Innovation and spectrum regulation and property rights : IEEE DySpan paper 2005

Abstract-This paper looks at the regulatory changes that
are required to allow technologies such as DySPAN
quick and easy access to radio spectrum. Without such
changes it will not be possible for DySPAN technologies
to make the inroads into the market, that are required
to ensure spectrum is used with the optimum economic
efficiency. This access to market requires greater use of
a technology neutral spectrum property right. The
basic premise being that spectrum users (licence
holders) should be able to deploy any service they wish
(using any technology), as long as it causes no more
interference than allowed in their licence. If that is not
the case then the permission of neighbouring users must
be sought.
The paper tries to answer three main questions, why
move to a less centralised spectrum regime, how this
could be implemented using a regulatory spectrum
property right, and how to define such a regulatory
spectrum property right.
I. Introduction
The purpose of this paper is to look at the issues
surrounding the flexible use of radio spectrum in an
environment where DySPAN technologies can be deployed
and used more easily. This is done from a primarily
European perspective, but the author believes that the main
principles of liberalisation and a flexible spectrum property
right, is applicable elsewhere. What the author has tried to
present here is a rationale of what the benefits of a more
liberalised spectrum regime are, and how this can be done
via spectrum property rights, as well as how best to
implement such a system.
The premise is that without the ability of spectrum users to
decide what services and what technologies to use, with
minimum delay and transaction costs, we stifle innovation
(particularly technical innovation). Technical innovation
has been considered to be one of
the main engines for economic growth1
. Central to allowing
spectrum users this flexibility, is having a clearly defined,
technology neutral, spectrum property right. Without such a
system of property rights the transaction costs associated with
DySPAN will be significantly raised. This is because (under a
command and control regime) operators of DySPAN
technologies will need to convince risk averse spectrum
regulators to allow their use. In a flexible more market driven
spectrum management regime, DySPAN entrepreneurs will be
able to have direct commercial negotiations with spectrum
property right owners.
Central to spectrum liberalisation is the definition of a flexible
property right and how it is enforced. The definition of such a
property right is important in feeding into the transactions costs
and enforceability. Without these being adequately addressed,
would severely undermine the efficiency of any market. Any
spectrum property right must be defined, defensible, and
divisible2
.
If transaction costs are high this will act as a brake to some
deals that could have increased overall welfare. For example if
a current user of spectrum values it at $1000, and another
potential user can change its use and then values it at $2000,
one would expect a trade to occur (in an otherwise well
functioning market). The exact price would either be set by the
market (if there were say a spot price), but more likely by bi-
lateral negotiation. However if the regulatory effort required to
allow the potential new owner to change use was $2000, then
the deal would not go through. Even if the figure were lower
say $500, this would reduce the incentive for the parties to
trade.
Transaction costs are a key area where regulators can have an
impact in allowing spectrum to pass from low to high value
uses. That is allowing spectrum to be put to the uses that
consumers most value. It is by having such an efficient market
that spectrum will make the greatest contribution to economic
growth generally, and in helping to promote competition for
consumers of spectrum based services, such as telecoms and
broadcasting, in particular.
1
Work of Paul David at Stanford and others.
2
Even if this only means allowing other users to share the band, eg
sub-letting spare spectrum capacity.
Innovation, spectrum regulation, and DySPAN
technologies access to markets
Roberto Ercole
Director of Roberto Ercole Associates UK
Rercole99@gmail.com
Submitted 2005

The current system
The command and control system of spectrum regulation
works by regulators deciding what services should have access
to what spectrum, and under what conditions. The normal
scenario will be that some spectrum is vacated, or cleared by
the regulator and a new service is chosen to replace it.
Regulators in conjunction with industry will carry out sharing
and adjacent band interference studies. This will be based on
deciding what the appropriate carrier to interference ratio is
between the old and new service to allow the incumbent
service to operate without interference from the new
technology. This will involve lab testing at various frequency
separations, perhaps determining a mean opinion score of how
say the voice service is degraded by the new technology, or the
increase in the bit error ratio of introducing the new service.
Once such figures are agreed, statistical studies might be run
on a computer to decide what the likelihood of interference
was. The regulator would then assign a licence which specified
the emission mask of the technology that could be used in band
and out of band, as well as a maximum transmitter power3
.
There might also be agreements on the need to register certain
transmitters for site clearance with other services such as
military or security services, as well as perhaps to coordination
with other countries at or near geographic borders. Any
deviation from agreed parameters or technologies could well
require the whole process to be redone.
What is required is a more flexible spectrum right, that allows
as much negotiation as possible to be directly between
spectrum users. Such a spectrum right should clearly define
what users are allowed to do unilaterally, and what requires the
permission of their neighbours. However, it can be seen that
what has in effect been done by the regulator, is to define an
emission mask both in and out of band. Any change of
technology and use that did not go beyond this mask, should
cause no more interference than was previously there. If
flexible rights were used (based on the inherent emission mask
assumed in the standards previously used), then the complex
issue of commercially balancing the cost of extra interference,
to the extra revenue the change in interference might bring, is
settled by direct commercial negotiation. This more likely to
lead to an efficient economic outcome than leaving such
decisions to a regulator.
Interference mechanisms
Interference occurs when the signals from other spectrum users
are received by the victim receiver. This can occur if the
emission of the interferer falls within the receive band of the
victim. However it can also occur when the signals of two or
3
Including any transmit antenna gains – EIRP.
more interferers mix (either at the site of the transmitters4
or
within the victim receiver itself). It can also occur even when
the interferer is in a separate but nearby band (blocking). This
occurs because radio receivers are not perfect in their ability to
pick-up certain frequencies. They will receive signals from
outside their band, but at very reduced signal levels. If the
signal outside the band is very high powered, then this can
overcome the filtering of the receiver to remove signals from
outside the wanted band. It is to prevent this form of
interference (blocking) that the maximum power of transmitters
must be set, even if this power remains within the radio
channel assigned.
A regulatory spectrum property right would address te first two
interference mechanisms, in-band interference, and blocking.
The third mechanism of intermodulation is problematic, even
under the current command and control regimes. It is mainly
an issue on large communal radio sites where many radio
signals at relatively high powers are present. One could
suggest that the problem of signals mixing and producing an
intermod product that falls within the pass band of a receiver is
an issue for the communal site manager. It is they who lease
space at their site and they should ensure that their neighbours
to not cause such problems. For instance such site managers
should ensure that their metallic mast structures are kept free of
rust, and painted regularly, and they are properly earthed5
.
Such issues tend to be localised. It is possible to require
adherence to codes of practice for site engineering. However
this interference mechanism problem is one that occurs now,
and is usually resolved by bi-lateral negotiation.
Harmful interference
Preventing harmful interference is obviously a good thing, but
zero interference almost certainly means that spectrum is under
utilised6
. It is not always obvious what harmful interference
means – ie should the receivers be more immune, or the
transmitters less noisy? What is required is a clear definition of
what every radio user is allowed to do (a clear spectrum
property right). In theory with such a clearly defined right (and
low transaction costs7
) the individual spectrum owners should
be able to negotiate appropriate compensation levels8
, and
achieve an economically efficient outcome, with the regulator
acting as a back-stop if these negotiations fail. This is discussed
in more detail below.
4
The rusty bolt effect giving rise to intermodulation products)
5
rusty joints in metallic masts give rise to electrical non-linearities
that allow signals to mix, and give rise to other signals at different
frequencies.
6
See figure 5, “the wireless craze, the unlimited bandwidth myth,
the spectrum auction faux pas, and the punchline to Ronald
Coase's "big joke": an essay on airwave allocation policy” - Harvard
Journal of Law & Technology Volume 14, Number 2 Spring 2001 –
by T. Hazlett.
7
And a well functioning market.
8
According to the Coase theorem – see below.

