United States s2

1 UNITED STATES 2 FEDERAL COMMUNICATIONS COMMISSION 3

4 5 1 In the Matter of: ) 2 ) 3 SECONDARY MARKET FORUM ) 4 ) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Volume: 1 22 23 Pages: 1 through 145 24 25 Place: Washington, DC 26 27 Date: May 31, 2000

6 7 8 9 HERITAGE REPORTING CORPORATION 10 Official Reporters 11 1220 L Street, N.W., Suite 600 12 Washington, D.C. 20005-4018 13 (202) 628-4888 14 [email protected] 1 2 1 IN THE UNITED STATES FEDERAL COMMUNICATIONS COMMISSION 2 3 4 5 In the Matter of: ) 6 ) 7 SECONDARY MARKET FORUM ) 8 ) 9 10 11 12 13 Main Commission Meeting Room 14 Federal Communications 15 Commission 16 445 12th Street, S.W. 17 Washington, D.C. 18 19 Wednesday, 20 May 31, 2000 21 22 23 APPEARANCES: 24 25 DALE HATFIELD, Chief, Office of Engineering and 26 Technology, FCC 27 WILLIAM KENNARD, Chairman, FCC 28 SUSAN NESS, Commissioner, FCC 29 HAROLD FURCHTGOTT-ROTH, Commissioner, FCC 30 PETER CRAMTON, Chairman, Spectrum Exchange and 31 Professor of Economics, University of Maryland 32 MORGAN O'BRIEN, Vice Chairman, Nextel 33 Communications 34 CARESSA BENNET, Counsel for the Rural 35 Telecommunications Group 36 MARK CROSBY, President and CEO, Industrial 37 Telecommunications Associations 38 ROBERT PEPPER, Chief, Office of Plans and 39 Policy, FCC 40 SHARON CROWE, Vice President, Bandwidth Markets, 41 Williams Communications 42 LAURENCE GREEN, Director, Strategy Unit, UK 43 Radiocommunications Agency

2 3 Heritage Reporting Corporation 4 (202) 628-4888 1 3 1 MIKE ANTONOVICH, Senior Vice President, Broadcast 2 Services, PanAmSat Corporation

2 3 Heritage Reporting Corporation 4 (202) 628-4888 1 4 1 APPEARANCES (Continued): 2 3 RICHARD REECE, Chairman, Red Bat Communications 4 TOM HAZLETT, Resident Scholar, American Enterprise 5 Institute 6 RICH BARTH, Vice President and Director of 7 Telecommunications Strategy and Regulation, 8 Motorola Corporation 9 JOE MITOLA, Consulting Scientist, Mitre 10 Corporation 11 MICHELLE FARHQUAR, Attorney, Hogan and Hartson 12 ROBERT SHIVER, Chief Executive Officer and 13 President, Securicor Wireless Holdings, Inc. 14

2 3 Heritage Reporting Corporation 4 (202) 628-4888 1 5 1 P R O C E E D I N G S

2 (9:05 a.m.)

3 MR. HATFIELD: If we could get started please.

4 I'm Dale Hatfield from the Office of Engineering

5 and Technology. And I'd like to welcome you to the Federal

6 Communication Commission's public forum on facilitating the

7 development of the secondary markets in radio spectrum.

8 In February of this year, many of you may know

9 that Chairman Kennard spoke at the Cellular Communications

10 Industry Association meeting down in New Orleans. And he

11 spoke about some of the serious difficulties we are facing

12 in managing the spectrum to meet the explosive needs of

13 wireless communications.

14 No part of our industry has grown as quickly and

15 as competitively as wireless services. Unfortunately,

16 spectrum is a limited resource and cannot be duplicated to

17 meet this demand.

18 Chairman Kennard talked about the need to be

19 creative and innovative in our spectrum management

20 policies, so that we could enable future growth and sustain

21 growth in wireless services and avoid spectrum shortages

22 that would constrain that growth.

23 In that talk, he raised the idea of a secondary

2 3 Heritage Reporting Corporation

4 (202) 628-4888 1 6 1 market in spectrum similar to what is occurring in other

2 commodity markets today. He tasked us, the Commission, to

3 explore the ways that we could facilitate the development

4 of such markets to try and not only increase the efficient

5 use of the spectrum already deployed, but to make spectrum

6 available for new services.

7 Now this, of course, is a challenging task. This

8 forum will help the Commission begin the process by

9 soliciting views from the public. I want to thank --

10 welcome and to thank the panelists in advance for their

11 participation. I know they are all very busy. And we

12 really do appreciate their taking the time to come here to

13 give the benefit of their experience.

14 I would also like to welcome Commissioner

15 Furchtgott-Roth down to the left. His presence this

16 morning with Chairman Kennard, of course, indicates the

17 importance that the Commission places on this issue. So

18 with that, I'll turn the microphone over to our chairman,

19 William Kennard.

20 CHAIRMAN KENNARD: Thank you very much, Dale.

21 And thank you all for being here. This is the beginning of

22 what, I think, should be a very exciting and engaging

23 debate that we need to have in this country about how to

4 (202) 628-4888 1 7 1 better manage the spectrum resource for the country. And

2 we need to have a sense of urgency about how we deal with

3 this issue, because spectrum is becoming increasingly

4 important.

5 The Internet is beginning its migration out of

6 the personal computer and into a whole variety of

7 interesting network, hand-held, wireless devices. And

8 that's a wonderful thing. And it's going to happen fast.

9 Today in the world, only about six million people

10 are accessing the Internet over hand-held wireless devices.

11 And in the next four years, that number is expected to grow

12 to 1 billion. And today, that six million people who are

13 using the Internet over wireless devices are located mainly

14 outside the United States. Over five million of them are

15 located in Asian countries.

16 Well, this revolution is just beginning to hit

17 the United States. And it's going to hit us fast. And

18 we've got to be prepared for it. And we have to be

19 prepared to manage the spectrum more efficiently so that we

20 can accommodate all these wireless devices.

21 Now, the good news is that once the Internet

22 makes this migration, it's going to democratize the

23 Internet, because many more people will be able to access

4 (202) 628-4888 1 8 1 it at using cheaper devices. That's the good news. The

2 bad news is that we are running out of spectrum,

3 particularly the quality spectrum below 3 gigahertz, which

4 is prime spectrum for mobile applications.

5 If you look at the way the Internet consumed

6 bandwith on the wireline side, you can see why it's

7 particularly imperative that we address spectrum management

8 today. The data traffic on our wireline networks is

9 doubled about every hundred days.

10 And if you import that same growth rate to the

11 wireless side of the house, you can see that we'll quickly

12 run out of spectrum. We'll have what I call a spectrum

13 drought if we don't very seriously look to better

14 management techniques for spectrum.

15 The good news, though, is that when the

16 Commission has addressed these issues of better spectrum

17 management, we've made progress. If you take a snapshot of

18 the way we manage spectrum today and compare it to where we

19 were five to ten years ago, it's really a dramatic

20 difference.

21 And we have spectrum options now, which have

22 greatly improved the process of licensing spectrum. In

23 fact, the spectrum option process alone has decreased by 70

4 (202) 628-4888 1 9 1 percent the time it takes to license spectrum in this

2 country.

3 We've moved to geographic wide-area licensing,

4 which is more efficiently used as spectrum resource. We

5 have gotten out of the mentality of what I call the

6 mother-may-I approach to spectrum management where you have

7 to ask the FCC for virtually every conceivable use of the

8 spectrum. And we've gone to more flexible use.

9 So if you look at our newest services like PCS,

10 we don't mandate what you use that spectrum for. You can

11 use it for whatever the market will bear. And so if you

12 look at the improvements that we've made in spectrum

13 management, you can see that we've improved the process by

14 importing more market-based management techniques to

15 managing the spectrum. And that, of course, is what

16 today's forum is all about.

17 Today's forum is about finding ways that the

18 market can better assist the government in managing the

19 spectrum. I believe that in order to accomplish this goal

20 of better spectrum management, we have to establish as a

21 goal that spectrum no longer be a scarce resource in our

22 country, that we ought to find ways that the spectrum

23 resource can be seen more as a commodity that can move

4 (202) 628-4888 1 10 1 freely in the marketplace, because that's how spectrum can

2 best meet the market demands of today and of the future.

3 We've seen little pockets of the spectrum, the

4 unlicensed spectrum, for example, where there are no entry

5 barriers. People can freely enter and exit the

6 marketplace, because they don't need a license from the

7 FCC. And it's a wonderful little microcosm of innovation

8 in the unlicensed spectrum.

9 And so we need to find ways that we can lower

10 entry barriers across the board. One way to do it, of

11 course, is by trying to develop a secondary market for the

12 use of the spectrum. I'm very excited about this prospect

13 because, to me, it imports another powerful market-based

14 tool to spectrum management and gets us out of this

15 Mother-may-I approach to managing the spectrum.

16 I like to use the analogy of real estate. If you

17 think of spectrum like real estate and a block of spectrum

18 being akin to a large office building, under today's

19 management techniques, government tends to micromanage the

20 process; that is, we give a license to every tenant in that

21 building.

22 And every tenant in that building has to come to

23 the FCC and ask us permission to use a block of spectrum or

4 (202) 628-4888 1 11 1 space in the building. Well, why not license spectrum in

2 blocks and allow spectrum managers to license the spectrum

3 to individual tenants? Take government out of the process.

4 We have begun that process in a very incremental

5 way in the 700 megahertz auction that we'll kick off in the

6 fall where we've imported the concept of a band manager, a

7 licensee who will come and have a block of spectrum and

8 move it around among private licensees as the market

9 demands.

10 The other thing that we're doing here is to look

11 at technology to help us better manage the spectrum. The

12 secondary markets approach is one of a number of important

13 spectrum management tools that I'd like us to explore.

14 But we've also, thanks to the leadership of Dale

15 Hatfield and Bob Pepper, we've kicked off a software-defined

16 radio proceeding where we are going to look at

17 software-defined radio as an important spectrum management

18 tool.

19 We also have kicked off a proceeding to look at

20 authorizing ultra-wide band or pulse radio as a way to

21 better manage the spectrum resource. So these are all

22 techniques that we should be looking at very seriously as

23 we move ahead.

4 (202) 628-4888 1 12 1 I am very pleased that the notion of creating a

2 secondary market for spectrum has engendered a lot of

3 debate, a lot of discussion, a lot of interest, because

4 it's important that we move ahead quickly on this for all

5 the reasons I've stated.

6 So I want to thank you all for being here and

7 thank you for your help which we really need to better

8 manage this resource. I think if we work together,

9 government and industry, we can transform the way we manage

10 spectrum in this country for the benefit of the American

11 public and really revolutionize the spectrum management

12 tools that we're using today. Thank you very much.

13 MR. HATFIELD: Thank you, Mr. Chairman.

14 Commissioner Ness has joined us now here at the front

15 table. Do you have an opening statement?

16 COMMISSIONER NESS: Thank you very much, Dale. I

17 look forward to the day when spectrum enables me to avoid

18 the traffic jams that I had coming in from Bethesda. I'm

19 truly delighted to be at this gathering, another

20 opportunity for us to be examining ways in which we can

21 better use this very valuable resource, spectrum.

22 And I want to commend the chairman for making

23 spectrum management one of his top four priorities in his

4 (202) 628-4888 1 13 1 plan for the year 2000, for convening this forum and other

2 fora to discuss these kinds of issues and for empaneling

3 the technology advisory which has provided us with so

4 valuable insights, so many valuable insights into how we

5 can better use the spectrum.

6 And he mentioned also that we've examined and

7 have begun proceedings for new and novel ways of using the

8 spectrum, such as through software-defined radio and

9 ultra-wide band alike. These, I think, are very, very good

10 techniques.

11 And I'm excited about today's discussion about

12 how we can find better ways to eke out more efficient use

13 of existing spectrum that's already allocated or already

14 licensed.

15 We have a very visible event going on right now.

16 It goes on for a month. It goes on every two and a-half

17 years, thereabouts. And that's the World Radio conference.

18 The World Radio conference convenes approximately 150

19 countries from around the globe to talk about allocations

20 of spectrum.

21 And I've attended three of these conferences over

22 the course of the last six years. And it's been

23 interesting the see how during the course of the last six

4 (202) 628-4888 1 14 1 years the progress that has been made in thinking about how

2 we use and reuse and share spectrum. It really is dramatic

3 to see.

4 Our colleagues abroad have begun to adopt some of

5 the concepts that we are using here in the United States.

6 Little by little, we've seen that. We've seen the spectrum

7 auction gather steam.

8 We've seen some of the other concepts that we've

9 been talking, including flexibility, begin to take hold in

10 the thinking of other countries. But also, we have an

11 opportunity to learn from the experiences and ideas that

12 they are using to make more efficient use of the spectrum.

13 So I found this to be an extremely valuable exercise.

14 The discussions today should help us to analyze

15 how we best create incentives for parties to give up

16 spectrum that's lying fallow or that is not expected to be

17 used for a considerable period of time and to put it into

18 more productive use.

19 So I, personally, look forward to hearing your

20 ideas. And, also, knowing how bad the traffic is going

21 back and forth every day, if I'm not here the entire time

22 today, I'm planning to listen to the proceeding on

23 cassette, which I oftentimes do. And I will probably have

4 (202) 628-4888 1 15 1 plenty of time to listen to this over the course of the

2 next few days.

3 So I want to thank, again, the Chairman for

4 convening this panel. And I want to pass the microphone

5 over to my colleague, Harold Furchgott-Roth.

6 COMMISSIONER FURCHGOTT-ROTH: Thank you, Susan.

7 And I, too, want to commend you, Mr. Chairman, for making

8 spectrum policy one of your top priorities. It is of

9 viable importance to this Commission and to the nation, as

10 a whole. I prefer to use the term "spectrum economics," as

11 opposed to "spectrum management."

12 And it's not merely sort of professional courtesy

13 here. But management sort of evokes what I would consider

14 a hierachial view of the world. And there are a lot of

15 economists who have given a lot of thought to spectrum

16 markets and allocation of spectrum. Allocation issues are,

17 essentially, economic issues.

18 We're very privileged to have here at the

19 Commission many economists who have spent much of their

20 career thinking about these matters. I think Evan Quarrel

21 (phonetic), in particular, in Office of Plans and Policy

22 has thought about these issues as much as anyone. And

23 we're very privileged to have on the panel today Professor

4 (202) 628-4888 1 16 1 Cramton. And hopefully, Tom Hays may show up or may not

2 show up. I don't know.

3 There was once a relatively obscure professor at

4 the University of Virginia who in the 1950's and 1960's,

5 wrote some -- what at the time were almost -- heretical

6 ideas, ideas that said, you know, initial allocations don't

7 really matter in markets. But if you have efficient

8 markets, assets will ultimately come to be used by their

9 highest-value users.

10 The assumption, of course, is that you have

11 efficient markets in the context of today, efficient

12 secondary markets with zero transaction costs. Liability

13 rules, to some extent, don't even matter that much, as long

14 as you ultimately have efficient markets.

15 These heretical ideas at the time, ultimately,

16 catapulted this relatively obscure professor, Ronald Coast,

17 to the University of Chicago. And these ideas chafed

18 conventional wisdom at the time.

19 But, ultimately, his ideas became conventional

20 wisdom about how the -- not only how markets operate, but

21 in fact, overwhelming supremacy, inevitabilty of markets.

22 And that is, in essence, what we face today. The

23 issue is not how markets can aid the government-managed

4 (202) 628-4888 1 17 1 spectrum. The issue, ultimately, is how government can

2 establish rules that do not interfere with markets.

3 The role of the Commission is not to manage

4 spectrum. In some sense, it is to let markets develop

5 their powerful beauty, their inevitable way of letting

6 resources migrate to their best use. And what will it take

7 to do that?

8 Well, I think economists such as Ronald Coast

9 would say what we need is more efficient rights to promote

10 better markets. There are lots of ways of doing that. I

11 don't know that there are simple answers to it.

12 And together with those property rights, more

13 efficient contract mechanisms, and more efficient liability

14 rules, those areas -- property, contract, liability rules --

15 are the necessary ingredients for efficient markets,

16 whether primary or secondary. And it's exactly as the

17 chairman outlined.

18 We have those in real estate markets today. When

19 one goes to a building or to any sort of property

20 development, these rules are in place. And we, ultimately,

21 wind up with fairly efficient allocation of resources. If

22 we did not have property rules in place, if we did not have

23 efficient contract mechanisms, if we did not have liability

4 (202) 628-4888 1 18 1 rules, no power on earth, no government on earth could wind

2 up with efficient markets.

3 What we find today in spectrum markets is

4 relatively few transactions involved in what might be

5 called a secondary market. Once we have initial

6 allocations for spectrum, they tend to be ossified there.

7 I'm reminded of my junior high class in South

8 Carolina state history which was a state requirement that

9 all 8th grade students take. And in the early years of the

10 Carolinas, some British king created a set of lord and

11 proprietors for the Carolinas and sort of assigned all of

12 the property to these people.

13 Now, of course, it's not clear what right the

14 king had to do this. And the people he assigned to it were

15 just a bunch of aristocrats in England who never went to

16 the Carolinas. And I also wondered why the history book,

17 the 8th grade history book, never went beyond that.

18 How did we get from these eight lords and

19 proprietors to the allocation of property that ultimately

20 came to pass? And the answer is ultimately, while some

21 people may have bothered with those people, it was the

22 development of local property rights, the local contracts,

23 local liability rules all under local self-government that

4 (202) 628-4888 1 19 1 enabled this to all come to pass, not the proclamation from

2 some distant king to a bunch of lord and proprietors who,

3 if you had to go kiss their ring every time you wanted to

4 do a transaction in England, nothing would have ever

5 happened.

6 That is the challenge before this Commission.

7 It's how do we turn spectrum into a market? How do we get

8 to a point where the vision of a Ronald Coast come to pass?

9 How do we get to a point where buying and selling slivers

10 of spectrum to get to a point where there are these highly

11 nuanced, highly subtle property rights that can be bought

12 and sold with relatively costless contracts?

13 And when those contracts are violated, there are

14 clear liability rules. And there's a clear government

15 mechanism to enforce those contracts and property rights.

16 How do we get there from where we are today? It's a long

17 path. We will get there, eventually. It is just a matter

18 of time.

19 There is, in my view, an inevitability to the

20 power of markets that no government can stand in the way

21 of. And that is for us to figure out how to get there from

22 here. Thank you, Mr. Chairman.

23 MR. HATFIELD: Thank you. Okay. Let me go over

4 (202) 628-4888 1 20 1 the ground rules and talk a little bit about the format

2 that we will be following. First, let me say that this is

3 intended to be a brain-storming session intended to raise

4 issues.

5 Depending upon the outcome of these sessions,

6 then we may be able to take some actions immediately, while

7 other proposals, of course, may require policy debate and

8 rule changes. And so I want to stress that we are sort of

9 at a pre-NOI stage, or pre-notice of inquiry stage.

10 And, essentially, what we're trying to do here

11 this morning is just conduct research to determine the

12 scope of the issues that we will be addressing.

13 Accordingly, we have three panels today.

14 Panel one will focus on why there is a need for

15 secondary and what types of spectrum demand that the

16 secondary markets might be able to satisfy. Our second

17 panel will focus on other market models and practice that

18 we might want to consider for the secondary market in

19 spectrum. And then, panel three, importantly, will focus

20 on how the FCC policies and rules can facilitate the

21 development of secondary markets.

22 At the start of each panel, the speakers will

23 move to the head table. Actually, we have our first panel

4 (202) 628-4888 1 21 1 up here already. And we'll need to do this quickly, so

2 that our -- because our time is limited. And we

3 anticipate, roughly, an hour for each panel.

4 We've asked the panelists to limit their remarks

5 to about five to seven minutes. And I will -- Bob and I

6 will try to hold them to that to make sure we don't

7 overrun. And we'd like to ask each of the panelist to

8 introduce at the start of their presentation.

9 We will moderate those questions. We've also set

10 up microphones to the left and the right, so that we'll be

11 able to take questions for the panelists from the audience.

12 And we would ask that if you do so, that you identify

13 yourself and your affiliation prior to asking your

14 question. So let's begin with panel one. And our first

15 speaker is Professor Cramton.

16 MR. CRAMTON: Yes. I'm Peter Cramton, Chairman

17 of Spectrum Exchange, a company designed to promote the

18 efficient exchange of spectrum to create public value. And

19 I'm also professor of economics at the University of

20 Maryland. It's a pleasure to be here.

21 I believe secondary markets are essential for the

22 efficient and intensive use of spectrum. Secondary markets

23 identify gains from trade that are unrealized by the

4 (202) 628-4888 1 22 1 primary market which in this case is the FCC spectrum

2 auctions. There's two sources of unrealized gains from

3 trade.

4 The first and most important is that the best use

5 of spectrum yesterday is not the best use of spectrum

6 today. Business plans change. Technologies change.

7 Consumer preferences change. This all leads to long-term

8 needs changing and response to this highly uncertain

9 environment.

10 The second is that short-term need for bandwidth

11 is variable. You want to sell when you have a surplus.

12 You want to buy when you have a shortage. These two

13 sources of unrealized gains from trade lead to two broad

14 categories of secondary markets, short-term and long-term.

15 The short-term markets are what has been

16 emphasized so far, I think, and is what is commonly

17 addressed in the press. And this is the buying of surplus

18 capacity to satisfy peaks and demand.

