Telecommunications: Strong Support for Extending FCC's Auction Authority Exists, but Little Agreement on Other Options to Improve Efficient Use of Spectrum
Published: 2005-12-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The radio-frequency spectrum is a natural resource used to provide an array of wireless communications services, such as television broadcasting, which are critical to the U.S. economy and national security. In 1993, the Congress gave the Federal Communications Commission (FCC) authority to use competitive bidding, or auctions, to assign spectrum licenses to commercial users. The Commercial Spectrum Enhancement Act required GAO to examine FCC's commercial spectrum licensing process. Specifically, GAO examined the (1) characteristics of the current spectrum allocation process for commercial uses; (2) impact of the assignment process--specifically the adoption of auctions to assign spectrum licenses--on end-user prices, infrastructure deployment, competition, and entry and participation of small businesses; and (3) options for improving spectrum management.
section_title: What GAO Found
paragraphs: The current spectrum allocation process is largely characterized as a "command-and-control" process, in which the government largely dictates how the spectrum is used. Many stakeholders we spoke with, along with panelists on our expert panel, identified a number of weaknesses of the existing spectrum allocation process, including that the current process is slow and leads to underutilization of the spectrum. FCC staff have identified two alternative allocation models: the "exclusive, flexible rights" model--which would extend the existing process by providing greater flexibility to spectrum license holders--and the "open-access" (or "commons") model--which would allow an unlimited number of unlicensed users to share spectrum. While little consensus exists about fully adopting either alternative model, FCC staff, as well as many stakeholders and panelists on our expert panel, recommend a balanced approach that would combine elements of the current process and the two alternative models. FCC's use of auctions to assign spectrum appears to have little to no negative impact on end-user prices, infrastructure deployment, and competition; evidence on how auctions impact the entry and participation of small businesses is less clear. Additionally, FCC's implementation of auctions has mitigated problems associated with comparative hearings and lotteries, which FCC previously used to assign licenses. In particular, auctions are quicker, less costly, and more transparent. Finally, secondary markets provide an additional mechanism for companies to acquire licenses and gain access to spectrum, and FCC has undertaken actions to facilitate secondary-market transactions, such as streamlining the approval process for leases. Industry stakeholders and panelists on our expert panel offered a number of options for improving spectrum management. The most frequently cited options include (1) extending FCC's auction authority, (2) reexamining the use and distribution of spectrum--such as between commercial and governmental use--to enhance the efficient and effective use of this important resource, and (3) ensuring flexibility in commercially licensed spectrum bands. Stakeholders and panelists on our expert panel overwhelmingly supported extending FCC's auction authority; however, there was little consensus on the other identified options for improvement.

section_title: Letter
paragraphs: The radio-frequency spectrum is a natural resource used to provide an  array of wireless communications services that are critical to the U.S.  economy and national security, such as mobile voice and data services,  radio and television broadcasting, radar, and satellite-based services.  Historically, concern about interference among users has been a driving  force in the management of spectrum. The Federal Communications  Commission (FCC)—an independent agency that regulates spectrum use  for nonfederal users, including commercial users—and the National  Telecommunications and Information Administration (NTIA)—an agency  within the Department of Commerce that regulates spectrum for federal  government users—have worked to minimize interference through the  “allocation” and “assignment” of spectrum. Allocation involves designating  “bands” of spectrum for specific types of services or classes of users, such  as designating certain bands for commercial or government use.  Assignment provides an authorization or license to use a specific portion of  spectrum to entities, such as wireless companies; this is referred to as  “licensed spectrum.” In contrast, some bands of spectrum are allocated to  “unlicensed” use, where an unlimited number of users without licenses  share the band of spectrum.
Demand for radio-frequency spectrum has exploded over the past several  decades as new technologies and services have been—and continue to  be—brought to the market in the private sector and new mission needs  unfold among government users of spectrum, including wireless  communications critical for public safety officials responding to natural  and man-made disasters. As a result, nearly all parties are becoming  increasingly concerned about the availability of spectrum for future needs,  because most of the usable spectrum in the United States has already been  allocated to existing services and users. These concerns are compounded  by evidence that some of the spectrum is currently underutilized.  Therefore, to promote a more efficient use of this resource and meet future  needs, FCC has increasingly adopted more market-oriented approaches to  spectrum management in recent years, including using a competitive  bidding process, or auctions, to assign spectrum licenses to commercial  users. Prior to auctions, FCC used comparative hearings, which were quasi- judicial forums, and lotteries as assignment mechanisms. As of November  30, 2005, FCC has held 59 auctions for over 56,000 licenses to select  between competing applications for the same license, and generated over  $14.5 billion for the U.S. Treasury.
