This Chapter addresses topics regarding spectrum planning, management, licensing, assignment and valuation, as well as policies to promote efficient use of spectrum such as spectrum trading, sharing and refarming. Spectrum is a key resource for expanding wirelss access to broadband services and a crucial element for broadband policy making. Moreover, this Chapter aims to shed light on the current challenges of spectrum management such as those related to the switch-over to digital terrestrial television (DTT) and the increased need for spectrum resources for wireless broadband.
1. Spectrum is a scarce resource essential for providing wireless telecommunication and broadcasting services. This implies that spectrum assignment and use is associated with important social and economic trade-offs that need to be fully considered.
2. From a technical perspective, radiospectrum, commonly referred to in telecommunications as “spectrum,” is the part of the electromagnetic spectrum whose frequencies span the 3 Hz to 3,000 GHz range. The ITU has divided the radiospectrum into different bands (Figure 1). Ultra High Frequency spectrum, that spans from 300 MHz to 3 GHz, is the most suitable for telecommunications services. Bandwidth increases with higher frequencies, but their reach decreases. Thus higher frequencies are more suitable for dense areas that require bandwidth, whereas lower frequencies are more appropriate for coverage purposes, as fewer base stations are required to provide service in any given area.
3. From an economic perspective, spectrum is a scarce resource in any given place or time, meaning only a finite amount of spectrum can be used. It cannot be stored, as opposed to many other scarce resources such as minerals or oil, and it cannot be transported, though at least in theory it can be traded given that the rights of use can be transferred.
4. As spectrum is used for the delivery of services that are considered essential, public authorities have an underlying obligation of guaranteeing that it is used in the most efficient way. A balance between licensing processes and conditions (including costs), as well as coverage, deployment, and quality obligations associated with the spectrum, together with competition considerations can only be reached through intense management. This management is essential to maximise, socially and economically, the use of the spectrum.
5. Spectrum policy has undergone dramatic changes in many OECD countries. Those changes are, or will soon be, affecting all LAC countries as well. The switch-over to digital terrestrial television (DTT), together with the increased need for spectrum resources for wireless broadband, is challenging actual spectrum regimes. More spectrum resources need to be released and made available for wireless broadband services, while at the same time maintaining a competitive level playing field. This chapter addresses the most relevant topics regarding spectrum management, licensing, and valuation.
6. Except when explicitly stated, this Chapter refers to spectrum used for the provision of telecommunications services, and especially broadband services. Several references are made to changes in allocation, which have been crucial for the transition to DTT and the “first digital dividend” (the 700 MHz band in Latin America). A potential “second digital dividend” (the sub-700 MHz band, which encompasses the frequencies in the 470-698 MHz range) will require the evaluation of spectrum use for telecommunications vis-à-vis broadcasting.
Key policy objectives for the LAC region
7. For the LAC region spectrum policy and efficient spectrum management is especially important in the context of broadband development. In many geographical regions without fixed telecommunication, infrastructure broadband development will depend on wireless access. The main spectrum policy objective can be broadly defined as guaranteeing its “efficient use.” This general objective is comprised of several more specific objectives:
• Maximise the social and economic utility of spectrum use. As a scarce resource essential for the provision of services that have positive externalities, active management is required to maximise these externalities, both from an economic and social perspective.
• Increase the availability, penetration, and use of telecommunications services. Inefficient management of spectrum usually translates into insufficient wireless telecommunications infrastructure and investment, insufficient coverage of population by wireless telecommunication networks, deficient quality, and high prices. These facts reduce availability (thus impacting the possibility of universal access), hamper the increase of penetration, and hinder demand for telecommunication services. Usage of services is the main causation of the economic spill-over effects attributed to telecommunications services, and thus, it is this lever that policymakers should aim at increasing. Wireless networks are often the most cost-effective way of reaching rural and remote areas, especially with the advent of tehcnologies that use lower frequencies with a wider reach.
• Provide a level field for competition in allocating spectrum. Spectrum plays a fundamental role in the development of competition. Firstly, as spectrum is limited and there is a minimum amount of spectrum needed to operate, the number of licences that can be made available in any given place is very small; this leads, naturally, to concentrated markets (even six locally concurrent licenses, which is rare, implies a minimum Herfindahl-Hirschman Index of 1,667, which is in the range of what is considered a “moderately concentrated market”). Secondly, not all spectrum bands are equal. Higher frequency bands, although they can accommodate more bandwidth, have lower reach, which translates into a larger number of radio base stations required for similar coverage than if lower frequencies are used; this in turn implies higher investment requirements, which influences costs and end-user prices. Thirdly, spectrum is valued very differently by different players; as a rule, incumbents value it more than new entrants, which mean that unmanaged spectrum auctions may provide less scope for new entrants. Policymakers have to consider these three facts when managing spectrum to encourage effective competition.
Tools for measurement and analysis in the LAC region
8. With the rapid evolution of telecommunication services that require spectrum, and with the difficulty of expeditiously pulling regulatory levers to respond to the always-changing technological environment, spectrum management requires detailed long-term planning backed up by certain tools (some of which have been in use for a long time) and objective periodic measurements.
• National frequency allocation tables (NFAT). Allocations are entries in a table which set out the use of a given frequency band for use by one or more radio communication services. Frequency allocation tables, which have been in use for a long time, describe which radio communication services can be provided in each portion of the spectrum. These tables should comply with international agreements and technical characteristics, but can be adjusted depending on national priorities and policy objectives. These tables are updated frequently. A good practice is to have a well-defined process for changing allocations, with documented support behind the decision.
• Spectrum inventories and licensee database. An exhaustive mapping of all spectrum, whether licensed or not, is fundamental for its management. The database should include all relevant information (area, licensee, granting and expiration dates, conditions and obligations, etc.). A good practice is to make the database public and easy to access, updated on an on-going basis.
• Long-term planning. A prospective long-term public document that outlines plans for spectrum use, including short-term actions (e.g., future auctions) as well as areas that will be studied and evaluated (e.g., possible allocation changes) is a good tool that can provide greater certainty to the market and allows regulators to focus their efforts. Though encompassing several years, this document should be updated at shorter intervals of time, reflecting potential changes mostly attributed to accomplishment of short-term objectives, technological advances,international agreements and user and market trends and developments. This document could also contain a plan to release spectrum based on the expected need for all or some of the telecommunications services.
• Measurement of efficient use. Measuring how well spectrum is being used is crucial to measure “efficiency,” a loosely used word. Though occupancy and data rates are two of these measures, they are far from perfect, as they fail to take into account certain critical aspects mostly associated with the value generated (e.g., public safety and emergencies). At any rate, measuring periodically how spectrum is being used (e.g., number of users, intensity of use, data rates, data transported, investment) gives a reasonable picture of how well objectives are being met, especially when compared among players using similar bands attributed to similar or identical services. There are no standard ways to measure efficiency in a comprehensive manner; several indicators need to be measured and normalized, taking into consideration the specific characteristics of each market.
• International benchmarking. The evaluation of spectrum efficiency relative to other countries provides important insight into how well spectrum is being used to meet objectives. As such, standard definitions of indicators, including processes for measuring and collecting data, must be applied.
Overview of the situation in the LAC region
9. Mobile communications have become ubiquitous in the LAC region. From lacklustre penetration in the late 1990s, today they have become the preferred way for voice communication and broadband access. The advent of prepaid mobile plans, which allow users to control telecommunication spending without recurrent financial commitment and to top-up with very small amounts, has dramatically increased the number of users. The combination of decreasing prices for mobile access and the growing use of new devices (e.g. smartphones and tablets), as well as burgeoning use of Internet applications, has meant the demand for spectrum has substantially increased.