19 You should think of a real-time spot market, such

20 as this run in electricity and other energy markets, for

21 example. This, I believe, will be a major virtue of

22 secondary markets in the future once flexible and

23 standardized technologies are developed, such as

4 (202) 628-4888 1 23 1 software-defined radios.

2 However, I think that today and in the recent

3 past the long-term secondary markets are going to be more

4 economically important. This involves long-term

5 transactions involving large specific investments where

6 somebody is acquiring a license to build out a service and

7 other things that they need to go along with that license.

8 And I'm going to focus on these long-term secondary markets

9 in my remarks.

10 A concrete example is the auctioning of

11 encumbered spectrum. And a good illustration of that is

12 the upcoming 700 megahertz auction to take place in the

13 fall. Here, the needs of the market are not fully

14 satisfied by the FCC's primary auction. The FCC is

15 auctioning 30 megahertz of spectrum.

16 The spectrum is perfect for 3-G mobile services

17 and for high-speed data services. But the spectrum is

18 encumbered by the existing UHF broadcasters, blocking the

19 use of this spectrum for these new uses in most of the

20 major markets.

21 The spectrum is worth much more if the incumbent

22 broadcasters can be cleared. And efficient clearing is

23 facilitated by a secondary market. In particular, Spectrum

4 (202) 628-4888 1 24 1 Exchange plans to conduct a private auction before the FCC

2 auction to identify the least cost-clear solution,

3 resolving the clearing issue before the FCC auction takes

4 place. This reduces uncertainty and delay.

5 The Spectrum Exchange auction will enable bidders

6 in the FCC 700-megahertz auction to bid with confidence

7 that the spectrum will be clear at an early and at a known

8 cost. Without this clearing auction, hold-out will delay

9 or prevent efficient spectrum use, destroying public value.

10 The clearing auction lets all comparable stations

11 in a broadcast market to compete to be the one to clear.

12 Those stations that can clear at the least cost will do so,

13 thus, minimizing any loss in broadcast service.

14 So, for example, in Chicago where there's four

15 stations that need to be cleared in the 700-megahertz band,

16 there's nine comparable stations. And these nine stations

17 can compete to be the four that clear. The incumbent

18 broadcaster in channels 59 to 69 will receive an incentive

19 payment in return for a commitment to relocate and, in

20 addition, may receive a clearing payment if they are the

21 ones to win the clearing auction.

22 The private auction in the broadcast market

23 identifies the stations that can clear at least cost and

4 (202) 628-4888 1 25 1 determines the market price for clearing. This is just one

2 example of how a market mechanism in the secondary market,

3 the private market can do something that the FCC is not

4 doing in its primary market. And I believe that will

5 always be the case.

6 It'll always be, regardless of how innovative the

7 FCC is. And to date, they've been very innovative.

8 There's certainly much more that they can do and intend to

9 do in the future. But there will always be -- the world is

10 changing so quickly that private markets will be essential

11 in identifying remaining gains from trade.

12 How can the FCC facilitate the secondary market?

13 Well, in the case of dealing with incumbents, it's reducing

14 uncertainties and distortions in the bargaining between the

15 incumbents and the new entrants.

16 So in the specific case of the 700-megahertz

17 auction, there's three things that they can do. One is

18 allow early transition to DTV only. The second is to

19 assure transitioning broadcasters of continued cable

20 carriage. And the third is establishing a relocation rule

21 for channels 59 to 69 broadcasters that limits the hold-out

22 problem.

23 I very much agree with Commissioner Furchgott-

4 (202) 628-4888 1 26 1 Roth's remarks that the goal of the FCC now is, one, to

2 make markets work better. And that should be the focus.

3 And I very much like the term "spectrum economics." Thank

4 you.

5 MR. HATFIELD: Thank you. Morgan?

6 MR. O'BRIEN: Thank you. My name is Morgan

7 O'Brien. I am the vice chairman of a company called Nextel

8 Communications. And I was the co-founder of Nextel.

9 When I heard that the FCC was going to be having

10 this panel I -- uncharacteristically, for me -- volunteered

11 to be the Nextel representative that came down to talk

12 about this topic, because while spectrum secondary markets

13 may be an abstraction for most people in this room and on

14 this panel, for me for the last 13 years I have done

15 nothing but participate in a secondary market. And let me

16 try to explain how that has worked.

17 Back in the 1980's when we founded Fleetcall,

18 which became Nextel, it was our perception that there was

19 an opportunity to consolidate the SMR market. And we,

20 through what I think are very enlightened policies at the

21 FCC, started a process in 1987 of going in and acquiring

22 existing licensees and putting those licenses together.

23 After 13 years of doing that, we have made

4 (202) 628-4888 1 27 1 literally hundreds and hundreds of private transactions

2 market-by-market throughout the United States and beyond

3 the borders of the United States, acquiring spectrum in

4 private markets from individual licensees. So if the

5 question is does that process work, the answer is I know it

6 works.

7 It's how I spend, and many others at Nextel,

8 every day. And what have we achieved from that? We have

9 taken spectrum which was allocated and assigned for one

10 time and for one purpose and with one kind of technology in

11 mind, which is basically was structured in the 1970's and

12 we have, by putting that spectrum together, we have been

13 able to pull that spectrum through from those limitations

14 that were imposed in the 1970's to the most sophisticated

15 digital network operating today in wireless without,

16 essentially, any need on the part of the FCC to set rules.

17 Mostly what the FCC had to do and what the FCC

18 did, and I think the FCC is really the hero in this story,

19 is they simply let us do this. They stood back and, even

20 though there was much opposition at the time when we

21 proposed doing this, the FCC simply let us privately work

22 through the process of acquiring spectrum and implementing

23 a new technology.

4 (202) 628-4888 1 28 1 So if the question is does that work, to me, the

2 answer is just so obvious. It's works exceedingly well.

3 If I would wake up tomorrow and read that the FCC has made

4 additional spectrum available in bands that Nextel could

5 use for further expansion and new technology, that that

6 spectrum was going to be made available free and clear and

7 through option, that obviously would be the best possible

8 news, because it seems to me anybody that has been involved

9 in this process through the last 30 years, as I have been,

10 the absolute best way for the FCC to make new spectrum

11 available is by option.

12 Anybody who's been through a comparative hearing

13 or lotteries, both processes that I have lived through,

14 would have to agree that auctions are clearly superior.

15 But virgin spectrum, clear spectrum in these bands is not

16 available, does not exist, at least in places where

17 companies like ours are interested in building systems,

18 i.e., where the people are.

19 Where the people are, the good frequencies have

20 long ago been assigned. So while we can think about the

21 abstractions of how to do this, the harsh reality is that

22 incumbents are there. And incumbents need to be dealt with.

23 And the pace of change, the pace of change in

4 (202) 628-4888 1 29 1 technology and in the market will not permit, and to the

2 extent that the message is, I don't think the FCC should

3 even remotely try to clear the spectrum through the

4 incumbents through a regulatory process, because the amount

5 of time that that takes is simply not consistent with

6 today's pace of technology in the marketplace that all of

7 us are operating in.

8 So while it would be clearly preferable to a

9 company like ours if the Commission were able to do that

10 and just waive the regulatory wand and the incumbents are

11 gone, they can't do that. They should not try to do that.

12 But instead, they should simply remove restrictions in the

13 rules from allowing the marketplace, the secondary

14 marketplace, to work.

15 Every day, literally every day, I'm in contact

16 with licensees who have licenses that under the FCC's rules

17 under certain circumstances can either sell that license to

18 me, trade that license with me, or let me manage that

19 license. And when the rules permit that, that is the most

20 efficient.

21 That is the best way of going, because if I have

22 put a higher value on that channel than the current

23 incumbent and the FCC rules permit, we can and we do every

4 (202) 628-4888 1 30 1 day work this out. And that is the best method. But there

2 are frequently examples. And in the private radio

3 services, the most glaring is the -- there are about 20

4 neighborhoods of spectrum that are reserved for private

5 users.

6 There, the FCC rules do not permit the free

7 marketplace to work. I have dozens, if not hundreds, of

8 examples of current incumbents, licensees on those

9 frequencies who would be happy to, and are ready to, do

10 business with us or somebody else like us to transfer those

11 channels or swap those channels, or whatever, but rules

12 that are at this point at least 25 years old prohibit that.

13 So to the extent that I have a message, it is

14 secondary markets work. The FCC should allow the secondary

15 markets to be the primary method for clearing incumbents,

16 but the rules must permit free transferability of licenses.

17 And in these cases, they don't. And to me, that's a source

18 of great frustration.

19 And why I wanted to come here today to say, yes,

20 definitely use secondary markets, but you have to clear

21 these 25-year-old rules out of the way.

22 MR. HATFIELD: Thank you, Morgan. Yes?

23 MS. BENNET: Hi. I'm Carrie Bennet. I'm general

4 (202) 628-4888 1 31 1 counsel to the Rural Telecommunications Group. And we're

2 very excited to be participating in this proceeding to

3 develop an exchange of ideas on the secondary markets for

4 radio spectrum. It is especially important for rural

5 America to have a voice in this proceeding.

6 RTG has over 60 rural telecommunications members.

7 And we strongly believe that the primary way of getting

8 spectrum, the auction process, has failed rural Americans

9 miserably. RTG members do have some wireless licenses.

10 They operate in MMDS, PCS, some with cellular. And, most

11 recently, there was success in the LMGS auction.

12 Sadly, however, there are over 500 rural

13 telecommunications companies who have been denied access to

14 spectrum. And as a result our customers, rural Americans,

15 have been unable to obtain wireless services. RTG members

16 are all affiliated with rural telephone companies and under

17 section 309 (j) of the act, this is a class of designated

18 entities that have allegedly been ignored by this

19 Commission.

20 RTG has been active in almost every spectrum

21 proceeding and been in frequent contact with the FCC to

22 discuss these issues. Today, I'd like the FCC and you all

23 to consider three areas and focus your attention on them.

4 (202) 628-4888 1 32 1 First, we'd like you to recognize that the FCC's

2 partitioning and desegregation rules have been a failure as

3 far as creating opportunities in the secretary market.

4 We'd like you to become aware of some of the

5 actions rural telecom providers have taken to get large

6 license holders to share spectrum in rural areas. There

7 have been a few success stories. And lastly, we'd like the

8 FCC to take some steps to improve the secondary radio

9 spectrum market.

10 First of all, let's talk about partitioning and

11 desegregation. It is not working. Out of all of the

12 hundreds of thousands of licenses that the FCC has

13 auctioned, less than one-tenth of one percent have been

14 through the partitioning or the desegregation process.

15 Why is it not working? Well, there's no

16 regulatory incentive for a licensee to partition or

17 desegregate spectrum. The FCC's build-out requirements

18 ensure that urban populations get covered, but not rural

19 America.

20 The trend of the FCC is to consider substantial

21 service, i.e., 20 percent of the population as meeting the

22 benchmark to continue to hold licenses and get renewals.

23 This holds rural areas hostage. Licensees do not want to

4 (202) 628-4888 1 33 1 partition or desegregate small geographic areas that rural

2 telephone companies are interested in serving. There's a

3 variety of business reasons that we've been given for that.

4 The licensees, generally, fall into three

5 categories. First, they are not interested in carving up

6 the license area, because they feel it devalues their

7 assets. We call this the Swiss-cheese approach. They

8 don't want to have a piece of cheese and there's holes.

9 And they think they are going to sell that license later,

10 maybe, to Nextel that that won't be as valuable to Nextel

11 or some other party.

12 They are also not interested, because they think

13 that maybe in five to ten years, they might want to serve

14 this area, because there's urban sprawl to these rural

15 areas. Then we have the ones that are interested, but the

16 transactional costs are too high to do a deal to three or

17 four county areas.

18 RTG fought very hard to get partitioning and

19 desegregation in the first place. And back in the PCS

20 days, it was an exclusive right for rural telephone

21 companies. The FCC took away that right and made it

22 available to everybody. We fought hard to keep it. We

23 fought in the Court of Appeals. And today, we still don't

4 (202) 628-4888 1 34 1 have the bands, pending some other partitions the FCC was

2 considering.

3 While today I'm here to announce that we're

4 dismissing our Court of Appeals case because partitioning

5 and desegregation doesn't work for anyone, regardless of

6 whether it's rural telephone companies, but what does work,

7 the cellular model worked very, very well.

8 If you all recall in the '80s, the FCC licensed

9 cellular spectrum and told the licensees -- it wasn't

10 through an auction -- but they told them, you build it or

11 you lose it in five years. There was every incentive to

12 build out those markets.

13 Today, they have recognized the need to build out

14 PCS markets, for example, and Sprint being the one to be

15 the first digital provider of a network in PCS recognized

16 the value of working with rural telecom providers. Today,

17 approximately 20 affiliates that mostly are rural telephone

18 companies are helping Sprint PCS build and operate markets

19 in the secondary rural markets.

20 These are done through management agreements, but

21 they are very onerous management agreements. And this is

22 due, in large part, to the FCC's Intermountain decision

23 which requires a lot of hoops to jump through to be able to

4 (202) 628-4888 1 35 1 manage spectrum for someone else. I'm sure Morgan is

2 already aware of this.

3 I think there's going to be another panel that

4 will discuss in more detail the FCC's rules and regulations

5 on that. Okay. The other thing that has worked very well

6 is we are currently working on a fixed wireless provider.

7 And due to non-disclosures, I can't disclose too much about

8 it. But they are willing to lease spectrum to us. And,

9 again, we ran into Intermountain problems with that.

10 Also, another license order, Next Wave, has

11 entered into an agreement in principle to have rural

12 telephone companies build out those license areas that they

13 don't have a license anymore. So I won't touch on that

14 subject too much.

15 How can the FCC help? Well, we believe if the

16 FCC continues its -- will get back to build-it-or-lose-it

17 requirements, that would force these companies, these large

18 license holders to let us use the spectrum to help them

19 build it out, lease it, or manage it more then.

20 We also think that there's some clarifications

21 that could be made with regard to Intermountain that would

22 make it easier to do the management agreements or lease

23 agreements. And I can get into those later.

4 (202) 628-4888 1 36 1 MR. HATFIELD: Thank you, very much.

2 MR. CROSBY: Thank you. I'm Mark Crosby,

3 President of the Industrial Telecommunications Association

4 and advocate for the industry, as Morgan mentioned, the

5 private wireless industry. I wanted to comment to

6 Commissioner Ness, I share your frustration. I, too, live

7 in Bethesda. And I am reduced to traveling secondary roads

8 to get to where I want to travel in the morning. The main

9 ones are too full.

10 Several years back concerning desegregation and

11 partitioning, I was flattered, frankly, to be approached by

12 a major PCS licensee, CBlock (phonetic), who approached ITA

13 saying would you be interested in, perhaps, some of our

14 spectrum? And I said, well, that sounds like a good idea.

15 So I went up and chatted with him.

16 And we had several conversations, but their

17 strategy was, we want you to buy blocks of minutes of use.

18 So I'm not interested in minutes of use, because the

19 product that you wanted to put on the platform doesn't work

20 for the private wireless industry. However, I am

21 interested in pursuing for the private wireless industry

22 access to your spectrum.

23 He said, no, no. We're not going to give you

4 (202) 628-4888 1 37 1 access to our spectrum. We want to sell you minutes of

2 use. And so no agreement. We parted friends. But nothing

3 came to fruition regarding desegregation and partitioning.

4 However, I gave ITA a thought. I said, maybe, there's

5 something here, since the private wireless industry is

6 extremely hungry for spectrum. So maybe there's a play

7 here.

8 So we, actually wrote a business plan. And we

9 said, well, let me see what I can do. We could have

10 multiple entities out there and win this auction. So to

11 get access to the spectrum will require multiple agreements

12 with multiple parties. And so that could be somewhat

13 problematic. And I also need to achieve critical mass.

14 I need not only a significant geography coverage,

15 I also need an amount of spectrum through these agreements,

16 so it makes it worthwhile to pursue the effort. I

17 discussed this concept with several major private wireless

18 manufacturers, and they said, bring me a bit of geography.

19 Bring me 2 megahertz, at least, in a significant part of

20 the country. And we will consider producing a product that

21 can handle private wireless.

22 At that point in time my superior said, we need

23 to table this, because even at the time as the PCS

4 (202) 628-4888 1 38 1 environment was a moving target, and unfortunately, I

2 didn't want to table it because I needed spectrum, but we

3 just had to stop.

4 So that's sort of a brief story of an

5 unsuccessful attempt on the part of ITA to accommodate its

6 members, it's spectrum needs through desegregation and

7 partitioning. It's still on our radar screen. I just

8 don't know how to proceed at this point.

9 However, one method to proceed, and the chairman

10 mentioned, band managers. ITA is extremely excited about

11 the opportunity of the band manager concept at 700. And

12 we're very pleased with that decision.

13 And the reason why is -- and I don't particularly

14 consider private wireless a secondary market -- you can

15 handle private wireless and band managers because the

16 Commission made some basic decisions. One, they allocated

17 spectrum. They defined the technical ground rules. And

18 they also defined who the licensee participants could be.

19 I think this is a great methodology to use the

20 guard band at 700 efficiently. It had generated

21 manufacturer interest. It will handle unique secondary

22 applications. Site-by-site licensing is accommodated.

23 What's also an assist, working with the incumbents in that

4 (202) 628-4888 1 39 1 band and the technology can be flexible. It doesn't need

2 to be specific technology.

3 And, in fact, in the guard band, I think

4 integration with commercial carrier infrastructure, indeed,

5 can take place. There's nothing wrong with having a

6 secondary served and having the products in the guard band

7 have the capability to access commercial platforms in other

8 bands.

9 And I think that's a -- that was sort of like the

10 objective for the desegregation. But you created a

11 structure so that not only it maximizes technology and

12 flexibility, integration with other platforms, a secondary

13 market is served. And we're really looking forward to it.

14 And I also think it creates tremendous opportunities for

15 small businesses who, otherwise, could not play in a major

16 auction.

17 They could be a band manager. They could be a

18 strategic partner with a band manager. Or, indeed, they

19 could be lessee customers. And it's the best of all

20 worlds, I believe, for small business. And I really

21 appreciate the FCC's courage to create band managers.

22 Thank you.

23 CHAIRMAN KENNARD: Do you want to recognize --

4 (202) 628-4888 1 40 1 MR. HATFIELD: Oh, yes. I want to recognize, and

2 I should have done so earlier to the right down here at the

3 far end of the table is Don Ableson (phonetic) who is chief

4 of our international bureau and, of course, has a big role

5 in spectrum economics here at the agency, not spectrum

6 management. And to his left is Diane Carnell from the

7 Wireless Telecommunications Bureau.

8 Commissioners? Chairman? You have any questions?

9 CHAIRMAN KENNARD: First of all, I want to thank

10 the panelist. I thought that was some very interesting

11 presentations; different perspectives but -- and that was

12 very useful.

13 I guess one of the things that I've been very

14 interested in hearing is whether we can create a true spot

15 market in spectrum. If we can have a spot market in

16 petroleum or in pork bellies or in bandwidth on T-1 lines,

17 for example, which some companies are exploring, is it

18 feasible to have a spot market in spectrum, so that it can

19 really be moved fluidly around in the marketplace?

20 And some people, when I first started talking

21 about this concept, some people perceived this as very much

22 of a threat. And I was very interested to hear Morgan

23 O'Brien's perspective on the history of his company,

4 (202) 628-4888 1 41 1 because I studied that history.

2 And Nextel was a huge threat to the incumbent

3 cellular business when that company was being put together.

4 And I think we have to recognize that oftentimes when we

5 try to import more market-based approaches to spectrum

6 management or spectrum economics -- I'll use those

7 interchangeably because I like both terms, frankly --

8 oftentimes this is a threat to incumbents, because the way

9 spectrum has been managed, historically, at the FCC is that

10 we have created a scarcity in spectrum.

11 And what that has done in this marketplace is it

12 has created more value in the license than in the value of

13 the innovating with the license itself. In other words, by

14 creating a scarce resource, the value of the business often

15 adheres in the value of the license itself as opposed to

16 what you do with the license. And we saw this with our

17 spectrum auctions, for example.

18 When we first moved to spectrum auctions, thanks

19 to Evan Correll (phonetic) and the passage of the '93

20 Budget Act, this was not welcomed by the incumbent industry

21 if you recall, because the incumbents saw that the auction

22 process with spectrum -- the auction process would make

23 spectrum less valuable as a scarce resource.

4 (202) 628-4888 1 42 1 And I was here at the Commission when we did the

2 first PCS auctions. And I recall just after we announced

3 the auctions, the prices of cellular service started to

4 decline. And you may recall that the incumbent cellular

5 companies started trying to lock in their customers in

6 long-term contracts.

7 They dropped, we estimated at the time, about 25

8 percent at the time of the auction. And now, we're selling

9 more competitors in the market. And the cost of around

10 these phone calls about is about 40 percent less today than

11 it was three years ago.

12 So the point is that when we can move spectrum to

13 becoming more of a commodity, we maximize consumer welfare.

14 And we create more innovation and more services at cheaper

15 prices.

16 So it's along like asking what is the failure

17 straightforward spectrum -- question is can we get to the

18 point where spectrum becomes a true commodity in the

19 marketplace? And how do we do it?

