What Really Matters in Spectrum Allocation Design Thomas W. Hazlett Liberal Institute Prague, Czech Republic September 8, 2004

T.W. HazlettSpectrum Allocation Design Liberal Institute 2 Ronald Coase’s Vision In papers published in 1959 and 1960, Dr Coase asked why valuable radio spectrum was going to waste. He suggested that the problem was the lack of private property rights over spectrum, which prevented the formation of a market to allocate spectrum efficiently. The answer, he proposed, was to open the allocation of radio spectrum to market forces. His proposal was derided, but radio spectrum is now routinely allocated by auction… -- The Economist (Dec. 4, 2003) (emphasis in original)

T.W. HazlettSpectrum Allocation Design Liberal Institute 3 Spectrum Property Rights From radical heresy to passé orthodoxy –Without being implemented Liberalization entails –Market allocation of bands (+ resale) –Flexibility in services, technologies, bus models –Overlay rights (facilitating reallocation) –Generic competition policy –“37 Concerned Economists” (2001)

T.W. HazlettSpectrum Allocation Design Liberal Institute 4 Spectrum Property Regimes “Property Rights and Wireless License Values” (March 2004) Examined license prices in 27 auction countries (1438 licenses, ) Empirical prediction of license price Prices in liberal regimes 38% lower New Zealand, Australia, Guatemala, El Salvador

T.W. HazlettSpectrum Allocation Design Liberal Institute 5 Dual Policy Errors Economists’ formal literature –focuses on auction revenue –correcting The Economist Unlicensed spectrum as costless –commons promoted over exclusive rights –pre-empts markets for wide area networks, which are the most valuable wireless applications

T.W. HazlettSpectrum Allocation Design Liberal Institute 6 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 Liberal Institute 7 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 Liberal Institute 8 “Successes” and “Fiascoes” CountryDateUS$/MHz/pop UKApr GermanyAug ItalyOct NetherlandsJul DenmarkSep AustriaNov GreeceJul BelgiumMar SwitzerlandDec

T.W. HazlettSpectrum Allocation Design Liberal Institute 9 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 Liberal Institute 10 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 Liberal Institute 11 USA Cellular/PCS (CMRS) ~ 170 MHz utilized by 6 wireless networks –164 million U.S. subscribers –800 billion MOU per year –$90 billion annual revenues –~ $150 billion in cumulative investment Consumer surplus (2003) ~ $81 billion

T.W. HazlettSpectrum Allocation Design Liberal Institute 12 Demand for U.S. Wireless MOU

T.W. HazlettSpectrum Allocation Design Liberal Institute 13 Value of Bandwidth PRICE of LICENSES – GHz ~ $5 Billion  170 MHz ~ $85 Billion SOCIAL VALUE r=5%) ~ $1.6 Trillion SOCIAL VALUE / PRICE > 20

T.W. HazlettSpectrum Allocation Design Liberal Institute 14 Examining Mobile Phone Markets 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 Liberal Institute 15 Retail Price and Allocated Spectrum

T.W. HazlettSpectrum Allocation Design Liberal Institute 16 Welfare Effect of Withholding a License: Reserve Prices in Belgium and Greece

T.W. HazlettSpectrum Allocation Design Liberal Institute 17 USA Simulation: Costs of Delay UNITSSTARTEND TOTMINMM./mo SpectrumMHz HHI0-10, DensityPop/km Auction0-111 NotCPP0-111 GDPPC$US/year37,312

T.W. HazlettSpectrum Allocation Design Liberal Institute 18 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 Liberal Institute 19

T.W. HazlettSpectrum Allocation Design Liberal Institute 20 Chile-like Scenario

T.W. HazlettSpectrum Allocation Design Liberal Institute 21 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 Liberal Institute 22 What Matters in Spectrum Allocation? Spectrum Competition

T.W. HazlettSpectrum Allocation Design Liberal Institute 23 May 3, 2002 Spectrum Auction Delay Hits Fast Track By Roy MarkRoy Mark

T.W. HazlettSpectrum Allocation Design Liberal Institute 24 l Lauren Hazlett (4) * Marilyn Hazlett (6) Official Telecommunications Policy Consultants