The Commercial Spectrum Enhancement Act required GAO to examine  FCC’s commercial spectrum licensing process. As discussed with the  committees of jurisdiction, we examined the (1) characteristics of the  current spectrum allocation process for commercial uses; (2) impact of the  assignment process—specifically the adoption of auctions to assign  spectrum licenses—on end-user prices, infrastructure deployment,  competition, and entry and participation of small businesses; and (3)  options for improving spectrum management. To address these issues, we  reviewed and synthesized relevant economic, legal, and policy-oriented  literature, such as the Spectrum Policy Task Force report, a document  produced by FCC staff. In addition, we hosted, in conjunction with the  National Academies, two balanced and diverse expert panels with 23  experts representing academia, government, and industry. The experts  discussed policy issues related to spectrum allocation and assignment, as  well as options for improving spectrum management in the future. We also  conducted semi-structured interviews with representatives of academia,  government, and industry. Finally, we interviewed officials at FCC and  analyzed data from FCC’s three primary spectrum license databases: the  Universal Licensing System, the Consolidated Database System, and the  International Bureau Filing System. We conducted our work from March  through August 2005 in accordance with generally accepted government  auditing standards. (See app. I for additional information on our scope and  methodology.)
subsections: section_title: Background
paragraphs: The radio-frequency spectrum is the part of the natural spectrum of  electromagnetic radiation lying between the frequency limits of 9 kilohertz  and 300 gigahertz. It is the medium that makes possible wireless  communications and supports a vast array of commercial and  governmental services. Commercial entities use spectrum to provide a  variety of wireless services, including mobile voice and data, paging,  broadcast television and radio, and satellite services. Additionally, some  companies use spectrum for private tasks, such as communicating with  remote vehicles. Federal, state, and local agencies also use spectrum to  fulfill a variety of government missions. For example, state and local police  departments, fire departments, and other emergency services agencies use  spectrum to transmit and receive critical voice and data communications,  and federal agencies use spectrum for varied mission needs such as  national defense, law enforcement, weather services, and aviation  communication.
Spectrum is managed at the international and national levels. The  International Telecommunication Union (ITU), a specialized agency of the  United Nations, coordinates spectrum management decisions among  nations. Spectrum management decisions generally require international  coordination, since radio waves can cross national borders. Once spectrum  management decisions are made at the ITU, regulators within each nation,  to varying degrees, will follow the ITU decisions. In the United States,  responsibility for spectrum management is divided between two agencies:  FCC and NTIA. FCC manages spectrum use for nonfederal users, including  commercial, private, and state and local government users under authority  provided in the Communications Act. NTIA manages spectrum for federal  government users and acts for the President with respect to spectrum  management issues. FCC and NTIA, with direction from the Congress,  jointly determine the amount of spectrum allocated to federal and  nonfederal users, including the amount allocated to shared use. Figure 1  shows the current allocation of spectrum between federal and nonfederal  users.
Historically, concern about interference or crowding among users has been  a driving force in the management of spectrum. FCC and NTIA work to  minimize interference through two primary spectrum management  functions—the “allocation” and the “assignment” of radio spectrum.  Specifically:  Allocation involves segmenting the radio spectrum into bands of  frequencies that are designated for use by particular types of radio  services or classes of users. For example, the frequency bands between  88 and 108 megahertz (MHz) are allocated to FM radio broadcasting in  the United States. In addition to allocation, spectrum managers also  specify service rules, which include the technical and operating  characteristics of equipment.
Assignment, which occurs after spectrum has been allocated for  particular types of services or classes of users, involves providing a  license or authorization to use a specific portion of spectrum to users,  such as commercial entities or government agencies. FCC assigns  licenses for frequency bands to commercial enterprises, state and local  governments, and other entities, while NTIA makes frequency  assignments to federal agencies.
In some frequency bands, FCC authorizes unlicensed use of spectrum— that is, users do not need to obtain a license to use the spectrum. Rather,  an unlimited number of unlicensed users can share frequencies on a non- interference basis. Thus, the assignment process does not apply to the use  of unlicensed devices. However, manufacturers of unlicensed equipment  must receive authorization from FCC before operating or marketing an  unlicensed device.
When FCC assigns a portion of spectrum to a single entity, the license is  considered exclusive. When two or more entities apply for the same  exclusive license, FCC classifies these as mutually exclusive applications— that is, the grant of a license to one entity would preclude the grant to one  or more other entities. For mutually exclusive applications, FCC has  primarily used the following three assignment mechanisms.
Comparative hearings were quasi-judicial forums in which competing  applicants argued why they should be awarded a license, and FCC  awarded licenses based on pre-established comparative criteria. FCC  principally used comparative hearings from 1934 to 1984. Critics  asserted that comparative hearings were time consuming and resource  intensive, lacked transparency, and often led to protracted litigation.
Lotteries entailed FCC randomly selecting licensees from a pool of  qualified applicants. Congress authorized FCC to use lotteries to assign  mutually exclusive licenses in 1981, partially in response to the  administrative burden associated with comparative hearings. FCC used  lotteries from 1984 to 1993. Critics contended that lottery winners  were not always the best suited to provide services; thus, several years  could pass before the licenses were transferred in the secondary market  to entities capable of deploying a system and effectively using the  spectrum.
Auctions are a market-based mechanism in which FCC assigns a  license to the entity that submits the highest bid for specific bands of  spectrum. The Congress provided FCC with authority to use auctions to  assign mutually exclusive licenses for certain subscriber-based wireless services in the Omnibus Budget Reconciliation Act of 1993. In  subsequent years, the Congress has modified and extended FCC’s  auction authority, including exempting some licenses from competitive  bidding, such as licenses for public safety radio services and  noncommercial educational broadcast services. Critics of auctions  have suggested that auctions raise consumer prices for wireless  services, slow the deployment of wireless systems, and are a barrier for  small businesses.
