1. Spectrum Markets are Robust, When You Remember to Feed Them Thomas W. Hazlett Professor of Law & Economics George Mason University thazlett@gmu.edu Spectrum Markets: Challenges Ahead Conference @ the Kellogg School of Management Northwestern University June 2-3, 2011

2. Killer App of 2007 June 2, 2011Kellogg Conf. * Spectrum Markets2

3. Steve Buys Spectrum contracts with carriers carriers’ liberal control rights in CMRS enable not “exclusive use” but intensely shared right to exclude  protects network investment purchase spectrum + network access efficient bundles vertical integration of tight complements naked license sales - tip of the iceberg June 2, 2011Kellogg Conf. * Spectrum Markets3

4. Spectrum Secondary Markets Nascent? Spectrum an input into network services Wireless services two-sided output market subscribers vendors (devices, services, apps) piggyback networks (MVNO, M2M) June 2, 2011Kellogg Conf. * Spectrum Markets4

5. Robust Secondary Markets June 2, 2011Kellogg Conf. * Spectrum Markets5

6. Exhaustive Rights for Markets? FCC: yes, rights need to be clearly and exhaustively defined for markets to work FCC: we have never defined “harmful interference,” the key border condition FCC: mobile markets work great, bring innovation & growth to the economy June 2, 2011Kellogg Conf. * Spectrum Markets6

7. Rights Definition Minimalism TUFs (titulo de usufructo de frecuencia) in Guatemala specify (1) frequency band (2) hours of operation (3) maximum power transmitted (4) maximum power emitted at the border of adjacent frequencies (5) geographic territory (6) duration of right (beginning and ending) the market works June 2, 2011Kellogg Conf. * Spectrum Markets7

8. 3G Coverage in Central America (courtesy of Amazon Kindle) http://client0.cellmaps.com/viewer.html?cov=1

9. October 2010 2G coverage light purple 3G coverage dark purple

10. Great Advantages liberal use rights let parties bargain free entry quick adjudication of border issues time limits and arbitration procedures specified transparency June 2, 2011Kellogg Conf. * Spectrum Markets10

11. Spectrum Contours “Hard”? stochastic emissions uncertainty in identifying conflicts like land, IP, water, fish or oil deposits? irrelevant claim difficult line drawing for administrators, too Coase 1959 costs of the “price system” vs. regulation June 2, 2011Kellogg Conf. * Spectrum Markets11

12. Simple Rights (C. Jackson 2005) June 2, 2011Kellogg Conf. * Spectrum Markets12

13. Difficult (overlapping complements) June 2, 2011Kellogg Conf. * Spectrum Markets13

14. Anti-commons Tragedy a rights assignment failure fragmentation produces excessive t-costs can be solved ex ante by regulators June 2, 2011Kellogg Conf. * Spectrum Markets14

15. Ownership Integration June 2, 2011Kellogg Conf. * Spectrum Markets15

16. Alternatively, Administrative Restrictions June 2, 2011Kellogg Conf. * Spectrum Markets16

17. Canadian White Space June 2, 2011Kellogg Conf. * Spectrum Markets17

18. Killer App of 1952 June 2, 201118Kellogg Conf. * Spectrum Markets

19. Anti-commons Tragedies June 2, 2011Kellogg Conf. * Spectrum Markets19

20. 2.5 GHz (ITFS/MMDS  EB s /BRS) June 2, 2011Kellogg Conf. * Spectrum Markets20

21. XM-WCS (2006) June 2, 2011Kellogg Conf. * Spectrum Markets21

22. XM buys WCS licenses July 14, 2005 NAB letter The proposed transaction is part of a longstanding pattern of deception by the satellite radio industry. In 2003, while publicly claiming it had no plans to insert local content on its network of terrestrial repeaters, XM spent months seeking a patent for technology to do just that. FCC blocked merger June 2, 2011Kellogg Conf. * Spectrum Markets22

23. Efficient Rights standard templates – e.g., CMRS don’t worry about exhaustive perfection large band allocations combinatorial auctions help efficient aggregation no service, technology, business restrictions overlays for bands littered with incumbents and white spaces June 2, 2011Kellogg Conf. * Spectrum Markets23

24. T-costs and the Nirvana Fallacy hold-outs and bargaining costs are positive everywhere analysis: overlays v. gov’t reallocation remembering: market t-costs highly sensitive to policy rules June 2, 2011Kellogg Conf. * Spectrum Markets24

25. U.S. CMRS 50,866 licenses (2003) 1,122 (AWS 2006) 1,099 (700 MHz) 734 cellular markets 493 BTAs 51 MTAs June 2, 2011Kellogg Conf. * Spectrum Markets25

26. 50,000+ deals later (Stifel Nicolaus 4.15.08) June 2, 2011Kellogg Conf. * Spectrum Markets26

27. Emptying the Spectrum (TV Band) Warehouse One Box at a Time 1953 81 channels (486 MHz) 1982  needed bandwidth for cellular 67 channels (402 MHz) 2009  needed bandwidth for 3G/4G licenses 49 channels (294 MHz) 2015  need bandwidth for ‘mobile data tsunami’ 29 channels (174 MHz) June 2, 2011Kellogg Conf. * Spectrum Markets27

28. Case-by-Case is a Long March June 2, 2011Kellogg Conf. * Spectrum Markets28 FCC, National Broadband Plan (March 2010), Chapter 5.

29. Standardized Overlays auction secondary rights using liberal template vest incumbents buy-outs, partnerships eliminate border wars rights enable capex to create band clearing side payments for alternative solutions cable/satellite carriage to move TV stations overlay licensees internalize cost of delay efficient alternative to administrative process June 2, 2011Kellogg Conf. * Spectrum Markets29