A number of economic techniques could be used by spectrum managers.
They are listed next, along with details of which of the trends identified in Subsection 14.3.1 they are able to address. Each technique then is discussed in detail.
■ Economic value of spectrum analysis estimates the value that the country achieves from each different use of the spectrum and hence gives some signals as to which uses should be preferred. This technique helps overcome the difficulty of the increasing numbers of new applications.
■ Administrative pricing increases the annual license fee required for the spectrum to a level that encourages users to make careful choices about the efficiency with which they use the spectrum. This technique helps overcome the growth in demand and the pressures on assignment, as well as all the difficulties associated with govern- ment policies.
■ Trading allows users a range of rights to sell or lease spectrum and possibly to subdivide their assignment. This technique helps over- Getting a License 211
come the growth in demand and new applications, helps overcome the profit-driven pressure on assignment, provides greater open- ness and allows more deregulation of the telecommunications sector.
■ Competitions such as auctions determine to whom large blocks of spectrum should be assigned. This technique overcomes the growth in demand, the profit-driven pressure, and all the government objectives.
Table 14.5 shows which tool can be used to solve which general task.
In some cases, it is clear that certain tools can or cannot achieve particular objectives. In others, it depends very much on the objective. For exam- ple, administrative prices can be used to judge the value of the spectrum and influence allocation decisions in some situations. In many cases, however, overriding issues will prevent this from occurring effectively.
Different tools can be used in different parts of the radio spectrum, and a number of tools can be used in conjunction. The detailed aspects associated with the application of each of the tools are discussed next.
14.3.2.1 Economic value analysis
Economic value analysis estimates the total value generated in the econ- omy of a country as a result of activities associated with radio spectrum.
For example, profit generated by cellular operators, the salaries paid to their staff, the equipment they purchase, where equipment is manufac- tured in the country, and the salaries paid to sales staff in retail outlets all would be counted. That allows the value added by each different use of
Table 14.5
Application of Economic Tools
Allocation Assignment Clearance
Economic value analysis Yes No Yes
Administrative pricing ? Yes Yes
Trading ? Yes ?
Competitions No Yes ?
the radio spectrum to be compared, so it can be determined which applications add the most value to the country.
Advantages By understanding the economic value, more spectrum can be allocated to those applications generating high levels of value. Thus, the allocation process becomes better informed. Interestingly, one of the main benefits of the work in the United Kingdom is that it has indicated the value of spectrum to government ministers, which has helped in the consideration of subsequent legislation designed to improve its use.
Disadvantages The main problem with economic value analysis is the difficulty in performing the work to any reasonable level of accuracy. A significant amount of data must be collected, for example, the total number of PMR users, the number in each category of use (e.g., taxi drivers), the cost of the PMR equipment in use, and the cost of substitute equipment. Experience in the United Kingdom has shown that typically it is possible to gather much of the required data but that the collection can take some time. With adequate data, the economic calculations are relatively straightforward.
14.3.2.2 Administrative pricing
Most administrations set license fees at a level that covers the cost of administering the spectrum. Under administrative pricing, that link is broken and prices are set at a level that approximates the market value of the spectrum. Prices ideally are set at a level where supply and demand match, and hence congestion is eliminated. At those levels, users then would have incentives to release unused or underused spectrum, to consider alternative services or uncongested frequency bands, and to im- plement more spectrally efficient technologies. The prices would not necessarily be relatively static, like the current license fees, but would change to reflect both changes in demand (e.g., the increase due to a new application being provided over radio) and changes in technology (e.g., new narrowband radio systems). The spectrum manager would need to carefully monitor supply and demand conditions to be able to change the price.
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There is one major work that describes the process of setting admin- istrative prices [2]. Detailed economic arguments explain how prices are set, but fundamentally a user in a congested band where demand exceeds supply needs to see that investment in an alternative that uses less spectrum would lower costs. That currently is not the case, so the role of pricing is to change the costs of the user such that the alternative becomes attractive.
More explicitly, once pricing is introduced users will be faced with the cost of the current equipment or service (as they are at present) plus a new cost that is the annual administrative price over the equipment lifetime. The alternative is for users to move to a different form of equipment or service that uses less spectrum. Because it uses less spec- trum, the administrative cost component is lower than that of the current equipment. Even if the alternative is more expensive before pricing is introduced, it becomes less expensive after pricing.
For example, a PMR user might purchase narrowband equipment, move to a shared PMR system, or move to cellular systems. The cost of each alternative can be calculated. If, say, narrowband equipment is the lowest cost, then the administrative prices should be such that the cost of the new equipment is offset by the savings in administrative prices over the equipment lifetime.