A regime that is predicated on zero interference will almost
certainly mean that opportunities for wealth creation have been
lost. The trade off between interference and extra revenue is
something that is almost impossible for a regulator to
determine. It is only direct negotiations between spectrum
users that can reveal this value.
This paper will argue that the requirement is for a regulatory
spectrum property right that allows the various parties to reach
an accommodation between the trade off between extra
interference and extra revenues. This spectrum right should
not seek to define all the many parameters required to
determine if harmful interference has occurred. The property
right should seek to specify what a spectrum licence holder can
do in their right without their neighbours’ permission. It is then
clear when they must seek the permission of their neighbours.
II. Background
The current inflexible spectrum regime makes it difficult for
new (and especially disruptive) technologies to get access to
spectrum; limiting their potential to increase competition in the
telecoms or broadcasting markets, and hence benefit
consumers9
. It is the flexibility of use of spectrum that is likely
to allow DySPAN technologies the faster and easier access to
the radio spectrum they require. The potential DySPAN
entrepreneur will be able to approach spectrum property right
holders and make a commercial deal as to how and when they
can access the required spectrum. If the entrepreneur has a
successful technology and business model, then the service will
thrive and grow. If (as may often happen) it is not, then the
discipline of the market will show this, and the service will not
take up scarce spectrum resources, once it is clear it will not be
commercially successful. Under a centrally controlled
spectrum regime such deals between users will require
extensive investigations by the regulator. It might also be the
case that the owner of the spectrum right will have little or no
financial incentive to co-operate, and hence is more likely to
object. It might also be the case that others, who see the new
technology or service as a potential competitor, will also
object.
Much time and effort can be spent on such regulatory
negotiations10
, which can be complex and lack regulatory
certainty. This in itself can discourage investment and
innovation. It will certainly tend to discourage all but the
9
see “Assigning Property Rights to Radio Spectrum Users” by
Thomas W. Hazlett : The Journal of Law and Economics, Vol. XLI
(2)(PT.2) October 1998, for a history of this in the US.
10
Which might be considered rent-seeking activity – ie wasted
economic effort.
largest and most determined organisations. Thus small scale
entrepreneurs, the “man in his garage with an idea” will find it
most difficult to get his “left field” idea trialled.
However, issues such as the benefits of equipment
standardisation11
, and interference control need to be
considered, but that these are not insurmountable. It also needs
to be recognised that introducing flexibility into spectrum
licences is not costless for regulators, and that some very small
licences might not benefit from direct flexibility. For example a
taxi company using a self provided mobile radio service12
. The
transaction costs for perhaps many dozens of users agreeing to
use another technology in their spectrum for a very localised
service (perhaps a city centre), would be high13
. This problem
of high transaction costs for small licences can be overcome
with different implementation strategies. This is discussed in
more detail in below.
What is needed is a system that is quicker and easier than the
current centrally planned system, and allows for the spectrum
use to change, as well as the user. Transaction costs (and speed
of the transaction) are key to getting the efficiency gains
promised by more market based spectrum management
regimes. These efficiency gains translate directly into
consumers getting more of the of the services they most value,
and less of those they least value. If the form of spectrum
liberalisation that is introduced does not provide flexibility
(with low transaction costs), then innovation is reduced or lost.
Given that the value of the spectrum market in a modern
economy might be of the order of 2% of GDP (it was around
@£25 billion per annum in the UK in 2002)14
, this is an
important issue of itself. This is compounded by the fact that a
large part of a developed economy’s growth of GDP might be
down to technical innovation in the knowledge economy. It
seems a fair bet that spectrum technologies are a key source of
technical innovation. This could mean that economic growth is
significantly reduced now, and this is a reason of itself to allow
such innovation as quickly as possible. It is also likely that as
the pace of technology change increases, the amount of “drag”
(from the increased transaction costs imposed by a command
and control structure) is likely to increase. In such
circumstances economies and consumers suffer, as well as
international competitiveness15
.
11
Which is a major issue in Europe after the success of
technologies such as GSM – which had an EU wide mandate on
spectrum.
12
Private mobile radio (PMR) – using narrow radio channels shared
with other taxi companies.
13
One might think of this like a game of monopoly, where the
players need to agree to trade properties to make a set.
14
The Economic Impact Of Radio, 2002 Update: Source UK
Radiocommunications Agency.
15
Within the EU there may also be concerns about the impact on
the single market, if Member States introduce very different property
rights.

Innovation and "disruptive" technologies
In John Kay's book16
, he discusses the idea of "disciplined
pluralism" (Chapter 9). He states that markets come up with
innovations, many of which are ultimately unsuccessful. He
argues that, "There are always well-founded objections to any
new proposed course of action. That there is always a proposal
which might be better than the one currently being considered.
As a result, these apparently rational processes frequently fail
to make decisions at all and, when they do often make worse
decisions than those which emerge from a more intuitive, and
certainly speedier, processes."17
. Kay argues that the most
efficient solution is one where a number of ideas are tried in a
series of small-scale experiments. The discipline of the market
ensures that only those that are successful go onto prosper.
The others (which are the vast majority) fail, but that this
disciplined pluralism is best for efficiency and innovation.
The advantage of this disciplined pluralism is that it avoids
having a central planner who "picks winners". The complexity
of the real world makes efficient central planning almost
impossible. There is also the further draw-back in that
technologies that are perceived as "disruptive", would tend not
be developed by a central planner18
. Kay uses the example of a
central planner for the computer industry in the 1970's, telling
Xerox that "they should not develop the idea of the PC as this
would undermine IBM's core business"19
.
Technology innovation and spectrum
As discussed above markets work by many potential business
models and technologies being in a race to find the best
solution. Most fail, and those that win may do so through
chance more than anything else. It is extremely difficult for a
central planner to predict which technology is best. What is
required is an environment where market forces can play
themselves out. This requires the market to pick the
technology, and that losing technologies are not "propped-up"
by regulators20
. It is argued here that by centrally planning the
service and technologies used for spectrum, harms technical
innovation. This is because it is harder to try new technologies
in spectrum, because you need the regulator's permission. As
mentioned above getting this approval from a central regulator
is likely to be time consuming.
In a flexible spectrum market these innovators (ie DySPAN
technologies) have easier and quicker access to spectrum. This
16
"The Truth about Markets" - Penguin Books 2003
17
page 106 - "The Truth about Markets"
18
or perhaps delayed.
19
An example quoted by Kay on page 106.
20
The technology continues to be used even though there may be
better ones, this is because the regulator only allows the "losing
technology" to operate in that frequency band.
is because entrepreneurs and innovators can approach those
who have spectrum and ask to use a small part, to develop their
services. The risk is low, when compared to the current
method of lobbying the central planner for spectrum, and then
perhaps having to purchase a national or regional licence, and
perhaps commit to deploy very large radio networks. This acts
as a disincentive to small-scale experiments.
One can think of the example of SMS (mobile text messaging).
It was introduced in European GSM networks primarily to tell
users they had a voice message (or other network information).
Its introduction did not require regulatory approval. It was
decided that since it was already developed, it might as well be
made available to consumers, to send messages to each other.
The cost of doing this was minimal. Suddenly the demand for
the service (personal SMS) grew beyond all expectation, and it
is now probably the most profitable mobile data service. No
one would have predicted it. If personal SMS had required new
spectrum, or involved a change of use of the GSM technology,
it might have been delayed while due process was gone
through. This due process is unavoidable for any public body.
By contrast WAP21
was planned by the mobile industry and
implemented with great fanfare in Europe - but initially failed
in the commercial space. Vodafone UK decided to try again
(latter) with this technology using " Vodafone Live"22
, and it is
now appears to be making money. This shows the sort of
innovation a market can come up with.
Both these examples did not require any change to the
spectrum licences of the GSM operators, so the market could
trial them using disciplined pluralism. They show the two
strengths of the market in developing innovation. That is that
profitable services can appear where they are not expected
(SMS), and those that are not what consumers want (WAP) are
weeded out. It even shows the surprising result that
technologies that the market has written-off once, can be
revisited and made successful with more innovation (the use of
WAP for “Vodafone Live").
However, the current inflexibility of spectrum licences means
that not only do we not have pluralism, it is also ill-disciplined.
By this I mean that spectrum is set aside for a particular service
or technology, and this cannot be changed without the central
planner's approval. Even if the technology is a commercial
failure it may continue past its "sell-by date", as there is no
other use allowed for that spectrum.
In Europe there is an argument that it is necessary to have
frequencies harmonised to prevent interference, and also ensure
that economies of scale happen. The issue of interference is
addressed in below, but suffice to say that it is possible to
define spectrum rights in a way that are technology neutral, and
21
Internet services optimised for GSM. Similar to i-mode.
22
Although their initial advertising was coy about "Live" using WAP.

