[opendtv] Re: 20050509 Mark's Monday Memo

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Tue, 31 May 2005 09:08:39 -0400

At 8:55 AM -0400 5/26/05, Tom Barry wrote:
>But I'm not sure the spectrum would be considered worth as much if
>you didn't get to be a permanent gatekeeper. (mixed blessing)

There's an excellent chance that it could be worth more.

If a company buys spectrum at an auction they need to recoup that 
investment, which essentially becomes a tax on consumers. In theory, 
when the auction term ends, the company that has been using the 
spectrum has a major advantage in that they have already amortized 
their infrastructure costs - this can make it less appealing for 
competitors to bid for that spectrum, allowing the incumbent to re-up 
at a better price.

If a real marketplace existed for using the spectrum, I believe that 
competition for this resource would cause the revenues to be 
maximized, especially during off peak periods. Today there is little 
incentive for broadcasters to offer access to their spectrum for 
applications that might compete with them. For example, a service 
that used overnight capacity to download programming to PVRs might be 
considered to be a competitive threat to broadcasters, as these 
programs might be viewed during the time periods when the station has 
maximum revenue potential. Stations tend to fill these off-peak 
periods with "easy money" that is not a competitive threat, such as 

And then there is the reality that broadcasters pay practically 
NOTHING for using the spectrum today. The major costs are the license 
and administration fees they pay to the FCC, which are typically less 
than $100,000/yr., even in the largest markets. In recent years, 
network compensation to affiliates has been reduced and in some cases 
eliminated.  The networks are in essence getting a free ride, based 
on their leverage over affiliates.

Contrast this with a system in which the content owner or local 
content aggregator would be required to bid for use of the spectrum 
against other broadcasters AND new competitors who might have the 
incentive to challenge the entrenched incumbents. No entity could sit 
on their spectrum and use it at less than market rates, as is the 
case today.

To be completely accurate, any fees paid to a spectrum utility would 
have three components.

1. Capital considerations - today a broadcasters must pay capital 
costs to build the transmission infrastructure. These costs would 
move to the spectrum utility, freeing up capital for other uses.

2. Operational considerations - one of the largest ongoing expenses 
for broadcasters is the power bill for the transmitters. To this one 
must also add ongoing operational and maintenance costs, including 
personnel. This money would be available to pay the spectrum utility 
for access to the spectrum.

3. Opportunity costs - With competition, the cost for access would 
presumably increase during those time periods when demand is highest. 
And, if different classes of service were offered, there would be 
multiple peak periods based on each class of service (e.g. prime time 
for fixed receivers and drive time for mobile receivers). This is the 
component of the system that would potentially drive up revenues for 
the utility.

Thus, there is already a large pot of money that would be available 
to the spectrum utility, even if we assume that broadcasters would 
pay no more than they do today for the first two items above.  Any 
new users of the spectrum would provide incremental monies to drive 
the system.

Thus I assume that a market driven system would more efficiently 
allocate the scarce spectrum resources and that the spectrum utility 
could operate profitably, while providing the government with a 
healthy amount of annual revenue for use of the spectrum resource.

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