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1 UNITED STATES 2 FEDERAL COMMUNICATIONS COMMISSION 34 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, 20006 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 Agency2 3 Heritage Reporting Corporation 4 (202) 628-4888 1 3 1 MIKE ANTONOVICH, Senior Vice President, Broadcast 2 Services, PanAmSat Corporation2 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. 142 3 Heritage Reporting Corporation 4 (202) 628-4888 1 5 1 P R O C E E D I N G S2 (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 Federal6 Communication Commission's public forum on facilitating the7 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 sustain21 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 Corporation4 (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. This8 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 of22 what, I think, should be a very exciting and engaging 23 debate that we need to have in this country about how to 2 3 Heritage Reporting Corporation4 (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 people10 are accessing the Internet over hand-held wireless devices.11 And in the next four years, that number is expected to grow12 to 1 billion. And today, that six million people who are 13 using the Internet over wireless devices are located mainly14 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 we20 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 2 3 Heritage Reporting Corporation4 (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 management8 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 of18 the way we manage spectrum today and compare it to where we19 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 702 3 Heritage Reporting Corporation4 (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 have7 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 2 3 Heritage Reporting Corporation4 (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 you17 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 that21 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 or2 3 Heritage Reporting Corporation4 (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 the6 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-defined16 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.2 3 Heritage Reporting Corporation4 (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 manage10 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. I17 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 2 3 Heritage Reporting Corporation4 (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 good10 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 over22 the course of the last six years. And it's been 23 interesting the see how during the course of the last six 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 14 1 years the progress that has been made in thinking about how2 we use and reuse and share spectrum. It really is dramatic3 to see.4 Our colleagues abroad have begun to adopt some of5 the concepts that we are using here in the United States. 6 Little by little, we've seen that. We've seen the spectrum7 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 2 3 Heritage Reporting Corporation4 (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," as11 opposed to "spectrum management."12 And it's not merely sort of professional courtesy13 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 2 3 Heritage Reporting Corporation4 (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't7 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 long14 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. The23 issue is not how markets can aid the government-managed 2 3 Heritage Reporting Corporation4 (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 take7 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 liability14 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. When19 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 have23 efficient contract mechanisms, if we did not have liability2 3 Heritage Reporting Corporation4 (202) 628-4888 1 18 1 rules, no power on earth, no government on earth could wind2 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 the10 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 were15 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 19 1 enabled this to all come to pass, not the proclamation from2 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 from22 here. Thank you, Mr. Chairman.23 MR. HATFIELD: Thank you. Okay. Let me go over 2 3 Heritage Reporting Corporation4 (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, while7 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 2 3 Heritage Reporting Corporation4 (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 set10 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. And19 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 the22 efficient and intensive use of spectrum. Secondary markets23 identify gains from trade that are unrealized by the 2 3 Heritage Reporting Corporation4 (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 use5 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, such20 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 2 3 Heritage Reporting Corporation4 (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 markets9 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, Spectrum2 3 Heritage Reporting Corporation4 (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 bidders6 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 stations11 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 25 1 determines the market price for clearing. This is just one2 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 the7 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 is10 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 reducing14 uncertainties and distortions in the bargaining between the15 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-out22 problem.23 I very much agree with Commissioner Furchgott-2 3 Heritage Reporting Corporation4 (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 Nextel8 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 -- volunteered11 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 2 3 Heritage Reporting Corporation4 (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 it6 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 in11 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.2 3 Heritage Reporting Corporation4 (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 involved9 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 2 3 Heritage Reporting Corporation4 (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 amount5 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 rules17 under certain circumstances can either sell that license to18 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 30 1 day work this out. And that is the best method. But there2 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 those11 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 secondary15 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 source18 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 general2 3 Heritage Reporting Corporation4 (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 to14 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 under17 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. 2 3 Heritage Reporting Corporation4 (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 as3 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 the8 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 2 3 Heritage Reporting Corporation4 (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 2 3 Heritage Reporting Corporation4 (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 out14 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 telephone18 companies are helping Sprint PCS build and operate markets 19 in the secondary rural markets.20 These are done through management agreements, but21 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 to2 3 Heritage Reporting Corporation4 (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 regulations5 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 about8 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 they13 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 large18 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.2 3 Heritage Reporting Corporation4 (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 roads8 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 by12 a major PCS licensee, CBlock (phonetic), who approached ITA13 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 work20 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 2 3 Heritage Reporting Corporation4 (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 nothing3 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 agreements12 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 that21 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 2 3 Heritage Reporting Corporation4 (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 particularly14 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 2 3 Heritage Reporting Corporation4 (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 other8 bands.9 And I think that's a -- that was sort of like the10 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 --2 3 Heritage Reporting Corporation4 (202) 628-4888 1 40 1 MR. HATFIELD: Oh, yes. I want to recognize, and2 I should have done so earlier to the right down here at the3 far end of the table is Don Ableson (phonetic) who is chief4 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 much22 of a threat. And I was very interested to hear Morgan 23 O'Brien's perspective on the history of his company, 2 3 Heritage Reporting Corporation4 (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 that10 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, by14 creating a scarce resource, the value of the business often15 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 industry21 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.2 3 Heritage Reporting Corporation4 (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 selling9 more competitors in the market. And the cost of around 10 these phone calls about is about 40 percent less today than11 it was three years ago.12 So the point is that when we can move spectrum to13 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 2 3 Heritage Reporting Corporation4 (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 are10 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 is13 -- 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 market17 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 in22 the years ahead, because there is tremendous gains. So I 23 see most --2 3 Heritage Reporting Corporation4 (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 occasion6 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.2 3 Heritage Reporting Corporation4 (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 way5 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, because15 when you started creating your market with the SMR's and 16 created Fleetcal, you had to figure who had things that you17 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 rules22 that you can put on the books that would uniquely help 23 Nextel.2 3 Heritage Reporting Corporation4 (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 be5 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 for16 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, not20 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.2 3 Heritage Reporting Corporation4 (202) 628-4888 1 47 1 MR. HATFIELD: All right. I wanted to ask, I see2 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.2 3 Heritage Reporting Corporation4 (202) 628-4888 1 48 1 MS. BENNET: Well, I think what Peter is, maybe, 2 forgetting and we see it in other telecommunications policy3 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 think2 3 Heritage Reporting Corporation4 (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 requirement15 on everybody? And it may not be economic to have, you 16 know, six full-service commercial mobile wireless operators17 in parts of rural America. Three may actually provide more18 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 you21 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 --2 3 Heritage Reporting Corporation4 (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 lost8 it.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 may13 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 we17 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 that23 -- let people know, Charles, who you are.2 3 Heritage Reporting Corporation4 (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 spectrum17 can't do it.18 Now, maybe, that will be resolved through 19 technology. And the vendors will start making equipment to20 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 2 3 Heritage Reporting Corporation4 (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 market6 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 is14 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 2 3 Heritage Reporting Corporation4 (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 licensee8 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 54 1 licenses, still have their licenses. And that's what makes2 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 a6 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.2 3 Heritage Reporting Corporation4 (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 they4 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 you12 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 them2 3 Heritage Reporting Corporation4 (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 a22 chicken and egg thing on the technology. Just how 23 important is it if you have the right economic tools in 2 3 Heritage Reporting Corporation4 (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 of5 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 confront8 that problem. So I think that it requires creative work on9 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 can23 get that snowball going and make things happen much faster 2 3 Heritage Reporting Corporation4 (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 technology7 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 created11 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 would18 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 2 3 Heritage Reporting Corporation4 (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 the9 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,2 3 Heritage Reporting Corporation4 (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 to15 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 management21 agreement or something like that to be able to make this 22 work.23 And we believe we have agreements that meet every2 3 Heritage Reporting Corporation4 (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 the8 floor if you could, please.9 AUDIENCE PARTICIPANT: My name is Ellen -- and 10 I'm a lawyer at Covington and Burling. The Chairman talked11 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 at2 3 Heritage Reporting Corporation4 (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 have9 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 UK14 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 2 3 Heritage Reporting Corporation4 (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 2 3 Heritage Reporting Corporation4 (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 that13 there's been kind of a similar one-off secondary market in 14 Morgan's description, so the bottom line is you may already15 have a secondary market occurring in spectrum. It's not as16 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 65 1 they are holding.2 And in the event, they could either do a sell-out3 to liquidate their positions, or easily take a look at what4 they are not utilizing and create an options market around 5 it.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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 66 1 inefficiency in time-to-market. If you have a standardized2 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, as13 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. Two22 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, 2 3 Heritage Reporting Corporation4 (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 utilize15 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 capture20 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 2 3 Heritage Reporting Corporation4 (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 you4 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 energy8 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'm21 like one off on this, and then, of course, computerized 22 operational dispatch.23 A lot of nomination process and dispatch process 2 3 Heritage Reporting Corporation4 (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, you3 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 as13 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 at21 $5,000. There's a $3,000 gap for one-hour in some parts of22 this country.23 There's a price shortage in natural gas right now2 3 Heritage Reporting Corporation4 (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 risk10 control a lot better.11 Lack of sophisticated participants in trading, we12 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 