20 MR. CRAMTON: I'd be happy to address that. I

21 think the answer is, yes. But it's going to take some

22 time. It's going to take a lot of work. The reason is

23 that the spectrum isn't like pork bellies. Pork bellies

4 (202) 628-4888 1 43 1 are nice. You can store them. You can transport them.

2 Spectrum is very much a commodity that if it's

3 defined by time and space, and so the problem that creates

4 is it makes the market for spectrum much less liquid than

5 the market for pork bellies or sugar or other commodities.

6 And so that's a challenge that needs to be overcome. Can

7 it be overcome? Absolutely.

8 A good example is what's happening and has

9 happened for over a decade with electricity where there are

10 real-time spot markets in electricity in many places

11 throughout the world. And electricity is also something

12 that can't be stored, at least not very easily. And it is

13 -- can be transported. But it's difficult to transport.

14 And what we find in that industry is that it

15 requires a fair amount of centralization and coordination

16 to get to the point where you can have a liquid spot market

17 because of the illiquidity and also the other challenges

18 that electricity faces.

19 Here, you have many challenges, perhaps, some

20 that make it easier than electricity. And these

21 challenges, I think, will be overcome through technology in

22 the years ahead, because there is tremendous gains. So I

23 see most --

4 (202) 628-4888 1 44 1 MR. HATFIELD: You know, software defined?

2 MR. CRAMTON: Right, software-defined radios and

3 other technologies that are being discussed. I think that

4 what you said about incumbents versus new entrants and

5 incumbents impose to markets, market innovation on occasion

6 is extremely important.

7 And one always has to recognize that the

8 incumbents are going to be lobbying largely for the status

9 quo that benefits them and against the innovation that is

10 actually essential in an industry that is moving so

11 rapidly. So I think that always has to be mentioned,

12 always has to be at the forefront of our minds.

13 MR. PEPPER: I'd also like to note that on the

14 second panel, Sharon Crowe and Williams Company has a lot

15 of experience, not just in telecom which is where they are

16 starting, but also in the energy area. We'll be talking

17 about some of the lessons learned from some of those

18 markets where there are spot markets. And so we are going

19 to be pursuing that, as well. Did anybody want to --

20 MS. BENNET: I just wanted to say one thing; and

21 that is, that until we can identify what the spectrum is

22 that's available that's held by the license holders,

23 there's nothing to move around or shift around.

4 (202) 628-4888 1 45 1 And I think one of the things there is when the

2 rules say you have this property right -- I'll go back to

3 Commissioner Furchtgott-Roth's theoretical analysis -- is

4 you have a property right that goes on indefinitely the way

5 it's currently licensed.

6 So if the FCC had something in place where they

7 could go to licensees and say how much capacity are you

8 actually using, how much do you think you're going to need

9 to project into the future, how much are you going to need

10 in the next 10 years, and what you're not using,

11 specifically in rural areas where you're not even building

12 out, make that available.

13 MR. PEPPER: That's a really good point. And

14 it's one of the things that I wanted to ask Morgan, because

15 when you started creating your market with the SMR's and

16 created Fleetcal, you had to figure who had things that you

17 wanted. I mean, how did you go through that process? And

18 going to Carrie's point, what could we be doing to

19 facilitate that today based on your experience?

20 MR. O'BRIEN: All right. It would be very

21 tempting for me to say to the FCC, here are a few new rules

22 that you can put on the books that would uniquely help

23 Nextel.

4 (202) 628-4888 1 46 1 In fact, I would be prepared to give you a list

2 this afternoon. But I think the record would show that

3 we're typically on the other side of this, where we say,

4 just eliminate the restriction. If there is a dollar to be

5 made on serving somebody in a rural area and the rules are

6 sufficiently flexible, that dollar will be made. That

7 entrepreneur will arise.

8 It may take some time, because there are

9 opportunities in areas that are not rural that are being

10 pursued. But I implore the FCC to stay the course of more

11 flexibility for current incumbents.

12 And in the area of management agreements, I

13 completely -- you would not imagine the lengths we have to

14 go through to come up with what would be, in any other

15 venue, would be the most obvious commercial transaction for

16 a current licensee to permit Nextel to use some or all or

17 their, quote, "excess capacity."

18 But because of Intermountain and policies that

19 have been on the books for 25 or 30 years, it's nearly, not

20 totally impossible because we do it, but it's nearly

21 impossible. Those are the rules that should be looked at

22 and just blown away. There is no room for these rules in

23 today's environment. There's no need for these rules.

4 (202) 628-4888 1 47 1 MR. HATFIELD: All right. I wanted to ask, I see

2 a little bit of tension here. I think from what Caressa's

3 saying that we need to push licensees, you know, build or

4 lose it, but yet we also hear we ought to let the

5 marketplace have greater freedom. And those seem to be

6 very much in conflict, or at least a conflict in my mind.

7 I mean, we don't say to somebody here who has a

8 vacant lot in the District, you've got to build a building

9 on the lot or the government's going to take it away from

10 you. So I wonder if you could, maybe, crystalize or talk

11 about that sort of fundamental tension a little bit more.

12 MR. CRAMTON: Well, there certainly is a tension.

13 I'm of the view that, once you move to an auction

14 environment where people are buying the property, the need

15 for a bid-out requirement is much less necessary. In fact,

16 I view the build-out requirements as a holdover from the

17 comparative hearing days where that was something that you

18 were offering the public for being granted a license for

19 free was you were going to build out the area.

20 But now in the world of auctions, I think the

21 aside from warehousing spectrum for -- as an exercise of

22 market power, the build-out requirements are not necessary.

23 So I would disagree, I'm sure, with Carrie on this one.

4 (202) 628-4888 1 48 1 MS. BENNET: Well, I think what Peter is, maybe,

2 forgetting and we see it in other telecommunications policy

3 is, just because you live in rural America, you shouldn't

4 be relegated to second-class citizenship. You're entitled

5 to services, as well. That's what the act says. That's

6 why we had the universal service policies.

7 And the Commission is -- their job is to make

8 sure that spectrum is available to all Americans, not just

9 the ones that have to be, as Morgan said, where you can

10 make a buck. Rural telephone companies exist, because

11 nobody wanted to go there and serve it.

12 They had to create telephone -- farmers and

13 ranchers started wires between their ranches to get the

14 services out there, you know, 50, 60, 70 years ago. Now

15 they see it. You know, we have this new technology that

16 makes it a lot cheaper. We're trying to solve a universal

17 service problem.

18 Wireless can be a solution to some of the

19 universal service problems, because it can be done so much

20 more cheaply. So these are not necessarily companies that

21 are out to make a buck. They are interested -- they are

22 co-ops. They are interested in providing service to these

23 citizens that have been forgotten. And that's what I think

4 (202) 628-4888 1 49 1 we have to balance.

2 MR. PEPPER: Carrie, if I could just follow up,

3 and then we'll want to open it up for questions from the

4 audience. So if people have questions, they might want to

5 go to microphones. And then, we can take the questions.

6 The build-out issue is kind of an interesting

7 one. When I lived in Iowa, in the town I lived in we had

8 three grocery stores. And now I live here, and I have

9 access to a lot more. But on a per capita basis, I

10 actually had more grocery stores available, in other words,

11 in terms of the grocery stores per people when I lived in

12 Iowa.

13 If you have a build-out requirement and you have

14 multiple licenses, do you impose that build-out requirement

15 on everybody? And it may not be economic to have, you

16 know, six full-service commercial mobile wireless operators

17 in parts of rural America. Three may actually provide more

18 competition in a rural market than six in New York City,

19 based upon the market conditions.

20 So if you have a build-out requirement, could you

21 apply it to a new -- don't you, because if you applied it

22 to everybody, it wouldn't work. That's kind of the market

23 realty. And as a practical matter --

4 (202) 628-4888 1 50 1 MS. BENNET: That's true.

2 MR. PEPPER: -- how would you approach this?

3 MS. BENNET: Well, I think that what we're

4 finding is in a lot of, sort of, these wireless services --

5 and I'll say this; it's mainly in the fixed services --

6 there's no interest on anyone's part on building out to

7 rural America. So they probably wouldn't care if they lost

9 They don't buy the license for that particular

10 area. But, unfortunately, you license in these big giant

11 areas where they have to take it's all or nothing, so they

12 may not care. I mean, I can't speak for them, but they may

13 not care if they lose it. And on the mobile arena, they

14 may not want to build it out, either.

15 I mean, they don't have PCS services build out

16 entirely across the country. So I think the question is we

17 need to explore this with these license holders. And they

18 need to get us some feedback on do you care if you lose it.

19 MR. PEPPER: Other questions from the audience?

20 MR. EISMAN: I have a question on unlicensed

21 spectrum. First, do --

22 MR. PEPPER: Would you identify yourself so that

23 -- let people know, Charles, who you are.

4 (202) 628-4888 1 51 1 MR. EISMAN: Charles Eisman with OET. With

2 regard to RTG, you know, from my reading there's all kinds

3 of spectrum devices being built on unlicensed spectrum.

4 Why can't some of the rural providers readily use

5 unlicensed spectrum to meet these needs?

6 And secondly, even more generally, for the

7 panelists, do you see the availability of unlicensed

8 spectrum as incenting or disincenting the development of

9 secondary markets? Thanks.

10 MS. BENNET: On the unlicensed spectrum, there

11 are some rural carriers using unlicensed spectrum.

12 Unfortunately, it's not the be-all-end-all. It doesn't do

13 everything that we need it to do. And I'm sure everyone's

14 familiar with the rural digital divide. And some other

15 things that we need, we need a lot more bandwidth to do it

16 out in rural America. And some of that unlicensed spectrum

17 can't do it.

18 Now, maybe, that will be resolved through

19 technology. And the vendors will start making equipment to

20 do that. And we can take advantage of that. But we're

21 trying to keep all of our options open, as well.

22 MR. PEPPER: Can I go back and actually ask

23 Morgan to answer the question that I asked, which was a

4 (202) 628-4888 1 52 1 slightly different -- I mean, you talked about getting rid

2 of rules and not having new rules.

3 And the question I was actually asking is -- it

4 has nothing, maybe, to do with rules -- and that is, what

5 kind of information do you need to actually have the market

6 that you've created or that you're using in terms of

7 secondary market?

8 How do you find out about licenses that you want

9 to buy versus -- I mean, and what you've done is over the

10 last dozen, 13, 14 years, you know, very effectively

11 figured out before others might find them licenses to

12 negotiate and acquire them.

13 One of the things that we've talked about here is

14 how do you create a liquid market? And Carrie pointed out

15 that people just don't know who the potential buyers and

16 sellers are. It's difficult to match demand with supply.

17 You were talking about licensees or utilization.

18 Or are there commercial operators and companies that track

19 that and do that? And how can that information facilitate

20 the market?

21 MR. O'BRIEN: Well, there really is -- the

22 easiest part of this whole process is knowing where to go

23 shopping, because the licenses are issued. The FCC's

4 (202) 628-4888 1 53 1 database reflects who has those licenses. And usually,

2 it's a very simple process to line up.

3 And we know, of course, because we've been at it

4 so long, have a very sophisticated process in which I can

5 go in and rank the most desirable acquisitions by any

6 number of different criteria -- for us, you know. And

7 then, I go -- now I have that information, but the licensee

8 does not.

9 So I know that this individual's licenses are

10 basically worth twice as much to me as that because of the

11 way they fit into either my current business plan or my

12 proposed business plan. So I have all the information I

13 need.

14 And I should add that in the 13 years that I've

15 been doing this, the number of acquisitions we've made and

16 properties that were for sale was probably less than 5

17 percent. So we have the same access to information that

18 everybody else did. And we just went after people who had

19 licenses. And we negotiated with them and came to a

20 resolution in which their transaction with us was

21 preferable to them to no transaction and maintaining their

22 license the way it was. And there are many people who,

23 despite all these years of our attempting to acquire their

4 (202) 628-4888 1 54 1 licenses, still have their licenses. And that's what makes

2 this a great country, as I say. They can hold their

3 licenses.

4 But more than those have either sold or traded

5 their licenses to us. And that's, again, what makes this a

6 great country. And we -- because we valued them more, and

7 if somebody else was, and frequently did, acquire those

8 licenses because they, in turn, valued them more than we

9 did at that moment in time well, again, that was fine.

10 That was -- those were the rules of the game.

11 MR. HATFIELD: Is there questions from the

12 audience? Yes?

13 MR. O'BRIEN: Let me just add while he's on the

14 way up here that, parenthetically, the complaint we heard

15 sometimes with our carrier licensing, as opposed to

16 services where they are individually licensed, it's a

17 little bit more difficult for people to try to actually

18 find out where spectrum might be available.

19 So there's been some suggestions that we might

20 want to do more in terms of collecting data and making it

21 available. I mean, answering for us, there's certainly --

22 we would never object to having better information about

23 who's got the licenses.

4 (202) 628-4888 1 55 1 MR. SUGRUE: I also want to comment. One of the

2 reasons why it's a great country is that the FCC has rules

3 at 700 megahertz that the incumbents could rely on, so they

4 don't necessarily need -- that that gives them a support

5 mechanism. Good. I can say here I can protect it. And I

6 think that's a counterbalance.

7 MR. HATFIELD: Yes?

8 MR. LEVANTHAL: Yes. Hi, I'm Norm Levanthal, an

9 attorney with Levanthal, Center, and Lerman (phonetic).

10 I'm curious about Professor Cramton's pre-auction auction.

11 I gather the concept is to set prices or terms in which you

12 clear the existing broadcasters.

13 But I'm curious as to how this works when people

14 who, I suppose, participate in this aren't licensees yet.

15 They haven't won anything. So how do you force anyone to

16 agree on what the terms are going to be, free location so

17 that the people who participate in the FCC auction know

18 what the so-called terms are?

19 MR. CRAMTON: Right. Well, one nice thing about

20 the FCC auction is you know who the bidders are before the

21 auction begins. So after the short-form filing date, you

22 have the list of FCC participants.

23 And you sign a -- or we sign a contract with them

4 (202) 628-4888 1 56 1 that they agree to paying this clearing cost as determined

2 by this market mechanism which is the clearing auction

3 beforehand. And we have contracts with the incumbent

4 broadcasters which says we agree to relocate or, perhaps,

5 clear if we end up winning the clearing auction.

6 MR. LEVANTHAL: But unless each market signs on,

7 it doesn't work.

8 MR. CRAMTON: Right. It runs into trouble when

9 you -- you don't have to do it nationwide. It can be done

10 broadcast market by broadcast market. But you need

11 participation by all the incumbent broadcasters in a

12 particular broadcast market.

13 MR. LEVANTHAL: And how successful have you been

14 so far?

15 MR. CRAMTON: We're moving right along in our

16 discussions with the largest incumbent broadcasters in the

17 6069 block now.

18 MR. LEVANTHAL: Okay. Thanks.

19 MR. HATFIELD: Other questions from the audience?

20 MR. SCHROMM: Dick Schromm, ITT Research

21 Institute. And I think, maybe, repeat it to anyone, it's a

22 chicken and egg thing on the technology. Just how

23 important is it if you have the right economic tools in

4 (202) 628-4888 1 57 1 place?

2 Do you think the technology will flow naturally?

3 Or is it technology first, and then economic tools can be

4 implemented? Just an opinion on the relative importance of

5 the technology and the economic approach to spectrum.

6 MR. CRAMTON: Well, there certainly is a chicken

7 and egg problem. And it's amazing how commonly we confront

8 that problem. So I think that it requires creative work on

9 both dimensions, simultaneously. There certainly needs to

10 be a creation of a snowball that can get rolling.

11 I think that the FCC's role in this is very

12 important in establishing rules that are conducive to

13 secondary markets, and not just for the spot market that

14 you're envisioning, but equally well for the long-term

15 contracts that Morgan is involved with. And he's been

16 doing it for 13 years.

17 It took a long time to do. It was a humongous

18 job. And it was a humongous job for Craig McCall to piece

19 together his network. And in situations going forward

20 where the FCC can see that the current use is not the best

21 use, relocation can be accomplished. Then it makes sense

22 for the FCC to establish sensible relocation rules that can

23 get that snowball going and make things happen much faster

4 (202) 628-4888 1 58 1 than the 10 to 15 years.

2 MR. O'BRIEN: Okay. My answer to the question,

3 from where I sit, it's obvious that economics takes

4 precedence over the technology. I mean, if we are given

5 access to the spectrum, and we put a certain value on it

6 and get it, then it's up to us to figure out the technology

7 that's going to get us the best return. And we don't get

8 these returns out of some abstraction.

9 We only get these returns if we can find

10 customers in this wide-open marketplace that's been created

11 who value our service, the one we invent, more than the

12 others. And so, I mean, I know I sound like I'm wildly

13 enthusiastic about this free market, but that's because

14 I've seen how well it works. It works.

15 MR. HATFIELD: Randy?

16 MR. PALMER: Randy Palmer with CTIA. Wouldn't

17 the elimination of spectrum caps be another idea that would

18 be helpful to the operation of a secondary market?

19 MR. CRAMTON: It's not clear. Spectrum caps are

20 about creating intense competition in individual markets.

21 And it's a judgment call that without spectrum caps at all

22 from the beginning, I think it's very clear you get into a

23 situation where there would be, if there were no controls

4 (202) 628-4888 1 59 1 and no DOJ, and so on, that you would have monopoly

2 provider of service, which is certainly not something we

3 want.

4 Now, many have argued that we are at the point

5 now where the spectrum now -- where we do have enough

6 providers. We do have robust competition. And the

7 spectrum cap is no longer needed in particular markets.

8 And I would potentially agree with that that eventually the

9 FCC should, probably, be moving to more of a case-by-case

10 decision, rather than an instrument that is as blunt as a

11 spectrum cap.

12 But it, certainly, has served a very useful

13 purpose in bringing in new entrants like Sprint and Nextel

14 and others to compete with a cellular duopoly.

15 MR. HATFIELD: If I could ask one more question

16 of Morgan, Morgan, I believe Nextel is --

17 MR. O'BRIEN: It's good to see you here.

18 MR. HATFIELD: -- use, I think, what were called

19 management agreements, in effect, where you were

20 essentially leasing spectrum. I was wondering, do you

21 still lease a substantial amount of spectrum? And what

22 allowed that to occur?

23 And is there any -- what are the lessons in that,

4 (202) 628-4888 1 60 1 because that's what allows somebody who wants to hold

2 spectrum, because they have an eventual business plan, but

3 allows you to get access to it in the short-term. Could

4 you tell me a little bit more about how that's worked?

5 MR. O'BRIEN: I could. It's worked exceedingly

6 well, even though it was -- it made some of us, some more

7 than others, nervous when we went into them, initially.

8 There are licensees who, for a variety of reasons, will

9 never, ever give up their license.

10 And I am pretty persistent. But even I,

11 sometimes, acknowledge that that licensee's not giving up

12 that license. However, the licensee would recognize that

13 putting their channels into a network such as the one we

14 have built which has cost hundred of billions of dollars to

15 build, obviously, putting those channels into our network

16 increases their efficiency, and therefore, is a good thing.

17 What we need to do when we have an immovable

18 object doesn't want to sell the license and that

19 irrefutable fact that the frequencies are more usable when

20 put into a network like ours, you have to have a management

21 agreement or something like that to be able to make this

22 work.

23 And we believe we have agreements that meet every

4 (202) 628-4888 1 61 1 single standard of the FCC's rules. And we wouldn't go

2 into them if we didn't. But it would be a heck of a lot

3 easier if the Commission just recognized this reality and

4 laid out some nice, clear guidelines that everybody could

5 look at. You know, it's not an insurmountable obstacle,

6 but it would be a heck of a lot easier.

7 MR. HATFIELD: Okay. One final question from the

8 floor if you could, please.

9 AUDIENCE PARTICIPANT: My name is Ellen -- and

10 I'm a lawyer at Covington and Burling. The Chairman talked

11 about creating a commodities market in spectrum. And I

12 think the 700 megahertz auction is a good example of the

13 FCC's really going part way.

14 I mean, it did provide for a lot of flexibility,

15 but it channelized the band. It set power restrictions.

16 And I guess my question is -- and, Peter, maybe you're the

17 one to answer this -- to what extent do you view the FCC --

18 that still being an important FCC function? Or to what

19 extent when it reallocates or puts spectrum up for auction

20 should it just say here's some spectrum? You can buy 36

21 megahertz. You can, you know, define your own market, et

22 cetera.

23 MR. CRAMTON: Right. Well, I think that we're at

4 (202) 628-4888 1 62 1 the point where structure is still necessary, that the

2 technologies right now are not sufficiently flexible to

3 have anything goes. I think in the future -- and I don't

4 know when this will -- whether it will be 10 years or 15

5 years, or what, where we really think of the spectrum as

6 simply bandwidth.

7 And we're pumping -- it's just another pipe.

8 We're pumping data through it. And all that -- we all have

9 devices and are using technology that's sufficiently

10 flexible that that's the best way to think of it. We are

11 not at that point right now with current devices. And the

12 benefits of structure can be enormous.

13 And I think you see them the best in, say, the UK

14 and Europe where they really made more use of their 180

15 spectrum because of the rigidly imposed standard for GSM

16 technology. So it's a trade-off. And it's one that the

17 FCC's going to have to work very hard to manage

18 appropriately.

19 MR. HATFIELD: I want to thank the first panel.

20 And what we're going to do is we're not going to take a

21 break. We'll just switch panels. It'll take a minute or

22 two, and we're going to keep going. But thank you very,

23 very much. This was terrific. Could we have the second

4 (202) 628-4888 1 63 1 panel come up?