10. Historically, LAC countries have not been generous with the licensing of spectrum. In 2003, on average only 104 MHz had been assigned to mobile operators, equivalent to less than 38% of the amount licensed in OECD countries. By 2011 this number had increased to 195 MHz, but it still represented only 46%. As of September 2015, following several years of intense regulatory activity in the region, the average had grown to 311 MHz (Figure 2.1). Though the amount of licensed spectrum grew by 60% in only four years, it is still below the OECD (less than 60%) and well below the ITU recommendation of spectrum required. For 2020, ITU recommends that 1,280-1,720 MHz be made available for wireless communications (ITU, 2006); LAC countries have only assigned around 20%.
11. Spectrum management and its licensing to service providers have resulted in the adoption of different approaches in the LAC region: from a full “command and control” regime, where regulators are the central axis in the assignment and other relevant usage rules (service regulation, secondary markets, etc.), to a fully liberalised market, where regulators mostly just dictate rules to avoid interference. As in most of the world, the LAC region still exercises significant command and control over the spectrum, its assignment, and the rules and obligations that govern its use for the provision of mobile telecommunications services.
12. Before the liberalisation of markets in the early 1990s, most licenses were awarded through a comparative selection (sometimes called a “beauty contest”). Interested parties were evaluated in terms of their announced plans (investment, coverage, prices to end consumers, etc.) and licenses were awarded to those candidates that best suited the regulator’s formula. In practice, though, this award system was extremely discretionary and non-transparent, deterring the entry of players. In fact, almost as a rule, all fixed line telecommunications providers were awarded a mobile license, as they were deemed to be the natural candidates. Some, though not all of the LAC markets, went on to create a duopoly structure, similar to the one defined in the United Kingdom and the United States when they first licensed additional players. The market was considered to be relatively small, primarily aimed at business users, and the licensing process and competition was not considered by many to be a priority for governments.
13. In the 1990s, beginning in the United States, a substantial change in the approach to licensing spectrum took place. Though alternatives had been tried to comparative selections (e.g., lottery) some of the advantages of auctions began to bear fruit. Observing these experiences, countries in the LAC region also embarked on assigning spectrum through auction processes. While it took some time for their widespread introduction most countries now carry out one of several forms of auctions to assign spectrum to private users. Since 2007, more than 35 processes of spectrum assignment have been concluded, with proceeds exceeding USD 7.25 billion, with only a few being carried out through a comparative selection process (Table 2.1).
14. The sums paid per spectrum assignments have varied substantially in recent years (Figure 2.2). That being said, except for a few assignments, where the high price paid can be explained by specific characteristics of the market and the timing of the auction, normalised prices (that is, US cents per MHz per population) tend to be under USD 0.05. It is important to emphasise that these prices are not fully comparable, as several countries impose recurring spectrum fees, which affect the price of spectrum at the outset.
15. One of the main pillars of the evolution of spectrum use relies on a successful migration from analogue to digital terrestrial television, aimed to free the 700 MHz band , as digital terrestrial television is much more efficient in using the spectrum. This is a band especially useful for mobile communications due to it’s propagation characteristics. This allows the 700 MHz signals to more easily penetrate buildings and walls while covering larger geographic areas with less infrastructure and therefore at a lower cost. Though most OECD countries have already completed the analogue switch-off, Latin America is lagging. Most countries plan on ceasing analogue transmissions by the end of the decade, though a few are expected beyond 2020.
Policies to promote efficient use of spectrum
45. First, it is important to state some general principles to promote the efficient use of spectrum. The term “efficient use” can refer to several broad objectives, which in turn makes it hard to establish uniform metrics. This is even truer when comparing very different services. For example, discussions for changing the allocation of the digital dividend spectrum, which meant comparing broadcasting to mobile broadband, entailed not only evaluating the economic value of each sector, but also the social value of both. Other comparisons that could render meaningless statements are those were spectrum used for military or national security are evaluated vis-à-vis traditional telecommunication services. Thus, it is of utmost importance to define the objective to be accomplished with the measurement of efficiency.
47. An almost unsurmountable challenge that arises is that significant parts of the spectrum are not subject to market incentives. This is the case for almost all spectrum held by the state or governments. It could also be argued that the same statement could be made of that spectrum which, though allocated, has not been assigned. As spectrum cannot be stored, unused spectrum has a significant opportunity cost.
48. As an almost universal rule, government agencies (military, national security, transportation, etc.) receive spectrum assigned directly for free and are restricted from using it for other applications other than their own. Many of the considerations for such policies are subjective and follow a public policy (if not political) agenda. One possible way to promote a more efficient use of such spectrum is to create certain incentives (which imperfectly mimic market-based incentives) to optimise such use. One good example is an “administered (or administrative) incentive pricing” regime, where fees have been replaced by prices set by a regulatory authority attempting to reflect the opportunity cost of the spectrum while at the same time incorporating potential incentives (which then promote an efficient use). Ofcom in the United Kingdom has used this methodology successfully since 1998, with subsequent reviews. As a consequence of such policy, Ofcom cites the release of 384.5 MHz used by radio astronomy, the return of some UHF spectrum used by the police in Scotland, and the removal of legacy fixed links in the 4 GHz point-to-point band. In any case, acknowledging that spectrum used by public agencies or other non-profit organisations has an economic value, which the economy as a whole is paying, ought to create incentives for a more efficient use.
49. Another policy that potentially increases efficient use of the spectrum and which has recently been discussed or implemented in several countries is spectrum trading and the development of secondary markets. Spectrum trading brings more flexibility to the conformation of better market structures, allowing spectrum to be transferred to those that value it the most, provided that conditions for spectrum trading are well designed setting clear conditions and timely procedures. Subdivisions and regroupings of licenses based on market prices will most likely produce a more efficient solution. For example, the Australian Communications and Media Authority allows combining or subdividing existing licenses to form new licenses, but the subdivisions cannot be smaller than the “standard trading unit” (STU – defined as an area of 5 minutes by 5 minutes of arc, approximately 9×9 km, with 1 Hz frequency band). New Zealand defines radio spectrum in terms of property rights (MRR – Management Rights Regime); management rights spectrum can be sold to service providers (“right-holders”) and subsequently traded between them. In the United States, spectrum trading is an incipient reality; licenses are tradable and they can be converted to other uses (though regulatory sanctioning is required). The United States also allows leasing and subleasing of spectrum; several agreements have been reached since 2003, when it first published leasing rules.
50. All these policies imply transferring the rights-of-use (and the obligations that the licenses carry), either temporarily or permanently (until the expiration of the license) and are fraught with barriers, either economic or regulatory. Administrative processes are lengthy and complicated, regulatory approval is usually required, and incentives for current holders are low due to scarcity (either because spectrum might be worth more in the future or because they might need it for future expansion).
51. Nevertheless, as they are incipient and too early to assess their impact, good practice in this area is to gear resources towards understanding these figures and closely follow international trends. At least in theory, they provide a market-based approach to a better use of spectrum and as such, are worth considering. Although legal, competition restrictions must be taken into account and technical issues (most importantly, interference) need to be incorporated into any trading framework, it creates a mechanism not only to mend any deficiencies that could have arisen during the original licensing process but also to adjust to the evolution of the market.
52. In addition to unlicensed and LSA/ASA agreements, spectrum sharing is another policy that would increase spectrum efficiency use. In principle, this term refers to multiple wireless systems operating in the same frequency band, without causing interference to other users, through at least one of several dimensions (time, space, or geography) and could be administrative, technical, or market-based. According to a study done in Europe (Werbach & Mehta, 2014), the average occupancy rate for a dedicated band was below 10% of the band’s capacity, so there is significant space to increase its use. As concerns over spectrum scarcity increase, sharing may well become the norm in the future, as it increases supply and provides greater access to a scarce resource. Sharing involves a process of continual reallocation, including even reallocation to different services, such as data and broadcasting. Needless to say, if well implemented, sharing reduces waste and increases efficiency.
