Subject: [NEXTEL-1] Massachusetts Institute of Technology-The Economic Case for Dedicated Unlicensed Spectrum Below 3GHz

From: [email-masked]
Date: Tue, 27 Apr 2004 19:38:40 -0400

Spectrum Series Working Paper #9 April 2004
COMMENT DRAFT*
The Economic Case for Dedicated Unlicensed Spectrum Below 3GHz
By William Lehr**

Massachusetts Institute of Technology
([email-masked])

Abstract1

There is general agreement that traditional mechanisms for managing
radio frequency (RF) spectrum are inefficient and in need of significant

reform. Many, if not most, of the economists who have considered the
issue appear to concur with the view that increased reliance on market
forces would enhance efficiency, and support assigning spectrum via
transferable, flexible licenses, especially when spectrum is perceived
to be
scarce.2 The FCC’s Spectrum Policy Task Force (SPTF) has endorsed this
perspective, advocating only limited use of dedicated unlicensed for
lower
frequency spectrum (below 3GHz).3 Unfortunately, the economic case for
additional dedicated unlicensed spectrum in lower frequency bands has
not been adequately stated. The goal of this paper is to redress this
deficiency and lend economic support to the case that has already been
made by an active minority of knowledgeable legal and technical experts
in support of the unlicensed model.4

This paper explains the economic arguments in favor of allocating
additional dedicated unlicensed spectrum in the lower frequency bands
below 3GHz.5

* This Working Paper is published here as a “Comment Draft” for the
April 16th 2004 “Pervasive
Connectivity” conference, hosted by the New America Foundation. The
author welcomes feedback ([email-masked]) in advance of a final
publication and distribution of this paper in May 2004.

** William Lehr is the Associate Director of the Research Program on
Internet & Telecoms Convergence
(ITC) at the Massachusetts Institute of Technology.
Lehr, W. “Economic Case for Dedicated Unlicensed”

- 2 -

Comment Draft – April 12, 2004

I. Introduction
The expansion in wireless services is one of the most important trends
that has transformed the Information, Communications and Technology
(ICT) sector during the last decade. Mobile telephone services changed
from being a premium service for the elite, used mostly from cars, to a
mass market communication service that can be used anywhere. Over the
same period, the growth of the Web, email, and the Internet brought data
communication services to the mass market for the first time. Now, with
the emergence of wireless broadband data services, the two worlds are
converging. This convergence will help drive another cycle of
investment, innovation, and economic growth.

Wireless enables mobile computing and ubiquitous connectivity, thereby
improving old services and creating opportunities for new ones. Progress
in sensor networks, information technology in biotech, multimedia
integration, and “GPS” location-based services all depend on wireless
technology. Wireless also offers one of the best hopes for increased
competition for wireline services. Direct broadcast satellite and new
digital terrestrial broadcasting compete with coaxial-cable TV, while
mobile telephony and wireless local loops (WLL) compete with fixed line
telephony. Continued growth and innovation in wireless services is
critical to the health of the ICT sector, and hence, to the overall
economy.

While “wireless services” encompass an incredible diversity of uses,
technologies, and markets, one commonality is that they all depend on
access to the radio frequency (RF) spectrum. The traditional model for
managing spectrum for commercial use has been based on a licensing
regime that grants licensees limited and restrictive-use rights to a
specific frequency band in a geographic area.

 Historically, the license regime imposed restrictions on the services
that could be offered, the technologies that should be used, and the
transferability of license rights.

 In light of advances in wireless technology and the evolution of
markets for wireless services, consensus is emerging that the
traditional model for managing spectrum is grossly inefficient.

 It has impeded innovation and investment in new technologies. The
regulatory restrictions have artificially constrained opportunities to
redeploy spectrum to higher value uses, to offer new services, and to
adopt technologies that would utilize spectrum more intensively. The net
effect has been to accentuate a perception of acute spectrum scarcity.
The question is not whether spectrum management is in need of reform,
but rather how it should be reformed.  Much of the focus has been on
increasing the economic role of market forces in regulating how spectrum
is allocated and used. There has been increased pressure to liberalize
licenses and facilitate the emergence of secondary-markets for
spectrum.9 While this represents an important direction for reform, it
is generally associated with continued reliance on a regime based on
exclusive-use licenses to specific frequency bands. While the licensing
model remains important, it is not the only model for managing spectrum.

This paper makes the economic case for allocating additional
lower-frequency spectrum for dedicated “unlicensed” use (below 3GHz).
The market success of services operating in current allocations of
dedicated unlicensed spectrum, the potential for unlicensed spectrum to
support new and innovative technology and business models, and the need
to “future-proof” regulatory policy make it desirable to allocate
additional spectrum for unlicensed uses.

The rest of this paper is organized into five sections. Section II
explains why there is renewed interest in the unlicensed model, and
Section III explains why spectrum below 3GHz is special. Section IV
clarifies what is essential about the “unlicensed” model and addresses
several potential misconceptions that may confuse how it differs from
the licensed approach. Section V focuses on the arguments in favor of
relying on a regime of exclusive licenses instead of unlicensed use for
lower-frequency spectrum, and explains why an additional allocation for
unlicensed use would be beneficial.

Section VI concludes.

II. Why the interest in unlicensed spectrum?

Traditional spectrum management based on exclusive licenses to narrow
frequency bands has been justified, in part, on the basis of
hundred-year-old radio receiver technology.10 Early receivers were
limited in their ability to tune and separate desired signals from
background noise, which might include signals from other transmitters.
The exclusive licenses granted the licensee the right to deny use of the
spectrum to other transmitters operating in that frequency band. This
was intended to protect the licensee’s service from interference, but it
also allowed the licensee to exclude shared use even in situations where
such use would not interfere. Over time, technology has evolved in ways
that make it possible to build much more efficient and
dynamically-responsive (intelligent) radio systems that can allow many
users and uses to simultaneously share the same frequency bands.
Technologies like smart antennas, spread spectrum modulation, and
cognitive (software) radios make it feasible for transceivers to
dynamically change their frequency, modulation, or power levels to
enable more efficient and intelligent spectrum sharing. The traditional
logic that exclusive frequency licenses are needed to manage
“interference,” has been significantly undermined by technical progress
and the evolution of wireless markets. For example, advances in signal
processing technology (e.g., multi-user detection theory) and
cooperative networking (e.g., ad hoc networks or grid computing) can
exploit the fact that there are multiple signal sources sharing the same
frequency bands to improve reception gain. The increased interest in the
unlicensed model has been prompted, in part, by the dramatic growth
associated with wireless Local Area Networks (WLAN). For example, the
rapid growth of WiFi – a WLAN technology – demonstrates the important
role that unlicensed can play in the evolution of wireless services.
WiFi services operate in the 2.4GHz unlicensed band that is shared with
cordless phones, microwave ovens, and a variety of other uses.

Considering the sad state of the ICT sector in recent years, it is
especially noteworthy that 22.7 million WiFi units worth $1.7 billion
were sold in 2003, reflecting three-digit growth for each of the
preceding two years.18 Although the reach of a WiFi base station is
limited to a few hundred feet, the proliferation of WiFi-based public
“hot spots” in government buildings, airports, hotels, coffee shops, and
other public areas make it increasingly possible to cyber-forage for a
wireless broadband connection.19 According to Gartner Dataquest, public
“hot spots” are projected to grow tenfold from almost 15k in 2002 to
over 152k by 2005.20 Pyramid Research predicts there will be 707 million
WiFi users generating $21 billion in service revenues worldwide by
2008.21 In addition, many end-users are using WiFi to extend the reach
of their fixed broadband service throughout their homes thereby
enhancing the usability of broadband Internet access and providing
opportunities for new types of consumer-grade networked appliances. In
many cases these home WLANs and sponsored hot sports are supporting open
access to the general public via “freenets.”22 In light of this
remarkable growth, it is worth remembering that as recently as five
years ago, most analysts expected wireless broadband data access to be
delivered by mobile telephone service providers over their “3G”
networks. Although 3G services are now available in some markets, it has
taken longer than expected, the coverage is more limited, and the
bandwidth slower than originally touted. Additionally, carriers have not
harmonized on a common “3G” standard and equipment prices remain high.
While mobile carriers will remain key participants in the broadband
wireless world, they are no longer the only player. Five years ago,
WLANs and 3G services were viewed as addressing very different market
needs. Now, it is clear that these services can be both complements and
substitutes.23 Equipment makers and service providers are now busily
trying to integrate 3G and WiFi services.

Other technologies like WiMAX (802.16) are extending the capabilities of
WLANlike technologies to cover metropolitan-sized areas, higher
bandwidths, and better congestion and security management capabilities
in order to make them more suitable for adoption by public communication
service providers. These updated version of “MMDS”-like technologies may
be used as a platform for delivering WLL access services. The use of
such technologies offers an alternative to and competing use for
spectrum that might otherwise be used by mobile telephony providers for
their 3G (and after that, 4G) services, or by over-the-air broadcasters
to deliver interactive multimedia content. At the same time,
technologies like ultrawideband (UWB) are challenging the very basis for
managing frequency in the form of exclusive licenses. UWB applies
spread-spectrum techniques to enable high bandwidth transmissions to
efficiently share a broad frequency band without destructive
interference. While current development efforts are focusing on the use
of UWB as a short-distance wireless-cable substitute (e.g., to provide
wireless connectivity for home entertainment systems),24 UWB could be
used also to support wide-area broadband communications.

The future wireless world will consist of a heterogeneous mix of
overlapping and
partially integrated wireless networks and technologies. Legacy
technology will
continuously mix with a continuous stream of new technology.25
Short-range networks
will mix with longer-range networks. There will be networks limited to
an individual’s personal space (WPANs), networks that reach tens to
hundreds of feet in a home or office (WLANs), and networks that extend
tens of miles (WMANs). Some will consist of one or only a few base
stations, while others will integrate many base stations providing
service over a wide-area. Some will provide mobile communication
services at automobile speeds, others at walking-speeds, and others only
to specific fixed locations (e.g., WLL).

There will be networks that support data rates for traffic that is low
speed (control,
sensors), intermediate speed (Web browsing, email, or telephony), and
high speed (highresolution
video or remote disk sharing). Sometimes these capabilities will be
provided
over an integrated network and other times over separate networks that
may or may not
communicate with each other. These may be owned by an end-user, a single
service
provider, or require traffic to be handed-off across infrastructure
owned by multiple endusers
and service providers.

