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.

Introduction

Spectrum is used to produce services which are supplied by firms for commercial reasons and distributed into a market place, and to provide public services such as defence and emergency services which are usually provided free at the point of delivery by a public body.

In the UK public sector spectrum use accounts for just under half of all spectrum use below 15 GHz – this represents the vast bulk of valuable frequencies. The breakdown of public sector spectrum use is shown in Figure 15.1.

In other countries too, military use of spectrum, particularly for radar and communications, accounts for most of public sector use. In the presence of international military alliances, such as NATO, military spectrum allocations are often harmonised internationally.

In most jurisdictions, commercial and public sector spectrum allocations are managed in a broadly similar way by the same independent agency or government department. A major exception is the United States, where spectrum used by the Federal Government is managed by the National Telecommunications and Information Administration (NTIA), part of the Department of Commerce, while spectrum allocated for commercial purposes and to state and local government is managed by the independent communications regulator, the Federal Communications Commission (FCC). Any major transfer or re-alignment of spectrum use may face the additional handicap of negotiations between these two organisations.

Historically, public sector organisations, especially national defence departments, were accorded high priority in spectrum use. Under the command-and-control regime, they were allocated spectrum for an indefinite period.

A reminder of the problem

At the start of this book we said that spectrum needs to be managed to avoid the interference between different users becoming excessive. We noted that the key purpose of spectrum management is to maximise the value that society gains from the radio spectrum by allowing as many users as possible while ensuring that the interference between different users remains manageable. Then we observed that the current “command-and-control” approach was unlikely to achieve this objective and was becoming more difficult to manage as an ever expanding range of applications arose. Instead, we noted how increasingly spectrum managers were turning to economic management methods to achieve their duties.

Key conclusions

We made the following conclusions.

• Technological advances. The advance of technology is having some impact on spectrum management. Multi-modal radios are gradually reducing the advantages of international harmonisation, making it easier for regulators to allow the use of market forces. Technologies that provide “underlays” (UWB) or “overlays” (cognitive radio) might require radical changes to spectrum management, but in practice cognitive radio may be best enabled simply by providing spectrum owners with sub-leasing capabilities while UWB can be accommodated as an increased noise floor for existing owners.

• Division of spectrum. While there are many alternative methods of dividing access to spectrum, all can be accommodated as a subdivision within the current overall process of division by frequency. For example, after a division by frequency, it is possible to further subdivide by time, angle, polarisation, geography or use. The regulator could choose to make this division themselves, or they could provide the licence holder with the freedom to do so, perhaps through the flexible type of licence envisaged under trading. Hence, major changes to spectrum management caused by technology look unlikely.

• […]

Creating property rights: economic aspects

Moving to a regime for secondary trading (as well as primary auctioning) of spectrum requires, as well as a clear technical definition of rights, a clear economic definition. As an illustration, spectrum licences in the UK have traditionally been held on an annually renewable basis, the licensee having further unspecified protection based upon a “reasonable expectation” of longer tenure. This lack of specificity would clearly create major and avoidable uncertainty in a spectrum market, and deter both transactions and the collateral investment necessary to put the spectrum to work. It is thus universally recognised that a trading regime requires a detailed specification of rights.

In principle, these rights can be embodied either in a tradable licence to use spectrum, or to install spectrum-using apparatus, or as directly owned property. In practice the tradable instrument in most jurisdictions is a transferable licence, and our discussion below is based on this approach, although we sometimes speak of “trading spectrum” rather than “trading licences”.

This chapter discusses some of the issues in the definition of licence conditions (construed as above). Section 8.2 sets out some of the basic economics of property rights. Section 8.3 considers key issues in how rights should be defined from an economic or commercial point of view. Issues concerned with technical (interference-related) aspects of property rights were dealt with in Chapter 7.

Introduction

Following the initial assignment of spectrum rights and obligations to users, whether by auction or other means, circumstances may change causing initial licence holders to want to trade their rights and obligations with others. Today this is not possible in many countries. However, in a few countries secondary trading – the trading of spectrum rights after the primary assignment – is possible. The possibility to trade radio spectrum is argued by many commentators to be a critical factor in the promotion of more efficient radio spectrum use. Furthermore, it is increasingly recognised that the flexibility afforded by trading is helpful for innovation and competitiveness.

Spectrum trading is a powerful way of allowing market forces to manage the assignment of radio spectrum rights and associated obligations and it is a significant step towards a market-based spectrum management regime. The trading of radio spectrum rights has been discussed as a policy option for many years and dates back to the seminal contribution of Coase [1]. It is widely accepted by economists and increasingly by spectrum policy makers that appropriately supervised market forces can be superior to the widely used but more inflexible command-and-control methods.

Trading of spectrum is made much more powerful when it is combined with policies aimed at promoting liberalisation in use; that is allowing users to choose the use to which a frequency band is put – subject perhaps to some constraints regarding the interference that can be caused (see Chapter 7).

Introduction

This chapter starts by considering whether market mechanisms could be used to determine the appropriate amount of spectrum commons. It then addresses two possible approaches that the regulator might use to make this decision, namely (1) the “total spectrum needed” approach and (2) the “band-by-band” approach.

The use of market mechanisms to determine the amount of spectrum commons

The standard market mechanisms are difficult to apply directly to unlicensed spectrum. Because there is no single user body, it is not possible for the unlicensed users to directly buy the spectrum under auction or trading.

A possibility is for a third party (the “unlicensed spectrum manager”) to buy spectrum and to make it a private commons. Users wishing to access this would pay the unlicensed spectrum manager by some mechanism. The difficultly is in envisaging an appropriate mechanism. Ideally, the payment should reflect the level of usage, but for many unlicensed devices keeping account of the amount of usage and periodically returning the information would impose such a major increase in complexity and hence cost, that much of the revenue opportunity would be lost in subsidising devices. An alternative is to impose a royalty-like fee on the manufacture of each device, with the fee level coarsely reflecting the expected usage (e.g. a garage door opener would pay less than a W-LAN node). This is more plausible as similar mechanisms are used today to collect royalty payments on patents.

Every smart-card vendor has its implementation of the ISO 7816 file structure and application selection process: these form the vendor's native operating system and, as we have seen in Chapter 6, they can be used to create a multi-application card scheme.

To gain the full benefits of portability, a high-level language and post-issuance downloading of applications, you need a multi-application operating system like JavaCard or Multos. But there are several operating systems that sit between these two extremes, and which may offer advantages in some situations.

IBM MFC

IBM developed its first multi-function card (MFC) 1 in the early 1990s. It has since been developed to extend the cryptographic support and add new features. One of its most important features, however, is the ability to support applications in E2PROM, which can be updated or downloaded after the initial issuance, using a scripting protocol.

IBM stopped supplying smart cards directly in 1999, but it has licensed the MFC to several manufacturers, and also develops tailored versions for specific schemes. It is now used by the French multi-application payment and e-purse card Monéo 2.

Advantis

Spanish card technology and systems supplier SERMEPA developed its ‘TIBC’ operating system in 1994 in order to run the ‘Visa Cash’ electronic purse product; TIBC was licensed to several card manufacturers and is still widely used in Spain and Latin America.