53. One of the main criticisms of spectrum sharing is the limitations to manage interference between different users; this is the main reason why spectrum has traditionally been licensed for exclusive use. It is often mentioned that, absent usage rules, sharing can lead to the “tragedy of the commons,” whereby increasing the number of users results in lower quality of service for everyone. Nevertheless, technological advances (e.g., cognitive radios, which are designed to be able to use several spectrum channels), regulation (e.g., rules of “etiquette” and co-operative approaches that govern common usage), and economic incentives (pricing and penalties) are helping alleviate most of the existing concerns. There is still a long road ahead, but sharing promises to address demand for increased spectrum for broadband services. LAC regulators should follow international developments in this respect, as other countries are bound to face spectrum scarcity problems earlier than in the region and thus are impelled to work out the details and hurdles in its implementation. As with the implementation of secondary markets, there are important competition considerations that have to be taken into account.
54. Spectrum refarming has proven to be a frequently sought out tool that significantly increases spectrum use efficiency. Refarming – defined as changing the use of frequency bands – has been quite common for some time, but it attracted little attention due to limited demand for spectrum and the sparsity of usage and ownership. Due to technological advancements, spectrum scarcity, and ever-changing social demands, refarming is now not only common but in many cases contentious. Some types of refarming (e.g., from broadcasting to broadband) are fiercely defended and opposed by several parties, and thus take a long time to be approved and implemented. Other types of refarming (e.g., reallocating spectrum from fixed to mobile networks) can also be quite contentious but are much easier to justify. Finally, the most common ones (e.g., the evolution of wireless telecommunication technologies, from analogue to LTE) occur in a somewhat seamless manner.
55. Most spectrum refarming requires regulatory intervention through a lengthy and expensive process (e.g., allocation of the digital dividend, incentive auctions in the United States to free up additional low-frequency spectrum for broadband beyond the 700 MHz). It usually implies the displacement of providers and end-users and requires new equipment (CPEs/handsets and network), which could be costly. It should, though, be promoted once the alternative uses of the spectrum have been evaluated (as described in sections 1 and 2 of this Chapter).
56. Refarming can also bring more competition to existing providers, and as such, it should be carried out in a competitively neutral fashion. It should not create any artificial advantages or disadvantages to any of the players. For example, spectrum used for fixed networks has usually been awarded for much lower prices than spectrum used for mobile networks. From an economic welfare perspective, it is hard to argue against fixed spectrum being used for mobile telecommunications. Nevertheless, allowing this to happen without an economic compensation mechanism to level the playing field creates unfair distortions that could significantly damage the market and create unjustified advantages to certain players that have arisen from a regulatory quirk. Implementing rules for technological neutrality, as well as flexibility on the use of the spectrum, is a way to facilitate refarming agreements among market actors aimed to improve an optimal use of spectrum.
57. Spectrum refarming that is more akin to technological upgrades is much easier to be implemented. The original refarming of mobile technologies (from analogue or 1G to 2G, and from 2G to 3G, or even from 2G CDMA to 2G GSM) met significant restrictions from regulators, but further upgrades have gone extremely smoothly. These refarmings are now understood as what they really are: spectrum being utilised for IMT that operators choose to use more efficiently to provide better and cheaper services. Some countries still require regulatory approvals for operator-centric refarmings, which, in essence, complicate, slow, and make upgrading a network more expensive. As long as interference restrictions are met and band re-segmentations are not required (as the spectrum used for iDEN requires if it were to be used for traditional mobile networks) or do not affect interoperability in the market, these refarmings should not only be allowed but also promoted. Regulatory intervention against this practice could hamper the evolution of wireless telecommunication services, the deployment of last-generation networks, the increase in competition, the creation of social and economic welfare, and the better use of spectrum.
Spectrum planning, management, and control
16. For spectrum to be rationally and efficiently used across borders, international coordination is necessary. At the highest level, the governance of spectrum use on a global basis is one of the main responsibilities of the International Telecommunication Union (ITU), a specialized agency of the United Nations, mostly carried out through its Radiocommunication Sector (ITU-R). The mission of the ITU-R is, among other things, “to ensure rational, equitable, efficient and economical use of the radio-frequency spectrum by all radiocommunication services, including those using satellite orbits, and to carry out studies and adopt recommendations on radiocommunication matters”(ITU, 2016). It helps meet the ITU’s objective of maintaining and extending international co-operation among all the Member States of the Union for the improvement and rational use of telecommunications of all kinds”. Its activities are centred on ensuring interference-free operations of radiocommunication systems by implementing the Radio Regulations and regional agreements, establishing recommendations intended to assure the necessary performance and quality in operating radiocommunication systems, and seeking ways and means to ensure good use of the radio-frequency spectrum and satellite-orbit resources and to promote flexibility for future expansion and new technological developments. The ITU-R holds periodic world (WRC) and regional (RRC) radiocommunications conferences. WRCs are held every three to four years in order to review and, if necessary, to revise the international treaty governing the use of the radio-frequency spectrum and the geostationary and non-geostationary satellite orbits (jointly referred to as Radio Regulations). During these conferences frequency assignments and allotment plans are revised. RRCs are conferences of either an ITU Region or a group of countries with a mandate to develop pan agreement concerning a particular radiocommunication service or frequency band; these conferences cannot modify the Radio Regulations.
17. At the regional level, the Inter-American Telecommunications Union (CITEL), an entity of the Organization of American States (OAS) is a key body related to spectrum. Its main objectives are centred in coordinating the rules needed to facilitate infrastructure deployment and telecommunication service delivery, harmonizing radio frequency spectrum to reduce the cost of providing wireless services, training in information and communications technologies (ICT), and helping countries devise telecommunications development strategies. The Caribbean Telecommunications Union (CTU), which is an intergovernmental organization, which is an intergovernmental organization dedidated to facilitating the development of the sector in the region, also plays a relevant role.
18. LAC countries are active in all these international fora. Common regional positions are important for the development of the sector and for more effective positions at meetings for international negotiations. More on LAC’s participation in international fora, and especially on regional ones, is addressed on Chapter 7 on regional integration.
19. Another key element of spectrum management relates to taking into account the economic impact of spectrum resources. As an essential scarce input for the provision of broadband, spectrum has an immense value for the economy. As fixed telecommunication infrastructures, in many LAC countries, do not have nationwide coverage, wireless broadband has become the alternative way to access the Internet, and as such, it is a key input for the digital economy. It is thus important that decisions that influence the way spectrum is managed – whether in terms of attribution, allocations, or assignments – are evaluated within a framework that considers value creation and externalities. An appreciation of externalities for the potential effects on GDP, job creation, investment, social welfare, and consumer and producer surpluses is essential.
