Spectrum Pricing Comparing Different Concepts for Implementation Presentation at the 9th Annual LS Summit Lichtenau, 16.06.2004 Dr. Markus Steingröver Detecon International GmbH Competence Practice Strategy & Innovation Oberkasseler Str. 2 53227 Bonn (Germany Member of
Contents 1. 2. 3. Aims & Examples of Administrative Pricing The British Approach to Administrative Pricing The Australian Approach Page 2
1. Aims & Concepts of Administrative Pricing Page 3
1. Aims & Concepts of Administrative Pricing 1.1 Economic Aspects of Spectrum Management Spectrum pricing is targeted at apparatus fees and has to be distinguished from other economic aspects of Spectrum Management Apparatus Licenses Licence to operate a specific apparatus in a specific location using a specific assigned frequency Assignment by Spectrum Manager Annual Fee & One Time Licence to freely utilize spectrum in a specific area. Assignment by Spectrum Licenses Auction Tender Fixed Price Transfer & Trading Framework Compulsory Acquisition Framework Page 4 Transfer & Trading Framework Compulsory Acquisition Framework Even in USA & Australia more than 80% of the Spectrum is assigned by Apparatus Licences
1. Aims & Concepts of Administrative Pricing 1.2 Apparatus Fees are a Major Tool of Spectrum Management As Spectrum Trading, Spectrum Pricing is aimed to set prices which reflects the scarcity of the spectrum to provide economically correct signals to the market Increased Usage of Spectrum leads to Congestion Overuse of Spectrum Harmful Interference Spectrum or Administrative Pricing aims to bring Demand in line with Supply Page 5 Promote efficient use of spectrum Prevent stockpiling of spectrum Provide incentives to move to less congested spectrum Provide incentives to hand back not needed spectrum Encourage to switch to spectrally efficient technologies
1. Aims & Concepts of Administrative Pricing 1.3 Determination of Fees Spectrum or Administrative Pricing uses criteria closely related to congestion to establish individual fees Area sterilized Geographical Location Spectrum Location Individual Annual Licence fee for Apparatus Assignment Page 6 Bandwidth used Exclusivity or shared use Additional Differentiation between efficient trunking systems and individual radio systems etc
2. The British Approach to Administrative Pricing Page 7
2. The British Approach to Administrative Pricing 2.1 Overview The UK was a pioneer in developing economically designed methods of Administrative Pricing The UK started implementing the first stage of spectrum pricing in 1998 Until now three stages have been launched, each one extending the coverage of administrative pricing in order to finally apply it to all apparatus types. There is a gradual increase of those fees that are considered as being to low to reflect the economic value of the spectrum In general spectrum pricing resulted in huge increases of fees phased over 4 years. This was especially true for bigger users of spectrum while smaller users of spectrum benefited from fee restructuring UK Chronology: 1998 Wireless Telegraphy Act permits license auctions and introduces administrative prices for spectrum 2002 Independent review of spectrum management and Government response 2003 Communications Act entrusts frequency management to new regulatory agency OFCOM which authorizes spectrum trading 2004 Introduction of spectrum trading? 2004 New administrative prices? Page 8
2. The British Approach to Administrative Pricing 2.2 The British Approach tries to base fees on marginal values of the spectrum (1) The major aim of the UK Approach is to provide incentive to economise on demand by pricing at competitive/opportunity cost level Some spectrum has no opportunity cost, because of international agreements (NATO spectrum etc.) Some spectrum is in excess supply and therefore has zero opportunity cost and price Market price of spectrum depends on cost reduction potential degree to which use of frequency reduces costs of production scarcity rent-profits available in downstream market Original method Smith Nera Aim is to calculate the marginal value of the spectrum Spectrum valued on basis of two alternative technologies Substitution between mobile spectrum and base stations Substitution between fixed links and wire-based technologies Subject to modifiers and introduced progressively. New proposal Also takes into account substitution of one frequency by another Page 9
2. The British Approach to Administrative Pricing 2.2 The British Approach tries to base fees on marginal values of the spectrum (2) In the UK approach four steps are taken to establish individual apparatus fees STU for Mobile Links (below 2 GHz): 1,65 Pounds STU for Fixed Links (above 2 GHz): 1,1 Pounds STU * Area Sterilized * Bandwidth Spectrum Tariff Unit (STU): Calculated figure Value of 1 MHz covering 1km2 Reference Fee Other factors affecting fee: Exclusivity Geogr. Location, Frequency Band Fee Modifiers for specific Licences, Transition Period (4 Years) Discounted lifetime costs of the least cost alternative to current usage Page 10
3G Mobile Other Mobile 2. The British Approach to Administrative Pricing 2.3 The British Approach: Who Pays what? 1000 900 800 700 600 500 400 300 200 100 0 Prime Spectrum '000s, MHz, p.a. (2002 projections) '000s 2G Mobile Private Business Radi... Maritime Defence + emergency... Fixed Links Terrestrial Television Terrestrial Radio Aeronautical Source: Ofcom Page 11
