SPECTRUM MARKETS. Michael Honig Department of EECS Northwestern University. March MSIT Week 10

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1 SPECTRUM MARKETS Michael Honig Department of EECS Northwestern University March 2014 MSIT Week 10

2 Spectrum Markets 2 Engineering Policy Economics Randall Berry, Michael Honig, EECS Rakesh Vohra, Kellogg MEDS

3 3 High Profile Issue

4 Why Spectrum Markets? 4 New policies are needed for spectrum allocation. Markets are natural policy candidates. Markets for spectrum pose unique challenges/ questions. Definition of property rights, interference externalities Efficiency, incentives, wireless system design Interplay between economics and engineering issues

5 5 Outline Background Spectrum Sharing Models Market structures How should spectrum be managed?

6 Limited Supply of Spectrum 6 good for cellular (300 MHz to 3 GHz)

7 Increasing Demand 7 Spark-gap transmitter (Tesla, 1893)

8 Spectrum Crunch 8 Petabytes per month

9 Regulation Prior to 1927: Open to All 9 Earliest uses of wireless for ship-to-ship, ship-to-shore communications. Broadcast radio begins in Licenses issued by the Department of Commerce.

10 Two Landmark Cases 10 Hoover vs Intercity Radio, 1923 United States vs Zenith Radio, 1926 Department of Commerce has no authority to regulate licenses. è Broadcasting boom: 200 new stations appeared in < 6 months. Herbert Hoover, US Sec. of Commerce Interference created chaotic radio environment (tragedy of the commons).

11 Spectrum Property Rights: A False Start 11 Tribune vs Oak Leaves Broadcasting, 1926 Property right allowed based on homesteading Interfering stations could be fined. Congress subsequently passed legislation prohibiting spectrum property rights Licenses issued for 90 days.

12 Regulation since 1927: Command and Control 12 Federal Radio Commission (FRC) established in Federal Communications Commission (FCC) established in Maintains authority to Grant / renew / deny licenses for spectrum use. Assign applications to particular frequencies. Police content and use Wise old man approach to spectrum allocation

13 The Spectrum Paradox 13 Spectrum is a scarce resource Spectrum is underutilized

14 Spectrum is a Scarce Resource 14 Nearly $20B netted for 700 MHz auctions in beachfront property

15 Spectrum is Underutilized 15 Spectrum measurements in New York City and Chicago conducted by Shared Spectrum Co.

16 An Economist s Proposal 16 Ronald Coase, 1991 Nobel Laureate in Economics R. Coase, The federal communications commission, J. Law and Economics, pp. 1 40, Introduce spectrum property rights, sell to highest bidders, do not restrict use. Coase s Theorem : In the absence of transaction costs, spectrum owners will trade rights so that the outcome allocates spectrum to best use.

17 An Economist s Proposal 17 Ronald Coase, 1991 Nobel Laureate in Economics R. Coase, The federal communications commission, J. Law and Economics, pp. 1 40, Introduce spectrum property rights, sell to highest bidders, do not restrict use. Coase s Theorem : In the absence of transaction costs, spectrum owners will trade rights so that the outcome allocates spectrum to best use. Role of government should be to minimize transaction costs.

18 An Economist s Proposal 18 Ronald Coase, 1991 Nobel Laureate in Economics R. Coase, The federal communications commission, J. Law and Economics, pp. 1 40, Introduce spectrum property rights, sell to highest bidders, do not restrict use. Coase s Theorem : In the absence of transaction costs, spectrum owners will trade rights so that the outcome allocates spectrum to best use. Spectrum auctions finally introduced in the 1990s. Restrictions on use remain.

19 A Governor s Proposal 19 Introduce property rights for senate seat, sell to highest bidder. Rod Blagojevich Former governor of Illinois

20 A Governor s Proposal 20 Introduce property rights for senate seat, sell to highest bidder. Found guilty of violating federal laws Rod Blagojevich Former governor of Illinois

21 21 Spectrum Sharing Models Exclusive use (liberal licenses) Commons Hierarchical (cognitive radio)

22 Spectrum Property Right: Liberal License 22 Spectrum is publicly owned, but licensed for exclusive use Liberal use rules Does not dictate technology (cellular, WiFi commons, satellite, ) Allows spectrum trading Can re-allocate spectrum on large scales. Can define/trade spectrum contracts on finer scales

23 Spectrum Commons 23 Open access Requires etiquette rules for sharing State-regulated (unlicensed) Spectrum owned by government Etiquette rules part of industry standard (802.11) Privately owned (licensed) Licensee sets rules, polices band Revenue from selling approved equipment

24 Engineering Approach to Spectrum Crunch 24 Add intelligence to mobile devices Frequency agility Wideband sensing Interference avoidance Adaptive quality of service (context aware) Cognitive Radio Mitola and Maguire (1999) Enables spectrum scavenging

