Using Market-Based Spectrum Policy
                  to Promote the Public Interest



                       Gregory L. Rosston*
                      Jeffrey S. Steinberg**



                           January 1997




















* Deputy Chief Economist, Federal Communications Commission

**   Special Counsel, Commercial Wireless Division, Wireless Telecommunications Bureau, Federal
Communications Commission

The opinions and conclusions expressed in this paper are those of the authors and do not necessarily
reflect the views of the Federal Communications Commission or any of its Commissioners, or other
staff.  This paper is intended to stimulate discussion and critical comment outside the FCC as well
as within the agency.                         ACKNOWLEDGMENTS

The authors wish to thank the many Commission staff members who contributed their comments
and ideas during the preparation of this paper, including Ron Netro, Pam Megna, Walter Strack,
Karen Brinkmann, and Tom Stanley of the Wireless Telecommunications Bureau; Evan Kwerel,
John Williams, and Joe Farrell of the Office of Plans and Policy; Ruth Milkman and Karl Kensinger
of the International Bureau; Bruce Franca, Michael Marcus, and Charles Iseman of the Office of
Engineering and Technology; Jerry Duvall and Keith Larson of the Mass Media Bureau; and John
Berresford of the Office of General Counsel.  Any omissions from this list are inadvertent and should
be attributed solely to the faulty memories of the authors.                        TABLE OF CONTENTS


                                                             Page
I. Introduction. . . . . . . . . . . . . . . . . . . . . . . . .1
II.  Background. . . . . . . . . . . . . . . . . . . . . . . . .1
III. Discussion. . . . . . . . . . . . . . . . . . . . . . . . .3
   A.  Competitive Markets . . . . . . . . . . . . . . . . . . .4
   B.  Flexibility . . . . . . . . . . . . . . . . . . . . . . 10
   C.  Public Interest and Market Failure Considerations . . . 14
   D.  Licensing and Fee Policies. . . . . . . . . . . . . . . 17
   E.  Administrative Certainty. . . . . . . . . . . . . . . . 20
   F.  The Global Marketplace. . . . . . . . . . . . . . . . . 21
IV.  Conclusion. . . . . . . . . . . . . . . . . . . . . . . . 24                         I.  INTRODUCTION

     Spectrum is a public resource that supports a variety of uses.  A principal statutory responsi-

bility of the Federal Communications Commission ("Commission") is to maintain authority and
control over spectrum in order to ensure that the spectrum is utilized for the benefit of all the
Nation's citizens and in a manner that serves the national defense and promotes the safety of life and
property.  In recent years, this function has taken on increasing urgency and difficulty as technologi-

cal, economic, and legal developments have increased both the demand for spectrum and the amount
of usable spectrum within the Commission's jurisdiction.  Furthermore, the Commission now has
statutory authority to assign spectrum through the use of competitive bidding in many circumstances,
thereby increasing its ability to rely on market forces to attain the best use of spectrum for the benefit
of consumers.  Given these developments, it is timely to consider the Commission's overall
spectrum policy objectives and how those objectives can best be promoted using the tools available
to the Commission.

     In this paper, the authors propose a series of principles and ideas that we believe should
inform the Commission's future decisions regarding spectrum policy.  As elaborated below, we
believe the Commission should continue and expand upon the initiatives it has already taken to adopt
spectrum policies that promote competition, allow maximum flexibility, encourage technical effi-

ciency, promote innovation, facilitate seamless networks, and maximize the amount of spectrum
available for use.  In this way, the Commission can attempt to ensure that spectrum will be used to
provide the greatest benefit to the public.

     This paper is not a policy statement of the Commission or any of its Bureaus or Offices, and
it is not intended to bind the Commission in any way.  Rather, its intent is to stimulate discussion
and critical comment both within and outside the Commission, with the ultimate goal of helping the
Commission, spectrum users, the consuming public, and other interested parties to address current
and future spectrum policy questions in the manner that best promotes the public interest.

                         II.  BACKGROUND

     A principal reason that Congress established the Commission more than 60 years ago was
to manage the radio spectrum so that the public could receive maximum benefit from its use.  Prior
to 1927, licenses to use radio spectrum were granted by the Secretary of Commerce, who also had
the power to designate frequencies for particular radio services.  The courts held, however, that the
Secretary of Commerce did not have the authority to deny licenses on the ground that they would
cause interference, nor to limit licensees' power, frequency, or hours of operation.  As a result, the
airwaves became filled with interfering signals, severely compromising the ability of any spectrum
user to make use of the spectrum.  To remedy this situation, Congress enacted the Radio Act of
1927, the substantive provisions of which were later incorporated into the Communications Act of
1934, which established the Commission.  Under the Communications Act, the Commission has
broad authority, consistent with the public interest, convenience, and necessity, to license users of
radio spectrum, impose conditions on their licenses, prescribe the nature of the services to be
rendered by stations or classes of stations, and prevent interference with licensees' authorized uses
of spectrum.

     In 1945, the Commission articulated a series of principles that guided its early spectrum
allocation decisions.  These principles reflected a paradigm under which the Commission actively
determined the best use for each block of spectrum and assigned spectrum according to specific
criteria.  Thus, in determining which of several services would be permitted to operate over a 
particular frequency band, the Commission sought to evaluate whether any service would be better
provided over wireline telecommunications facilities, which services were most important, how
many people would benefit from each service, and which services would be most accepted by the
public.  In addition, the Commission considered the propagation characteristics of different
frequencies, as well as the extent to which industry and the public had already invested in equipment
to use particular frequencies for specific services.

     As a result of developments in technology, new services, such as two-way mobile switched
voice communications, have become available that were barely imagined in 1945.  Unlicensed
devices, such as cordless phones and garage door openers, have proliferated.  Global satellite
systems that require an unprecedented level of international coordination are being offered.  Tech-

nology has enabled services to be offered over progressively higher frequencies that were once
thought to be unusable.  On the one hand, digital and other technologies have made it possible to
offer some services using ever narrower bandwidths, while at the same time new services are envi-

sioned that require increasingly wide bandwidths.  Spread spectrum technology has raised the
possibility of several users, or even several services, independently sharing wide frequency bands
without interference.  Furthermore, technology and the market will continue to develop rapidly for
the foreseeable future in ways that cannot reliably be predicted.  The Commission's current spectrum
policy decisions therefore should incorporate sufficient flexibility so as not to constrain these future
developments or favor particular technologies.

