20 December 2002

Sally Trebble

Because the laws of physics make radio spectrum a finite resource, it is commonly assumed that demand to use it is greater than the available supply. There may have been evidence to support this at a time when assessments of demand in the electronic communications industry generally were based on untested speculation about consumer behaviour and dreamy land grab driven innovation. But if it was ever true, it isn’t anymore.

The introduction of spectrum trading will prove that the supply of radio spectrum is as adequate to meet demand as is the availability of roads to dig up for housing fixed infrastructure. Historical scarcity was caused by wasteful technologies and restrictive licensing. Paradoxically, the roll-out of radio services in the future will be constrained by lack of demand for new services and lack of resources to build physical infrastructure. Radio spectrum will be readily available.

The myth of scarcity

Radio spectrum licensing in the UK is based on the 1949 Wireless Telegraphy Act. This post-war legislation makes it an offence to establish or use any station for wireless telegraphy or to install or use any apparatus without a licence granted by the Secretary of State (there are special provisions for broadcasting which are not dealt with here).

The Secretary of State is given the broadest possible powers to issue licences, allowing her to prescribe licence terms, provisions and limitations and to impose rules controlling the location and technical specification of the equipment used and the purpose for which, the circumstances in which, and the persons by whom it can be used. She can also exempt radio equipment from the requirement to be licensed altogether.

These powers have been used to issue licences which are generally straightforward to understand and not swamped with regulatory obligations. However, radio licences are specific to a particular use, often to a particular set of technologies, and are granted in a personal capacity. The result is that only the original grantee can use the radio spectrum which is assigned through current processes for a given purpose, using particular kit. Where equipment is licence exempt, the user generally cannot charge for services provided over it.

There are many examples of spectrum, available for licensing or already licensed through this system which are currently unused, including most of the UK allocation of public TETRA spectrum, assigned in tranches in 1997 and 2001 to Dolphin, the majority of broadband fixed wireless access spectrum auctioned and partially assigned in 2000/1 and the assignments of 3rd generation spectrum auctioned in 2000.

And yet, prospective market entrants have been unable to launch services due to ‘spectrum scarcity’ against this background. Inquam resorted to buying Dolphin through purchasing its share capital in order to secure its TETRA assignment, the only way a licence can legally be transferred under current rules.

The additional complications introduced by the EU Licensing Directive, requiring every spectrum assignment to be conducted in a way which is fair, proportionate and non-discriminatory, until recently have prevented some companies from launching fixed wireless access services, despite having both technical and financial resources and a proven market. The broadband fixed wireless access spectrum they needed was already licensed to a company in administration and they could not secure a transfer of the Atlantic licences around which their services are designed without buying the company. The spectrum has since then become licence exempt, making the licensing process academic in their case.

Frenzied auctions across Europe took the myth of spectrum scarcity to new heights. The theory behind auctions is that supply and demand will set the price and the involvement of 13 heavyweight bidders and the licence fees paid suggested that demand far outstrips supply in the case of 3G. But in 2000 there was no market for 3G. There were no customers, no technologies and no services. Prices were driven by concern among 2G incumbents about market signals if they failed to secure licences, at a time when future growth predictions were taken as a measure of current success. The fate of the 3G spectrum is the subject of much debate but at least one licensed 3G operator has already discontinued plans for roll-out in Germany.

What is spectrum trading?

Changes to the law to permit spectrum trading, would allow spectrum licensees to grant rights to use all or part of their spectrum assignment to a third party, without the need for an administrative re-licensing process. An administrative right to use radio spectrum thus becomes a tradeable commodity.

There are 3 variables, knows as mode of trade, duration and extent.

Mode of trade: the mode of trade determines the way in which the spectrum traded can be used. This may involve only a change of ownership where other controls on the use of the spectrum remain the same; reconfiguration where the frequencies traded are re-packaged through partition or aggregation; or change of use, allowing the spectrum traded to be deployed for a different service to that envisaged when the licence was originally granted. These modes can be combined in different ways.

Duration: the duration of a trade determines the period during which a third party is given rights to use the spectrum. A trade need not be a permanent sale ie for the duration of the original licence (it could not be for any longer than the original term). It could be a type of ‘lease’, with the rights to use the spectrum reverting to the original licensee after an agreed period or on the occurrence of a particular event such as the insolvency of one of the parties (a ‘pre-emptive reversion’ ).

