What Really Matters in Spectrum Allocation Design

1. What Really Matters in Spectrum Allocation Design Thomas W. Hazlett twhazlett@yahoo.com International Telecommunications Society Berlin, Germany Section 6.3 * September 7, 2004

2. “Successes” and “Fiascoes”

3. What Really Matters in Spectrum Allocation Design • with Roberto Muñoz (Sept. 2004) • Economic lit. focus: license rent extraction • Efficiency question in output markets • Price • Quantity Spectrum Allocation Design ITS-Berlin

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

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

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

7. Cellular/PCS (CMRS) • 7% of spectrum under 3 GHz • Intense sharing • 164 million U.S. subscribers • 800 billion MOU per year • $90 billion annual revenues • 150,000 base stations • hundreds of applications, devices • Consumer surplus (2003) ~ $81 billion Spectrum Allocation Design ITS-Berlin

8. Demand for U.S. Wireless MOU Spectrum Allocation Design ITS-Berlin

9. Value of Bandwidth • PRICE of 10 MHz @ 1.9 GHz ~ $5 Billion • 10MHz ~ 1/17 of CMRS bandwidth • Market value of 170 MHz ~ $85 Billion • SOCIAL VALUE (@ r=5%) ~ 20X PRICE • Bandwidth more valuable to consumers than producers by an order of magnitude + Spectrum Allocation Design ITS-Berlin

10. What Really Matters? • Low retail prices, high network usage • Estimate prices with 3-equation model • 29 Countries (18 with Auctions) • Data for price and MOU: quarterly, 1999I-2003II • Auction countries: prices not lower • Two very significant drivers of lower prices: • More competition (lower HHI) • More spectrum • Marginal costs lower • Decreases HHI (lower fixed costs of entry) Spectrum Allocation Design ITS-Berlin

11. Retail Price and Allocated Spectrum Spectrum Allocation Design ITS-Berlin

12. Welfare Effect of Withholding a License: Reserve Prices in Belgium and Greece Spectrum Allocation Design ITS-Berlin

13. USA Simulation Spectrum Allocation Design ITS-Berlin

14. Social Gains from an Increase in CMRS Spectrum Spectrum Allocation Design ITS-Berlin

15. Spectrum Allocation Design ITS-Berlin

16. Chile-like Scenario Spectrum Allocation Design ITS-Berlin

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

18. What Matters in Spectrum Allocation? • Spectrum • Competition Spectrum Allocation Design ITS-Berlin

19. Conclusion • Liberalization => EAFUS => market allocation of radio spectrum • License auctions not a panacea • Flexible use licenses, with abundant bandwidth, produce large social benefits • Political economy difficult Spectrum Allocation Design ITS-Berlin

20. May 3, 2002 Spectrum Auction Delay Hits Fast Track By Roy Mark Spectrum Allocation Design ITS-Berlin