Scott J. Wallsten is a special consultant to Economists Incorporated and vice president for research and senior fellow at the Technology Policy Institute. This article is drawn from research he is doing jointly with John Mayo at Georgetown University.

Secondary Spectrum Markets

The Federal Communication Commission’s (FCC’s) move to use markets to allocate spectrum rights through auctions in the mid-1990s has been a success. Yet regardless of how efficiently initial rights are allocated, changing supply and demand conditions mean that initial allocations can quickly become inefficient. Well-functioning secondary markets can ensure that spectrum can shift to new, more efficient uses.

The ability of secondary spectrum markets to function well has become increasingly important as demand for wireless services continues to increase. The scarcity of spectrum has led to calls to cap the total amount of spectrum that any given licensee can hold under the belief that it is too difficult for new entrants to acquire spectrum. This debate over spectrum caps, however, is occurring largely in the absence of data on secondary spectrum markets.

Secondary markets are common throughout the economy. Broadly speaking, a secondary market is one in which a seller of a good is not the one who initially sold the good, though there is not always a bright line between transactions better described as wholesale and those better described as secondary. When property rights are defined clearly and information can flow freely, these markets work well and are typically unremarkable—houses and cars are routinely sold in secondary transactions, as are most things sold in garage sales and on eBay.

Nevertheless, some factors have slowed the development of secondary spectrum markets. In particular, property rights to spectrum have been somewhat controversial, in part because license holders own the right to use spectrum but do not technically own the spectrum itself. In addition, those usage rights are often constrained by a wide range of restrictions, including time of use, geographic area, technology allowed, and even the purpose for which the spectrum may be used. Though these factors, plus interference issues, can make defining property rights difficult, they do not make it impossible.

Despite these difficulties, secondary spectrum markets are quite active. For example, the amount of PCS spectrum that has changed hands each year since 2004 is about as much as was newly released in the 2006 Advanced Wireless Services (AWS) auction.

Secondary spectrum markets include a host of economic activities, which range from activities that may be better described as wholesale transactions to true license resale. Sales to mobile resellers, such as Tracfone, straddle the line between wholesale and secondary. These resellers lease network capacity on cellular networks and resell it under their own brand names. The end-user interacts only with the reseller, not with the underlying provider. Resellers serve more than 18 million customers in the United States.

A related secondary market involves spectrum for use by the so-called machine-to-machine (or “M2M”) industry, which supports data communication between remote machines and processes. But most of the M2M market focuses on businesses, which use M2M devices to, for example, track mobile assets, monitor electricity use, and gather telemetry from remote areas. These applications typically rely on specialized devices that work on networks built primarily by large facilities-based cellular wireless carriers. Though this market is new, ABI Research estimates that North America had 22.3 million M2M connections in 2008, and M2M revenues collected by cellular carriers were about $2 billion in 2006. In addition to those markets, there also exists direct spectrum trading.

The FCC has made steady progress towards better facilitating secondary transactions. In 2000 it identified “certain essential elements,” for secondary markets to function: “ 1) clearly defined economic rights; 2) full information on prices and products available to all participants; 3) mechanisms for bringing buyers and sellers together to make transactions with a minimum of administrative costs and delays; 4) easy entry and exit to the market by both buyers and sellers; and 5) effective competition with many buyers and sellers.” While the FCC has generally been able to promote these elements, some work remains to be done.

For example, while in direct spectrum trading the rights are defined at least as well as they are specified in the license, information on who owns what and where remains difficult to obtain. The FCC keeps track of this information, but in a database, the Universal Licensing System (ULS), that is extremely difficult to use. Moreover, determining who owns what spectrum rights is becoming more difficult due to the ability of license holders to disaggregate (divide into smaller frequency blocks) and partition (divide into smaller geographic areas) licenses. Arguably, the opaqueness of this database constitutes one barrier to a more robust secondary spectrum market.

Nevertheless, careful examination of the ULS database yields some interesting information. The data show that thousands of licenses change hands each year (not including licenses that technically changed hands but only because firms merged or were acquired) and hundreds of others are subleased. These trades represent a large amount of spectrum: between 1999 and 2008 about 10 billion MHz-pops (spectrum bandwidth times the population covered) of Personal Communications Service (PCS) spectrum changed hands each year.

The FCC has significantly reduced the amount of time to approve license transfers, as the figure demonstrates. In the first 6 months of 2009, it took the FCC just over 10 days to approve a license transfer on average across all license types. The decline in approval times shows that the process may be better described as simply notification, rather than approval, though the agency can reject an application under certain circumstances.

The significant volume of activity and rapid approvals of transfers show the FCC has made progress in promoting secondary spectrum markets. The data do not, however, by themselves demonstrate that secondary markets are working as well as they could be. For example, as the FCC noted, these markets require full information to function well. That information is not easily obtainable. In part because of the high investment required to use the ULS database, it is difficult to learn who owns which spectrum. In addition, while licenses can be traded, no robust platform exists to facilitate this trading, though at least one company, Spectrum Bridge, is attempting to become that platform.

In sum, secondary spectrum trades are far more common than many realize, but certain institutions, such as a robust ownership inventory and trading platforms, must develop to further facilitate the thriving markets that many hope to see.