Also, a somewhat different approach should be adopted to the management of spectrum in developing countries. Commons Spectrum should be unlicensed where there is little probability of congestion. Despite arguments about the ability of “spectrum commons” to alleviate congestion, congestion across key parts of the spectrum is likely for the foreseeable future. Congestion is unlikely where short range communications are used and can be made less likely by regulatory insistence on, e.g. politeness protocols. Hence, there should be a mix of licensed and unlicensed spectrum with the unlicensed approach restricted to bands and applications where congestion is unlikely. Market mechanisms cannot be used in determining how much unlicensed spectrum would be needed so instead the regulator needs to make a judgement. This could be based on a top-down approach which estimated the total amount of unlicensed spectrum that might be needed. Alternatively, a bottom-up approach could be adopted which considered spectrum on a band-by-band basis, using a structured process to determine whether licensed or unlicensed use would be most appropriate, generally based on the approach predicted to lead to the greatest economic value. Public spectrum There is no reason why public sector spectrum should be treated as ‘exceptional’ and be immune from application of the market processes. In practice, however, reforms in this area may have to take a more gradual course, relying on intermediate stages such as valuation and administrative prices. There remains the pervasive problem, under almost any spectrum management regime, of generating incentives towards efficient use of spectrum by the public sector. In practice, there may be a continuing need for detailed scrutiny of public sector holding and the application of pressure to hand back unneeded spectrum. The goals of spectrum management are broadly the same in developing as in developed countries, and so are the available instruments. However, their governments and regulators may face less congestion and have an incentive to speed up the assignment process in order to buy services for their citizens. This may imply either use of fast-track administrative methods or the development of a simple to administer market process. Stimulating the market Finally, there are some tools that might assist the development of the market, or help with transitional issues. These include band managers and spectrum pricing. There are many potential types of commercial band manager. Under an environment where spectrum is tradable, the key to successful operation will be the ability to make use of the spectrum more efficiently than the regulator. However, this is difficult to do, making the economics of band management problematic. If regulators wish to encourage band managers they may need to look into specific policy measures to do so. A spectrum management agency can use prices to achieve efficiency, which will generally lead to superior outcomes compared to pricing on the basis of cost recovery. Charging annual fees can encourage current and prospective holders to make the right decisions to ensure efficient use of the spectrum. Many holders of spectrum are not in a position to make rapid changes to their use of spectrum in response to the application of pricing, but in practically every case the holders of spectrum have opportunities to change their use of spectrum in the longer term. In our book we discuss each of these areas in substantially more detail, building a strong and complete case for modern spectrum management being based upon economic and market principles and showing how these can be deployed in practice. We expect to see this approach increasingly deployed by regulators around the world over the coming years. • “Essentials of Modern Spectrum Management” by Martin Cave, Chris Doyle and William Webb is published by Cambridge University Press ISBN-13: 9780521876698 About the authors: Professor Martin Cave was the author of the UK treasury report which paved the way for liberalisation in the UK, Professor William Webb is Ofcom’s Head of Research and Development and Dr Chris Doyle of the University of Warwick is the author of many papers on spectrum economics.