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 wireless communications possible 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 radio and television, 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. 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, FCC and NTIA 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. 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 three assignment mechanisms— comparative hearings, lotteries, and auctions. FCC historically used comparative hearings, which gave competing applicants a quasi-judicial forum in which to argue why they should be awarded a license instead of other applicants. In 1981, partially in response to the administrative burden of the comparative hearing process, the Congress authorized the use of lotteries, which allowed FCC to randomly select licenses from the qualified applicant pool. 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. 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. As of November 30, 2005, FCC has conducted 59 auctions for over 56,000 licenses 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. (See fig. 1.) 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. To promote the more efficient use of spectrum, FCC is incrementally adopting market-based approaches to spectrum management. For instance, FCC has introduced some flexibility in the spectrum allocation process, although it remains largely a command-and-control process. In addition, in 1994, FCC instituted auctions to assign certain spectrum licenses. According to industry stakeholders, FCC’s use of auctions is seen as an improvement over comparative hearings and lotteries, the primary assignment mechanisms employed in the past. Finally, FCC has taken steps to facilitate greater secondary market activity, which may provide an additional mechanism to promote the more efficient use of spectrum. 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. However, 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 Personal Communications Services (PCS), are considered less restrictive. Under these rules, wireless telephony operators are free to select technologies, services, and business models of their choosing. FCC has not provided comparable flexibility in other bands. For example, spectrum users have relatively little latitude for making similar choices in frequency bands allocated to broadcast television services. Further, the Spectrum Policy Task Force Report, a document produced by FCC staff, identified two alternatives to the command-and-control model: the “exclusive, flexible rights” model, and the “open-access” model. 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. 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 FCC’s 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. 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. FCC is currently using elements of these two alternatives models, although it primarily employs the command-and-control model. In 1994, FCC began using auctions—a market-based mechanism that assigns a license to the entity that submits the highest bid for specific bands of spectrum. FCC’s implementation of auctions mitigates a number of problems associated with comparative hearings and lotteries—the two primary assignment mechanism employed until 1993. For example: Auctions are a relatively quick assignment mechanism. With auctions, FCC reduced the average time for granting a license to less than 1 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 we reported in December 2005, 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. 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.