2 (Pause.)

3 MR. HATFIELD: Okay. I think we're ready to get

4 started. And our first speaker will be Sharon Crowe,

5 please.

6 MS. CROWE: Ready?

7 MR. HATFIELD: Yes, we're ready.

8 MS. CROWE: Okay. I'm Sharon Crowe. I'm the

9 Vice President of Bandwidth Trading for Williams

10 Communications. I started with Williams in 1995 as

11 director for Energy Trading with them. I have been a

12 commodities trader for the last 12 years of my life.

13 I started in-trading with Louie Dreyfus, which

14 was a trading commodities shop up in the Northeast. We

15 traded in grains, metals, bonds, and other various other

16 commodities besides energy.

17 So I've kind of seen the introduction of new

18 markets and how they get started, the hurdles they have to

19 face, as well as the successful and unsuccessful elements

20 with adverse market conditions that have occurred. One of

21 the things I want to just touch briefly on, because I know

22 I only have seven minutes, and Bob will give me a hook, is

23 essentially is what I'm trying to do is take a look at the

4 (202) 628-4888 1 64 1 model right now that we have going on in fiber, which is

2 the band-width trading.

3 And there's been a lot of hype about bandwidth

4 trading. So this is a simplification of what it really is.

5 Of course, the traders engage in the exchange and purchase

6 of goods. And then bandwidth is the frequency or capacity.

7 So therefore, bandwidth trading is simply the exchange and

8 purchase and sales capacity of a communications channel.

9 And the examples of what's been going on in

10 bandwidth trading are off-net provisioning and dark fiber

11 swaps. So therefore, carriers have been conducting trades

12 for years. And hearing the first panel speak, to hear that

13 there's been kind of a similar one-off secondary market in

14 Morgan's description, so the bottom line is you may already

15 have a secondary market occurring in spectrum. It's not as

16 visible as you think it is.

17 What's happened, though, in the fiber bandwidth

18 market, which is new, is bandwidth risk management. So,

19 essentially, when you're looking at a spectrum secondary

20 market, what maybe you're trying to apply is a risk-

21 management process where people who are long licenses can

22 do full optimization of the unutilized capacity that they

23 may have in order to reach full economic value for what

4 (202) 628-4888 1 65 1 they are holding.

2 And in the event, they could either do a sell-out

3 to liquidate their positions, or easily take a look at what

4 they are not utilizing and create an options market around

6 In trading, you have three elements, three faces

7 of trading: The hedger, which is the entity that wants to

8 maximize projected revenues from an asset base or customer

9 portfolio; an intermediary, of course, which is someone

10 that wants to arbitrage on the inefficiencies, getting in

11 between the producer and the consumer; and, of course, the

12 speculator, which looks to seek for profit for price

13 movements or irrational market behavior.

14 A hedger can participate in all three avenues.

15 So if you're long in asset base or if you have a good

16 customer portfolio, you can be all three of these elements.

17 If you're an intermediary, you can only get in the middle

18 or you can speculate. And if you're a speculator, you're

19 on your own.

20 These are the inefficiencies that encourage

21 trading in any commodity -- contract parameters, term

22 performance, volume and price. A lot of negotiations are

23 one-offs. Every deal looks different. That creates an

4 (202) 628-4888 1 66 1 inefficiency in time-to-market. If you have a standardized

2 agreement, that eliminates these problems.

3 You show the rules in which the FCC -- and say

4 you create a committee similar to what we've done in

5 bandwidth, and you say this is what we want to do. These

6 are the rules we want to play under. You find a lot more

7 ease for them to change policies that they have if you say

8 these are the ways we expect to trade.

9 Infrastructure idiosycricies, operational

10 streamlining, what makes the process a lot easier, I

11 mentioned earlier, a lack of optimization of an asset

12 portfolio. No market clarity, the old-school mentality, as

13 if I'm long in this, I need to have it. I need to hang on

14 to it, because there may be an urban area that will grow.

15 So therefore, this rural area may have to suffer.

16 Or the fact is, it may be valuable more tomorrow. And

17 another old-school mentality that I've heard is, just

18 because you commoditize something doesn't mean that the

19 price is going to go down.

20 And a prime example of this is when natural gas

21 started trading on April 4, 1990, the price was $1.50. Two

22 weeks ago, it was $2.50. Today, it's $4.95. In 1992, the

23 price of natural gas was 90 cents in February. In 1996,

4 (202) 628-4888 1 67 1 that price was 28 bucks. Okay. That's called volatility.

2 So when you're talking about trading in a

3 secondary market, don't necessarily come to the conclusion

4 that you're always going to have an inverted price curve,

5 because that's not always the case. When you create a

6 trade commodity, you create human perception which creates

7 volatility.

8 And then, of course, price discrepancies,

9 benchmarks, non-existent or archaic, and then what is one

10 element of trading is the cost-based approach, instead of

11 value-based. It's never about what it costs. It's never

12 about what it's to build to maintain. It's always about

13 what it's worth.

14 What is the marketplace willing to pay to utilize

15 this type of capacity? What do they feel the option value

16 is? What is the potential deferred value of it? If the

17 market value is less below what you're long, then you need

18 to call Solomon Smith Barney and get out of your business.

19 If it's greater, then you need to look at trying to capture

20 as much value as possible.

21 There are similarities in all the commodities

22 markets. They are regulated, either by federal or state.

23 They are economic -- standardization where you have a lot

4 (202) 628-4888 1 68 1 of players and ends up consolidating down to several -- or,

2 I mean, down to a few -- excuse me -- and then a

3 standardization of the policies and parameters in which you

4 operate under, and then infrastructure that is static.

5 Pipes, wires, barge, rail, everything that other

6 commodities trade underneath, all the intrastructure

7 remains stagnant. The most thing that's happened in energy

8 in the last couple of years is 3D seismic and greater heat

9 grade curve on power plants.

10 Nothing has happened in the transmission wires.

11 Nothing's happened to the railroad. That's where a lot of

12 inefficiencies in market revenues have been derived from

13 the inefficiencies in the infrastructure. But what makes

14 telecommunications different is the simple fact that the

15 infrastructure is not static.

16 The equipment evolution changes every six to ten

17 months. There are continued software enhancements.

18 There's large-scale -- an issue with large-scale

19 connectivity. Now, I'm from the fiber side, so I don't

20 know if some of these affect spectrum. So excuse me if I'm

21 like one off on this, and then, of course, computerized

22 operational dispatch.

23 A lot of nomination process and dispatch process

4 (202) 628-4888 1 69 1 that happen in the other commodity markets are human

2 intensive. I don't care how much software is in place, you

3 still give a dispatch notice to a power plant operator to

4 turn that power plant up or down, even if they have

5 automated, generated control.

6 Telecommunications is the first commoditized

7 infrastructure market. Now, these are some of the perks

8 and then the perils of any newly traded commodity. Price

9 transparency, standardization, access to market and supply,

10 incremental revenue mitigate risk, position management.

11 By that I mean you can manage exactly where your

12 long and short and where your price volatility is as far as

13 when you're out of the like-price terms. And then, of

14 course, capital expenditure evaluation, if you have a

15 forward-curve, you're able to look at the capital that you

16 want to deploy, both incremental as well as investment,

17 into building out your framework for your business.

18 The perils, of course, are events of default.

19 And these always happen, always. Real-time spot market in

20 electricity, yes. But we have bids at $2,000 and offers at

21 $5,000. There's a $3,000 gap for one-hour in some parts of

22 this country.

23 There's a price shortage in natural gas right now

4 (202) 628-4888 1 70 1 where the bid offers spread on a daily basis can be 25 to

2 30 cents. Liquidated damages, of course, if you don't

3 perform, you know, you're going to have to pay. And a lot

4 of people operate in newly traded commodities on a

5 best-efforts basis. Well, there is no best efforts in

6 trading.

7 Volatile pricing, of course, to any entity can

8 equate to volatile earnings. So therefore, you have to

9 manage your PNL's with market-to-market accounting and risk

10 control a lot better.

11 Lack of sophisticated participants in trading, we

12 call them mollets, and warranty performance, daisy chains,

13 one person after another. You know, this license goes to

14 this person to this person to this person. To keep track

15 of that, by the end of the road, who really owns it? Who

16 really has title to it?

17 And is there a way to do a book-out where you can

18 agree on price and everybody moves out of the middle? And

19 then, of course, balance sheet depth, if you're going to

20 play, you better come to the table with some credit or some

21 cash in order to be able to participate.

22 MR. HATFIELD: You've got another minute.

23 MS. CROWE: Okay. I'm almost done. And the

4 (202) 628-4888 1 71 1 perks and perils are interchangeable. So it just depends

2 upon the level of risk reward an entity seeks. It's all

3 about leverage incompetencies and the value you bring.

4 What we feel is, if you can take trading and have

5 a strength core in trading -- this happens to be our

6 trading floor -- and leverage it with the capability of

7 what you have in telecommunications, then your core

8 competencies will shine through. And you have the

9 opportunity to be successful in this marketplace. That's

10 it.

11 MR. HATFIELD: Thank you. That's going to be

12 actually what our auction room is going to look like there.

13 MS. CROWE: That's the guy I would love to talk

14 to.

15 MR. HATFIELD: That's right. Laurence, you're

16 next.

17 MR. GREEN: Good morning. My name is Laurence

18 Green. I'm from the UK Radio Communications Agency, which

19 is the body in the UK which is responsible for launching

20 most non-military radio spectrum.

21 Although we're an executive agency and a little

22 bit separate from the rest of government, we are very

23 firmly part of the Department of Trade and Industry. We

4 (202) 628-4888 1 72 1 report to the minister there who deals with E-commerce.

2 That's Patricia Hewitt. And we're very fully engaged in

3 formulating policy and advising her on what to do with the

4 radio spectrum.

5 At the same time, you have a degree of

6 operational autonomy in our licensing and enforcement. So,

7 really, we've got the best of both worlds. We're a fairly

8 medium-sized to small organization, about 550 staff,

9 revenue about $62 million in fiscal '98-99, though in this

10 year, we're expecting a slight increase in that thanks to

11 the 3D auction which raised some $23 billion. We also hope

12 the Treasury doesn't expect us to do that every year.

13 MR. PEPPER: That's in pounds, not dollars.

14 MR. GREEN: Thank you. I'm very grateful to be

15 invited here today, because I think this is immensely

16 exciting, the opportunities for spectrum trading. I feel

17 something of a fraud being up here talking about

18 alternative market models, because we don't really have a

19 market model in the UK at the moment.

20 And I guess that the UK and Europe, generally,

21 might be moving along a slightly different track. So I'm

22 certainly not going to put forward what I'm saying today as

23 a model I would suggest the United States follows,

4 (202) 628-4888 1 73 1 necessarily. But nonetheless, I hope the UK and European

2 perspective will be of some interest.

3 And our account legislation doesn't, in fact,

4 allow licenses to be bought and sold, except in some

5 limited circumstances, effectively, only if there's no

6 change in the legal identity of a licensee and a company is

7 acquired by way of purchase of shared capital.

8 This is a rather clumsy and inefficient and, by

9 no stretch of the imagination, going to be called a proper

10 market mechanism. We certainly recognize the potential

11 advantages of the market, all the things we've heard about

12 this morning making spectrum available more readily for new

13 products, new services.

14 And the importance of this is underlined very

15 much at the moment by the tremendous pace of change. And

16 convergence, perhaps, is one of the main symptoms of this,

17 the coming together of broadcasting, telcoms, and

18 computing. And it's a very rapid rate of change, as I've

19 said, and also extremely unpredictable, which makes it

20 inherently unlikely that government is going to get the

21 right answer if it tries to have everything by regulation.

22 In fact, we will very shortly be publishing a

23 major study of convergence, looking ahead to the year 2010

4 (202) 628-4888 1 74 1 looking at various scenarios of how the converging sectors

2 might develop. And one of the conclusions of this study is

3 very much that spectrum trading is extremely important,

4 given the flexibility and responsiveness that's necessary

5 to enable the maximum benefits to be derived from the

6 larger economy and the digital revolution.

7 We are starting to move a bit towards that

8 direction. In 1998, we introduced spectrum pricing, what

9 we call -- pricing where fees are set by regulation as a

10 sort of surrogate market level and also auctions.

11 And, as I mentioned before, we've just concluded

12 our first auction of surge generation mobile telephony.

13 Well the principle there, of course, is that the fees

14 should reflect the economic value of the finite spectrum

15 resource, and therefore contribute to it more efficient use.

16 We feel that a spectrum market would re-enforce

17 the positive effects of spectrum pricing and give increased

18 incentive to use those to be able to realize the value of

19 their underutilized spectrum, because they will be able to

20 transfer it through the market to someone else that can

21 have more value, and even would benefit that from -- so at

22 its consultation in October 1998, coordinating spectrum

23 through the market, that's how similar to market economics,

4 (202) 628-4888 1 75 1 spectrum economics.

2 That term, there's a very positive reaction to

3 this which was pleasing. Over 90 percent of the responses

4 favor spectrum trading in principle. But there were a

5 number of concerns.

6 And some of those were heard about this morning

7 over how do you safeguard competition? How do you avoid

8 monopolies and duopolies building up? Should you be doing

9 something to avoid speculation? Is speculation something

10 you should welcome, as some economic theorists might say,

11 as a way of helping match supply and demand? Or is it, in

12 some sense, harmful because of the burglar characteristics

13 of the way you do spectrum?

14 Pricing stability, is that going to be a negative

15 factor? What do you do about effective frequency

16 coordination where you've got tightly packed band that have

17 to be very carefully planned? So, by and large, we think

18 that we will proceed with markets. But they will have to

19 be a fairly firm framework of regulation.

20 And I think the bandwidth-free market forces on

21 regulation is a very tricky one for the spectrum manager to

22 get right. What this means in practice, I guess, is that

23 we'll be looking to introduce spectrum trading selectively

4 (202) 628-4888 1 76 1 with a number of different, what we call, different trading

2 modes.

3 And by now, gee whiz, the property market here,

4 what I mean by trading mode is if you look at the property

5 markets, you can buy freehold property. You can buy a

6 long-term lease. You can buy a short-term lease. You can

7 have a hotel room for a night. Each of those meet

8 particular needs. And similar things apply to spectrum.

9 One operator will need to roll out a network and

10 require a 25-year tenure. Another operator might just need

11 a bit of spectrum to gather news or make an outside

12 broadcast and just need the spectrum for a few hours. So

13 there are a vast range of needs for the market can help

14 meet.

15 Also a question about whether spectrum trading

16 should be limited to where the spectrum has been auctioned

17 in the first place, and one of the concerns we have is the

18 possibility of windfall gains. And again, economists tell

19 us not to be worried about this.

20 But there is a concern, even if it's just a

21 political concern about what happens if spectrum is sold

22 relatively cheaply in the primary market by the spectrum

23 manager, and then the price goes up over a very short

4 (202) 628-4888 1 77 1 period of time in the secondary market. So we do see a

2 continuing need for regulatory framework, so markets need

3 regulations.

4 I don't think the spectrum market would be any

5 exception. One of the big differences between Europe and

6 the United States is that in Europe we're a lot closer

7 geographically to our neighbors which means that frequency

8 coordination is a lot more important.

9 It's difficult to see how operators could have

10 carte blanche to introduce whatever services and technology

11 they liked in a band, because we'd be up against the

12 problem that where that use would encounter to an ITU radio

13 regulation requirement, they'd have to be hauled back to

14 recording interference to another party in another country.

15 And conversely, we couldn't protect them from interference

16 coming from another country. So that's certainly an

17 important constraint.

18 And also, we have the -- I'm not sure if it's a

19 benefit or a disbenefit of mandatory EU decisions and

20 directives on how the spectrum can be used. Sometimes, it

21 works out well. As Peter said, we have the DCS, the second

22 generation GSM. And sometimes it can work out badly. But

23 when it works well, it works very well, indeed, as we've

4 (202) 628-4888 1 78 1 seen.

2 The only problem we have in Europe is that we are

3 bound by a directive called the EU Licensing Directive,

4 which governs the licensing of communications of all sorts,

5 including spectrum. And this imposes certain requirements

6 on the licensing process, including the need to publicize

7 the availability of spectrum, consultation on the limits on

8 numbers of licensees, opportunities to comment, right of

9 appeal. There's a full-blown procedure there.

10 And the problem is that even where spectrum is

11 traded on the market, the spectrum authority would have to

12 be involved to some extent. At the very least, they'd have

13 to be notified of a trade. And there would, probably, have

14 to be some sort of right of veto.

15 And that would be enough to attract the provision

16 to the licensing directive. And I won't go into all the

17 details, but the problem is that the requirements of this

18 license and directive would effectively kill a free market

19 very quickly, because you can't really have a free market

20 operating with all those constraints on having to publicize

21 and give people rights of appeal and consult.

22 It's difficult, seeing how one party could agree

23 to sell spectrum to another if they were bound by all those

4 (202) 628-4888 1 79 1 considerations. It would be very clunky. And it would

2 take a long time. And it would be inefficient in market

3 terms. The spectrum trading market wasn't intended to be

4 caught by the licensing directive. But nonetheless, it is.

5 So we're working within Europe to try to lobby to

6 get that changed. And the European Commission, which in

7 fact is the only body in Europe which can bring forward an

8 amendment to the directive, is reviewing the whole body of

9 communications legislation at the moment and have, in fact,

10 proposed relaxing those restrictions on spectrum trading

11 which is very welcomed.

12 But, of course, there are many variables, as they

13 say. And we're going to have to look very carefully at the

14 precise wording they proposed, because I think it's fair to

15 say there are many concerns in Europe about the full-blown

16 model that's referred applicated this morning.

17 It's a very different geopolitical and economic

18 set-up. And that's going to affect how far and how fast we

19 can go with spectrum trading. But I think overall,

20 although Europe might have some way to go in developing a

21 spectrum market as far as, I guess, the FCC could in the

22 United States, I think we are going to move towards that

23 solution as more and more people become convinced that it,

4 (202) 628-4888 1 80 1 in fact, is the only way to go when you've got rapid change

2 and unpredictable change.

3 As I said, the only difference is going to be the

4 precise balance between regulation and the market forces.

5 There's a lot of work to be done, certainly. And I guess,

6 therefore, European Union member states are going to want

7 to move at the same rate.

8 And it's going to be particularly important, as

9 commissioners have done, to make clear that they are not

10 mandating spectrum trading. They are just allowing those

11 member states that wish to introduce it. But that having

12 been said, there still are residual concerns in other

13 countries in Europe that might lead to a fragmentation of

14 the common market or the single market.

15 And that could lead to disadvantages in some

16 circumstances. So there's quite a long way to go on that.

17 And I wouldn't expect any change for the directive to

18 really be in place before the end of about 2002. So that's

19 going to limit the speed at which we can move.

20 So thank you very much for listening to me. And

21 I have been very interested in listening to this debate.

22 And I think I've got a lot to learn about developments in

23 the states. Thank you.

4 (202) 628-4888 1 81 1 MR. PEPPER: Thank you.

2 MR. ANTONOVICH: Hello. I'm Mike Antonovich,

3 Senior Vice President, Broadcast Services at PanAmSat. I

4 effectively run a secondary market for spectrum now,

5 wireless spectrum. I run the Broadcast Services Group

6 which provides sales and marketing and management of

7 occasional use inventory on PanAmSat Fleet.

8 Our customer base is news agencies, broadcasters,

9 resellers, brokers, distant learning, television-type

10 customers for the need for satellite bandwidth and

11 services. We offer integrated satellite teleport services.

12 And it's a market that's in, not only our own facilities,

13 but the facilities of nearly 2,000 providers worldwide.

14 So to create a market, when we talk about

15 spectrum, it's kind of a lot like bandwidth, that bandwidth

16 is a lot like beachfront in Arizona. You know, you either

17 have to move the ocean to Arizona or the customers to the

18 ocean. And to make any of the bandwidth valuable, it does

19 require significant capital expenses and an infrastructure.

20 And that just doesn't happen in a secondary

21 market without, really, some strict and strong regulatory

22 frameworks. Today, we operate occasional use, if you will,

23 of the spot market capacity on 13 satellites around the

4 (202) 628-4888 1 82 1 world to roughly 2,200 megahertz is in the occasional use

2 pool that we use to service customers like Williams, like

3 the other people that arbitrage and end users directly,

4 news agencies, broadcasters, and the like.

5 So how does the business work? Well, we have

6 very -- three kinds of inventory, really, in the business.

7 We have specific inventory we've set aside on a long-term

8 basis to support this business, so that customers know or

9 they have some surety of knowledge that the bandwidth is

10 going to be there to support their nonfull-time use.

11 There's a great deal of other inventory that is

12 available on a rolling-window basis to support

13 opportunistic use of bandwidth, you know, before full-time

14 users come along. And I think that's much of the model

15 we're talking about here in terms of the spot market is how

16 do we use it efficiently, you know, prior to it, you know,

17 finding a terminal user, a permanent user?

18 And the third type of capacity that we also

19 acquire is resale capacity from existing customers who

20 either don't have a full-time requirement, or who only have

21 a fractional requirement for the bandwidth they operate on.

22 And so we provide arbitrage for that market, as well.

23 So we, and many others in our industry, operate

4 (202) 628-4888 1 83 1 in that nether world between customer and the bandwidth to

2 add improved value of the bandwidth to our customers. Now,

3 to make that happen in any market, you've got to be able to

4 book it and manage it.