2. The British Approach to Administrative Pricing 2.3 The British approach is theoretically sound but problematic in practice... No revenue target: Prices shall reflect marginal value From a theoretical point of view sound and pure economic approach However, when it comes to details of calculation things become muddled and intransparent No calculation of STU, that allows for recalculation is published Moreover, judgements and assumptions are not avoidable (i.e. technical details of alternatives) STU reflects weighted average of marginal value across respective spectrum ranges Single fees differ therefore from true marginal value Technical Alternatives and hence Marginal Values change rapidly Regular re-calculation of STU would be necessary Page 12 This makes UK Approach not very transparent, complicated and difficult to administer
3. The Australian framework Page 13
3. The Australian framework 3.1 The Australian Formula integrates all administrative pricing variables In the Australian Framework the Fee depends on observed congestion factor in 8 Ranges of Spectrum Location and 4 Geographical Areas National High Density Medium Density Low Density 0-30 MHZ 2,16 2,16 2,16 2,16 30-70 Mhz 9,75 3,81 2,03 0,44 70-960 Mhz 10,00 4,90 2,24 0,42 960-2690 Mhz 9,99 2,24 1,04 0,52 2690-5 Ghz 9,97 1,85 0,75 0,54 5-8,5 Ghz 8,42 1,56 0,73 0,33 8,5-31,3 Ghz 5,11 1,34 0,32 0,02 above 1,012 0,539 0,117 0,004 Congestion Factors Factor is multiplied with Bandwidth used and a Constant Cost Factor: K * Congestion Factor * Bandwidth (Bi) K is the pre-defined Cost Factor 38.78 % Surcharge for Indirect Costs of Spectrum Management (SMC) Additional Discounts for spectrum- efficient technologies Page 14
3. The Australian framework 3.2 How Bandwidth is taken into account K * Congestion Factor * Bandwidth (Bi) Bi is calculated using the mid-point of 11 Bandwidth Ranges The formular distinguishes between 11 Bandwidth ranges B i A v e r a g e 0 1 8 K h Z 9 1 8 3 6 K h Z 2 7 3 6 2 0 0 K h Z 1 1 8 2 0 0 5 0 0 K h Z 3 5 0 5 0 0 2 0 0 0 K h Z 1 2 5 0 2 0 0 0 7 0 0 0 K h Z 4 5 0 0 7 0 0 0 1 4 0 0 0 K h Z 1 0 5 0 0 1 4 0 0 0 3 0 0 0 0 K h Z 2 2 0 0 0 3 0 0 0 0 5 0 0 0 0 K h Z 4 0 0 0 0 5 0 0 0 0 2 0 0 0 0 0 K h Z 1 2 5 0 0 0 2 0 0 0 0 0 5 0 0 0 0 0 K h Z 3 5 0 0 0 0 The formula is based on the mid-point of the ranges. Page 15 The use of ranges, rather than a continuum, limits the possible number of fees and keeps the fee schedule reasonably simple. For example, for a service with a bandwidth of 25 khz, the formula is based on 27 khz (that is, the mid-point between 18 and 36 khz).
3. The Australian framework 3.3 Modifications To further differentiate fees the Australians included another variable (Ai) to account apparatuses that are only used sub-locally Ai = area of coverage The formula is based on two areas of coverage groupings: local sub-local Local grouping has a weighting of one. It applies to most services Actual area covered differs between services (type of service, transmission equipment, topography of the area, licence conditions etc) However, it was decided that it was too complex to allow for all these factors Sub-local grouping applies to spectrum access permitting operation of a device at power level of not more than 1 watt or to a service to be provided only within premises of licence The weighting for sub-local is 0.1. These types of services, therefore, pay one-tenth of the amount for local services. This factor does not apply to fixed point-to-point, fixed point-to-multipoint, fixed television outside broadcast station and fixed receiver licences Page 16
3. The Australian framework 3.4 Results The result of the Australian Approach is one single table that shows the fee for every apparatus assignment thinkable 70-960 Mhz National High Dens. Medium Dens. Low Dens. 0 18 KhZ 26 26 26 26 18 36 KhZ 48 26 26 26 36 200 KhZ 211 103 47 26 200 500 KhZ 626 307 140 26 500 2000 KhZ 2.236 1.096 502 94 2000 7000 Mhz 8.051 3.946 1.806 339 7000 14000 Mhz 18.785 9.208 4.213 791 14000 30000 Mhz 39.359 19.294 8.828 1.657 30000 50000 Mhz 71.561 35.079 16.051 3.013 50000 200000 Mhz 223.629 109.623 50.160 9.415 200000 500000 Mhz 626.161 306.944 140.448 26.361 960-2690 Mhz National High Dens. Medium Dens. Low Dens. 0 18 KhZ 26 26 26 26 18 36 KhZ 48 26 26 26 36 200 KhZ 211 47 26 26 200 500 KhZ 625 140 65 33 500 2000 KhZ 2.233 501 232 117 2000 7000 Mhz 8.039 1.804 834 419 7000 14000 Mhz 18.757 4.210 1.946 979 14000 30000 Mhz 39.300 8.820 4.078 2.051 30000 50000 Mhz 71.454 16.037 7.414 3.728 50000 200000 Mhz 223.293 50.115 23.168 11.651 200000 500000 Mhz 625.222 140.323 64.870 32.623 2,69-5 Ghz National High Dens. Medium Dens. Low Dens....... Page 17 Table is published in the Apparatus Fee Schedule Australians define several groups of assignments subject to Different K Factors Therefore, Schedule shows more than one (three) fee tables each applicable to different groups of apparatus assignments
3. The Australian framework 3.5 Conclusions The Australian Framework simulates the market but has to be modified to fit into the European environment Advantages: Disadvatages: Spectrum location ranges reflect different nature of services across the spectrum Fee shows amount of spectrum denied to others in specific geographical region Framework promotes efficiency and provides incentives to reduce spectrum demand Transparent and easy to administer: detailed lists show congestion factor for each spectrum location and bandwidth Page 18 Unmodified adoption might lead to huge increase for high bandwidth applications in high density areas: transition period is necessary to adjust individual fees Other Policy objectives have to be addressed by the Framework
Your Contact Dr. Markus Steingröver Detecon International GmbH Competence Practice Strategy & Innovation Oberkasseler Str. 2 53227 Bonn (Germany) Phone: +49 228 700 1513 Fax: +49 228 700 1507 Mobile: +49 171 331 5876 +49 171 3315876 e-mail: Markus.Steingröver@detecon.com Page 19