can18 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 some21 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 2 3 Heritage Reporting Corporation4 (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 have5 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 2 3 Heritage Reporting Corporation4 (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 hope12 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 as23 a model I would suggest the United States follows, 2 3 Heritage Reporting Corporation4 (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 is7 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 new13 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 2 3 Heritage Reporting Corporation4 (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 is3 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 increased18 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,2 3 Heritage Reporting Corporation4 (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 negative15 factor? What do you do about effective frequency 16 coordination where you've got tightly packed band that have17 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 to22 get right. What this means in practice, I guess, is that 23 we'll be looking to introduce spectrum trading selectively 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 76 1 with a number of different, what we call, different trading2 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 need11 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 2 3 Heritage Reporting Corporation4 (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 technology11 they liked in a band, because we'd be up against the 12 problem that where that use would encounter to an ITU radio13 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 second22 generation GSM. And sometimes it can work out badly. But 23 when it works well, it works very well, indeed, as we've 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 78 1 seen.2 The only problem we have in Europe is that we are3 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 on8 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 have13 to be notified of a trade. And there would, probably, have14 to be some sort of right of veto.15 And that would be enough to attract the provision16 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 publicize21 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 those2 3 Heritage Reporting Corporation4 (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 to6 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 they13 say. And we're going to have to look very carefully at the14 precise wording they proposed, because I think it's fair to15 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 we19 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, 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 80 1 in fact, is the only way to go when you've got rapid change2 and unpredictable change.3 As I said, the only difference is going to be the4 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's19 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.2 3 Heritage Reporting Corporation4 (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 bandwidth16 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 2 3 Heritage Reporting Corporation4 (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 how16 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 have21 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 2 3 Heritage Reporting Corporation4 (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 to4 book it and manage it.5 We operate a 24-hour scheduling center. You have6 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 without13 the systems to manage it and to operate it. So how has the14 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 justify19 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 2 3 Heritage Reporting Corporation4 (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 a8 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 about2 3 Heritage Reporting Corporation4 (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, there7 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 advances12 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 of15 users and the reduction and the cost for service. So the 16 megahertz for the operator and the benefit per megahertz of17 the user community as accelerated.18 And we see the next wave being Internet-based 19 video and Internet-based, data-type transmissions which are20 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 2 3 Heritage Reporting Corporation4 (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 never19 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 2 3 Heritage Reporting Corporation4 (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 of18 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 the23 market which records and consolidates the offers and 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 88 1 broadcasts this information in each appropriate location in2 a repeating data loop similar to a stock-market ticker. On3 the buyer side, auction-enabled wireless devices constantly4 monitor the broadcast ticker.5 When a consumer places a call, the software in 6 the wireless device matches the information from the ticker7 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 receives11 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 format15 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 like19 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 2 3 Heritage Reporting Corporation4 (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 that10 has plenty of available seats. And a carrier who has empty11 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. And19 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, 2 3 Heritage Reporting Corporation4 (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 2 3 Heritage Reporting Corporation4 (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 the7 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, regardless11 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 just19 that of a single carrier, thus ensuring that consumers will20 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 2 3 Heritage Reporting Corporation4 (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 have10 momentary, you know, markets in spectrum like you've 11 described.12 So it's amazing how quick things move from theory13 to implement. And we'll see how successful, so that's very14 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 2018 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 2 3 Heritage Reporting Corporation4 (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-time5 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 satellite19 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 2 3 Heritage Reporting Corporation4 (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 about4 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've8 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 2 3 Heritage Reporting Corporation4 (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 would7 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 able12 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, as18 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 difference22 between real-time and near-real-time in terms of error 23 correction and error checking and other methodologies to 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 96 1 ensure a higher delivery, reliability, quality of service. 