The business cases for delivering these wireless capabilities to
end-users will vary by technology and application. For example, WPAN and
WLAN technologies to interconnect consumer appliances may be bundled and
sold as consumer equipment.  Wider-area services based on 3G or 802.16
technologies may be deployed via a service provider model. In the former
case, it may seem more natural to rely on an unlicensed model because
the devices may be expected to be used more often in a non-coordinated,
standalone fashion (e.g., within a single home). Whereas a licensed
model may seem more natural to support a service-provider model used to
provide wide-area communication services over a wireless network
involving many base stations covering a large geographic area. In the
case of a Bluetooth-enabled headset or MP3 player or a UWB-enabled home
entertainment hub, it is more likely that interference issues – if they
arise – can be locally managed (e.g., if a cordless phone is interfering
with use of the home WLAN, then walk a few feet away). In contrast,
service providers may be reluctant to invest the millions of dollars
that are required to build a wide-area carrier network without the
protection against future interference that an exclusive license
provides.  While the linkage between range of operation,
equipment/service provider models, and unlicensed/licensed spectrum is
valid to a point, it is also overly simplistic. As the competition
between WiFi and 3G demonstrates, technologies thought to address one
set of needs may be used in another context, creating additional
opportunities for technologies to compete with and complement each
other. The convergence of computing and communications, which is pushed
still further by the growth of wireless, makes it more difficult to
define where the network “edge” is and what functionality should be
included in equipment versus networks. At this stage, it is far from
clear which technologies will work best with which business and
regulatory models to serve which user needs. In all likelihood, there
will be a mix of models and this is healthy.

The need for a mix of regulatory models has been recognized by
policy-makers. For
example, the Spectrum Policy Task Force concludes that “no single
regulatory model can
or should be applied to all spectrum,”  however they also argue that in
the lower
frequencies (below 5GHz), that the FCC “should focus primarily, though
not exclusively,
on using the exclusive use model” (page 38).28 Before examining the
economic basis for

the bias in favor of a licensing regime, it is important to understand
why spectrum below 3GHz is special and therefore needs to have
additional spectrum allocated to unlicensed in order to properly respect
the Task Force’s worthwhile goal of promoting diversity in the
regulatory models employed.

III. Why lower frequency spectrum is special
While technology is making it more feasible for spectrum at different
frequencies to
support similar services (and hence act as substitutes), there are
important differences in
the usefulness of spectrum at different frequencies. The chief technical
advantage of
using lower-frequency spectrum is that lower-frequency signals propagate
more easily
through the air and are more tolerant if there is not direct
line-of-sight (LOS) between the
transmitter and receiver. Also, the electronics associated with
operating at lower
frequencies are less expensive. Finally, there is simply much more
spectrum available
in higher frequency bands.

Moreover, because of its attractiveness for offering particular services
(e.g., wide area
communication services), its limited abundance, and legacy technology
issues, the
lower-frequency spectrum is much more crowded with incumbents than is
higherfrequency
spectrum. Over time, the frontier of usable RF spectrum has moved to
ever higher frequencies as improvements in digital technology have made
it increasingly viable to digitize and process higher frequency signals.
These advances support viable communications using lower power signals
in noisier environments, with improved non-LOS performance, and over
longer distances (e.g., smart antenna design) than was previously
possible. While this has made it feasible to locate services in higher
frequency bands than before – and thereby relaxed constraints on the
supply of available spectrum –demand for lower-frequency spectrum has
also increased. The changes in technology have not changed the physics
of RF transmissions.

The technical “advantages” of lower-frequency spectrum depend on the
intended application. For example, the longer propagation performance
may be undesirable if the goal is to control interference by limiting
the effective transmission distance. Thus, if one’s goal is to
interconnect entertainment system components within the home with
high-bandwidth (data rate) channels that do not extend outside the home
(potentially causing interference with other uses of the spectrum),
using higher-frequency spectrum may be preferable: the benefits of
spectral abundance are not offset by reduced propagation distance.

Alternatively, if one wants to go longer distances at high data rates
then higher frequencies may also have advantages. For example, it is
easier to concentrate a high data rate signal into a focused narrow beam
at a higher frequency and this may also allow one to operate at a higher
power (e.g., microwave point-to-point services).
The benefits of lower-frequency spectrum are most apparent if one’s goal
is to
support two-way, narrowband, communications over a wider area (measured
in miles
instead of hundreds of feet) where non-LOS operation is important.
Classic applications here include mobile telephony service (e.g., 2G/3G)
and WLL (which includes MMDS and 802.16 technologies). On the one hand,
the longer propagation characteristic means that fewer cell sites may be
used if the service is supported at a lower frequency. These savings can
be substantial. For example, Wanichkorn and Sirbu (2002) estimated the
costs of deploying modern fixed wireless local loop systems based on
second-generation MMDS technologies. They found that a system operating
at 2.6GHz (current spectrum for MMDS) would require twice as many cell
sites as one operating at 700MHz (UHF), which would result in system
cost savings of 17%. On the other hand, non-LOS operation can enhance
usability (e.g., a mobile phone works when in pocket or inside
buildings) and lower installation costs. Additionally, with the kind of
antennas used in today’s handheld devices, the signal will go farther at
lower power at a lower frequency. This can help conserve battery power
which is important in its own right.  While the benefits of longer
distance propagation, non-LOS, and potentially greater power
conservation are readily apparent for certain classes of applications
(e.g., control networks, short message data services, and voice
communications), much of the interest in new wireless services is
focused on broadband applications. For such applications it may be
preferable to locate these in higher frequency channels, in any case.
While true, this is not an argument against additional dedicated
unlicensed spectrum. Even if wide area, narrowband communication
services do end up dominating most of the spectrum below 3GHz, this does
not mean that the principal mode for managing such spectrum should be
via exclusive licensing.

In any case, today a substantial chunk of prime lower-frequency spectrum
is currently occupied by incumbent licensees that offer “broadband”
services. Traditional over-the-air radio and television broadcasting in
the AM/FM and VHF/UHF bands use valuable lower-frequency real estate for
which alternative higher-frequency distribution media are already
available (e.g., coaxial cable television and direct broadcast
satellites deliver many more programming channels without using
lower-frequency spectrum). Partially relocating these services to higher
frequency channels or conversion to more efficient broadcast
transmission technologies would free up additional commercial spectrum
for other uses that currently lack viable alternatives, including
allocating additional spectrum for dedicated unlicensed use.

Finally, the debate over unlicensed versus licensed is not as important
at higher
frequencies precisely because spectrum is relatively more abundant. It
can be allocated to
both licensed and unlicensed commercial uses. Moreover, because
higher-frequency
signals travel more nearly in straight lines, an exclusive licensing
regime could be based
on point-to-point licenses. Because the signals travel in a “pencil
beam” (e.g., a wireless
fiber substitute), it is feasible to award a large number of
non-interfering, exclusive
licenses in a small geographic area. If there are an infinite number of
licenses available,
then the licensing regime is closer to an equipment certification
regime, like, for example,
the Part 15 rules which govern operation in unlicensed spectrum today.

This paper focuses on the need for spectrum reform to allocate
additional dedicated
spectrum below 3GHz precisely because this spectrum is highly desirable
and its allocation is contentious. While the “scarcity” of spectrum is
debatable, it is clear that regulatory policy can make spectrum scarce
when it might otherwise not be.

IV. What’s the real difference between licensed and unlicensed spectrum?

The preceding discussion has explained why advances in wireless
technology and markets have increased pressure to reform spectrum
management, and have increased interest in the unlicensed model. It also
explained why spectrum below 3GHz is special.  Before explaining the
economic arguments in favor of allocating additional spectrum to
unlicensed, it is worthwhile dispelling some potential misconceptions
regarding the differences between the licensed and unlicensed management
regimes.

A. Dedicated unlicensed is consistent with liberalized, flexible
licensing

More spectrum for unlicensed does not mean less spectrum or less
flexibility for licensed uses. The case made here is fully consistent
with increased liberalization of spectrum policy and with the arguments
by economists that efficiency would be enhanced if non-market-based
restrictions on how licensed spectrum is used were relaxed. Policies
which facilitate the secondary trading of licenses will help direct
spectrum to its highest value uses and will relax artificial
(regulatory-induced) spectrum scarcity.  Barriers to entry for new
competitors, technologies, and services would be reduced. And, the
opportunity cost for accessing spectrum would be reduced. In making the
case for additional dedicated unlicensed spectrum, this paper presumes
that the licensing regime will be reformed to eliminate inefficient
regulatory constraints and to increase the role of market forces in
determining how spectrum is allocated and used. However, the case for
allocating additional spectrum for dedicated unlicensed is even stronger
if progress towards liberalizing rules for the use of exclusive licensed
spectrum is limited.  Allocating additional spectrum for dedicated
unlicensed use need not mean less spectrum for licensed uses. There is
frequency available to promote both regulatory models in the highly
desirable lower frequency bands. Allocating an additional 100 to 300 MHz
for dedicated unlicensed use below 3GHz would dramatically expand the
available spectrum for unlicensed use, while leaving exclusive licenses
the dominant model for managing commercial spectrum. Finally, it is
worth noting that adopting a regime of dedicated unlicensed spectrum
does not imply more regulation than does management under a liberalized
license scheme. First, if the spectrum is not congested, then even the
minimal regulatory oversight of issuing licenses can be avoided under an
unlicensed regime. Complete deregulation would be the extreme version of
an unlicensed regime.
Second, if congestion does occur, some sort of regulatory mechanism to
reconcile and
enforce conflicting claims will be needed regardless of whether the
management regime
is unlicensed or licensed. Congestion management in unlicensed spectrum
could be via
an access etiquette or protocol, through market pricing, or through some
sort of
administrative oversight. The administrative oversight could be via the
courts (e.g.,
potentially, a specially-constituted “spectrum court”44) or via a
regulatory agency such as the FCC, as is currently the case. These same
options are available under a regime of exclusive licenses, and do not
require adoption of exclusive licensing for implementation.  Although it
may seem more natural to manage unlicensed spectrum through an access
etiquette, there is no reason why the government could not either manage
a real-time market, or outsource such management to a band manager for a
fee. The band manager does not have to have an exclusive license to be
induced to manage the spectrum efficiently. The creation of such a
market does not necessitate exclusive licensing, as I explain further
below. Alternatively, if a protocol approach is used, this does not mean
that the FCC has to choose the protocol. Its selection could be left to
a private standards development organization (e.g., IEEE). Finally,
while it is beyond the scope of this paper to make a specific
recommendation regarding how dedicated unlicensed should be managed,
there are a number of proposals that might be considered, ranging from a
modified version of the Part 15 rule framework that is currently used to
regulate use in the ISM unlicensed band to some new set of “rules of the
road” or a technical standard.46 Much of the support for exclusive
licensing appears motivated by a desire to move regulatory control away
from the FCC and towards deregulated markets or the courts.  Prospects
for realizing the goal of further deregulation would likely be enhanced
if additional spectrum were to be allocated to dedicated unlicensed
because this would help alleviate scarcity (reducing the opportunity
cost for spectrum) and would potentially decouple and thereby defuse
some of the opposition to reform.  Allocating additional spectrum for
dedicated unlicensed may ease the transition to spectrum reform in
several ways. For example, some of the opposition to flexible licenses
is from those who support allocating additional spectrum for unlicensed
uses. Such opposition would be ameliorated by the allocation of
additional unlicensed spectrum.  Other opposition to liberalized
licenses is from those who oppose granting a windfall to incumbent
licensees. Providing spectrum for dedicated unlicensed use would offset
such a windfall by providing a substitute for the licensed spectrum
(which will lower windfall profits to the extent that spectrum scarcity
is reduced and provides a platform for competitive entry). Additionally,
the perceived “windfall” might be reduced if incumbent assistance in
making additional spectrum available for unlicensed were to be made part
of the “bargain” with incumbents by which they might gain additional
license rights. On the other side, much of the opposition to unlicensed
comes from incumbents who fear secondary easements threaten their
license rights. Dedicated unlicensed in another frequency band is less
threatening than “in-band” unlicensed use via easements.  In summary,
therefore, support for dedicated unlicensed does not mean more
government control, more regulation, or less flexible licensing.