As of November 30, 2005, FCC has conducted 59 auctions to select between  competing applications for the same license, which have generated over  $14.5 billion for the U.S. Treasury. However, only a very small portion of  total licenses has been auctioned. In particular, FCC has auctioned  approximately 56,100 licenses—about 2 percent of total licenses. (See fig.  2.) The other 98 percent of licenses have been assigned through other  means.
In recent years, two government-led task forces have examined spectrum  policy in the U.S. FCC established the Spectrum Policy Task Force,  comprised of FCC staff, to assist the Commission in identifying and  evaluating changes in spectrum policy that would increase the public  benefits derived from the use of spectrum. In November 2002, the task  force released a report that contained a number of recommendations,  including promoting more market-based mechanisms to allocate  spectrum. The Commission subsequently implemented several of the task  force’s recommendations, including developing rules for leasing spectrum.  The Federal Government Spectrum Task Force, comprised of the heads of  executive branch departments, agencies, and offices, examined spectrum  policy for government use, including homeland security, public safety,  scientific research, federal transportation infrastructure, and law  enforcement. In June 2004, the Department of Commerce released two  reports based on the task force’s findings, which contained a number of  recommendations for reforms to federal agencies’ use of spectrum. For  example, the Department of Commerce recommended adopting incentives  for more efficient use of spectrum by government agencies. However, as  we noted in 2003, the bifurcated responsibility between FCC and NTIA for  spectrum management can hinder reform. Specifically, neither FCC nor  NTIA has ultimate decision making authority over spectrum management  or the authority to impose fundamental reform. Because of the lack of a  single decision making point for spectrum reform, we recommended that  the Congress consider establishing an independent commission that would  conduct a comprehensive examination of spectrum management. To date,  such a commission has not been established.
section_title: Spectrum Allocation Remains Largely a Command-and-Control Process, But Alternatives Exist
paragraphs: Spectrum allocation remains largely a command-and-control process,  although FCC is providing greater flexibility in some instances, particularly  as it licenses newly available spectrum. Many stakeholders with whom we  spoke and panelists on our expert panel identified a number of weaknesses  with the command-and-control process. FCC staff identified two  alternative spectrum management models: the exclusive, flexible rights  model and the open-access, or commons, model. Under these models,  users of spectrum, rather than FCC, would exert a greater influence on the  use of spectrum. Although there is limited consensus about fully adopting  either alternative model in the future, many stakeholders and members of  our expert panel, as well as the Spectrum Policy Task Force, support  balanced approaches that would combine elements of all three models.
subsections: section_title: Spectrum Allocation Is Largely a Command-and- Control Process
paragraphs: FCC currently employs largely a command-and-control process for  spectrum allocation. That is, FCC applies regulatory judgments to  determine and limit what types of services—such as broadcast, satellite, or  mobile radio—will be offered in different frequency bands by geographic  area. In addition, for most frequency bands FCC allocates, the agency  issues service rules to define the terms and conditions for spectrum use  within the given bands. These rules typically specify eligibility standards as  well as limitations on the services that relevant entities may offer and the  technologies and power levels they may use. These decisions can constrain  users’ ability to offer services and equipment of their choosing.
FCC has provided greater operational and technical flexibility within  certain frequency bands. For example, FCC’s rules for Commercial Mobile  Radio Service (CMRS), which include cellular and PCS services, are  considered less restrictive. Under these rules, wireless telephony operators  are free to select technologies, services, and business models of their  choosing. In contrast, spectrum users have relatively little latitude for  making such choices in frequency bands allocated for broadcast television  services.
Despite these efforts, many industry stakeholders and experts with whom  we spoke cited a number of weaknesses in the command-and-control  process for spectrum allocation. The most frequently cited weakness by  our expert panel was the slowness of the allocation process.  Because of  the regulatory nature of the command-and-control process, arriving at  allocation decisions can be a protracted process. The slow moving  allocation process delays consumers’ access to new technologies. In  addition, some panelists noted that the current allocation process leads to  underutilization of spectrum. For example, a recent study found that during  a four-day period in New York City, only 13 percent of spectrum between 30  MHz and 2.9 GHz was occupied at one time or another. Another weakness  cited by a number of stakeholders was that the command-and-control  process does not systematically allocate spectrum to its highest value uses.  As a result, highly valued services may not be fully deployed.
section_title: FCC’s Spectrum Policy Task Force Identified Two Alternatives to the Command-and-Control Allocation Process but Recommends a Balanced Approach
paragraphs: The Spectrum Policy Task Force Report, a document produced by FCC  staff, identified two alternative spectrum management models to the  command-and-control model: the exclusive, flexible rights model, and the  open-access model. The exclusive, flexible rights model extends the  existing license-based allocation process by providing greater flexibility to  license holders. The open-access model allows an unlimited number of  unlicensed users to share frequencies, with usage rights governed by  technical standards. Both models allow flexible use of spectrum, so that  users of spectrum, rather than FCC, play a larger role in determining how  spectrum is ultimately used. FCC’s Spectrum Policy Task Force  recommended a balanced approach to allocation—utilizing aspects of the  command-and-control; exclusive, flexible rights; and open-access models.
subsections: section_title: The Exclusive, Flexible Rights Model Is a License-Based Approach to Spectrum Allocation
paragraphs: The exclusive, flexible rights model provides licensees with exclusive,  flexible use of the spectrum and transferable rights within defined  geographic areas. This is a licensed-based approach to spectrum  management that extends the existing allocation process by providing  greater flexibility regarding the use of spectrum and the ability to transfer  licenses or to lease spectrum usage rights. Licensees with exclusive  licenses can exclude others from using the spectrum they have been  assigned, and with flexible rights they enjoy flexibility to provide the  services they wish with their licenses, provided they comply with  applicable FCC rules and policies. To a certain extent, the model treats  spectrum like real estate, and some have suggested moving far in this  direction by turning spectrum licenses into full property rights—an option  that existing legislation currently prohibits. FCC’s broadband PCS rules  closely resemble this model, in that they provide substantial flexibility to  licensees in terms of technology and use of spectrum.
