# Presentation: 336157

## SPECTRUM MANAGEMENT: PROPERTY RIGHTS, MARKETS, AND THE COMMONS 

- Gerald R. Faulhaber & David J. Farber
- Wharton School & School of Engineering
- University of Pennsylvania
- Presented at Federal Communications Commission
- June 12, 2002

## Traditional Spectrum Allocation

- Since 1934, radio spectrum allocated by FCC and Commerce (FRA, 1927-34) by administrative fiat
- Set aside bands for particular uses
- Then allocate within bands to particular users
- Comparative hearings (“beauty contests”)
- “Public interest”
- Political control
- Broadcast radio, then TV most important uses
- Rationales: Interference and Scarcity
- real or regulation-induced?

## Features of Administrative Allocation

- License constrained to specified use
- Technical constraints often tailored to that use
- Presumption of renewal
- License cannot be sold without FCC approval
- No leasing (until very recently)
- No property rights conveyed (NextWave case)
- And “Free”
- Who else allocates scarce resources on this model?
- Former Soviet Union: *GOSPLAN*

## Economists’ Critique

- Ronald Coase-1959
- Why is the government doing this?  Virtually all other private goods in the US economy are allocated by the private market; auction *ALL *this stuff off!  Huge increase in efficiency of use
- Scarcity is artificial; induced by regulation for the interests of the broadcast industry
- “Is this a big joke?:
- FCC commissioner, in response to Coase’s testimony
- 1993: FCC holds first auctions...*FINALLY!*

## Is This Enough?  Economics Part Deux

- Auctions used on a very small part of spectrum (120 Mhz).  Remainder continued to be allocated administratively.
- The Economists’ View:
*All* spectrum should be in the market; privately owned, bought, sold, leased, subdivided, aggregated, etc., subject to technical constraints to control interference (property rights).
- Yes, even DoD and police.
- Spectrum is too important for administrative allocation; let the market do it to achieve maximum efficiency.

## Who Trusts Markets?

- “Is this a big joke?”  Why are markets efficient?
- Self-interested owners will ensure spectrum is used by those who value it the most (via sale or lease)
- Markets instantly reflect changing demand and changing technologies; spectrum will move to highest valued use.
- But aren’t markets usually monopolized?
- Most markets have no such problems; spectrum is so abundant market power is unlikely to be a problem, once it’s all in private hands.
- What about public uses, such as police, Part 15?
- Government usually buys its own inputs (police cars, computers, land) with tax money; why do we think spectrum should be any different?

## The Engineers’ Critique

- Engineers as frustrated with GOSPLAN as economists: inefficient use of spectrum.
- Critique based on new radio technologies
- UWB: trades off power for bandwidth; emits “in the noise.”
- Agile (software-defined) radio: dynamic allocation of bandwidth; frequency-hopping
- Neither of these technologies problem-free
- Suggests many users can share the same bandwidth
- A Commons model, rather than ownership model.
- Economists and engineers have a common goal: more efficient use of spectrum and a distaste for GOSPLAN; but are we going in opposite directions?  *Looks like it!*

## Ownership or Commons: What Works?

- Ownership model works well if:
- Scarcity!  If spectrum will never be scarce, then no need for a market
- High power dedicated frequency uses (Power 99 in Philadelphia: 50KW at 98.9 FM forever)
- Legacy applications will be dominant for a long time
- Commons model works well if:
- Spectrum will never be scarce
- Everyone can use sophisticated transmitters/receivers for agile radio/UWB

## Do We Need to Choose? A Proposal

- Place *all* spectrum into the market, using deVany et al. property rights proposal *(Stanford Law Review, 1969)*
- Two alternative spectrum ownership models:
- Ownership with non-interference
- I own the spectrum and have absolute use priority; others can use it but only if they don’t interfere with this absolute use priority *UWB and agile radio OK; enforcement*
- Ownership with real-time leasing
- I own the spectrum and you can use it if you pay me.
- Identifiable emitter
- Real-time price, long-term lease price
- Perfectly competitive market
- Software to negotiate and bill (BMI and ASCAP models)
*UWB and agile radio OK; billing*

## What’s the Result?

- Either model accommodates both private ownership and commons-type uses
- Who pays?
- How robust with respect to scarcity?
*In the medium term, both models are likely to have identical results *(if all spectrum placed in market)
- Moving *all* spectrum to markets and using dynamic allocation will free up so much spectrum the market price is likely to be close to zero: *de facto Commons!*
- In the medium term, there is no real scarcity  ~zero price
- Except for “prime real estate,” such as cellular-friendly spectrum and legacy spectrum.

## How Do We Get There?

- Current licensees heavily invested in present regime.
- Make the move to a new market-based regime a “win-win”
- Focus on achieving efficient use by getting *all* spectrum into the market without distortions
- Not correcting perceived inequities in current distribution of licenses.

## Kwerel & Williams “Big Bang” auction

- Announce auction 1 year in advance
- All current licensees may put all or some of “their” spectrum in the auction
- Not required; but then constrained from market for 5 years
- FCC puts all “white space” bands to auction
- Bidding is opened; anyone can bid for any band offered, or combination thereof.
- Licensees may choose to accept a bid; if they do, *they receive the bid money*

## Kwerel & Williams “Big Bang” auction-2

- Licensees may choose to reject the bid and keep the spectrum.
- All spectrum placed in auction becomes private property, with all the technical (but not use) restrictions of the current licensee.	- Repackaging of some bands may be helpful
- Secondary markets ensure that buyers and sellers can transact continuously	 - “Big Bang” creates liquidity
- Spectrum can be aggregated, subdivided, bought, sold or leased.
- FCC and NTIA retire from the allocation business.

## Conclusion

- We all agree: GOSPLAN sucks
- Private markets work when scarcity an issue
- Commons work when scarcity not an issue
- But we can have it both ways:
- _Two_ alternative market-based regimes that give us the benefits of both
- Apparent conflict is bogus: engineers and economists can make common cause for radical reform
- Can we get there from here?  *Yes!  *With political constraints?  *Yes*!  If we move slooooowly?  *No!*