do not give rise to increased interference. If an operator
chooses to change their technology to one that causes no more
interference than the previous one, then there should not be an
issue. If the technology changed to causes more interference to
your neighbours, then operators need to negotiate amongst
themselves. That is they need to come to commercial
agreements about what compensation one party requires to
have their spectrum “suffer more interference”.
The issue of forcing the market into a particular standard is one
that is fraught with difficulties. It is unlikely that regulators will
be better placed than industry to know which one to pick, and
in most circumstances worst placed. This does not mean that
such standards cannot arise – they could with industry
agreement. However mandating standards for radio has also
become difficult with WTO rules.
The combined effects of flexibility and innovation for spectrum
It needs to be borne in mind that technical innovation does not
work in isolation from the telecomms market. There is a
feedback loop, whereby technical innovation that proves
successful encourages more development of such technologies.
The easier it is for innovation to be tried in the market, the
more people will try and innovate. This could be a very
important element not only in encouraging innovation, but also
in promoting more competition, such as to fixed operators from
radio based ones.
Without a flexible trading market for spectrum the force of
disciplined pluralism is severely weakened (at best delayed by
a regulator's due process). This means that the innovation that
arises from trial and error is reduced. This effect occurs today,
and will continue to occur for as long as the spectrum market is
not "liquid". The argument that no one will want to trade, and
this means we don't need trading, misses the point. Even if
there are no trades we will still get the possibility of
multiplicity of use of spectrum. That is that spare capacity
within spectrum licence is made available to third parties. This
is because spectrum licence holders will have the incentive to
make such capacity available for resale. The price mechanism
will ensure that this spare capacity goes to the users who value
it most. Hence the opportunity cost will be considered, and this
will lead to the greatest outcome for the consumer and
producer surplus. This will be the most economically efficient
outcome.
For example a mobile operator will not use all its spectrum in
all locations, so might lease or allow trials in certain locations
in its band. If they are successful, the innovator might
purchase more spectrum, based on the new information in the
market that the service is successful (commercially and
technically). Without this flexibility this cannot happen or
happen quickly.
The net effect of this is that not only does spectrum not flow
from low to high value uses (which is economically efficient),
but that innovations cannot reach the marketplace. These
innovations in the use of spectrum could be very important in
terms of introducing new competitive pressure for telecomms
services.
A flexible spectrum market would introduce the disciplined
pluralism discussed in the paper. This would have the potential
to foster greater innovation from technologies such as
DySPAN, and allow technologies and business plans to
develop by trial and error. That is without the need for prior
approval from a regulatory central planner, who may well be
risk averse. The potential for spectrum to give rise to
"discontinuous" change in current telecomms market is
substantial. The longer flexible spectrum use is delayed the
more opportunities may be missed for innovation and for
introducing more potential competition.
The upshot is that consumers may not be getting the services
they most value, or may be paying more for those services
because of an artificial spectrum licence scarcity23
. That is that
regulators decide on the number of operators who should be
providing particular types of services and what technology they
should use. This could ultimately harm the competitive position
of countries if they maintain this inflexibility and other
countries liberalise. It is only by moving away from a
command and control system, to one that allows greater scope
for market forces to play themselves out, that can overcome
this problem. Such a system of spectrum property rights as
opposed to traditional spectrum licences would allow new and
innovative technologies, like DySPAN, to enter the market
more efficiently.
III. Implementation Strategies -
Where best to start liberalisation
It needs to be borne in mind that even if a particular spectrum
licence is defined in a technology neutral way, and allows for
change of use, this does not mean that in practice change of use
would be viable in practical terms. This is because of the
constraint that users must stay within their defined property
right (or negotiate with their neighbours). What can be
deployed within such a right will be determined by what it was
initially designed for. For example, a paired band with low
power in one part of the duplex, and higher in the other, will be
most suited to a mobile service. Any service that requires
substantially higher transmit powers, that go beyond the
spectrum right will require the permission of neighbouring
spectrum owners. A technology neutral right will not change
23
Valletti argued that this artificial licence scarcity might have led to
the high prices (£22.5 billion) paid in the UK 3G auction in April
2000.

this fact. However it will allow spectrum owners to negotiate
directly, to either buy, or sub-lease rights to make such new
services possible. It the proposed new use is profitable enough
to allow such agreements to be purchased, they will occur (in a
well functioning market). Thus such a system of spectrum
property rights will allow the market to dynamically
reconfigure spectrum to its optimum use over a period of time.
Unlike under a command and control regime, this mechanism
will be able to resolve opportunity cost issues, based on the
valuations to services given by spectrum owners. This may
turn out to be wrong or change over time, but as discussed
above, the discipline of the market will correct for any errors
made by market players in such valuations, as well as any
changes in valuations over time24
.
As a general principle the larger and more exclusive the
amount of spectrum there is in a property right, the more
flexibly it can be used. In spectrum which is shared with other
users (co-channel, co- location), change of use is less likely to
be viable. However it is still possible to introduce flexibility to
such shared spectrum licences, via the use of overlay licences,
or by allowing such licences to be aggregated and converted to
a flexible right – if the aggregate licence were large enough to
make this worthwhile.
Thus spectrum licensing can be thought of as falling into four
main classes:
I. Exclusive national channels (such as for GSM or 3G);
II. Exclusive regional channels (which require co-
channel working at specific geographic boundaries).
III. Managed bands (such as PMR and fixed links) –
where a central planner assigns a rigid licence that
specifies use and technology to aid sharing with other
sorts of users; and
IV. Deregulated bands (low power device/ WiFi), which
are not planned and have no guaranteed interference
protection. Also known as spectrum commons.
As has been stated above, for flexibility to work requires that
apparatus licences be converted to technology neutral licences
and that the spectrum block be sufficiently large and exclusive
to support other uses. This would tend to imply that licence
types I and II would offer the greatest chance of benefiting
from flexible spectrum licensing. This could range from the
ability to upgrade kit to newer technology, to allowing mixed
use of bands25
.
24
Say as new information enters the market, or new technologies
become available.
25
Ie a GSM operator may use spectrum intensively only in city
centres and on busy roads. They might be able to allow others to
use spectrum for novel purposes in less populated areas.
Class III is likely to be very costly to convert to flexible
individual licence due to the large number of them. The sheer
number of such licences required to give enough spectrum to
allow any practical flexibility might mean that the transaction
costs involved would be prohibitive. It would be possible to
allow the aggregation of such licences to be converted26
(where
this was thought worthwhile). In this way commercial spectrum
management organisations (SMO’s) might emerge to manage
such bands. A possible way to convert such shared bands into
flexible rights might be the use of overlay rights, which is
discussed below.
Class IV is unlikely to benefit from property rights as there is
no security of tenure. The band is shared with other users.
The suggestion would then be to initially consider converting
apparatus based licences of classes I and II, to technology
neutral flexible licences based on the emission masks inherent
in the current licensed technology. This emission mask would
be used to define the type of emission spill-over, out of band,
that was allowed (as well as maximum in-band power). The
assumption within the band would be that any service could be
deployed that did not go above the permitted radiated power
(eirp) or PFD27
.
Exclusive National channels - Class I licences
For example a GSM operator might have its spectrum in urban
areas fully used, but be able to provide wireless local loop type
services in rural areas, or perhaps sub-lease spectrum to
another operator to do so. This might be accomplished by
using kit with the same emission characteristics as GSM, or by
using another technology far from any frequency band edge.
This would ensure that the use of the new application caused
no more interference than GSM would have. In a flexible
environment we should not be concerned what spectrum users
do within their exclusive band, as long as they remain within
their emission mask (which includes a maximum in band and
out-of-band power).
Exclusive regional channels – Class II licences
Examples of this would be for regional mobile or fixed
wireless access operators. In these circumstance there is the
added complexity that not only is there an adjacent spectrum
problem, but there is also adjacent geographic use of the same
spectrum. This requires that not only must a spectrum property
26
If trading within use were allowed.
27
This could be at a boundary for a regional licence or an absolute
figure for each transmitter for a national licence.

