1 Satisfying Spectrum Demand Through Secondary Markets Peter Cramton Chairman, Spectrum Exchange Professor of Economics, University of Maryland May 31,

2 Secondary Markets Are Essential for the Efficient and Intensive Use of the Spectrum Secondary markets identify gains from trade not realized in the primary market (FCC auction) Two sources of unrealized gains from trade: Best use of spectrum yesterday is not the best use today –Business plans change; technologies change –Long-term needs change in response to this uncertain environment Short-term need for bandwidth is variable –Want to sell when you have a surplus –Want to buy when you have a shortage

3 Two broad types of secondary markets: short-term and long-term Short-term: buy surplus capacity to satisfy peaks in demand (think: real-time spot market) –Satisfying short-term demand spikes will be major virtue of secondary markets in future, once flexible (and standardized) technologies are developed, such as software defined radios Long-term: many-year use involving large specific investments to build out a service (think: long-term contract) –I will focus on using secondary markets to satisfy long-term demands –Example: auctioning encumbered spectrum

4 700 MHz Auction of Channels Concrete example where needs of market not fully satisfied by FCC’s primary auction FCC to auction 30 MHz in 700 MHz band on September 6 This spectrum perfect for 3G mobile or 3 rd broadband pipe to the home But spectrum is encumbered by existing UHF broadcasters, blocking use by new licensees in most major markets Spectrum is worth much more if clear of incumbent broadcasters Efficient clearing is facilitated by secondary market

5 700 MHz Clearing Auction Spectrum Exchange will conduct a private auction before the FCC auction to identify the least-cost clearing solution Resolve clearing issue before FCC auction Reduces uncertainty and delay The Spectrum Exchange Auction will enable bidders in the FCC’s 700 MHz Auction to bid with confidence that the spectrum will be cleared at an early date — and at a known cost

6 Importance of Clearing Auction Without clearing auction, –Holdout will delay or prevent efficient spectrum use, destroying public value Clearing auction lets all comparable stations in a broadcast market compete to be the one to clear –Those stations that can clear at lowest cost will do so, thus minimizing any loss of broadcast service Chicago –4 stations in 700 MHz band must clear or relocate –9 comparable stations –9 compete to be the 4 that clear

7 Mechanics of the Private Clearing Auction Incumbent broadcaster in Channels receives –an incentive payment in return for its commitment to relocate –the clearing payment if it wins the clearing auction The private auction in each broadcast market –Identifies stations that can clear at lowest cost –Determines the market price for clearing

8 How the FCC Can Facilitate the Secondary Market Reduce uncertainty and distortions in the bargaining between incumbents and new entrants: Allow early transition to DTV-only Assure transitioning broadcasters of continued cable carriage Establish relocation rule for channel 59–69 broadcasters that limits holdout problem