     Over the years, the Commission has recognized that its previously articulated principles are
no longer adequate to guide spectrum policy, and it has moved away from the philosophy implicit
in those principles toward an approach that is more attuned to the operation of market forces.  In
particular, the Commission has relied less on administrative efforts to determine the best uses of
spectrum, and instead it has allowed service providers increased flexibility to respond to incentives
communicated by the marketplace for the efficient production of diverse services that consumers
want and need.  The Commission should make clear that it will follow this approach in a consistent
manner, and resist pressure from those who urge the Commision to restrict market forces in order
to protect their private interests rather than to promote the public interest.  The Commission has also
sought and obtained the legal authority to award licenses by competitive bidding, and it has used that
authority to assign licenses in an efficient, market-based manner.  Additionally, on March 5, 1996,
the Commission convened an en banc hearing to address spectrum policy issues.  At that hearing,
four panels of experts offered testimony regarding future spectrum demand, technology trends, spec-

trum allocation, and spectrum assignment.  Finally, we should note that many of the proposals
discussed in this paper reflect and extend ideas developed in prior research by Commission staff. 


                         III.  DISCUSSION

     The radio spectrum is a valuable natural resource with unique characteristics.  Spectrum may
be used more or less efficiently, but it cannot be created or destroyed.  Unlike many natural resourc-

es, spectrum is inexhaustible over time; the manner or degree to which spectrum is used at one
moment has no physical impact on the availability of spectrum at any other moment.  At any given
time and location, however, the amount of usable spectrum is finite.  Thus, any use of spectrum
necessarily precludes or affects, to a greater or lesser degree, some other simultaneous use of the
same spectrum.  There is no known means by which spectrum can be made infinitely available to
all who may wish to use it.

     Pursuant to the Communications Act, the Commission's overriding mandate is to promote
the public interest.  In order to achieve this end, Congress has made clear that the United States 
shall maintain control over spectrum within the Nation's jurisdiction, and that a license to use spec-

trum shall not constitute ownership of that spectrum.  We believe the public interest is best served
by ensuring that the American people receive the maximum benefit from the spectrum resource. 
Therefore, the Commission's spectrum policy should advance the goals of ensuring that the full
benefit of the spectrum resource accrues to the public, and of achieving the most beneficial uses of
spectrum.

     The public may benefit from the use of spectrum in a variety of ways.  One form of benefit
occurs when Government agencies maintain control over spectrum and use it for public  purposes,
such as national defense or public safety.  The public may also benefit when private users of spec-

trum are required to use that spectrum in ways that serve the public interest.  While these uses may
yield public benefits, these benefits may be lower than the benefits to be achieved from treating
spectrum like other inputs in the provision of public and private services.  As discussed below, man-

dated use in general may ultimately diminish the public welfare by preventing market forces from
operating to yield the most valued services at efficient cost and competitive prices.  We therefore
believe that in most cases, the Commission can best promote the public interest by relying on
competitive market forces, and by implementing allocation, assignment, usage, and other policies
that permit market forces to operate most effectively.

     We believe that a well conceived conceptual framework can make it easier for the
Commission to reach sound, consistent, procompetitive spectrum policy decisions that maximize
the public interest.  To the extent that the Commission can establish a clear and consistent paradigm
for approaching these issues, that fact will provide guidance and increased certainty to the market,
thereby encouraging investment in new technology.  This paper is intended to assist the Commission
in developing such a paradigm.

A.  Competitive Markets

     In general, the public derives the greatest benefit from spectrum to the extent that spectrum
is used for services that the public values most highly and therefore is most willing to pay for.  No
government agency, however, can reliably predict public demand for specific services or the future
direction of new technologies.  Even if technology and the public's needs were unchanging, a central
planner could only imprecisely evaluate the benefits of the myriad possible uses of spectrum and
determine which frequencies should be used for each service.  Given the rapid evolution of
technology, moreover, the Commission cannot reliably predict what services will be available or
which frequency range will be efficient for any service even a few years from now, much less what
the public demand for each service will be and how to respond to changing demand.  Therefore, even
if the Commission could correctly identify the most economically efficient use of spectrum at any
given time, it would be obliged continually to modify its allocations to reflect technological and
economic developments.  This reallocation process necessarily consumes substantial public and
private resources, reduces certainty for users of spectrum, discourages investment, and delays the
introduction of new services.  This process also discourages innovation because it requires
entrepreneurs to disclose their ideas to the public well in advance of their introduction, severely
diminishing the competitive advantage from being first to market.

     In recognition of these shortcomings of central planning, we believe the Commission should,
wherever possible, rely on market forces to ensure economically efficient use of spectrum.  In a per-

fectly competitive market, firms will produce the combination of goods and services most desired
by consumers in the most efficient manner, and will offer these goods and services at competitive
prices.  In this way, the market achieves technological and allocative efficiency.  Furthermore,
entrepreneurs have an incentive to enter, where feasible, into production of goods and services that
have been provided on a less than fully competitive basis, since these products tend to offer the
greatest opportunities for profits.  Thus, if reasonably competitive conditions exist and significant
market failures do not occur, the market achieves economically efficient use of resources more
quickly and more reliably than government regulation.

     The Commission's spectrum policies, therefore, should both permit and promote the opera-

tion of competitive market forces.  In large part, the Commission can serve these principles simply
by not interfering where it concludes that the judgment of the marketplace is sufficiently reliable. 
Thus, except in instances of substantial market failure or overriding public interest considerations,
the Commission should avoid mandating that spectrum be used to provide specific services (e.g.,
two-way switched voice mobile, paging, or dispatch).  The Commission also should endeavor to
minimize regulations governing how services may be provided, which limit competition, obstruct
innovation, and impede efficient investment, as discussed more fully below.