right be defined as above, but also that the in-band and out-of
band PFDs28
be measured or calculated.
It is possible to make measurements, but the difficulty is that
such measurements are complex and require large volumes of
data. Radio waves tend to fluctuate in power levels over any
given time, and even between locations only a few metres
apart. Thus a PFD could only be measured over a number of
points and times and averaged. An easier solution might be the
use of sophisticated computer models that use real terrain data,
and calculate what PFDs are based on internationally agreed
propagation models. Such models give a statistical average, so
some choice needs to be made about what percentage to pick.
In fact it could be argued that even for exclusive national
channels, a very similar process of calculation is done for
coordination with foreign countries, such as France and Eire.
These coordination agreements are known as Memoranda of
Understanding (MOUs) in Europe29
.
Overlay rights to convert managed bands to commercial
Spectrum Management Organisations (SMOs) - Class III
licences
It would be possible to auction the overlay rights for any
particular band that is shared by many different users. The
auction might be for a large band that is national or regional, so
that it can be a flexibly defined (property right). The winner of
any award process (auction) would have to guarantee to
support the incumbent users (sitting tenants) for a number of
years. These users would have to receive the same grade of
service they would have done under the NRA and pay the
equivalent fee they would have done.
Once the flexible overlay licence was awarded, the commercial
owner of the spectrum would be free to deploy any service
within their property right (emission mask), as long as it did
not reduce the agreed quality to the sitting tenants, or other
spectrum users outside the band. The commercial owner
would be free to buy-out sitting tenants, or pay them to move to
various parts of the band to help him/her re-plan the band.
The ability of a commercial SMO to offer financial rewards
based on market valuations could be a powerful tool in re-
planning such bands to allow other types of use in managed
bands. For example it might be that the owner of fixed link30
A
has a valuation of $100 per year on the radio service. A
28
Power flux density – a way of defining the power a radio
transmitter lays down at any particular location. Used in ITU.
29
For example see CEPT/ERC Recommendation T/R 20-08 E,
“Frequency Planning and Frequency coordination for the GSM
System”. Available from
http://www.ero.dk/documentation/docs/doccategory.asp?catid=2&ca
tname=ECC/ERC/ECTRA%20Recommendations
30
Microwave point to point link.
prospective user B wishes to use that spectrum in that location,
and has a valuation of $200. If B approached a commercial
SMO, the SMO might be able to broker a deal using some of
the difference between the valuations of A and B.
It might be that a large number of small users need to be
migrated over time to allow a completely new service that uses
the spectrum of many small users. The transaction costs of
doing this will be high normally. But a commercial SMO
would be able to make changes over a period of time, and offer
financial inducements. The SMO would also have the added
benefit of already having a commercial relationship with these
many small users.
A regulatory SMO would find it hard to offer such commercial
inducements, and perhaps be constrained by local Treasury
rules. A regulatory SMO would not have the same commercial
incentive to make profit. Without this incentive to maximise
profit it is likely that the spectrum will not be used for its
highest value use – which is another way of saying used for the
services consumers most value. That is the regulatory SMO
does not face the full force of the opportunity cost of its
decisions, and hence may lead to a loss of economic efficiency.
This is even more serious if one considers that changes in
technology and markets means that highest value use of
spectrum is constantly changing. It should also be remembered
that the pace of this change of spectrum use (required to
maintain economic efficiency) is likely to increase, as the rate
with which radio technology changes increases .
Of course such commercial SMO’s give rise to the opportunity
to award what is in effect a private monopoly to a commercial
organisation. Whilst competition law could be used to
overcome this, the ideal situation would be to ensure that there
is more than one SMO in an particular frequency band. How
large a given “frequency band” is depends on how easily
consumers of such spectrum services can substitute other
providers or services for a given SMO’s product (and the cost
of those substitutes). For example, a PMR spectrum user could
perhaps use GSM or TETRA networks. A fixed link user might
be able to use another SMO’s spectrum, but that might depend
on the tuning range of the fixed link kit they have (as well as
other substitutes like cable).
Such competition analysis for potential private SMO’s would
require careful analysis of the technologies and market
conditions for each area and potential service the SMO might
offer. However, the more liquid the market for spectrum, ie the
greater the percentage of spectrum that allowed flexibility, the
harder it would be to corner markets.

Deregulated Bands (spectrum commons) – Class IV licences
The users of deregulated bands31
do not normally need a
specific spectrum licence. They operate under a class spectrum
licence, which specifies the general constraints such users must
follow. Such constraints include things like, the maximum
power, if the spectrum can be used for commercial use, the
shape of the emission mask in band, and out of band.
Each user of such spectrum accesses that spectrum without any
exclusive right, much as a farmer might have done in the past
to graze cattle on common land. A spectrum service based
business model that relies on large economies of scale might
depend on such licensing regimes in particular bands. Such a
regime is obviously essential for equipment such as wireless
Lans (IEEE 802.11), and hot spot services that rely on such
technologies. It should also be remembered that the value
generated (consumer and producer surplus) can be very large
from such technologies/business models.
The growth of WLAN type services depends on large volumes
of PC cards that can be used in laptops or PDAs, which can be
used at home, in the office, or in public spaces. All these uses
generate savings, which bring down the costs, and hence attract
more users (leading to a virtuous circle). There could also be
significant network effects32
. However, if there is not sufficient
spectrum for all users, it could give rise to a “tragedy of the
commons” effect, whereby very few can use this spectrum
because of increased interference.
Decisions are currently made as to the potential benefits and
costs of specifying if bands are deregulated or not. The exact
split between deregulated, and the other types of managed
bands depends on judgements made by regulators. It has been
suggested that all spectrum should at some time in the future go
over to a commons type approach33
. If spectrum is not a scarce
resource, then there is no need to license it34
. This depends on
whether technology will ever solve the bandwidth shortage
problem.
However, there are significant doubts over the suitability of a
spectrum commons type approach for all, or even the majority
of spectrum bands. The use of deregulated spectrum is usually
best suited to low power systems, that have very limited range.
As has been noted, even if spectrum can be used without
31
Examples of such bands are 2.4 GHz for low power devices and
WLANs, and 5GHz bands for WLANs (Wi-Fi).
32
As more people use a network the more attractive it becomes to
join. One view is that the value of a network increases with the
square of the number of users. This can lead to “tipping effects”
which favour one technology over another once a network gets to a
certain size.
33
the Economist May 31st
2003 – “freeing the airwaves”, page 80
discusses the issue and concludes that the options should be kept
open.
34
And hence no need for property rights or trading.
causing interference, this may still require the spectrum owners
permission, as this is a fundamental requirement of a property
right (ie it should be definable, defensible, and divisible). It is
possible that such a regime will undermine investment in radio
equipment and technology, and Valletti and Hazlett have
suggested this is a possible outcome.
There is also the problem of the “hidden terminal”. This is
where the radio channel appears free to terminal A, because
another terminal (B) is transmitting on the other side of a large
obstacle to terminal C. The terminal receiving B’s transmission
(terminal C) is interfered with by A. There are possible
solutions such as terminal C transmits a beacon code message
when it is receiving. This involves extra cost and coordination,
and requires that terminal A is compatible with the technology
used by C to transmit the “busy tone”. Without the incentive of
the owners of the network including B and C, being able to
charge A’s owners, there is no incentive to co-ordinate. There
is also no incentive on the owners of the network to engineer
their system to increase spare capacity, to allow terminals such
as A the opportunity to use this spare capacity.
However if spectrum licensee’s can charge for terminals such
as A, which opportunistically use spare spectrum capacity, then
they have the incentive to invest more in their networks to
make them more spectrally efficient, allowing them to charge
for more opportunistic use. This sets up a virtuous circle, and
allows the investment to continue (in greater spectrum
efficiency) until the marginal cost of increasing the spectrum’s
spare capacity, equals the marginal revenue they can charge
owners of terminals that use their bandwidth opportunistically.
It is worth noting that the use of spectrum property rights does
not necessarily remove the possibility of such deregulated
bands being used in the future. It would be possible for say
equipment manufacturers to buy spectrum and designate
themselves for such use. The manufacturers perhaps making
money from making such kit, or royalties (from IPR) from
other manufactures of such equipment. However the most
likely method of determining such bands is by regulators
designating them.
Competition Issues - Anti-competitive Hoarding
As has been noted above for SMO’s there may be competition
issues that need to be addressed in moving to a more flexible
spectrum regime. In such scenarios deals or trades may occur
that are not covered by merger regimes. One often cited
problem is hoarding. On the one hand hoarding might be
economically efficient, as it reserves spectrum for a higher
value use that will arrive in the future. However if the aim of
hoarding is to corner a market then that could give rise to
competition concerns, and as such the hoarding would be

distinct from economically efficient hoarding and be anti-
competitive.
Anti-competitive hoarding then is what should be of concern to
regulators. Anti-competitive hoarding being where an operator
with significant market power35
(SMP) attempts to foreclose
potential or actual competition, buy buying up spectrum. The
spectrum is then either used by the operator in the market
where is has SMP, or put to a low value use to give the
appearance that the spectrum is being fully utilised.
An operator with SMP (or prospective SMP) may be
purchasing spectrum to deny it to others, that is to foreclose
actual or potential competition. Thus even if say a mobile
operator buys spectrum that is currently used for fixed links,
this can still be anti-competitive. This is because the purchase
means that it is harder for a potential competitor to enter the
market. This in theory means that the SMP operator would be
in a position to further raise its prices or drop its quality. Safe
in the knowledge that the market is now less contestable.
Deciding when spectrum purchases are anti-competitive is not
a trivial task. It depends on the substitutability of one piece of
spectrum for another. As discussed above this depends on
physical characteristics, as well as on the availability of
suitable radio kit. It also depends on if the potential purchaser
has SMP or is likely to have so after the purchase. There also
needs to be some “De Minimis” test, in European merger
regulation the test is significantly decreases actual or potential
competition.
General competition law or specific ex ante rules
An important issue for spectrum regulators will be in deciding
what competition safeguards are required for spectrum
regulation. In general, one might say that in sectors where
competition has been established, that ex post (ie general
competition rules) would be sufficient to protect competition.
In terms of spectrum, the situation would need to be judged on
how well might this market function. As a general rule one
would expect that the more liquid the market for spectrum was,
the harder it would be for any organisation to corner that
market and start charging monopoly rents. To a large extent
this spectrum market liquidity will be determined by how
flexibly spectrum is licensed and the transaction costs involved
(as well as how much spectrum is available for commercial
use). One scenario might be that in any initial phase of
spectrum liberalisation, ex ante rules would be in place as a
safeguard during any transition phase. After a suitable period,
such sector specific rules might be removed.
35
Or is hoping to acquire SMP via such a trade.
Any such ex ante regulation should be as light touch as
possible, perhaps with the requirement that trades over a
certain size be notified to the regulator, who has say 30 days to
object. A “no response” from the regulator being taken to
mean the deal is approved. This approval would be separate
from any merger control regime, although it might be assumed
that if the larger deal (ie the merger of companies) has been
approved by a merger investigation, then the spectrum element
of the deal can be taken as having been also approved.
The difficulty that is faced is that one is moving from a system
which has encouraged rent-seeking, that is where the welfare of
a particular spectrum user is increased not by being
economically productive, but by making someone else worse
off. Spectrum users are encouraged to spend money influencing
regulators, and arguing worst case interference scenarios to
make market entry more difficult for new entrants. If very
limited flexibility is introduced then this might mean that
spectrum users are encouraged to buy up spectrum, not to use,
but to deny to potential rivals. This might be exacerbated by
the fact that information asymmetries might exist, such that
those who currently have spectrum, and know how the
regulatory system operates, might be best placed to use the new
limited flexibility. This could be in contrast to potential new
entrants with less experience of acquiring and using spectrum.
IV. How to define a regulatory spectrum property right
A technology neutral regulatory spectrum property right
There are many possible dimensions to define radio spectrum.
It is not necessary to define them all in a regulatory licence.
For example, the time of day, or the CDMA spreading codes,
or polarization are all possible parameters. However if the aim
is to minimise transaction costs and have a property right that is
definable, defensible, and divisible, then it should be that the
regulator defines the “main” parameters , such as frequency
range, power roll-off ect.
It could then be left to individual spectrum property owners to
decide how to subdivide their spectrum by these other
parameters. It is this regulatory spectrum property right that is
required to allow the Coase Theorem to work efficiently. That
is allow the market to dynamically assign spectrum to various
uses based on the opportunity cost of using the scarce resource
of radio spectrum.

