Introduction

In 1993 the ITU recommended that in spectrum prices should follow a set of principles [1].

• All spectrum users should pay a charge.

• Non-discrimination – the spectrum charge should be calculated fairly, i.e. if two users are using the same amount of spectrum in the same way, both should pay the same charge.

• The spectrum charge should be proportionate to the amount of bandwidth used.

• The charges should reflect the spectrum's value to society, i.e. if need be, frequencies used for public services should be subject to lower charges.

• The cost of spectrum regulation should not be borne by the state.

• Spectrum users should be consulted about intended adjustments in spectrum charges.

• The pricing structure should be clear, transparent and comprehensive, without unnecessarily lengthening the licensing process.

• The pricing structure should reflect the scarcity of available spectrum and the level of demand for spectrum in different frequency bands.

• The spectrum charge should be calculated so as to recover the costs of spectrum regulation. Spectrum pricing should not seek to maximise revenue for the government.

• The ability to levy spectrum charges should be anchored in law.

As discussed in the previous chapter, the contemporary approach to the setting of incentive based spectrum prices places a greater emphasis on economic factors. While some of the principles above remain relevant to the setting of spectrum prices, the 1993 ITU recommendations contain contradictions. For example, it is generally not possible to set spectrum prices to reflect scarcity while at the same time recover only the administrative costs of regulating spectrum.

Introduction

Much of the discussion in previous chapters has revolved around problems of spectrum management likely to be encountered in developed countries. It is thus pertinent to ask how the situation differs for developing countries.

If anything, their dependence on spectrum-using technologies is even greater. Lacking fixed networks to deliver communications services such as voice telephony and broadcasting, they are heavily reliant on spectrum for commercial and non-commercial services. This is illustrated by recent ITU data, which show the growth of penetration (per 100 inhabitants) of fixed and mobile lines in the least developed countries. It shows that mobile lines were roughly the same in number as fixed lines in 2001 (see Figure 16.1), but by 2004 they outnumbered fixed lines by three to one. Over the 2000–4 period the number of television receivers, mostly relying on terrestrial distribution, also increased by 50%. These data emphasise the importance of getting spectrum policy right.

Consequences for spectrum management

What special aspects of spectrum management are important in developing countries? It is helpful first to identify the differentiating factors between the two environments that are relevant.

• Developing countries are characterised by a lower per capita income, which reduces consumption of all items including spectrum-using services.

• Conversely, a lack of alternative platforms places a high priority on the development of wireless systems; there is also growing evidence that mobile communications can improve business efficiency, widen markets and promote income growth in developing countries.

• At the same time, much spectrum in developing countries is not yet assigned, or assigned wastefully to government departments, especially defence forces.

• […]

Introduction

In earlier chapters we have stated that there is a need for, and a benefit associated with, regulating radio spectrum use. In practice the costs of regulation are typically recovered through licence fees paid by radio spectrum users and hence there is a price associated with the use of licensed radio spectrum. For example, in the USA the FCC applies two types of fees – application fees and regulatory fees which cover the administrative cost of managing the use of spectrum, respectively. They may also serve to discourage the filing of frivolous applications. If set too high, however, fees can result in under-utilisation of the spectrum, while if set too low hoarding and congestion may arise.

The simple recovery of administrative costs via licence fees, while practised by almost every spectrum management agency around the world, fails to make use of one of the most powerful incentive mechanisms available to encourage more efficient use of radio spectrum. By varying licence fees in a suitable way, a spectrum manager can improve the economic and technical efficiency of spectrum management. The setting of incentive based prices is especially attractive in circumstances where spectrum has been assigned and/or allocated via administrative means rather than auctions. Incentive based pricing also works well in the absence of secondary trading, but as we show in this chapter, it can also work alongside spectrum trading.

Licence fees are a potent means of achieving greater efficiency for radio spectrum licensees holding non-auctioned spectrum.

Spectrum has been divided by frequency

In this chapter we look in more detail at different mechanisms for dividing up access to the spectrum. The previous chapter noted that spectrum is typically divided by frequency, with each user being given exclusive access to a frequency. In this chapter we look at the current process in more detail, assess all the different mechanisms for dividing spectrum and look at the impact that a change would have on the current use of radio spectrum.

Before delving deeper into spectrum access it is worth considering the question of what spectrum actually is. When a user gains a licence they do not actually gain any “spectrum”. Indeed, there is not really any such thing as radio spectrum, it is merely a representation of electro-magnetic radiation. Instead, users typically get a licence to transmit at a specific frequency and often with other conditions attached. Implicit to this is the expectation that they will be able to receive the transmitted signal without any harmful interference. We return to look at these conditions or “rights” in more detail in Chapters 7 and 8 where they become an important component of spectrum trading. As long as these rights are not compromised, other users could in principle access the same frequencies. Any method of dividing access to the spectrum that allows users to receive their transmitted signal would be viable.

