Spectrum pricing and trading06.10.2020
In an increasingly digital environment, adequate access to spectrum is key to expanding the deployment and coverage of telecommunications networks, and addressing the ever-increasing demand for data services. These networks support a variety of online applications, extending the impact of spectrum management to several sectors of the economy by transforming the way people access resources for health, transportation, education, agriculture, government, and financial services. As a scarce resource, spectrum requires proper management from regulators, to ensure equitable access and an interference-free environment among different users and services, as well as to introduce new technologies. A key aspect is the value charged for the use of spectrum, as well as the flexibility for licensees to utilize a secondary spectrum market, ensuring that it is put to its best use.
Types of spectrum fees
Spectrum is a limited resource with many possible uses, making it a valuable asset for national governments. National regulatory authorities manage, license, and monitor spectrum under the mandate to promote its most efficient and effective use for the benefit of society. Recognizing that, regulators charge fees for the use of spectrum. These fees can be broadly grouped into two categories (ITU 2016):
Both types of fees may apply to a particular spectrum licence. Regulators take a wide variety of approaches when setting spectrum fees, depending on the market characteristics, the health of the sector, the demand for the spectrum band, and the value of the proposed use of spectrum to the economy and society. These criteria also govern regulators’ decisions on which licensing mechanism to apply.
Setting fees: administrative approach
An administrative approach to setting fees is defined by the regulator setting the fees that licensees must pay for the right to use the spectrum. The level of the fees depends largely on the demand for the spectrum in the market compared to the available supply.
Administered incentive pricing
Source: ITU 2016; Ofcom 2010; ACMA 2020.
While commonly associated with auctions, regulators also apply reserve prices in some direct assignment procedures for scarce spectrum, as in Singapore’s 5G beauty contest award procedure for 5G spectrum. Singapore’s Infocomm Media Development Authority (IMDA) notes it set its reserve price after considering “the intrinsic value of the 3.5 GHz band, international and local benchmarks, and IMDA’s econometric assessment of Singapore’s mobile market.” Notably, while IMDA set a reserve price for the 3.5 GHz band, no initial fee was applied to the mmWave band that was also on offer, citing the ample spectrum available in the upper bands and demonstrating how demand for different bands plays into the valuation of fees (IMDA 2019).
Setting fees: market-based approaches
Market-based approaches to assigning spectrum are, de facto, used in cases of spectrum scarcity when demand for spectrum exceeds supply. Similar to the scarce spectrum assigned by direct assignment procedures described above, fees for the use of spectrum do not follow a cost-based approach but rather charge a premium to account for the economic value of the spectrum. Unlike administratively set fees, auctions provide a useful perspective of the market’s demand for and valuation of a spectrum band. Another way to value spectrum is through spectrum trading and leasing on the secondary market. In both cases, the market gives an approximation of the economic value of a particular spectrum band by showing what price others will pay to obtain it.
Spectrum prices defined in auctions
While auctions are market-based, regulators still intervene to ensure the best outcomes for the economy and society, as well as any policy goals. One way they do this is by establishing a reserve price, or the lowest starting bid for a block of spectrum. Since auctions provide insight into other countries’ valuation of a spectrum band, regulators often compile a benchmark of the reserve and final prices of auctions conducted in other countries that have awarded the spectrum band in question, preferably in recent years. The reserve price acts as an effective minimum floor, ensuring that bids do not undervalue the spectrum. A reserve price discourages tacit or explicit collusion among possible bidders to keep prices artificially low and also deters operators from bidding on spectrum that they may not need or want at a low price in the hopes of getting a higher price in resale. There are many examples of reserve prices set in auction, such as Italy’s multiband auction in 2018 (Ministry of Economic Development 2018: 30) and Hong Kong, China’s 2019 auction (OFCA 2019: 1).
Regulators also consider other factors in addition to benchmarks when setting reserve prices. Other determinants include the domestic market, the desirability and demand for the spectrum, its propagation characteristics, and the possible usage scenarios.
Spectrum trading or leasing in secondary markets
The value of spectrum and the licensee’s spectrum needs may change over the course of a licence. In these cases, having the ability to transfer or trade spectrum is an asset, if it is allowed in the licence terms. A secondary market is more relevant in cases of spectrum with higher demand, which is usually characterized by long licence terms and premiums for spectrum use (e.g. mobile spectrum). Establishing a secondary market for spectrum trading and allowing spectrum leasing provides many benefits:
Spectrum trading frameworks range in terms of regulatory involvement: some regulators do not require any regulatory approval following the assignment of the licence, while other regulators require notification of the proposed spectrum trade, and others require regulatory approval before a trade takes place. Regulators can add certain safeguards to ensure that licensees do not buy spectrum expressly to resell it for a higher price. This could include adding terms to the licence to prohibit spectrum trading or leasing for a period of time and requiring potential licensees to demonstrate their intention to put the spectrum to use (e.g. business and network plans as criteria to participate in an auction or direct assignment).
Spectrum trading has been in allowed in a number of countries. New Zealand was one of the frontrunners in spectrum trading, with its Radiocommunications Act 1989 allowing spectrum rights to be freely traded. Australia also allows for spectrum trading under certain conditions, although notification to the national regulator, ACMA, is required and prior ACMA approval is needed in certain cases (ACMA 2020; Australia, Radiocommunications Determination 2012, Art. 8(2)). Similarly, the United Kingdom allows most spectrum licences to be traded, with some exceptions, upon approval by the U.K. regulator, Ofcom. In the United States, spectrum transfer applications are automatically approved as long certain criteria are met; a review is triggered if the transfer does not meet the criteria for immediate approval. India also allows spectrum trading in certain cases, under the rationale that spectrum trading encourages competition, incentivizes innovation, makes it easier to do business, and optimizes resources (Department of Telecommunications 2015: 1). In 2019, Brazil updated its Telecommunications Law, with a key reform being to allow spectrum trading with regulatory approval, which may include regulatory conditions on the transfer (Law No. 13879 of October 3, 2019, Art. 163). At the regional level, the European Union encourages Member States to allow spectrum trading in harmonized flexible use bands.
Spectrum valuations in mobile spectrum awards: promoting policy objectives
In both spectrum auctions and direct assignments, regulators are increasingly designing processes that consider other criteria, which in some cases may lower the fees required for spectrum usage. Some examples in different countries have discounted fees in exchange for coverage commitments to encourage the narrowing of the rural digital divide, such as:
In addition, many regulators are actively encouraging 5G deployments and supporting the mobile industry via direct assignments. One way some regulators are lending this support is by discounting spectrum or offering it in exchange for network investment and deployment commitments. Network investment to deploy 5G is expected to be high, making additional high costs for spectrum potentially detrimental to deployment objectives. Some examples include:
The importance of setting the right level of fees
Setting the appropriate level of fees for spectrum use to support various applications is important. On the one hand, many regulators depend on the fees collected to sustain their annual budgets. However, on the other hand, overly high spectrum fees may discourage or exclude smaller players, new entrants, or individuals from accessing spectrum. This could especially hinder innovation and competition. Even operators of larger networks, such as mobile network operators, have limitations on the price to pay for spectrum, especially considering the substantial costs to maintain and expand the networks. For instance, if spectrum reserve prices are set too high, operators may decide not to participate in assignment procedures for new spectrum. For example, a task force of the Indian Ministry of Finance urged the Department of Telecommunications to reduce its reserve pricing, payment schedule, and interest rates of its 5G auction. This was in response to fears that the high price, coupled with the financial stress of the telecommunications sector, could result in poor participation, and ultimately delay 5G roll-out in the country (India 2020: 121).
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