A regulatory spectrum property right could be defined as:
1. Frequency band of use (upper and lower bounds);
2. Maximum power (Power Spectral Density - PSD) in-band;
3. Emission mask (PSD) out-of-band falling to the EMC
limit at [class A at 3m;
4. Emission mask (PSD) of noise that can fall in the
licensee’s frequency band (ie from neighbouring users);
5. The lowest protection that can be claimed (EMC limit at
[class B at 3m36
]);
6. Length of the Licence;
7. The propagation model/tool to calculate field
strengths/PFDs at geographic boundaries (% time and
locations) ; and
8. To abide by national Treaty obligations (ITU etc) + any
national security and safety of life rules.
Such a right could be used to clearly define what a spectrum
user could do within their band, and under what conditions
their receivers are expected to operate37
. These factors are
implicit in current assignments, although it is not always
unambiguous, and there are certainly security of tenure issues
that are not always clear. The maximum PSD in band would
give an indication to the user’s neighbours of what sort of
blocking performance would be required of their receivers 38
.
Thus not only would the characteristics of the transmitters be
specified, but also the level of protection that receivers can
expect.
The advantage of using such a generic property right is that it
is then up to individual spectrum users to commercially
negotiate anything that is required, which goes beyond the
spectrum property right they have. Users can offer any service
that fits within their spectrum property right, and causes no
more interference than they currently do (subject to any other
licensing constraints39
that are necessary). One area of such
36
200 µV/m above 216 MHz – FFC Part 15, subpart J – radiated
emissions measured at 3m.
37
The current system of compatibility needs to make assumptions
about receiver performance and the impact of the adjacent user on
that service. This is how the initial allocation/assignment is
approved.
38
receivers are not perfect and pick up some signals from outside
their band. Receivers use filters to block this form of interference.
But such filters are not perfect and can only reduce the amount of
interference. If the adjacent signal is too strong (even thought it is
perfectly within its own band), it will degrade adjacent services.
39
Such as ITU designations, or EU harmonisation measures, or
requirements for defence or safety of life services.
constraints come from the desire to harmonise spectrum use, to
take advantages of economies of scale, and for strategic trade
issues40
. Professor Cave has questioned the use of such
spectrum restrictions, and it could be argued that market
players are best placed to voluntarily agree such standards;
except perhaps where there is an issue of anti-competitive
behaviour using standards to foreclose markets41
.
This is very similar to the definition of a spectrum property
right used in Guatemala42
, called a TUF43
, which specifies
frequency band, hours of operation, maximum power
transmitted, maximum power emitted at the boarder of adjacent
frequencies, geographic territory, and duration (licence length).
The definition of such a right seems to have lead to remarkable
few interference complaints needing to be arbitrated by the
courts44
, as well as a very large increase in telephone subscriber
penetration compared with its neighbours45
.
Interference and property rights
A distinction needs to be made as to the purpose of the
property right. It could be thought of as including all the
information to decide if the use of spectrum by user A, would
have any significant impact on user B. This kind of
interference impact analysis is very complex and requires
detailed knowledge of the victim receiver, ie how would the
carrier to interference ratio of receiver B be reduced by the
transmissions of system A. This impact on receiver B would
not be constant, that is to say that the level of interference from
A would vary, because a radio wave’s energy levels vary over
very short distances, and over time. So for example it might be
that the impact is a degradation of 3 dB46
for 10% of time and
locations. Also as is discussed below, such levels are not
normally measured but predicted using computer models, so an
agreement is needed on the propagation model used. Also if
real terrain data is used, like height and shape of buildings, as
well as what they are made of47
. It is also the case that for
mobile systems the victim and interference source may be in
motion relative to each other. This means that one also has to
consider the relative likelihood that say A and B will be within
40
The RA/Ofcom has undertaken a study to examine the costs and
benefits of mandatory of international harmonisation.
41
Which could be covered by Chapter I and II competition law, or
sectoral interconnect regimes.
42
See http://www.itu.int/osg/spu/ni/spectrum/ for ITU reports on
Guatemala and other countries’ experiences.
43
Titulos de Usurfrucato de Frecuencias.
44
Some 14 cases from 1996 to 2004. See “spectrum management
for a converging world: case study on Guatemala available at the
above ITU website.
45
See “spectrum management for a converging world: case study
on Guatemala, Figure 8 for telephone subscribers.
46
In the carrier to noise ratio.
47
The propagation loss through metallic glass and concrete building
used in business buildings will differ from brick and plasterboard
used in residential properties.

a certain distance of each other. This can be done using Monte
Carlo methodologies48
, which makes assumptions about how
the mobiles move, their likely transmit power, what the
received signal level is likely to be, as well as how much
interference is acceptable.
All these issues (and more) need to be agreed before one can
decide if “A interferes with B”. There is plenty of scope in the
old command and control regime for rent-seeking activity. It
would also remain to define what unacceptable interference
was, as things such as voice quality can be highly subjective. A
spectrum right that tried to define all these parameters would
be complex.
There however remains a fundamental question that needs to be
addressed in deciding if interference should be protected
against, or if spectrum property rights should be protected. If it
is protection against interference, then it could be that this will
act as a barrier to the efficient functioning of a market.
Consider a spectrum property owner who swaps an old
technology for a newer one that is more robust in the face of
interference. It might be that the spectrum owner intended to
use this extra robustness to accommodate a new user. However
once the investment is made, and before the new service comes
in, a neighbour deploys a new service in their adjacent band,
that relies on the extra robustness of their neighbour. It might
be that the spectrum user who deployed the more robust
technology wants to keep that “spare” spectrum capacity
fallow.
As has been discussed under anti-competitive hoarding, it can
be economically rational to hold spectrum fallow, in the hope
that a higher value service will come along. It might also be
that an operator is in the process of rolling out their service, so
it is not yet fully deployed. It may be that an operator has
purchased spectrum on the basis that they will deploy a
broadcasting service, and that in the gaps created due to
frequency re-use, deploy and on-site communication system.
The operator’s investment plan (and purchase of the spectrum)
was based on the deployment of both services. Perhaps the
spectrum was purchased by an SMO, who intends to make their
profit by leasing their spectrum to other operators. If spectrum
can be used on the basis on non-interference then these
business models are undermined, and this can lead to a lack of
investment. It will not be in the interest of spectrum users to
increase or free up spare capacity as they may not be able to
exploit this themselves, because their neighbours are free to use
this without their permission in a non interference regulation
regime. That is a regime where one is free to go outside your
property right if you can prove it does not interfere with your
48
For example see Report ITU-R SM.2028, Monte Carlo simulation
methodology for the use in sharing and compatibility studies
between different radio services or systems, (Question ITU-R
211/1)
neighbours. This can be thought of as a free rider problem,
where economically efficient investment is not made because
the investor cannot capture the value deriving from that
investment.
As has been noted above, a system of spectrum property rights
will not only encourage spectrum to go to those that value it
most, but also free up spare capacity. If spectrum users are
able to use this spare capacity without permission from the
owner of the spectrum property right, then the price mechanism
will not have operated. That is the user of the spectrum’s spare
capacity will not have faced the opportunity cost of their
decision to use the spectrum. Thus, it will not go to the user
that values it most, and hence the outcome is likely to be
economically inefficient. This leads to consumers getting less
of what they value most, or paying more for the services they
value most.
Even if account is taken of what might happen in the near
future, there is no guarantee about the future. The service
deployed by the neighbour may not cause interference now, but
it might do to some future time. Thus user B may be prevented
from changing his technology or deploying a new service in the
band, even though it fits in his spectrum property right. This is
because user A deployed a service in the past that went outside
his spectrum property right, but was able to claim that it did not
cause any interference.
The author would argue that the complex issue of if
interference is caused is best left to spectrum licence holders.
What is required is a system of well defined and enforceable
property rights which makes clear what can be done within a
spectrum licence and what needs the permission of your
neighbours. This is the argument made by Ronald Coase in his
submission to the FCC, which forms the basis of the Coase
Theorem. This states that economic efficiency will be
achieved as long as the property rights are fully allocated and
that completely free trade of all rights is possible. It shows that
it does not matter how the rights are originally allocated and to
who, as long as they are owned by someone. If the allocation
is not the most economically efficient, then future trades will
place the spectrum in its highest-value use (eventually).
The importance of the Coase Theorem is that it shows that the
externality caused by spectrum interference can be internalised
by spectrum property rights. That is the optimum trade off
between the extra interference caused, versus the value the
extra use gives rise to. Thus, a regulatory spectrum property
right does not need to include all the parameters required to
determine if interference has occurred. It must make clear who
can do what, and when a neighbour’s permission is required.
Of course a number of assumptions are required to make the
Coase Theorem a practical, and this is explored in Annex 1.

