Market methods are being employed both at the initial issuance of a spectrum licence, when auctions are used (for a detailed discussion of Auctions see Section 5.5), and, more significantly, by allowing spectrum rights to be bought and sold in the lifetime of a licence and allowing a change of use of the relevant spectrum. Trading only involves the change of ownership of licences, whereas liberalisation involves giving greater flexibility in how spectrum is used to the user. We use term ‘trading’ to cover both change of ownership and flexibility.
Spectrum trading is introduced here in this section and for a more detailed discussion of Market-based Sharing see Section 4.2.4 of this module.
Spectrum trading is a mechanism whereby rights and any associated obligations to use spectrum can be transferred from one party to another by way of a market-based exchange for a certain price. In contrast to spectrum re-assignment, in a spectrum trade, the right to use the spectrum is transferred voluntarily by the present user, and a sum is paid by the new user of the spectrum which is retained, either in full or in part, by the present (transferring) user. For example, in February 2010, Optus Mobile, an Australian mobile network operator, announced that it had entered into an agreement to purchase 3G spectrum licences from 3G Investments, a subsidiary of Qualcomm. The spectrum licences are for 10MHz of paired spectrum in the 2100MHz band in eight regional capital cities in Australia.
Spectrum trading contributes to a more efficient use of frequencies because a trade will only take place if the spectrum is worth more to the new user than it was to the old user, reflecting the greater economic benefit the new user expects to derive from the acquired spectrum. These efficiency gains will not be realized, however, if transaction costs are too high and one of the aims of any spectrum trading regime should be to keep down transaction costs. After all, the goal is to facilitate transfers by establishing a swift and inexpensive mechanism. If neither the buyer nor the seller behave irrationally or misjudge the transaction, and if the trade does not cause external effects (e.g., anti-competitive behaviour or intolerable interference), then it can be assumed that spectrum trading contributes to greater economic efficiency and boosts transparency by revealing the true opportunity cost of the spectrum.
Furthermore, trading has other relevant indirect effects:
- it enables licensees to expand more quickly than would otherwise be the case;
- it makes it easier for prospective new market entrants to acquire spectrum;
- if spectrum trading were combined with an extensive liberalization of spectrum usage rights, there would be a considerable incentive for incumbents to invest in new technology in order to ward off the threat of new entrants in the absence of other barriers to entry (i.e., the unavailability of spectrum);
- this, in turn, would boost market competition.
Forms of Spectrum Trading
The European Commission identifies the following methods for transferring rights of use:
- Sale – Ownership of the usage right is transferred to another party;
- Buy-back – A usage right is sold to another party with an agreement that the seller will buy back the usage right at a fixed point in the future;
- Leasing – The right to exploit the usage right is transferred to another party for a defined period of time but ownership, including the obligations this imposes, remains with the original rights holder.
- Mortgage – The usage right is used as collateral for a loan, analogous to taking out a mortgage on an apartment or house.
In terms of the trade itself, there are a variety of mechanisms that can be used. These include:
- Bilateral negotiation: The seller and (prospective) buyer directly negotiate the terms of the sale and are not subject to any particular constraints set by the regulator;
- Auctions: Once a type of auction has been chosen and the rules have been decided by primarily the seller, prospective buyers have the opportunity to acquire the spectrum usage rights by bidding in the auction;
- Brokerage: Buyers and sellers employ a broker to negotiate, with their consent, the contractual terms under which the transfer of usage rights can take place;
- Exchange: This refers to the establishment of a commercial trading platform, similar to a stock market, where transfers take place according to specific rules established by the members.
These mechanisms are most likely to be used in combination. In the first instance an auction will be used as the primary means of assignment, tradable spectrum is listed on an exchange and either direct negotiation or brokerage facilitate the transfer of spectrum user rights. As we have discussed earlier band managers may be delegated responsibility for managing certain bands on behalf of the regulator.
 At the time of writing (February 2010), this transaction remains subject to approval from the Foreign Investment Review Board and the Australian Competition and Consumer Commission.