B. Unlicensed does not mean free access

The debate over unlicensed is sometimes confused with questions of what
price to charge for spectrum. Implicit in the idea that spectrum ought
to have a positive price is the notion that there are costs associated
with allocating, managing, and using spectrum.  Because the RF spectrum
is not “destroyed” when it is used, there are no costs associated with
replenishing the resource. However, a positive opportunity or use cost
may arise when spectrum is scarce. The opportunity cost arises because
spectrum that is used for one purpose may preclude use by another. The
scarcity may be real – in the sense that two interfering uses may not be
able to co-exist or share the spectrum at the same time – or artificial
– as when there exists a regulatory restriction (which includes an
exclusive license) that precludes another use even if such use could
share the spectrum without interfering. When multiple uses seek to share
the same spectrum and there is “interference” then we say that the
spectrum is “congested.” Under such circumstances, the user of the
spectrum imposes a “congestion” externality on other actual or potential
users of the spectrum. This is a real cost of using spectrum that must
be borne by society.  Furthermore, whether the spectrum is priced or
not, these economic costs are incurred.  For example, they may be
incurred in the form of reduced quality of service (i.e., increased
delays, higher bit error rates, or denial of service).  Spectrum costs
may also arise associated with the need to address legacy issues (e.g.
to clear spectrum from incumbents) or to cover spectrum management costs
(e.g., the costs of issuing and managing licenses or supporting a
secondary spectrum market).  As long as there are costs associated with
allocating, managing, or using spectrum, unlicensed spectrum is no more
“free” than is licensed spectrum. A key distinction over licensed versus
unlicensed spectrum is not whether spectrum is “free,” but rather how
spectrum use is priced and charged for. An example of the classic
licensed model is traditional mobile telephone service in which
end-users make monthly payments to a service provider that increase with
usage. In contrast, the classic unlicensed model is of an end-user who
purchases a WiFi-enabled device and then can communicate as much as she
likes without paying any additional (future) fees for use of the
service. In the WiFi case, the unlicensed spectrum was made available by
the government for no “charge.” Prior to the advent of spectrum
auctions, the government did not seek to collect money for use of the
spectrum. While these examples are clear, they are misleading because
neither is necessarily bound to a particular pricing or business model.
For example, a communication service contract could be offered over
unlicensed spectrum (e.g. public “hot spot” vendors); or equipment
vendors could capitalize spectrum charges in the initial purchase price
(e.g., the cost of acquiring spectrum for dedicated unlicensed use could
be recovered via fees on equipment sales). Alternatively, equipment
vendors can use leases and expected future purchases to amortize up
front costs; or a service provider can shift future recurring charges to
initial one-time charges.

The real distinction is not whether the licensee is a service provider
or equipment vendor, or whether costs are recovered via one-time charges
or via recurring charges, but whether there is a private entity
(business) that has a right to extract revenue from end-users as a
condition for using the spectrum. The key distinguishing feature of
unlicensed spectrum is that there is no grant of such a right. In an
exclusive license regime, it is possible for the licensee to exclude
other users for reasons beyond those related to interference management.
These could include the desire to artificially restrict spectrum supply
in order to extract scarcity rents or to protect or extend market
power.  For example, AM and VHF broadcasters opposed the allocation of
spectrum for FM and UHF broadcasts because these promised to increase
competition. In contrast, in an unlicensed regime, the only restrictions
against shared use arise as a consequence of the need to limit
interference. Because the decision to adopt an “unlicensed” regime
cannot eliminate real costs when they arise, it cannot make spectrum
“free.” However, by eliminating charges that might arise associated with
artificial scarcity (arising from use of the exclusive use right), it
should reduce the costs of using spectrum. This also means that if there
are any fees for spectrum usage that these will not require prior
negotiation of a contract with a service provider. Furthermore, it is
expected that these will be small and will be associated solely with the
need to account for only real costs associated with spectrum usage
(i.e., congestion costs or costs associated with setting up and managing
use of the unlicensed spectrum). Therefore, there is an implicit
assumption that access to spectrum under an unlicensed regime will be
nearly free to individual end-users.

C. Dedicated unlicensed is consistent with spectrum auctions.

Whether spectrum should be auctioned, and if so, how auction proceeds
should be distributed is another issue that can confuse the debate over
unlicensed spectrum. It is tacitly assumed that for auctions to be
effective in eliciting bidders true valuations, the spectrum should be
offered under exclusive use licenses. To really fit the theoretical
ideal, these licenses should be perpetual.56 Therefore, this would
suggest that allocating additional spectrum to dedicated unlicensed is
inconsistent with auctions. This is incorrect.

Over the last decade, spectrum auctions have provided a large source of
funds for
general government revenues. Proponents argue that these auctions
efficiently allocate
spectrum to its most efficient uses and provide a mechanism for the
general public to
benefit from any scarcity rents associated with spectrum. Opponents
argue that the
auctions have imposed a crippling debt burden on would-be providers and
have siphoned
off much-needed critical investment capital from the telecommunications
sector, thereby
slowing the roll-out of advanced services.

While economists generally agree regarding the efficacy of auctions in
assigning
spectrum to its highest value uses, this could also be accomplished via
secondary trading
in exclusive licenses that may initially have been allocated by lottery.
Moreover, if
secondary trading is not allowed, then auctions may fail to ensure that
spectrum is assigned optimally over time. That is, even if the ex ante
assignment (based on the best knowledge available to bidders at the time
of the auction) is efficient, ex post changes in technology or markets
may make a different assignment more desirable. Therefore, auctions are
neither necessary nor sufficient to ensure that spectrum is efficiently
allocated.

Auctions are also attractive because they provide a vehicle for
capturing and reallocating any scarcity rents associated with spectrum
use. For example, the promise of auction proceeds may induce government
agencies and legislators to support reallocating additional spectrum for
commercial use. If properly designed, an auction could also be used to
reallocate/relocate incumbents efficiently and thereby ease the
transition associated with spectrum reform.

Providing a practical mechanism for resolving transition issues is a key
motivation underlying the two-sided “Big Bang” auction proposal of
Kwerel and Williams (2002).  Indeed, as Ikeda and Ye (2003) have
suggested, auctions could be used to purchase additional spectrum for
unlicensed use. Such a plan could be incorporated into a “Big Bang”
auction. Thus, auctions can be used to increase the supply of commercial
spectrum and to re-direct existing spectrum to more efficient uses. When
used in this way, support for auctions and for allocating additional
spectrum to unlicensed are fully consistent.  The use of auctions to
extract scarcity rents is much more problematic – but this is a problem
both for licensed and unlicensed uses in that it artificially inflates
the “cost” of acquiring spectrum. If the goal of the auction is to
capture scarcity rents, policy-makers may seek to maximize auction
proceeds which may induce them to restrict the supply of spectrum or
limit competition in wireless services. Capturing scarcity rents for the
public coffers is sometimes rationalized as being consistent with the
public interest because it provides a way for the general public to
share in the benefits associated with spectrum use, not just the
investors and customers of wireless firms. While the political
attractiveness of such a policy is readily understandable, the
implications are pernicious for telecommunications policy, especially at
a time when policy-makers are seeking to promote investment in next
generation communications infrastructure. Auction proceeds that are
removed from the sector represent a tax on wireless services and reduce
the funds available for investment.61 In summary, if auctions are used
properly – solely as a mechanism to assign spectrum efficiently and to
facilitate the relocation of incumbents – they are consistent with
providing low-cost access to additional dedicated unlicensed spectrum.
Of course, it is not necessary to use auctions to provide additional
dedicated spectrum for unlicensed use, and as noted earlier, auctions
are neither necessary nor sufficient to ensure that spectrum is
efficiently assigned.

D. Dedicated unlicensed is different from underlay or overlay rights
Providing easements for unlicensed use of exclusive licensed spectrum is
another
policy option that is being widely discussed. Certainly, if such
easements are granted it
will provide a valuable opportunity for unlicensed users to access
additional spectrum.  There are two principle ways in which unlicensed
easements may be granted: (1) as underlay rights; or (2) as overlay
rights.

An underlay easement would allow secondary unlicensed users to share
licensed spectrum as long as they remain below the noise floor
established by the license. For some technologies, like UWB that operate
by spreading their signal over a wide range of frequencies and thereby
are able to transmit high data rate signals at very low power in any
particular frequency channel, an underlay easement is especially
attractive.  Alternatively, overlay easements (sometimes called
“interleave” rights) allow secondary unlicensed use of spectrum during
periods or in locales where the licensee is not using the spectrum.
Location-aware (GPS) and cognitive radio technologies could be used to
enable smart devices to modify their transmissions in order to
dynamically share the spectrum with the licensed users. For example, by
adopting a “listen before talking” protocol, an unlicensed user could
detect if the spectrum is in use, and only transmit if it finds that the
frequency is free. Both of these easements may be justified as desirable
refinements of the exclusive use right that is implicit in a traditional
license. With these easements, the exclusive use right is narrowed so as
to more closely address only those situations where the licensee’s use
of the spectrum is threatened by interference. In effect, these
easements reduce the likelihood that the granting of an exclusive use
license will result in artificial spectrum scarcity either by its mere
existence or by the way that it is enforced by the licensee.  While
adoption of such easements would prove useful in supporting a wide-range
of unlicensed operation, these are not an adequate substitute for
dedicated unlicensed spectrum. First, implementation of unlicensed
easements is quite contentious and has been widely opposed by
incumbents. While there are many technical approaches to how these might
be implemented, there is no general agreement as to the best technical
solution.