Advantages The key advantage of administrative pricing is that it can encourage existing users to think carefully about the amount of spectrum they require, preventing hoarding and providing an incentive to use narrowband equipment. A secondary advantage is the raising of additional resources for either the radio spectrum management or government use.
Disadvantages Calculating prices is difficult and unlikely to be accurate.
The government needs to monitor carefully the effect of the prices and adjust them accordingly, which requires substantial skill.
14.3.2.3 Trading
Spectrum trading is a means to develop a real market in spectrum, as opposed to the pseudo-market created by administrative pricing. By allowing trading between users of spectrum, prices can fluctuate rapidly in accordance with the actual supply and demand, as opposed to that
perceived by the administrator. Many of the goals are the same as for administrative pricing in that because the spectrum has a value users are inclined to use it efficiently. The incentive is not the stick of annual fees but the carrot of potentially large cash gains through sale.
There are many options with trading, including the simple sale of a license to another entity, the ability to divide a license and sell parts of it to another entity, and the ability to lease the license to another entity.
One or all of these options could be provided. The introduction of trading often requires major new legislation and the design of an extended transitional program as tradability is extended across various areas of the spectrum. Important transitional steps typically include the following:
■ Setting up a publicly accessible spectrum register;
■ Introducing spectrum trading rights gradually and differentially across different areas of spectrum;
■ Limiting capital gains that might be earned by license holders, possibly including auctions and increases in charges;
■ Introducing compensation for repossession of spectrum.
Advantages Trading has a number of advantages over administrative pricing, for example:
■ The true market value is realized for the spectrum.
■ Trade in spectrum typically will be able to take place more rapidly than the administrator could reassign spectrum.
■ Organizations purchasing others readily would be able to keep any spectrum involved.
Disadvantages Trading has a number of disadvantages, for example:
■ Windfall gains may be made by those who happen to hold spectrum at the time that trading is introduced.
■ The value of the spectrum may not be realized by some users, so the desired signals to improve the efficiency of spectrum use may not be seen.
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■ The state does not capture any revenue.
■ The market may be difficult to administer and regulate, resulting in distortions of the market and problems when spectrum needs to be repossessed.
14.3.2.4 Competitions
Competitions can be used where there are large blocks of spectrum and more competing organizations that require the spectrum than there is spectrum available. The most straightforward form of competition is the price auction, whereby the bidder offering the highest price is awarded the spectrum. Other techniques, include beauty contests, in which quali- tative judgment is used, and service auctions, in which the bidder offering the best service to the user is the winner. There are a number of auction designs, and the whole area of running an auction requires careful study.
Much of this study has now been performed and documented for the personal communications service(PCS) auctions in the United States, which have shown that, if conducted carefully, competitions can be a successful tool for assigning spectrum. Where auctions are being used, most spec- trum managers are now adopting the U.S. PCS auction methodology, thus avoiding the need to partake in auction design. Auctions are widely used for cellular licenses around the world but typically not for other applications.
Advantages Some of the advantages of auctions are the following:
■ They are transparent and visibly fair.
■ They are cheap to operate compared with the alternative assign- ment methods, especially when auction designs proved by others are adopted.
■ They raise money for government.
■ They can be devised to take into account a variety of valid concerns other than just price paid.
■ They give a market test of the value of spectrum, which may be of value for devising policy in areas where auctions are not appropriate.
Disadvantages Spectrum auctions are not suitable for small or low-value uses, such as local PMR and individual fixed links, because of the rela- tively high transaction costs in conducting auctions, problems in defining a product to sell, and the intermittent nature of demand. However, there might be scope for auctioning national PMR and fixed-link bands to organizations that would provide local spectrum licenses to individual users.
14.3.2.5 Spectrum management and WLL
For WLL, it is likely that some of these tools will be used. The simplest tool to use for WLL is competitions, typically in the form of auctions.
That is because much of the spectrum used for WLL will be empty and there may be competing applicants. Auctions can help make a decision between different WLL operators.
Spectrum pricing also may be an issue. If the spectrum is provided at no cost, and spectrum pricing is used to control the growth in fixed-link demand, it will be hard for the spectrum manager to defend not applying spectrum pricing to WLL. Fortunately, the prices applying to fixed links are relatively low, so such pricing may not be problematic.
In some countries, it may be possible to avoid pricing altogether.
Where the government is eager to introduce competition to the PTO, it may be prepared to waive spectrum fees to allow the new WLL operator to compete as effectively as possible, which was the case in the United Kingdom.