Satisfying Spectrum Demand Through Secondary Markets

1
Satisfying Spectrum Demand Through Secondary
Markets
www.spectrum-exchange.com

• Peter CramtonChairman, Spectrum
  ExchangeProfessor of Economics, University of
  MarylandMay 31, 2000

2
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

4
700 MHz Auction of Channels 60-69

• Concrete example where needs of market not fully
  satisfied by FCCs 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 FCCs 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 5969
  broadcasters that limits holdout problem