     In addition to avoiding regulations that impede competition, the Commission should also
affirmatively orient its policies, where possible, to create the conditions under which market forces
can most effectively work.  This principle should guide the Commission's practices both in allocating
spectrum and in assigning it to particular users.  Thus, in allocating spectrum, the Commission
should strive to ensure that ample spectrum is available for services that the public demands.  In
addition, where spectrum is currently governed by rules that do not permit it to be used to its full
value, the Commission should act quickly and effectively to expand service flexibility so that this
spectrum can be used more efficiently, thereby increasing the value of spectrum to licensees and the
public.  Where possible, the Commission should also exhaustively license spectrum in bands that
are now licensed on a site-by-site basis by issuing flexible, geographic-area overlay licenses and
creating mechanisms for voluntary changes in spectrum use, including where appropriate procedures
for new geographic-area licensees and incumbents to negotiate compensated relocation of incum-

bents. 

     The Commission also should be wary of unnecessarily reserving spectrum for future use. 
In most instances, the public is probably better served if spectrum is made available for use and that
use is allowed to change as technological and market developments warrant, rather than if spectrum
is withheld from use indefinitely.  The Commission should therefore make available for assignment
any remaining large blocks of unassigned spectrum, and it should move quickly to reallocate spec-

trum to private sector use as it continues to receive authority over spectrum formerly reserved for
the Federal Government.  Moreover, to the extent that the best use for spectrum in some circum-

stances is for it to lie temporarily fallow, we believe that the competitive market can reliably identify
those situations.  Therefore, we believe the best practice ordinarily is for the Commission to allocate
and assign spectrum, and to allow sufficient flexibility so that spectrum users may hold spectrum
in reserve if they determine that to be the highest valued use of the spectrum.  That means that the
Commission should refrain from imposing inefficient construction requirements in order to prevent
anticompetitive warehousing or achieve buildout to rural areas.  Construction requirements do not
necessarily solve these problems because licensees can typically satisfy such requirements without
providing the service at issue, and they impose inefficiencies in the use of spectrum.  

     The Commission can also help promote economically efficient use of spectrum by
establishing the initial geographic scope and bandwidth of licenses in a manner that is sensitive to
the different characteristics of different frequencies, as well as the different spectrum needs of vari-

ous services.  In general, the Commission should set initial allocations to approximate its estimate
of the efficient use of spectrum.  Because of transaction costs, sensible initial allocations are
important to quickly achieving efficient spectrum use.  For example, in order to afford potential
providers wishing to offer services that require large bandwidths an opportunity to compete while
minimizing potentially significant transaction costs to acquire contiguous spectrum from multiple
parties, the Commission should make large frequency blocks initially available in some portions of
the spectrum, or rely on simultaneous multiple round auctions, combinatorial bidding or other
mechanisms to facilitate the efficient aggregation of smaller blocks put up for bid at the same time. 
Furthermore, the Commission should attempt to designate these large blocks in those frequency
bands that, because of their propagation characteristics, are most likely to be suitable for efficient
offering of broadband services.  At the same time, the Commission must be aware that its estimate
of efficient spectrum use is necessarily imperfect, and it must anticipate that technological develop-

ments will change the bandwidth necessary for many types of services, permit the introduction of
new services with different bandwidth requirements, and increase the spectrum range over which
services may be efficiently provided.  Therefore, the Commission should avoid defining the specific
services users may offer or the specific frequencies they may utilize for such services, and it should
permit aggregation (subject to anticompetitive scrutiny) and disaggregation of spectrum into
different size blocks.  In this way, the Commission can allow the market to correct for the imper-

fections inherent in the initial allocation process, and it can ensure that allocations intended to further
competition now do not inadvertently restrict competition in the future.

     The Commission should also carefully consider the appropriate relationship among exclusive
licensing, shared licensing, and unlicensed use.  In most circumstances, exclusive spectrum  licenses
best promote efficiency and competition by giving each spectrum user maximum protection from
interference.  However, some uses of spectrum, particularly very low power uses, create such small
potential for interference, and have so little effect on the availability of the resource to others, that
they can be offered most efficiently and most competitively without licensing spectrum users.  As
a result, once the spectrum has been set aside for unlicensed use, the efficient charge for the use is
zero.  However, setting aside spectrum for unlicensed use does involve a cost -- the spectrum cannot
be used for high-power services.  Comparing the benefits of low power and high power use is very
difficult, but the Commission should endeavor to develop a framework for evaluating the benefits
of setting aside additional spectrum for unlicensed use.  These benefits could then be compared with
the benefits of exclusive use, as indicated by the prices paid at auction for the rights to use spectrum
with similar characteristics.  

     The Commission has authorized unlicensed use of very low power devices on a secondary
basis in most bands occupied by licensed services; has authorized use of higher power unlicensed
communications devices on a secondary basis in some bands; and has designated certain blocks
of spectrum exclusively for unlicensed personal communications services devices.  The Commis-

sion should continue to consider the circumstances under which unlicensed uses of spectrum are
appropriate, and in particular whether technologies such as spread spectrum may increase the
potential utility of unlicensed devices.  At the same time, the Commission should be aware that
unlicensed users may have less incentive to use spectrum efficiently.  To address this problem in
unlicensed bands, the Commission has adopted certain protocols, etiquettes, and power limitiations. 
The Commission should also consider that, with expanded flexibility and relaxation of build-out
requirements, licensees may in some circumstances find it profitable to accommodate certain low
power uses within their licensed spectrum through contractual agreements with manufacturers, there-

by leaving the determination of whether spectrum will be used for such purposes more fully to
market forces.

