New report cites need for balance of unlicensed, licensed spectrum

A new study, "The Case for Unlicensed Spectrum," argues that the government allocation of spectrum for unlicensed use may actually increase total auction revenues associated with the sale of spectrum. For that reason, the study urges a balanced approach to making both unlicensed and licensed spectrum available in the American marketplace.

In the study (commissioned by Google, a "white space" proponent)), authors Paul Milgrom, Jonathan Levin and Assaf Eilat found that proposals to auction spectrum designated for unlicensed use threaten to undermine its utility and potential. They said unlicensed applications have served as an important complement to licensed use.

"Unlicensed spectrum is an enabling resource," said Eliat, a senior economist at Compass Lexecon, at a news conference held on the report by Wireless Innovation Alliance in Washington, D.C. "Licensed spectrum concentrates use to the hands of very few players."

He said unlicensed spectrum both competes and compliments licensed spectrum. It competes by restricting the market power of licensed spectrum, while it also complements the value of that spectrum. A complementary example, Eliat said, are the "apps" that run on the unlicensed spectrum of tablets and smart phones that extend and enhance the audience of television broadcasters, who use licensed spectrum.

"Why have the unlicensed portions of the spectrum been such an effective catalyst for innovation?" the authors ask in the study. "Our answer is that unlicensed spectrum is an enabling resource that, like other enabling resources and technologies, encourages innovation by many parties. Licensing or ownership that limits access to such resources discourages innovation by giving too much power to the licensee or owner."

The authors asked the question of whether governments should leave unlicensed spectrum alone or would it be better to license and control it, as with television broadcast stations.

"Allocating spectrum for unlicensed use has been more effective in encouraging the development of a host of innovative uses by a host of independent parties," they concluded. "Wi-Fi, in particular, played an essential role in the development of modern mobile phones and tablet computers, which have driven the initial explosive growth in demand for wireless data communications.

"Unlicensed spectrum supports low-powered uses that allow greater reuse and sharing of the spectrum and encourage third-party innovation. And, of course, it spurs investment in complementary technologies. For example, Wi-Fi encourages the building of high-speed connections to homes and businesses where it is used."

Peter Cramton, professor of economics at the University of Maryland, noted that 50 percent of Internet use is now over Wi-Fi, which he said is the best example of the success of unlicensed spectrum use. Eliat noted that Apple's iPad has generated about $16 billion dollars. Yet, he questioned the tablet's value at all without Wi-Fi connectivity.

The report said the historical findings with unlicensed spectrum "provide ample reason for policy makers to expand the quality and quantity of unlicensed spectrum alongside that of licensed spectrum."

They asked whether it is costly, in terms of auction revenues, to set aside some spectrum for unlicensed uses? "The surprise for many will be that economic theory provides no clear answer," the authors said, "but we believe that the most likely answer is no. Reserving some spectrum to be unlicensed reduces the quantity available to be sold, which both raises prices and reduces quantities. So, even if unlicensed spectrum had no demand- enhancing effects, the revenue effect of reserving some spectrum for unlicensed could be

If new unlicensed uses have even a fraction of the expected impact, then the enabling resource of unlicensed spectrum will have a hugely positive impact on the value of licensed spectrum, leading to increased auction revenues, they said. "As the demand for licensed spectrum grows, it is a fair guess that the demand for equally good unlicensed spectrum will grow apace. Wise policy should allow and celebrate that sort of growth."