Proponents cite several advantages with the exclusive, flexible rights  model. First, proponents argue that this model would promote the  economically efficient use of spectrum. For example, advocates typically  point to CMRS to support this argument, as CMRS licenses are exclusive  and governed by relatively flexible rules; in addition, the market for CMRS  services is highly valuable, innovative, and fast-growing. Second,  proponents suggest that the model provides certainty for licensees. The  model provides a reliable means of protecting commercial users from  interference, allowing them to guarantee quality of service on a wide scale.  Third, proponents argue that greater certainty will encourage investment in  technology and infrastructure.
Opponents cite several problems with the exclusive, flexible rights model.  For example, opponents assert that the model might not promote  technically efficient, or intensive, use of spectrum. According to some  critics, exclusivity might reduce licensees’ incentives to invest in  developing more technically efficient technologies as users have  guaranteed access to spectrum, thereby deterring innovation. In addition,  some opponents assert that the model could encourage “hoarding” of  spectrum, as licensees could benefit from blocking access to spectrum by  potential competitors. In other words, companies may buy rights to  spectrum—with no intention of using the spectrum—to prevent a  competitor from acquiring rights to the same spectrum.
section_title: The Open-Access Model Is a Non-Licensed Approach to Spectrum Allocation
paragraphs: The open-access model allows a potentially unlimited number of  unlicensed users to share frequency bands, with usage rights governed by  technical standards, but with no rights to interference protection. This  approach does not require licenses, and as such is similar to the current  FCC Part 15 rules (which govern unlicensed use in the 900 MHz, 2.4 GHz,  and 5.8 GHz bands)—where cordless phones and Wi-Fi technologies  operate.  As with exclusive, flexible rights, users would have greater  latitude in determining how they use spectrum. However, in this case,  markets for end-user equipment, rather than for licenses, would determine  how different frequency bands are used or allocated. Under this model,  commercial spectrum-based service providers would not seek to maximize  their return on spectrum licenses, but rather, on the sale of equipment that,  once purchased, would allow consumers to enjoy wireless services.
Proponents of the open-access model cite several advantages with this  approach to spectrum allocation. For example, proponents assert that the  open-access model will promote the technically efficient use of spectrum.  In order to avoid interference, users have an incentive to develop smarter  equipment that will use the spectrum intelligently. An example of  technically efficient equipment is agile radio. Agile radios can determine if  a specific frequency is currently in use, emit in that band if it is not, and  switch to another band in microseconds if another user begins to emit in that band. In fact, supporters of the open-access model believe that open  access to spectrum will foster the development of technologies that will  reduce spectrum scarcity, and therefore interference problems, as a new  type of wireless architecture becomes possible. According to proponents,  the open-access model for spectrum allocation also limits the ability for  companies to “hoard” spectrum—that is, since there would be no exclusive  use of spectrum in this model, companies could no longer block their  competitors from acquiring spectrum by simply acquiring or holding on to  spectrum themselves. In addition, since users would no longer need to buy  spectrum rights, the open-access model reduces barriers to entry into  spectrum-based markets, according to proponents.
Opponents cite several problems with the open-access model. One cited  problem is that an open-access approach could lead to the overuse of  spectrum. Specifically, opponents believe that the technologies that could  end spectrum scarcity are years away from realization. Without such  technologies, an unlimited number of unlicensed users would result in the  overuse of spectrum and interference. Moreover, opponents argue that the  uncertainty about interference would inhibit investment. Another cited  problem is the potential irreversibility of this model—that is, once  consumers have the equipment, it would be difficult to prevent them from  accessing the spectrum if the spectrum were needed for some other  purpose in the future. One only need to imagine the difficulties involved  with trying to prevent people from using their garage door openers—which  operate in some bands under Part 15 rules—to understand this potential  challenge.
section_title: FCC’s Spectrum Policy Task Force Advocated a Balanced Approach
paragraphs: The Spectrum Policy Task Force report recommended a balanced  approach to spectrum allocation—utilizing aspects of the command-and- control; exclusive, flexible rights; and open-access models. In particular,  FCC’s task force recommended the following:  moving away from the command-and-control model, except for limited  exceptions such as public safety or to conform to treaty requirements;  using the exclusive, flexible rights model where scarcity of spectrum is a  concern and transaction costs are low; and   using the open-access model where scarcity is a lesser concern and  transaction costs are relatively high.