2 There are work-arounds now in the existing technologies for3 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 talking14 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. It17 didn't have to be immediately correct. Obviously, it isn't18 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 97 1 wondering, given the sort of transponder market you've been2 talking about or marketed use of transponders, what kind of3 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 steps21 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 2 3 Heritage Reporting Corporation4 (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 -- Williams7 and Enron (phonetic) approached Comtel about facilitating a8 bandwidth trading organization where we brought together 149 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 commercially15 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, 2 3 Heritage Reporting Corporation4 (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 work5 with and bring in entities like Mike's and Morgan's who are6 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 to11 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 the15 market should look like, instead of expecting the 16 government to give you some rules. And then, you come back17 and it's a back-and-forth go process.18 That turns something that can become liquid in 1219 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.2 3 Heritage Reporting Corporation4 (202) 628-4888 1 100 1 I know that I've kind of used the same thing with2 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 to7 $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, we15 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 2 3 Heritage Reporting Corporation4 (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 way12 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 become21 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 2 3 Heritage Reporting Corporation4 (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 else6 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 think23 in Chicago at 5 o'clock on January 30th, there's going to 2 3 Heritage Reporting Corporation4 (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 satellites11 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 markets15 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 to2 3 Heritage Reporting Corporation4 (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, as21 in elsewhere and global.22 MR. PEPPER: Are there differences among regions 23 to -- some countries doing it in a way that facilitates it,2 3 Heritage Reporting Corporation4 (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 a4 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's18 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 2 3 Heritage Reporting Corporation4 (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 the6 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 causes10 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 deal15 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 107 1 of the hazards of tracking down interference and mitigating2 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 that7 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 the13 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 taken19 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 keep22 in mind as we move through this process.23 MS. CROWE: Oh, yes. I've got a prime example 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 108 1 for you.2 MS. CARNELL: Okay.3 MS. CROWE: It's called FERC Order 888, 889. And4 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 so11 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 for16 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 2 3 Heritage Reporting Corporation4 (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 to4 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 read20 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 Spectrum23 License Faux-Pas and The Punch Line to Ronald Coase's Big 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 110 1 Joke." And, of course, it tells you everything you want to2 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. 2 3 Heritage Reporting Corporation4 (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 19608 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 ago17 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 2 3 Heritage Reporting Corporation4 (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 system5 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 to13 vested rights to have an FCC license. But the policy today14 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 without18 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 2 3 Heritage Reporting Corporation4 (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 the4 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 the8 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, flexible17 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 allow22 much more spectrum to come into the market would be 23 probably the single greatest factor to get bandwidth 2 3 Heritage Reporting Corporation4 (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 to10 use spectrum in new ways, unoccupied spectrum, that is with11 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 2 3 Heritage Reporting Corporation4 (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, in6 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 there13 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.2 3 Heritage Reporting Corporation4 (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 message17 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 going23 to see the Defense Department give up on all its spectrum. 2 3 Heritage Reporting Corporation4 (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 over5 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 2 3 Heritage Reporting Corporation4 (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 talked3 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 are6 clearly spectrum bands below 3 gigahertz that are much more7 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 which10 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 rural13 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 which19 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 2 3 Heritage Reporting Corporation4 (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 called10 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 it13 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 of18 issuing the certification and cast away many, many, many of19 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 2 3 Heritage Reporting Corporation4 (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 those5 that are truly necessarily in the public interest and those6 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 have10 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 what13 I call odd-bands like the 4.9 gigahertz band, which doesn't14 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.2 3 Heritage Reporting Corporation4 (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 for6 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 2 3 Heritage Reporting Corporation4 (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 offers5 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 up15 to a couple of megabits a second for a single user. And so16 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 and23 relatively slow and spotty in some places, it will be able 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 123 1 to back off to second and first-generation personalities.2 In other words, the wideband despreader will also3 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 for21 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 2 3 Heritage Reporting Corporation4 (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 progress16 towards a proliferation of even more affordable and smarter17 SDR technology, we're going to be approaching the backyards18 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. There21 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 yard2 3 Heritage Reporting Corporation4 (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 around6 and it's an open kind of environment like we're 7 envisioning, I think, that the FCC's envisioning, maybe for8 spectrum.9 But in order to have an orderly system with these10 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 2 3 Heritage Reporting Corporation4 (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 2 3 Heritage Reporting Corporation4 (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 to16 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 40019 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 2 3 Heritage Reporting Corporation4 (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, as13 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 will20 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 2 3 Heritage Reporting Corporation4 (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 turn5 to.6 We started with the FCC's data base and looked at7 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 experienced14 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, almost19 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 2 3 Heritage Reporting Corporation4 (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 Bennet9 in that regard.10 We also have lack of deployment and equipment for11 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've19 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 of23 spectrum don't want to be known in terms of what prices 2 3 Heritage Reporting Corporation4 (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 this4 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 clearinghouse8 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 132 1 able to establish