     Another alternative to exclusive licensing is licensing two or more parties to share a
particular frequency band.  The Commission must keep in mind that licensed spectrum sharing
typically requires additional regulatory restrictions on users' operational flexibility in order to keep
them from interfering with each other, especially where more than a very few users are involved, or
else sharing is likely to result in lower service quality.  Furthermore, as with unlicensed spectrum,
users under a sharing arrangement generally have less incentive to use spectrum efficiently than
exclusive licensees.  The Commission should carefully consider in each case whether these costs out-

weigh the gains of opening the spectrum to more licensees.  The Commission also should consider
whether, in most cases, spectrum sharing can be effectuated by private arrangement between the
licensee and another party.  In general, we believe that spectrum sharing should be mandated only
in rare instances where specific conditions, such as high transaction costs, would prevent entry into
efficient private arrangements.  Even with high transaction costs, sharing should be limited to
circumstances where the Commission possesses very good information and a high degree of
certainty about technology and future trends so that the benefits of reducing transaction costs will
outweigh the costs of inflexibility and poor incentives. 

     Promotion of competition should also be a principal consideration motivating the estab-

lishment of rules for assigning spectrum to individual users.  In particular, the Commission should
strive to reduce barriers to entry by eliminating restrictions on eligibility wherever possible.  The
Commission generally should not impose eligibility restrictions unless they are clearly necessary to
prevent a party from developing or retaining market power (i.e., the ability to control or significantly
influence price).  Furthermore, wherever possible the Commission should consider less restrictive
measures than eligibility restrictions to achieve this end.  For example, allowing service flexibility
across a wide range of spectrum and increasing the supply of spectrum available to the market would
reduce barriers to entry and reduce the need for eligibility restrictions.

     At the same time, the Commission should be prepared to intervene directly in the market
where necessary to preserve or promote competitive conditions.  Market forces do not ensure
economic efficiency or maximize consumer welfare in markets that are not competitive because a
dominant producer or group of producers has market power.  Thus, where market forces and antitrust
law may be insufficient to prevent any party from developing or retaining market power, the
Commission should consider measures such as spectrum caps to ensure at least a minimum number
of competitors.  In applying caps, the Commission should consider the range of spectrum available
for a service as well as the availability of other technologies that do not use spectrum.  For the most
part, these measures will likely be needed only in service markets that have not yet completed the
transition to full competition, as indicated by factors including the degree of concentration, pricing
patterns and trends, the extent of barriers to entry, and the extent to which substitutable services can
be provided.  Once a market has become fully competitive, the normal operation of market forces,
supplemented by enforcement of antitrust laws, should ordinarily suffice to prevent competitors from
exercising market power or engaging in anticompetitive activities.  The Commission should consider
whether additional reporting requirements are needed to help it determine when special measures
are necessary to promote competitive conditions.  In addition, increasing the number and variety of
competitors in the market may help to develop and maintain robust competition.

B.  Flexibility

     In order for competition to bring consumers the highest valued services in the most efficient
manner, we believe competing users of spectrum need flexibility to respond to market forces and de-

mands.  This flexibility includes the freedom to determine how they will use spectrum, how much
spectrum they need, and the geographic area in which they will provide service.  Flexibility
eliminates artificial market entry barriers by enabling spectrum users to respond quickly to changing
public demands for new and different services, as well as enabling users to introduce innovative
services and technologies rapidly without administrative costs or delays.  Furthermore, flexibility
increases users' incentives to expand spectrum capacity by enabling them to profit from investments
in more efficient use of spectrum, either by using spectrum for additional purposes or by transferring
the authorization to use part of the spectrum to a party that values it more highly.  Flexibility also
can promote competition by increasing both the diversity of potential service offerings and the
number of providers that can offer competing services.  In general, flexibility endows a spectrum
license with certain attributes resembling private property rights, including the ability to transfer
control with Commission approval, freedom to determine how the property will be used (subject to
applicable technical requirements), and freedom to profit from use of the resource.  As discussed
above, the Commission legally cannot award perpetual or absolute ownership rights to spectrum. 
However, substantial replication in the spectrum context of the freedoms inherent in property rights
will allow competition to function more effectively, much as it does in those sectors of the economy
where the basic inputs are privately owned.

     We therefore believe that the Commission's policies should strive to maximize spectrum
users' flexibility in four dimensions.  First, users should have substantial service flexibility, meaning
the freedom to use spectrum for services of their choosing.  In several recent proceedings, the
Commission has acted to permit licensees extensive service flexibility in new services, such as per-

sonal communications services and general wireless communications service.  Similarly, the
Commission has taken action to increase service flexibility in existing services, for example by creat-

ing additional flexibility for mobile services licensees to offer fixed services.  In general, this trend
should continue, but some incumbent service providers may urge the Commission to limit flexibility
in order to reduce competition for their services.  Limiting the public benefits from newly available
spectrum to protect the private interests of existing licensees does not promote the public interest. 
Although the Commission is required by statute to establish certain regulatory classifications, within
those classifications the Commission has substantial leeway regarding the amount of flexibility it
can afford.  Maximum service flexibility will enable spectrum users quickly and efficiently to
modify their offerings to provide the services that consumers demand and that technology makes
possible.

     Second, technical flexibility means that users should have broad freedom to choose the
technologies and equipment that they will use to provide services.  Technical flexibility gives spec-

trum users the ability and incentive to develop and implement innovative, spectrum-efficient, low-
cost, and consumer-responsive technologies for delivering their services without unnecessary delay
or regulatory interference.  In addition, technical flexibility will give different licensees the ability
to try different technologies and to compete on the basis of their technologies.  For example, some
personal communications services providers believe that code division multiple access (CDMA) will
be the best technology for their service, whereas others favor time division multiple access (TDMA)
or the Groupe Speciale Mobile (GSM) standard.  The competition between the different technologies
as well as the comeptition between different systems should lead to innovation and new services for
consumers.  

     Third, users should have flexibility to determine both the amount of spectrum they occupy
and the geographic area they serve.  As discussed above, when the Commission issues an initial
license it must define that license, at a minimum, in terms of both spectrum block size and geograph-

ic area.  Once initial licenses have been assigned, however, licensees should ordinarily be free to
disaggregate their spectrum and partition their service areas in order to operate within the parameters
that they determine to be efficient.  Similarly, in those instances where the Commission's initial
assignments are relatively constrained with respect to bandwidth or geographic scope, licensees
should generally be able to aggregate additional authorizations in order to provide the services
demanded by the marketplace.  As a general rule, flexibility of scope should be limited only as
necessary to promote specific pro-competitive goals or to preserve other specific public interest
requirements.  For example, where limits on aggregation of spectrum may appear necessary to
prevent a party from developing or maintaining market power, the Commission should first consider
increasing the supply of spectrum usable for a service, and impose spectrum caps only where it is
impossible to create competition through additional spectrum.