Converting from apparatus to flexible licences
It is suggested that we take individual apparatus based licences
for exclusive national and regional licences and convert them
to flexible property rights (subject to other policy concerns
such as windfall gains49
). This could be done using the
emission mask inherently assumed in a particular technology
licence (ie the current apparatus licences). The roll-off50
of
these emission masks can be used to define the band-edge
emissions51
. Operators within their band would be able to
transmit at a power based on their current allowed maximum52
.
If the emission mask of the current service is used then any
change of use that stays within that mask should cause no more
interference than under the current regime.
The use of adjacent spectrum masks (again inherent in the
technology licensed) could be used to specify what a receiver
could expect to suffer. This mask would roll-off to some
absolute level below which the NRA53
would not protect any
radio service to (perhaps based on EMC54
limits extrapolated to
suitable frequencies). User A’s emission spills-over into user
B’s band, and vice versa. User A’s receivers are expected to
operate above a certain noise floor, and with the spill-over from
B’s transmitters. This mirrors the current situation under
which compatibility studies (undertaken by the NRA) have
been undertaken to ensure the initial assignments/allocations
were viable.
Spectrum masks – how do you know you are within it?
Using the example of Australia, they have chosen to define
certain core spectrum conditions for their property right, which
relate to what is known as a spectrum emission mask55
. The
owner of such a spectrum property right is in theory able to
offer any service that fits in their right56
. In practice this ability
to offer any service is constrained by how the initial right was
49
the change from command and control to a liberalised spectrum
regime means that some spectrum licences have their value
enhanced. eg a piece of agricultural land that is allowed to build
residential properties on might soar in value.
50
How the transmitted power reduces outside the frequencies
specified in the licence.
51
It might be that the emission mask from the standard is worst
case (almost certainly), so the emission mask in the standard would
be the starting point. Also band edge filtering could further reduce
this band edge emission.
52
This would be to ensure neighbouring licensees knew what
blocking performance was required of their receivers.
53
National Regulatory Authority – responsible for spectrum
management
54
Electromagnetic Compatibility levels, which set the levels of
radiated emissions non-radio equipment can radiate. Such as from
washing machines and computers, etc.
55
maximum transmitter power (PSD) in-band and out of band,
effective antenna height.
56
The term “fit” can include negotiating the right to spill-over into
someone else’s spectrum.
framed. For example, a right for a mobile cellular service will
be hard to convert to a high power broadcast service, as such a
service would go beyond the core conditions. A technology
neutral spectrum licence will not alter this fact, however it will
allow change of use to occur more easily by allowing spectrum
users to directly negotiate with each other to make changes that
go beyond a spectrum licence.
In Australia all new devices are subject to a registration regime,
which requires that an interference assessment methodology
specified by the Australian regulatory body is carried out.
This involves using specified computer models (propagation
tools) to work out the interference power at the spectrum
licence boundary (eg in spectrum, or geographic area or both).
The methodology then works out what impact the interference
power has on the anticipated neighbouring service. When
spectrum users register such devices (ie because they want to
change use) the ACA (Australian Communications Authority)
can ask for an interference Impact Certificate (IIC). AN IIC
requires an accredited person go through the ACA interference
methodology. This methodology is referred to as the device
boundary construct. It has been argued that this methodology
is too proscriptive57
, but that the idea of an accredited person
verifying conformance with core conditions is a reasonable ex-
ante conformance measure (perhaps similar to EMC
conformance). However, it can be argued that58
the
methodology used by the accredited person should be up to
them to decide based on the circumstances, and not mandated
by the regulator59
.
The Australian system seems to attempt to decide if
interference has been caused. As has already been noted this is
a complex issue that requires many assumptions to be made.
This paper argues that a regulatory spectrum property right
should seek to define clearly when a neighbour’s permission is
required. This is what is required to allow the Coase Theorem
to work (subject to a well functioning market and a clear and
enforceable spectrum property right). It then becomes a
commercial discussion about how much compensation is
required. This will turn in part on the interference caused, but
also on sharing the profit the new spectrum use will create. As
has been noted, the fact that interference is not caused now
does not mean it will not be caused in the future. It might also
act as a disincentive for future investment in spectrum, if the
benefits of using less spectrum can be had by another user on
the basis that they do not interfere. However the potential
57
Australian Productivity Commission – “Radiocommunications
Report” – July 2002. Recommendation 9.1 says that the ACA
certification process should only require conformity to core
conditions, and that the ACA device boundary methodology may not
be the only way of showing compliance with the device boundary.
See http://www.pc.gov.au/inquiry/radiocomms .
58
and was by the Australian Productivity Commission.
59
This comes from the general principle that regulators should were
possible define outcomes required as opposed to methodologies
where ever possible.

benefit is that transaction costs might be minimised, as long as
no interference is caused the spectrum can be used by a
neighbour.
V. Other Issues
Licence tenure
Licence tenure is an important issue that needs to be addressed.
The options include rolling or annual licences, fixed term (ie 10
years say), and perpetual . From an economic efficiency point
of view a perpetual right (with the option of compulsory
purchase) would seem to offer the greatest efficiency. This is
because however long an initial licence assignment, there will
come a period towards the end of the licence where
investments may not be able to pay-back before licence expiry.
This in-effect would be a dead-time in the licence of under
investment. It might be that one could have rolling licence
periods of say five or ten years, where the expectation would
be renewal. This in practice would seem to be little different
from a perpetual licence period.
One might argue from an equity perspective that it is unfair that
a perpetual licence should be granted. A market is unlikely to
place much value on licence periods say more than 20 years
into the future60
, but a government with a longer term view
might. This would argue for a licence period long enough to
allow for pay-back on costly investments. One might suggest
periods of say 20 or more years, but this would depend on an
analysis of discount rates, and when they cease to have any
significant impact on spectrum valuations. This would need to
be balanced against the impact of lower investment towards the
end of the licensed period.
Windfall Gains
Some licences would have the value of their spectrum
enhanced by allowing flexible trading, which would be a
windfall gain. The concern would be that this gain occurs not
because of any productivity of the licence holder, but because
of the change in the licensing system. It could be argued that a
fair share of this should go to the State. For example, a licence
which allowed spectrum to be used to communicate with taxis
nationally, might be suitable to be converted to a commercial
mobile service such as GSM. Any liberalisation of the
licensing regime that removed this barrier to switching service
60
The value would be derived by discounting the cash from the
future by a certain amount to work out what £10 in twenty years
might be worth today. Given discount rates of a few % leads to this
value being rapidly reduced.
could lead to a large windfall gain for the holder of such a
licence61
.
This is an equity problem, and does not impact on economic
efficiency in moving to a more market based regime. However
the method chosen to overcome windfall gains may increase
transaction costs for trading. Any increase in transaction costs
can limit the efficiency of the market and the efficiency with
which the Coase Theorem would operate. For example, if a
100% windfall tax were chosen, then the point of trading would
be lost. Any attempt to tax the potential profit would act as a
transaction cost, and hence lead to deals becoming less
attractive, and hence less likely to happen. Indeed, one might
think of huge windfall gains as a sign that the system was
indeed working and that spectrum was flowing from low to
high value uses.
VI. Conclusions
The paper’s main conclusions are that :
Large exclusive spectrum blocks offer the most potential for
spectrum sharing and multiplicity of new services, using spare
capacity;
The ability to use spare capacity is best encouraged thorough
spectrum property rights that are definable, defensible, and
divisible. This will encourage the investment that is required to
increase, or make available, this spare capacity;
It is this encouragement to use spare spectrum capacity that
will give innovative technologies such as DySPAN the quick
and easy access to radio spectrum they require to be
commercially successful.
The criteria for allowing access to another user’s spectrum
space should not be on a “non-interference basis”. Such a
principle could lead to free rider problems, and hence a lack of
investment to make such spare capacity available. This is the
very essence of why private property rights are required for
scarce resources;
Determining if undue interference has been occurred is
extremely complex and possibly highly subjective as a
criterion. The test should equate to if users are within their
spectrum property right or not, or if they are in a deregulated
band (ie operating under a class licence);
A regime based on a regulatory spectrum property right is most
likely to lead to an efficient economic outcome. This outcome
is one where spectrum owners and proponents of technologies
61
This is similar to land, and its value being very dependent on the
type of planning permission allowed. Ie farm land is not as valuable
as residential land near urban centres.