20. It is very important to consider the potential alternative use of spectrum. This has been critical in assisting LAC countries to benefit from the digital dividend, as auctions enabled the market to assist in determining the value of the different uses of spectrum for the economy. The outcomes generally indicate that the market for mobile services places a higher value on spectrum than other potential forms of use and that there is still likely unmet demand of several hundred MHz –( AHCIET et al, 2012c). If countries are to meet the ITU spectrum requirement recommendation. This means alternatives will have to be constantly evaluated through authorities having the necessary tools and skills to do so but also with the acknowledgement that market forces can assist in revealing the knowledge held by the private sector. Spectrum needs differ among countries in the region depending on different issues as intensitivy of use of mobile broadband, coverage, penetration and so forth
21. A challenging area in spectrum management can be decisions about which bands are allocated for use by public authorities, such as emergency services. In any such decision a good practice can be to undertake a cost benefit analysis. By assessing information about alternative uses of the spectrum it is possible to compare the costs and benefits and thus make better decisions that fit national needs and government objectives. Part of such analysis needs to look at questions on how best to meet objectives including the most efficient delivery of public services, alongside the consideration of spectrum management. By way of example, in 2015, the Australian Productivity Commission examined the best way to secure a mobile broadband capability to meet the long term needs of Australia’s public safety agencies (PSAs) – the police, fire, ambulance and emergency services. To do this they were asked to:
• undertake a ‘first principles’ analysis of the most efficient, effective and economical way of delivering mobile broadband capability to PSAs by 2020
• consider the most cost-effective combination of private and public inputs, services and expertise to deliver the capability
• consider aspects of this capability such as national interoperability across jurisdictions and agencies, coverage, integration of voice services, security, capacity, resilience, sustainability of arrangements into the future and compatibility with end user devices
• consider domestic and international developments that might be applicable to Australia.
22. The economic valuation of radio spectrum is a challenging, if not daunting, task. Firstly, it necessarily requires a multi-year evaluation – 10 or more years – in a sector characterised by technological breakthroughs and discontinuities. Few envisaged, for example, the high rate of smartphone uptake around the world. Secondly, country-specific and market conditions influence any valuation. Thirdly, even among similar players and uses, the value for each player could be significantly different depending on specific circumstances. Assigning the spectrum to a player that values it the most does not necessarily mean that the value to the economy is maximised; this is part of the rationale behind spectrum caps, which try to protect competition by pre-empting possible spectrum hoarding, which increases barriers to entry. Fourthly, the valuation might require a comparison of distinctly different things, as was the case of broadcasting and broadband. In such scenarios, certain aspects are very hard – if not impossible – to measure. In countries where most households predominantly access free-to-air (FTA) television broadcasting, either because of income restrictions or because pay television infrastructure is not ubiquitous, the social value of the service is high and challenging to quantify.
23. There are three broad approaches taken to measuring the value of the spectrum to an economy (OECD, 2014):
• Economic welfare. This approach is based on estimating consumer and producer surpluses. Consumer surplus is defined as the difference between the amount each consumer is willing to pay and the actual price of the service. Producer surplus is usually defined as the difference in price and the marginal cost of production. This methodology is meaningful given that it includes both the effect of lower prices and the increase of the subscriber base, as well as the production function, which considers the cost of providing the services. Though simple enough in theory, the actual estimation requires evaluating demand and supply curves, and thus, will require a significant simplification of assumptions. Even more, when the analysis is a multi-year forward looking exercise, the evolution of demand and supply curves will need to be incorporated. Special attention needs to be paid to the fact that, on the demand side, many services are bought in bundles, and on the supply side, services are provided through a multiservice platform.
• Economic contribution. Another way of valuing spectrum use is to measure the total value added created in the economy. It looks at the different stages of the value chain to produce the service and estimates how much value added is created in each one of the steps. For example, it considers how much investment and labour are required to build and run a network, how much effort is necessary to distribute, market and sell the services, and how much is required for customer care. In broadcasting, a crucial link in the value of a chain is the development of content. This approach is simple as it is based on input-output tables, which are usually available, but it does not fully account for all indirect externalities and fails to estimate consumer surplus and broader productivity increases.
• Productivity increase. This third approach tries to estimate the impact on the economy attributed to the use of services provided through the spectrum. For example, a given workforce could be able to produce more output if it were aided by mobile communications (for example, better routes for the delivery of goods could be chosen, reducing time spent and increasing deliveries at any given period). Higher productivity translates into higher GDP: Recent extensive research to estimate the effects of broadband have been undertaken from a number of sources, but significant work still needs to be carried out.
24. It is important to emphasise that spectrum in the LAC region carries more relative weight and relevance for broadband access and use than in OECD countries because fixed networks are much less developed. At the end of 2014, fixed broadband penetration in Western Europe was 32.8%, whereas in the LAC region it had reached 7.9%. Wireless broadband in the area is much more a substitute to fixed broadband than a mere complement. Millions of people will mostly only have access to broadband networks through infrastructure that relies on the use of spectrum. Spectrum then is playing a fundamental role in reducing the digital divide, not only between developed and emerging economies, but also within countries themselves, becoming an important tool for tackling inequality and bridging income gaps. In a large geographical region, where between 15% and 20% of the population live in rural areas, spectrum can often enable the provision of broadband services more efficiently from a cost and deployment perspective.
25. As technology evolves, consumer preferences change, and the relative value of spectrum changes, policy makers have the obligation to facilitate the transition from less to more valuable uses of spectrum. Spectrum is a public good, and as such, policy makers should ensure that it maximises public benefit.
26. Managed market-based approaches have proven effective in maximising public value. These require a market-based approach to licensing spectrum (usually through auctions, see below), few barriers for sharing and transferring spectrum holdings, few or no technological requirements, greater license flexibility, and rules that guarantee that the market for services is competitive.
27. Moreover, institutional issues arise with spectrum management since the use of spectrum affects not only the telecommunication and broadcasting industries, with their overall impact on the economy and social welfare, but also other users such as the certain government tasks (e.g., transport), the military, public safety agencies, and the research community. As needs and objectives might not be fully aligned, or could even be divergent, a whole-of-government approach is needed. In addition to international coordination, there is a need to ensure also high-level national coordination.
28. From a broad perspective, there are two potential institutional arrangements:
• Single institution. A single entity is responsible for all aspects of spectrum management at the national level. It is in charge of planning, licensing, and monitoring spectrum. This model centralises decision making, and, if the entity is fully autonomous, it has all the required attributions to take a long term perspective based on welfare creation. By way of examples, IFT, Mexico’s recently established regulator, Ofcom in the United Kingdom, and the Australian Communications and Media Authority (ACMA) follow this model.
• Shared responsibilities. This is the most common model, with responsibilities assigned to different government entities based on various criteria.
– In the United States the FCC administers spectrum for non-federal use (business, state and local, government, entertainment, commercial, private), whereas the National Telecommunications and Information Administration (NTIA), a unit of the United States Department of Commerce, administers spectrum for federal use (national defense, law enforcement and security, transportation, resource management and control, emergencies). The Interdepartment Radio Advisory Committee, chaired by the NTIA, ensures coordination between the two agencies.
– Some countries divide spectrum management by service (e.g., broadcasting and telecommunication services), such as in Colombia, where the Autoridad Nacional de Televisión (ANTV) oversees TV broadcasting and grants spectrum licenses, ICT Ministry oversees TV radio broadcasting and grants spectrum licenses while the Agencia Nacional del Espectro (ANE), is in charge of planning, managing, allocating all services (including broadcasting), and gives technical support to the Ministry of ICT that is in charge mainly of the licensing phase in the spectrum management process for the remaining services.
– Other models incorporate the federal and state dimensions. For example, in Germany, the Bundesnetzagentur (BNetzA), reporting to the Ministry of Economics and Technology, regulates several public utilities (telecommunications, electricity, gas, post, and railway). The German Federal Council (Bundesrat), the legislative body that represents the sixteen federal states at the national level, is a member of the advisory council of BNetzA
29. No model is without pitfalls, but even in those were there are no shared responsibilities and there is significant autonomy, coordination among the different institutions is essential to guarantee that all objectives are met.
