TCS Daily

The Christmas Spectrum

By Benedikt Koehler - December 13, 2004 12:00 AM

Still looking for the Christmas gift for the person who has everything? If the embarrassment of appearing empty-handed on Boxing Day is unbearable, cash is not the issue and you are living in the UK, put your worries behind you. On 23 December spectrum trading in Britain goes live, so you can bid for bandwidth, gift wrap your title deed, and rest assured you have found a present that is expensive and novel. But it might be difficult to come up with clear answers to the questions bound to come up over dinner: Why is spectrum special? And, if I return it will I get my money back?

The answer to the first question is unequivocal: yes, spectrum trading is special. Over the last century changes this big have happened about once every generation. Spectrum rights first became a hot property in the pioneering days of radio broadcasting. In the US, a country built by settlers staking their claim in the wilderness and turning it into their homestead, it was second nature for entrepreneurs to feel the same rules applied to strips of bandwidth. By 1912 bandwidth users could count on legal backing to ward off latecomers contesting they had rights to the same bandwidth. By 1934 the US passed the Communications Act to settle the rules of engagement for spectrum competition. Henceforth, owners of spectrum could divest their entitlement only after receiving government approval, and complying with conditions how "the public interest, convenience and necessity will be served thereby." Spectrum owners knew they had to comply with government guidelines, but in return they enjoyed the reassurance they no longer had to defend their market against new entrants. Regulators had sealed off market entry for them.

This regime seemed to suit everyone, well, almost everyone. The year 1959 was the next key date in the story of spectrum trading, when LSE professor Ronald Coase had the temerity to question whether government constraints on spectrum use were in everybody's best interests. After all, sealing off the market not only froze out competitors, Coase said, it also froze out discovering ways of doing things differently. At the time, this point passed almost unnoticed outside those sections of ivory towers where academics pore over new publications. But decades later, once mobile phone companies sprang into action, his article seemed uncannily prescient. The time had come to rethink how to handle spectrum use. In due course, auctioning off spectrum rights for mobile operators became one of the top money-spinners of the Golden Nineties.

Mobile phone operators paid princely sums for the right to use 3G licenses, and expected in return to be left to enjoy the market they thought they had cornered. The story could stop right there, with spectrum users, consumers and regulators living happily ever after, each knowing what to expect. Yet free markets are not scripted like fairy tales, more like adventure stories. The happy ending of market equilibrium did not last long, disrupted by new technology emerging on bandwidths nobody had bothered to care about. The challenger's name is WiFi.

Even a few years ago the prospect the fledgling WiFi market might ever threaten mobile phone operators seemed as remote as giving David even odds to knock out Goliath. Granted, WiFi transmission was cheap. But few were able to envisage how short range transmission could harm the might of giant telcos, whatever the cost savings. So, WiFi spectrum was never subject to licensing, and anyone was free to try his luck in using it. In the meantime, Hotspots are proliferating everywhere, and for a good reason. Operators are aiming to leapfrog from WiFi to WiMax. The key difference between the two is how far they reach. WiFi users can link up even a few hundred feet, a challenge telcos can shrug off. WiMax, on the other hand, can boost transmission up to a radius of 30 miles, and that makes WiMax a lethal challenger to telcos' business plans. To put this into context: a single WiMax could cover Greater London and its population of over ten million people. If that happens, owning a 3G license in the UK is not the sure path to riches it once was.

So, for regulators it is back to the drawing board. Yesterday's assumptions are out of date. A tsunami of market innovation could be imminent from the Far East. South Korea, with a population a quarter of the United States, is home to half of the world's Hotspots. Hardware manufacturers in Korea are kitting out their domestic market as a launch pad for testing the latest hardware to morph WiFi into WiMax. The next step? Well, remember the story of transistor radios, and the plot writes itself. The rules of engagement are due for an overhaul. Rest assured incumbent telcos are hard at work pleading their case in Brussels, where guidelines for spectrum licensing in the EU are under review.

That is why 23 December is a big day, not only for Christmas shoppers. The UK will be navigating uncharted waters by permitting trade in spectrum rights. So far, only four countries have taken this step: New Zealand, Australia, Guatemala and El Salvador. In each case, price action told the same story: trades are struck at discounts to prices achieved at auctions of years gone by. It seems Ronald Coase, vintage 1959, is still up to date. Regulating spectrum markets is like trying to bag the wind. Watch the direction of trades in spectrum rights, they will tell the story which way markets are heading.


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