The impact of Spectrum Management Policy on the Penetration of 3G Technology

Policy Brief

Government regulators grant licenses to cellular operators to use spectrum. Regulatory authorities aim to encourage economic development through telecommunication and secondarily to earn revenue from spectrum licensing. How licenses are awarded and conditions placed on the licensee, in addition to country specific demographic factors, influence the short term and long term adoption of cellular technology. Looking across 127 countries, we have examined how spectrum policy decisions have influenced the adoption of 3G cellular technology.

1.  Mandating single technology Standard

Countries reach 50% penetration (peak adoption rate ) more quickly when they mandate a 3G single technology.

2.  Band neutrality

Limiting 3G to a single frequency band promotes faster roll out, but in the long run can slow down the growth.

3.  Auctions

Using auctions rather than other methods to allocate spectrum helps countries to reach 50% penetration earlier.

Technology Standardization

Regulators can either mandate a technology for a specific generation of cellular service or let the operators decide. Compatibility resulting from a single standard can lead to economies of scale for operators and equipment vendors. Early diffusion is therefore slower in countries with multiple standards.

Fig 1. 3G per 100 pop world wide (Single standard vs Multiple standards) (source: ITU 2010, DotECON)

We find that countries with multiple standards for a telecom generation were about 9 months later to reach the 50% penetration rate than the counties with single standards although the growth rate in multiple standards country is higher than the single standard counterparts. It can be argued that single standard can hinder development of alternative technologies. However, stimulating new technology development may be less important than reaching high penetration in countries without an indigenous cellular infrastructure-manufacturing sector.

Fig 2: Comparison of choice of standards options by country-income level (source: ITU 2010, DotECON)

Band Neutrality

Regulators can either mandate a specific band for a specific technology or let the operators upgrade or refarm their already acquired bands. It is commonly argued that a band mandate enhances global roaming and ensures economies of scale. However, it forces the operators to go through the spectrum award process to introduce new technology even though they might be capable of reusing their existing spectrum. We find that mandating the band helps the countries to reach the peak adoption rate earlier. This is because the operators can use the new band for the new technology while serving the existing customers with older spectrum.

Fig 3. 3G per 100 pop world wide (Bandmandate vs non bandmandate) (source: ITU 2010, DotECON)

Fig 4: Comparison of choice of spectrum band options by country-income level (source: ITU 2010, DotECON)

However as the adoption reaches the peak rate in order to keep a faster growth rate the operators should be able to reuse their existing spectrum as newer technology takes over the older one. This is why our research shows that mandating band slows down the growth reaffirming the need for spectrum re-farming.

Auctions

Regulators in general prefer auctions to any other spectrum award methods. Auctions are faster in comparison with hearings, which might take months or years. They largely ensure transparency and ensure that the party that values the spectrum most gets the spectrum. This has a significant effect on ensuring high adoption rate. The capital debt caused by auctions might act as an incentive for fast roll-out to earn revenue to cover the debt. Our finding suggests that auctions as the award process do help the countries to reach peak adoption rate faster affirming the hypothesis. The countries that conducted auctions were at least 7 months earlier than their counter parts to reach 50% penetration rate. However, the estimation does not find the effect of award process significant on growth parameter. The finding indirectly supports the hypotheses that auction bid prices are “sunk-cost” and have little effect on the ultimate rollout of the technology.

Fig 5. 3G per 100 pop world wide (Auction vs non auction) (source: ITU 2010, DotECON)

Fig 6: Comparison of choice of spectrum award processes by country-income level (source: ITU 2010, DotECON)

Estimation Procedure

A regression analysis was conducted on a logistic model of technology diffusion to ascertain the effects of the policy variables. The dependent variable for the regression model was the logarithm of the ratio of 3G adopters and the potential adopters. To ascertain the effect of the policy variables country income and mobile industry variables such as 2G penetration, Internet adoption, and various other variables were controlled. The model estimates 71% of the variation on 3G penetration. The estimation finds that the regulatory policies regarding spectrum management are positively associated with high penetration rate of mobile technology. Insights gained from this study of 2G to 3G transition can provide guidance to regulators contemplating the transition to the newer generations.

Moinul Zaber

PhD Student, Engineering and Public Policy,

Marvin Sirbu

Professor of Engineering and Public Policy, Industrial

Administration and Electrical and Computer Engineering

Carnegie Mellon University, 5000 Forbes Avenue Pittsburgh, Pennsylvania 15213-3890