The Economics of Spectrum Sharing
28 Pages Posted: 1 Apr 2013 Last revised: 12 Sep 2013
Date Written: March 31, 2013
In light of the growing demand for wireless broadband spectrum, significant attention is now being devoted to more effectively utilizing federal allocations of spectrum, either by entirely repurposing for commercial use or sharing with commercial users. Spectrum sharing is believed to be one way to allow commercial users to access a band without incurring the costs of completely clearing existing federal users. While sharing avoids costs of clearing federal users, spectrum sharing has its own costs and is likely to impact the value of the shared spectrum. The purpose of this paper is to understand the economic tradeoffs associated with various spectrum sharing arrangements.
This paper will begin with a brief description of current policy issues around sharing and review potential frameworks for making spectrum allocation decisions. We posit that efficient spectrum allocation decisions should maximize the likelihood of achieving the policymakers’ goals. Moreover, whatever the goals of policymakers, economically efficient use of spectrum creates value for achieving those goals. Consequently, efficient spectrum use should only be sacrificed for explicit policy objectives that are considered more valuable than the forgone value of using the spectrum efficiently. In trying to achieve efficient spectrum management, or in evaluating proposed departures from efficient use of spectrum, it is crucial to know the costs and forgone opportunity associated with any allocation policy. This is especially true when evaluating spectrum sharing proposals, because any specific proposal inevitably involves a trade-off between costs and benefits of two or more competing users.
To understand this tradeoff we will discuss the theoretical drivers of commercial spectrum value. The value of spectrum is essentially derived from the inherent profitability of wireless services deployed on the spectrum. In the case of shared spectrum, the total value of the spectrum is the sum of the value to each shared use. To the extent that sharing restricts the operations or increases the costs of deployment for a given user, it diminishes that users profitability. Only if the sharing arrangement increases the value to another user by a greater amount will the total value of the uses of a band of spectrum increase.
Based on these principles of spectrum value, the next section will discuss how spectrum sharing will likely impact the value of spectrum to a single user and the cumulative value to all users. If the total value of the spectrum for all shared uses is less than the value for a single user, then spectrum sharing diminishes the potential value of the spectrum; likewise, when the total shared value is higher than the single user value, sharing increases the spectrum value. We will explore mechanisms through which various types of spectrum sharing might impact the value of a single user, and the resulting cumulative value of the band to all users. We will use illustrative examples to illustrate this impact of sharing.
Likely examples include the geographic sharing proposed by NTIA for the 1675-1710 MHz band, the FCC’s proposed small cell sharing in the 3.5 GHz band, and the sharing between TV Broadcasters and unlicensed users in the TV white spaces. While geographic sharing of the 1675-1710 MHz band could limit costs to federal reallocation, it would also diminish the economic value of the spectrum by eliminating revenues in the exclusion zones, reducing any nationwide premium on the spectrum, and potentially increasing costs to deploying wireless broadband services. To evaluate the relative value of sharing proposals in the 3.5 GHz and TV Broadcast bands, we must compare the total potential value from all shared users to the value that a single commercial user could derive from this spectrum.
Keywords: economics, telecommunications, valuation, wireless, spectrum, spectrum sharing
JEL Classification: D23, D46, D61, D78, L96
Suggested Citation: Suggested Citation