25 Hierarchical 25 Primary and secondary users Secondary users must not disrupt primary users Relies on cognitive radio

26 Hierarchical 26 Primary and secondary users Secondary users must not disrupt primary users Relies on cognitive radio State-regulated Spectrum owned by government Use rules for secondary users part of standard (802.22) Private contracts with spectrum scavengers Interference levels/payments set by mutual agreement

27 Hierarchical: Technologies 27 Primary and secondary users Secondary users must not disrupt primary users Relies on cognitive radio Underlay: low-power, spread spectrum for secondary users Overlay: exploit white spaces left by primary users

28 Current Allocations 28 Mix of: restricted use bands (e.g., broadcast TV) liberalized licenses (cellular) state-regulated commons (WiFi) Active trading of liberalized licenses among commercial service providers US policy trends have favored assignments of unlicensed spectrum over liberalized licenses

29 Why Unlicensed Spectrum? 29 Pushed by DARPA

30 Why Unlicensed Spectrum? 30 Pushed by DARPA Military needs distributed, dynamic methods for spectrum sharing across military units Also by Microsoft, Google, Apple Facilitates 3 rd -party software applications Success of WiFi

31 Bold Predictions 31 IEEE Spectrum Magazine, March 2004

32 Arguments for Unlicensed Spectrum 32 Encourages innovation (WiFi, Bluetooth, etc.). Reduces barriers to entry. Has created at least as much value as licensed. See [Benkler, 2012], [Eilat, Milgrom, Levin, 2011] Huawei, Rolling Meadows January 2014

33 Counter-arguments 33 Unlicensed spectrum encourages innovation (WiFi, Bluetooth, etc.) Technologies developed for unlicensed spectrum could be developed for licensed use as well. WiFi uses a simple, distributed interference management scheme inappropriate for applications requiring high spectral efficiency. Huawei, Rolling Meadows January 2014

34 Counter-arguments 34 Unlicensed spectrum lowers barriers to entry. This may lead to a tragedy of the commons due to excessive interference. Unlicensed erects barriers to investment along with technologies and applications that may generate the highest social value. Huawei, Rolling Meadows January 2014

35 Value of Unlicensed 35 Unlicensed spectrum has created at least as much value as licensed. [According to FCC Commissioner Jessica Rosenworcel], recent economic studies that add up the broader impact of unlicensed spectrum on the economy estimate its annual value at more than $140 billion. FCC's Rosenworcel looks to 5 GHz band, 600 MHz guard bands for unlicensed wireless - FierceWireless Huawei, Rolling Meadows January 2014

36 Counter-arguments 36 Unlicensed spectrum has created at least as much value as licensed. The value of spectrum must be separated from the value of the application it supports. The total value must be distinguished from the marginal value. Value depends on congestion and interference management. Huawei, Rolling Meadows January 2014

37 How to assess spectrum value? 37 Evaluate as an opportunity cost: If spectrum X were not available, then what would be the cost of serving those applications? Evaluate marginal value: If additional spectrum δx were allocated to application A, then how much additional demand could be supported? Evaluate congestion cost: How much is congestion reduced by adding spectrum or investing in interference management? Huawei, Rolling Meadows January 2014

38 The Case for Liberal Licenses 38 Advocates: Encourages investment (cellular), efficient use Does not constrain technology, rules for spectrum sharing n Cellular, WiFi, Satellite, broadcast Detractors: Facilitates trading Has led to oligopoly [Hazlett, 2010] ITA, San Diego February 2014

39 Spectrum Supply Curve 39 Quantity of spectrum (Hz) Equilibrium price supply demand Spectrum price ($/Hz) As the spectrum price goes to zero: The supply decreases due to the decrease in spectral efficiency. The demand increases due to introduction of new services.

40 Commons vs Market 40 Quantity of spectrum (Hz) Commons Spectrum market supply demand p* Spectrum price ($/Hz) market transaction costs < cost of interference è Set up spectrum market

41 Commons vs Market 41 Quantity of spectrum (Hz) Commons Spectrum market supply demand p* Spectrum price ($/Hz) cost of interference < market transactions costs è Use commons model

42 42 Market Structures Bit pipe Spot markets Local transactions

43 Bit Pipe Model 43 Wholesale contract with cellular provider Kindle

44 Bit Pipe Model 44 Wholesale contract with cellular provider Mobile Virtual Network Operators (MVNO s) Resells mobile services (e.g., Virgin Mobile)

45 Bit Pipe Model 45 Wholesale contract with cellular provider Mobile Virtual Network Operators (MVNO s) Resells mobile services (e.g., Virgin Mobile) Emerging model for wholesale cellular provider Open broadband network No retail services Wide coverage

46 Bit Pipe Model: Properties 46 Wide-area coverage, high mobility Interference management Quality of Service guarantees Facilitates new wide-area wireless services Well-matched to lower frequency assignments