such as DySPAN can reach commercial arrangements about
how the DySPAN technology has access to spectrum;
As spectrum is a scarce resource access to it must be limited
based on the opportunity cost. This opportunity cost is revealed
by the functioning of a market; and
For the market to function correctly a number of issues
regarding potential market failure need to be addressed. The
are namely, transaction costs, externalities of interference and
mandatory equipment standardisation, competition concerns,
and hold-out problems. The solutions to these issues will
depend on individual market circumstances. The externality
problem of interference should be addressed using enforceable,
technology neutral, spectrum property rights.
Acknowledgements
The views expressed in the paper are the author’s own views.
However they have been arrived at over a number of years,
after numerous discussions with both spectrum engineering
experts and economists. I would like to thank all those parties.
I would also like to thank the very helpful comments and
suggestions I had from two anonymous referees.
Bibliography
R. H. Coase, The Federal Communications Commission, 2 J.L.
& ECON. 1 (1959).
The independent UK spectrum review (Cave Review - UK):
http://www.spectrumreview.radio.gov.uk
Spectrum trading by T. M. Valletti: Telecommunications
Policy 25 (2001) 655–670
Oftel’s response to the independent spectrum review:
http://www.ofcom.org.uk/static/archive/oftel/publications/o
ftel_response/2001/spec0901.htm
FCC OPP working series Paper 38 : A proposal for a rapid
Transition to Market Allocation of Spectrum – by E Kwerel
and John Williams http://www.fcc.gov
Australian Productivity Commission Radiocommunications
Inquiry Report (No. 22, July 2002) -
http://www.pc.gov.au/inquiry/radiocomms
Responses to the Australian Productivity Commission
Radiocommunications Inquiry: Network Economics
Consulting Group Spectrum Engineering Australia.
A property System for Market Allocation of Electromagnetic
Spectrum : A legal-economic-engineering study – by Arthur
De Vany et al : Stanford Law Review, 21 (June 1969).
“Property and Freedom” by Professor Richard Pipes (2000),
Harvard University. New York: Vintage Books, 89.

As discussed above what is required in a regulatory spectrum
property right is not to define all possible parameters to
determine if interference has occurred, but to define a set of
parameters that allows an efficient market outcome in the use
of spectrum. This is the well known Coase Theorem. For a
market to generally work efficiently requires a number of
factors to be in place:
A homogeneous product – ie what is sold is very similar or the
same;
Perfect information – ie buyers and seller have enough
information to work out a fair price for any particular
transaction;
Many buyers and sellers –to help prevent any of them gaining
market power, and ensuring that they are price takers not price
setters;
Free entry and exit to markets – no sunk costs making markets
more contestable; and
Low transaction costs – if it is expensive or difficult to get your
products to market, then less will be traded than the welfare
optimising result requires.
Any externalities are addressed – such as enforcing polluter
pays principles. For spectrum the main ones are interference
and the benefits of mandatory standards setting.
When one considers the requirements for a perfect market62
to
deliver the maximum consumer and producer welfare, it can be
seen that spectrum’s properties can hold some major
divergence from this ideal. Considering each in turn:
Homogeneous product
Spectrum is not completely homogenous. Some frequency
bands are better than others for certain types of services. For
example, long range communications are best suited to lower
frequency bands such as in the 30 MHz range for HF
communications which can “bounce” off the atmosphere.
Mobile communications for wide area coverage (GSM type
service) is best suited to between 400 MHz and 900 MHz. The
properties of radio waves vary with frequency, the lower
frequencies tending to have longer range (less path loss), but
there are also special propagation mechanisms such as
refraction, absorption, and ducting which favour one frequency
over another. This is due to the physics of radio waves and the
atmosphere.
62
No market’s are perfect, so it is assumed that most of the benefits
of a competitive market can be achieved by close approximation to
these ideals.
Higher frequencies tend to require smaller aerials, making them
more suitable for handheld devices.
There are also economies of scale effects that can exhibit
themselves at some frequencies, even when the propagation
characteristics are almost identical. The main example is the
availability of radio equipment at certain frequencies. For
example, GSM is mainly available at 900 and 1800 MHz. In
theory an operator with spectrum at 600 MHz could operate
GSM more efficiently, as they would need fewer cells to cover
rural areas63
. The cost of obtaining kit would be much higher
at 600 MHz, than within the core standardised GSM band of
900 MHz. This is because manufacturers of kit have designed
their plants to make equipment in only certain frequency
ranges. For Nokia say, to make bespoke handsets and base
station equipment for another frequency band would probably
be prohibitively expensive. However new technology is
allowing multimode terminals to be produced more cheaply, so
that GSM terminals are available that operate at 900 and 1800
MHz.
Thus, spectrum is not perfectly homogenous, but does exhibit
some homogeneousness when frequencies are close together.
The further one moves in frequency from a particular range the
less of a substitute the other frequencies become.
Perfect information
If a buyer or seller of spectrum does not have sufficient
information to value it, then trading becomes a very uncertain
process. In such circumstances one might expect spectrum will
tend to be valued on the basis of this uncertainty, ie lower than
its real value. This might be due to uncertainty over
interference problems that may exist currently or in the future.
It may be due to regulatory uncertainty, ie can the current use
of the spectrum be changed.
A key help in ensuring that information asymmetry is
minimised is in the licensing process. The spectrum regulator
needs to ensure that it is easy to determine who has legal title
on the spectrum and what restrictions apply, as well as what
powers neighbours are allowed to use. This could be done in
the form of a central registry, as used in many countries for
land. A web-based database, that was searchable, would help
in such processes (perhaps charging a small fee for each
search). The database would also help show what the adjacent
uses were, which could impact on the value of any band. There
may be confidentiality issues, and security issues. It would be
more likely that fuller information could be provided for civil
uses, and perhaps sensitive details regarding government use
could be omitted.
63
As propagation characteristics means that a radio at 400 MHz will
have greater range than a 900 MHz radio (all other things being
equal).
Annex 1 : Potential inefficiencies from liberalisation

