What Really Matters in Spectrum Allocation Design

1. What Really Matters in Spectrum Allocation Design Thomas W. Hazlett twhazlett@yahoo.com Liberal Institute Prague, Czech Republic September 8, 2004

2. Ronald Coase’s Vision In papers published in 1959 and 1960, Dr Coase asked why valuable radio spectrum was going to waste. He suggested that the problem was the lack of private property rights over spectrum, which prevented the formation of a market to allocate spectrum efficiently. The answer, he proposed, was to open the allocation of radio spectrum to market forces. His proposal was derided, but radio spectrum is now routinely allocated by auction… -- The Economist (Dec. 4, 2003) (emphasis in original) Spectrum Allocation Design Liberal Institute

3. Spectrum Property Rights • From radical heresy to passé orthodoxy • Without being implemented • Liberalization entails • Market allocation of bands (+ resale) • Flexibility in services, technologies, bus models • Overlay rights (facilitating reallocation) • Generic competition policy • “37 Concerned Economists” (2001) Spectrum Allocation Design Liberal Institute

4. Spectrum Property Regimes • “Property Rights and Wireless License Values” (March 2004) • Examined license prices in 27 auction countries (1438 licenses, 1995-2001) • Empirical prediction of license price • Prices in liberal regimes 38% lower • New Zealand, Australia, Guatemala, El Salvador Spectrum Allocation Design Liberal Institute

5. Dual Policy Errors • Economists’ formal literature • focuses on auction revenue • correcting The Economist • Unlicensed spectrum as costless • commons promoted over exclusive rights • pre-empts markets for wide area networks, which are the most valuable wireless applications Spectrum Allocation Design Liberal Institute

6. What Really Matters in Spectrum Allocation Design • with Roberto Muñoz (Sept. 2004) • www.aei-brookings.org • Economic lit. focus: license rent extraction • Efficiency question in output markets • Price • Quantity Spectrum Allocation Design Liberal Institute

7. Auctions • FCC license auctions began July 1994 • Economists urged since Coase (1959) • Rationale is that auctions • Assign licenses to most productive suppliers • Eliminate rent seeking waste • Monies raises replace taxes, saving 33¢ per dollar collected in license revenues Spectrum Allocation Design Liberal Institute

8. “Successes” and “Fiascoes” Spectrum Allocation Design Liberal Institute

9. Revenue-centric analysis • UK and German auctions a “success” -- Swiss and Dutch a “fiasco” • Ascending sequential round bidding loses favor; sealed bid auctions preferred • Policy analysis => • Make bidding more competitive • Assumes market outcomes exogenous Spectrum Allocation Design Liberal Institute

10. Three Common Proposals in Economics Literature • Reserve prices • Bidding credits for ‘weak bidders’ • Restricting number of licenses • Each reduces efficiency in output market to increase revenue from inputs (licenses) • Penny wise, pound foolish? Spectrum Allocation Design Liberal Institute

11. USA Cellular/PCS (CMRS) • ~ 170 MHz utilized by 6 wireless networks • 164 million U.S. subscribers • 800 billion MOU per year • $90 billion annual revenues • ~ $150 billion in cumulative investment • Consumer surplus (2003) ~ $81 billion Spectrum Allocation Design Liberal Institute

12. Demand for U.S. Wireless MOU Spectrum Allocation Design Liberal Institute

13. Value of Bandwidth • PRICE of LICENSES • 10 MHz @ 1.9 GHz ~ $5 Billion  170 MHz ~ $85 Billion • SOCIAL VALUE (@ r=5%) ~ $1.6 Trillion • SOCIAL VALUE / PRICE > 20 Spectrum Allocation Design Liberal Institute

14. Examining Mobile Phone Markets • Estimate prices with 3-equation model • 29 Countries (18 with Auctions) • Data for price and MOU: quarterly, 1999I-2003II • Auction countries: prices not lower • Two very significant drivers of lower prices: • More competition (lower HHI) • More spectrum • Marginal costs lower • Decreases HHI (lower fixed costs of entry) Spectrum Allocation Design Liberal Institute

15. Retail Price and Allocated Spectrum Spectrum Allocation Design Liberal Institute

16. Welfare Effect of Withholding a License: Reserve Prices in Belgium and Greece Spectrum Allocation Design Liberal Institute

17. USA Simulation: Costs of Delay Spectrum Allocation Design Liberal Institute

18. Social Gains from an Increase in CMRS Spectrum Spectrum Allocation Design Liberal Institute

19. Spectrum Allocation Design Liberal Institute

20. Chile-like Scenario Spectrum Allocation Design Liberal Institute

21. Basic Lessons • Enormous social gains from additional spectrum access • Vast proportion of gains go to consumers • Business users gain efficiencies • Public safety users gain efficiencies • Service provider profits turn negative • Political resistance by incumbents expected Spectrum Allocation Design Liberal Institute

22. What Matters in Spectrum Allocation? • Spectrum • Competition Spectrum Allocation Design Liberal Institute

23. May 3, 2002 Spectrum Auction Delay Hits Fast Track By Roy Mark Spectrum Allocation Design Liberal Institute

24. l Lauren Hazlett (4) * Marilyn Hazlett (6) Official Telecommunications Policy Consultants Spectrum Allocation Design Liberal Institute