With respect to underlay rights, the FCC is investigating defining a
“frequency temperature” profile that would allow better account of how
the need to protect interference may differ as one moves throughout the
license territory.63 The interference temperature concept is
interesting, but there are a number of important technical and
regulatory questions that need to be addressed. For example, how will
the interference temperature be modified over time as technologies or
services change? Will different temperature profiles be specified for
each frequency license and will these differ by the services being
offered? If so, that may amount to on-going frequency-specific
regulation of the choice of technology and services and therefore mimic
much of what has proven unsatisfactory with traditional spectrum
management. Even assuming that this proves to be a viable mechanism for
implementing underlay rights, that does not mean that incumbents will
support its adoption.

With respect to overlay rights, there are even more problems and more
diversity of opinion as to how to implement such rights and whether they
are desirable. At one end of the extreme are technologies that rely on
real-time dynamic frequency allocation. At the other end, there are
modifications that would allow secondary use in rural areas where the
licensee does not currently have infrastructure. There are important
questions as to how overlay compliance would be enforced. Identifying
and prosecuting infringing intermittent transmitters is likely to be
quite difficult. The difficulties of implementation and enforcement will
vary with the overlay/underlay strategy that is employed. In all cases,
however, the licensee will have a valid fear that destructive
interference will be more likely in their frequency band if the
secondary use easement fails to be implemented correctly.

In contrast, with dedicated unlicensed, licensees in adjacent bands have
no more reason to fear interference than if the adjacent spectrum were
allocated under an exclusive use license. Therefore, allocating addition
spectrum for dedicated unlicensed use may be easier in the face of
opposition and may offer more “future proofing” with respect to dynamic
technology changes. Exclusive license holders who have valid concerns
about the threat easements pose for their current services and services
they wish to add in the future may be likely to prefer supporting
unlicensed use in dedicated spectrum, especially when the spectrum comes
from someone else’s piece of the pie.  Using easements to support
unlicensed treats unlicensed as a secondary use.64 This tilts the
playing field towards licensed spectrum, thereby reducing the benefits
from adopting an explicit approach to promote regulatory diversity. By
providing for both additional dedicated licensed and unlicensed
lower-frequency spectrum, the impact of regulation on the future choice
of technology and the industry structure is reduced. The market can
choose which spectrum model is more appropriate for supporting
innovation and market growth. It may turn out that dedicated unlicensed
spectrum is most useful as a testbed for experimenting with new services
which find it necessary to migrate to licensed spectrum if the benefits
of an exclusive license prove compelling. Alternatively – as certainly
seems possible if not likely – we may find that the same vigor that has
characterized competition and innovation in the unlicensed 900MHz, 2.4
and 5GHz bands extends to any new dedicated unlicensed spectrum.

V. Economic arguments in favor of unlicensed

In earlier sections, I explained why supporting dedicated unlicensed (1)
is consistent with increased liberalization of exclusive licensed
spectrum and does not imply increased government regulation of the
unlicensed spectrum; (2) does not imply free spectrum, although it does
assume that spectrum use costs will be neglible;65 and (3) is consistent
with using auctions to assign spectrum, although does not require that
auctions be used.

In addition, I have explained why additional dedicated spectrum above
3GHz or
secondary use easements via underlay or overlay rights do not offer an
adequate
substitute for additional dedicated spectrum below 3GHz. In this
section, I first
characterize the economic arguments in favor of using exclusive licenses
for virtually all
lower-frequency spectrum, and then identify the flaws in these
arguments. In the
following, I am assuming that flexible licensing and secondary markets
have been enabled. As noted earlier, if this is not the case, then the
argument for allocating additional spectrum to dedicated unlicensed is
even stronger.

A. Economic basis for supporting exclusive licenses

There are three principle economic justifications for relying on
exclusive licenses:
(1) spectrum scarcity; (2) investment incentives; and (3) interference
management. The first justification views spectrum as an economic good
and focuses on the role of markets in allocating that good. The second
justification focuses on the need to provide users and providers with
appropriate incentives to invest in network equipment and services. The
third justification recognizes that even when spectrum is not “scarce,”
it may be necessary to coordinate user behavior in order to allow users
to share spectrum without adversely impacting or “interfering” with each
other.

These three justifications are closely interrelated and may each be
viewed (loosely) as related to a slightly different notion of economic
efficiency: “Spectrum scarcity” addresses allocative efficiency, which
ensures that resources are directed toward their highest value uses;
“Investment incentives” addresses dynamic efficiency, which ensures that
resources are used optimally over time; and “interference management”
addresses productive efficiency, which ensures that resources are not
wasted (services are produced at lowest resource cost).

Each of these justifications rests on a common set of assumptions that
are open to critique, and therefore, support consideration of an
alternative management regime based on unlicensed use. These include
assuming that: (1) spectrum is scarce; (2) markets offer the best
mechanism for allocating scarce spectrum resources; and licenses are
necessary for (3) markets to operate efficiently; (4) provide investment
incentives; and (5) to manage interference. The following sub-sections
explain why each of these assumptions are questionable. This discussion
rebuts the economic justifications used to explain why a licensed regime
is better than an unlicensed regime.

1. Scarcity may be a regulatory artifact

The impetus for spectrum reform came from service providers, equipment
makers, and customers wishing to offer or take advantage of new wireless
services that
are currently hampered by regulatory restrictions that limit access to
RF spectrum. Since
1995, billions of dollars have been paid in auctions for licenses,
providing tangible
evidence of industry’s willingness-to-pay for spectrum and providing an
empirical basis
for estimating the opportunity cost for using spectrum. Estimates
inferred on this basis
can be substantial. For example, one industry analyst used “$10 per
month per
subscriber” as a ballpark estimate of the on-going cost of the spectrum
used to support
2G mobile services.

While the auction data demonstrates that industry is willing to pay
substantial
amounts for exclusive use licenses, it is unclear how much of this
payment reflects
artificial scarcity due either to regulatory mismanagement (i.e., too
much spectrum being tied up under restrictive, inflexible use licenses
that prevents it from being reallocated) or to exclusive licenses (e.g.,
the desire to protect or exploit market power). Incumbents have argued
that granting them flexibility would allow spectrum to be redeployed,
thereby increasing supply and lowering spectrum costs. Additionally,
proponents of auctions argue that to the extent that a license may
convey an opportunity to earn monopoly profits, ex ante competition
among would-be monopolists will extract any monopoly rents in the
auction proceeds. If this occurs, however, it means that the expected
business plan of the winner incorporates those anticipated monopoly
profits. The licensee has an incentive to maximize the value of its
exclusive license, which includes potentially restricting future access
to the spectrum, even when such access could be shared at zero cost.
Certainly, if additional spectrum is made available by allocating new
spectrum to commercial uses or by spectrum reform that makes it easier
to use existing spectrum more intensively (e.g., increasing licensing
flexibility and granting secondary use easements) and more easily
transferred to higher value uses (e.g., by promoting the emergence of
secondary markets and by allocating additional spectrum to dedicated
unlicensed), the opportunity cost for spectrum should decrease. Evidence
of current spectrum use suggests that licensed spectrum is
underutilized.  If one drives around with a meter measuring the level of
RF transmissions in the prime spectrum below 3GHz, one finds under-used
spectrum most of the time, in most locales, in most of the frequency
bands. While some frequencies are being used intensively in some places
(e.g., cell phone calls that are dropped during rush hour), there is
usually lots of unused spectrum in adjacent bands. This suggests that
most of the observed “scarcity” is a regulatory artifact.
Furthermore, as already noted, many of the advances in wireless
technology make it possible to use spectrum much more intensively
without causing destructive interference. For example, one of the
justifications for retaining spectrum for over-the-air television
broadcasting is to protect access to free television for households with
old analog televisions. Requiring customers to upgrade their televisions
to take advantage of smart-receiver, digital technology would allow much
more efficient utilization of the spectrum. In Berlin, policymakers
determined that it was much cheaper to simply subsidize the conversion
to digital receivers than to delay the conversion to digital television.
As explained further below, dedicated unlicensed spectrum may enhance
incentives to adopt spectrally efficient technology faster.  If spectrum
is not scarce, then one of the significant justifications for supporting
exclusive licenses disappears. If there is no scarcity, then it is
unnecessary to incur the bureaucratic overhead and transaction costs
associated with licenses in order to allocate the resource more
efficiently.

Finally, if history is any guide, then the experience to date of
“Quality of Service”
pricing in the Internet suggests that it may continue to be cheaper to
over-provision
capacity than to implement a pricing mechanism to induce more efficient
utilization at the margin. During the 1990s, significant academic and
industry research and development went towards developing
incentive-compatible pricing mechanisms to allow more efficient
utilization of Internet capacity. The problem was that the traditional
Internet was based on a “best efforts” packet service protocol that
results in increasing packet delays during periods of congestion. For
delay-sensitive services like voice telephony, this presents a problem.
Although numerous technologies have been implemented to support
prioritized pricing, most network operators simply opted for
over-provisioning rather than incur the added overhead associated with
traffic metering and transaction processing. When quality-of-service
pricing has been introduced, it has been employed more as a means of
supporting pricing discrimination than in order to allocate scarce
resources.

2. Coordination costs may be lower with unlicensed

Although spectrum reform and adoption of new wireless technologies can
significantly increase spectrum supply, demand may grow even faster.
Even if there is ample spectrum for most uses in most locales, localized
congestion (with respect to time or location) is likely to persist at
least under some circumstances. Furthermore, the adoption of efficient
spectrum sharing technologies will take time and will not be uniform.
For these reasons, it is important to consider how best to allocate
spectrum if it remains scarce.

