Spectrum trading and the role of innovation Richard Marsden, DotEcon FCS/Eversheds Spectrum Forum London - 8 July

EC Study on Spectrum Trading DotEcon, Analysys and Hogan & Hartson recently completed a major study on spectrum trading The study focused on both: Trading – transfer of spectrum usage rights between parties in a secondary market Liberalisation – relaxing restrictions on services and technology associated with spectrum usage rights Final report available from EC website (http://europa.eu.int/information_society/topics/radio_spectrum/highlights/what_new/index_en.htm) Workshop in Brussels on 15 July

There are both benefits and costs from spectrum trading … The study examined a range of potential costs and benefits from trading & liberalisation: Direct efficiency effects Transparency Competition Innovation Scale economies in regulation Regulatory costs Interference coordination Standardisation Other national policy goals Concentration Potential benefits Potential costs

… but benefits substantially outweigh costs Introducing trading AND liberalisation can bring significant welfare gains in many bands Largest category of benefits is INNOVATION Regulatory costs Interference coordination Standardisation Other national policy goals Concentration Direct efficiency effects Transparency Competition Innovation Scale economies in regulation Potential costs Potential benefits

Traditional spectrum management suppresses incentives for innovation New services and technologies must win regulatory approval to access spectrum Normally requires intensive lobbying: Process may take many years Favours well-resourced incumbents Innovators lose ‘first mover’ advantage Regulator may pick ‘wrong’ technology Successful lobbying for change of use does not guarantee access to spectrum

Welfare gains from innovation are large Welfare gains from new services dwarf existing service efficiency improvements e.g. Hausman (1997) – cumulative cost of regulatory delays in spectrum for mobile = $100bn Combination of trading and liberalisation offers: Sufficient scale to incentivise innovation Reduced risk and uncertainty for entrants Less wasteful lobbying Easier access to spectrum for trial launches Trading and liberalisation would both: Encourage domestic innovation Promote diffusion of successful innovations from abroad

Examples of liberalisation facilitating innovation and entry Wireless broadband services (up to 1Mbps) competing with DSL and cable Launched in Australia in Dec 2003 Wide-area broadband technology Using 3G spectrum acquired in 2001 auction Equivalent spectrum in Europe was pre-packaged with 3G licences ‘Netvigator’ service launched in UK in May 2004 Deploying UMTS TDD technology in 3.4GHz spectrum Only possible because RA relaxed technology restrictions for FWA bands

Nextel – a cautionary tale Sixth largest US mobile operator 13.4m subs; 17,000 employees; $10bn+ revenues Aggregated SMR licences to create national mobile network from 1991 But FCC allowed trading & liberalisation without clear framework: Interference with public safety operators No consensus over real extent of interference Lack of clarity on rights to protection undermines commercial incentives to resolve problem FCC resorting to giving Nextel valuable replacement spectrum in 1.9GHz band

The European dimension Countries should have strong self interest to introduce spectrum trading However, EU countries that ignore spectrum trading opportunity also create costs for others: Restricts prospects for launch of innovative services that require pan-European scale Reduces likelihood of innovations originating in Europe Strong case for coordinating certain aspects of trading and liberalisation across Europe Objective should be to create compatible frameworks not necessarily common outcomes

Case study: innovation in mobile 1990s: Europe led USA, owing to coordinated introduction of GSM 2000s: Europe falling behind USA and Asia in new mobile technologies: Integration of wireless technology into handheld devices 802.11b and wireless hotspots Mobile networks deploying CDMA2000 and EDGE Innovative wireless broadband technologies (Arraycom, Flarion, Navini, IPWireless) originating outside Europe; most commercial trials in Asia and USA Difficulty of accessing spectrum appears to be holding back launch of new technologies in Europe

Conclusions Spectrum trading offers great opportunities for innovative wireless technologies Welfare benefits could be huge Need well-defined usage rights to ensure functioning market Innovation benefits will only be maximised if sufficient number of EU states adopt trading AND liberalisation Otherwise, Europe risks increasingly becoming a ‘taker’ not ‘maker’ of new technologies and services