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Satisfying Spectrum Demand Through Secondary Markets

Peter CramtonChairman, Spectrum Exchange

Professor of Economics, University of MarylandMay 31, 2000

www.spectrum-exchange.com

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Secondary Markets Are Essential for the Efficient and Intensive Use of the Spectrum

• Secondary markets identify gains from trade not realized in the primary market (FCC auction)

Two sources of unrealized gains from trade:

• Best use of spectrum yesterday is not the best use today– Business plans change; technologies change

– Long-term needs change in response to this uncertain environment

• Short-term need for bandwidth is variable– Want to sell when you have a surplus

– Want to buy when you have a shortage

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Two broad types of secondary markets: short-term and long-term

• Short-term: buy surplus capacity to satisfy peaks in demand (think: real-time spot market)– Satisfying short-term demand spikes will be major virtue of secondary

markets in future, once flexible (and standardized) technologies are developed, such as software defined radios

• Long-term: many-year use involving large specific investments to build out a service (think: long-term contract)– I will focus on using secondary markets to satisfy long-term demands

– Example: auctioning encumbered spectrum

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700 MHz Auction of Channels 60-69

• Concrete example where needs of market not fully satisfied by FCC’s primary auction

• FCC to auction 30 MHz in 700 MHz band on September 6

• This spectrum perfect for 3G mobile or 3rd broadband pipe to the home

• But spectrum is encumbered by existing UHF broadcasters, blocking use by new licensees in most major markets

• Spectrum is worth much more if clear of incumbent broadcasters

• Efficient clearing is facilitated by secondary market

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700 MHz Clearing Auction

• Spectrum Exchange will conduct a private auction before the FCC auction to identify the least-cost clearing solution

• Resolve clearing issue before FCC auction

• Reduces uncertainty and delay

• The Spectrum Exchange Auction will enable bidders in the FCC’s 700 MHz Auction to bid with confidence that the spectrum will be cleared at an early date — and at a known cost

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Importance of Clearing Auction

• Without clearing auction,– Holdout will delay or prevent efficient spectrum use, destroying public

value

• Clearing auction lets all comparable stations in a broadcast market compete to be the one to clear– Those stations that can clear at lowest cost will do so, thus minimizing

any loss of broadcast service

• Chicago– 4 stations in 700 MHz band must clear or relocate

– 9 comparable stations

– 9 compete to be the 4 that clear

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Mechanics of the Private Clearing Auction

• Incumbent broadcaster in Channels 59-69 receives– an incentive payment in return for its commitment to relocate

– the clearing payment if it wins the clearing auction

• The private auction in each broadcast market– Identifies stations that can clear at lowest cost

– Determines the market price for clearing

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How the FCC Can Facilitatethe Secondary Market

• Reduce uncertainty and distortions in the bargaining between incumbents and new entrants:

• Allow early transition to DTV-only

• Assure transitioning broadcasters of continued cable carriage

• Establish relocation rule for channel 59–69 broadcasters that limits holdout problem