The standard economist answer is to rely on markets to allocate scarce
resources.  Although Coase (1959) made this point almost fifty years
ago, regulators have been slow to move towards increased reliance on
market forces. While this may be the correct solution for most scarce
resources, and even for spectrum in a many cases, it is worthwhile
considering the circumstances within which “market allocation” is not
likely to offer the best mechanism for allocating scarce spectrum.  For
a market to be efficient, a number of assumptions have to apply. First,
it has to be possible to define the good that is to be allocated.
Second, the market prices should be efficient. As Benkler (2002) has
explained, these assumptions may not apply in the case of spectrum. If
the goal is to rely on markets to address spectrum scarcity, then the
markets need to be local. That is, scarcity will arise in specific
locations at specific times.  As the time scale becomes shorter (i.e.,
as one moves toward real-time markets) and the geographic region
smaller, the challenges of supporting an efficient market will become
greater. Under such circumstances, it may be simpler to opt for
over-provisioning coupled to an admissions control protocol rather than
market-allocation to address congestion.

Furthermore, even if a market price can be determined in a timely
fashion, there is
no guarantee that it will be efficient. If there is either monopoly or
monopsony power,
prices may deviate from optimal levels. As noted before, incumbents have
an incentive to
protect and exploit their market power. By restricting the availability
of spectrum, they
may be able to inflate prices to capture artificial scarcity rents. Even
more perversely,
they may selectively restrict spectrum access to new technologies that
are expected to pose a competitive threat to their market power, thereby
influencing not only end-user prices but the direction of technical
change and slowing the progress of competition. The history of AM and
VHF opposition to FM and UHF and its adverse impact on the development
of these services, as described by Hazlett (2001), demonstrates that
this is a real concern.

Prices may also deviate from efficient levels if there are externalities
that are not reflected in the prices. These could be negative (e.g.,
interference) or positive (e.g., network effects) that are not
appropriable by the transacting parties and hence not included in the
prices. For example, in the absence of suitable underlay rights, a
negative externality would arise if a technology like UWB were
foreclosed from using frequencies which are priced only to reflect the
value of the use rights of those services that operate within licensed
bands.76 Alternatively, a new technology or service may fail to emerge
if prices do not take account of the positive externalities associated
with network effects. While it may be possible to reform property rights
so that these externalities are internalized, it may be better to simply
address these externalities via a non-market mechanism.

Even if efficient prices can be set by the market, these do not always
offer the best
mechanism for coordinating the allocation of resources. When Coase
(1959) argued in
favor of using markets for allocating spectrum licenses, he was focusing
on the thencurrent
state of the wireless world and the alternative used by the FCC to
allocate licenses based on a bureaucratically-expensive administrative
process that was vulnerable to influence costs. This is not the modern
wireless world considered here of flexible licenses for a lot of
spectrum.

In Coase (1937), his seminal paper on the theory of the firm, Coase
identified circumstances when markets are not likely to offer the best
mechanism for allocating scarce resources. If transaction costs are
sufficiently high, it may be better to allocate resources using a
non-market mechanism. Transaction costs are higher when there are search
and information costs, bargaining costs, or policing and enforcement
costs. If scarcity is intermittent or localized, these costs may be high
relative to the value of the spectrum rights that are being exchanged.
Matching spectrum buyers and sellers if the market is decentralized may
be expensive. Alternatively, supporting a centralized market when the
transactions need to be decentralized (because scarcity is very
localized) may entail substantial transaction costs. For example,
consider device with only very occasional needs to communicate with
anyone, and when they do communicate, the parties are seldom the same.

The value of the spectrum being sold may be small if users’
willingness-to-pay to
avoid “congestion” is low. For example, if the communications are
inherently low value
or easily shifted in time, modulation, or frequency (so as to avoid
interfering) than the
“prices” may be so low that coordination might be better achieved using
a non-price
coordination device that relies solely on signaling instead of market
transactions. There
are lots of “rules of the road”-type mechanisms that may achieve
coordination much
more effectively without requiring the overhead of a payment mechanism
of enforcement. If spectrum is not scarce and transaction costs are
relatively high then an unlicensed model (more like a commons) may offer
a superior mechanism for allocating spectrum, as even Faulhaber and
Farber (2002) concede.

3. Exclusive licenses are not essential to support market allocation of
spectrum
While the preceding discussion raised questions about the feasibility
and efficiency of using markets for allocating spectrum, these arguments
are not conclusive.  There may be situations where market-based spectrum
allocation may be efficient.  However, the market-based allocation does
not have to be via real-time pricing, and even if it is, it does not
require exclusive licenses.

On the one hand, market forces could be employed in the selection of a
sharing protocol or etiquette to manage the unlicensed spectrum. This
could be accomplished by delegating the selection of the protocol to an
independent standards development organization.

On the other hand, exclusive licenses are not necessary to implement
real-time pricing. As Noam (1995, 1998) first pointed out, and Benkler
(2002) re-enforces, exclusive frequency-based licensing may make it more
difficult to efficiently allocate spectrum using prices. A licensing
regime based on exclusive rights to use a narrow band of frequencies in
a specific geographic-area may prove too rigid and cumbersome. There is
no a priori reason to believe that the government could not administer a
real-time market (acting as the Walrasian auctioneer and clearing house)
as efficiently as a private band manager; or, alternatively, why such
management could not be outsourced without requiring a grant of private
exclusive license rights.
Finally, because the allocation of additional spectrum to dedicated
unlicensed is anticipated to occur in conjunction with – not in full
replacement of – increased flexibility for licensed spectrum, market
trading of exclusive licensing and dedicated unlicensed could co-exist
in different frequency bands below 3GHz. Indeed, the availability of low
cost unlicensed spectrum would provide a check on the ability of
exclusive licensees to extract artificial scarcity rents and would
provide a haven for those users and technologies for which market
allocation of spectrum may not be efficient, as noted above.

4. Exclusive licenses not necessary to promote investment incentives
Exclusive licenses are also justified to promote investment incentives.
On the one
hand, exclusive licenses can provide incentives to use spectrum more
efficiently. On the
other hand, exclusive licenses are argued to be necessary to promote
investment in carrier
infrastructure. While these benefits may be true about exclusive
licenses, they are neither
the only nor best way to promote efficient spectrum use and investment.
Although
related, these two rationales involve distinct notions and are addressed
in the following sub-sections.

a) Incentives to use spectrum efficiently

A common criticism of the unlicensed model is that it lacks incentives
to use spectrum efficiently, resulting in a “Tragedy of the Commons.”
This arises when each user fails to take into account the negative
impact of their usage on the experience of others, resulting in
“congestion” or harmful interference.
By assigning a private property right to the spectrum, the owner becomes
the residual
claimant to the spectrum, and thereby has an enhanced incentive to
manage the spectrum
efficiently. Of course, this assumes that the benefits of using the
spectrum are fully
appropriable, which is unlikely to be the case for several reasons.
First, because spectrum
licenses are not granted in perpetuity and are constrained in other ways
that limit the
owner’s ability to fully exploit the benefits of ownership. Second,
efficient management
assumes that the market allocation is efficient and I have already
explained why that
might not be so. Third, it ignores that a commons could be owned
collectively and adopt
a collective management scheme that could be equally efficient. There is
no a priori
reason to presume that resource ownership in common with common
management is less
efficient than private ownership with private management.

Additionally, as Benkler (2002) points out, incentives to invest in
spectrum-efficient
technology may be improved in a unlicensed world. If users know that
they may have to
contend with congestion, this can enhance their incentives to invest in
technologies that
are robust to interference. While it is possible that these technologies
could either
ameliorate interference (e.g., switch to an unused channel when
interference is detected)
or make matters worse (e.g., boost power to drown out the competing
signal), additional
“rules of the road” could be designed to constrain the types of
interference responses
adopted to those that are collectively efficient.

b) Incentives to invest in wireless infrastructure
Some proponents of exclusive licenses argue that these are needed to
provide carriers
and customers incentives to invest in radio equipment and services
because such longlived
assets are co-specialized with the frequencies that they use.
Because constructing a traditional carrier network requires large
investments that may
be substantially sunk, a carrier’s incentive to invest is reduced by the
threat of
interference. By granting some protection against future interference
over the investment
horizon, an exclusive license lowers the ex ante costs of investing in
infrastructure, and
thereby may promote investment.

While this reason has provided a valid rationale for why service
providers have
claimed they need exclusive licenses, and also why these licenses ought
to be for long
terms and subject to easy renewal, the service provider model is not the
only business
model for offering wide-area communication services. For example,
consider the case already cited of the device that only wants to
communicate occasionally, and which may also be quite inexpensive. In
such case there, there is no large network investment that needs to be
protected. While such services may be provided over a service provider’s
network, this does not have to be the case.

Moreover, advances in wireless technology are rendering this traditional
rationale less relevant. First, wireless technology is increasing the
frequency-agility of radio systems.  Even without the ideal of
“cognitive radios,” software radio and modern system engineering
techniques are making network equipment more modular and more
upgradable. The behavior of radios can be changed in many ways via
remote software upgrades or partial upgrades (board replacements) that
do not require replacement of the entire radio. Second, much of the
investment in a carrier’s network that is long-lived (towers, cell
sites) remains useful even if all of the electronics need to be
replaced; and the electronics have much shorter useful lives (so do not
justify granting a license in perpetuity to protect against hold-up
costs). Third, with the development of secondary spectrum markets and
flexible licensing, exit costs are reduced which further reduces the
need for protection from exclusive licenses. Taken together, these
advances and changes in the market make the spectrum used and the
infrastructure that use it less cospecialized, thereby reducing the
traditional basis underlying the need for exclusive licenses to protect
carrier investment incentives.

Furthermore, to the extent incumbents fear competition from new
technologies, they may seek to foreclose these technologies by denying
them access to spectrum. While efficient secondary markets for spectrum
would reduce the risk of such foreclosure, it would not eliminate this
risk.

5. Exclusive licenses not necessary to manage interference
Real spectrum “scarcity” arises when two uses of the same spectrum
interfere with each other. One way this can be managed is by assigning a
property right that allows one user to exclude the other. This property
right can provide the basis of a market allocation of spectrum. However,
I have already explained why such a market mechanism may not always be
the most efficient way to allocate scarce spectrum, and why exclusive
licenses are not necessary and may be inferior to dedicated unlicensed
even if a market allocation process is used.

It is also sometimes argued (Hazlett, 1998) that the owner of an
exclusive license would be more likely to adopt the efficient sharing
protocol than would a government manager of dedicated unlicensed
spectrum. There are several responses to this argument.  First,
dedicated unlicensed that relies on a sharing protocol need not rely on
an administrative government process to select the protocol, as already
explained. Second, a dedicated unlicensed regime involves more than just
an algorithm for allocating scarce spectrum. While the sharing protocol
is important, it is not the only feature that distinguishes unlicensed
from licensed.

