What Really Matters in Spectrum Allocation Design Thomas W. Hazlett International Telecommunications Society Berlin, Germany Section 6.3 * September 7, 2004

2 “Successes” and “Fiascoes” CountryDateUS$/MHz/pop UKApr GermanyAug ItalyOct NetherlandsJul DenmarkSep AustriaNov GreeceJul BelgiumMar SwitzerlandDec

T.W. HazlettSpectrum Allocation Design ITS-Berlin 3 What Really Matters in Spectrum Allocation Design with Roberto Muñoz (Sept. 2004) Economic lit. focus: license rent extraction Efficiency question in output markets –Price –Quantity

T.W. HazlettSpectrum Allocation Design ITS-Berlin 4 Auctions FCC license auctions began July 1994 Economists urged since Coase (1959) Rationale is that auctions –Assign licenses to most productive suppliers –Eliminate rent seeking waste –Monies raises replace taxes, saving 33¢ per dollar collected in license revenues

T.W. HazlettSpectrum Allocation Design ITS-Berlin 5 Revenue-centric analysis UK and German auctions a “success” -- Swiss and Dutch a “fiasco” Ascending sequential round bidding loses favor; sealed bid auctions preferred Policy analysis => –Make bidding more competitive –Assumes market outcomes exogenous

T.W. HazlettSpectrum Allocation Design ITS-Berlin 6 Three Common Proposals in Economics Literature Reserve prices Bidding credits for ‘weak bidders’ Restricting number of licenses Each reduces efficiency in output market to increase revenue from inputs (licenses) Penny wise, pound foolish?

T.W. HazlettSpectrum Allocation Design ITS-Berlin 7 Cellular/PCS (CMRS) 7% of spectrum under 3 GHz Intense sharing –164 million U.S. subscribers –800 billion MOU per year –$90 billion annual revenues –150,000 base stations –hundreds of applications, devices Consumer surplus (2003) ~ $81 billion

T.W. HazlettSpectrum Allocation Design ITS-Berlin 8 Demand for U.S. Wireless MOU

T.W. HazlettSpectrum Allocation Design ITS-Berlin 9 Value of Bandwidth PRICE of GHz ~ $5 Billion –10MHz ~ 1/17 of CMRS bandwidth –Market value of 170 MHz ~ $85 Billion SOCIAL VALUE r=5%) ~ 20X PRICE Bandwidth more valuable to consumers than producers by an order of magnitude +

T.W. HazlettSpectrum Allocation Design ITS-Berlin 10 What Really Matters? Low retail prices, high network usage Estimate prices with 3-equation model 29 Countries (18 with Auctions) Data for price and MOU: quarterly, 1999I-2003II Auction countries: prices not lower Two very significant drivers of lower prices: –More competition (lower HHI) –More spectrum Marginal costs lower Decreases HHI (lower fixed costs of entry)

T.W. HazlettSpectrum Allocation Design ITS-Berlin 11 Retail Price and Allocated Spectrum

T.W. HazlettSpectrum Allocation Design ITS-Berlin 12 Welfare Effect of Withholding a License: Reserve Prices in Belgium and Greece

T.W. HazlettSpectrum Allocation Design ITS-Berlin 13 USA Simulation UNITSSTARTEND TOTMINMM./mo SpectrumMHz HHI0-10, DensityPop/km Auction0-111 NotCPP0-111 GDPPC$US/year37,312

T.W. HazlettSpectrum Allocation Design ITS-Berlin 14 Social Gains from an Increase in CMRS Spectrum STARTEND  $Price/min % Output (Bil. min./mo.) %  Welfare ($Bil./yr) 34.8 PV(  ($Bil.) 478.9

T.W. HazlettSpectrum Allocation Design ITS-Berlin 15

T.W. HazlettSpectrum Allocation Design ITS-Berlin 16 Chile-like Scenario

T.W. HazlettSpectrum Allocation Design ITS-Berlin 17 Basic Lessons Enormous social gains from additional spectrum access Vast proportion of gains go to consumers –Business users gain efficiencies –Public safety users gain efficiencies Service provider profits turn negative –Political resistance by incumbents expected

T.W. HazlettSpectrum Allocation Design ITS-Berlin 18 What Matters in Spectrum Allocation? Spectrum Competition

T.W. HazlettSpectrum Allocation Design ITS-Berlin 19 Conclusion Liberalization => EAFUS => market allocation of radio spectrum License auctions not a panacea Flexible use licenses, with abundant bandwidth, produce large social benefits Political economy difficult

T.W. HazlettSpectrum Allocation Design ITS-Berlin 20 May 3, 2002 Spectrum Auction Delay Hits Fast Track By Roy MarkRoy Mark