section_title: Little Consensus Exists about the Future Management of Spectrum
paragraphs: We found little consensus on the future management of spectrum. As noted  above, there is disagreement about the merits of the exclusive, flexible  rights and open-access models. However, many industry stakeholders we  spoke with and panelists on our expert panel support a mixed approach,  which incorporates spectrum use under an exclusive, flexible rights  licensed model and an open-access model. For example, those who favor  open access do not all believe that licensing should suddenly be done away  with, but that different approaches ought to be tested and compared before  any policy decision is made. Similarly, a number of industry stakeholders  we spoke with who favor providing spectrum users with flexible rights in  licensed bands also believe that unlicensed spectrum is, at the minimum,  appropriate for use by certain devices within certain bands.
section_title: Auctions Have Little to No Negative Impact on the Wireless Industry and Are More Efficient than Previous Assignment Mechanisms
paragraphs: Auctions have little to no negative effect on end-user prices, infrastructure  deployment, or competition, although the effect on entry and participation  of small businesses is less certain. FCC’s implementation of auctions has  also mitigated problems arising with comparative hearings and lotteries. In  addition to auctions, secondary markets provide another means for entities  to acquire licenses or lease spectrum in order to gain access to spectrum.
subsections: section_title: Auctions Have No Negative Impact on the Wireless Industry
paragraphs: Some critics of spectrum auctions have suggested that auctions negatively  impact the wireless industry. Since auctions require licensees to pay for  licenses, and in some instances the payments can represent a significant  outlay, these critics believe that auctions (1) raise consumer prices as  entities seek to recoup their auction payments, (2) slow infrastructure  deployment by diverting financial resources to the government, (3) distort  competition by creating an environment where some entities that acquired  licenses via auction compete with other entities that previously acquired  licenses via other means, and (4) deter entry and hinder small business  participation in the wireless industry by necessitating large payments prior  to the issuance of licenses.
We found that FCC’s implementation of auctions has no negative impact on  end-user prices, infrastructure deployment, and competition; the evidence  on the impact on entry and participation of small businesses is less clear. In  particular:  End-user prices. We found that auctions have little to no impact on  end-user prices. Economic research suggests that auction payments do  not affect end-user prices, since these payments represent a sunk cost,  which do not affect future-oriented decisions. For example, using data  on cellular prices from 1985 to 1998, one author empirically found that  auctions had no effect on prices. Additionally, industry stakeholders  we spoke to and panelists on our expert panel noted that competition  ultimately affects end-user prices. Thus, regardless of a company’s  desire to recoup its auction payment, the company will select prices that  maximize future profits based on competition in the market. Among the  panelists on our expert panel, a majority said that auctions do not affect  end-user prices. Specifically, 10 panelists said that auctions do not affect  end-user prices, 3 said that auctions decrease prices, and 5 said that  auctions increase prices.
Infrastructure Deployment. We found that auctions have little to no  impact on infrastructure deployment. Similar to the argument for end- user prices, economic research suggests that auction payments do not  deter infrastructure deployment; companies will make decisions about  infrastructure deployment based on the future profit potential of those  investments. Some industry stakeholders with whom we spoke, and  panelists on our expert panel, mentioned that auction payments may in  fact stimulate infrastructure deployment. In particular, since an auction  payment represents an investment, the company will seek a return on  that investment. To earn that return, a wireless company will sell  subscriber services, which are made possible through the deployment of  wireless networks. Among panelists on our expert panel, eight said that  auctions increase investment, five said that auctions had no effect on  investment, and seven said that auctions decrease investment.
Competition. We found little evidence that auctions affect the  competitive environment. Many stakeholders told us that auctions  generally do not place companies at a competitive or financial  disadvantage compared to companies that acquired licenses through  other, non-auctioned, means that might not have involved payment for  the licenses, such as lotteries. These stakeholders noted that (1)  companies acquired non-auctioned licenses many years ago, (2) many  non-auctioned licenses have subsequently been sold and paid for, and  (3) companies that acquired non-auctioned licenses have subsequently  acquired additional licenses via auction. Therefore, any competitive  advantage these companies gained by obtaining licenses through means  other than auctions has dissipated. Among our panelists, 11 said that  auctions increase the degree of competition, while 3 said that auctions  had no effect on competition, and 4 said that auctions decrease  competition.
Entry and participation of small businesses. Some industry  stakeholders we interviewed stated that auctions limit participation to  large companies with extensive financial resources. These  stakeholders assert that small companies are unable to acquire the  financial resources necessary to successfully compete in FCC’s auction  process. However, others noted that large companies also tended to  dominate the comparative hearing process. In addition, some  stakeholders noted that the capital intensive nature of the wireless  industry—not the assignment mechanism—makes it difficult for small  businesses to participate. Expert opinion diverged on this issue: among  our expert panelists, eight said that auctions increase entry while  another eight said that auctions decrease entry, and three panelists said  that auctions had no effect on entry.
section_title: Auctions Mitigate Many Problems Associated with Previous Assignment Mechanisms
paragraphs: As mentioned earlier, comparative hearings and lotteries—the two primary  assignment mechanisms employed until 1993—suffered from several  problems. Comparative hearings were generally time consuming and  resource intensive, as entities employed engineers and lawyers to prepare  applications and FCC dedicated staff to evaluating applications based on  pre-established comparative criteria. Further, decisions arising from  comparative hearings lacked transparency and often led to protracted  litigation. While lotteries were less time consuming and resource intensive,  they did not necessarily assign licenses to the entities that were best suited  to provide services. Thus, several years could pass before the licenses were  transferred in the secondary market to entities capable of deploying a  wireless system and effectively using the spectrum. Further, neither  comparative hearings nor lotteries provided a mechanism for the public to  financially benefit from commercial entities using a valuable national  resource.