30. Spectrum resources have important implications for competition dynamics. For example, decisions taken on setting spectrum caps on operators, while conducting spectrum auctions, are likely to shape the market in subsequent years. Likewise, spectrum planning and management tasks are key decisions for the future of communications, both from an operational (e.g. assigning spectrum to mobile stations) and a strategic point of view (e.g. band segmentation plans, migration schedule). Given the highly technical nature of these issues and their important implications for competition in communication markets, regulatory authorities should have the authority to conduct spectrum auctions or, at a minimum, be able to establish competition-related conditions for spectrum auctions. The government should in any case be able to retain control of the bands used for government-related purposes (e.g. military, police) under the framework laid down
31. In all cases, especially in those countries where the communications authority is not in charge of assigning spectrum, it is essential that all parties work closely with the competition authority in order to guarantee that spectrum use promotes effective competition. In this respect, the relationship in Chile between the Subsecretaría de Comunicaciones (Subtel) and the Fiscalía Nacional Económica (FNE), which is responsible for defending and promoting competition, demonstrates good practice.
32. Spectrum harmonisation, defined as the uniform allocation of radio frequency bands across entire regions, is one of the main roles of governments. Harmonisation aims at minimising radio interference along borders, facilitating international roaming, and sharing the economies of scale that arise from international standards and the creation of large markets. The ITU, as the United Nations agency responsible for radio communication, is the entity in charge of coordinating harmonisation at the global or regional level.
33. The benefits of harmonisation are clear, but the process to reach consensus is not. Whereas certain parties argue towards complete and compulsory harmonisation, others argue for a more liberal stand that would allow for more autonomous management and the emergence of new policies (e.g., spectrum trading) that would direct spectrum towards those that value it the most. Nevertheless, it can be argued that the approach taken so far – of an intense degree of harmonisation – has served the industry very well and is one of the main success factors behind the advent of wireless digital telecommunication services, leading to lower costs of technology, for the benefit of consumers.
34. Independently of the each country’s approach to spectrum management, it is imperative that all LAC countries actively participate in all global harmonising forums (ITU-R and the preparatory conferences). It is also important to strengthen the role of regional organisations, namely, the Caribbean Telecommunications Union (CTU) and the Comisión Técnica Regional de Telecomunicaciones (Comtelca), as well as increasing their participation in and the role of the Inter-American Telecommunication Commission (CITEL).
35. Moreover, spectrum licensing frameworks are key to managing spectrum consistently. From a high level perspective, there are three possible licensing agreements:
• Exclusive assignment. A licensing of a given band to a party that has exclusive rights over its use has been a common model in the assignment of spectrum. The original rationale behind this was that, because of technological limitation, interference could be a major problem, which could be minimised by giving the rights-of-use to only one party. How spectrum is assigned, though, can vary widely from the type of band and country (e.g., direct assignment, beauty contest, auction, lottery, etc.). These licenses come with restrictions on how spectrum is used, in order to avoid interference to other users in other bands.
• Unlicensed spectrum. Sometimes also referred to as open or free spectrum, unlicensed spectrum (or license-exempt spectrum) can be used by any entity for any private or public purpose. In practice, in order to minimise interference, equipment using unlicensed spectrum must comply with certification rules, as well as adhere to certain standardised protocols. Most importantly, there is no regulatory protection against interference. Unlicensed spectrum is adequate for services and devices based on low-power radiation, where potential interference can be managed in a reasonable way. Wi-Fi spectrum, which is unlicensed, has become one of the most common means to access broadband networks. Other technologies and devices which use unlicensed spectrum are Bluetooth (which allows communications over very short distances), ZigBee (low-power wireless communications mesh network, also for short distances), WirelessHART (used for monitoring industrial processes and power consumption), WirelessHD (used for high-definition television sets), WiGig (for multi-gigabit transmissions at very short distance), and RFID (automatic identification of tagged objects or living entities).
• Licensed Shared Access (LSA) and Authorised Shared Access (ASA). Of recent conception, LSA/ASA allows spectrum that has been licensed to be used by more than one entity. It aims at introducing additional licensed users at a given band, further increasing spectrum efficiency and unlocking additional spectrum capacity. Though it could potentially lower overall industry costs and accelerate spectrum harmonisation, these licensing frameworks have not fully taken off and are not mainstream in any country yet, as by definition the use of the spectrum is binary (either one or the other can use it at the same time, location, and frequency) and thus requires clear sharing rules that guarantee predictable quality of service.
36. The exclusive licensing agreement has been the traditional approach to granting private entities the use of spectrum. It has been successful in that it has allowed, within a framework of legal and operating certainty, wireless telecommunication services to grow rapidly and become ever more diverse. Unlicensed spectrum has become a widespread complement for the last 100 feet (or shorter) of communications networks, either wireless or wireline. With the advent of machine-to-machine communications, it will become much more widely used.
37. The LSA/ASA approach has only recently being developed. Though its theoretical benefits – better use of a scarce resource, especially when it is underutilised – cannot be argued against, it poses certain technical issues (interference), most of which are currently being resolved. It is also facing opposition from incumbent exclusive-license holders that acquired their spectrum through an award procedure. Other types of agreements to use underutilised spectrum, such as white spaces. White spaces are part of the spectrum which is left unused, mostly because it is required for historical technical reasons, such as the use ofguard bands or between adjacent analog broadcasting channels to avoid interference. Advances on modulation techniques and technical characteristics of equipments allow for using and sharing these “white spaces”. This can potentially increase the amount of spectrum available for IMT, but their widespread adoption is not imminent in the very short term. There is relevant experience on white spaces use to make more spectrum available, such as research and projects on dynamic spectrum and television white spaces carried out by Microsoft.
38. As a general practice, following historically successful worldwide trends, authorities should continue granting exclusive spectrum licenses for IMT. More spectrum should be identified for such purposes; IMT spectrum which is not being used should be put up for grabs following a well-thought out medium to long-term strategy based on maximising spectrum efficiency and competition. Additionally, unlicensed spectrum should be promoted, as its complementary value to licensed spectrum is well proven and has become a hotbed of technological development. Given the worldwide success of Wi-Fi technology, and the extremely important role it plays in mobile traffic offloading, policy makers in the region should conduct needs assessment for unlicensed spectrum, to avoid congestion (promoting for example the use of the 5Ghz band). LSA/ASA regimes and other approaches such as white spaces should be experimented with caution. LAC countries could use international experience in the making to better use these regimes, as there are significant advantages to be gained from the success and failures of first movers.
39. As a rule, all regimes should be as flexible as possible, imposing minimal requirements, except when interference is an issue that compromises services and spectrum efficiency. Many unforeseen issues could potentially be dealt with ex-post regulation. In order to increase legal certainty, regulatory regimes should explicitly allow for such intervention if certain conditions, expressed ex-ante, are met. Where certain conditions have been imposed during the licensing process, such as coverage and utilisation, these should be well-defined and measurable.
40. It is well understood that legal certainty and the existence of strong institutions foster an environment for long-term investment and innovation, reducing the cost of capital, and increasing risk-taking. There is significant creation of economic and social welfare when rules are clear and the process to adjust them to a changing marketplace, to technological advancements, and to shifts in social and economic needs is based on careful evidence assessment and involves a public discussion.
41. All licensing regimes require legal certainty. Specifically, exclusive licensing arrangements require strict rules of temporary property rights and protection from interference. Deployments of telecommunications infrastructure typically need significant up-front investments, which then have a long useful lifespan. Thus, licensing terms should reflect this characteristic: long terms with high renewal expectations are accompanied by constant investments in network upgrades. Uncertainty in the renewal of licenses usually translates into insufficient investment towards the end of the license term, which then reflects into poor levels of quality of service and lack of supply. This situation gets exacerbated in the case of short licensing terms, as insufficient investment periods become more frequent. In general, spectrum licenses should be awarded for periods of more than ten years. Conditions for renewal should be known well in advance and the proceedings should be conducted through open and transparent procedures.