Technology used to lend itself to discrete allocations

Until recently all technologies used a relatively narrow bandwidth and assumed that they were the sole users of that frequency. For example, the GSM mobile phone system transmitted signals with a 200 kHz bandwidth, which at 900 MHz is less than a thousandth of the carrier frequency. The systems were designed assuming that there would be little interference, and where there was it would be carefully controlled by the operator.

The result of the use of these technologies has been to regulate the spectrum by frequency. That is, the spectrum is divided up into discrete parcels of frequency, for example 915–925 MHz, and assigned to a particular user. That user then expects that they will be given exclusive use of the band. This is shown diagrammatically in Figure 2.1, and has been the system on which spectrum management has been based for almost 100 years.

This approach facilitates the same use of spectrum in multiple countries, often known as harmonisation. By aligning the decision as to what the spectrum is to be used for across multiple countries, the same technology, such as GSM, can be deployed. This brings a range of benefits including economies of scale, international roaming and reduced interference. However, it also brings some disadvantages including the need for the regulator to predict the optimum service and technology and tying many countries to the same frequency plan regardless of whether the need differs from country to country.

Introduction

Historically, regulators have assigned frequencies by issuing licences to specific users for specific purposes – an administrative approach. The administrative approach can also be more or less prescriptive on the details of spectrum use. Often it has involved specifying what equipment a licensee can use and where, and at what power levels it can be used.

This is a good way to control interference, yet such methods are often slow and unresponsive to new technological opportunities. They also assume a level of knowledge and foresight on the part of the spectrum regulator which it may not possess. Attention has recently been focussed on creating genuine markets for spectrum and spectrum licences under which both the ownership and use of spectrum can change in the course of a licence's operation. This is a major step beyond the auctioning of licences which are not subject to trading and change of use. It does, however, require the full specification of what “property rights” to spectrum can be traded and utilised.

Some spectrum, especially for short-range use (BlueTooth, RFIDs, microwave ovens, various remote control devices, wireless security systems, etc.) need not be licensed at all. This might be the case where users do not interfere with one another, or because new technologies can be employed which are capable of dealing with interference as it happens. If such coexistence can be achieved, the spectrum commons approach is desirable.

Why spectrum needs to be managed

A large and growing part of the world's output relies upon use of spectrum. Frequencies are used both commercially, notably for mobile communications and broadcasting, and by public sector bodies to support national defence, aviation, the emergency services and so on. As demand grows spectrum needs to be managed to avoid the interference between different users becoming excessive. If users transmit at the same time, on the same frequency and sufficiently close to each other they will typically cause interference that might render both of their systems unusable. In some cases, “sufficiently close” might be tens or hundreds of miles apart. Even if users transmit on neighbouring frequencies, they can still interfere since with practical transmitters signals transmitted on one channel “leak” into adjacent channels, and with practical receivers signals in adjacent channels cannot be completely removed from the wanted signal. The key purpose of spectrum management is to maximise the value that society gains from the radio spectrum by allowing as many efficient users as possible while ensuring that the interference between different users remains manageable.

To fulfil this role, the spectrum manager provides each user with the right to transmit on a particular frequency over a particular area, typically in the form of a licence. Clearly, the spectrum manager must ensure that the licences that they distribute do not lead to excessive interference. In practice, this can be a highly challenging task.

Introduction

The introduction of trading and liberalisation broadly allows market forces to shape the usage of spectrum through licence holders making decisions on their use and ownership according to their market assessment. However, there may be some cases where market forces do not act strongly because licence holders do not have sufficient knowledge of spectrum, only have a small holding, or where the ownership is very fragmented and hence the transaction costs are high.

One possible solution to these issues is the emergence of intermediaries known as band managers. These are organisations which would make a business of acquiring spectrum and then leasing it to end users. If they were able to do this more efficiently than the regulator then they might be able to operate profitably.

In this chapter we look at the different classes of band managers that might emerge, the key issues for their success, and build a simple business case to show the policy and economic conditions that would be necessary for their profitable operation. This is to allow a greater understanding of the likelihood of band managers emerging and the impact of on-going policy decisions.

The idea of deliberately creating band managers for particular frequencies has been the subject of debate at least since 1987, when it was proposed in the UK as a possible means of privatising spectrum assignment and market testing the provision of the service delivered [1]. There were two elements to the discussions that took place.

• The possible superiority of private vs. public frequency assignment.

