 | Around the World in 80 Ideas |
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DEREGULATION 10: Calling all investors Radio spectrum and broadcast deregulation The problem: big demand, little spectrum Demand for telecommunications is high, and spectrum is a valuable commodity. So how should it be allocated? The solution: sell spectrum It is possible to create a market for radio spectrum by issuing tradable rights to use it. Experience: successful selling Until 1987, New Zealand's radio spectrum was managed in much the same way as that of most other countries. A state monopoly dominated broadcasting, and a state panel controlled access to the spectrum. But as part of its general economic reforms, New Zealand removed these barriers to entry into telecommunications and broadcasting, opening these sectors to new commercial enterprises, including foreign-owned ones. Next, in 1989, a new Radiocommunications Act established a market-centred system for allocating the available spectrum, based on tradable property rights. It created two types of property rights: the rights to manage access to parts of the spectrum, and spectrum licences held by the individual broadcasters. Ownership of the spectrum was assumed by the Crown, which then granted management rights for periods up to 20 years. The 'band managers' who purchase these rights can then issue licences to end users for their use of particular frequencies. Spectrum licences have to be registered with the government, and a fee paid to the government before they can become effective; but they can generally be traded or mortgaged in any normal commercial manner by the end users, without reference to the band manager. By this two-level method, the government avoids having to become too involved in the complexities of allocating spectrum between end users: management bodies simply pay the Crown for the right to do that, and charge broadcasters for the frequencies they use. In the past, radio spectrum was allocated by public tender, but since 1995 an auction process has been preferred, with rights going to the highest qualified bidder. Intended sales are publicly announced and advertised, and the results are publicly posted. In another innovation, the auction ending in February 1998 was conducted on the internet rather than on paper - a world first. There were 36 bidders in this particular auction, 14 of them being successful in winning the 29 lots sold, raising NZ$3.6 million for the government. A great deal of effort went into the software needed to conduct these auctions, which employ complex game theory in order to maximize the potential receipts and keep the process fair. A Wellington-based company, Netlogic, developed the software during 1997 at a cost of NZ$30,000, but the total costs of the exercise were less than the costs incurred in previous, paper-based auctions. Bidding for another auction, for the third-generation (3G) communications spectrum, involved 400 bidding rounds over a six-month period, ending in January 2001. The process netted the New Zealand government just under NZ$51 million. The United Kingdom too employed sophisticated game theory in its auctions of 3G licences, its own government ending up with a £22.5 billion (1) windfall by the end of the process in April 2001. Thirteen bidders had driven up prices well beyond the original estimate of £5 billion. As a measure to generate competition and market entry, the first licence, with the greatest bandwidth, was reserved for a newcomer, and was won by TIW, a US-Canadian company backed by Hong Kong's Hutchison Whampoa. The other four licences went to the existing mobile phone operators, BT Cellnet, Orange, One2One and Vodafone Airtouch. The auction ended when the cable company NTL, backed by France Telecom, dropped out of the race. The auctions in the United States a little later generated comparable excitement, as carriers scrambled for spectrum. Licences included ones covering the whole country, and brought the government easy money for wavebands that were previously unused but which could be paired easily with carriers' existing offerings. But over-complexity, applied to an auction of much less importance, made the later UK wireless internet sale something of a failure. After the government's huge 3G success, some newspapers reported that the Treasury might raise another £1000 million from the process. This extravagant claim put off many carriers, who felt that a clever auction process had already tricked them into paying far too much for the 3G spectrum, leaving them short of cash for further investment; and the bidding process was too protracted for the value of the licences available. In the event, only 16 of the 42 available 28Ghz licences were sold, raising only £38 million. Assessment: pushing the right buttons The 3G auction in the United Kingdom worked because it came at the right time, at the height of the dotcom boom. The spectrum was seen as highly valuable, and the cost of developing the infrastructure, though huge, was seen as a minor problem because carriers were (then) awash with cash. The auction rules were very cleverly structured so as to squeeze the maximum amount of money from the potential bidders. The 28Ghz spectrum, by contrast, was seen as much less valuable. The stock market had fallen, dotcoms had plummeted, and the infrastructure cost was seen as significant. Smaller companies were discouraged by the complicated (and perhaps greedy) auction rules, including the requirement to pay at least 50% of the licence fee immediately up-front. Others argued that the rules meant they could not obtain all of the licences they needed to provide a joined-up service. And the largest carriers had already over-committed themselves in previous spectrum sales in Europe. In some auctions, carriers have argued that too little spectrum is auctioned at any one time, causing an inflationary scramble for the available rights. Many carriers argue that governments should go back to allocating spectrum on the basis of a 'beauty contest' and give the spectrum free to the winners. However, the introduction of a tradable property-rights system of frequency allocation makes rationing the spectrum far more efficient, orderly and swift than any such arbitrary and bureaucratic process. It also makes entry into radio communications more open, thereby introducing more competition. It also raises money for governments and induces them to release more unused parts of the spectrum - large sections, for example, which defence ministries sometimes occupy, unused, on the grounds that they might possibly be needed in some future crisis. Auctions are difficult to get right; but it seems unlikely that the world will go back to the old system in which governments dominated the communications sector and allocated spectrum arbitrarily. For further information:
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Copyright 2002: Adam Smith Institute
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