5 We operate a 24-hour scheduling center. You have

6 to have technical resourses of managing the bandwidth and

7 monitoring it to ensure performance, facilities on the

8 ground in our case, specifically. We are effectively a

9 linocite microwave with no guy wires to the ground.

10 The satellites are held there by gravity and

11 engineers and events people to make it work, because the

12 bandwidth, as I've said, is nice. But it's nothing without

13 the systems to manage it and to operate it. So how has the

14 business worked for, you know, the geostationary ark

15 business? It's worked well.

16 The FCC licenses and authorizations are, in the

17 public view, the standards of getting licenses are defined.

18 The terms that one gets licenses are long enough to justify

19 the significant capital investments, in our business a

20 satellite is, typically, a $250 million capital expense

21 with large operating expenses in order to make the

22 bandwidth partially valuable.

23 The rest of the value comes between the ground

4 (202) 628-4888 1 84 1 segment that we provide or third parties provide. And

2 that's the whole value equation takes off, because it's

3 about the development of that resource. And we've heard

4 some debate this morning about the due-diligence standard,

5 if you will, use it or lose it.

6 And in the satellite business, domestically, I

7 think it's worked very, very well. If someone's acquired a

8 license, they've had a time period to get a satellite and

9 facilities in place and prove they have the financial

10 wherewithal to get there. And it's worked.

11 Where it hasn't worked very well is on the

12 international front where the time periods for developing

13 satellites or the diligence required to maintain those

14 licenses hasn't been nearly as strict, what we would call

15 in our business paper satellites where the firing times of

16 nine years or more to develop a satellite just simply

17 doesn't work anymore.

18 The bandwidth is there. It's available to be

19 used. And typically, it's a two- or three-year process to

20 get a satellite built. And when slots are sat on for nine

21 years, it creates some -- a scarcity, you know, by a paper

22 process and not by what the markets would do.

23 And in any spot market, obviously, it's not about

4 (202) 628-4888 1 85 1 the service provider. It's about the customer, who's out

2 there that can take advantage of the bandwidth and the

3 facilities that one builds.

4 In our business, it's quite clear it's been the

5 broadcast community, distance learning, business

6 television, and others. And to make all that happen, there

7 have been a number of key enabling technologies that have

8 moved along with the whole development of satellite usage

9 over the last 25 years.

10 In the old days, it was large, fixed antennas

11 were the only means of accessing a satellite, with advances

12 in technology, the deployment of satellite news gathering

13 trucks and smaller and lighter equipment and the

14 digitization of video, tremendous advances in the number of

15 users and the reduction and the cost for service. So the

16 megahertz for the operator and the benefit per megahertz of

17 the user community as accelerated.

18 And we see the next wave being Internet-based

19 video and Internet-based, data-type transmissions which are

20 perfect for fractional bandwidth models where much of the

21 information is no longer going to be full-time service

22 requirements, but more bursting [sic] in nature, where the

23 packet sizes and the way one moves digital signals today

4 (202) 628-4888 1 86 1 are terrific for getting more efficient use of bandwidth.

2 And we think that's something that's going to

3 make a spot market for spectrum wireless satellite very

4 valuable to users. Can this model work in other parts of

5 the radio spectrum, 700 hertz or anywhere else?

6 Now, the answer is yes, if there's enough

7 bandwidth there to support a user community, if it can be

8 operated in a relatively interference-managed environment,

9 if the capital investments required to use it can be

10 validated in the market and with the cooperation and

11 support of customers, service providers, and the agencies.

12 Thank you.

13 MR. PEPPER: Thank you very much.

14 MR. REECE: I'm going to start by thanking

15 Chairman Kennard, the Office of Engineering and Technology,

16 and the FCC for the opportunity to speak at this forum.

17 My name is Dick Reece. And I'm the founder and

18 president of Red Bat Communications. You've probably never

19 heard of us. Well, of course, you've never heard of us.

20 But we have been working on concepts related to a wireless

21 bandwidth exchange for the last five years.

22 Red Bat is now being incubated by Diamond

23 Technology Partners, a Chicago-based consulting firm, with

4 (202) 628-4888 1 87 1 extensive experience in developing new exchanges in market

2 structures. Diamond recently played a crucial role in the

3 formation of the Four GM Auto Parts Exchange and has also

4 helped a fortune-500 company develop a wire line bandwidth

5 exchange.

6 Red Bat is developing a real-time market that

7 will not only enable spectrum operators, such as cellular

8 and PCS carriers, to instantly sell their available

9 capacity to consumers equipped with hand-sets capable of

10 automatically finding the optimal carrier any time,

11 anywhere, the technology is here already to operate this

12 market.

13 And in the future with the development of

14 software-defined radio, it will provide even greater

15 opportunities to improve the efficient utilization of

16 spectrum.

17 I would like to briefly describe the operation of

18 the system. In our market, spectrum holders determine the

19 available band within a certain geographic area, such as a

20 cell site, and set prices for this bandwidth based on a

21 standard unit of time or packet of data.

22 The spectrum holders transmit their prices to the

23 market which records and consolidates the offers and

4 (202) 628-4888 1 88 1 broadcasts this information in each appropriate location in

2 a repeating data loop similar to a stock-market ticker. On

3 the buyer side, auction-enabled wireless devices constantly

4 monitor the broadcast ticker.

5 When a consumer places a call, the software in

6 the wireless device matches the information from the ticker

7 with user-defined parameters to select the optimal carrier.

8 The head-set will, then, simply register and operate as a

9 runner.

10 After the call is completed, the carrier receives

11 payment through a clearinghouse where the market verifies

12 that the rates billed were, indeed, the rates charged at

13 that time and location. Some of you will recognize that

14 this market is operating as a modified Dutch auction format

15 where prices start high and descend until a buyer emerges.

16 Such a market would provide many significant

17 benefits to consumers, carriers, and equipment

18 manufacturers alike. In the interest of time, I would like

19 to describe just a few of these benefits.

20 On the seller side, benefits to the spectrum

21 holders and operators, one, this auction enables spectrum

22 operators to implement yield management systems similar to

23 those developed in the airline industry. Like the airline

4 (202) 628-4888 1 89 1 industry, wireless telecommunications is a business with

2 very high fixed costs, the low variable costs.

3 So bandwidth is like inventory that constantly

4 expires. It is similar to empty airline seats on a plane

5 that has just left the gate. Right now, if the airline

6 industry resembled the wireless industry, travelers would

7 be locked into a single airline for long periods of time.

8 Even if your airline is fully booked, you

9 wouldn't be able to switch to another carrier's flight that

10 has plenty of available seats. And a carrier who has empty

11 seats cannot offer those to available consumers who would,

12 otherwise, be left behind.

13 Our auction enables wireless carriers to follow

14 the highly successful example of the airline and implement

15 a yield management model. In periods of slack demand,

16 carriers could reduce their prices to stimulate usage. As

17 long as the price is above marginal costs, the additional

18 revenue will go straight to the carrier's bottom line. And

19 consumers will benefit from calls they, otherwise, would

20 not have made.

21 In times in regions where demand fails available

22 capacity, carriers could raise prices to increase marginal

23 revenue, thus making more efficient use of fixed assets,

4 (202) 628-4888 1 90 1 while efficiently distributing open bandwidth to consumers

2 who are most willing to pay at that time and location.

3 Two, our auction will create market incentives

4 and advantages to those carriers who devote resources to

5 improving their network technology. The auction will also

6 help smaller PCS license holders to attract users without

7 absorbing the massive customer acquisition costs necessary

8 to build a subscriber base.

9 Three, the auction will create substantial

10 liquidity for a wireless bandwidth exchange by enabling

11 bandwidth owners, including third-party investors, to

12 liquidate their assets, instantly. Current proposed

13 exchanges are similar to a stock market for institutional

14 investors. This auction will create a retail market, like

15 a NASDAQ with additional liquidity.

16 Four, this auction provides strong market

17 incentives for consumers to rapidly adopt software-defined

18 radio hand-sets, since consumers with advanced SDR's will

19 be able to use the lowest-cost spectrum or the

20 most-advanced services.

21 And as the technology develops, newly accessible

22 spectrum can be added to the auction whenever it is

23 available. On the buyer side, the benefits to the

4 (202) 628-4888 1 91 1 consumers of this auction, the auction software and the

2 hand-sets will enable consumers to customize and control

3 their expenditures on wireless communications in powerful

4 new ways.

5 For example, as a consumer, I would establish a

6 threshold where the hand-set only completes my calls if the

7 cost is less than, say, 15 cents a minute. Calls above

8 this threshold will require a manual override.

9 These thresholds could be linked to my address

10 book, so that calls to my wife will get through, regardless

11 of price, while a call to my lawyer, well, that might need

12 to be a cheaper call. Our manual downloads could be

13 scheduled to operate automatically when prices fall. The

14 possibilities are limitless.

15 In addition, the auction will use market forces

16 to allocate channels to those who are willing to pay the

17 most at that time and location. Moreover, the auction can

18 provide access to all available bandwidth, rather than just

19 that of a single carrier, thus ensuring that consumers will

20 not be left at the gate.

21 Thank you for giving us the opportunity to

22 present a few of the benefits of Red Bat's auction concept

23 and for your continuing efforts to develop new markets in

4 (202) 628-4888 1 92 1 spectrum.

2 MR. PEPPER: Thank you very much to all the

3 panelists. I'm actually quite intrigued by this concept

4 that you've -- or, actually, more than a concept. You're

5 developing the software.

6 Dale and I were just commenting that this --

7 something like this was first proposed by Ellie Nome, a

8 professor up at Columbia University about three or four

9 years ago. And everybody said, well, Ellie, you can't have

10 momentary, you know, markets in spectrum like you've

11 described.

12 So it's amazing how quick things move from theory

13 to implement. And we'll see how successful, so that's very

14 exciting. I was, actually, curious as I was listening to

15 you in terms of how you think about the satellite market

16 which is actually a fairly, you know, I would say, mature

17 but it's a market where transfer time has developed over 20

18 years that's -- how would something like this be used to

19 extend what you do? Is that -- have you thought about that?

20 MR. ANTONOVICH: In different ways. One of the

21 more interesting ways the model is going to change, we've

22 gone to digital video, which has allowed us to more

23 efficiently pack a satellite. We can get more channels of

4 (202) 628-4888 1 93 1 usable information through a satellite now, digital audio

2 data.

3 It's all more efficiently loaded. But the model

4 hasn't changed, those you will either audit for a full-time

5 circuit or a part of time. And nothing really changed.

6 Where the model starts to change, though, is when we're in

7 a packet-type structure, like IP-based protocols where now,

8 it's only a matter of a delivery of a service from one to

9 another where customers will now have some ability to look

10 at it more on the parcel delivery model where they'll be

11 able to pay based on their priority.

12 Do they need it, like, there immediately? Or

13 would next-day be good enough, and therefore have some

14 ability to control price or time which has historically,

15 like power and bandwidth, been fixed variables for us? We

16 now create an independent variable called time.

17 And I think that's one where the market will

18 start to differentiate and make better use of the satellite

19 bandwidth, because today it's a premium to transmit on

20 satellite because of, you know, of the geographic reach of

21 satellites. But there's been no time or price

22 relationships. And that'll change. And models like the

23 auction model or a differentiated time and price model do

4 (202) 628-4888 1 94 1 fit.

2 MR. PEPPER: Sharon, how does this fit with some

3 of the perils, for example, or things that you talked about

4 that are needed to create a market in terms of knowing

5 what's been delivered, being about to confirm what's been

6 delivered with the quality assurance that was the contract?

7 I mean, how does -- how do you think about this what you've

8 been hearing?

9 MS. CROWE: Well, essentially, on the

10 standardization, it's always beneficial to bring those

11 principles together that feel they will actively

12 participate in the marketplace. And then you come up with

13 parameters based on quality of service differentials or

14 attributes.

15 And if somebody wants to offer a better quality

16 of service than someone else, you can have a minimal price

17 benchmark, and then other entities can participate in that

18 market if you develop basic differential market, which is

19 either a premium or discount to whatever service you want

20 to.

21 And then, of course, the nomination and

22 confirming process is always the most important part,

23 because then you'll know when an act of default has

4 (202) 628-4888 1 95 1 occurred. So in spectrum, I don't know how the medium

2 works. But the measurement process and the liability

3 associated with not performing are two of the most

4 important factors in any standardized contract. I hope

5 that answers your question.

6 MR. HATFIELD: Yes. I was hoping Mr. Reece would

7 respond to that, because that's one of the things that

8 jumps to me with drop-call problems, and things like that.

9 Can you specify a quality well enough to be able to make

10 the market work?

11 MR. ROTH: Probably, in the future you'll be able

12 to if you have software defined hand-sets, and you define

13 your pricing mechanism based on standard packets of data,

14 rather than based on per minutes of use, so that if you

15 want to increase the quality of a call, you may be able to

16 increase the data rate at which that call is placed.

17 So you could, then, have a select -- you know, as

18 a consumer, you could arbitrarily decide, well, you know

19 the quality of this call is insufficient. I will accept a

20 higher price in order to improve the quality of the call.

21 MR. ANTONOVICH: And, again, there's a difference

22 between real-time and near-real-time in terms of error

23 correction and error checking and other methodologies to

4 (202) 628-4888 1 96 1 ensure a higher delivery, reliability, quality of service.

2 There are work-arounds now in the existing technologies for

3 wireless that, you know, correct most of the errors people

4 get now of all forms.

5 And in the last years, they've been breathtaking

6 in the number of improvements we've seen in error

7 correction and other methods.

8 MR. HATFIELD: I was just thinking, generally

9 speaking, of the terrestrial mobile environment from a

10 propagation standpoint is probably a lot tougher than

11 transponder characteristics, and so forth. And it's sort

12 of intuitively you have a more stable medium to work with.

13 MR. ANTONOVICH: Perhaps. But when we're talking

14 about wireless PDA devices, personal digital assistance, I

15 mean, there it's just a matter of ensuring that the

16 information, the files, the data is ultimately correct. It

17 didn't have to be immediately correct. Obviously, it isn't

18 available to a user until --

19 MR. HATFIELD: Good point. Good point.

20 MR. PEPPER: Other questions from colleagues?

21 Doug Webbing from International up here.

22 MR. WEBBING: I have just one question. From

23 what Mike said about the satellite area, I was just

4 (202) 628-4888 1 97 1 wondering, given the sort of transponder market you've been

2 talking about or marketed use of transponders, what kind of

3 lessons are there for the terrestrial wireless users in

4 terms of either Commission rules that help you or rules,

5 maybe, that hinder you or rules you either like to see

6 added or not added?

7 Is there something, you know, that you could

8 suggest that would help us to think about applying what

9 you've learn today to terrestrial wireless situations?

10 MR. ANTONOVICH: I must confess, I probably

11 don't, because I deal from a customer service perspective.

12 And I, certainly, understand and appreciate what customers

13 want. I have no idea what the FCC wants.

14 MS. CARNELL: Bob?

15 MR. PEPPER: Diane?

16 MS. CARNELL: Yes. Diane Carnell with the

17 Wireless Bureau. Could I turn that question, maybe, to

18 Sharon and Mr. Reece just to talk a little bit about what

19 analogs you might see from other markets, particularly

20 electricity markets or the utilities markets, of next steps

21 that might get this process rolling in the spectrum context?

22 And you, who are looking at it sort of more

23 immediately in the spectrum context, whether there's

4 (202) 628-4888 1 98 1 something that you see that would sort of get this ball

2 rolling that are more factors as compared to sort of other

3 less important factors? You mentioned a number, but I'm

4 wondering, you know, how do we get started?

5 MS. CROWE: Well, how we got started in

6 wire-based telecommunications was we approached -- Williams

7 and Enron (phonetic) approached Comtel about facilitating a

8 bandwidth trading organization where we brought together 14

9 principals to sit down and discuss the marketplace in

10 detail and create a standardized contract.

11 We took a couple of contracts that were out in

12 the marketplace and, you know, sat in a room in Washington

13 and again in Tucson and just went through it and created

14 the type of contract that we felt was not only commercially

15 feasible, but technically operational.

16 And that's the big issue, too, because the

17 initial contract that we dealt with with Enron had

18 commercial feasibility, but the technical issues were

19 oversimplified. So it's beneficial for you to have your

20 commercial people and your technical people in the same

21 room when you're going through it.

22 And it was great, because it was trading

23 perspective brought in, but there was also, like, no, no,

4 (202) 628-4888 1 99 1 no. You really can't do this. And this is why. That's

2 one way to get started. Another is to look at the

3 marketplace and see if it's going to happen overnight.

4 Give yourself a timeline that you can easily work

5 with and bring in entities like Mike's and Morgan's who are

6 participating in this space with Red Bat's vantage point

7 and the people that are sitting there saying, okay, we

8 think that this marketplace is feasible.

9 I think that was speaking on the first panel --

10 thought it was feasible. Get down in a room and propose to

11 yourself how you want the marketplace to work, and then

12 approach the FCC with this, because dealing with the FERC

13 and the FTC all these years, I know it's a lot easier to

14 work with regulatory when you say this is what we think the

15 market should look like, instead of expecting the

16 government to give you some rules. And then, you come back

17 and it's a back-and-forth go process.

18 That turns something that can become liquid in 12

19 months into something that takes three years. No offense

20 to the government or anything, but it's just -- you know,

21 you get lawyers involved -- I'm just talking about my

22 corporate lawyers, too, you know. And I think that's a

23 good start.

4 (202) 628-4888 1 100 1 I know that I've kind of used the same thing with

2 standardization, but it really does help, because

3 market-adverse effects do happen. And you're better to be

4 pro-active with regulatory with how you want the market to

5 look like in the front, because when something like this

6 happens -- I mean, when gas went to $28, when power went to

7 $7,000, the FERC walked in and then all of a sudden, you

8 get additional regulation.

9 If you want it to be a free market, then be

10 pro-active, sit down, get yourselves together, and create

11 the marketplace the way you want it to look like. Sorry.

12 MR. PEPPER: Mark?

13 MR. ROTH: From our perspective, just a general

14 obvious statement you need in order to form this market, we

15 need buyers and we need sellers. On the buyer side, I

16 think it's -- I think we have a pretty straightforward

17 buyer proposition for the buyers.

18 And the seller side, that's the real point of

19 inertia is getting the sellers to commit their capacity

20 through this mechanism. And why we think we have very

21 strong value propositions for them, particularly for

22 smaller PCS carriers who have a difficult time building a

23 subscriber base that they can actually sell to, especially

4 (202) 628-4888 1 101 1 in the face of nationwide marketing campaigns and

2 nationwide coverage, how do they create a subscriber base

3 and reduce their acquisition costs?

4 We think that we have a strong proposition for

5 them. And those are the sellers that we were going to

6 first approach. But in general, there's probably just a

7 huge amount of inertia around the concept of applying

8 management concepts to frequency or spectrum use. So I

9 think inertia might be one of the biggest impediments.

10 MR. PEPPER: Any questions for anybody out there?

11 MS. CROWE: If I can make a comment, the best way

12 to get sellers into the marketplace is by saying you have

13 an asset base you need to preserve the value for. And you

14 can either utilize it if the marketplace gets rolling; you

15 can either sit by and become a victim to whatever ends of

16 developing. Or you can be part of the process.

17 And that's how we've been able to get additional

18 carriers into the bandwidth trading arena by simply saying

19 you've got $14 billion worth of value on the ground.

20 Either step up to the plate, make the rules, or just become

21 a victim to them.

22 MR. PEPPER: We've been hearing a little bit

23 difference, I think, is Red Bat is a more of a

4 (202) 628-4888 1 102 1 retail-oriented market, as opposed to the wholesale market

2 in terms of what we're trying to do at Williams and Amsat

3 (phonetic).

4 And I'm curious whether you've thought about

5 using the Red-Bat approach or, you know, what somebody else

6 might call kind of a -- what Price Line's trying to do in

7 some of their retail minutes in the long-distance business.

8 How would you apply those approaches to the wholesale

9 network capacity?

10 MR. ROTH: Are you asking to link into --

11 MR. PEPPER: Link into. Or have you thought

12 about using the, you know, your approach to the kinds of

13 issues that Sharon and Mike --

14 MR. ROTH: Sure, absolutely. We would if you

15 have a wireless bandwidth exchange in an institutional

16 model or wholesale model that, for us, would seem to

17 resemble more of a futures market where they would be

18 trading a capacity ahead. And we would be able to

19 liquidate that capacity, instantly.

20 For example, if you had third-party investors

21 coming into that exchange via bandwidth in certain

22 locations, there might be speculators saying, well, I think

23 in Chicago at 5 o'clock on January 30th, there's going to

4 (202) 628-4888 1 103 1 be huge demand for wireless minutes. They could buy that,

2 and then auction it off instantly through our retail

3 market. So I think we'd be very supportive of -- we would

4 help provide liquidity to a wireless bandwidth exchange.

5 MR. PEPPER: Laurence, a question. In the

6 European context, are there the same kind of transponder

7 sales in spot market and satellite time that Mike was

8 talking about, do you know?

9 MR. GREEN: I don't know offhand, I must say.

10 But I imagine that if it exists here, that means satellites

11 are such an international sort of activity, I'd be

12 surprised if something similar weren't going on in the UK.