• […]

Introduction

As discussed in the introductory chapter, the key reason for managing spectrum is to avoid interference between different users. To do this, users are given licences which set out in some form their “rights” to transmit or receive. These licences can be stated in many different forms, for example:

• through a particular technology (e.g. GSM),

• through a particular use (e.g. mobile),

• through a particular set of emission characteristics known as a mask (e.g. 50 dBm in band falling by 10 dB/MHz out of band).

In existing command-and-control methods user licences are typically specified in terms of the equipment or technology they are able to use, which by careful control of neighbouring uses avoids interference. However, this approach generally does not provide users with the flexibility to subsequently change their usage as circumstances change. For example, if a licence is stated in terms of a technology such as GSM this does not allow a licence holder to subsequently upgrade their network to 3G.

As has been discussed in Chapters 4 and 6, the use of market forces could significantly enhance the value derived from radio spectrum, and one of the key ways to enable these forces is through a trading regime that also allows change of use. Achieving this requires the users' rights, often termed “property rights” by analogy with land, to be defined in a different manner.

Introduction

Over the course of time radio spectrum administrators have applied many different ways to assign radio spectrum rights to users. Until the late 1980s administrators assigned licences using administrative processes that included lotteries, beauty contests and awards on a first-come first-served basis. In the early 1990s a few administrators chose to auction spectrum rights, and following the large revenues raised in auctions for mobile telecommunications spectrum rights in the United States in the mid 1990s, interest in using auctions to assign frequency rights increased markedly around the world.

In the 1990s auctions appealed to some radio administrators, as it was felt an assignment process based upon market signals would reflect more accurately the value of spectrum and lead to more efficient use of spectrum, see FCC [1]. Advocates of auctions have long argued strongly that the outcomes in well-designed auctions are better for society than administrative procedures. It is widely argued that the superiority of auctions stems from their objectivity and transparency.

Some radio spectrum administrators believe auctions ensure that the frequency rights go to those who should best own them because frequencies are typically granted to those willing to bid the highest amount. In competitive market economies, scarce resources are allocated efficiently if they flow to those willing to pay the highest amount and radio spectrum is no different to any other scarce resource in this respect.

Nevertheless, the application of auctions as a mechanism to assign frequency rights has been challenged.

Introduction

The “commons” is a part of the spectrum where anyone can transmit without a licence. For that reason it is sometimes called licence-exempt or unlicensed spectrum.

Unlicensed spectrum was until recently of little interest. However, since the late 1990s it has been debated more widely. This has been caused by the following developments.

• Deployments of new technologies in the 2.4 GHz band, particularly of Wi-Fi, have been very successful, leading many to ask whether further unlicensed allocations would result in more innovation and deployments.

• The development of ultra-wideband (UWB) and the promise of cognitive radio have led some to question whether these technologies can overcome historical problems with unlicensed spectrum.

The debate around the role of unlicensed spectrum has been particularly intense in the USA, where the term “spectrum commons” has come to be used to advocate an approach where much more of the spectrum is unlicensed. Advocates have suggested concepts such as radios seeking temporarily unused spectrum, making short transmissions and then moving onto other unused bands. Some of these concepts extend beyond unlicensed spectrum and into property rights and many of these issues were discussed in Chapter 7.

There is little agreement as to the optimal relative amount of spec-trum assigned to unlicensed as against licensed usage. There are also many hybrid suggestions. For example, it has been suggested that spectrum be unlicensed but users have to pay a fee to access it depending on the current level of congestion.

Introduction

Spectrum is an essential input into many services which are highly valuable in both a commercial and public service sense. In Europe it has been estimated that radio spectrum contributes between 2% and 3% of GDP. Public services, such as defence and the emergency services, are usually provided by a public agency and made available free to the population. There is thus no problem over monopolisation leading to excessive pricing. But commercial services are sold into a market, which makes it necessary to oversee that problems of anti-competitive behaviour do not arise.

It follows that, where spectrum is an essential input into a service market such as mobile telephony, a firm which controls the necessary spectrum also controls the downstream service sold to end users. To some extent, there may be non-spectrum-using alternatives to the wireless ones – fixed line calls instead of mobile calls and cable television instead of terrestrial or satellite broadcasting. But in many cases either these services are not good substitutes for the wireless ones, as fixed calls are not always a good substitute for mobile calls, or the relevant competing platform, such as cable TV, may simply not exist.

Figure 9.1 shows the role of spectrum in the value chain, based upon the examples of mobile communications and broadcasting. It shows, in particular, that competition in the provision of services to end users can be inserted into the value chain at other points than by licensing spectrum to several operators – for example by the intervention of mobile virtual network operators (MVNOs), or by allowing a firm to “resell” a mobile operator's call minutes.