Market Mechanisms for Redeveloping Spectrum

1. Market Mechanisms for Redeveloping Spectrum Evan Kwerel Office of Strategic Planning and Policy Analysis Federal Communications Commission March 11, 2004 Harvard University

2. Disclaimer • The opinions expressed in this talk are those of the author and do not necessarily represent the views of the FCC or any other members of its staff. • Talk is based on joint work with John Williams. Evan Kwerel WP_38_Presentation.3.11.04

3. Only about 7% (185 MHz) of Spectrum in 300-3000 MHz Range Is Fully Available to Market Today PCS 3% Cellular 2% SMR 1% Evan Kwerel WP_38_Presentation.3.11.04

4. Another 15 % (413 MHz) for Flexible Use in the Pipeline Evan Kwerel WP_38_Presentation.3.11.04

5. But… • Heavily encumbered • Fragmented in geographic and frequency domains • Needs massive restructuring Evan Kwerel WP_38_Presentation.3.11.04

6. TV and DTV Stations that Encumber Channel 67 in EAG-1 Evan Kwerel WP_38_Presentation.3.11.04

7. Percent of MHz-Pops Encumbered on TV Channels 60-69 in Northeast EAG C D Evan Kwerel WP_38_Presentation.3.11.04

8. Three or More TV Stations Encumber Parts of All Blocks in the 700 MHz Band in NYC Channel 59-69 TV Incumbents Within 100 Miles of New York City 747 752 762 777 782 792 806 746 C1 D1 PS C2 D2 PS 59 60 61 62 63 64 65 66 67 68 69 WBNE WRNNTV WHSPTV WHSETV WBPHTV WMBCTV WHSITV WFMZTV WPPX WEDY WTICTV WACI Spectrum encumbered by: One station: Two stations: Three or more: Evan Kwerel WP_38_Presentation.3.11.04

9. How to End the Spectrum Drought Property rights and markets Define flexible, exclusive and exhaustive spectrum rights Use markets to move spectrum to its highest value use FCC spectrum exchange during transition Simultaneous market mechanism to restructure fragmented spectrum Wholly voluntary for incumbents Incentives for incumbents to participate Reduces transaction costs Increases liquidity Evan Kwerel WP_38_Presentation.3.11.04

10. Proposal for Rapid Transition • Flexibility: reallocate restricted spectrum to flexible, exclusive use • FCC spectrum exchange: conduct series of large-scale, two-sided simultaneous auctions of spectrum voluntarily offered by incumbents together with any unassigned spectrum Evan Kwerel WP_38_Presentation.3.11.04

11. Proposal (continued) • Incentives to participate • Immediately grant participants flexibility • Allow participants to keep the proceeds from the sale of their spectrum • Participating incumbents share in increased value from flexibility and value created by a rapid and efficient restructuring of the spectrum Evan Kwerel WP_38_Presentation.3.11.04

12. Proposal (continued) • Incumbents not harmed • Non-participants: allowed to continue current operations and would receive full flexibility in 5 years. • Participants: not required to sell to get immediate flexibility. Can buy back their licenses. • Expect incumbents to participate • Participation costs are low, nothing else to lose • No flexibility withheld • Participation serves efficiency by making explicit the opportunity cost of keeping spectrum. Evan Kwerel WP_38_Presentation.3.11.04

13. Initial Implementation • 413 MHz in the 300 to 3000 MHz range • Reduce current spectrum shortages for high demand uses Evan Kwerel WP_38_Presentation.3.11.04

14. Removing Barriers to Flexible Use Isn’t Enough • Unassigned spectrum needs to be available for flexible use • Need to reconfigure existing spectrum into tradable property rights • Redefine interference limits in terms of outputs • Some licenses dissolve into flexible overlay licenses Evan Kwerel WP_38_Presentation.3.11.04

15. Removing Barriers to Flexible Use Isn’t Enough (cont’d) • Need to address coordination problem • Put all highly interdependent spectrum up for sale at the same time • Mechanism to combine spectrum into efficient packages • Incentive problems may prevent efficiency-enhancing trades • Interests of spectrum managers vs. interests of firm as a whole • Incumbents with incentives to strategically hold out Evan Kwerel WP_38_Presentation.3.11.04

16. Who Runs the Exchange? • Why not a purely private spectrum exchange? • Who sells FCC held spectrum? • The FCC is in the best position to solve the coordination problem • FCC holds unencumbered spectrum • Little cost to adding licensed spectrum • FCC has established credibility in conducting transparent auctions for spectrum rights Evan Kwerel WP_38_Presentation.3.11.04

17. Who Runs the Exchange? • The FCC is in the best position to solve incentive problems of ensuring participation and mitigating hold-out problems • FCC regulatory authority over spectrum gives it more carrots (e.g., conditional flexibility) and sticks than private parties • Solving the coordination problem helps solve the participation problem Evan Kwerel WP_38_Presentation.3.11.04