Third, while an efficient market ought to induce adoption of an
efficient sharing protocol, there are a number of reasons which have
already been cited for why a market based on exclusive licenses may fail
to be efficient. Allocating additional spectrum for dedicated unlicensed
and for exclusive licenses will provide an interesting test of which
model adopts the most efficient mechanisms for sharing. An analogous
problem is associated with the economics of industry standardization:
sometimes de facto standardization offers the best solution, whereas
other times, the full process of a standards development organization is
needed to protect against capture by a limited set of interests.

Finally, it is sometimes argued that exclusive licenses are needed to
enable more efficient enforcement of whatever interference management
regime is adopted. The claim is that by moving to a regime based on
property rights, enforcement via the Courts will replace enforcement via
a technical protocol or via an administrative body like the FCC and that
Courts are inherently more efficient (Hazlett, 2001). The justification
for this last claim relies, in part, on the vulnerability of government
administration to influence costs.  However, as Benkler (2002), points
out, tort enforcement by the Courts is not necessarily better than
enforcement by a different branch of government. Both are vulnerable to
influence costs and both may result in lengthy delays and inefficient
outcomes. Property rights for spectrum are inherently ambiguous, and
should underlay and overlay easements be adopted, will become even more
so.

Furthermore, as already explained, dedicated unlicensed could be
enforced via a market mechanism (e.g, an industry standards body). Even
voluntary certification of compliance with the “industry specified
congestion management protocol” could be effective. While there may
still be opportunistic defections, no enforcement mechanism is perfect
and the benefits of better enforcement must be weighed against its
costs. If spectrum is relatively plentiful (and hence low cost),
voluntary compliance may be sustainable as an individually rational
equilibrium.

Finally, advances in technology such as cognitive radios will make it
easier to decentralize interference management.
B. Dedicated unlicensed below 3GHz preserves regulatory diversity
Allocating additional spectrum for dedicated unlicensed in the lower
frequency bands helps retain regulatory flexibility and diversity.
Preserving such diversity only in higher frequencies fails to recognize
the important fact that different frequencies are not perfect
substitutes.

The regulatory diversity is valuable because no enforcement mechanism is
perfect and the uncertainty regarding the optimal regulatory approach is
greatest in times of rapid technical progress and industry
transformation. Wireless services are helping to drive industry
convergence that is blurring the boundary between computing and
communications, content and conduit, broadcasting and
telecommunications, and wired and wireless networks.

Providing for the co-existence of multiple regulatory models supports
multiple experiments and provides an element of “future proofing.” With
respect to the evolution of broadband wireless services, we have already
seen such benefits delivered by the surprise success of WiFi services
deployed in the ISM unlicensed band. Although this spectrum is crowded
and was not generally regarded as prime spectrum, it has given root to a
technology that has forced a rethinking of the whole way in which
broadband wireless services are delivered.

Finally, achieving spectrum reform will be difficult. Providing
additional spectrum for dedicated unlicensed services in the
lower-frequency spectrum may enhance the likelihood that the necessary
reform will be accomplished in a timely fashion. I have already
identified a number of ways in which allocating dedicated unlicensed
spectrum might help to ameliorate opposition to spectrum reform.

C. Dedicated unlicensed supports innovation and investment

In addition to encouraging investment in smart radio technology,
dedicated unlicensed is also more compatible with decentralized,
distributed models for industry evolution. While the service provider
model is likely to remain an important feature in the landscape for
wireless services, especially wide area communication services, it is
not the only model that should be allowed to exist.

The critical feature of dedicated unlicensed is that no private interest
has a right to deny access to potential users. Because users do not have
to negotiate a service agreement before accessing unlicensed spectrum,
and because there is no one that has an exclusive right to exclude them
from using the spectrum, unlicensed spectrum lowers the costs for
decentralized, small-scale entry and viral industry growth. This can
foster distributed experimentation. Devices in isolated areas that are
not intended to be part of large integrated networks may find use of
such spectrum especially attractive. However, as the WiFi example
demonstrates, technologies originally developed for one type of market
may evolve to serve other needs.
Although the distributed networks may remain independent, they may also
be interconnected. This could be via the public telecommunications
network comprised of interconnected service provider networks. When part
of the larger communications infrastructure, these distributed,
decentralized wireless networks can support edge-based innovation.
Innovations can be adopted incrementally, without requiring changes to
core network components or without directly confronting the network
effects that can make legacy applications so difficult to replace. While
network effects contribute to the value of being part of a larger
network, they can sometimes pose a barrier to innovation.

Even if unlicensed proves most useful as a test-bed for new technologies
which elect
to migrate to licensed spectrum if they prove successful and congestion
management
becomes more of an issue, this would provide a sufficient basis for
supporting the
unlicensed model. Moreover, there are likely to be technologies that we
have not yet
imagined that may find unlicensed offers a better operating environment.
The growth of wireless grids or ad hoc networks may be better supported
in unlicensed spectrum.  Finally, unlicensed spectrum may be more likely
to support the emergence of networks that are based on an
equipment-provider model. That is, networks that may be created when
end-user’s deploy equipment that can operate both as end-nodes and as
relay or transmission nodes. By linking series of such devices together
in a “grid” or “mesh,” it is possible to create a network capable of
supporting communications over a wide area without the intercession of a
service provider. Although a service-provider may be involved, and
interconnection with a service provider at some level is likely, such
“ad hoc” networks offer an alternative strategy for building up
communications infrastructure. If successful, these could offer
additional sources of competition for incumbents, further contributing
to consumer choice. In response to the threat of such competition or in
recognition of the benefits offered by new technologies, service
providers may be induced to integrate these new services to enhance
their service offerings. Indeed, as with WiFi/3G, unlicensed model can
(1) complement traditional service provider business models (cellular);
(2) assist in wireline/wireless convergence (e.g., WiFi supported via
DSL); or provide a platform for alternative entry platforms (e.g.,
wireless local loop).

VI. Conclusions and Policy Recommendations

There is general agreement among industry analysts that the traditional
models of spectrum management are in need of reform. Most economists
agree that the reform should seek to increase the ability of market
forces to shape how spectrum is allocated and used. Traditional licenses
that were encumbered with restrictions on the choice of technology, the
services offered, their coverage, and the transferability of access
rights have imposed a high opportunity cost for spectrum for many
advanced communication services, while precluding the deployment of
under-utilized spectrum to higher-value uses. This has increased
industry costs, reduced incentives to innovate, and slowed the
deployment and adoption of new services.

One solution that has been proposed is to transition to regime of
tradable property rights for spectrum based on exclusive use frequency
licenses. An alternative approach for managing spectrum would be to
allocate a band or bands of frequencies for unlicensed uses. There seems
to be an emerging consensus among those who support increased reliance
on market forces that exclusive use licenses offer a superior mechanism
for spectrum management, especially for the valuable lower frequency
spectrum below 3GHz. The spectrum in these bands that is available for
commercial use (and much of it is not and remains under government
control) is heavily populated by licensed incumbents. Support for using
exclusive licenses for lower frequency spectrum is justified, in part,
via recourse to Coase’s (1959) argument that markets do a better of job
of allocating scarce resources than do central governments. Moreover, it
is argued support for unlicensed uses can be adequately provided via
underlay and overlay easements to allow secondary usage of licensed
spectrum.

While the transition to a flexible licensing regime and making provision
for unlicensed easements are important reform policies, there is also a
need to allocate additional spectrum for dedicated unlicensed use in the
lower frequencies below 3GHz.  An allocation on the order of another 100
to 300MHz would leave plenty of spectrum for the exclusive licensing.
Making such a provision is desirable because unlicensed use supports a
fundamentally different model for how wireless services may be developed
and deployed. This offers a valuable contribution to the wireless
ecosystem, as the success of WiFi in recent years attests.

Opposition to dedicated unlicensed is often conflated with the view that
unlicensed is inconsistent with auctions, implies spectrum use should be
“free,” or that supporting unlicensed means opposing liberalization of
licensed spectrum. These are misconceptions. An allocation of additional
unlicensed spectrum could be included as part of a spectrum auction.
Unlicensed use is not “free” but it does preclude a private party using
its license to extract rents for access to the spectrum. And, unlicensed
spectrum does not imply more regulation and is consistent with increased
reliance on market forces.

Additional spectrum for dedicated unlicensed use is important because
secondary use easements are neither a foregone conclusion nor an
adequate substitute. Furthermore, an allowance below 3GHz is important
because spectrum at different frequencies is useful for different
things. Additional spectrum for dedicated unlicensed use above 3GHz will
be available, and in any case, the difference between a licensing and
unlicensed regime are less pronounced at higher frequencies.
Promoting regulatory diversity is consistent with supporting increased
reliance on market forces since no regime will be completely free of
regulation and its incumbent distortions. By providing for multiple
models in the lower frequencies, the forces of market-fueled innovation
and competition are enhanced.

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1 This research was conducted with support from the MIT Research Program
on Internet and Telecoms
Convergence (http://itc.mit.edu), as well as the Communications Futures
Program (http://cfp.mit.edu).
2 See, for example, Comments of 37 Concerned Economists (2001), Hazlett
(2001), Kwerel & Williams
(2002), or Fahlhaber & Farber (2002) for the majority view among
economists on the need for flexible licensing. See Noam (1995) for an
early contrary minority view.
3 See Kolodzy (2002).
4 See Benkler (2002), Werbach (2003), Gilder (2003), or Lessig (2001).
5 The choice of 3GHz as a cut-off is somewhat arbitrary. It was chosen
to include the MMDS spectrum at
2.5GHz as well as the ISM Unlicensed spectrum at 2.4GHz and to
approximate the upper bound for nonline-
of-sight transmission. The benefits of lower-frequency spectrum are even
greater at still lower frequencies, say below 1GHz which is dominated by
broadcast television. I am using “lower” instead of “low” frequency in
this paper to refer to frequencies below 3GHz to avoid confusing radio
engineers who refer to lower-frequency spectrum as anything below
300Khz. (Thanks to Timothy Shepard for pointing this out.)

A significant share of spectrum is reserved for government use and is
managed by the National
Telecommunications Information Agency (NTIA). The spectrum that is
allocated for commercial and public use is managed by the Federal
Communications Commission. The focus of this paper is on management
models for commercial and public use spectrum, however, the author
supports reallocating additional spectrum from government use to the
private sector. Such a reallocation would benefit both providers and
users of commercial services, and displaced government users who will
benefit from the innovations in wireless services that would be
promoted.

Over time, the FCC has liberalized licensing rules for different bands
and services such that the rules that
apply differ by frequency. Historically, the FCC has been pretty liberal
in allowing commercial licenses to be transferred for existing uses
(e.g., allowing licensees to trade territories or to accommodate
corporate restructuring).

