FCC Allows Spectrum License Trading

On Thursday the Federal Communications Commission voted to allow spectrum licensees to lease their licensed spectrum to third parties. This long-awaited result now frees spectrum licensees and interested parties to create a secondary market in spectrum licenses. As reported in the New York Times,

Officials and industry analysts say the hope is that by allowing license holders to lease slivers of the spectrum that are currently underused, consumers will benefit from reduced instances of cellphone calls being dropped. More efficient use of the spectrum would make it easier to connect to the Internet with hand-held computers in crowded areas where the spectrum available is inadequate to move data and it should help extend wireless services in rural areas that are underserved.

Other stories on the FCC’s decision are at InternetNews.com, at Wired News, and at the Washington Post.

Not all observers are convinced that this move will deliver benefits. Those who are skeptical about the effects of the license trading (discussed in this Wireless Week article), argue that because of the economic doldrums, there is not excess demand for spectrum, so the economic effects of relaxing the constraints on license trading are small. While that is true in the short run, it’s a small point. The larger point is that removing this constraint will have both static and dynamic efficiency effects. Enabling secondary license markets to arise provides an opportunity for licensees to profit from reallocating spectrum to higher valued uses that other firms may be pursuing. One example of such reallocation, from the New York Times article is

An airport with congested airwaves from air-traffic transmissions and cellphone use would be able to lease a piece of the spectrum from other spectrum holders that are not using their space during peak hours.

That reallocation creates value, both for licensees and other firms, as well as for consumers who can avail themselves of the uses of the spectrum. Furthermore, removing this trading constraint may encourage technological change and innovation, an important dynamic efficiency consideration.

But is still not a full, true, alienable property right. The FCC still retains the ownership of the spectrum, so this license trading opportunity still does not convey a full property right to the spectrum.

For most of the past century the federal government, usually through the FCC, has retained ownership of rights to transmit in various parts of the radio spectrum. For most of the twentieth century the FCC allocated spectrum use through either an application procedure or through a lottery; both of these allocation methods allowed the FCC to choose the potential licensees, in keeping with the FCC remit to govern broadcasts based on a public interest objective (this public interest remit for the FCC is increasingly coming into question, too).

As early as 1958, economists Ronald Coase and Arthur DeVany recommended privatizing the radio spectrum, selling it through an auction process. Privatization would create well-defined property rights in specific locations on the spectrum, and would enable spectrum owners to transfer rights, and importantly, to determine how much value they place on having adjacent owners far enough away to remove some, most, or all likely interference. Privatization could also involve a judicial system of legal recourse in the event that some owners believed that interference from someone else’s spectrum property harmed their use of their spectrum.

Since 1994 the FCC has auctioned spectrum transmission rights. The FCC retains ownership of the spectrum itself, but has been auctioning ten-year licenses conveying the rights to use spectrum for specific purposes. These licenses have not been transferable between uses or between license holders. Retaining spectrum ownership enables the FCC to continue regulating broadcast, cable, telephone, wireless cable, and two-way analog and digital (such as analog and digital telephones and pagers) communication uses. However, a turgid system of enabling but regulating radio spectrum use, such as the FCC has been following since its inception, could slow or deter technological change itself, particularly in the burgeoning wireless technology industry. Still, the new license trading opportunity moves us toward the alienability, or tradeability, feature of ownership that best facilitates the reallocation of spectrum to higher valued uses.

Will it transmit information on actual opportunity costs to military and other incumbents? Government users of spectrum typically do not sit well with the licensing and trading of spectrum, and the military is a particularly substantial incumbent in several parts of the spectrum that could be put to good commercial use. If they are able to benefit financially from allowing others to lease part of their spectrum, that would force the military incumbents to compare the option value of holding onto all of it for their own future uses with the commercial value of the license to others. License trading potentially provides an alternative source of revenue for federal and military agencies that have looked at their spectrum as an entitlement rather than an asset. License trading will permit them to lease unused wavelengths without losing future rights to them. It will also allow commercial communications companies to have access to spectrum that would otherwise be off limits. In other words, free trade in spectrum rights creates opportunities for mutually beneficial exchange.