FCC’s implementation of auctions mitigates a number of problems  associated with comparative hearings and lotteries. For example:  Auctions are a relatively quick assignment mechanism. With auctions,  FCC reduced the average time for granting a license to less than one  year from the initial application date, compared to an average time of  over 18 months with comparative hearings.
Auctions are administratively less costly than comparative hearings.  Entities seeking a license can reduce expenditures for engineers and  lawyers arising from preparing applications, litigating, and lobbying; and  FCC can reduce expenditures associated with reviewing and analyzing  applications.
Auctions are a transparent process. FCC awards licenses to entities  submitting the highest bid rather than relying on possibly vague criteria,  as was done in comparative hearings.
Auctions are effective in assigning licenses to entities that value them  the most. Alternatively, with lotteries, FCC awarded licenses to  randomly-selected entities.
Auctions are an effective mechanism for the public to realize a portion  of the value of a national resource used for commercial purposes.  Entities submitting winning bids must remit the amount of their winning  bid to the government, which represents a portion of the value that the  bidder believes will arise from using the spectrum. As mentioned earlier,  auctions have generated over $14.5 billion for the U.S. Treasury.
Many industry stakeholders we contacted, and panelists on our expert  panel, stated that auctions are more efficient than previous mechanisms  used to assign spectrum licenses. For example, among our panelists, 11 of  17 reported that auctions provide the most efficient method of assigning  licenses; no panelist reported that comparative hearings or lotteries  provided the most efficient method. Of the remaining panelists, several  suggested that the most efficient mechanism depended on the service that  would be permitted with the spectrum.
section_title: Secondary Markets Provide an Additional Mechanism for Companies to Acquire Licenses and Gain Access to Spectrum
paragraphs: While FCC’s initial assignment mechanisms provide one means for  companies to acquire licenses, companies can also acquire licenses or  access to spectrum through secondary market transactions. Through  secondary markets, companies can engage in transactions whereby a  license or use of spectrum is transferred from one company to another.  These transactions can incorporate the sale or trading of licenses. In some  instances, companies acquire licenses through the purchase of an entire  company, such as Cingular’s purchase of AT&T Wireless. Ultimately, FCC  must approve transactions that result in the transfer of licenses from one  company to another.
In recent years, FCC has undertaken actions to facilitate secondary-market  transactions. FCC authorized spectrum leasing for most wireless radio  licenses with exclusive rights and created two categories of spectrum  leases: Spectrum Manager Leasing—where the licensee retains legal and  working control of the spectrum—and de Facto Transfer Leasing—where  the licensee retains legal control but the lessee assumes working control of  the spectrum. FCC also streamlined the procedures that pertain to  spectrum leasing. For instance, the Spectrum Manager Leases do not  require prior FCC approval and de Facto Transfer Leases can receive  immediate approval if the arrangement does not raise potential public  interest concerns. While FCC has taken steps to facilitate secondary  market transactions, some hindrances remain. For example, some industry  stakeholders told us that the lack of flexibility in the use of spectrum can  hinder secondary market transactions.
Secondary markets can provide several benefits. First, secondary markets  can promote more efficient use of spectrum. If existing licensees are not  fully utilizing the spectrum, secondary markets provide a mechanism  whereby these licensees can transfer use of the spectrum to other  companies that would utilize the spectrum, thereby increasing the amount  of available spectrum and reducing the perceived scarcity of spectrum.  Second, secondary markets can facilitate the participation of small  businesses and introduction of new technologies. For example, a company  might have a greater incentive to deploy new technologies that require less  spectrum if the company can profitably transfer the unused portion of the  spectrum to another company through the secondary market. Also, several  stakeholders we spoke to noted that secondary markets provide a  mechanism whereby a small business can acquire spectrum for a  geographic area that best meets the needs of the company.
section_title: Industry Stakeholders and Panelists Suggested Several Options to Improve Spectrum Management
paragraphs: Industry stakeholders and panelists on our expert panel offered a number  of options for improving spectrum management. The most frequently cited  options include (1) extending FCC’s auction authority, (2) reexamining the  distribution of spectrum—such as between commercial and government  use—to enhance the efficient and effective use of this important resource,  and (3) ensuring clearly defined rights and flexibility in commercially  licensed spectrum bands. There was no consensus on these options for  improvements among stakeholders we interviewed and panelists on our  expert panel, except for extending FCC’s auction authority.
subsections: section_title: Extend FCC’s Auction Authority
paragraphs: Panelists on our expert panel and industry stakeholders with whom we  spoke overwhelmingly supported extending FCC’s auction authority. For  example, 21 of 22 of panelists on our expert panel indicated that the  Congress should extend FCC’s auction authority beyond the September 30,  2007 expiration date. As mentioned earlier, panelists and stakeholders  believe that auctions are more efficient than previous mechanisms used to  assign spectrum licenses; moreover, auctions are viewed as being faster,  less costly, and more transparent than the previous mechanisms.  Additionally, extending FCC’s auction authority could generate significant  revenues for the government. However, panelists and stakeholders also  noted that the government should use spectrum auctions to promote the  efficient use of spectrum, not necessarily to maximize revenues for the  government.