47 Spectrum Spot Market 47 Spectrum Broker Service requests Service providers (Acme Wireless) Licensees A, B, C, Immediate access, rapid (automated) transactions Low transaction costs Facilitates local services No need to build out large footprint

48 Wireless Spot Market 48 Spectrum Broker Service requests Service providers (Acme Wireless) Owners A, B, C, Spectrum can be bundled with equipment Broker allocates spectrum and technology (e.g., cellular/commons) Spot market for bits

49 Market Mechanisms 49 Spectrum Broker Sets prices, attempts to clear market Auction mechanism: collects bids; determines allocation Can be automated ( spectrum server ) Service providers (Acme Wireless) Owners A, B, C,

50 Spectrum Contracts 50 Spectrum Broker Service providers (Acme Wireless) Owners A, B, C, Contracts can be arranged across: Frequency (spread spectrum, underlay) Locations (mesh networking) Time (time-of-day, futures, scavenging) Variable QoS guarantees (statistical)

51 Interference Management 51 Spectrum Broker Service providers (Acme Wireless) Owners A, B, C, Spectrum assets predefined by owners Service providers must comply with power limits, interference constraints Spectrum assets partitioned, assigned by broker to satisfy service requests

52 52 How should spectrum be managed? Commercial broadband access Clean slate

53 Spectrum Management: Observations 53 Low Freqs. (< 1 GHz) High Freqs. (> 3 GHz) Frequency à Coverage is easy Interference management is difficult Coverage is difficult Interference management is easy

54 Spectrum Management: High-Level 54 Low Freqs. (< 1 GHz) High Freqs. (> 3 GHz) Frequency à Wide-area coverage Coordinated interference management Expensive infrastructure Local coverage Distributed interference management (random access) Inexpensive

55 Shrinking Cells 55 Low Freqs. (< 1 GHz) High Freqs. (> 3 GHz) Frequency à Macro-cells Coordinated interference management Expensive infrastructure Femto-cells/WiFi Distributed interference management (random access) Inexpensive

56 Spectrum Sharing Models 56 Low Freqs. (< 1 GHz) High Freqs. (> 3 GHz) Frequency à Exclusive use (licensed) Encourages investment in infrastructure Bit Pipe (e.g., Light Squared) Commons Public (unlicensed) Private (licensed)

57 Spectrum Management: High-Level 57 Bit Pipe (< 1 GHz) Macro-cells Coordinated interference management Expensive infrastructure Dynamic Spectrum Markets? Frequency à Micro-cells Light interference management Spectrum servers Rapid transactions Commons (> 3 GHz) Femto-cells/WiFi Distributed interference management (random access) Inexpensive

58 What about Cognitive Radio? 58 Enables spectrum scavenging Sense/exploit white spaces Could be applied to licensed or unlicensed spectrum Focus has been on unlicensed access for secondary users

59 Where does cognitive radio fit? 59 Bit Pipe (< 1 GHz) Coordinated interference management Expensive infrastructure Frequency à Commons (> 3 GHz) Distributed interference management (random access) Inexpensive

60 Where does cognitive radio fit? 60 Bit Pipe (< 1 GHz) Coordinated interference management Expensive infrastructure Frequency à Commons (> 3 GHz) Distributed interference management (random access) Inexpensive

61 Where does cognitive radio fit? 61 Bit Pipe (< 1 GHz) Coordinated interference management Expensive infrastructure Frequency à Commons (> 3 GHz) Need only simple dynamic channel assignment. Sensing, scavenging is probably unnecessary.

62 Where does cognitive radio fit? 62 Bit Pipe (< 1 GHz) Dynamic Spectrum Markets Commons (> 3 GHz) Coordinated interference management Expensive infrastructure Frequency à Scavenging spectrum across multiple service providers via a spot market may be useful, but

63 Where does cognitive radio fit? 63 Bit Pipe (< 1 GHz) Dynamic Spectrum Markets Commons (> 3 GHz) Coordinated interference management Expensive infrastructure Frequency à Scavenging spectrum across multiple service providers via a spot market may be useful, but! SPs would control available spectrum! cognitive means frequency-agile

64 Spectrum Management: Two Views 64 Spectrum is abundant It is just poorly managed Spectrum will remain scarce Applications will be generated to use new spectrum Shift to cheaper, spectrally inefficient technologies

65 Transition to Spectrum Abundance 65 Tradeoff between spectrum efficiency and power efficiency Shift emphasis towards low-power, inexpensive wideband signaling techniques Efficiency becomes limited by transaction costs Spot markets with distributed interference management Transparent (standardized?) mechanism (pricing/auction) Wireless devices: frequency/technology agile, compatible with spot market mechanism

66 Many Remaining Challenges 66 Economics Policy Engineering Incentives, efficiency Market design Interference management

67 Many Remaining Challenges 67 Economics Policy Transition to spectrum markets?? Engineering Incentives, efficiency Market design Interference management