a nationwide footprint, because the cones2 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 this13 whole exercise. And the cellular operators had to reassure14 themselves of that, too. And there are very strong 15 provisions in these contracts that ensure that the cellular16 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 2 3 Heritage Reporting Corporation4 (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 a4 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 Morgan8 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 in12 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 capacity17 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.2 3 Heritage Reporting Corporation4 (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 a11 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 you18 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. The22 lower prices that are being offered now to consumers, also 23 the need to support both analog and digital customers has 2 3 Heritage Reporting Corporation4 (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 Intermountain11 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 2 3 Heritage Reporting Corporation4 (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 want7 some control here.8 Finally, who receives the moneys and profits from9 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 2 3 Heritage Reporting Corporation4 (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 licensee7 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 -- some11 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 positive18 thoughts here with respect to urging the establishment of a19 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 2 3 Heritage Reporting Corporation4 (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 2 3 Heritage Reporting Corporation4 (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 to11 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 obtained15 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 by19 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 2 3 Heritage Reporting Corporation4 (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 clearly6 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 for19 licensing of the 700 band. These private organizations, in20 turn, must have flexibility to meet market demands spectrum21 in all forums.22 Our experience suggests that the best way to meet23 this demand is through spectrum leasing. Since the 220 2 3 Heritage Reporting Corporation4 (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 telecommunication6 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 the17 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.2 3 Heritage Reporting Corporation4 (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 to12 provide otherwise.13 Accordingly, the relationships we have structured14 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 2 3 Heritage Reporting Corporation4 (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 the13 licensees' construction obligations. This will provide 14 licensees incentives to participate in the secondary market15 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 2 3 Heritage Reporting Corporation4 (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's3 policy as a model for their own.4 We believe that the Commission may facilitate the5 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 2 3 Heritage Reporting Corporation4 (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 frame3 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 cellular10 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 that16 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 2 3 Heritage Reporting Corporation4 (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 I11 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 apart13 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. 2 3 Heritage Reporting Corporation4 (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 some3 wonderful law firm like Michelle's and pay lots of money to4 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? I7 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 2 3 Heritage Reporting Corporation4 (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 put5 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 the14 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 talking22 about here make a wonderful case for the underutilization 23 of those bands. And the benefit to public safety and 2 3 Heritage Reporting Corporation4 (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 like8 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 taxi11 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 2 3 Heritage Reporting Corporation4 (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 privatized3 that process. I won't get into that. But that actually is4 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 report10 and orders, you turn it around and you set the timetable 11 and you have a series of, presumably, two rounds of private12 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-makings16 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 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 151 1 than anything else. Three years ago, when I took over this2 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 keep9 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 of2 3 Heritage Reporting Corporation4 (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. I19 mean, even today, we're looking, you know, how do you use a20 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 2 3 Heritage Reporting Corporation4 (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 underlay18 rights sort of idea to do some experimentation on what kind19 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 2 3 Heritage Reporting Corporation4 (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 to3 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 question8 was, as obviously the head of a bureau that has the biggest9 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 this22 can we do here within our statutory authority?23 Or do we have to go outside and go back to 2 3 Heritage Reporting Corporation4 (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 various23 tools would be lease-fee authority that we would promote 2 3 Heritage Reporting Corporation4 (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 advocate3 for it on the Hill.4 MS. FARHQUAR: And I would agree with that. That5 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 can12 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 plans23 being screwed up if we did violate those rules.2 3 Heritage Reporting Corporation4 (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 order6 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's14 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 these18 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 nationwide23 license, and in one area he may screw up and that may 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 158 1 affect the whole license, and we're leasing from him. What2 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 some6 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 issue23 really would constitute a problem area that you'd have to 2 3 Heritage Reporting Corporation4 (202) 628-4888 1 159 1 get the FCC to fix or address.2 MR. PEPPER: Right. Which goes to, I think, what3 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 their10 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.2 3 Heritage Reporting Corporation4 (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 to5 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 sides10 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 have13 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 what20 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, 2 3 Heritage Reporting Corporation4 (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 to3 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 how6 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 all15 together. And sitting over here to the left is Bob Califf 16 (phonetic) who is no longer with the Commission, but he did17 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 from22 the UK to help us out today, and then Linda Paris, Maureen 23 Partino, and Mary Beth McBerry for helping with the press 2 3 Heritage Reporting Corporation4 (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.)9 //10 //11 //12 //13 //14 //15 //16 //17 //18 //19 //2 3 Heritage Reporting Corporation4 (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 Corporation2 3 Heritage Reporting Corporation 4 (202) 628-4888

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