13 I mean, what we're seeing, I think, not just on satellites,

14 but more generally we're seeing sort of little gray markets

15 jump up in the UK.

16 We don't have a great deal of information on it.

17 We just get anecdotal evidence they exist and look at base

18 stations which is sort of like provided by third party for

19 a small group, a close group of users. And there's some

20 indications there that companies are buying and selling

21 themselves just to get hold of the spectrum.

22 So that's a sort of a rather clumsy way of

23 spectrum trading, but hard information is very difficult to

4 (202) 628-4888 1 104 1 come by. I'd just add to something that was said

2 previously that was sort of interesting for marking in

3 wireless minutes, so I guess the logic of convergence will

4 be that it won't matter whether it's wireless or wireline

5 for many applications.

6 And one of the scenarios that we're exploring in

7 this study is called "band revolution", where, because of

8 the bandwidth demand, everything goes over to fiberoptic.

9 And wireless is just used where it's essential, for

10 example, for mobile or maybe for short-tail. I think

11 you'll see that's the point of view of the user.

12 It doesn't much matter whether it's wireless or

13 wireline in that context. And we'll see markets in just

14 communications or bit transport, irrespective of whether

15 they are wireless or wireline.

16 MR. PEPPER: Mike, you were nodding that this

17 does happen.

18 MR. ANTONOVICH: I can help Laurence out.

19 Indeed, they are very vibrant and vigorous broker reseller

20 arbitrage for satellite spectrum and services in Europe, as

21 in elsewhere and global.

22 MR. PEPPER: Are there differences among regions

23 to -- some countries doing it in a way that facilitates it,

4 (202) 628-4888 1 105 1 for example, more than we do, lessons that we might learn

2 in or, I mean, where do you find that --

3 MR. ANTONOVICH: Well, it's different. There's a

4 service provider layer that one sees, globally. Some of

5 the strongest international providers in our industry,

6 satellite industry, are European -- British Telecom,

7 GlobeCast, notably.

8 And in the U.S., there are a number of very

9 strong providers, including Williams and others, who

10 operate internationally and globally. But that market is,

11 right now, it's about digital video. Where I think the

12 trend line is it's going to be far less about video and

13 more about transactional activities far beyond the plain

14 old television.

15 And I think that's where the models get very

16 interesting in terms of the integration into the wireless

17 PDA markets and a lot more hybridization of networks. It's

18 going to be less about just geostationary satellites and

19 more about integration of them into terrestrial wireless

20 and terrestrial wired networks and more of an integrated

21 networks approach to however one moves picture, sound,

22 files.

23 MR. PEPPER: Thank you. Any further questions

4 (202) 628-4888 1 106 1 from the audience? Charles?

2 AUDIENCE PARTICIPANT: Yes. It occurs to me is

3 that the wireless could have one complication that,

4 perhaps, wireline and satellite doesn't have; and that is,

5 is the time and wireline, I think, you pretty much have the

6 control over the physical stuff by the -- being carried,

7 selling the service.

8 With wireless, it's quite possible somebody buys

9 the time and, perhaps, he's mobile. Perhaps, he now causes

10 interference to a third party, a different licensee. How

11 do you manage that liability? Okay.

12 Do you have all the wireless carriers in

13 agreement, in consortium? Or do you have big liability

14 problems? How do you ensure against that? How do you deal

15 with that? I think it's an important factor.

16 MR. ANTONOVICH: It's a difficult problem,

17 especially when we get out of U.S. jurisdiction, if you

18 will, and you're into a multicountry environment. The

19 Europeans, as an organization, do an excellent job of

20 managing and mitigating interference on a regional basis.

21 But one of the beauties of wireless, naturally,

22 is users from virtually everywhere within that footprint,

23 be it terrestrial or satellite, get access. It's also one

4 (202) 628-4888 1 107 1 of the hazards of tracking down interference and mitigating

2 its use.

3 And as we get into more of the non-geosatellite

4 systems, there's been a great deal of UN cry about

5 interference that we're concerned about in the

6 geostationary business from these low-earth satellites that

7 are moving through the view of our customers.

8 Largely, most of these problems can be mitigated

9 or managed. And it takes a lot of careful coordination

10 activities by the various existing applicants and new

11 entrants to the markets to manage it. It's not

12 insurmountable. I mean, we certainly have to live with the

13 laws of physics and propagation. But they work.

14 MR. PEPPER: Thank you. I thank the -- Diane?

15 MS. CARNELL: One quick question, probably,

16 directed towards the Sharon Crowe again. I'm wondering

17 whether there are any examples from other sectors of

18 actions that regulatory authorities have taken or not taken

19 that have been particularly helpful towards developing

20 secondary market or potentially have been not terribly

21 helpful in developing a secondary market that we might keep

22 in mind as we move through this process.

23 MS. CROWE: Oh, yes. I've got a prime example

4 (202) 628-4888 1 108 1 for you.

2 MS. CARNELL: Okay.

3 MS. CROWE: It's called FERC Order 888, 889. And

4 although it opened up the electricity market more for

5 capitalism on trading and the separation of generation

6 transmission assets from the utility base, it did not

7 really touch on all the implications at managing a

8 transmission grid that is not totally connected, you know,

9 because you have connectivity problems between different

10 regions, Eastern that connect to Western -- and TBA, and so

11 on.

12 It didn't address all those issues. So they had

13 to come back out with FERC Order, what they called 02 (a),

14 which was the FERC Order 2000 which further died down into

15 the opening up of the transmission grid for free access for

16 all counterparties.

17 And because that element was missing in the

18 original order, people claimed that that's why you had a

19 power problem in synergy and TBA when it went to $5,000,

20 $7,000 a megawatt hour when historical prices never topped

21 off at $35.

22 And so, those are -- that's kind of the reasons

23 why we're looking at the other element of

4 (202) 628-4888 1 109 1 telecommunications on a very technical aspect, because in

2 electricity, you know, the grid finds a way of healing

3 itself. In telecommunications, there's no second chance to

4 be right. We'll lose the data.

5 It has to be retransmitted, especially with

6 continuous feed. So that's why, you know, when you're

7 looking at issues, make sure that all -- you look at the

8 glass as if it has no water in it. Everything that can

9 happen will happen. Sorry.

10 MR. PEPPER: With that, I want to thank the

11 panelists very much. This is, again, a great panel. And

12 we'll switch panels and be back in about two minutes.

13 Thank you.

14 MR. HATFIELD: Tom Sugrue, who is the Chief of

15 our Wireless Telecommunications Bureau, has joined us down

16 at the other end of the table. Are we ready? Tom Hazlett

17 will start out if we figure out the technical problems here.

18 MR. HAZLETT: Hi, I'm Tom Hazlett. And I have a

19 paper coming out. I know you all are going to want to read

20 this. So we'll -- I don't have the paper for you to check

21 out. So that's why I'll just pitch it here called, "The

22 Wireless Craze: The Unlimited Bandwidth Myth, The Spectrum

23 License Faux-Pas and The Punch Line to Ronald Coase's Big

4 (202) 628-4888 1 110 1 Joke." And, of course, it tells you everything you want to

2 know about liberalizing radio spectrum policy.

3 And the interesting challenge that was issued by

4 the Chairman of the Commission the last part of February

5 has just sort of some terrific historical irony when

6 Chairman Kennard suggested that we have wireline bandwidth

7 markets. Why not markets in wireless?

8 Well, that was an interesting question posed in

9 1959 by Ronald Coase who later won a Nobel Prize for work

10 coming out of his analysis of FCC radio spectrum policy.

11 And, in fact, Coase thought that there should be radio

12 spectrum markets. And this was an intriguing idea to many

13 people.

14 And he was invited to testify in 1959 to the

15 Federal Communications Commission about his policy

16 proposal. And the first question from an FCC commissioner

17 was is this all a big joke? And, in fact, Ronald Coase

18 found very little support for the idea of radio spectrum

19 markets and, indeed, a long proposal that detailed what

20 exactly should happen to develop property rights.

21 And property rights, radio spectrum markets was

22 written for the Rand Corporation, a well-known think tank,

23 that paid for the report, and then refused to publish it.

4 (202) 628-4888 1 111 1 And they refused, in part, because of an anonymous referee

2 report that was now, in part, published by Ronald Coase

3 some decades later when it was less controversial.

4 And part of the report said I know of no country

5 on the face of the globe, except for a few corrupt Latin

6 American dictatorships, where the sale of the spectrum

7 could even be seriously proposed. This came out about 1960

8 and led the Rand Corporation to back away from going

9 forward with this proposal.

10 And here we are today talking about exactly the

11 sort of proposal that Ronald Coase had in mind with,

12 hopefully, less dramatic controversy surrounding this road

13 from public interest allocation to property rights to

14 bandwidth markets.

15 And this is the flow of logic. Unfortunately,

16 Bob Pepper brought up Ellie Nome's proposal a few years ago

17 and because Ellie is not here, I'm sure there'll be no

18 contradiction to this. (Laughter.)

19 The fact is that Ellie did not propose going to

20 property rights to incite bandwidth markets. In fact, his

21 idea was to go directly from public interest allocation

22 straight to bandwidth markets. Well, that's a short cut

23 that will not work. And in fact, policy makers in trying

4 (202) 628-4888 1 112 1 to put the market together, so to speak, were figuring out

2 ways to have the market develop should really be worrying

3 about traversing this political line of death for many

4 decades has separated the public interest allocation system

5 from property rights.

6 And, of course, you go back to the earliest days

7 of radio spectrum regulation, the central logic of the

8 policy was to preempt vested rights, private property

9 rights in radio spectrum. And even today, the policy

10 adopted in December of 1926 and before the radio act is

11 still in effect.

12 And that is that you have to give up any claim to

13 vested rights to have an FCC license. But the policy today

14 has been liberalizing and the way that it can further add

15 the combustion to the move towards bandwidth markets is,

16 certainly, to allow these properties to develop.

17 Bandwidth markets, obviously, can develop without

18 a rule-making and, in fact, will best develop without a

19 rule-making explicitly on the subject of bandwidth markets.

20 Wire line bandwidth exchanges are popping up all around.

21 We've heard from some of the people involved in these.

22 And the key there, of course, is that the fiber

23 creates private property rights in the radio spectrum and

4 (202) 628-4888 1 113 1 allows that market to develop quite spontaneously. It's

2 also important to see that the so-called glut or the great

3 increase in supply in spectrum in the wire line part of the

4 market is really responsible for exercising this

5 development in these trends to create these bandwidth

6 markets.

7 That should be a very important suggestion to the

8 FCC that allowing more spectrum to be in use in more

9 flexible ways, thereby increasing the effective supply of

10 radio spectrum, is what we have to do. And, of course, in

11 fundamentally enabling the market, there are various

12 aspects of property rights to consider.

13 And the FCC is not unaware. There have been

14 papers written by FCC people and other experts, including

15 Evan Corell and Doug Webbing that go back many, many years

16 that talk about flexible use, flexible technology, flexible

17 divisibility of spectrum, and so forth, free

18 transferability without license transfer delays, and the

19 right to use unoccupied bands.

20 That's something that has not been so commonly

21 discussed, but certainly, the ease of entry that will allow

22 much more spectrum to come into the market would be

23 probably the single greatest factor to get bandwidth

4 (202) 628-4888 1 114 1 markets going, because it would create this so-called glut

2 of spectrum.

3 So this will unleash the cornucopia, the full

4 property rights for spectrum users, gearing the

5 telecommunications regulation wireless specifically to

6 concerned restrictions limited to interference contours,

7 shifting the burden of proof in FCC proceedings to those

8 who oppose entry and use liability rules and streamlined

9 technical adjudications to allow entrants to come in and to

10 use spectrum in new ways, unoccupied spectrum, that is with

11 administrative short-cuts.

12 Sort of a footnote to this is that antitrust

13 policy will have to move with the FCC policy, instead of

14 having sort of the poor-man's antitrust policy that said

15 there can only be so many licenses owned or various

16 cross-ownership restrictions because there is this service

17 limit to what a license is for.

18 We'd have to go to a generic antitrust standard

19 which, in my opinion, is not at all a bad thing. You have

20 to go? No. Wrap up here? I think it's plausible. There

21 are lots of examples that people are familiar with showing

22 the liberalization benefits to consumers. There have been

23 spectrum reforms and liberalization really going on since

4 (202) 628-4888 1 115 1 the middle 1960's.

2 There's a lot of stuff going on now. I would

3 suggest that there are still miles to go, vast

4 underutilized spectrum, whether you look at the TV band,

5 whether you look at the possibility for underlay rights, in

6 addition to overlay rights that would unblock technology

7 such as ultra- wide band.

8 In fact, the crowded spectrum today is vastly

9 underutilized. Why? Because of limits on technology and

10 flexibility. I would conclude with a punch line to Ronald

11 Coase's joke which is that, in fact, I don't know why you

12 want to characterize the government of Guatemala, but there

13 are easier, better, more liberal ways to do spectrum policy.

14 And since 1997, in fact, January of 1997, the

15 telecommunications law in Guatemala has issued a radio

16 spectrum license, something the United States has not seen.

17 As you know, we issue radio station authorizations in the

18 United States that actually regulate the apparatus.

19 Here, in the Guatemalan telecommunication

20 context, this is the license. It's a one-page license.

21 And it has five definitions of radio spectrum that go to

22 the licensee or the owner. This is -- defines what they

23 call a TUF, a T-U-F, Title to Use Radio Frequencies.

4 (202) 628-4888 1 116 1 And this is -- I could use my algorithm Spanish

2 to read this to you. But I'll spare you that. (Laughter.)

3 But as you can plainly see, the fact is that this license

4 very simply defines a block of radio with respect to

5 geography, bandwidth, hours of operation, interference in

6 and interference out, omissions in, omissions out, and has

7 dates at the bottom. And that's it.

8 So this sort of liberal policy actually is

9 working quite well in the Guatemalan context and should

10 give hope to all of us, including Ronald Coase, that it is

11 plausible to talk about the sale of spectrum, whether or

12 not you be in a Latin America democracy or the United

13 States. Thanks.

14 MR. PEPPER: Rich Barth?

15 MR. BARTH: Thank you, Bob, Dale. It's not

16 particularly easy following Tom's enthusiasm with a message

17 of don't do it when he's saying just do it. So I'm going

18 to try and weave a somewhat more cautionary tale. Do it,

19 but don't do it everywhere.

20 And I would base that recommendation on the fact

21 that for at least the next four years following, perhaps,

22 Coase's time lines, it's not highly likely that we're going

23 to see the Defense Department give up on all its spectrum.

4 (202) 628-4888 1 117 1 We're not going to see public safety give up on spectrum.

2 So there will be bands that are going to be

3 encumbered by some sort of restrictions in the public

4 interest that probably will evolve into different uses over

5 time. But pushing against those brick walls, initial

6 initially, I would not recommend as the easiest course of

7 auction.

8 Let me roll back to the beginning, and then come

9 to some points that I think are complimentary to Tom's.

10 When I started trying to pull my thoughts together on

11 today's presentation I, of course, immediately went where

12 the Washington Post went this morning in the pork bellies

13 and thought I could make jokes out of that and tried to

14 think through Wall Street and how some early markets were

15 created in this country and globally.

16 And really none, in my mind at least, simply

17 apply in any ready way to the marketplace where we're at

18 today for spectrum, spectrum management, spectrum

19 allocation, spectrum property rights, and all the elements

20 having to do with the secondary spectrum market.

21 The constraints are very real. You have a

22 regulatory overhang from the Telecommunications Act in the

23 '30s that's still out there inhibiting certain kinds of

4 (202) 628-4888 1 118 1 transactions. There are issues to be looked at there.

2 There are certainly all the physics issues that were talked

3 about earlier, propagation characteristics.

4 You can't just compare spectrum at 700 megahertz

5 at to spectrum at 1.9 gigahertz, 2.5, et cetera. There are

6 clearly spectrum bands below 3 gigahertz that are much more

7 able to be used for mobile applications than for fixed.

8 Fixed would work there also, but fixed also works above 3

9 gigahertz much more easily keeping the lower spectrum which

10 has the right propagation and other characteristics for

11 mobile more available for those services.

12 What we would like to recommend from a more rural

13 perspective is, yes, try some of these. Just do it

14 spectrum marketplace new ideas, but be a little bit

15 cautious in how you do it and where you do it. And I'd

16 recommend that the Commission look at, perhaps, a

17 bifurcation of two different categories of future licenses.

18 One would be a permissive reuse of spectrum which

19 could be defined in the rules going forward for new

20 spectrum allocations, and the other would be a permitted

21 reallocation or reuse of spectrum by which a user would

22 have to come in to the Commission and get prior approval,

23 as opposed to in a permissive system getting -- merely

4 (202) 628-4888 1 119 1 informing the Commission of the change of -- the transfer

2 of the license, the transfer of the use, the transfer in

3 some way, shape, or form of the use of the spectrum for

4 economic gain or not.

5 In the initial case for permissive re-use, we'd

6 recommend that new spectrum bands that are auctions, as

7 opposed to those that are otherwise allocated, be

8 considered for a permissive re-use. The key missing link

9 here, however, is that the regulatory overhang, as I called

10 it, of the FCC's process is still out there and not likely

11 to be easily swept away.

12 I would commend the Commission to think of how it

13 rethought its equipment recertification processes over the

14 last 6 months, where the Commission did what we, in

15 Motorola, call a core process redesign.

16 They looked at every aspect of taking in

17 equipment certification application through the end game of

18 issuing the certification and cast away many, many, many of

19 those steps in order to streamline the process, fast-track

20 the process.

21 In doing so, in a period of I think just about

22 three months, the Commission went from 120-day processing

23 time down to a 12-day processing time for its equipment

4 (202) 628-4888 1 120 1 certification. The Commission knows how to do this and

2 needs to look at some of the processes that it has

3 internally in place and has probably had in place for the

4 last 50, 60 years and carefully desegregate them into those

5 that are truly necessarily in the public interest and those

6 that aren't.

7 And even on top of that, look at some permissive

8 reuse, reapplication, re-licensing of spectrum-kind of

9 scenarios, rather than just the permitted ones that we have

10 today. I think that the band manager concept is one that

11 sort of moves down this path. And that's pretty obvious.

12 And I think the Commission, particularly, in what

13 I call odd-bands like the 4.9 gigahertz band, which doesn't

14 seem to be generating a lot of interest on anyone's part

15 would be an obvious candidate to also license, perhaps, in

16 a band manager-type of approach if it has to be auctioned.

17 That's pretty much it.

18 I think the permitted versus permissive reuse of

19 spectrum is the way to go, because you're not going to

20 redirect the entire FCC system towards a new spectrum-free

21 marketplace, nor should the Commission consider doing that

22 in light of all of its other responsibilities in managing

23 spectrum. Thank you.

4 (202) 628-4888 1 121 1 MR. PEPPER: Thank you. Joe?

2 MR. MITOLA: Thank you. I'm Joe Mitola from the

3 Miter Corporation. Miter is a public corporation,

4 not-for-profit, chartered in the public interest, what Tom

5 called a think tank. And I'm -- and we operate centers for

6 the Department of Defense that do research for DOD.

7 I'm not speaking either for the DOD nor for the

8 Miter Corporation. I'm just speaking as a guy who knows

9 something about software radios. As many of you know,

10 software-defined radio is an emerging technology.

11 It has its roots in digital radios, radios that

12 use base-band signal processing for creating an air

13 interface with the constraints on the transmission band

14 being defined by the hardware.

15 Software-defined radio technology extends this

16 digital radio starting point by including a wide-band

17 antennas, wide-band RF conversion, wide-band

18 analog-to-digital conversion, and then higher performance

19 digital signal processing so that one radio device with a

20 fixed piece of hardware can access multiradio bands and

21 modes that are pretty adjacent to each other, such as

22 between 400 and 900 megahertz, for example.

23 For software radio, that's pretty close together

4 (202) 628-4888 1 122 1 and can do this with a software personality. Now, a

2 single-channel software radio has -- only gets to use one

3 of its many personalities at a time. Two-channel radios

4 can use more than one at a time, and so forth. This offers

5 a lot of promise.

6 For example, commercial operators are sponsoring

7 the development of this technology, because it offers the

8 potential of future proof in the infrastructure against

9 changes in the air interface standards. If you look at

10 third-generation wireless, for example, 3D based on

11 wide-band co-division multiple access or WCDMA, there are

12 enormous number of combinations of data rate, quality of

13 service, tariff, and availability for these different modes.

14 Data rates range from a few kilo bits a second up

15 to a couple of megabits a second for a single user. And so

16 you look at this new technology. A WCDMA chip could be

17 built like the Qualcomm chips are today, for IS-95, pretty

18 much with a sing-function chip. However, that's unlikely.

19 It's more likely that the silicon in these

20 handsets will have a programmable analog-to-digital and

21 digital-to-analog conversion capability in there, so that

22 while this third-generation rollout is very incremental and

23 relatively slow and spotty in some places, it will be able

4 (202) 628-4888 1 123 1 to back off to second and first-generation personalities.

2 In other words, the wideband despreader will also

3 have an A to D function and all the rest of the GSM or

4 IS-136 or amps or whatever the prior generations are will

5 be done in software personalities. And this is something

6 that's pretty well technology-in-hand today.