     Fourth, licensees should have implementation flexibility.  To the extent it can legally do so,
the Commission should generally eliminate requirements for licensees to build out their networks
within a specified period of time.  By permitting licensees to allow spectrum to remain unused where
it is economically efficient to do so, the Commission can make it possible for market forces to
govern the rate at which spectrum is developed, and eliminate the need to rely on administrative
judgment regarding when spectrum should be released.  Furthermore, spectrum flexibility, includ-

ing the flexibility to transfer authorizations to use spectrum, will cause licensees to bear the full
opportunity cost of allowing spectrum to remain idle.  In addition, flexibility will allow additional
licensees freely to enter any market, and therefore will reduce the ability of licensees that are already
in a market to withhold spectrum for anticompetitive purposes.

     In most instances, service and technical flexibility should be limited only by rules to prevent
interference.  An authorization to use spectrum is of limited value without an expectation that one's
legitimate use of the spectrum will be free from interference by others.  Thus, each user of spectrum,
like a user of land or any other resource, must sacrifice some degree of unrestricted use so that every
other user can enjoy the benefits of spectrum utilization within that user's own defined bounds.  The
Commission should continue to define the extent to which each spectrum user may expect freedom
from interference and enforce rules to protect those expectations.  The Commission can and should,
however, perform this function in a manner that is minimally intrusive upon users' flexibility.  Thus,
rules to limit interference should ordinarily be output-based (e.g., limitations on emissions outside
the licensed spectrum band and geographic area or sharing criteria) rather than input-based (e.g.,
specifying permissible services or technologies).  So long as a spectrum user's emissions comply
with objective numerical standards, it should ordinarily be free to offer whatever services using
whatever technologies it wishes.  The Commission should also consider expanding spectrum users'
flexibility to negotiate among themselves interference limitations that may differ from those speci-

fied in the rules.

     Although we believe the Commission should generally attempt to minimize limitations on
technical flexibility, it should consider whether, under narrow circumstances, its specification of
technical standards may promote the effective operation of the market.  In most cases, we believe
that if a common standard is economically efficient for a product or service, market forces will lead
producers to adopt the optimal common standard voluntarily.  Under some circumstances, however,
the market may fail to quickly produce a common standard because individual producers have
interests in particular standards that are different from the public interest.  While it may be appro-

priate for the Commission to intervene under such limited circumstances, it should do so sparingly
because prescribed technical standards can have substantial drawbacks.  For example, the
Commission may have difficulty selecting the most efficient standard, and any standard it selects
may discourage or even prevent future innovation that would benefit the public.  In addition, the
process of formulating a single technical standard can seriously delay introduction of a service. 
Thus, the Commission should evaluate the circumstances in each case carefully so as not unneces-

sarily to override the market's natural response mechanisms.  Where a single standard is necessary,
the Commission should encourage industry to agree on the standard, and it should preserve as much
flexibility within the standard as is possible.  Furthermore, the Commission should actively explore
sunsetting any technical standards once the market has developed to the point where they are no
longer necessary.  

C.  Public Interest and Market Failure Considerations

     Although competition ordinarily is the most effective means of ensuring the production of
a socially optimal mix of goods and services in an economically efficient manner, under some
circumstances market forces will fail to produce outputs that maximize social welfare.  For example,
as discussed above, markets do not function effectively where a dominant producer has substantial
market power.  Market failure also may occur when the production or consumption of an output
exhibits significant externalities, i.e., costs or benefits that consumers or producers are unable fully
to incorporate into their decision-making processes.

     The market also may fail to yield socially efficient output of public goods.  Public goods are
products or services that individuals can consume without purchasing (non-excludability) and
without detracting from other consumers' opportunities to benefit from the same unit of the good
(non-rivalry in consumption).  The marketplace typically underproduces public goods because,
lacking the power to exclude, producers are unable to collect a charge from every consumer of the
good.  Many users of spectrum provide services that exhibit attributes of public goods.  For exam-

ple, national defense, public safety services, and basic scientific research are public goods that are
often provided or funded by governmental units for the benefit of the public as a whole.  It should
be clear, however, that although the services provided in these cases are public goods, the inputs to
these services are not public goods.  Spectrum, like cars and radios, is an input to the provision of
public safety.

     The public interest is best served when public and private enterprises produce economically
efficient types and quantities of public goods.  In the case of some public goods that use radio
spectrum, such as national defense and some public safety services, the Commission and the
executive branch have agreed upon allocations of spectrum for federal government use to produce
these outputs.  For other public goods, however, the Commission must consider how best to
promote the public interest by ensuring that efficient quantities of the goods are produced.  Some
have argued that the best way to achieve this end is for the public to allocate direct financial
subsidies to producers of public goods, who will use that money to compete for spectrum on the
open market in the same way they compete for most other inputs.  Others argue, however, that for
historical and political reasons this approach may often be impractical and that spectrum should be
reserved for such entities.  We note in this regard that the Public Safety Wireless Advisory
Committee Report identifies access to spectrum as well as funding and increased access to
commercial services as inputs that are needed to maintain and improve public safety.  However,
to ensure that the public gets the maximum benefit from the spectrum, in considering the reservation
of spectrum for any service the Commission should balance the value of spectrum in that service
against its value for other uses.  In general, explicit financial subsidies are preferable to set-asides
because they are more narrowly targeted and their costs can be more easily evaluated.  By contrast,
it is difficult to determine the cost of reserving spectrum, and set-asides create disincentives for the
adoption of possibly efficient tradeoffs between equipment and spectrum.  Options such as
redirecting some portion of auction revenues for public safety might prove to be a more efficient
subsidy mechanism than set-asides because then public safety agencies would realize the opportunity
cost of their spectrum usage and make more efficient choices.