Extent: the extent of a trade depends on what rights and obligations are transferred. These may be exclusive to the purchaser or they may run concurrently with the rights of the licensee, so that 2 parties have equal rights to use the same radio frequencies. Rights may also be divided geographically, so that the parties have rights to use the licence in different parts of the licence’s geographic scope. The extent of a trade could also determine where risk falls in the funding of a spectrum licence.

Existing spectrum markets

Spectrum is commercially traded in several countries already. In Australia, spectrum blocks may be packaged vertically to provide bandwidth, or horizontally to provide geographical coverage. A service industry is developing around the spectrum market, including consultancy and on-line brokerage services.

New Zealand has a double layer system where ‘management rights’ for frequency bands are auctioned and licence rights for use-specific frequencies within those bands are then sold off. Trading has been used mostly to consolidate spectrum for broadcasting, allowing the creation of a new television channel covering 70% of the population.

In Guatemala, a relatively free market in spectrum rights has developed, generating more efficient use in the FM broadcasting sector. In Canada, despite a liberal approach to trading and licensing, the market for spectrum is inactive.

The USA introduced spectrum trading some time ago and the Federal Communications Commission, the telecoms industry regulator, is now actively promoting a secondary market. It is being encouraged to remove all licence conditions except those relating to interference and competition. As with New Zealand and Guatemala, trading is being used primarily to aggregate frequencies to create national services out of limited regional assignments.

Introduction of spectrum trading in the UK

The UK Government is currently working on the form which spectrum trading will take in the UK. A bit of a perfectionist when it comes to liberalisation, the UK can be expected to develop a workable, market friendly model, which complies to the letter with the new EU Framework Directive (effective in the EU since April 2002 and in force in the UK by July 2003), specifying highly detailed processes which include cast iron protection of third party rights to prevent interference, and which ultimately, leave the Government in control of the system. This is the English regulatory way.

The Directive permits (but does not require) Member States to legislate for undertakings to transfer rights to use radio frequencies with other undertakings. Such trades must be made public and notified to the Regulator, and the procedures developed for trading must not be anti-competitive. Significantly, change of use is only permitted by the Directive to the extent that it is consistent with frequency harmonisation under the Radio Spectrum Decision (Decision No 676/2002/EC) or other Community measures.

These provisions are reflected is the draft Communications Bill, which enables, but does not require, the introduction of spectrum trading in the UK. ‘Trading Regulations’ will be issued pursuant to the new legislation, setting out the detail of how trading will work, and current Wireless Telegraphy Act licences will be revoked and reissued or modified to enable existing licensees to sell or lease their assignments. Spectrum Trading Guidelines are likely. Any trade which fails to comply with this set of rules, will be void.

In practice, Trading Regulations are expected to permit trading in some licence classes by the end of 2004. The first candidates for trading will probably be public wireless networks (eg GSM licences), broadband fixed wireless access, private business systems and terrestrial fixed links. It is being proposed that at the same time, basic ‘change of ownership’ trading would be introduced for all other licence classes. A second anticipated tranche for more complex trading would cover sound and television broadcasting, both analogue and digital, programme making, special events and aeronautical and maritime spectrum assignments.

The Government has recently announced the terms on which remaining broadband fixed wireless access spectrum will now be licensed, omitting any ‘use it or lose it’ obligation and widening the uses to which the spectrum can be put to include backhaul, the exclusion of which from the last round is considered to be one of the reasons why the 2000/1 auction round left many lots unassigned. More open licensing such as this, now, will facilitate trading in the future.

A service surround would probably have to develop for trading to function, involving intermediaries, brokers and planners. The Government is developing online information systems to support spectrum licensing more generally which would provide an electronic platform for UK trading. This could eventually be rolled out internationally, allowing prospective purchasers to plan Europe wide radio networks. Online trading will permit the Government to monitor and record all trades and to charge an administrative fee for every exchange which takes place. This is not ground breaking - the European Commission’s ‘eEurope 2005: an information society for all’ initiative requires all Member States to ensure that public services are online, interactive and accessible and exploit the potential of broadband networks by the end of 2004.

What changes?

A significant knock-on effect of trading will be that any flexibility allowed in a spectrum assignment which is traded would also have to be allowed to licensees without a trade. In other words, once trading is permitted, the same flexibility is available to all licensees.

