Spectrum trading – The way forward?

1. Spectrum trading – The way forward? Sverrir Olafsson BT CTO

2. Overview • The spectrum situation – economy, regulation and technology • The need for spectrum liberalisation • The role of spectrum trading in future spectrum management • The use of different trading instruments • Case study

3. Introduction Radio spectrum is a limited (natural) resource

4. Introduction

5. Situation to date - trends • The demand for spectrum is increasing at a rapid rate – and the trend will continue • Increasing number of • Cell phones • WiFi access points • Laptops • PDSs • Sensors • etc • The increasing density of wireless devices is leading to considerable increase in interference resulting in performance deterioration and reduced customer satisfaction

6. Situation to date - trends • Traditionally radio spectrum is controlled and allocated by governments on a licensing basis • Allocations are generally technology specific and focus on • Interference avoidance • Type of use • Exclusive use • Lengthy procedures are used to allocate spectrum narrowly describing how it can be used by licensees • The system does not allow spectrum licence holders to sell their usage rights

7. Traditional assignment of spectrum • Auctions • Spectrum should go to those who value it most. However, this is based on the assumption that contenders can value the spectrum. Imperfect understanding of the spectrum’s true economic value has resulted in huge overpricing – at everybody’s expense • Beauty contests • Based on “hearings” and “interviews”. Assignment could be based on or influenced by non – relevant factors. Prone to fraud and waste. • First come first serve, • Based on the time of arrival and the ability to queue • Lotteries • Work quickly. However, no assurance that those who get the spectrum will use it and value it the most. Can lead to unjust enrichment for the lucky winners

8. Disadvantages of licensing • Strict licensing can work detrimentally • Ermes (paging technology) allocated spectrum but never implemented • TFTS (in-flight telephony) allocated spectrum but newer implemented • Result: allocated spectrum remains idle – to this day • Allocating spectrum to particular technologies runs the risk of picking the wrong technology •  great chunks of spectrum are licensed but under - utilised •  artificial spectrum scarcity

9. Problems with traditional allocation • Does not allow • flexible spectrum usage • dynamic reallocation of spectrum • allocation to those who appreciate it most • Also • traditional allocation leads to sub-optimal spectrum usage – average occupancy typically around 8% • The traditional approach becomes increasingly “difficult” as a range of new and heterogeneous technologies emerges • Dynamic and unpredictable technological environment can not be managed by strict and rigid regulation of spectrum • More flexibility in spectrum management is required

10. Ownership Applications Spectrum The basis of the spectrum inflexibility • Traditionally the three elements • Spectrum • Ownership • Applications are closely linked by regulation • Breaking this inflexibility requires • Liberalisation of spectrum management – including • Introduction of spectrum markets • Spectrum commons • Opportunistic access to spectrum

11. Situation to date - trends • Governments and regulators have recognized these limitations and the need to seek new and innovative methods to access and share spectrum • Both FCC, OFCOM and other regulators have put efforts into considering new approaches to spectrum management • The active participation in the spectrum debate includes • Governments and regulators • The European Union • Vendors, network operators and service providers • Representatives of user groups

12. Difficulties • Liberalisation comes up against various difficulties. The main ones are: • Interference management • What levels of interference are acceptable? • Transition management • Managing the legacy of existing allocations. Many mobile operators have made substantial investments in “exclusive spectrum licences”. Also, equipment manufacturers have invested in radio technologies assuming that dedicated spectrum has been allocated for them • Recover of investment costs

13. The way forward – to liberalisation • A holistic multidisciplinary approach to spectrum management is required with inputs from • Technology • Access, power control, channel selection, antennas, modulation,…. • Economics • Pricing, utility, game theory,spectrum trading,… • Regulation • Liberalisation of licensing, reselling of spectrum, regulation driven by technology,..

14. Spectrum ownership Spectral efficiency Spectrum trading Required spectrum Opportunistic access Managing the uncertainty • How much of the additional spectrum required will be provided by • Spectrum ownership • Increased spectral efficiency • Spectrum trading (spot, derivatives, …) • Opportunistic spectrum access?