     To the extent the Commission desires to take into consideration other public interest goals
in allocating or assigning licenses and is unable to use explicit monetary subsidies as discussed
above, it should do so by clearly stating the obligations on the license upfront and allowing the
licensee flexibility in meeting those obligations.  Licensees should be allowed to meet the
obligations themselves or to contract with others to meet the obligations for them in order to
minimize the inefficiency of the obligations.  Furthermore, any intervention should be narrowly
tailored to the goal it is intended to promote, and the Commission should in every instance balance
the public interest in intervention against the costs of interfering with competitive market forces.

     Public interest concerns also may require some limitations on service or technical flexibility. 
The Communications Act and related statutes, for example, contain provisions that create specific
public interest obligations for broadcasters, including the obligation to allow reasonable access to
the broadcast airwaves by legally qualified candidates for Federal elective office; the obligation
to provide "equal opportunities" to legally qualified candidates for public office; the prohibition
against charging legally qualified candidates for public office more than the "lowest unit charge"
during a certain period prior to an election; and the obligation to air educational and informational
programs for children.  Similarly, providers of direct broadcast satellite service are required to
reserve capacity for non-commercial educational and informational programming and make it
available to national educational programming suppliers at reasonable rates.  The Commission has
also proposed similar rules for digital audio radio service.  Some service rules may be needed to
further the public interest in universal access to telecommunications services at just, reasonable, and
affordable rates, as well as services that are accessible to persons with disabilities.  Some techni-

cal limitations may also be necessary in the interest of public health, safety, and environmental
protection, including limitations on radiofrequency emissions and rules requiring service providers
to offer interoperable emergency services.  As with rules intended to prevent interference, however,
it should be possible to achieve these ends in a manner that is minimally restrictive of users' flexibili-

ty, in large part by focusing on outcomes rather than means.  For example, the Commission recently
required certain commercial mobile radio service providers to offer enhanced 911 services meeting
defined performance criteria by specific dates, but it preserved flexibility by avoiding specification
of the technology they must use.  The Commission's recent Order regarding children's educational
television similarly preserved broadcasters' flexibility in meeting their statutory obligation while
providing clear guidance as to what will be considered satisfactory performance.

D.  Licensing and Fee Policies

     In order for the public to derive the maximum benefit from spectrum use, authorizations to
use spectrum should be assigned in a manner that minimizes delay and inefficiency.  When the
Commission receives mutually exclusive applications for initial spectrum usage authorizations to
provide subscription-based services, competitive bidding is the most effective means of promoting
this end.  Competitive bidding serves the public interest in several ways.  First, a well designed
competitive bidding approach is better able to get spectrum into the hands of those who initially
value it most highly and to facilitate efficient spectrum aggregation than fragmented secondary mar-

kets.  The auction process ensures that an authorization to use spectrum will be initially awarded to
the party that places the highest value on the spectrum and therefore is willing to pay a market price
for it.  Although secondary markets are useful to reassign spectrum as its value to different parties
changes over time, relying on efficient auctions in the first instance reduces costs and delay in the
initial assignment process.  Second, users who are not required to pay market value may have an
incentive to acquire licenses on a speculative basis simply to resell these licenses, thereby wasting
valuable resources in rent seeking.  Indeed, this occurred on a widespread basis when the
Commission awarded cellular licenses by lottery.  Although the Commission should not attempt
to prevent authorized spectrum users from selling their authorizations for a profit, it better serves the
public interest to require the party that is initially authorized to use spectrum to pay the value of that
authorization to the public, rather than getting it for free simply because it is lucky enough to win
a lottery.  Third, auctions vastly reduce the delay involved in resolving mutually exclusive
applications for initial licenses, and getting those licenses into the hands of those who value them
most highly, as compared with lotteries or comparative hearings.  The Commission's successful
experience in conducting auctions confirms our evaluation that competitive bidding is ordinarily the
preferred means for awarding initial authorizations from among mutually exclusive applications.

     In some instances, however, competitive bidding is not an appropriate means for assigning
spectrum use authorizations.  First, auctions are not necessary in the absence of mutually exclusive
applications because, if there is only one applicant, then there are no opportunity costs associated
with granting a license to the sole applicant.  Auctions also are not currently authorized except where
spectrum is likely to be used for certain specified purposes.  Furthermore, auctions may be prob-

lematic for services that have large economies of scope or scale and need to be provided on a
transnational basis to realize those economies.  In theory there is no reason that licenses for such
services could not be awarded by competitive bidding, but there may be practical difficulties
involved in conducting competitive bidding for transnational services.  For example, it may be
difficult for a single provider to obtain a set of complementary licenses from different countries,
even though the licenses are most valuable as a set, if competitive bidding occurs in a sequence of
auctions.  The licensing process would also be delayed if an international organization would have
to be formed or designated to coordinate or conduct a simultaneous auction.  However, these
concerns should not foreclose the possible use of auctions.  Rather, they should be considered in
comparing auctions to available alternatives, including the current process.

     If Congress so authorizes, the Commission may collect fees for spectrum use.  In general,
the Commission should consider assessing fees that approximate the market value of spectrum where
such fees will help to promote the economically efficient use of spectrum.  For example, user fees
for shared frequencies in the private land mobile radio services may help to alleviate a "tragedy of
the commons" situation in which use of the spectrum may become congested and users have little
incentive to use that resource more efficiently because any privately initiated attempt to improve
efficiency would confer benefits on all users of the shared spectrum, with only a fraction of these
benefits accruing to the party undertaking the effort.  Where no such circumstances are present,
however, the Commission should not assess user fees in a misguided effort to obtain revenue.  In
general, user fees are appropriate only under limited circumstances where the spectrum user does
not realize the opportunity cost of the use of spectrum.  With exclusive use, flexibility and the ability
to transfer licenses, users do realize the opportunity cost of using spectrum, and thus fees should not
be charged.  Where these conditions do not obtain, the Commission should consider whether
restrictions on the license could be relaxed so that the user does realize the opportunity cost, rather
than simply imposing fees.

