Spectrum trading: increasing the efficiency of spectrum usage

Transcription

1 Spectrum trading: increasing the efficiency of spectrum usage Radio spectrum is increasingly viewed as a scarce resource. Governments have at their disposal various measures that can be employed to maximise the efficiency of spectrum usage. One notable option is the switching off of analogue TV broadcast services, replaced by more efficient digital distribution methods. Another measure currently attracting increased interest amongst regulators is based on market forces: the introduction of spectrum trading. Marloes van Caspel explores some of the key issues associated with spectrum trading, and draws some concrete conclusions from developments in New Zealand, the first country to develop a tradable market for spectrum rights. Spectrum trading and the economic issues involved Radio spectrum is considered to be a public resource. As such, governments periodically make spectrum available via the primary market. This primary assignment may utilise one of several mechanisms, each with different characteristics. One of the key characteristics of the different mechanisms is economic efficiency, which is defined as the degree to which spectrum is given to those parties that value the spectrum most highly: auctions: economically efficient, since spectrum always goes to those who place the highest value on it beauty contests: may be economically inefficient since assignment can be made based on factors that do not relate to the economic value of spectrum first-come, first-served (FCFS): economically inefficient since they are awarded on the basis of the ability to queue lotteries: economically inefficient since they are awarded according to luck of the draw. Spectrum trading is a secondary mechanism, by which all or part of the primary assignment may be traded. As such, spectrum trading can affect the overall efficiency of spectrum use. This paper considers three key issues in the trading of spectrum: whether spectrum assignments should be tradable the form of the spectrum that can be traded the form that the spectrum trading market should take. Spectrum tradability Spectrum trading can be implemented in conjunction with any of these primary assignment mechanisms. Often, the primary mechanism chosen by the government is inefficient, particularly if the priority in assigning spectrum is non-economic (such as the fairness of the process, social benefits etc). Under these circumstances, a secondary market mechanism may then be deployed to increase the economic efficiency of the assignment, although this could compromise the achievement of any non-economic goals tied to the spectrum rights. In free market economies, such inefficiencies can of course be redressed through the disposal and/or acquisition of the owners of the spectrum rights. However, the associated costs of such transactions are significant. Spectrum trading allows spectrum rights to be traded at a much lower cost since only the asset itself needs to be traded, rather than the spectrum owner.

2 Spectrum trading need not be used exclusively to compensate for an economically inefficient primary assignment process. It can also be used in conjunction with more efficient assignment mechanisms (such as auctions) in order to allow for fluctuations in spectrum needs over time. Two scenarios illustrate how this may occur: over time, the importance of spectrum to the spectrum owner changes the amount of spectrum assigned in the primary assignment proves to be either excessive or inadequate. The option to trade spectrum introduces an element of liquidity to the value of spectrum. If the winning bidder had over-estimated the value of the spectrum (as may occur in auctions), spectrum trading allows the so-called winner s curse to be reduced. If spectrum is valued more highly in the secondary market than in the primary market (as may occur in lotteries), windfall gains for the winner may arise. Since spectrum trading involves a monetary exchange, it can increase market awareness of prevailing spectrum value. Market players can use this information to check whether they are making most effective usage of the spectrum, whilst regulators may use prevailing market prices to assess whether spectrum allocations are being efficiently utilised. However, spectrum trading also introduces a number of uncertainties, the most critical of which is political. In the process of assigning spectrum rights, the government cedes control of the spectrum to the market. This allows the possibility of a dominant player accumulating significant amounts of spectrum and therefore controlling the spectrum market. Regulation of spectrum trading allows governments/regulators to retain a certain amount of control over the way in which spectrum is used and traded. The following sections explore the different ways in which governments, by defining which assets can be traded, and what form the spectrum market should take, can influence the secondary spectrum market. Nature of assets to be traded One of the variable elements in the trading of spectrum rights is whether assets are traded in assignments that are identical to or different from the original (primary) assignment: If the assets traded on the secondary market are the same as those issued in the primary market, the spectrum assignments can be redistributed to those users that can make the best economic use of that assignment. If the assets sold on the secondary market are different to those issued in the primary market, different users can obtain and utilise the amount of spectrum that precisely meets their individual needs. Thus far, spectrum trading has been discussed in terms of its capacity to correct inefficiencies in primary spectrum assignments or respond to changing needs over time. However, spectrum trading can also be used to correct inefficiencies arising from the allocation of spectrum to different applications, which can create artificial spectrum scarcity. For example, dect frequency, which is located on 1880MHz, is generally under-utilised. On the other hand, spectrum in the adjoining frequency bands (allocated to GSM1800 and UMTS applications) is at a premium. Operators in these higher demand bandwidths may be able to make more efficient use of the less utilised allocations of dect frequency spectrum.

