Licensed or unlicensed: the economic considerations in incremental spectrum allocations

• Authors: Coleman Bazelon
• Venue: IEEE Communications Magazine
• Year: 2009

At present, no existing market mechanism allows for the trading of radio spectrum between licensed and unlicensed uses. Whenever spectrum is made available for reallocation, the FCC faces a dilemma in determining which access regime to use. For example, the television white spaces are largely unused and available for reallocation. Since both licensed and unlicensed allocations are valuable, allocation decisions (for the TV white spaces or any new band of radio spectrum) must be based on a clear understanding of the trade-offs between the two choices. This article defines economic criteria that can be used in making these important decisions. Economic criteria can go beyond the simple measures of profit and consumer surplus from market transactions. Although some measures of benefit, such as the value of innovation, may be difficult to quantify, the analytic economic framework presented here can easily incorporate them. This analysis does not address any noneconomic considerations in choosing between licensed and unlicensed uses. As one example, the issue of potential societal benefits from promoting minority ownership of spectrum through restricted licenses - something only possible in a licensed regime - is not addressed in this economic analysis. The analysis herein provides the economic information needed for policy analysis; it need not be the sum total of that policy analysis. Standard economic theory tells us that the value of an additional unit of spectrum is equal to the increase in socially beneficial services it produces. For licensed spectrum allowed to trade in markets, this value is relatively easy to calculate: It is the price firms pay for the licensed spectrum. The equation is more complex, however, when unlicensed spectrum is involved. The current value of unlicensed spectrum bands is equal to the sum of the value of the spectrum in all uses in those bands. The incremental value of additional spectrum allocated to unlicensed uses, however, is based on the relief to congestion the additional spectrum will provide. Unlicensed spectrum also contains a value associated with the possibility of future innovation made available by the lower transaction costs of gaining access to unlicensed spectrum. This option value increases with additional allocations of unlicensed spectrum, leading to the benefit of incremental option value from additional unlicensed spectrum. The formula for the benefits from additional unlicensed spectrum allocations can be summarized as "congestion alleviation plus incremental option value." I apply the analysis developed in this article to the case of TV white spaces. I use information from the recent auction of the lower 700 MHz band E block to calculate the incremental value of licensing the white spaces. I also calibrate an estimate of the incremental value of the white spaces under an unlicensed allocation. Initial calibration of the economic criteria that determine the trade-off between incremental licensed and unlicensed spectrum allocations indicates that currently licensing incremental allocations is the favored policy. If policy makers choose to allocate incremental spectrum as unlicensed, they should recognize the economic costs of that choice.