15. Spectrum ownership Spectral efficiency Spectrum trading Required spectrum Opportunistic access Managing the spectrum uncertainty • Develop strategies to minimize probability of shortage

16. Spectrum trading • In 2005 OFCOM forecast that 72% of the licensed spectrum would be traded by 2010! • OFCOM characterizes trading by • Mode • Relates to partition or aggregation of spectrum • Change of use • Change of ownership • Duration • Length of leases, sale and buy back, outright sale • Extent • Degree to which rights and obligations are transferred

17. Managing risks by spectrum trading • An important reason for spectrum trading is the management of perceived risks relating to • Uncertain future spectrum demands • Uncertain future price of spectrum • The right trading environment needs to be in place to address these uncertainties • Also, the right trading instruments need to be available to address the identified risks New challenges for hedging strategiesCombined hedging of demand and priceuncertainties Unknown demand Unknown price

18. Spectrum trading • For spectrum trading to deliver benefits spectrum markets have to have the following characteristics: • Sufficient number of buyers and sellers – liquidity • Market participants have full information on products and prices • Mechanisms to bring buyers and sellers together • No barriers to market entry and exit for both buyers and sellers

19. Advantages of trading • Trading can provide faster access to spectrum for new services and new users • This provides enhanced responsiveness and flexibility which are important in times of rapid changes in technology • This also enhances innovation and competition – generally to the benefit of the user

20. Advantages of trading • Trading encourages existing users to make more effective use of their spectrum – new technologies – better engineering • As it needs to be paid for • Residual (non-used) spectrum can be sold – if the right mechanisms are in place – to those who need it more • Spectrum trading will support the view that spectrum is a commodity and that it is beneficial to use it efficiently

21. Advantages of trading • Markets are generally good at matching resources to demands leading to their efficient utilisation • Changes in wireless communications are rapid and unpredictable • Central regulation is not suitable for such an environment • Market participants are generally better informed to make decisions regarding spectrum usage and customer preferences • Spectrum trading empowers those with the knowledge to make decisions in the dynamically changing environment

22. Financial instruments • For the management of identified risk exposures a range of financial instruments can be used • Leasing arrangements • No up front payments for future usage • Futures and forward contracts • Binding selling or purchasing of spectrum at prefixed prices • Swaps • Potential exchange of spectrum at future times • Options • The right, but not an obligation to purchase spectrum at a future time at a pre-fixed price. This right comes at a price - premium • Each of these instruments has its own characteristics and benefits

23. Spectrum trading with options • Options are a flexible instrument for the management of uncertain future spectrum demand • Pricing depends on perceived demand and price volatilities • Sellers – short positions • Selling covered calls provides an alternative revenue from spectrum • Buyers – long positions • Buying calls provides access to spectrum that may be required

24. Spectrum trading – analogy to capital markets • An operator may not need to own any spectrum if • Spectrum can be accessed on an opportunistic basis • Access technologies are sufficiently efficient • Trading in spectrum becomes reality • Analogy to financial markets • Lenders may not base lending on customers’ deposits but in stead borrow from the capital market to lend on

25. Spectrum trading – who will trade? • Hedgers • Network operators • Service providers • Parties seeking broader exposure to the market – correlation balancing • Investment banks • Pension funds • Individuals • Speculators – trading licenses – f. ex. regional frequencies • Investment banks • Market makers

26. Modelling spectrum bandwidth derivatives Service Broker Network A predicts overcapacity of bandwidth Network B

27. Modelling spectrum bandwidth derivatives Service Broker Network A buys call options Network B sells call options

28. Pricing spectrum bandwidth derivatives Here Network B is obliged to service network A clients even at the expense of dropping some of its clients At the expiry time if network A decided not to exercise the option then there are two reasons The strike price is higher than the bandwidth spot price rendering the option useless The bandwidth demand is less than its capacity and Network A can then sell the option to another network provider who needed extra bandwidth

29. Modelling spectrum bandwidth derivatives Black-Scholes PDE to price options The explicit solution for a call option is N(x) is the cumulative standard normal distribution function

30. Simulation results Bandwidth demand (a) and bandwidth market price (b)

31. Simulation results With bandwidth trading (a) and without bandwidth trading (b)

32. Simulation results Lost bandwidth (with trading) (a) and lost bandwidth (without trading) (b)

33. Profits • Profits that accrue to long call position • Profits that accrue to short call position

34. Simulation results Total profit made with trading (a) and without trading (b)

35. Summary As the complexities of wireless access technologies increase, new multidisciplinary approaches to spectrum management are required. These include Opportunistic access – cognitive radios Spectrum trading Spectrum trading supports Innovation and competition Efficient spectrum usage Risk management in dynamically changing environment The importance of spectrum trading will depend on supply and demand and also the technical advances made in accessing the spectrum, such as power control, channel selection and access behaviour

36. Thank You