Common Ground: Adam Smith In Space

by Clayton Mowry

The 18th century author of The Wealth of Nations probably never thought about space or satellites in orbit. Yet Adam Smith’s notion of the invisible hand of competition and the free market actively shapes the satellite communications industry today.

Smith once said, “The propensity to truck, barter and exchange one thing for another is common to all mankind.” In the satellite services business such trade is usually a transaction where transponder time is exchanged for money. Such exchanges can come in the shape of long-term capacity leases by HBO, CBS and the like, or in the form of occasional use where resellers parse out time for sale to more infrequent users of on-orbit capacity.

The marketplace for transponder capacity created by resellers and transponder brokers is an excellent example of a “secondary market” for spectrum. A primary market for spectrum might consist of government held auctions, processing rounds, lotteries or other means by which regulators decide which wireless companies they should license to provide communications services. But as Adam Smith would attest, markets devised and run by the government are not always efficient. In the case of radio spectrum, licenses awarded to terrestrial wireless services are often underutilized or allow spectrum to lie fallow–often in rural areas where demand is the weakest.

Over the past year, the Federal Communications Commission (FCC) begun to explore the use of secondary markets as a potent weapon in their regulatory panoply that can be used to free up underutilized spectrum and meet the explosive demand for wireless communications services.

Last May the FCC held a public forum to learn from experts how they might best encourage and nurture secondary spectrum markets. At the forum, FCC Commissioner and trained economist, Harold Furtchgott-Roth, argued that in a market with full property rights, communications companies are capable and willing to develop secondary spectrum markets on their own. By coupling those property rights with a deliberate relaxation of FCC rules that inhibit the sale of spectrum rights, the Commission could encourage new markets, spectrum exchanges, and information sources that bring buyers and sellers together.

Mike Antonovich, senior vice president for broadcast services at Panamsat, represented the satellite industry at the May forum. He pointed out that secondary markets for satellite spectrum are thriving. He argued that those markets were able to develop because of predictable FCC licensing and clearly set standards for interference. A secure regulatory regime has allowed satellite companies and teleports to invest significant capital in systems and personnel that are dedicated to selling occasional use transponder capacity.

Fast-forward to November 2000, when the Commission announced it was adopting a policy statement and Notice of Proposed Rulemaking to set forth a framework for establishing more robust secondary markets for wireless communications services. The policy statement articulated four guiding principles at the heart of the FCC initiative.

First, license holders should have clear usage rights to their spectrum. Second, usage rights should be easily transferable or divisible. Third, license holders should have flexibility in determining which services they provide and what technology they use. And fourth, license holders have a fundamental obligation to protect against, and the right to be protected from, harmful interference.

Those principles sound all well and good. Yet, underlying the Commission’s drive to create secondary markets are two important objectives–the first is to promote the sale of spectrum rights within a given service category–cellular, PCS, microwave, satellite, etc. The second is to promote inter-service sharing across a range of services where, for instance, satellite spectrum could be sold and used by terrestrial wireless service providers and vice versa.

The satellite industry is far ahead of the wireless industry on the first front. Transponder brokers and capacity resellers created the secondary market for satellites decades ago. Interestingly, the Internet and its ability to bring together buyers and sellers from around the globe may soon help to once again revolutionize the resale of satellite capacity. The London Satellite Exchange is looking to facilitate on-line and off-line bandwidth trading of satellite capacity. Human engineers are still required to ensure the quality of service and protect against interference, but the exchange is sure to change the way satellite bandwidth is traded.

The real potential for problems lies not in allowing communications companies to buy and sell excess capacity within a clearly defined service category, but in attempts to sell spectrum across wireless sectors. Neither the FCC’s regulatory structure nor the technology necessary to swap spectrum across many bands is mature enough to meet this well intended but potentially calamitous goal. Imagine if you will a satellite operator who might sell its unused spectrum only to find out a terrestrial wireless buyer had cased interference or interrupted service to SNG users in an adjacent band.

The satellite industry should be careful in this proceeding to show the rest of the wireless world just how secondary markets can thrive while discouraging the Commission from reaching too far into inter-service sharing. Adam Smith might once again serve as their guide if they would only heed his sage advice, “…in the great chessboard of society, every single piece has a principle of motion of its own, altogether different from that which the government might choose to impress upon it.”

Clayton Mowry is the executive director of the Satellite Industry Association. His email is [email protected].