3 To address these inefficiencies, another, more radical, version of spectrum trading may be applied, allowing spectrum to be traded between applications (as illustrated in Exhibit 1). Exhibit 1: Tradable assets (Source: Analysys) However, this variant results in a substantially more complex monitoring function within the overall spectrum management process, and runs contrary to international agreements on spectrum allocation. This radical version of spectrum trading has a number of very significant barriers to implementation, and it is therefore likely that other, more simple, forms of spectrum trading are implemented first. Spectrum markets Spectrum markets may take many different forms, including: a direct search market where buyers and sellers seek each other out directly a brokered market where brokers offer search services to buyers and sellers a dealer market where dealers buy assets for their own stock an auction market, where potential buyers are brought together to bid for an asset. Regulators have significant powers to shape the secondary market. At one extreme, a direct search market could be introduced and the regulator could choose to facilitate this market to some degree. At the other extreme, the regulator could schedule periodic auctions at which spectrum owners could offer spectrum lots. Fundamentally, the regulator must consider the degree to which a secondary market can deliver efficiency of spectrum use, compared with the additional complexity it introduces into the spectrum management process. As well as influencing the nature and mechanisms of a market for trading spectrum rights, it is also important for regulators to establish and enforce rules to control the amount of spectrum that may be acquired by an individual operator. By capping spectrum ownership, operators may be prevented from accumulating significant amounts of spectrum and thereby controlling or obstructing competition and innovation, or hoarding large amounts of spectrum with a view to dealing speculatively with this scarce resource. Case study: New Zealand

4 In 1989, New Zealand became the first country in the world to allow spectrum rights to be traded. This case study presents a short account of how spectrum trading was introduced in New Zealand, and the outcome of the process so far. Need for new approach to spectrum management Until 1987, spectrum management in New Zealand, as in many other economies, evolved as a centrally administered system. This system worked well when entry into telecommunications markets was restricted and the range and number of users was small. Market reform prompted a re-examination of the approach to spectrum management that would be best suited to the more open and competitive environment that was developing. Process towards new legislation In the late 1980s the Government of New Zealand stated that it wanted to move away from the present system of first-come, first-served assignment, which cannot cope with the deregulated environment, to some sort of market-based system. A system of spectrum management and allocation based on tradable spectrum rights was proposed. After considering this recommendation, the Cabinet agreed to adopt a spectrum trading mechanism, which came into effect on 1 April This legislation provided for both for the continuation of the current licensing regime, and for a regime for spectrum management based on tradable rights. Spectrum trading policy A central issue under the New Zealand regime relates to the balance between control and flexibility. While the strict regulation of rights and the management of interference is fundamental, it is also critical to provide enough flexibility to allow spectrum utilisation to respond to new technologies and changing demand patterns. Legislation provides for the creation and registration of three types of property rights - management rights, spectrum licence rights and existing apparatus licences. Management rights: within certain interference limits, the exclusive right to the management of a nationwide band of frequencies for a period of up to 20 years. Within this band the manager can issue (typically local) sub-licences. Licence rights: Spectrum licences, issued by the manager, afford the holder the right to use spectrum within the band specified within a defined area. The range of uses to which spectrum can be put is unlimited, other than by interference constraints. Apparatus licences: In blocks of spectrum where management rights have not (yet) been created, the system of (non-tradable) apparatus licences continues. Transfer process to tradable licences The government favoured a progressive conversion of licences to a spectrum rights regime. As the initial owner of all management rights, the government has used auctions as its favoured primary assignment mechanism since Following the primary assignment, rights can be traded freely. It is a matter for the spectrum managers concerned whether or not to trade their rights and, if so, on what basis. There are no restrictions on the activities of operators, the number of entrants into the markets, or specialised licensing requirements. Competition rules within the industry rely on general competition law. Little use of spectrum trading New Zealand has proved that it is feasible to create tradable spectrum rights, and to auction these rights, even when there are sitting tenants. In practice however, there have so far been

5 relatively few examples of the use of this secondary market mechanism: Telstra, an original holder of GSM spectrum, has sold its licence to Bellsouth (now Vodafone) in a private deal. Similarly, the original purchasers of New Zealand s 28GHz LMDS spectrum have sold on their rights. Overall, however, spectrum trading is not used extensively for a number of reasons: There remains some confusion regarding old and new licences, as well as nervousness in the industry about the expiry date of the present licences. There is uncertainty about the way spectrum will be treated for international planning purposes since the availability of equipment also often constrains spectrum utility. There is also concern about the adequacy of competition safeguards, particularly for commercially valuable spectrum. The secondary market has less impact when the primary assignment mechanism is already market-based (i.e. an auction). As purchasers of spectrum are operators intending to build out networks, they have little intention to sell this spectrum on in the short term. There are few operators vying for spectrum in New Zealand in the recent 3G spectrum auction six blocks of spectrum were offered and only four bids received. New Zealand is an example of a market in which spectrum trading has been fully implemented, extending even to trading of spectrum between applications. The attitudes of the government, as well as operators in New Zealand, towards the spectrum trading regime remain positive, although it is difficult to measure any increase in efficiency. Evidence of the impact and success of spectrum trading can only be demonstrated when trading in spectrum rights reaches significant volumes. This is not currently the case. Nonetheless, as a pioneer in this field, New Zealand has demonstrated the viability of such a regime, and regulators in other markets may wish to draw on its experience to understand whether similar spectrum trading models can be successfully applied in other markets. We fully expect that, given time to evolve and mature, spectrum trading will emerge as a valuable regulatory tool that can be applied to increase the efficiency of spectrum usage. For further information, please contact Amit Nagpal