     In addition to using competitive bidding, the Commission should continue to take other
actions to expedite the assignment of licenses.  Thus, the Commission and its staff have reduced
delays by automating and otherwise streamlining many licensing processes.  For example, the
Wireless Telecommunications Bureau has implemented "auto-granting" and electronic filing of
authorizations for many services, and the International Bureau has reduced processing time for unop-

posed non-controversial international Section 214 applications to under 30 days after the public
notice comment period.  Similarly, the Commission has expedited the availability of service by
relying on private spectrum coordinators in many cases.  The Commission should continue explor-

ing additional initiatives along these lines.

     The Commission also should strive to ensure that its licensing and fee policies accommodate
the needs of all businesses.  An increasingly market-based spectrum policy may require new tools
to meet the goal of ensuring that small businesses are given the opportunity to participate in the
provision of spectrum-based services.  Some attributes of a more competitive, demand-driven
spectrum market will advance this goal.  For example, the availability of larger amounts of spectrum
and the grant of greater flexibility will reduce the scarcity value of spectrum, lowering its price and
making it more affordable for small businesses.  Eliminating use restrictions will encourage firms
to allow others access to their spectrum for non-interfering uses.  Small firms, who are often the
proponents of new technologies, will not have to go through the expensive, time-consuming, and
uncertain process of gaining Commission approval for a proposed use and then securing the
allocation of spectrum for this use.

     Flexibility in the scope of licenses, through rules permitting disaggregation of spectrum and
partitioning of geographic area licenses, will make it easier for small businesses to acquire licenses
suitable for their business plans and thus will serve as one method of eliminating market entry
barriers.  The availability of spectrum in the secondary market also can work to the competitive
advantage of small firms since they do not have to reveal their planned technology and business
plans to their competitors.  On the other hand, as the Commission increasingly utilizes more market-
based assignment mechanisms and allows licensees greater flexibility, small businesses may have
difficulty obtaining information about and accessing spectrum or otherwise satisfying their commu-

nications needs.  To mitigate these possible consequences to small businesses, the Commission
should consider taking steps to facilitate small business access to information about available
spectrum and spectrum-based services.

E.  Administrative Certainty 

     An effectively functioning competitive market includes elements of both certainty and
uncertainty.  The very essence of competition is uncertainty of outcomes; competitive markets
reward efficiency-enhancing behavior, but success is not guaranteed.  In order to function effective-

ly, however, a competitive market needs clear and firm regulations.  If spectrum users and their
financial supporters are not reasonably certain of the rules that will govern spectrum use, they will
be less willing to invest in obtaining and developing the spectrum.  For example, entrepreneurs likely
will bid and invest greater amounts in spectrum if they know in advance that the use will be flexible
and are confident that it will remain that way.  In the absence of such certainty, the spectrum may
not be used to its full potential and the public may fail to realize its full value.

     For this reason, the Commission's spectrum policies should promote administrative certainty. 
Thus, before a use of spectrum is authorized or a service is initiated, the Commission should estab-

lish the rules affecting that use with as much certainty as is reasonable.  For example, the
Commission should set out in advance the interference rules, the full range of flexibility allowed,
requirements concerning accommodation of preexisting users of the spectrum, and any other matters
affecting the rights and obligations of licensees.  Because of the value of flexibility, licensees
regularly appeal to the Commission to increase flexibility after the award of their licenses, thereby
generating opposition on equity grounds that might not have arisen if flexibility had been granted
before the licenses were assigned.  In order to avoid such debates, and to maximize efficiency in the
initial award of licences, the Commission should award maximum flexibility initially.

     The principle of administrative certainty also affects many of the Commission's policies after
initial authorization of a service.  For example, a desire to provide certainty underlies the policy that
licensees ordinarily have an expectancy of renewal when their license terms expire.  Although the
Commission awards licenses for fixed terms, due to the high renewal expectancy these licenses in
many ways resemble de facto licenses in perpetuity.  This policy encourages efficient investment
in assets tied to a specific license because license holders retain the benefits of these investments. 
Without confidence in their long-term rights, licensees would tend to underinvest in license-specific
assets, especially as the end of the license period approached.

     Furthermore, the Commission should exercise its jurisdiction to reallocate spectrum and
change the rules governing use of spectrum with due regard for the reasonable expectations of
incumbent licensees.  No incumbent has a legitimate expectation of freedom from competition, but
incumbents do expect that they will be able to continue using spectrum that they have been assigned
without additional or unexpected interference, or major new service and technical restrictions.  Al-

though in some instances the public interest will require the Commission to act notwithstanding
these expectations, it should do so only where necessary to promote clearly established public
interest goals.  Moreover, when it is necessary in the public interest to reallocate spectrum, the
Commission should make every effort to ensure efficient and fair compensation for spectrum incum-

bents who are required to move.  In general, the Commission should consider "overlay" assignments,
with the right to move incumbents if provided with equivalent replacement assets or service, as a
method of ensuring that spectrum incumbents will be fairly and efficiently compensated for the value
of their investments.  Such efforts are not only a matter of common equity, but in the long run will
encourage efficient investment by promoting certainty among spectrum users regarding the security
of their investments.

F.  The Global Marketplace

     Finally, all of the Commission's spectrum policy decisions should reflect the international
context in which spectrum usage occurs.  Radio waves do not stop at national borders.  Therefore,
domestic policies must take into account the spectrum policies of other nations.  United States spec-

trum policies should, among other things, support global systems and seamless international net-

works, both in satellite and in terrestrial operations, where such systems promote the public interest. 
Consumers benefit from being able to communicate easily with persons in other nations and to move
equipment readily between nations.  For example, a global satellite system customer, or a customer
of a system that is part of a worldwide seamless network, could use one transceiver in multiple
nations to receive and send voice, video, or data service.  At the same time, the effort to achieve
worldwide seamless networks may exact costs, which the Commission should balance against the
benefits.
  
