Spectrum Markets are Robust, When You Remember to Feed Them

Thomas W. Hazlett

Professor of Law & EconomicsGeorge Mason University

thazlett@gmu.edu

Spectrum Markets: Challenges AheadConference @ the Kellogg School of

ManagementNorthwestern University

June 2-3, 2011

Killer App of 2007

June 2, 2011Kellogg Conf. * Spectrum Markets 2

Steve Buys Spectrum• contracts with carriers

• carriers’ liberal control rights in CMRS enable

• not “exclusive use” but intensely shared • right to exclude protects network

investment

• purchase spectrum + network access• efficient bundles• vertical integration of tight complements• naked license sales - tip of the iceberg

June 2, 2011Kellogg Conf. * Spectrum Markets 3

Spectrum Secondary Markets

Nascent?• Spectrum an input into network

services

• Wireless services two-sided output market• subscribers• vendors (devices, services, apps)• piggyback networks (MVNO, M2M)

June 2, 2011Kellogg Conf. * Spectrum Markets 4

Robust Secondary Markets

June 2, 2011Kellogg Conf. * Spectrum Markets 5

Exhaustive Rights for Markets?

• FCC: yes, rights need to be clearly and exhaustively defined for markets to work

• FCC: we have never defined “harmful interference,” the key border condition

• FCC: mobile markets work great, bring innovation & growth to the economy

June 2, 2011Kellogg Conf. * Spectrum Markets 6

Rights Definition Minimalism

• TUFs (titulo de usufructo de frecuencia) in Guatemala specify

• (1) frequency band • (2) hours of operation • (3) maximum power transmitted • (4) maximum power emitted at the border

of adjacent frequencies • (5) geographic territory • (6) duration of right (beginning and ending) • the market works

June 2, 2011Kellogg Conf. * Spectrum Markets 7

3G Coverage in Central America

(courtesy of Amazon Kindle)

http://client0.cellmaps.com/viewer.html?cov=1

October 20102G coverage light purple3G coverage dark purple

Great Advantages

• liberal use rights let parties bargain

• free entry

• quick adjudication of border issues • time limits and arbitration procedures

specified

• transparency

June 2, 2011Kellogg Conf. * Spectrum Markets 10

Spectrum Contours “Hard”?

• stochastic emissions

• uncertainty in identifying conflicts

• like land, IP, water, fish or oil deposits?

• irrelevant claim• difficult line drawing for administrators,

too• Coase 1959 • costs of the “price system” vs. regulation

June 2, 2011Kellogg Conf. * Spectrum Markets 11

Simple Rights (C. Jackson

2005)

June 2, 2011Kellogg Conf. * Spectrum Markets 12

Difficult (overlapping complements)

June 2, 2011Kellogg Conf. * Spectrum Markets 13

Anti-commons Tragedy

• a rights assignment failure

• fragmentation produces excessive t-costs

• can be solved ex ante by regulators

June 2, 2011Kellogg Conf. * Spectrum Markets 14

Ownership Integration

June 2, 2011Kellogg Conf. * Spectrum Markets 15

Alternatively, Administrative Restrictions

June 2, 2011Kellogg Conf. * Spectrum Markets 16

Canadian White Space

June 2, 2011Kellogg Conf. * Spectrum Markets 17

Killer App of 1952

June 2, 201118Kellogg Conf. * Spectrum Markets

Anti-commons Tragedies

June 2, 2011Kellogg Conf. * Spectrum Markets 19

2.5 GHz (ITFS/MMDS

EBs/BRS)

June 2, 2011Kellogg Conf. * Spectrum Markets 20

XM-WCS (2006)

June 2, 2011Kellogg Conf. * Spectrum Markets 21

XM buys WCS licenses

• July 14, 2005

• NAB letter• The proposed transaction is part of a

longstanding pattern of deception by the satellite radio industry. In 2003, while publicly claiming it had no plans to insert local content on its network of terrestrial repeaters, XM spent months seeking a patent for technology to do just that.

• FCC blocked merger

June 2, 2011Kellogg Conf. * Spectrum Markets 22

Efficient Rights• standard templates – e.g., CMRS

• don’t worry about exhaustive perfection

• large band allocations• combinatorial auctions help efficient

aggregation

• no service, technology, business restrictions

• overlays for bands littered with incumbents and white spaces

June 2, 2011Kellogg Conf. * Spectrum Markets 23

T-costs and the Nirvana Fallacy

• hold-outs and bargaining costs are positive

• everywhere

• analysis: overlays v. gov’t reallocation

• remembering: market t-costs highly sensitive to policy rules

June 2, 2011Kellogg Conf. * Spectrum Markets 24

U.S. CMRS

• 50,866 licenses (2003)

• 1,122 (AWS 2006)

• 1,099 (700 MHz)

• 734 cellular markets

• 493 BTAs

• 51 MTAs

June 2, 2011Kellogg Conf. * Spectrum Markets 25

50,000+ deals later (Stifel Nicolaus 4.15.08)

June 2, 2011Kellogg Conf. * Spectrum Markets 26

Emptying the Spectrum (TV Band) Warehouse One Box at a Time • 1953

• 81 channels (486 MHz)

• 1982 needed bandwidth for cellular• 67 channels (402 MHz)

• 2009 needed bandwidth for 3G/4G licenses• 49 channels (294 MHz)

• 2015 need bandwidth for ‘mobile data tsunami’• 29 channels (174 MHz)

June 2, 2011Kellogg Conf. * Spectrum Markets 27

Case-by-Case is a Long March

June 2, 2011Kellogg Conf. * Spectrum Markets 28

FCC, National Broadband Plan (March 2010), Chapter 5.

Standardized Overlays

•auction secondary rights using liberal template •vest incumbents•buy-outs, partnerships eliminate border wars •rights enable capex to create band clearing

•side payments for alternative solutions•cable/satellite carriage to move TV stations

•overlay licensees internalize cost of delay•efficient alternative to administrative process

June 2, 2011Kellogg Conf. * Spectrum Markets 29