See for example Kolodzy (2002) which presents the report of the FCC’s
Spectrum Policy Task Force.
Similar discussions have been occurring around the globe. For example,
in the UK (Cave, 2002), in the European Community (EC Green Paper on
Spectrum Policy, 1998), in the ITU (Jeacock, 2004), and elsewhere around
the world (see http://www.itu.int/osg/spu/ni/spectrum/index.html for
briefing presentations from around the world from a workshop at the ITU
in February 2004).

 See FCC (2000).

 The super-heterodyne transceiver circuit, which has provided the basic
architecture for radio design, was
invented by Edwin Armstrong in 1917.

Exclusive-use licensees share the spectrum among multiple users (e.g.,
mobile operator supporting
numerous simultaneous calls or an over-the-air broadcaster providing
service to many homes in the broadcast market). The “exclusivity” arises
because of the licensees right to determine who is allowed to share the
spectrum.

 For example, the interference threshold associated with broadcast
television licenses is set to
accommodate the needs of those receivers that are furthest from the
broadcasting station’s tower (where the
signal is weakest) but which are still expected to be able to be view
the station. Receivers closer to the transmission tower or with
“smarter” signal processing capabilities could tolerate higher levels of
“interference.”
 See Lehr, Gillett, and Merino (2003) for further discussion of the
implications of software radios.
 See Spectrum Policy Task Force (2002a) and Werbach (2003) for
user-friendly discussions of some of
the relevant developments.
For example, David Reed (2003) argues that spectrum capacity may
increase as users are added to the
system. Also, see Grossglauer and Tse (2002).
 See Carter, Lahjouji, and McNeil (2003) for a survey of unlicensed uses
and regulatory issues. While
unlicensed use of wireless spectrum in the 900MHz and 2.4GHz bands has
thrived, unlicensed devices have had much more limited success in
certain other bands (e.g., see Ting, Bauer, and Wildman, 2003, regarding
use of the Citizen Radio and Unlicensed PCS bands).
 WiFi, or 802.11b, is the wireless Ethernet LAN standard. See Lehr &
McKnight (2003) for further
discussion of WiFi.
These estimates are from an In-Stat/MDR Report (see, Shim, Richard
(2004), “Report: Wi-Fi gear
moving on the double,” CNET News.com, January 14, 2004, available at:
http://news.com.com/2100-7351-5141002.html).
 There are a continuously evolving class of related standards that
support “WiFi”-like communications
over longer distances, at higher bandwidths, in different frequency
bands, and with support for additional applications (e.g., added
security and network management functionality, support for real-time
services, etc.). See http://grouper.ieee.org/groups/802/11/main.html for
information on these standards or Lehr & McKnight (2003), which provide
additional references.
 See “Report Examines Hotspot Growth and Profitability,” Broadband
Wireless OnLine, June 30, 2003
(available at:
http://www.shorecliffcommunications.com/magazine/news.asp?news=2081)
See Judge, Peter, “Wi-Fi to overtake broadband,” TECHWORLD, July 22,
2003 (available at:
http://www.techworld.com/news/index.cfm?fuseaction=displaynews&NewsID=293).

 WiFi networks may be open or closed. Many users do not activate the
security features of WiFi and leave
their networks open either intentionally or through benign neglect. When
the network is open, anyone with a WiFi-enabled communication device
which is within range of the base station can access the network. In
addition, some publicly-spirited individuals, community groups,
government organizations, and firms sponsor free-access WiFi hotspots.
For example, see http://www.lights.com/freenet/ for a directory of
“freenets” around the world.
 That is, WiFi can be integrated into a 3G network to provide high-speed
hot spot access that increases the
value of the lower-bandwidth but longer-range 3G services.
Alternatively, WiFi can provide a substitute service for 3G. With the
addition of Voice-over-IP and further improvements in WiFi technology,
the potential competition between 3G and WiFi could intensify. See Lehr
& McKnight (2003) for further discussion.
For a perspective on the role of UWB in home networking see Ultra
Wideband FAQs at http://ewww.
motorola.com/webapp/sps/site/overview.jsp?nodeId=02XPgQhHPR02204720. See
FCC (2003c) for
recent FCC decision permitting low-power UWB use and see
http://www.uwb.org for information and links regarding the activities of
the UWB working group
.
The need to accommodate legacy technology increases as the pace of
adoption of new technologies
increases, allowing multiple generations of technology to co-exist.
Technologies like software radio can accelerate adoption by lowering the
costs of updating systems (e.g., remote software upgrades replace
hardware replacement for base stations) and by reducing the costs of
managing heterogeneity (i.e., devices can support multiple radios to
facilitate interoperability).
 Wireless grids or ad hoc networks provide an extreme version of such
networks. In a wireless grid, each
end-user node is also a repeater. By cooperatively sharing their
capacity, such networks could support endto-
end services without the coordination of a centralized planner. See
Lippman and Reed (2003);
McKnight, Lehr, and Howison (2003); or Gaynor, McKnight, Hwang, and
Freedman (2003) for further discussion of the implications of these new
networking trends.

 For example, see Isenberg (1997) or Blumenthal and Clark (2003).

 It is worth noting that while the Task Force recommends primarily
relying in the licensing model, it does
not argue that this should be the only model in the lower frequencies
(which they refer to as frequencies below 5GHz, see Kolodzy, 2002). The
Task Force advocacy of co-existence between licensed and unlicensed
below 5GHz is consistent with the arguments made here.
The relationship between frequency and propagation is complex and
transmissions in each band offer
advantages and disadvantages. As frequency increases, wavelength
decreases, which impacts the way the RF waves interact with obstacles
along the transmission path (air molecules, rain drops, trees, doorways,
hills, etc.).
This is due in part to market scale and learning effects. As the market
for and experience with operating
at higher frequencies grows, the cost disparity in the associated
electronics will decrease. One important effect is that higher frequency
antennas can be smaller.
That is, the RF spectrum extends from 3Khz to 300GHz. There is only 3GHz
of lower-frequency
spectrum as defined here, as opposed to almost a 100GHz above (of
currently usable spectrum). Thus, if one is simply counting MHz, there
is obviously more potentially usable frequency above 3GHz than below
3GHz. However, this comparison is somewhat misleading because, as is
explained here, different spectrum has different propagation properties
and so a 100MHz at 700MHz may allow you to do more or less than at
10GHz, depending on what you want to do. Moreover, the 3GHz upper
threshold is somewhat arbitrary but is intended to include the
unlicensed spectrum currently used by WiFi (2.4GHz) and the MMDS
(2.6GHz) spectrum that is under review for reform. While the WiFi
technology was originally developed as a WLAN service at ranges of a few
hundred feet, its range can be extended to several miles with
directional antennas and certain other modifications. Additionally, MMDS
systems were originally developed to provide a wireless local access
platform for service providers over MAN distances and improvements in
MMDS have increased the ability of technologies in this class to provide
NLOS service. In contrast, the challenges appear much great associated
with supporting NLOS or long-range communications using frequencies
above 3GHz (e.g., in the 5GHz unlicensed spectrum where 802.11a WLANs
operate).
This includes broadcast entertainment (radio and television), mobile
telephone services, and narrow-band
control services.
 That is, when it was difficult/expensive to digitize higher-frequency
(high-sampling rate) signals,
services were deployed using lower-frequency channels.

The savings are based on comparing the cost of operating a broadband
wireless local access system using
OFDM modulation and indoor CPE (desk-top antennas) at 700 MHz instead of
2.6GHz (see Wanichkorn and Sirbu, 2002, page 25). Analogous effects were
confirmed by Chris Knudsen, Vulcan Partners, in private correspondence,
and by Mark McHenry, Shared Spectrum Company (see McHenry, 2001).
Installation becomes feasible in expanded set of locations (e.g., where
LOS is not available such as inside
the home) and does not require costly antenna placement (i.e., customer
self-install can replace serviceprovider
on-site installation).

 The physics of RF transmission do not imply that it takes more power to
transmit a bit of information at a
higher frequency. If the aperture of the receiving antenna is kept
constant, then the power required to transmit does not depend on the
frequency. Since the size of the antenna can shrink as the frequency
increases, it is possible to design fancier antennas using the same form
factor for a lower frequency antenna. What this means is that with more
advanced technology, it should be possible to allow higher frequency
operation for small hand-held devices without requiring more power per
bit transmitted. But, this is likely to incur higher antenna costs, at
least in the near term. However, if the data rate goes up, which is
often one of the advantages of operating at a higher frequency, then
more power will be used but this is a function of the data rate
supported rather than the frequency at which it is supported.
 This is the approach that has been adopted by the FCC for spectrum in
the millimeter bands above
70GHz (see FCC WT 02-146 Millimeter Band Proceeding).
Beam forming antennas can facilitate much more efficient use of spectrum
in all frequency bands (spatial
reuse).
 That is, the exclusive license does not allow arbitrary exclusion of
uses that would not otherwise be
interfering but does provide recourse to protect the licensees service
from an interfering use. Analogously, the certification rules included
in Part 15 are intended in part to ensure that the power limit
restrictions that are intended to limit interference conflicts in
unlicensed spectrum are respected.
Cite: 37 Economists, Kwerel & Williams, Farber & Fahlhaber, etc.
 However, because such reforms remain contentious, there are
"transition" benefits to allocating
additional dedicated unlicensed spectrum now. While it is hoped that
liberalization of licenses will progress rapidly, the final outcome is
far from assured. A commitment to additional unlicensed at this stage
could ensure that additional spectrum for this model of development is
guaranteed and would help clarify the debate for how licenses ought to
be liberalized. This would contribute to reducing regulatory uncertainty
and would likely reduce the contentiousness of the debate over licensed
spectrum. (That is, by muting arguments that unlicensed and licensed
spectrum are in contention.)
 The dedicated spectrum could be provided by releasing additional
government spectrum for commercial
use.
This paper does not attempt to make a specific proposal as to which
frequencies or how much frequency
below 3GHz ought to be allocated for dedicated unlicensed use, or even
whether it is better to allocate the
frequency in a contiguous block or in multiple blocks with different
management schemes. Each specific
proposal would need to be evaluated with respect to how the transition
would be managed (how to address
the needs of incumbents and other stakeholders?) and what institutional
framework should be used to
support congestion management in the unlicensed framework (protocol or
market? Who decides?). The
100-300MHz estimate is used to suggest the magnitude of the allocation
that ought to be considered (i.e., to
exclude trivial allocations), that are achievable (i.e., there is
substantially more than 300MHz of spectrum
that is currently under-utilized below 3GHz, much of it currently
restricted to government use), and that would provide enough bandwidth
to allow for innovative services and substantial growth in users.
Current and near future modulation techniques can code one to a few bits
per hertz. While these may be increased, there are theoretical limits to
the information carrying capacity of frequency that must be respected.
Allocating between 100 to 300MHz would allow peak data rates in the
100Mbps to 1Gpbs range, thereby ensuring that the wireless services were
not artificially constrained to slower speeds because of regulatory
limits.