     It may be particularly important to coordinate the policies of the United States and other na-

tions for satellite systems, which may serve multiple nations from the same satellite platform. 
Satellite systems in the future are increasingly likely to be global or regional systems.  The new  non-
geostationary systems have constellations of satellites that move relative to the Earth.  User
transceivers are capable of communicating with these satellites and transferring calls to other
satellites as they come into view.  Constellations of non-geostationary satellites are capable of
providing services anywhere in the world.  In order to be profitable, these constellations need ade-

quate spectrum in which to operate.  Therefore, the Commission should promote measures to achieve
efficient use of spectrum worldwide, including efforts to revise international administrative proce-

dures that may create artificial orbit spectrum scarcity.  For example, the Commission may need
to develop spectrum policies for the entry of foreign-owned satellite systems into the United States
market.  This is likely to require additional exchange of information with other nations to discuss
harmonization of policies, including spectrum allocations for such systems.

     United States consumers and producers can also potentially benefit from the development
of worldwide seamless networks.  Roaming agreements that permit customers of personal wireless
services to make and receive phone calls easily while away from their home nations, and agreements
that facilitate free circulation of communications equipment between nations such as mutual recogni-

tion agreements for the type approval of terminals, can contribute to the development of such
networks.  In addition, policies that promote use of the same spectrum for the same services around
the world may facilitate the development of global systems and seamless networks by eliminating
the need for equipment that can operate on multiple frequency bands, as well as for protocols to
convert international communications from one frequency to another.  Furthermore, consistency in
spectrum allocations among different countries may produce economies of scale for equipment
manufacturers, thereby reducing prices for consumers.  However, a system of worldwide spectrum
block allocations has costs as well as benefits.  As discussed above, restrictions on how licensees
may use spectrum may prevent licensees from putting spectrum to its highest valued uses and from
quickly introducing innovative services and technologies.  Moreover, to the extent that government
policy limits uses of spectrum and requires specfic technologies, the market will be unable to test
whether the benefits of worldwide seamless networks exceed the costs.

     We therefore believe that the Commission should pursue policies that facilitate the devel-

opment of worldwide seamless networks without precluding other uses and technologies.  This end
can be achieved by promoting policies that reduce the transaction costs, both in the United States
and abroad, of participating in worldwide seamless networks.  Specifically, the United States should
support spectrum allocations in the International Telecommunication Union, domestically, and in
other countries that would allow the same equipment to operate worldwide but would allow other
uses as well.  The Commission should also establish licensing band plans featuring spectrum blocks
and service areas that are consistent with, or could be made consistent with, worldwide systems,
including by facilitating aggregation of spectrum blocks and geographic areas in the licensing
process where appropriate and by permitting aggregation and disaggregation in the after market.  If
the Commission determines that the highest value of some frequency band is likely to be for a
particular worldwide system, it should optimize the initial band plan for that system, but it should
not foreclose other uses of that spectrum or prevent the market from reconfiguring the spectrum.  We
believe that such policies, which minimize the transaction costs for the market to configure the
spectrum in the most economically efficient manner, will best balance the benefits of worldwide
seamless networks and the benefits of flexibility.
     
     Spectrum policy in the United States should be part of an international framework that facili-

tates the emergence of new technologies.  In general, governments cannot reliably predict what inno-

vative uses private companies will develop that require spectrum licenses, and these unpredicted,
creative uses can contribute greatly to the development of global communications and a world
economy.  In the United States' experience, competition and flexibility promote innovation. 
Therefore, in addition to promoting competition and flexible spectrum use  domestically, the United
States should seek to encourage competitive markets and the creation of a flexible environment for
spectrum worldwide.    

     Finally, global spectrum policies, like global wireline telecommunications policies, should
seek to extend connectivity to citizens around the world.  Intergovernmental satellite organizations
such as intelsat and Inmarsat have been instrumental in bringing communications to the develop-

ing world and ensuring that all nations are interconnected to the global public switched network. 
As private non-geostationary and geostationary satellite systems are licensed, and the natures of
intelsat and Inmarsat change, it is important that United States and global policy support expansion
of competitive communications in developing nations.

     In order to accomplish these goals, the United States must continue to take an active
leadership role in international forums.  This requires considerable coordination of domestic and
international policies and priorities.  Effective international spectrum management requires that the
United States enter into various commitments with foreign governments, including multilateral
agreements governing satellite communications and agreements with our immediate neighbors
governing terrestrial spectrum usage.

                         IV.  CONCLUSION

     This paper proposes a policy framework under which the Commission would generally rely
on competitive market forces and allow spectrum users maximum flexibility to respond to the market
in order to achieve usage of spectrum that is of the greatest value to the public.  This framework
would continue and expand upon the initiatives that the Commission has already taken in these
directions.  We believe that the Commission's consideration of these principles as guidelines will
help lead it to decisions that best serve the American people. 

     These principles imply a different and less activist role for the Commission than under other
potential spectrum policy paradigms.  Nonetheless, this paper identifies several crucial functions that
the Commission should continue to perform in order for competitive market forces to work most
effectively.  First, the Commission should actively seek out instances in which spectrum is currently
allocated or its use restricted in a manner that prevents it from being used to its full value, and it
should remedy those situations.  Second, when making spectrum initially available for a new service
or use, the Commission should establish initial geographic areas and frequency blocks that reflect
its best estimate of the most efficient uses of spectrum so as to reduce the need for immediate sec-

ondary market transactions.  Third, the Commission should set and enforce minimally restrictive
baseline rules governing interference and health effects.  Fourth, the Commission should seek to
maximize the amount of spectrum available to users.  Fifth, the Commission should monitor the
market and undertake targeted intervention to correct for significant market failures, where
necessary, to ensure competitive conditions or advance important public interest goals.  Sixth, the
Commission should act where appropriate to further the efficient use of spectrum in the public
interest in the international context.  Finally, in determining whether to undertake any intervention,
the Commission should balance the benefits of intervention against the value of administrative
certainty.  We recommend that the Commission carefully consider whether, by following these
principles, it will further its ultimate goal, the use of spectrum in the public interest.