The Debates Shaping Spectrum Policy

Martin Sims, Martin Sims

• Publisher: CRC Press
• Year: 2021
• ISBN:
  9781000510331
• Edition: 1
• Topic: Technologie et ingénierie
• Subtopic: Communications mobiles et sans fil

What debates have caused spectrum policy to change course and which will determine its future direction? This book examines these issues through a series ofchapters from a range of notable experts.

The backdrop is a period of turbulent change in what was once a quiet backwater. The past quarter century has seen wireless connectivity go from nice-to-have luxury to the cornerstone of success as nations battle for leadership of the digital economy. The change has been reflected in the crucial role now played by market's mechanisms in a field once dominated by administrative decisions. Spectrum policy's goals have moved far beyond the efficient use of the airwaves to include encouraging economic development, investment, innovation, sustainability and digital inclusivity.

Are historic procedures still appropriate in the face of this multiplicity of demands? Are market mechanisms like auctions still the best way to deliver what has become essential infrastructure? Does the process of international coordination need to change? Is spectrum policy's effectiveness limited by the power of global economic forces? Can it reduce rather than add to global warming? Where does 6G and AI fit in? Is public perception the new spectrum policy battle ground? These are all issues examined in The Debates Shaping Spectrum Policy.

1
THE PAST, PRESENT AND FUTURE OF SPECTRUM AUCTIONS

MARTIN CAVE¹

DOI: 10.1201/9781003156765-2

Contents

Introduction

What Spectrum Auctions Can Do

How Can Spectrum Auctions Possibly Go Wrong?

Auction Design Failures

Do Spectrum Auctions Raise the Price or Lower the Quality of Mobile Communications, or Discourage Investment?

Overbidding, or the Winner’s Curse

Supply-Side Restrictions on the Availability of, or Competition for Spectrum

What Do Recent 5G Auctions Suggest about the Current State of the Market?

The Future of Auctions

Conclusions

Introduction

The natural resource of radio spectrum was first discovered and used over a century ago. When its military significance was appreciated in the First World War, most countries chose to allocate and assign it centrally using administrative ‘command and control’ methods. The first comprehensive spectrum auctions, replacing administrative with market methods, took place 30 years ago in New Zealand, which was famous at the time as a pioneer in such approaches. The auction design adopted there was the ‘second price auction’: the band goes to the highest bidder but at the price offered by the second highest bidder. It led to unexpectedly low prices in some bands for which there was little competition but was otherwise considered a success.

In the USA, in the 1980s, the first alternative to administrative methods chosen was the use of lotteries, employed to assign the first batch of radio frequencies released for mobile services. The lottery offered 643 licenses³ and attracted over 400,000 applicants, most of them small-time rent seekers intent on ‘flipping’ the licence, rather than ever building a network and providing a service. It was a calamitous process that lasted six years, delaying the launch of mobile services and doing nothing to serve the public interest.²

In the face of these contrasting results, in 1993, the US Congress allowed auctions to be held for non-broadcast spectrum. The 1994, simultaneous, multiple round auctions for 30 MHz lasted four months and netted USD 7.7 billion, which covered the historical costs of the Federal Communications Commission (the auctioneer) since its inception in the 1920s. Its success led US lawmakers to make auctions mandatory in 1997.

Thus, comparative hearings, also known as beauty contests, ruled the roost across much of the world until the turn of the century at which they gave way to competitive auctions fairly universally, at least in the burgeoning field of mobile communications, and because spectrum using wireless services were free from the ‘natural monopoly’ property which applied at the time to many wireline networks, a competitive auction usually embraced several licences covering the same service area. Thus, multi-bidder competitive spectrum auctions worked with liberalisation and competition in the services provided using the spectrum, to create a powerful innovative force.

Many early auctions, notably some of the 3G auctions held in Europe in 2000/2001, generated unexpectedly high revenues.³ This did not escape the notice of finance ministries, which welcomed such inflows into their coffers. In this way, auctions soon became the norm, with only a few countries bucking the trend and maintaining ‘command and control’.

This chapter takes the reader on an informal tour of the issues that arise with spectrum auction, since their inception 30 or so years ago, now, and in the future as the mobile sector, in particular, develops further. The tour covers the basic economic ideas behind auctioning natural resources; the policy objectives that auctions can pursue; how auctions can go wrong; the performance of 5G auctions; and some speculations about how they may develop in the future.

What Spectrum Auctions Can Do

We begin with an economics digression. The first prominent economist to support auctioning spectrum was R. H. Coase, British-born but working for most of his life at The University of Chicago. He is famous for the so-called Coase theorem, according to which if property rights are unambiguously assigned, then trade between the parties – market exchange – will allow resources to gravitate to their most efficient uses: “the delimitation of [property] rights is an essential prelude to market transactions.”