While panelists on our expert panel overwhelmingly supported extending  FCC’s auction authority, a majority also suggested modifications to  enhance the use of auctions. However, there was little consensus on the  suggested modifications. The suggested modifications fall into the  following three categories:  Better define license rights. Some industry stakeholders and  panelists indicated that FCC should better define the rights  accompanying spectrum licenses, as these rights can significantly affect  the value of a license being auctioned. For example, some industry  stakeholders express concern with FCC assigning overlay and underlay  rights to frequency bands when a company holds a license for the same  frequency bands.
Enhance secondary markets. Industry stakeholders we contacted and  panelists on our expert panel generally believe that modifying the rules  governing secondary markets could lead to more efficient use of  spectrum. For example, some panelists on our expert panel said that  FCC should increase its involvement in the secondary market. These  panelists thought that increased oversight could help to both ensure  transparency in the secondary market and also promote the use of the  secondary market. Additionally, a few panelists said that adoption of a  “two-sided” auction would support the efficient use of spectrum.  With a  two-sided auction, FCC would offer unassigned spectrum and existing  licensees could make available the spectrum usage rights they currently  hold.
Reexamine existing small business incentives. The opinions of  panelists on our expert panel and industry stakeholders with whom we  spoke varied greatly regarding the need for and success of FCC’s efforts  to promote economic opportunities for small businesses. For example,  some panelists and industry stakeholders do not support incentive  programs for small businesses. These panelists and industry  stakeholders cited several reasons for not supporting these incentives,  including (1) the wireless industry is not a small business industry; (2)  while the policy may have been well intended, the current program is  flawed; or (3) such incentives create inefficiencies in the market. Other  industry stakeholders suggested alternative programs to support small  businesses. These suggestions included (1) having licenses cover  smaller geographic areas, (2) using auctions set aside exclusively for  small and rural businesses, and (3) providing better lease options for  small and rural businesses. Finally, some industry stakeholders with  whom we spoke have benefited from the small business incentive  programs, such as bidding credits, and believe that these incentives  have been an effective means to promote small business participation in  wireless markets.
section_title: Reexamine the Use and Distribution of Spectrum
paragraphs: Panelists on our expert panel suggested a reexamination of the use and  distribution of spectrum to ensure the most efficient and effective use of  this important resource. One panelist noted that the government should  have a good understanding of how much of the spectrum is being used. To  gain a better understanding, a few panelists suggested that the government  systematically track usage, perhaps through a “spectrum census.” This  information would allow the government to determine if some portions of  spectrum were underutilized, and if so, to make appropriate allocation  changes and adjustments.
A number of panelists on our expert panel also suggested that the  government evaluate the relative allocation of spectrum for government  and commercial use as well as the allocation of spectrum for licensed and  unlicensed purposes. While panelists thought the relative allocation  between these categories should be examined, there was little consensus  among the panelists on the appropriate allocation.  For instance, as shown  in figure 3, 13 panelists indicated that more spectrum should be dedicated  to commercial use, while 7 thought the current distribution was  appropriate. No panelists thought that more spectrum should be dedicated  to government use.  Similarly, as shown in figure 4, nine panelists believed  that more spectrum should be dedicated to licensed uses, six believed  more should be dedicated to unlicensed uses, and five thought the current  balance was appropriate.
section_title: Ensure Clearly Defined Rights and Flexibility
paragraphs: Similar to a suggested modification of FCC’s use of auctions, some  panelists on our expert panel suggested better defining users’ rights and  increasing flexibility in the allocation of spectrum. Better defining users’  rights would clarify the understanding of the rights awarded with any type  of license, whether the licensees acquired the license through an auction or  other means. In addition, some panelists stated that greater flexibility in the  type of technology used—and service offered—within frequency bands  would help promote the efficient use of spectrum. In particular, greater  flexibility would allow the licensee to determine the efficient and highly  valued use, rather than relying on FCC-based allocation and service rules.  However, some panelists on our expert panel and industry stakeholders  with whom we spoke noted that greater flexibility can lead to interference,  as different licensees provide potentially incompatible services in close  proximity. Thus, panelists on our expert panel stressed the importance of  balancing flexibility with interference protection.
section_title: Conclusions
paragraphs: As commercial enterprises and government agencies increasingly utilize  spectrum to provide consumer services and fulfill important missions, the  management of spectrum to ensure its efficient use takes on greater  importance. Many industry stakeholders and panelists on our expert panel  told us that the current command-and-control process for allocating  spectrum is less effective than other approaches. As a result, they stated  that spectrum is not being fully utilized at all times and perhaps not being  used for its highest-value purposes. Yet, few stakeholders or experts agree  on how to improve the process. To achieve greater consensus for reform of  the spectrum management process, we previously suggested that the  Congress consider establishing an independent commission that would  conduct a comprehensive examination of spectrum management.
One aspect of spectrum management that appears very effective is the use  of auctions for assigning licenses for commercial entities. As implemented  by FCC, spectrum auctions resolve problems associated with previous  assignment mechanisms, while giving rise to little or no problems. Most  stakeholders and experts with whom we spoke support extending FCC’s  auction authority beyond the current expiration date of September 30,  2007.
section_title: Matter for Congressional Consideration
paragraphs: Given the success of FCC’s use of auctions and the overwhelming support  among industry stakeholders and experts for extending FCC’s auction  authority, the Congress should consider extending FCC’s auction authority  beyond the current expiration date of September 30, 2007.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FCC, NTIA, and the Office of  Management and Budget for their review and comment. FCC provided  technical comments that we incorporated where appropriate. NTIA had no  comments on the draft. OMB concurred with our finding that auctions have  mitigated problems associated with comparative hearings and lotteries and  noted that the Administration supports the permanent extension of FCC’s  auction authority. OMB also noted that the Administration has proposed to  give FCC authority to use economic mechanisms to promote efficient  spectrum use.