42. Long licensing regimes together with clear high-probability renewal processes do not mean that authorities cannot revoke licenses; governments should always keep enough powers to do so under pre-defined circumstances, such as law infringement (especially in recurrent breaches) and inefficient use. Another situation that should be considered is long-term spectrum planning and the possibility of attribution changes. The advent of digital terrestrial television and the possibility to use the 2.6 GHz band for IMT has proven that revocation can be needed for better spectrum use, and, as such governments should be able to appeal to this evidence.
43. Some countries, such as the United Kingdom, looking to increase certainty surrounding spectrum licenses, removed predefined license terms. Nevertheless, the regulator can revoke any license for spectrum planning purposes with a five-year notice. It thus guarantees that it can recover any spectrum in case it is required to do so, but at the same time ensures that services using such spectrum are not degraded and that deployment investors can use the spectrum for a reasonable time to make a sensible business case.
44. There are certain situations that should be avoided if possible. The need for greenfield renewal after expiry, creates uncertainty on several fronts (likelihood of renewal and price). In some of the recent renewal processes in the LAC area there was no clarity on the price; in another case in the region, this, together with a long and uncertain injunction process, has left the 2.6 GHz band idle. Pricing of licenses, and, more importantly, renewals of licenses, should be transparent, known in advance as much as possible, and non-discretionary. In addition, policy makers should monitor the evolution of the market and define in advance any update on conditions for renewal of licences, if needed.
Spectrum assignment procedures
58. Historically, spectrum has been assigned by several distinct methods. Licenses can be awarded by non-market based procedures, such as through a direct administrative procedure. This assignment procedure is widely used to grant government agencies the use of spectrum, but was also prevalent in monopolistic markets when spectrum was awarded to incumbents. Some recent examples of direct spectrum assignments include ICE in Costa Rica, Arsat in Argentina (2012)
59. Spectrum has also been awarded through other procedures, which lack market incentives. The FCC in the United States in 1992 awarded licences through a lottery process. Since consolidation was later allowed, significant value was transferred by a process with a random component from public to private hands. The FCC abandoned this process and moved to an auction-based system. LAC countries have not used lottery assignations. Except for very specific situations, these types of assignments should be avoided, as they are not efficient from an economic perspective. The OECD supports market-based mechanisms to assign spectrum.
60. All other assignment mechanisms fall into the contest category, but it is important to point out that not all contests are market driven. The most widespread mechanism is one of comparative selection where the license is awarded to the participants that submit the best plan based on a series of promises usually linked to some aspect of “social” or “public welfare” (e.g., coverage, technology, investment, prices, financial strength, etc.). This type of assignment could potentially render non-transparent results, as it can easily be designed to favour a certain operator. In practice, there is a significant arbitrary and discretionary component in such procedures, as some criteria might not be fully relevant to judge appropriateness and the weights given to the different variables are many times subjective.
61. The price paid for the spectrum under the contest model tends to be low (or non-existent), which implies there may be a subsidy from the State to a private stakeholder. Contests do not allow for a real valuation of the economic value of spectrum resources, as there is a situation of asymmetrical information between the regulatory authorities and the operators. Comparative selection procedures have been common in the region but there is increasing use of auctions.
62. Auction theory is a complex area where significant progress has been made in recent years. Auctions are recognised as being the most efficient method for assignment. Well-designed auctions provide the right incentives for players to use spectrum efficiently and to price it accordingly. Needless to say, one of the main reasons auctions have become common in the industry, including in the LAC region, is that they tend to generate important revenues for governments.
63. Auctions are an efficient assignment mechanism. They allow answering two questions simultaneously: whom to assign the spectrum to and how much to charge. Well-conducted auctions have detailed rules published in advance; prices paid by winners are defined by all players in terms of their strategy and skills. Auctions allow efficient assignment of spectrum to the players that value it most. They also help answer the preeminent question of value. Auctions, if well designed, can be an invaluable price discovery mechanism, leaving to the regulator the more basic question of setting a minimum reference price. It is a process that avoids the pitfalls of other alternatives, becoming significantly less discretionary and increasing certainty to markets.
64. There are several types of auctions. In sealed price auctions, all pre-qualified participants submit one bid. In a sealed first-price auction, the license is awarded to the highest bidder, who then pays its proposed price. In ‘Vickrey Auctions’, or sealed second-price auctions, the license is awarded to the highest bidder, who in turns pays the second highest price.
65. In ascending price auctions (English auctions), participants progressively increase their bid. The auction is over when there are no more bids; the winner is the entity that offers the highest bid. In descending price auctions (Dutch auctions), the auctioneer sets a price and progressively lowers it until one of the bidders accepts it. English and Dutch auctions can be done in successive rounds, where all participants submit a bid; the bidding information is then made available to participants, who then proceed to the next round.
66. Multiple round auctions are advantageous in that they are easy to understand by participants. Giving information to participants after each round increases confidence to all players involved. Nevertheless, it is a mechanism that can be distorted by players, by, for example, signalling during the process or even colluding.
67. Combinatorial auctions have become common in many countries to address such issues. These are auctions for the simultaneous sale of more than one item, such as blocks of spectrum bands with geographical delimitations. Participants place bids on combinations of the items on offer and the winning bids are those that maximise overall value to the auctioneer. The larger the number of items on offer, the more complex determining the winners becomes, and the more uncertainty for operators to ensure that the final distribution of spectrum matches their preferences, which can discourage participation. The maximising solution could potentially mean leaving some items unassigned. These auctions have been used in Canada and the United Kingdom.
68. In principle, any auction can incorporate restrictions and obligations. Some of the most common ones are spectrum caps (where bidders cannot exceed maximum spectrum holdings) and coverage obligations. Given the investments required to deploy a nationwide network, it makes sense to implement clearly defined and reasonable coverage obligations for operators being awarded spectrum. This can provide some certainty about the future coverage of networks.
69. Ambitious coverage obligations are difficult to enforce and may increase regulatory risk and any obligation to be imposed, should be carefully designed in order to balance benefits from larger coverage against lower auction receipts for the State and slowing market entry and competition. However, this does not mean that providing coverage for rural areas where network roll-out is less or even non profitable cannot be included among the set of obligations to be fulfilled. Extending mobile broadband and telephony access and/or introducing competition in rural areas may be advisable, and a case-by-case analysis is needed to take the adequate coverage obligations in each case in order to maximise benefits for citizens.
70. Some elements in assignment procedures to promote competition should be highlighted. Auctions can be designed to promote competition in the marketplace. A common restriction is the setting of spectrum caps, which, even though they can potentially reduce the number of participants in the auction, avoid spectrum hoarding, eliminate pre-emptive strategies, create some equilibrium in spectrum holdings, and increase spectrum use efficiency. Spectrum caps are common in OECD countries, where they are widely used for encouraging entry and addressing situations of dominance. In order to promote competition, special care should be taken to continue to ensure that smaller players have access to sufficient spectrum resources, by putting in place spectrum caps or set-asides in auction design (i.e. reserved blocks for entrants where incumbents or dominant operators cannot bid), bearing in mind the balance between higher and lower spectrum bands. Caps have been used in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Peru; they vary widely as they respond to the specific characteristics of each market at the time they were set. For example, Mexico has set a cap of 80 MHz in its latest AWS auction. Colombia applies different caps for lower (30 MHz below I GHz) and higher frequency bands (85 MHz). Caps are usually updated whenever more spectrum is auctioned or when consolidation activity results in spectrum accumulation which is deemed to affect competition in the marketplace.