7 These narrow-band modes are almost entirely done

8 in software. Now, you could unleash -- now these are in

9 research labs, not in deployed products, just to make that

10 clear. This technology could be unleashed for secondary

11 markets according to the following scenario -- and since

12 the Commissioner likes real estate, I'll use a real estate

13 analogy:

14 About 25 years ago, my wife, Linanne (phonetic),

15 and I bought our first home. It was a townhouse. On our

16 first Thanksgiving there, the neighbors got together for a

17 game of touch football in the backyard. There were no

18 fences. We had plenty of room to play.

19 The next year we got together and we couldn't

20 play, because everybody had fences, some for dogs, some for

21 cat kids, some to protect their flowers from us football

22 players. So the next Thanksgiving, we commiserated about

23 the good old days when we could play football in the

4 (202) 628-4888 1 124 1 backyards.

2 Obviously, using secondary spectrum, it can be a

3 lot like playing football in the backyard or in the

4 backyards with a lot of neighbors. In the past, the only

5 way to guarantee that the football players, the radio

6 transmission devices would not crash through the petunias

7 was to build these physical fences, the physical limits on

8 the RF hardware transmission devices.

9 With software-defined radio, however, what we're

10 doing is tearing down these fences. The fences are going

11 down, because we're creating a SDR handset that can access

12 spectrum from 400 to 960 megahertz in one band and from 2

13 to 5 gigahertz in another band.

14 Now, this is a football player who can jump over

15 the existing fences, kind of in stride. And as we progress

16 towards a proliferation of even more affordable and smarter

17 SDR technology, we're going to be approaching the backyards

18 in my current neighborhood.

19 Now we live on a golf course. I still have the

20 same wife, by the way. There are -- that's unusual. There

21 are no fences in my backyard. There are, however, these

22 discreet little white stakes that tell the golfers where

23 their balls out of bounds, tell me where my neighbor's yard

4 (202) 628-4888 1 125 1 ends and mine begins, and so forth.

2 And what we're financially incentivized to do

3 that, because the view of the green is worth money. So

4 that's why we do it. And I get the divot taken out of my

5 backyard every so often where we can throw footballs around

6 and it's an open kind of environment like we're

7 envisioning, I think, that the FCC's envisioning, maybe for

8 spectrum.

9 But in order to have an orderly system with these

10 almost no physical fences, you have to have good rules and

11 automatic electronic-type enforcement measures. In the

12 past, radios were not smart enough to obey the complex

13 rules sets that I believe will be necessary to switch from,

14 say, a cellular band, following Mr. Reece's kind of model,

15 over to a police band to get a few spare digital amps

16 channels when you need them instantaneously and then back

17 again a few seconds later to balance the loading of the

18 cellular radio network against unused police channels.

19 Recently, I wrote a paper called cognitive radio

20 for flexible mobile multimedia communications where I

21 describe the technical details of a spectrum rental

22 protocol by which software radios could actually do this.

23 Police could get their spectrum for periods as brief as a

4 (202) 628-4888 1 126 1 few seconds to users such as cellular operators.

2 Within a few careers, this radio technology will

3 be capable of accessing spectrum in this way and of

4 automatically obeying intricate rule sets needed to assure

5 equitable access back to the primary user. So if the cop

6 pushes to talk, he gets to use the band, even though a

7 second or so ago it was used by somebody else.

8 Now, I call this the spectrum seasonal protocol,

9 because in my vision of the future, those to whom the

10 spectrum is allocated would have the free market incentive

11 to generate a revenue stream by charging secondary users

12 for that spectrum.

13 This creates some financial incentives for the

14 primary users to invest in the SDR technology required to

15 offer the spectrum rental for well-orchestrated secondary

16 use, in other words for rent. And I'll get to this issue

17 of well-orchestrated in a minute.

18 I think it's going to take a combination of SDR

19 technology, of SDR-based rules of etiquette have yet to

20 emerge, plus the financial incentives to take the next big

21 step in secondary uses of spectrum. For example, if

22 spectrum caps did not apply to spectrum rental, then you

23 could have spectrum caps at limit in certain ways, and yet

4 (202) 628-4888 1 127 1 spectrum rental that somehow allows those who are

2 generating a lot of revenue to get additional spectrum.

3 That's not a proposal. That's just a thought.

4 Let me conclude, which I think Peter wants me to do, by

5 emphasizing the fact that we need good rules. And it will

6 take some well-instrumented, scientific experiments to

7 develop them.

8 I know how I feel when I go in my backyard and I

9 see some physical proof that a doberman has visited,

10 conducting business in an unauthorized way. Now, if that

11 doberman had had a smart electronic collar with a GPS,

12 global positioning satellite motion sensor, I would have

13 been able to persuade him not to stop for that long in my

14 backyard.

15 Some secondary users of the spectrum are going to

16 inadvertently fall into similarly undesirable behavior.

17 SDR technology is like a new puppy. But it is a doberman,

18 and it has teeth. If you can transmit anywhere between 400

19 and 960 megahertz on a watt right next to somebody's heart

20 monitor, you have teeth.

21 So what we need to try to do is to create

22 well-heeled SDR technology that has the technical rules

23 embedded in the handsets and also in the infrastructure so

4 (202) 628-4888 1 128 1 that we can have both good football games and good

2 neighbors. And as always, these are my personal views and

3 not those of the DOD nor of the Miter Corporation. Thank

4 you.

5 MR. PEPPER: Thank you, Chuck. Michelle?

6 MS. FARHQUAR: I'm Michelle Farhquar. I'm a

7 partner in Hogan and Hartsen Law Firm. I and I appreciate

8 the opportunity to address these distinguished panelists

9 here today and, really, applaud all of you for your

10 leadership in sponsoring this forum.

11 I think the timing is excellent to launch the

12 secondary market initiative for several reasons. First, as

13 you've heard today, there's been a strong evolution of a

14 wireline spot market.

15 There's also been emerging experiences and

16 successes with secondary spectrum markets, as I'll discuss

17 in a minute. Upcoming guard band auctions will also

18 provide further practical experience for the FCC and the

19 market and faster secondary markets on a broader scale will

20 enable the FCC to identify underlying marketplace and

21 regulatory barriers.

22 And I do believe that there are some out there.

23 I've also had some personal experience that leads me to

4 (202) 628-4888 1 129 1 believe this back in January and February where I was

2 approached by a very small LMDS licensee who wanted to buy

3 some additional spectrum. And it's very difficult for

4 someone in that category to know where to do, where to turn

6 We started with the FCC's data base and looked at

7 all the LMDS licensees in particular market areas of

8 interest, especially with some size and quantity, and then

9 had to approach licensee-by-licensee, attorney-by-attorney

10 to get what we needed.

11 And it was a very slow, cumbersome, not an easy

12 process. And I'm not sure that it really led to much

13 fruitfulness. So I certainly, personally, have experienced

14 the frustration that many licensees have in this area. By

15 way of background, the FCC has options more than 5,000

16 megahertz of spectrum since 1994.

17 And as Chairman Kennard noted in his recent CTIA

18 speech, there have been two very surprising results, almost

19 a dichotomy. We still have a major shortage of mobile

20 radio spectrum in particular, for the commercial operators

21 in the urban areas. 3-G data networks need much more

22 spectrum.

23 For private radio users, as well, they have very

4 (202) 628-4888 1 130 1 severe needs, again, specially in the urban areas and the

2 urban markets. At the same time, we now also have large

3 unused spectrum blocks and capacity which, unfortunately,

4 to not match up perfectly with the most urgent needs.

5 Here, we have very little build out in the rural

6 areas. And I'd go so far to say that rural consumers are

7 dying of thirst in an ocean of untapped spectrum and

8 completely agree with many of the comments of Carrie Bennet

9 in that regard.

10 We also have lack of deployment and equipment for

11 many of the spectrum bands half recently been auctioned.

12 It's often been described as a chicken and egg problem

13 where the licensees say there's no equipment. The

14 manufacturers say there are no specifications or business

15 plans.

16 And the end result is no build-out. By way of

17 secondary market experiences -- and these are really just

18 the tip of the iceberg that I'll mention right now -- we've

19 talked already about the wireline spot market. We've had

20 some familiar with our firm with this particular area.

21 And it's interesting that a lot of these spot

22 markets have been emerged as anonymous where the sellers of

23 spectrum don't want to be known in terms of what prices

4 (202) 628-4888 1 131 1 they are offering on a daily or weekly or a particular

2 basis. So clearinghouses have emerged.

3 And the third-party brokers have facilitated this

4 process in matching the buyers and sellers. And the

5 sellers, in particular, have benefitted from reduced

6 marketing costs, the ability to off-load some of their

7 excess capacity, and also guarantees from the clearinghouse

8 or broker that they will get paid.

9 So they are able to offer their spectrum to

10 buyers that might otherwise not meet their credit checks.

11 With respect to wireless, there's been a long experience,

12 both positive and some negative, with resale, which is a

13 type of secondary market.

14 It's worked well in the paging area, have had

15 mixed results in other areas. But one I'd like to point

16 out that I've had some experience with is a company called

17 Air Sell (phonetic) which is reusing excess rural cellular

18 capacity, repackaging it, and then beaming up to the air

19 with antennas that are focused on the airborne general

20 aviation market.

21 So they are completely reusing an untapped

22 spectrum base. They only need five or six channels of

23 what's 800 channels-plus in a given market. And they are

4 (202) 628-4888 1 132 1 able to establish a nationwide footprint, because the cones

2 that they establish are able to go much further in

3 geography than they do on the ground.

4 Therefore, it's a win-win situation for a number

5 of people, certainly for the rural cellular operators.

6 They've got a brand new revenue stream. And that allows

7 them to deploy further to more rural consumers. And also,

8 they are not a direct competitor, because they are serving

9 a whole different customer base, these general aviation

10 fliers and pilots.

11 And also, there's no interference. They very

12 carefully tested for interference before they launched this

13 whole exercise. And the cellular operators had to reassure

14 themselves of that, too. And there are very strong

15 provisions in these contracts that ensure that the cellular

16 operator can shut down these systems if there's even the

17 slightest possibility of interference.

18 Also, the FCC has had long experience with ITFS

19 lease agreements in the MMDS-ITFS arena since 1985,

20 although wireless cable may not have taken off or worked,

21 there are still allot of these agreements out there and

22 many of which are still operational.

23 We've already heard about the satellite

4 (202) 628-4888 1 133 1 transponder capacity issues raised by Pan Am Sat

2 (phonetic). And Carrie Bennet talked a little bit about

3 affiliation agreements to build nationwide footprints for a

4 lot of new nationwide wireless providers.

5 There are three ways that I've seen these done

6 and accomplished. One is the nationwide carrier leases

7 spectrum from other licensees. This is a model that Morgan

8 O'Brien talked about a little while ago. Another is the

9 nationwide carrier affiliates or has franchise agreements

10 with a local licensee.

11 And the third way, which is the most difficult in

12 many ways, is where the nationwide carrier encourages a

13 local company to lease its spectrum and build out its

14 market and then manage that market. And this becomes a

15 little more cumbersome because of nature of the FCC's rules.

16 Also, wholesalers of micro wave spectrum capacity

17 that are emerging. Pathnet is one of these. And I think

18 they are finding that there are more buyers, perhaps, than

19 sellers, ironically, because there are certainly microwave

20 licensees such as railroads or utilities that have excess

21 spectrum, but not necessarily a perfect match with

22 potential buyers there, because sometimes the buyers want

23 higher speeds or they want the bandwidth in certain places.

4 (202) 628-4888 1 134 1 Upcoming, we'll have the guard band leases and

2 cellular use of DTV spectrum as I mentioned before. There

3 are number of potential barriers -- go to the next slide --

4 here. A transfer of control issues has been flagged

5 earlier.

6 I think this is the category of all those old

7 rules that Morgan O'Brien talked about earlier this

8 morning. And I'll talk about those briefly in a minute.

9 They may be overly flexible in some ways, bid-out

10 requirements that Carrie Bennet noted. And Red Bat noted a

11 seller inertia. And that could be due, in part, to the

12 very flexible build-out requirements.

13 You also have increasing spectrum values and a

14 fear of encumbering spectrum prematurely. Carrie Bennet

15 mentioned that, as well. And, in part, the wireless

16 explosion and the promise of tomorrow has led to the view

17 that there's a pot of gold just around the corner. And you

18 better sit on what you have.

19 Don't encumber it, because it may be worth

20 something next year. Then, the lack of excess mobile

21 spectrum capacity in urban markets has been a problem. The

22 lower prices that are being offered now to consumers, also

23 the need to support both analog and digital customers has

4 (202) 628-4888 1 135 1 led to a real squeeze on the major carriers.

2 And finally, you have regulatory uncertainty,

3 including FCC's concerns regarding their own enforcement

4 authority over some of these secondary market licensees or

5 lessees and interference concerns.

6 MR. PEPPER: Go a couple of minutes. And then

7 focus on --

8 MS. FARHQUAR: Okay, okay. With respect to the

9 transfer of control issues that have already been

10 mentioned, many people don't realize that the Intermountain

11 case where many of these issues spring from is only three

12 pages long. It was a 1963 Commission decision. And it

13 flagged six primary areas.

14 The first is, does the licensee have unfettered

15 use of all facilities and equipment? Usually, that's an

16 easy criteria to meet. So that really hasn't been much of

17 a problem. The second is who controls the daily

18 operations? This has been a major problem, because if you

19 have the lessee arrangement, in particular, they are going

20 to want to control the daily operations.

21 Third is who determines and carries out the

22 policy decisions, including preparing and filing

23 applications with the Commission? Here again, that's

4 (202) 628-4888 1 136 1 usually easily arranged and handled. Fourth is who is in

2 charge of employment, supervision, dismissal of personnel?

3 Another problem area.

4 The lessee will want to have some control here.

5 Who is in charge of payment or financing obligations, the

6 money, the expenses? Also, a problem, the lessee will want

7 some control here.

8 Finally, who receives the moneys and profits from

9 the operation of facilities? A very big problem area.

10 Potential contract issues, these have been flagged in a

11 number of the franchise agreements I mentioned, as well as

12 some of the wire line leasing models in the air sell

13 contracts.

14 You have a lot of leverage with the licensee,

15 both in terms of whether or not they want to enter the

16 agreement and in terms of pricing. The lessee's comfort

17 with a very indefinite status and indefinite rights is a

18 problem. Licensee responsibility for the lessee can also

19 be a major problem if the lessor is going to be held

20 responsible. Interference, technical, and operating

21 parameters have to be worked out.

22 The length of the contract term is a major

23 problem for the lessee, because if he's going to be

4 (202) 628-4888 1 137 1 building out equipment in the particular band, he wants to

2 ambitize it over the life of the equipment or for tax

3 purposes. So he's going to want as long a term as possible.

4 Indemnification issues, who is responsible for

5 outages, for interference, for damages, breach of contract

6 provisions? When can you walk away? When can the licensee

7 take back the spectrum if they need to, and renewal and

8 extension rights.

9 MR. PEPPER: Why don't you wrap up with FCC?

10 MS. FARHQUAR: FCC problem areas, the FCC -- some

11 issues that have been discussed with respect to the FCC's

12 role raised some problems. Should the FCC be a

13 clearinghouse? Should it have broad regulatory authority

14 over lessees? Should it review the contracts? Should it

15 arbitrate? Should it draft samples or models? Should

16 there be limited licensee flexibility?

17 And I, on the next slide, have just some positive

18 thoughts here with respect to urging the establishment of a

19 private sector secondary market with a more minimal FCC

20 role, providing strong FCC support and endorsement for

21 these markets, almost like a part 15 set-up, a general

22 frame work that would clarify licensee control, the

23 lessee's role, the technical issues, but maintain a lot of

4 (202) 628-4888 1 138 1 flexibility.

2 MR. PEPPER: Thank you very much, Michelle. Bob?

3 MR. SHIVER: I'm Bob Shiver, Chairman and CEO of

4 Securicor Wireless. Before I begin, I think it may be

5 appropriate to see if I could spot -- earlier, I thought

6 about spotting some of my time to Tom while we were going.

7 First, I'm pleased to be here.

8 MR. PEPPER: It's no option market, no.

9 MR. SHIVER: Well, we don't have to discuss

10 price. First of all, I'm pleased to address sort of the

11 Commission on the issue of secondary markets in spectrum

12 trading. Spectrum policy changes by the FCC over the past

13 five years including the options of spectrum partitioning

14 and desegregation have brought us closer than ever to real

15 secondary markets in radio spectrum.

16 As I think you've seen from the panels today,

17 this is truly a critical issue facing our industry. I'd

18 like to speak briefly about my company today and why I'm

19 here. Securicor Wireless is the largest service provider

20 in the 220 band. We have a nationwide spectrum footprint

21 and served customers throughout the United States.

22 We have been the dominant bidder in both of the

23 220 auctions held by the Commission acquiring over 200

4 (202) 628-4888 1 139 1 licenses on a nationwide, regional, and local basis. We

2 have developed patented linear modulation technology for

3 use in the 220 and other bands that permit quality voice

4 and data services over five kilohertz channels.

5 Finally, we also distribute land-mobile radio

6 products to the public safety and private user communities.

7 The history of the 220 band has had many twists and turns.

8 Originally conceived by the FCC as a test band for the

9 development of spectrally efficient technologies like

10 linear modulation, 220 service providers have persevered to

11 the bulkization [sic] of demand by lottery, through

12 numerous court challenges, and through delays in our

13 auctions.

14 Today, the build-out of the 220 band has obtained

15 a critical mass and its service providers have now

16 rationalized their spectrum holdings through the auction.

17 The 220 band has emerged as a strong competitive force in

18 the specialized wireless markets and the test envisioned by

19 the Commission 10 years ago has proven to be a solid

20 success.

21 We're now ready for the next stage of our

22 development. Securicor believes that the development of a

23 free and open secondary market in radio spectrum will

4 (202) 628-4888 1 140 1 greatly enhance the wireless service options available to

2 all private users.

3 The spectrum market auctions are a good, but

4 imperfect, delivery mechanism to the market and leave

5 significant spectrum demands unmet. While they are clearly

6 a great improvement over past licensing methods, auctions

7 are held infrequently, are subject to legal challenges and

8 delays, require significant managerial time, and capital

9 investment, and certainly involve uncertain outcomes.

10 They are not well-suited to meet the demands of

11 many private organizations and cannot accommodate, among

12 other items, spot market needs. A secondary market

13 inspector will supplement the primary market and enable

14 spectrum providers to offer their customers a portfolio of

15 spectrum options where and when they are needed.

16 We believe this secondary market can be best

17 realized through private suppliers of spectrum such as the

18 guard band managers recently approved by the Commission for

19 licensing of the 700 band. These private organizations, in

20 turn, must have flexibility to meet market demands spectrum

21 in all forums.

22 Our experience suggests that the best way to meet

23 this demand is through spectrum leasing. Since the 220

4 (202) 628-4888 1 141 1 band auctions, we've been actively seeking business and

2 franchise partners to help us with the build-out of our

3 nationwide and geographic licenses, certainly a challenge

4 for any wireless provider.

5 One partner, the national rural telecommunication

6 cooperative, has helped us immeasurably in lease task. We

7 have partitioned and desegregated licenses in many of the

8 rural areas to the NRTC and this community. We continued

9 to have discussions with more parties interested in

10 entering the wireless business in their local markets,

11 markets which may otherwise not be on our roll-up schedule

12 for some time.

13 We have found partitioning and disaggregation to

14 be an imperfect proxy for spectrum leasing. The auctions,

15 of course, value nationwide and geographic licenses at a

16 premium. We've paid such a premium for our licenses in the

17 auction.

18 To break up such a license through partitioning

19 or disaggregation simply doesn't make commercial sense.

20 And we cannot recapture the premium we've paid by doing

21 this. Our spectrum holdings are a core asset for our

22 future. And like all wireless companies, we strive to

23 maintain those assets.

4 (202) 628-4888 1 142 1 We are hopeful that this clarity will further

2 stimulate interest in partitioning licenses. Like most

3 wireless companies in our business, Securicor has entered

4 into various business relationships, including management,

5 resale, and equipment leases arrangements.

6 We're always mindful in these ventures that the

7 fundamental obligations of a licensee to maintain control

8 over his license. We believe this spectrum lease can

9 accomplish this by providing for proper oversight by the

10 lessor-lessee. However, Commission policy in this area,

11 particularly the Intermountain microwave decision, seems to

12 provide otherwise.

13 Accordingly, the relationships we have structured

14 have been by necessity, time and resource-intensive,

15 cumbersome, costly, and difficult to administer. How,

16 then, may the FCC facilitate the creation of a free and

17 open secondary market through spectrum leasing? We have

18 four recommendations.

19 First, the Commission should confirm the

20 application of a licensee control obligations adopted in

21 its recent 700 megahertz guard band decision. This will

22 enable a lessor licensee to responsibly meet its

23 obligations by providing for oversight of and recourse

4 (202) 628-4888 1 143 1 against.

2 It's lessees without unduly limiting the

3 flexibility of the relationship. Second, construction

4 requirements imposed on licensees should be defined in

5 terms of substantial service, rather than set benchmarks

6 expressed in terms of geographic and population coverage.

7 This will help assure that licensees may respond

8 to the real demands of their markets without the need to

9 build-out and carry expensive infrastructure before the

10 market will support simply to preserve the license.

11 Third, the FCC should count the build-out by

12 spectrum lessees, resellers, and others towards meeting the

13 licensees' construction obligations. This will provide

14 licensees incentives to participate in the secondary market

15 and seek partners in markets that they may not otherwise

16 reach.