In the more extreme case where change of use is allowed, a broadband fixed wireless access licensee which currently has an unused spectrum assignment, for example, could use its spectrum for 2G mobile services, for fixed backhaul even if that was excluded at the time of grant, or for basic voice rather than broadband, profits from which continue to be steady compared to the slide in data revenues.

In the more straightforward model, a current licensee could sell its current assignment to a third party wishing to enter the same market. Current UK rules on licence terms and administrative fees are being reviewed, so that current licensees can sell on a licence with greater security of tenure than the traditional one year term. Licence fees may still be payable, but the benefit of fees already paid may be passed on by the seller to the purchaser.

Alternatively, where a current licensee has neither the budget nor the short term strategy to use its spectrum assignment, it may lease its frequencies for a defined period to a third party with equipment and customers. The licensee may then reclaim the frequencies at the end of the lease, perhaps having completed its network roll-out or satisfied itself that its technology works.

However, special rules are expected to apply to 3G licences, prohibiting spectrum trading until 3 years after the first licensee’s substantive launch of service in the UK. This makes it unlikely that trading in 3G spectrum will be permitted before the expiry of the 3G roll-out obligation to reach 80% of the population by 31st December 2007. If it is true that it is necessary to be in at the beginning of a new market to secure a sustainable share of it, this exclusion of 3G from the spectrum trading rules could effectively strip 3G spectrum of commercial value, since the market would be 3 years old by the time new licensees could enter and no longer up for grabs except at the margins. This idea was until recently the subject of a Government consultation, and no announcement has yet been made on whether it will be adopted.

Roll out obligations would disappear altogether in many cases, since a right to trade a spectrum assignment would be inconsistent with an obligation to build a network using that spectrum. Arcane notions of diversity might become a thing of the past, as licensees re-deploy their spectrum to the most popular services, leaving niche markets to fade away or become monopolies.

The biggest obstacle to spectrum trading would be international, particularly European, harmonisation. Since most spectrum allocations are made in compliance with European band planning, a unilateral decision by the UK to permit change of use but subject to European requirements would result in little freedom. In the absence of spectrum liberalisation at European level, the UK project to re-align the 450-470 MHz band, scheduled to begin in 2005, would still have to go ahead. If European rules were relaxed, current streamlined arrangements for GSM roaming might be undermined, unless multi-mode frequency hopping handsets became mass market.

Although new radio technologies are increasingly designed for spectrum hopping, most existing transmission and receiving equipment is pre-programmed to operate at particular frequencies. It is usually either not possible or too expensive for radio apparatus to be re-tuned to new frequencies. This means that many licensees could only sell their spectrum to new entrants or to existing competitors, and might have to sell their equipment with it. Conversely, it would be a great deal easier to buy the assets, including the frequency assignment, of a failing radio based business, without also taking on its debts because the company would not have to be purchased in order to secure the licence.

Final word

The usefulness of spectrum trading, in the end, comes down to how much unsatisfied demand for radio spectrum there really is. Leaving aside broadcasting, there may be very little. Since it became more difficult to secure capital for network roll-out, most prospective service providers who want to use radio, make resale arrangements with existing network operators. This utilises the spare capacity which efficient technologies release, and provides reliable revenue streams with which to fund network roll-out and upgrade.

Fixed broadband networks are reaching critical mass and although the fixed wireless alternative is likely to be very interesting in uneconomic areas, the necessary spectrum is in plentiful supply from the licensing authorities already and public finance is available to support network roll-out. In addition, licence exempt spectrum in the 2.4 GHz and 5 GHz bands already supports broadband wireless fixed access services using 802.11 and other Wi-Fi technologies.

In these circumstances, it is unclear how much demand there will be for commoditised radio spectrum to support telecommunications services, or where it will come from. The Government has some idea, based on the approaches it receives for licenses and requests for re-assignment on a private basis.

Spectrum trading could become another local loop unbundling story, where considerable time and effort are dedicated by public officials and private companies into developing a workable process which no-one has the money or the will to exploit – 32 operators signed the standard local loop unbundling contract but less than 5 have actually unbundled loops and unbundling is not making a discernable difference to broadband competition in the UK. Pockets of activity without scale efficiencies make it uneconomic and the same will likely be true of radio spectrum.

The biggest impact of spectrum trading could well be liberalisation of use of existing assignments, so that little ever changes hands but entrepreneurial licensees can move with the times on the spectrum they’ve already got.

This article is also published at www.telecomfinance.com