71. In addition, consideration should be given to introducing a spectrum floor. This novel approach, recently introduced by Ofcom in the United Kingdom, will not accept an outcome to a combinatorial bidding process that does not offer a specified amount of spectrum to at least one newcomer. In effect, this gives a preference for a lower bid from an entrant over a higher one from an incumbent.
72. Other commonly used elements are the incorporation of obligations to offer wholesale services for the hosting of MVNOs. As addressed in Chapter 3 on competition and infrastructure bottlenecks, entry of MVNOs, can be further facilitated via obligations imposed in the license. For example, the regulator can also introduce mechanisms to make the competitive environment more favourable to MVNOs by making national roaming obligatory among operators, so that MVNOs can offer the same coverage as MNOs. Although non-facilities-based competition exerts a limited discipline on facilities-based carriers, non facilities-based entry may be a legitimate entry strategy for new players. In addition, facilitating resale may enhance the value and therefore incentives to invest in new infrastructure.
73. Other issues that have arisen in dealing with spectrum are related to the clearing of the bands. Some countries (Colombia and Brazil) have opted to impose this obligation as a condition to be awarded the spectrum license. It is bound to become more common, as more spectrum is allocated to IMT but is occupied by other tenants (e. g., the 600 MHz band in the United States). Well-designed migration processes and clearing of bands obligations during the auction could be an efficient way of dealing with the issue and could accelerate the deployment of wireless broadband networks.
74. Governments should avoid restricting assignment only to existing players. This goes against promoting competition and implies that the government is administratively deciding what the market structure ought to be instead of leaving this to market forces. Also, generally speaking, ‘beauty contests’ are not recommended, as they tend to be subjective, operators tend to underpay the real value of the spectrum, and economic rents are transferred to private companies.
75. Finally, some countries in the LAC region include conditions in spectrum auction procedures such as the distribution of tablets, or contributions for universal service funds that can create distortions with the risk of reducing the cost-effectiveness of public funds. These programmes should be run independently from spectrum auctions and in general, cross-subsidies from spectrum fees to fund public interest programmes should be avoided.
76. One of the most challenging tasks authorities face when licensing the spectrum is setting a fair price. There is no doubt that the market is best positioned to determine the value of the spectrum, but this alternative is not always available. Auctions are the best price discovery mechanism, but there is still the need to set a minimum reference price, that can be different from one auction to another
77. There are basically five different ways to estimate the value of the spectrum. In practice, regulators need to perform all of them and then adjust the value depending on the objectives being sought and other specific conditions to the problem at hand. For example, if few bidders are expected at a given auction, the reference price plays a fundamental role in an auction. The main reference for the minimum price is given by the avoided cost methodology (described below), as it reflects the indifference point, which considers that an operator would not pay less than what it would cost it to find an alternative solution to accommodate future demand. An auction would then throw up a price between the avoided cost price and the net present value of cash flows obtained by using the spectrum.
78. Any estimation of the value of spectrum should be approached with caution, especially when valuing the future use of spectrum, as this is essentially a forward looking exercise where many factors may vary substantially in the medium and long term. It can be done through benchmarking, econometric analysis, avoided costs, business case or opportunity costs.
79. Benchmarking is probably the most common spectrum valuation methodology. In essence, it compares prices paid at other similar auctions (national, regional, or international) in a normalised fashion (usually price per MHz per population). It is simple and easy to explain, but its main pitfalls arise because real value depends on several factors, such as market potential, spectrum already allocated, competition level, license periods, additional fees and so forth, which a simple price comparison does not consider. This can be addressed by performing econometric analyses (described below).
80. It should be emphasised that the comparison, to be fair, should consider total price paid (that is, not only the amount paid at the auction but also any recurring fees linked to the spectrum tenancy) as well as the assignment methodology (that is, it is not advisable or sensible to compare an auction price with a the price paid at a ‘beauty contest’, as this last assignment most likely does not reflect a market price). Chile awarded the 700 MHz band for 0.1 cents/MHz/pop in 2014, whereas Brazil, almost at the same time, licensed it for 25 times as much.
81. The value of the spectrum depends on a large number of variables. Accounting for them makes the benchmarking of different prices more reliable. Some variables that need to be considered reflect the general conditions of the market (GDP per capita, population, urbanisation, etc.), while others are intrinsic to the spectrum and the auction (band, amount of MHz on offer, timing, duration of the license, market structure, etc.). An econometric analysis where price is the dependent variable can be performed using some of these variables as controlling factors. The main disadvantage of this methodology arises from the lack of enough data points to be able to incorporate several independent variables. Attention needs to be given to the definition of the controlling variables, as they could be measured differently in different countries, and thus, the analysis could render spurious results.
82. The estimation of avoided costs is based on calculating the cost reduction obtained by a given operator by being able to use additional spectrum. The model assumes that operators have to satisfy increasing demand, which entails a different cost structure if more spectrum is made available.
83. Network capacity can be increased by technological improvements, frequency reuse, increase in the number of radio base stations, simultaneous use of different networks (for example, Wi-Fi local networks or buying capacity from other operators), or, ultimately, using additional or a different band of the spectrum (due to its propagation characteristics, higher frequencies allow for more capacity reducing coverage per base station, while lower frequencies, conversely, allow for higher coverage per base stations, but less bandwidth capacity). Avoided cost is defined as the investment required to deploy the first four options without being able to use additional spectrum. The estimation is intrinsic to each market and does not depend on any benchmarking analysis. It can be estimated for each operator in the market. Its main disadvantage arises from the scant information regulators have about the cost structure of operators, as well as the need to build a hypothetical network as complement to existing networks. It also requires estimating future demand, which recent history has proven to be extremely difficult in the LAC and elsewhere. This methodology is widely used by operators, as they can easily estimate their own avoided costs.
84. The value of the spectrum can be calculated estimating the business case, or the cash flow of the business using the spectrum. The main assumption behind this methodology lies in that an operator would never be willing to pay more than the net present value of the cash generated by the business. It is usually the most realistic way to estimate the price of the spectrum for new entrants.
85. It is important to mention that the avoided cost methodology is a comparison of the discounted cash flow of two distinct business cases: with and without spectrum. Both require the estimation of the cost of capital, which can, from a regulator’s perspective, become a contentious issue.
86. Opportunity cost is defined as the value created when something is put to an alternative use. In the case of the spectrum, it is the value not generated when it is used for one alternative instead of another. This methodology is used to compare the value of the spectrum used for different telecommunications services (e.g., mobile versus fixed, mobile versus satellite, broadcasting versus IMT). In practice, calculating the opportunity cost of the spectrum relies on estimating avoided costs and discounted cash flows, as well as estimating the economic externalities generated by each of the alternative uses. For example, many of the economic and social benefit estimations of the value of the digital dividend comprised a detailed analysis of the opportunity costs of the spectrum.
Digital television, digital dividend, and analogue switchover
87. The digital dividend – the 700 MHz band in LAC countries – is, without any doubt, at the heart of all digital inclusion initiatives in the region, as it promises to bring broadband access to areas not reached by existing networks and lower the price of service. Compared to other IMT bands, the 700 MHz band has significant propagation advantages; more coverage is attained with every cell site.
88. This band was allocated to broadcasting services in most LAC countries, with intensity of occupation varying significantly. With the advent of digital television, which allows more channels with higher quality to be transmitted through the same bandwidth, less spectrum can be assigned to broadcasting without compromising either the number of signals transmitted nor their quality, enabling also for a greater choice of television channels and licenced broadcasters, which could lead to increase competition in broadcasting and the development of more local content. This transition constitutes a unique opportunity to release spectrum resources, as a result of greater spectrum efficiency, and make them available for advanced mobile services such as mobile broadband.