We are sending copies of this report to the appropriate congressional  committees. We are also sending this report to the Secretary of Commerce,  Chairman of the Federal Communications Commission, and the Director of  the Office of Management and Budget. We will also make copies available  to others upon request. In addition, the report will be available at no charge  on the GAO Web site at http://www.gao.gov.
Should you have any questions about this report, please contact me at  202-512-2834 or heckerj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Individuals making key contributions to this report include Amy Abramowitz, Stephen Brown, Emilie Cassou, Michael Clements, Nikki  Clowers, Kate Magdalena Gonzalez, Eric Hudson, Terri Russell, Mindi  Weisenbloom, and Alwynne Wilbur.
section_title: Scope and Methodology
paragraphs: The Commercial Spectrum Enhancement Act required us to review the  Federal Communications Commission’s (FCC) commercial spectrum  licensing process. The objectives of our study included examining the (1)  characteristics of the current spectrum allocation process for commercial  uses; (2) impact of the assignment process—specifically the adoption of  auctions to assign spectrum licenses—on end-user prices, infrastructure  deployment, competition, and entry and participation of small businesses;  and (3) options for improving spectrum management.
To address all three objectives, we conducted a comprehensive, structured  literature review of economic, legal, and public policy material relevant to  spectrum issues. Our literature review included domestic studies on  spectrum management that were published in the last 25 years. To identify  articles for our literature review, we searched a number of databases,  including LexisNexis, Hein Online, Westlaw, and ProQuest, using key terms  such as “spectrum,” “assignment,” and “license.”   We eliminated articles  and studies from our literature review that did not directly relate to our  objectives or did not provide original analysis. We also considered the  methodological soundness of the articles and studies included in our  literature review; we determined that the findings of these studies were  sufficiently reliable for our purposes.
We also extracted data from FCC’s license databases (Universal Licensing  System, Consolidated Database System, and International Bureau Filing  System) to determine the distribution of active licenses among different  segments of the wireless industry and to identify the largest holders of  licenses. To assess the reliability of the information from these databases,  we interviewed FCC officials responsible for the databases about their data  collection and verification policies, and procedures for license information.  We also electronically tested the databases. We concluded that information  from FCC’s license databases was sufficiently reliable for the purposes of  this report. In addition, we interviewed FCC, National Telecommunications  and Information Administration, and Office of Management and Budget  officials and conducted semi-structured interviews with representatives  from academia and the wireless industry to obtain a broad range of  perspectives on spectrum allocation and assignment issues. We selected  representatives from academia and the wireless industry based on their  organization’s vested interest in spectrum policy, or their expertise in  spectrum policy as represented by presentations or publications. (Table 1  lists the companies, academic institutions, or other entities of the  representatives we interviewed.)
We also contracted with the National Academies to convene a balanced,  diverse panel of experts to discuss spectrum allocation and assignment  issues and options to improve spectrum management in the future. We  worked closely with the National Academies to identify and select 23  panelists who could adequately respond to our general and specific  questions about spectrum allocation, assignment processes, and options  for improvement. In keeping with National Academies policy, the panelists  were invited to provide their individual views, and the panel was not  designed to reach a consensus on any of the issues that we asked them to  discuss. The panelists convened at the National Academies in Washington,  D.C., on August 9 and 10, 2005. Twelve panelists participated on the panel  on August 9, 2005; eleven panelists participated on the panel on August 10,  2005. (See table 2 for the list of panelists on each day.) The agendas and  questions were identical for both days. To start each day, the panel  moderators provided an overview of the issues to be discussed; during the  remainder of the day, the panelists addressed the questions we had  provided for their consideration. At the end of the each session, we asked  the panelists to individually answer a short series of questions about the  topics discussed in order to more systematically capture individual  panelists’ views on key dimensions. We did not verify the panelists’  statements, although we did ask the panelists, in some instances, to clarify  certain details. The views expressed by the panelists do not necessarily  represent the views of GAO or the National Academies.
After the expert panel was conducted, we analyzed a transcript of the  panel’s discussion and survey responses in order to identify principal  themes and panelists’ views.   The results of the expert panel should be  interpreted in the context of two key limitations and qualifications. First,  although we were able to secure the participation of a balanced, highly  qualified group of experts, there are other experts in this field who could  not be included because of the need to limit the size of the panel. Although  many points of view were represented, the panel was not representative of  all potential views. Second, even though we conducted preliminary  research, in cooperation with The National Academies, and heard from  national experts in their fields, two panels cannot represent the current  practice in this vast arena. More thought, discussion, and research must be  done to develop greater agreement on what is really known, what needs to  be done, and how to do it. These two key limitations and qualifications  provide contextual boundaries. Nevertheless, the panel provided a rich  dialogue on spectrum allocation and assignment issues, as well as options  for improving spectrum management in the future; the panelists also  provided insightful comments in responding to the questions posed to the  panel.