1. Market Mechanisms for Redeveloping Spectrum Evan Kwerel Office of Strategic Planning and Policy Analysis Federal Communications Commission DIMACS Workshop October 7, 2004

2. 2 Evan Kwerel Disclaimer The opinions expressed in this talk are those of the author and do not necessarily represent the views of the FCC or any other members of its staff. Talk is based on joint work with John Williams.

3. 3 Evan Kwerel Only about 7% (185 MHz) of Spectrum in 300-3000 MHz Range Is Fully Available to Market Today Cellular 2% PCS 3% SMR 1%

4. 4 Evan Kwerel Another 15 % (413 MHz) for Flexible Use in the Pipeline

5. 5 Evan Kwerel But… Heavily encumbered Fragmented in geographic and frequency domains Needs massive restructuring

6. 6 Evan Kwerel TV and DTV Stations that Encumber Channel 67 in EAG-1

7. 7 Evan Kwerel

8. 8 How to End the Spectrum Drought Property rights and markets –Define flexible, exclusive and exhaustive spectrum rights –Use markets to move spectrum to its highest value use Big bang transition –All highly interdependent spectrum up for sale at the same time –Voluntary for incumbents but see opportunity cost –Incentives for incumbents to participate –Reduces transaction costs and increases liquidity –OSP WP 38 (www.fcc.gov/osp/workingp.html)

9. 9 Evan Kwerel Alternative Big Bang Mechanisms Auction that includes incumbents’ licenses. Incumbents can bid on their licenses at no net cost. Auction where incumbents can get vouchers for turning back their licenses Exchange where incumbents can offer licenses at declining ask prices

10. 10 Evan Kwerel Mechanism 1: FCC Auction that Includes Incumbent Licenses Simultaneously auction spectrum voluntarily offered by incumbents together with any unassigned spectrum. Use package bidding. Participants –Get immediate flexibility –Can keep the proceeds from the sale of their licenses –Can buy back their licenses at no net cost – but can’t resell immediately Non-participants –Do not receive full flexibility for significant time (e.g., 5 years) –Allowed to continue current operations

11. 11 Evan Kwerel Mechanism 2: FCC Auction with Vouchers for Incumbents Incumbents given auction vouchers in exchange for turning back their licenses Value of vouchers determined in auction –Incumbents attributed spectrum quantities (MHz- Pops) based on licenses turned back –Voucher value = attributed MHz-Pops X auction prices/MHz-Pop of new licenses covering area of incumbent’s licenses

12. 12 Evan Kwerel Mechanism 2: FCC Auction with Vouchers for Incumbents (cont’d) Vouchers equivalent to cash –Can be used to pay winning bid in current or any subsequent auction –Transferable and divisible Allows FCC to create new, fungible geographic area licenses suited to new uses – if mandatory or all incumbents participate voluntarily –No need to create licenses (geographic areas, frequencies) based on legacy rights –Bidders would bid on spectrum with certain characteristics (location, bandwidth, low power or high power), not specific frequencies, minimizing opportunity for destructive strategic behavior in auction

13. 13 Evan Kwerel Mechanism 2: FCC Auction with Vouchers for Incumbents (cont’d) Alternative design with “voluntary” participation –Allow incumbents to opt out and continue in current use. Opt-out spectrum limited to current use for significant period. –FCC can require non-participants to relocate to different part of auctioned band with costs paid from auction revenues or new licensees –Spectrum in cleared portion of band would be fungible in auction. Spectrum in relocation portion would not.

14. 14 Evan Kwerel Mechanism 3: FCC Exchange Incumbents can offer licenses at declining ask prices David Parkes investigating alternative designs

15. 15 Evan Kwerel Pros and Cons: Mechanism 1 Pro: Incumbents can maintain status quo – “voluntary” Pro: Uses “simple” one-sided auction mechanism Con: FCC must define area licenses that approximate initial spectrum rights –Difficult, especially when encumbered areas overlap –May not be able to define usable area licenses based on incumbents rights for certain services, e.g. microwave –Allows bidding only on specific frequencies (not fungible rights).

16. 16 Evan Kwerel Pros and Cons: Mechanism 2 Pro: Allows FCC fresh start in defining and assigning spectrum rights –Clears entire band of incumbents –Can define new rights (geographic areas and frequency blocks) without regard to crazy-quilt pattern of legacy rights –Can design highly competitive auction for fungible spectrum rights –Minimizes strategic holdouts by incumbents to extent have liquid market for fungible rights Pro: Uses “simple” one-sided auction mechanism Con: Not voluntary, can’t maintain status quo

17. 17 Evan Kwerel Pros and Cons: Mechanism 3 Pro: Allows incumbents to offer licenses and bid for replacement licenses within single package Con –Requires developing more complex exchange mechanism –FCC must define area licenses that approximate initial spectrum rights –If we make flexibility conditional on participation, how do we define participation?

18. 18 Evan Kwerel Potential Applications Accelerated clearing of TV spectrum (700 MHz band) Restructuring airport landing/takeoff rights (slot auctions)

19. 19 Evan Kwerel Remaining Issues Best formula for dividing revenues among sellers (FCC and incumbents) –With package bidding no unique price for rights sold by incumbents –Equity –Efficiency of allocation –Incentives for participation in auction –Myerson and Satterthwaite (1983) impossibility theorem: budget balanced, efficient, voluntary

20. Thank you! Evan Kwerel Office of Strategic Planning and Policy Analysis Federal Communications Commission Evan.Kwerel@fcc.gov (202) 418-2045