In application to spectrum, in particular, he reasoned that, once there is legal certainty around a spectrum property right, it is possible to assign it, “employ[ing] the price mechanism, as this allocates resources to users without the need for government regulation.”⁴ This would mean that if A owns a spectrum licence which is now used to provide a broadcasting service, but B could use it more profitably to provide a mobile communications service, then a trade between the two can take place, which will benefit them both, and might also benefit the universe of downstream service users, whose comparative willingness to pay for the two services ultimately underwrites the comparative value of the spectrum to A and B.⁵

How better to get the process started with newly released spectrum than to have an auction of spectrum licences in which A and B can take on other bidders seeking the ‘property right’ and also to allow licence holders to trade their rights thereafter, in response to changes in tastes and technology?

Coase also believed that, with the market mechanism, the goal should be to maximise use of the spectrum, by owners who would then have the necessary incentives to deploy high quality and extensively available services.

This insight came to Coase in 1959. For this and a lifetime of other work, Coase was awarded the Nobel Prize in Economics in 1991.⁶

But it took policymakers in the USA 34 years to act on the message and implement spectrum auctions.

It is worth noting that it is fairly typical for a natural resource which is in plentiful supply to be allocated administratively by a government, probably at a zero or near zero price. But when or where it is scarce, that allocation becomes inefficient, and market methods are called upon.

Thus, we find that raw water in Southern California or Australia, where it is a scarce natural resource, is auctioned or traded, while water rights in the UK, where for now there is often too much water, are administratively assigned.

We have already noted, in the earlier discussion of Coase’s ideas, the capacity for a competitive spectrum auction to direct spectrum to firms which can use it more efficiently and can, therefore, afford to bid more for it. This is the first and possibly the most important function a spectrum auction can discharge.

The second has more to do with who gets to benefit from the scarcity value of prime radio spectrum – say the 700 MHz band. If the government simply assigns it at a zero price to one or more operators, their shareholders will get access to a highly valuable and scarce asset for nothing and will convert it into high returns for shareholders and managers: they will get the so-called scarcity rents on the public asset.

But under an auction regime, that same scarcity value or rent will accrue to the government. Efficient operators should make normal returns, but the scarcity value would go to the finance ministry for use in various forms of public spending, transfers, tax cuts, the reduction of debt, relief of poverty, health and educational expenditure, etc. – as well as, unfortunately on some occasions, various wasteful or corrupt purposes. Bearing in mind that the cumulative global revenues from spectrum auctions to date is close to USD 1 trillion, it is of distributional significance where the money goes.

However, the versatility of auctions is not exhausted by greater efficiency and benefits for public spending. There are two further things more useful things which they can and have done.⁷

The auction rules can include caps on what the largest operators can buy in any auction, intended to restrain them from buying up all the available spectrum and thus eliminating or weakening their smaller rivals.

Finally, an auction can also achieve wider economic and social objectives by inserting them as conditions in the spectrum licence. For example, the regulator can require one or more operators to extend coverage to non-commercial areas. Or quantitative investment targets can be incorporated as licence conditions – although care must be taken to ensure that such obligatory inputs are chosen efficiently: it is usually better to specify mandatory outputs, not mandatory inputs. Or they could require spending on handset subsidies, or digital education – whatever can successfully be enforced as a licence term.

Any such condition, when it bites, will reduce auction revenues. It can be seen as a way of ploughing some of the auction revenues back into the sector – rather than diverting them to completely unrelated public purposes. Moreover, as the supply of these additional services is procured as part of a competitive auction process, it too can be directed towards the operators who can perform the tasks most efficiently. But this process breaks down when the auxiliary obligations are so granular that there is only one operator who can perform them: see later.

A recent Austrian example shows how these can be flexed in the course of an auction of 700 MHz and other bands, which concluded in September 2020.⁸ Each of the three operators faced challenging initial coverage requirements and the outcome of the earlier stages of the auction was a combined bid of €300 million. In the final stage, the regulator took advantage of a capacity to flex coverage requirements further, by asking each operator to specify which sets of municipalities it would be prepared to cover in addition, in return for which reductions in its fee. (A process of this kind is known as a ‘menu auction’.) The auction software then selected those bids which maximised coverage within a given budget. In this way, the regulator reduced its auction revenues by one-third, to €200 million. Note that this way of proceeding maintained competitive tension in the auction throughout.

How Can Spectrum Auctions Possibly Go Wrong?

Auctions can go wrong in a number of ways, some based on how firms behave (the demand side of the spectrum auction equation) and others based on how the regulator or government behaves (the supply side o...