Key Takeaways
- The sunk-cost proposition may be too narrow for spectrum renewal policy, as large upfront payments can continue to affect operators’ financing, investment, and market behavior.
- Spectrum valuations are inherently uncertain, and the asymmetric consequences of overpricing and underpricing warrant a cautious approach to renewal pricing.
- Rolling renewals and annual fees could provide investment certainty while supporting efficient spectrum reallocation over time.
- For spectrum renewals, dynamic efficiency should be the ultimate objective, rather than maximizing near-term revenues.
Executive Summary
The sunk-cost proposition holds that because an upfront spectrum auction payment is irrecoverable, it should not influence forward-looking decisions. Since the introduction of large-scale spectrum auctions in the mid-1990s, economists and regulators have often referenced this proposition as a reason not to be concerned about high upfront fees paid for mobile spectrum licenses. In this paper, “Spectrum Renewal Pricing: Rethinking the Sunk-Cost Proposition,” Senior Managing Director Richard Marsden challenges the conventional economic assumption that upfront spectrum license payments, once made, are sunk costs that should not affect mobile network operators’ future investment, pricing, or operating decisions.
Mr. Marsden argues the sunk-cost proposition is too narrow to provide a blueprint for spectrum-renewal policy. This paper promotes two complementary approaches to spectrum license renewals. First, in support of dynamic efficiency in allocation, it makes the case that regulators should price below rather than at benchmark estimates of market price. Second, it identifies rolling renewals and annual fees as a better option than fixed durations and upfront fees for facilitating efficient change in spectrum holdings over time. The objective should not be to extract the maximum defensible value from spectrum today but to design a regime that promotes efficient investment, holding, and reallocation over time.
How NERA Can Help
NERA helps governments, regulators, and mobile network operators design spectrum renewal policies that balance investment certainty, efficient spectrum allocation, and evolving market needs. Drawing on decades of experience in spectrum auctions and market design, our experts advise on renewal pricing, license structures, annual fees, and mechanisms that facilitate efficient reallocation and trading. Combining economic theory, global best practice, industry benchmarks, and practical implementation experience, NERA develops tailored approaches that reflect each market’s regulatory objectives, competitive dynamics, and investment environment.
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