18. Remaining Issues • Design of exchange mechanism • Incumbents can bid on (and buy back) own licenses in in band-restructuring auction • Exchange with rising bids and falling ask prices • Role of FCC as seller of spectrum • Defining flexible spectrum rights to promote liquidity in the spectrum exchange Evan Kwerel WP_38_Presentation.3.11.04

19. Remaining Issues • “Special” categories of exclusively licensed bands • Public safety spectrum • Public broadcasting spectrum • Federal government spectrum • Spectrum not exclusively licensed to private parties • Non-exclusive (e.g., private land mobile) • Unlicensed spectrum (part 15) Evan Kwerel WP_38_Presentation.3.11.04

20. Current Focus:MDS/ITFS Band Restructuring • 200 megahertz of spectrum below 3 GHz • 2500-2690 MHz and 2150-2162 MHz • More total spectrum than cellular and PCS • International 3G band • Mostly in low value uses, e.g., one-way video services • Spectrum highly fragmented • In geography - Small geographic and site licenses (geography splintered) • In frequency - Interleaved licensing • Most ITFS spectrum leased to MDS • Secondary markets active, but limited by transactions cost Evan Kwerel WP_38_Presentation.3.11.04

21. Alternative Band Plans E4 G4 C1 C2 C3 C4 E1 E2 E3 G1 G2 G3 A1 A2 A3 A4 resp. F4 H3 F2 F3 H1 H2 D4 D3 F1 D1 D2 B4 B1 B2 B3 Current Channel Plan A B C D A B C D E F G E F H G J band K band Coalition Band Plan 16.5 megahertz blocks 16.5 megahertz blocks Evan Kwerel WP_38_Presentation.3.11.04

22. MDS/ITFS Exchange Proposal • Give incumbents new spectrum rights as defined in coalition proposal • Hold a simultaneous spectrum exchange for “white space” and the new rights held by incumbents • Nobody moves until after the exchange closes Evan Kwerel WP_38_Presentation.3.11.04

23. MDS/ITFS Issues with Exchange Proposal • Incentive to participate • Lease arrangements – who is authorized to sell rights? • Market liquidity and holdouts • License areas –crazy quilt pattern based on service areas of ITFS site licenses • Auction design Evan Kwerel WP_38_Presentation.3.11.04

24. MDS/ITFSBand Clearing Vouchers • Incumbents turn in their spectrum licenses in exchange for vouchers • Incumbents could opt out of voucher plan and receive a 6 MHz high power channel that closely matches their current service area. ITFS opt outs get moving costs from auction winners. • FCC creates new, unencumbered geographic area licenses suited to new uses Evan Kwerel WP_38_Presentation.3.11.04

25. MDS/ITFSVoucher Valuation • Vouchers equal to auction value of spectrum “attributed” to incumbents under new band plan • Each incumbent attributed spectrum quantities (MHz-Pops) based on Coalition plan or a modified plan • Voucher value equal to MHz-Pops attributed to incumbent multiplied by the auction prices per MHz-pop in incumbent’s service areas Evan Kwerel WP_38_Presentation.3.11.04

26. MDS/ITFSVouchers Equivalent to Cash • Vouchers could be used to pay winning bid in MDS/ITFS or any subsequent auction • Vouchers are transferable and divisible • Vouchers allow incumbents that no longer want to maintain spectrum holdings to fund educational and communications needs (consistent with Commission’s original intent in allowing ITFS leasing) Evan Kwerel WP_38_Presentation.3.11.04

27. MDS/ITFSVoucher Proposal Auction Design • FCC holds simultaneous auction w/ package bidding for all MDS/ITFS spectrum • Bidders would bid on spectrum with certain characteristics (location, bandwidth, low power or high power), not specific frequencies, minimizing opportunity for destructive strategic behavior in auction Evan Kwerel WP_38_Presentation.3.11.04

28. Benefits of Voucher Proposal Compared to Exchange Proposal • Clears all spectrum designated for low power use • Puts all the spectrum in low power segments of band in market at the same time • Allows FCC to choose efficient new license areas better suited to low power cellular-like uses • Eliminates leases and associated bargaining issues • Eliminates strategic hold-out problems • Increases market liquidity w/ fungible spectrum • Can use one-sided auction mechanism Evan Kwerel WP_38_Presentation.3.11.04

29. Costs of Voucher Proposal Compared to Exchange Proposal • Not voluntary • Incumbents may not be able to precisely replicate current service areas • Requires FCC to determine metric for spectrum rights Evan Kwerel WP_38_Presentation.3.11.04

30. Thank YouFor More Information • OSP Working Paper No. 38 www.fcc.gov/osp/workingp.html • evan.kwerel@fcc.gov Evan Kwerel WP_38_Presentation.3.11.04