89. With the possibility of using this spectrum for mobile broadband in the LAC region, the case to change the allocation of the band seemed reasonably straightforward. Nevertheless, the debate was quite intense and lasted several years. By 2010, two years after this band had already been auctioned for IMT and one year after the analogue switch-off of full power television had been completed in the United States, LAC countries had just started the debate to change its allocation. Most countries have already proceeded with the change and some have even auctioned this spectrum (Bolivia in 2013; Brazil, Chile, and Argentina in 2014). This is a good example of transferring spectrum to more beneficial uses, responding to technological evolution and the demands of society. Nevertheless, the migration to digital television has not been a smooth process in the region, as it involves significant investment on both sides of this two-sided market (broadcasters and households). Even though digital signals are already being transmitted almost everywhere, the switch-off is still many years away in most countries (Table 4); broadcasters have been reticent about ceasing analogue transmission, as the installed base of digital TV sets in the region is still low. Insufficient incentives and lack of information, as well as limited purchasing power, have made the transition very slow. As free over-the-air television is deemed to be extremely important from civic, cultural, and social perspectives, forcing the switch off unilaterally is not considered to be an option; Free To Air (FTA) television is the only affordable television service for many households. As broadcasters have prominent positions in this area of public policy and have influential lobbying skills, the debate is still open in most countries. Nevertheless, all countries are moving in the same direction and the spectrum being freed from the switch-off will be used more efficiently from an economic and social perspective based on a broader consideration of all potential costs and benefits.
90. Another important part of the debate has been the choice of standard for digital TV. Most countries in South America opted for the Brazilian standard (ISDB-Tb, based on the Japanese standard); in turn, the debate to choose the standard in Brazil, concluded in 2006, was quite heated and lasted several years. Brazil opted to modify the Japanese standard and then proposed neighboring countries to adopt it. Peru, Chile, Argentina, and Venezuela announced their decision in 2009, followed by Ecuador, Bolivia, Uruguay, Nicaragua, Costa Rica, and Paraguay in 2010. The widespread adoption of this standard will give it reasonable economies of scale (more than 450 million people), which can help bring down equipment costs and ensure innovation and R&D related investment. Countries that opted for other standards will achieve similar or higher economies of scale as they can ‘piggyback’ on larger and more developed markets such as in Europe and the United States.
91. Another important issue that arose after the digital dividend was allocated to IMT regarded the segmentation of the band. The United States, which adopted its own band plan in 2007, assigns a total of 60 MHz to mobile broadband and 24 MHz to a public safety broadband network. The Asia-Pacific Telecommunity (APT) published its recommendation of harmonised frequency arrangements in 2010; the arrangement allows for a full use of the 90 MHz, 30 MHz more than the US plan. Though discussions were intense, with some urging the adoption of the American band plan, most LAC countries opted for the APT standard. Argentina was the first country to announce its intentions in 2011, but Colombia was the first to officially adopt it in 2012; it was followed almost immediately by Mexico, Panama, Ecuador, Chile, and Costa Rica. Only two countries, Bolivia and Paraguay, opted for the United States band plan. The adoption of a harmonised plan in the region is important, as it will ensure interoperability, will allow economies of scale, and will minimise interference problems.
92. As the LAC region switches off the analogue broadcasting networks, there are many aspects to be considered for a smooth transition. Public funding will most likely be required. The first issue to be considered is that the population needs to be well informed about the transition and what it means to them. Some countries have not raised awareness enough among citizens; these campaigns take a long time to catch up, but once they have been understood, an important part of the burden shifts to the population and the transition speeds up, reducing the need for aggressive campaigns to subsidise decoders and television sets. Broadcasters also face significant costs to migrate their networks to the digital standard; commercial broadcasters usually have no trouble meeting these costs except for small networks, though public networks could potentially need public funding. Better quality and the possibility of multiplexing, in principle, make a reasonable business case for action in this respect. Concluding the analogue switch-off is important, as it allows countries to reap earlier the benefits of the 700 MHz band. According to some estimates (Flores-Roux, 2013), each year that its use is delayed has an impact of around 1% of GDP six years later. This supports why subsidising the transition to digital television is the correct strategy, but a well-planned and orderly transition, as well as targeted subsidies, will minimise the cost.
93. This Chapter addressed policy considerations regarding spectrum management. First, it highlighted that spectrum management frameworks should be transparent and stable and have as their main goal the encouragement of investment and competition in order to increase availability and penetration of telecommunication services, while considering value creation and externalities on GDP, job creation, investment, social welfare, and consumer and producer surpluses. In this sense, national spectrum licensing frameworks (for the different types of agreements such as exclusive, unlicensed and LSA/ASA) are key for managing spectrum consistently and establishing legal certainty so that deployments and upgrades of infrastructure can be implemented under long-term perspective and with high renewal expectations.
94. The main tools to be used for spectrum management are national frequency allocation tables (NFAT), spectrum inventories, licenses database, long term planning, and measurements of efficient use. Moreover, when proceeding with the challenging task of economic valuation of radio spectrum, policy makers can choose between the tools of econometric analysis, benchmarking, avoided costs, business case and opportunity costs.
95. Moreover, this Chapter raised important implications of spectrum management for competition dynamics. Close collaboration with the competition authority is advised and flexibility in assignment, not only in terms of technological neutrality, but also in terms of service (“service neutrality”) should be sought. Setting spectrum caps, spectrum trading, development of secondary markets, spectrum sharing and spectrum refarming are also tools policy makers can use to potentially increase competition and the efficient use of spectrum.
96. While spectrum may be assigned via non-market based procedures (such as direct administrative or lotteries) and different contest procedures (such as comparative selection), this Chapter has shown that the most efficient mechanism of spectrum assignment is through auctions. Well-designed auctions are less discretionary, increase the certainty of markets, and can be an invaluable price discovery mechanism, leaving the regulator with the role of setting a minimum reference prices, setting aside blocks for entrants and/or establishing restrictions (such as caps) and obligations (such as coverage or offering wholesale service to MVNOs) when necessary for attaining policy goals.
97. Finally, this Chapter addressed the current challenges related to the digital dividend (the 700 MHz band in LAC countries) and the switch-over to digital terrestrial television. To ensure a smooth transition and a greater spectrum efficiency, it was stressed that well-planned orderly transitions, awareness campaigns for the population, combined with targeted subsidies (for decoders or migration costs of broadcasters), will help to minimise public and private costs involved in the transition.
1. See http://www.pc.gov.au/inquiries/completed/public-safety-mobile-broadband#report
2. See http://research.microsoft.com/en-us/projects/spectrum/default.aspx
3. See http://www.acma.gov.au/Industry/Spectrum/Radiocomms-licensing/Spectrum-licences/spectrum_21 In addition, in February 2016, ACMA outlined its strategy for addressing the growth in mobile broadband capacity in its work plan based on its experience. See http://www.acma.gov.au/Industry/Spectrum/Spectrum-planning/About-spectrum-planning/mobile-broadband-strategy-caps-off-decade-of-work
AHCIET GSMA (2012), Beneficios Económicos del Dividendo Digital para América Latina (Economic Benefits of Digital Dividend for Latin America),Asociación Iberoamericana de Centros de Investigación y Empresas de Telecomunicaciones, Montevideo, URL: www.gsma.com/latinamerica/wp-content/uploads/2012/06/GSMA_DocFinal.pdf.
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