17 Fourth and finally, the Commission should

18 continue all efforts to broaden the reach and availability

19 of its universal licensing system. This, of course, will

20 provide the core data base of licensees necessary for a

21 secondary market in spectrum.

22 With these actions, the Commission will continue

23 to -- the momentum it has built in the past few years

4 (202) 628-4888 1 144 1 towards an open secondary market. This is especially

2 important to remember that many countries look to the FCC's

3 policy as a model for their own.

4 We believe that the Commission may facilitate the

5 creation of a truly international secondary market in

6 spectrum, promoting service options and spectrum

7 availability, not even dreamed of a few years ago. I

8 appreciate the opportunity to share my views today.

9 MR. PEPPER: Thank you very much, bob. I'd like

10 to, actually, ask the first question of Michelle, because

11 this Intermountain case keeps popping up as something that

12 stands in the way of allowing the kind of, you know, lease

13 arrangements, and so on. Now, the Commission -- I mean,

14 this was a Commission action in 19 --

15 MS. FARHQUAR: 1963.

16 MR. PEPPER: -- 1963. And as I think about it,

17 the Commission does not apply all the Intermountain

18 criteria in the broadcast area, for example, with

19 management agreements. What did the Commission do there?

20 MS. FARHQUAR: What the Commission did there was

21 that it allow lease agreements and management agreements,

22 both for the radio and increasingly, to some more limited

23 degree, on the television side. But it was a very

4 (202) 628-4888 1 145 1 conscious decision by the FCC where they set forth a new

2 frame work which is not necessarily the Intermountain frame

3 work.

4 And it was done at the Commission level. But

5 there's no statutory requirement that the Intermountain

6 criteria be met. It was done very specifically by the FCC.

7 And it's continued down through time.

8 Now, what happened, I guess, in the late '80s,

9 mid-80s is that the FCC became very concerned that cellular

10 licensees were overusing management agreements. So it

11 basically put the crimps down a little bit with respect to

12 these agreements and issued this 1986 policy guidance and

13 reaffirmed the Intermountain standards and actually

14 sharpened them up a bit. There may be some liberalization

15 that's happened de facto since then, but certainly not that

16 they've announced.

17 MR. PEPPER: It's not a statutory --

18 MS. FARHQUAR: It's not a statutory guideline, no.

19 MR. PEPPER: Tom, did you have any questions?

20 Dug?

21 MR. SUGRUE: Well, let me just try one. And I

22 found the panel very stimulating. I guess I love thinking

23 about these long-term things. And it inevitably gets back

4 (202) 628-4888 1 146 1 to what should we do next week in order to move the ball

2 along?

3 So I might just ask each panelist if there was

4 sort of one suggestion you could give us that we might do

5 and implement sort of to get the ball rolling in the next

6 months here, what would it be?

7 MR. PEPPER: Why don't we start down here with

8 Rich and then --

9 MR. BARTH: Yes. I would recommend

10 deconstructing the process. Dale's going to hate it when I

11 know say bring Ken Nichols down from Columbia and have him

12 do what we did up in the lab, because he just took it apart

13 and removed steps that were completely unnecessary.

14 If you take away the frightening bureaucratic

15 hire 50 lawyers to get it done process, you really don't

16 have to change a lot of other rules of the road for the

17 FCC. And you'd still make it a more user-friendly system

18 to approach and create a marketplace for transferring

19 spectrum rights.

20 MR. SUGRUE: And by process, you mean the entire

21 spectrum management process? Or do you mean --

22 MR. BARTH: No. The process of obtaining

23 waivers, and the process of obtaining license transfers.

4 (202) 628-4888 1 147 1 There are just so many steps and legal requirements that

2 you can't do it as a common citizen. You have to hire some

3 wonderful law firm like Michelle's and pay lots of money to

4 do it. I think you want to make it a user-friendly

5 process, an online process, preferably.

6 MR. SUGRUE: What does the FCBA think of that? I

7 don't know. Michelle?

8 MS. FARHQUAR: I'd probably do three things if I

9 could expand that slightly. One is to look at ways to

10 increase incentives to build-out in rural areas, because I

11 think that's important concern. The other is to really

12 look hard at the Intermountain criteria, because I think

13 staff are giving guidance to some licensees at one level

14 that you can do this and that, whereas other licensees

15 aren't hearing that guidance.

16 And I think it's important to issue some new

17 frame work or guidance as to what the current standard

18 really is. And then, I would really encourage the FCC to

19 get a private sector entity to become a clearinghouse for

20 some of this spectrum information.

21 MR. PEPPER: Tom?

22 MR. HAZLETT: Yes. I actually had four for you.

23 Thanks for asking. First, along these lines, it should be

4 (202) 628-4888 1 148 1 easy to find out how the spectrum is being used. And it's

2 not easy to find out how the spectrum is being used at the

3 FCC.

4 So there should be a spectrum registry that's put

5 together, probably, with outside help. And the

6 qualification should be that you can read it without an

7 attorney. Why these things need lawyers -- sorry again,

8 Michelle.

9 Secondly, the FCC should really try to develop

10 the voluntary reallocation principles that are already

11 started with PCS and some other context with so-called

12 overlay rights. But specifically, they should develop

13 underlay rights for low-powered services that could use the

14 same concepts, essentially, in reverse.

15 Third -- and I'm surprised nobody attacked the

16 property rights concept. Maybe, given the context of the

17 panel here, it's not on the forefront, but the typical

18 attack ant property rights concept is that there are some

19 services that should be left outside the market -- police

20 and safety, public safety, and things of that nature.

21 But, you know, the services that you were talking

22 about here make a wonderful case for the underutilization

23 of those bands. And the benefit to public safety and

4 (202) 628-4888 1 149 1 public services could happen in a more liberal environment.

2 So to effect that and move that forward and get

3 past the political roadblocks, there should be a

4 competitive bidding for enterprise or market-level

5 communication systems for public service where you would

6 take private providers of services that would bid to the

7 FCC to provide services to public safety organizations like

8 data processing contracts with the government or, in some

9 ways, like the next tell model or the Fleetcal model that,

10 essentially, allowed a given band to provide more than taxi

11 dispatch services in the initial days and did that plus

12 with extra services.

13 But those contracts should be the subject of the

14 bidding. And finally, the last thing is to -- and this

15 goes back to what was said on the previous panel about how

16 you don't -- if you're trying to create new market

17 institutions, you don't want to get into an back and forth

18 with a regulatory agency which is the administrative

19 process now in terms of the rule-makings.

20 If you could privatize a rule-making, you would

21 turn it around. And instead of the FCC putting out a

22 notice of inquiry and writing the rule-making the comments

23 from the public, the FCC would actually sponsor a

4 (202) 628-4888 1 150 1 competition for private parties to write the rule-making.

2 And some people cynically will say we've already privatized

3 that process. I won't get into that. But that actually is

4 an important aspect of that.

5 The Commission cannot act without information

6 from the private sector. Essentially, all the

7 information's out there. And the Commission does have to

8 rely on that. But instead of having the FCC in an

9 open-ended process have to initiate rule-makings and report

10 and orders, you turn it around and you set the timetable

11 and you have a series of, presumably, two rounds of private

12 rule-makings competing to actually create the rules for

13 certain markets.

14 And you would have incentives for consortia or

15 organizations or firms or individuals to write rule-makings

16 that were quite good and quite plausible for the FCC to

17 adopt, actually have a proposed schedule for a privatized,

18 ultra-wide band rule-making in 2,000 which would start on

19 August 1st and conclude on December 24th, I think would be

20 a prime time for that sort of an order to the market. In

21 case you need that schedule, I've got it here for you.

22 MR. SHIVER: I still think my idea of spotting

23 some time to -- I guess, Tom, my comment is more economic

4 (202) 628-4888 1 151 1 than anything else. Three years ago, when I took over this

2 position, and Bob Kelly was our legal advisor, we had a

3 whole host of local sites that had build-outs attached to

4 them spread throughout United States.

5 And obviously, I had lots of questions about why

6 we had that and what was the history for it, particularly

7 since I did not come from a wireless industry, whatsoever.

8 And the comments were that we had to maintain those to keep

9 the license.

10 There, certainly, at that time was not really

11 enough spectrum in the marketplace in those local licenses

12 to build much of a business. There was not much of a

13 technology or equipment option out in the marketplace

14 during that time.

15 And the phase two of the auction, which would

16 have brought a lot more spectrum into the marketplace on a

17 national basis and certainly would have helped. I believe

18 that was delayed two or three times over a period of

19 several years.

20 If you added up the cost of maintaining those

21 sites and, you know, on average it's any where from, you

22 know, $800 to $2,000 per site per month, over 300 sites on

23 a monthly basis, and then annualize that over the period of

4 (202) 628-4888 1 152 1 time that we said today, that's a significant amount of

2 capital that we employ just maintaining those licenses

3 because of old rules that had we had use of that capital

4 elsewhere, I mean, we probably would have been into the

5 marketplace with a more efficient consumer-based service

6 much sooner than we said today.

7 So I really look at if there's one thing I would

8 change, you know, tomorrow it would the construction kinds

9 of requirements that go along with that, because I truly

10 believe it is an inefficient ruling that does not allow

11 companies like ours and others to look at really what the

12 marketplace is looking for.

13 As far as sort of working in rural America, we

14 have found that to be a marketplace that we partner in.

15 Sort of partitioning and disaggregation has worked with us,

16 because we've found common ground with the national rural

17 telecommunication cooperative.

18 Nevertheless, the build-out rules still apply. I

19 mean, even today, we're looking, you know, how do you use a

20 finite source of capital at any one in time? And where do

21 you best put it to use?

22 Today, we still have a construction sites to

23 maintain, sort of, the national license. So that would

4 (202) 628-4888 1 153 1 sort of be my wish list on it. And I think from there,

2 there's a lot of other things that would fall forward from

3 that.

4 MR. PEPPER: Thank you. Joe?

5 MR. MITOLA: Just briefly, my suggestion would

6 have to do with technology development. I think the FCC

7 made a great step forward in its notice of inquiry on --

8 radio that got industry more broadly thinking about this

9 technology and its potential.

10 I think, maybe, a useful next step would be for

11 the Commission to sponsor, not fund or whatever, but just

12 kind of sponsor some experimentation in taking SDR

13 technology and experimenting.

14 For example, the FCC would be a great point man

15 for getting NTIA and, maybe, APCO (phonetic) or others

16 together to say let's get this SDR technology together and

17 in an experimental situation, maybe, getting Tom's underlay

18 rights sort of idea to do some experimentation on what kind

19 of constraints, algorithmic, automatic, real-time, things

20 that a transparent to the user.

21 What kinds of things that we build into these

22 radios so that they are well-behaved, you know, like a

23 doberman that knows where to do, as opposed to in my

4 (202) 628-4888 1 154 1 backyard. I think that that can happen, but it's going to

2 take some experimentation and some leadership by the FCC to

3 do that. Thank you.

4 MR. PEPPER: Thank you. That's good. Thank you.

5 Are there any questions from the audience? Doug?

6 MR. WEBBING: I just wanted to go a little

7 further out field to Tom's question, because Tom's question

8 was, as obviously the head of a bureau that has the biggest

9 licensing load is, what can we do quickly?

10 But I also think a number of panelists here and

11 earlier talked about the auction is not the answer to

12 everything, but a very step the Commission took. And, of

13 course, that took legislative change.

14 I just wondered if, even though this is the

15 longer, further-out looking issue, are there any major

16 legislative changes that any of the panelists think could

17 really help this process? And, obviously, I'm thinking

18 about the communications act or whatever.

19 MR. PEPPER: As you look at what you've proposed,

20 did you see the need -- I mean, I guess another way to ask

21 dug's question is based upon the wish list how much of this

22 can we do here within our statutory authority?

23 Or do we have to go outside and go back to

4 (202) 628-4888 1 155 1 Congress and say, well, there's some great ideas. But we

2 can't do them? I was -- actually, what I was hearing most

3 of were things that, in fact, are already within our

4 authority.

5 MR. HAZLETT: I mean, all of us want to ask the

6 question what could we do tomorrow to skip Congress. And

7 so, I mean, there are a number of things. In terms of the

8 long-run political support you have to put together for an

9 act of Congress, it's probably best to try plan B first.

10 And, you know, I think there are a lot of things.

11 I mean, some of these realistic ideas for

12 stripping away this buildout or whatever are things that

13 the Commission can work on. I had a question, maybe, a

14 pointed question for Michelle. And that was why are the

15 sellers reticent to -- you know, why do they hide behind

16 the middleman broker or whatnot? Is it possible you know

17 that?

18 MS. FARHQUAR: Price discrimination issues in

19 terms of where they set the pricing for their customers.

20 MR. HAZLETT: I see. Interesting. Okay.

21 MR. BARTH: Well, the one piece of legislative

22 change that I think helps the FCC and its quiver of various

23 tools would be lease-fee authority that we would promote

4 (202) 628-4888 1 156 1 very strongly as a legislative, long-term fix. It's not

2 going to happen this year. But we can continue to advocate

3 for it on the Hill.

4 MS. FARHQUAR: And I would agree with that. That

5 can make a big difference in the private radio market, in

6 particular.

7 MR. HATFIELD: Carrie has a question.

8 MS. BENNET: Yes. I didn't get a chance to talk

9 enough before. But my question is on the leasing

10 arrangements. We are in the process of working out some

11 pretty major lease arrangements. And we don't think we can

12 wait six months for you all to figure out Intermountain.

13 Is there a process whereby we could come to the

14 FCC without leases and have you bless them as -- maybe,

15 like we have the assignment of license process. Could we

16 treat it as if we may have a transfer of control and come

17 forward and say look at this and tell us is this

18 effectuating a transfer of control between lessor and

19 lessee?

20 And if so, can you just go ahead and approve it?

21 And then, we've kind of gotten your blessing. And we can

22 move forward and not have to worry about our business plans

23 being screwed up if we did violate those rules.

4 (202) 628-4888 1 157 1 MR. PEPPER: I think that question was asked the

2 Tom. You can submit them to Tom has let and he'll --

3 MS. BENNET: It's a forum.

4 MR. PEPPER: Sure, you can submit them. And I

5 mean, I would look at the band manager, 700 megahertz order

6 is our current thinking on that. We didn't purport to

7 overrule Intermountain, but if you interpret Intermountain

8 in light of what's explicitly permitted there, I think we

9 tried to be quite clear as what we were permitting so that

10 people will not have Intermountain problem.

11 And now, if you could fit what you're doing

12 within that, I think we'd be a long way there. If you

13 can't, then we can talk about it, but at least then there's

14 an order saying we're going to do it in this band. And

15 you're saying, well, let's do it over here, as well.

16 MS. BENNET: And just as a further example of

17 where we're struggling right now on working on one of these

18 things -- and I'll get some advice from the panelists on

19 this as well -- the lessee doesn't really have any rights

20 if the lessor or the licensee screws up on its license for

21 the other areas.

22 And like we have, you know, Bob with a nationwide

23 license, and in one area he may screw up and that may

4 (202) 628-4888 1 158 1 affect the whole license, and we're leasing from him. What

2 rights can we get from the FCC to get that part of the

3 license for us? Can we -- I mean, maybe, that requires

4 some legislation. I don't know.

5 It definitely would require a rule-making or some

6 sort of guidance from the FCC to tell us that we have

7 particular rights. And we've been a good lessee and

8 affecting the licensing almost. Can we get the license?

9 And we're struggling with this on our leases,

10 because we want kind of that right built into our leases,

11 but we need FCC approval for that. And we can't do it.

12 And that kind of triggers the transfer control issue again.

13 And anyone have any comments on that?

14 MR. PEPPER: That's actually, I was going to say,

15 a great lawyer's question. So, Michelle -- it raises a

16 very interesting question that I don't think, you know, a

17 lot of people here have really thought about.

18 MS. FARHQUAR: Well, I think they've thought

19 about it in the context of indemnification.

20 MR. PEPPER: Right.

21 MS. FARHQUAR: And, certainly, that's covered in,

22 not all, but some contracts I've seen. But the other issue

23 really would constitute a problem area that you'd have to

4 (202) 628-4888 1 159 1 get the FCC to fix or address.

2 MR. PEPPER: Right. Which goes to, I think, what

3 Sharon Crowe and others were talking about in terms of

4 liability for failure to perform under a contract. But

5 what you're suggesting is that the -- you're suggesting

6 that, in fact, the liquidated damages would, in fact, be

7 the license in a sense. And that's something that we --

8 MR. SHIVER: I don't know. If I lease a house

9 from someone in Arlington County and they stop paying their

10 mortgage and the bank forecloses on it, I think I'm just

11 taking a subject -- I don't know that I have rights as the

12 lessee against the bank. And I'm not sure.

13 Now, except in the installment payment context,

14 the incidents in which we've actually revoked licenses is

15 fairly rare. I think that's a fair statement. So I don't

16 know how real a problem it is. But I understand it's at

17 least a theoretical problem. And in the installment

18 payments context, it's a real problem.

19 MS. FARHQUAR: And, certainly, the FCC in the

20 past where licensees have had those types of problems have

21 allowed STAs to keep operating for periods of time, months,

22 even longer sometimes just mainly for the customer's

23 benefit so they don't lose service immediately.

4 (202) 628-4888 1 160 1 MR. PEPPER: Right.

2 MR. SHIVER: That fundamental question, we have

3 probably done more of those kind of arrangements vis-a-vis

4 because we have a national license. It's sort of led us to

5 almost three different agreements. One is obviously

6 disaggregation when the two parties can't agree on, you

7 know, what happens.

8 And then, the other is partitioning. And

9 probably the one we've done the most of is where both sides

10 recognize the partnership that you're entering into, you

11 recognize the risks on it if, you know, either party

12 doesn't do what they are supposed to do. But we still have

13 entered into it. And because of that, those parties have

14 continued to work together.

15 So I think if there's some clarity that could

16 ever be made on that issue, it would hum. But in the

17 meantime, there are ways around it that we've been able to

18 work with, principally because we spend enough time with

19 sort of our partners on it, knowing what they need and what

20 they are trying to do and where we're headed and trying to

21 make them work together.

22 Obviously, it's too early in the relationship to

23 know if, you know, how the party's going to perform. But,

4 (202) 628-4888 1 161 1 you know, so far we're quite happy with it.

2 MR. PEPPER: I think that, actually, we've got to

3 wrap up. But thank you very much. And I think this is a

4 really good question, Carrie, because it takes the sort of

5 legal issues and things that we do to the next level of how

6 do we facilitate, you know, creative arrangements, even

7 before we get to the purely liquid spot-market that we

8 heard about earlier.

9 I want to thank this panel. And I want to thank

10 all of the panelists. It's been extremely informative and

11 very interesting. Dale, did you want to --

12 MR. HATFIELD: Yes. I'd like to add some thanks

13 and recognition, too. One is for Lisa Gaseford (phonetic)

14 in OET who really did the heavy lifting of pulling this all

15 together. And sitting over here to the left is Bob Califf

16 (phonetic) who is no longer with the Commission, but he did

17 a lot of the initial ground work.

18 We got a lot of help from Brian Permont

19 (phonetic) in Commissioner Furchtgott-Roth's office in

20 identifying panelist. Laurence Green, I wanted to

21 particularly thank you for making the trip all the way from

22 the UK to help us out today, and then Linda Paris, Maureen

23 Partino, and Mary Beth McBerry for helping with the press

4 (202) 628-4888 1 162 1 coverage, and then Dan Oliver, Jeff Rear, and Steve

2 Balderston for helping with the meeting room set-up, and

3 then Charles Harrington for also helping on logistics.

4 So thank you very much. It was their hard work

5 that really helped put this together. So with that, thank

6 you very much.

7 (Whereupon, at 12:41 p.m., the meeting in the

8 above-entitled matter was adjourned.)

4 (202) 628-4888 1 1 REPORTER'S CERTIFICATE 2 3 4 FCC DOCKET NO.: N/A 5 6 CASE TITLE: SECONDARY MARKET FORUM 7 8 HEARING DATE: May 31, 2000 9 10 LOCATION: Washington, DC 11 12 I hereby certify that the proceedings and 13 evidence are contained fully and accurately on the tapes 14 and notes reported by me at the hearing in the above case 15 before the Federal Communications Commission. 16 17 Date: _5-17-00______18 Muriel Barclay 19 Official Reporter 20 Heritage Reporting Corporation 21 1220 L Street, N.W., Suite 600 22 Washington, D.C. 20005-4018 23 24 25 TRANSCRIBER'S CERTIFICATE 26 27 28 I hereby certify that the proceedings and 29 evidence were fully and accurately transcribed from the 30 tapes and notes provided by the above named reporter in the 31 above case before the Federal Communications Commission. 32 33 Date: _6-14-00______34 Terri Mathews 35 Official Transcriber 36 Heritage Reporting Corporation 37 38 39 PROOFREADER'S CERTIFICATE 40 41 I hereby certify that the transcript of the 42 proceedings and evidence in the above referenced case that 43 was held before the Federal Communications Commission was 44 proofread on the date specified below. 45 46 Date: _6-14-00______

2 3 Heritage Reporting Corporation 4 (202) 628-4888 1 1 Glenn Arkin 2 Official Proofreader 3 Heritage Reporting Corporation

2 3 Heritage Reporting Corporation 4 (202) 628-4888