Such a database might include the frequency band, the owner,
the maximum transmitter power in the band, and the emission
mask allowed outside the band. It could also show any
relevant regulatory restrictions on the use of the band (such as
only for mobile or broadcasting ect). It might also show any
current or potential restrictions due to international negotiations
(at the ITU-R say).
In general, the greater the accessibility and detail provided
about spectrum use in a country, the easier it will be for
industry to make judgements as to which parts of the spectrum
they can add value to. For example, a potential national mobile
operator purchasing spectrum from a number of localised taxi
firm PMR operators. This encourages spectrum to pass from
low value, to higher value uses, and hence increases overall
welfare for the country.
Many buyers and sellers
This will vary from band to band depending on the usage. In
bands that have many small users in very localised geographic
areas, this might be true, but given the very specific geographic
location of some licences (a local taxi firm or fixed link
between two buildings) they are not likely to be very attractive
individually to many potential buyers. In circumstances where
there are not many buyers or sellers it may be possible for
regulators to ensure that there are at least more than one
operator or source of spectrum64
. This could be via some ex
ante competition law65
to prevent any particular user gaining
market power, that is some spectrum trades might need prior
approval.
Free entry and exit to markets
Entry and exit barriers can have a major impact on competition
in some markets. If a large investment is required to enter a
market, and that investment cannot be recovered66
on exiting
the market, then competition may not function correctly. This
is because once you enter the market you cannot withdraw,
therefore you are forced to regard that as a sunk cost. That is
they will continue trading even if there is not enough profit to
get the capital expenditure back. As long as there is sufficient
income from the service to pay for operational costs the service
will be offered. Any one who wishes to enter the market which
has an incumbent knows that they may get into a price war,
where both parties will have little option but to write off their
initial investments. This is highly unattractive. It may also be
64
In cases where small users require spectrum to be assigned by a
central commercial planner of spectrum.
65
General competition law is regarded as ex post, ie occurring after
the incident. Ex ante regulations are common in particular sectors
such as telecoms and other utilities, where there is a need to foster
competition. It might be that some sectors are natural monopolies.
66
At least a significant part cannot be recovered.
that the incumbent can fool other potential entrants into
thinking its cost base is lower, so that the new entrant cannot
win such a price war67
.
The higher the entry barriers are to a market (and telecoms is
characterised by very high ones), the greater the deterrent
effect for new entrants. Contestable market theory suggests
that even if there is only one supplier of a service, the price
charged might still be near the competitive price. This is
because the current incumbent supplier knows that as soon as
he charges above the competitive price, this will be a signal for
others to enter the market. If there are high entry or exit
barriers then the incumbent knows that potential competitors
may be wary of entering the market, and be afraid of the
incumbent’s “reputation”, if the incumbent has driven others
out of the same market before. The higher the entry or exit
barriers, the more pronounced these effects will be.
Low transaction costs
If transaction costs are high this will act as a brake to some
deals that could have increased overall welfare. For example,
if a current user of spectrum values it at $1000, and another
potential user can change its use and then values it at $2000,
one would expect a trade to occur (in an otherwise well
functioning market). However, if the regulatory effort required
to allow the potential new owner to change use was $2000,
then the deal would not go through. Even if the figure were
lower say $500, this would reduce the incentive for the parties
to trade.
Another transaction cost is likely to be the enforcement of
spectrum property rights, and the negotiations about
compensation (how much is required to use an adjacent users
spectrum). A back stop of arbitration is likely to help reduce
any problems that might arise from hold-out issues. The main
choices would appear to be via a court or some specialist
tribunal that focuses on such detailed issues. The choice may
well very with local circumstances, but one would generally
expect a specialist tribunal to be faster and cheaper than a full
court hearing. Another form of transaction cost is likely to be
policing via monitoring of the radio waves. It could be that this
is left to spectrum users, who could perhaps purchase the
service (or an insurance) from a third party. It might be that
the State continues this function, or contracts it out. A
combination of these three is also possible. Again, this would
depend on local circumstance.
Transaction costs is a key area where regulators can have an
impact in allowing spectrum users to allow spectrum to pass
from low to high value uses. That is allowing spectrum to be
put to the uses that consumers most value.
67
This is because the incumbent is likely to have much better
information on costs than a potential new entrant.

Addressing externalities
A market can only work efficiently if externalities are
addressed, that is when the actions of one person impact on
another, without the “victim” having any protection of their
rights. Examples might be pollution, where the impact on the
environment could be high, but the polluter is able to continue
making money. Another might be noisy neighbours. What is
required is a way to balance the interests of each party. This
can be done via the definition and enforcement of property
rights. As has been noted in the work of Hazlett (see above)
there is an optimum level of interference that is welfare
enhancing. A regulatory spectrum right allows the effected
parties to settle the dispute based on how much their rights are
worth to them (how much do you want to let me play loud
music at night?).
Another issue that is commonly raised is that of the benefits of
mandatory equipment standards for radio services. The issue of
the benefits of such mandatory standards have been important
in Europe, where it is felt that using a common standard is
essential for having “world-beating technologies” such as
GSM. A well functioning market should be able to come up
with agreed standards (that are not mandatory) if this is
beneficial in terms of economies of scale or reducing
interference (ie reducing transaction costs). It might be that
regulators wish to retain the right to mandate such standards
when they feel the market has failed. The difficulty with such
interventionist action is that it is a very strong encouragement
for rent-seeking (pick my standard so I can make money on the
IPR). Regulators will be no better placed to pick a winning
technology than industry (and usually worse placed). If one
looks at the history of such standards setting in Europe, one can
point to the success of GSM, and the failure of others such as
TETRA (in the commercial space), TFTS, ERMES. It is also
problematic to mandate standards because of WTO rules which
require that regulators to apply the principles of non-
discrimination, transparency, and that licensing should be no
more burdensome than necessary to achieve objective and
proportionate goals, and not constitute a barrier to market
entry68
. It has also proved difficult in the past to mandate
standards, for example the attempt to force 3G operators in
Europe to use UMTS as opposed to Qualcomm’s CDMA
system.
Whilst this is a complex area, and it is hard to be definitive, the
author believes that the trend is to make the benefits of
mandatory standardisation ever smaller. This is because much
can be achieved using multimode terminals (which technology
is making ever cheaper to produce).
68
http://www.wto.org/english/news_e/pres97_e/refpap-e.htm and
WTO new press release 22 Feb. 1996 – Background Note on the
WTO negotiations on Basic Telecommunications – see Regulatory
issues/Licensing of press release.
Hold-out problems and legal certainty
The efficient working of the Coase Theorem might be
impeded by hold-out problems, that is that new uses of
spectrum my be prevented from being deployed because of
some owners of spectrum refusing to sell. One might think of
this in terms of a game of monopoly, where one player is
willing to sell a property to another at the face value if it does
not give them a set69
. If the other player needs that property to
complete the set, the price inevitably becomes much higher.
This is the hold-out problem, and might mean that some
economically efficient deals are not done because the parties
cannot agree how to share the spoils. This problem can also be
thought of as a coordination difficulty, which increases the
transaction costs of some trades. Without these transaction
costs, these trades would have gone ahead, and lead to an
increase economic efficiency.
For example, the owner of the small piece of spectrum will
only sell to the “spectrum developer” for a much higher price
than it is worth to the owner, in an effort to get all the value of
the deal. This idea was looked at with regards to take-over
bids70
. The work indicates that there are a number of strategies
buyers of spectrum might employ when trying to buy a number
of smaller blocks to refarm to a higher value use. They could
seek to do the deal simultaneously71
. Spectrum buyers may
attempt to buy through agents to disguise their intentions.
However, hold-out does have the potential to cause market
failures, and a possible solution is compulsory purchase,
discussed below.
Compulsory Purchase
A well-defined spectrum property right might give rise to hold-
out problems that the market might not be able to address, and
hence would be a market failure. It may be necessary in these
circumstances to use some form of compulsory purchase
provision in some circumstances to get round hold-out
problems. One would normally expect the use by government
of any compulsory purchase powers would require that a fair
and transparent procedure be defined for when such powers can
be used. Without such clear rules users of spectrum may have
distorted investment patterns, in that they will not have the
regulatory certainty to make long term investments in
spectrum. This could reduce economic efficiency and total
welfare benefit. The expectation would be that compulsory
purchase would only be used in extremis, when there is some
clear evidence of market failure (ie due to hold-outs).
69
a set being required to build houses, and charge more rent for
players who land on the property.
70
“Take-Over Bids, the free rider problem and the Theory of the
Corporation” (Hart and Grossman), Bell Journal of Economics and
Management Science 11 (Spring 1980) 42-64.
71
As can sometimes happen in monopoly, although the process
may become complex with many parties.

Normally one would also expect some form of compensation to
be required when spectrum is compulsorily purchased. It can
be been argued compensation is not necessarily required, as
this risk could be factored into any initial evaluation. That is
when a private company buys spectrum it does so in the
knowledge it might have the spectrum taken back and could
seek to be off-set this risk by private insurance. However as
noted in72
this might make the regulator more prone to using
compulsory purchase. The idea of private insurance could be
more efficient than compensation from a regulator assumes that
such compulsory purchases would only take place in tightly
specified circumstances. Without tightly specified guidelines
the cost of such insurance may be very high due to this
regulatory uncertainty, and become a transaction cost that
lowers economic efficiency.
However it may be that the mere backstop of compulsory
purchase will help reduce such hold-out problems, none the
less it is a potential market failure that needs to be addressed.
National and International standardisation
As has been discussed above there is a strong view in Europe
that the mandatory harmonisation of spectrum bands, and the
equipment standards that can be deployed in them is beneficial
and necessary. This is based on the view of such things as
GSM would not have occurred, or been so successful, without
mandatory standardisation. This could lead to distortions in the
market affecting how homogenous the product of spectrum
was. Such effects might arise from national standardisation,
and also from ITU-R standardisation, or frequency
coordination. That is where a service is designated as the
primary service, or the primary service that was first deployed
(thereby enjoying a higher level of protection that subsequently
deployed primary services). The impact of such regulations
might be to make the functioning of such markets more
complex, and hence increase transaction costs.
72
Network Economics response to the Australian productivity
commission Nov. 2001. See
http://www.pc.gov.au/inquiry/radiocomms.

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Innovation and spectrum regulation and property rights : IEEE DySpan paper 2005