Spectrum Management Under the Microscope

Julian McGougan, Head of Public Policy

27th November 2009

Spectrum Liberalisation seminar, Westminster

Is there a housing shortage?

• Received wisdom:

Of course there is! It’s a national scandal.

• The reality is less clear-cut:

There are more families on nationwide housing waiting lists than empty properties.

But demand exceeds supply by less than you’d think (1.8 million vs 1 million).

1 million empty homes is the real scandal.

• And you won’t be surprised to learn:

The fewest empty homes tend to be where the greatest demand is.

Is spectrum scarce?

• Received wisdom: Of course it is. Demand exceeds supply, and is growing.

• The reality: Research both in the UK and elsewhere has shown most

spectrum is little used most of the time in most places. Ofcom study shows that even the unlicensed 2.4 GHz (the “WiFi

band”) isn’t congested in urban areas.• But:

While the supply of spectrum may exceed demand in aggregate, that may not be true just where you want access to it.

The availability of thousands of empty houses in many parts of the country may not constrain your willingness to buy or rent any of the houses you like where you actually want to live.

So it is with spectrum (demand driven by propagation and equipment standardisation/availability).

But there is an ARTIFICIAL spectrum shortage

• Ofcom has actually carried out few spectrum auctions to date.• Digital Britain, Judicial Reviews, and increasing European harmonisation initiatives

have temporarily stalled the Spectrum Awards Programme.• And shaking out spectrum from the public sector is taking a while.

• Meanwhile in the secondary market: Few spectrum trades have been concluded to date. Spectrum brokers (as essential for a vibrant, liquid secondary market in spectrum

as estate agents are for property) have yet to set up shop. Band management (although arguably more advanced in the UK than in much of

the rest of the EU) remains essentially uncommercial and focused on satisfying demand from specific user groups.

• So spectrum demand remains focused on the primary market.• Where Ofcom continues to make markets in spectrum for fixed links, business radio

and PMSE.

• So Ofcom continues to have Significant Market Power in the supply of spectrum.

How few Ofcom spectrum auctions to date?

Date Spectrum MinimumLicence term

Geographic licence areas

Number oflicensees

Amount raised (£ m)

Anything deployed yet?

National Regional

May 2006 DECT guard band

10 √ 12 3.8 Some

Oct 2006 412 MHz 15 √ 1 1.5 Yes, lots

May 2007 1785-1805 MHz

15 √ 1 0.4 ?

Feb 2008 10-40 GHz 15 √ √ 10 1.4 A little

May 2008 L-Band 15 √ 1 8.3 No

Feb 2009 DDR (interleaved)

16 √ 2 0.0 No

The dilemma for Ofcom’s Spectrum Policy Group

• How can Ofcom satisfy its principal spectrum-related Statutory Duty to secure optimal use of spectrum when:

Large swathes of spectrum are left in the hands of those who make little or no use of it; and

Spectrum which could be sold into the market sits in Ofcom’s “cupboard” with limited market visibility of it; all the while

There is considerable unmet demand for spectrum in the market?

So how could Ofcom help more demand for spectrum to be met?

Objective Tools

Don’t discourage investment in spectrum

Publish current licence expiry dates.Put in place a predictable means of licence extension (Cap and collar? Choice of AIP or lump sum?) with an appeals mechanism on the price quoted.

Lower barriers to trading and leasing

Publish more information about tradable licences (TLCs, usage data).Reduce number of steps involved in a trade.Introduce legally secure leasing.

Address incorrect price signals in AIP

SRSP needs to look at:implausible alternative usesdefinition of substitute bands for price-settingwrong geographic pro rata AIPwrong spectrum class licences

Discourage hoarding “Use it or lose it” obligations (but for how long could spectrum be unused before it’s hoarding?)Threat of competition law (but how to define a spectrum market?)OR JUST GET MORE SPECTRUM INTO THE MARKET!

INC

RE

AS

ING

DIF

FIC

UL

TY

And then there’s the spectrum in public sector hands…

• “Demand for spectrum depends on a wide range of factors, including

price; the availability of spectrum on the secondary market; and release of additional spectrum.

• For almost all services and scenarios, the effective supply of spectrum will potentially grow faster than underlying demand, with implications for appropriate policies to be followed on spectrum pricing, trading and release.

• These findings significantly depend on the amounts of spectrum public sector bodies decide to release to the market.”

Converged Communications In Tomorrow’s World, Ofcom, June 2009

Why band managers are important

• Artificial spectrum scarcity constrains innovation and has a detrimental effect on competition with long-term access to suitable spectrum representing an unnecessarily high barrier to entry.

• Public sector spectrum owners will take time to recognise spectrum as an asset which has an ongoing cost, but is also a potential source of revenue.

• And many public sector spectrum owners fear they might have a future requirement for unused spectrum, which would preclude outright sale of much of this spectrum to commercial users.

• Band managers are the missing piece of the puzzle, they would:

Offer commercial spectrum licensees an additional revenue stream from locating secondary uses in their “white spaces”.

Enable the rationalisation of the public sector’s disparate spectrum holdings and the pooling of spectrum from different owners to maximise efficient use.

Tend to be more dynamic in responding to demand than Ofcom.

Predicting some future spectrum trends

• Increasing litigation in the primary market (with implications for Ofcom’s resources & the timing of auctions). 2.6 GHz will set a trend.

• Ofcom’s “after sales service” will become increasingly important (with implications for Ofcom’s resources): Applications to change Technical Licence Conditions (a key determinant of the value

of a spectrum licence in secondary market), including for permitting very different uses of the same spectrum with geographic separation (Ofcom sets TLCs on a UK-wide basis). Right of appeal cf planning applications?

Increasing number of trades (including splitting spectrum licences, temporally too). Band management – Ofcom’s latest proposals for access to spectrum for PMSE use

doesn’t imply “letting go” (quite the opposite!). Ofcom very cautious about lack of oversight.

Complaints about incoming interference likely to rise, but it’s far from clear what would trigger any auction from Ofcom – victims gathering evidence of illegal spectrum usage and incoming interference? Just how keen would Ofcom be to act?

Need to establish a process for negotiating extensions beyond minimum licence terms. Appeals against changes to AIP (not everyone wants to go to the High Court)?

• Ofcom will have to decide whether to remain the dominant supplier of spectrum for certain services (e.g. fixed links, business radio, PMSE), where a commercial spectrum owner may find itself competing against its regulator (like playing against a competing team, where that team has picked the referee).

Some perverse outcomes of Ofcom’s spectrum management

1. Ofcom significantly raised the AIP on a fixed-link band used extensively by BT, pushing them to fibre.

BT returned the spectrum to Ofcom, which is now unused. How does that contribute towards Ofcom’s Duty to secure

optimal use of spectrum?

2. A commercial spectrum owner is incentivised to use its spectrum inefficiently if it wants to reduce the risk of being found guilty of hoarding.

A key strategic decision for Ofcom (one of many!)

• What are the optimal terms on which commercial users should hold their spectrum?

• To secure optimal use of spectrum, should Ofcom balance the amount of spectrum in commercial hands on long-term licences with the amount held on shorter-term notice periods?

• Or should Ofcom aim to principally be a regulator, not market maker, with its spectrum cupboard as bare as possible?

Long-term licences (up-front payment)

Security of tenure encourages investment.Unwanted spectrum not likely to come back to Ofcom’s “cupboard” anytime soon (perhaps stagger term expiry dates cf property leases), aiding secondary market.

Short-term licences (on AIP) with annual break points

More flexibility for users, who could react to requirements better - so spectrum better utilised?