US Secondary Spectrum Market

The U.S. economy relies on markets to allocate an enormous number of resources. This reliance on markets is based, in part, on one of the most important theorems in economics. Broadly speaking, this theorem – called the First Fundamental Theorem of Welfare Economics -- says by signaling to market participants where resources are needed and where they are not, market prices can under certain conditions lead to an efficient allocation of resources. One assumption of this theorem is that the market participant’s willingness to trade (sell or lease dormant spectrum) is efficient in that it reflects the underlying value of the resource. In particular, that sellers don’t have “too little” incentive to trade and buyers have sufficient incentive to buy or that efficient trade is not prevented by transactions costs or by strategic competitive issues. If either side of the market falls to satisfy this condition, the market will not perform as it should and money/resources will be wasted. In the vernacular of economics, if either condition exists, a market failure will exist. In the case of spectrum licenses, it may be too early to declare the success or failure of secondary markets; however, we should all be able to see the truth in utilization, bits, revenue/utility per MHz pop as the defining factors of success.
Cantor has spent considerable time and resources attempting to make the spectrum market more efficient. We have enjoyed some success in developing innovative spectrum management, auction and trading technologies. Unfortunately, along the way we have learned a great deal about the willingness of both buyers and sellers to trade. For example, we have learned all too well that many holders (i.e. FCC Licensees or the government itself) are typically not interested in leasing or selling outright, their unused/under-utilized spectrum. And in many cases this is independent of a buyer’s willingness to pay.
Why should this be the case? The reason is that many potential sellers are also currently operators that do not view a particular spectrum transaction in isolation, but rather as part of their overall strategy. Thus, in many cases the willingness of sellers to lease or sell unused spectrum outright is dampened substantially by the economic loss they believe they would incur by having, by virtue of such a sale or lease, another competitor expand its transmission capacity and/or some future vision of need that may or may not be realistic. The presence of such a cost biases the seller’s decision away from the value creating features of the optimum goal of putting spectrum to its best and highest use and, in so doing, wastes valuable spectrum resources and lessens the public good.
What can be done about this? The first thing that must be done is the industry and government must establish/enhance systems and rules that would promote greater transparency and competition in the wireless spectrum market. Access to licensed spectrum should not prevent companies from bringing services to American consumers and/or public service entities when overall spectrum utilization in the country is between 1-20%. The first step involves developing a definitive and transparent data set that identifies all public/private wireless spectrum assets over the next 6-12 months. (Cantor Fitzgerald Spectrum Exchange has developed such a tool and I believe this is feasible and can be done a relatively low cost). The second step involves developing an efficient dynamic allocation mechanism that would reallocate and/or release fallow spectrum from those rights holders that value it less to those entities that value those rights more. The mechanics for this will be complicated but could be much easier after the spectrum is quantified and qualified in real time in a format easy to use. Some companies won auctions for the right to use these resources while other allocations were made decades ago. Regardless of how spectrum use rights have been made in both private and public sector, there have been limited efforts to actually to quantify and qualify these use rights across multiple frequencies and jurisdictions. Further, proof of utilization would make spectrum management complete. In the mean time, needless to say, a great deal of spectrum continues to sit fallow. Each day spectrum is not utilized; there are losses in both private and public sector.
Because the status quo is not effectively allocating this resource (why does 90+ percent of the spectrum sit fallow and especially more (99%) in rural areas), we believe that the government through both regulatory and legislative means needs to establish/enhance a set of rules that would promote a more competitively structured wireless spectrum market. Spectrum owners constantly change the rules in their favor, perhaps after we have systems and tools that analyze these assets in real time, spectrum may have the opportunity to be freed up and put to its best and highest use. Some times, spectrum is gathered by speculative entities that then change the rules thus creating a windfall and not actually putting the spectrum on the air. Therefore, complete transparency across all frequencies and geography will actually show the reality of who owns what where with the potential of forced disclosure of usage matched by NTIA/3rd party spectrum use studies (simple spectrum analyzers). Then, public and private entity leadership would be more able to make decisions to buy, sell, lease etc and legislators and government might see abuses and make the necessary changes to policy. To that end, the FCC might re-institute its Spectrum Cap for un-used assets over time - a rule that would limit the amount of spectrum any one firm can own and not use in a single geographic area. Given that 80-99% of spectrum is not used today, based on analysis by NTIA, Shared Spectrum, Georgia Tech and others, along with the technical gains in spectral efficiency (10 MHz of spectrum today may be equivalent to 100 MHz a few years ago-Martin Cooper comments) indicate to us that more spectrum hoarding for incumbents may not be necessary because the challenges most incumbents may face today have more to do with tower siting, backhaul, indoor coverage, and other operational/service related issues than spectrum scarcity/over-utilization. Does the government really track this in real time across the US marketplace? Restrictions on the amount of spectrum any one entity can own may ensure that the prices that guide the reallocation and utilization of spectrum will be based on market participant willingness to pay and sell that are “just right” and not anti-competitive practices. Other ideas which will be better debated after you have quantification and qualification include use it or lose it, taxation, budget penalties etc. across the public and private sector.
Finally, with the advent of tools and systems that manage the real time allocation of spectrum rights, un-used and un-auctioned spectrum currently controlled by the FCC and NTIA could be made available to public and private entities who need the quality of service that licensed spectrum can deliver. The capability to dynamically assign these assets in real time in specific geographies is something Cantor has been developing over the past several years. (Real Time Dynamic Auctions) New technologies like Software Defined Radio and Cognitive Radio could make the business case more justifiable for short term spectrum leasing.
Absent such developments, I believe the spectrum market may continue to exhibit substantial signs of market failure, and the U.S. consumer and business sectors will fail to receive the full benefits associated with employing one of the world’s most important resources – wireless spectrum.