See, for example, Bazelon (2002).
This is analogous to the problem of management compensation and the
correct balance between salary,
bonuses, and equity (ownership) participation in the firm. Ownership may
help but is not necessary nor sufficient to induce managers to make
decisions which are optimal for investors.

There are several proposals for how these might be implemented,
including adopting a “bill of rights” for
unlicensed wireless devices (see Konston, 2002). Alternatively, a
technical protocol could be used that would address interference
management issues (see Peha, 2000 for an example of a technical solution
for sharing).

 However, because there are costs associated with adopting technologies
that make it feasible to use
higher frequency spectrum (expanding the range of useable RF) and to
facilitate more intensive use of existing usable and allocated spectrum
(e.g., spectrum sharing), these could be thought of as investments in
increasing spectrum “capacity.” However, these costs are not directly
associated with using the spectrum but rather with how it is used. A
good spectrum management regime will provide appropriate incentives for
adopting such technologies.
 Interference management involves both the allocation of scarce spectrum
when multiple uses cannot
share the spectrum, and coordinating usage so that when sharing can
occur, it does so without inflicting damaging interference on each
other. There are many ways to manage such coordination. For example, it
could be on the basis of a “first come, first serve” where other uses
wait until the channel is clear; or it could be based on changing the
modulation scheme or operating frequency; or on some other approach.
Whatever approach is adopted, it may impose some costs on one or more of
the users (e.g., late comers are delayed or everyone tolerates a noisier
environment), however the expectation is that costs associated with
operating an efficient shared use coordination mechanism will be small
relative to the value of the traffic coordinated. While there may be
some adoption costs (e.g., higher cost for software or equipment to
implement the sharing mechanism), any recurring costs per user will be
negligible.

 A similar debate occurred over whether Internet access is “free.”
Traditionally, the heaviest users were
university researchers and corporate employees. End-users did not
directly pay for using the Internet and so perceived that there were “no
usage fees.” However, the costs of supporting the infrastructure were
borne by the universities and corporate employers who paid flat monthly
fees based on the capacity of their connections to the Internet. These
capacity charges were correlated with usage (larger pipes for more
traffic) and were sometimes subsidized (government funding for the
Internet) (see McKnight and Bailey (1998).

 Of course, with flat rate pricing for blocks of calls, the monthly rate
stays the same as long as the caller
does not exceed their allowance. Customers who expect to make more
calls, select a higher price bundle.
 The public benefited from the use of the services that could be lower
priced because they did not have to
recover the cost of acquiring spectrum. For example, the first mobile
license was given to the incumbent telephone carriers and the second was
awarded via lottery. The reasons why it is undesirable to use auctions
to extract scarcity rents for using spectrum are discussed further
below.

 There is no material difference in charging for spectrum use of
“dedicated unlicensed” via a license fee
for the intellectual property associated with a protocol that is
approved to operate in the spectrum and via charges for a service that
is only available via “licensed spectrum.”

 See Hazlett (2001) for a discussion of the many examples where
incumbents have resisted spectrum
reform that would have alleviated regulatory-induced scarcity by
allocating additional spectrum for potential competitors.
 That is, unlicensed use does not mean use without any rules. The
unlicensed spectrum may be managed
by a protocol that provides a technical determination of how spectrum
will be allocated during periods of congestion.
 Ting, Bauer, and Wildman (2003) cite the costs of clearing unlicensed
PCS spectrum (U-PCS) that were
collected in device fees for qualifying equipment seeking to use the
asynchronous allocation as a potential explanation for why this spectrum
remains under-utilized.

That is, if bidders are participating in a sequential auction, the
truth-revelation properties may be
different. Bids may be reduced to reflect the fear that future
government policies will seek to capture some of the profits anticipated
by bidders.

See Crampton (2002), McMillan (1994), or Rosston and Owen (2002) for
examples of economist support
for spectrum auctions. For a contrary view, see Noam (1995) or Melody
(2001). Theoretically, a bidder should not bid more for the spectrum
than what the spectrum is worth to the bidder after accounting for the
expected costs of constructing the network that will use the spectrum
and the other costs of operating the business. Once the spectrum is
acquired, it is a sunk cost and as long as capital markets are
efficient, the bidder should still have the same incentive and
opportunity to deploy its network. Unfortunately, capital markets are
unlikely to be efficient as the capital shortages faced by telecom firms
during the recent downturn in the sector demonstrated. Additionally,
expectations may be incorrect and the winner’s curse may apply.
That is, in principle, an auction and a lottery followed by secondary
market trading will both assign
spectrum to its highest value use. In practice, this need not be the
case since neither the initial auction nor the subsequent trading may be
efficient for reasons discussed further below.

 Kwerel and Williams (2002) recommend that the government be required to
bid for spectrum that might
be set aside for dedicated unlicensed use.
 For example, restrictive licensing rules can limit the extent to which
services operating in different
frequencies can compete with one another.

 See Rothkopf and Bazelon (2003), Melody (2001), and Noam (1998) for
critiques of using auctions to
extract surplus.
 See Peha (2003) for a description of how such a system might operate.
 See FCC Interference NPRM ET03-237 (2003)
 Primary use is consistent with government pre-emption under special
circumstances. The need to have
adequate spectrum available in the case of an emergency or for national
security is often cited as a reason
for why additional government spectrum should not be released for
commercial use. One solution to this is
to provide for government-preemption or interruption during such
periods. If necessary, such pre-emptible
service could be provided for spectrum allocated via exclusive licenses
or dedicated unlicensed and so need not provide a basis for preferring
an exclusive licensing regime.

 There should not be usage charges that require a service provider
agreement. Therefore, if there are costs
these should be capitalized in the price of the radio equipment and, in
any case, are expected to be minimal per end-user.
This rough estimate was provided by Carl Panisik, Texas Instruments, in
the context of pointing out that
spectrum costs would need to be much lower in order to make the high
data rate services anticipated by 3G/4G services viable. To offer higher
data rates, carrier’s either need more spectrum, likely incurring higher
auction fees, or by using the spectrum they have more intensively, which
means more (smaller) cell cites and higher infrastructure costs. (Mr.
Panasik offered this estimate during his talk at a workshop on spectrum
reform sponsored by the National Telecommunications Information
Administration (NTIA) on December 9, 2003. While quite imprecise, it was
interesting to note that no one in the room of academics, government,
and industry experts questioned the relative magnitude of this
estimate.)

Theoretically, it is possible to use the auction proceeds to offset ex
post monopoly pricing to the extent
that is desired (see Loeb and Magat, 1979).

One may ask question whether a license-induced monopoly is a bad thing.
There are two circumstances
when economics suggests it might not be: (1) when the services to be
provided via the spectrum are a natural monopoly (i.e., costs are lowest
when the market is supplied by a single provider); or (2) when the
monopoly profits may be viewed dynamically as Schumpeterian returns to
risky investments in an earlier period. In light of the trends in
wireless services and competition elsewhere in telecommunications
services, spectrum licensing is unlikely to be justified via recourse to
a “natural monopoly” argument. The second argument relates to the
potential need for licenses to provide efficient investment incentives,
which is addressed further below.
The equilibrium price will depend on both supply and demand conditions.
In any case, expanding supply
will mean prices will be lower for whatever level of demand prevails.
 See Johnston and Snider (2003).
 See Landler (2003).
 In the context of spectrum pricing, “over-provisioning” amounts to
adopting technologies to expand the
usability of available spectrum, which includes technologies that allow
operation in increasingly noisy environments.
See McKnight and Bailey (1998) for a summary of some of this research.
See Odlyzko (1998) for
argument that over-provisioning is less expensive than charging for
quality-of-service.
What constitutes efficient “pricing” depends on the context of the
transaction. Pricing is inefficient if it
precludes concluding buyer/seller transactions that would otherwise be
efficient (e.g., there are buyers with a willingness-to-pay that exceeds
the cost of supply). In a competitive market, efficient pricing should
reflect marginal costs; in a bilateral trade, any price between the
buyer’s willingness-to-pay and the seller’s cost is potentially
efficient. Prices are also inefficient if excess resources are expended
in acquiring a price.  In a competitive market, this may arise because
it takes too long to settle on an equilibrium (marketclearing)
price; in a bilateral trade, because there is too much bargaining.

 Because new technologies will experience network effects, scale and
scope economies, and learning
effects, it may be possible to foreclose emergence of a competing
technology by denying it access to spectrum at affordable rates early in
its life-cycle.
 That is, UWB would have to purchase rights to operate in the broad
range of frequencies over which it
spreads its signal. Purchasing such rights may be too expensive,
precluding UWB participating in the market. The use of the spectrum by
the carriers with ownership of the excludable licenses imposes a
negative externality on the UWB technology that is not reflected in the
prices for the excludable licenses.
 That is, when there are network effects, early adopters convey a
subsidy on subsequent adopters because
the value to every subscriber is greater when the network is larger.
Such network effects can provide the basis for penetration pricing
(i.e., early adopters pay lower prices, which increase as the size of
the network grows, see Katz and Shapiro, 1986). These may arise because
the market needs to “learn” about the benefits of the new technology.
A discussion of commons vs. private property management is beyond the
scope of this paper. See
Ostrom (1990), Benkler (1997), or Lessig (2001).
 See Konston (2002).
 Since nothing in life is certain or forever, the protection cannot
eliminate risk and does not need to.
Undertaking risky investments is a normal part of business.
 The license protects against ex post behavior that would threaten the
ex ante expectation that the original
investment will be recovered. This is analogous to the justification for
granting intellectual property rights to provide incentives to invest in
creating content.
 Denying access is not necessary. Merely increasing the cost of spectrum
access to entrants or new
technologies may be sufficient to block their entry in the presence of
uncertainty, network effects, or scale economies.
 In addition to the references cited here, helpful information was
provided by David Reed, Tim Shephard,
David Clark, Marvin Sirbu, Jim Snider, Coleman Bazelon, Sharon Gillett,
and Andrew Lippman, although they bear no responsibility for how I may
have misunderstood them.

http://www.newamerica.net/Download_Docs/pdfs/Pub_File_1548_1.pdf

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