Auctions have advantages over races and lotteries in spurring commercial lunar developments. (credit: NASA)

Races, beauty contests, franchises, and build-out requirements for lunar property

by Sam Dinkin
Monday, September 13, 2004

We have a big batch of real estate sitting in the sky just waiting to be divvied up by humanity and settled. The Aldridge Commission called for property rights. Whether and how property rights are accomplished could be the difference between a settled Moon and an unsettled Moon.

Alan Wasser points out that the Outer Space Treaty is probably a good thing to keep around (See “A better way to promote space settlement in our lifetime”, The Space Review, September 7, 2004.). He is reassured by the ban on nuclear weapons. I think kinetic weapons are the ones to worry about, but I can certainly understand that hundreds of billions of dollars worth of satellites are protected by the Outer Space Treaty.

Without withdrawing from the Outer Space Treaty, an international organization could be developed that is consistent with both individual property rights and the Outer Space Treaty. Imagine that there is a new Lunar Land Office with a UN charter or a “coalition of the willing” that are signatories to its charter. That Land Office can make a claim of the Moon on behalf of all the citizens of Earth. If those claims are recognized by the courts of the G-7 and other economic leaders of the Earth, then the rights will be good enough to start transferring them.

The rights can look something like what I describe in “Property rights and space commercialization” (The Space Review, May 10, 2004) or more along the lines of Alan Wasser’s proposed legislation. I agree with Alan that money raised should be used to subsidize settlement.

We can break up the discussion of lunar property rights into three areas:

1. How do you acquire property rights?
2. What can you do with property rights?
3. What must you do to keep property rights?

Acquiring property rights

Alan Wasser demands a race and I demand an auction. Races are ascendant now. Do you have your ticket to the Ansari X Prize flight in the Mojave this month? The last day to purchase on the web is September 24. The Centennial Challenge is all about races. But races are wasteful of resources and have a risky upside for participants.

The Aldridge Commission Report was very excited by the 40-to-1 ratio of investment to prize money (See “The Aldridge Report: it’s all about execution”, The Space Review, July 5, 2004). But duplicative research is wasteful. The X Prize was valuable in pointing out a multi-billion dollar business that is the only sensible incentive for racers who want to make a profit.

Races are how we award patents. Our industrial policy in this area seems to be doing pretty well. There are definitely some huge technological gridlock situations that result when different parties win different pieces of technology. Standards wars can sometimes ensue. By encouraging hasty duplicative research, patent races may not be the best model for development of the Moon. Patents are also a tax on small entrepreneurs because it is too risky for the little guys to do well with patents (See “Patents are not pat hands”, The Space Review, July 5, 2004).

Another way to award property rights is to hold an auction for franchises. For example, there could be an Earth-Moon transport franchise. Property on the Moon does not have much intrinsic value in the absence of transportation. Depending on how costly transportation is, the value of land could be worthless or quite valuable. Spectrum authorities tend to wait to auction spectrum until there are at least two technology choices to deploy on the spectrum. Otherwise, the spectrum will sell for near the minimum price and the technology provider (transporter) will extract all the profits from the telecom companies (real estate developers).

While I am a firm believer that lunar tourism is a multi-billion dollar business, a development plan requires more than just my money. Reasonable investors might put the probability of lunar tourism being a $30-billion market by 2030 at 33%. If such an investor gets a monopoly franchise for all tourist flights to the Moon and can serve everyone at a 20% profit, they would value the concession at $6 billion/year if the market materializes and would be willing to make an upfront bid worth the net present value of $2 billon/year after 2030 in order to buy the franchise. The franchisee would make substantial investments to verify the value of the market, arrange transportation for the tourists, and do other things that an owner would. Critically, the franchisee would sell the franchise if there is a more optimistic operator ready to pay for it.

South Africa awarded a monopoly cell phone franchise as a way to get investment into their system. There is a big tradeoff when selecting whether to have a monopoly or a more competitive system with free entry or multiple franchisees. If there is only one firm serving the Earth-Moon market, then it can recoup its investment with all the upside potential of the market. On the other hand, the users are over a barrel and must pay the monopoly price. A good balance would be to allow three franchisees to start with a fourth and a fifth franchisee entering at one or two future dates. Selling the entrant franchises right away would prevent the ability of the incumbents from lobbying them out of existence. Also, fixing a firm date for free entry and granting all comers $100 licenses to start service in 2040 would set a firm sunset to the startup phase of lunar transportation.

If an investor instead sees that the lunar tourism market has a 33% chance that it is a $30-billion market, but that two other firms will enter the market if there is a successful startup and then they each will only eke out a $1 billion/year profit each, now the lead firm will only be able to invest the NPV worth of $333 million/year to get started—about 1/6 what a monopolist could invest. When there is no limitation on entry, the upside is divided among all entrants, but the downside is born by the first mover if there is no market. That may be a prescription for everyone waiting.

Another way to award property rights is a lottery. Lotteries are a great way to get real estate into people’s hands quickly. The trouble is that now there is no assurance that the people who get them will develop them and there is no assurance that the people who value them the most will get them. Lotteries were tried for telecom spectrum and scrapped because of “unjust enrichment” for the lucky winners who flipped the licenses for hundreds of millions.

As long as we are talking about bad ways to award property rights, I must mention that hearings, or “beauty contests” as they are called in the telecom world, are terrible. They are prone to fraud and waste. The Olympic siting scandals were in a beauty contest. By forcing developers to spend millions on paper studies that go into the trash the minute a franchise is awarded, beauty contests are even worse than lotteries or races typically.

As the Chief Economist of Optimal Auctions, I predictably favor auctions as the way to award property rights. They avoid the wastefulness of a race and the randomness and unjust enrichment of a lottery. Auctions guarantee that the property gets into the hands of those who value the property most highly. This means that the main value of the auction is holding it at all, not the money raised by it. The money is gravy that can be used to enhance policy in other ways. Lotteries, races, and beauty contests are so destructive of economic efficiency that auctions might be the best policy even if the auction revenue is burned. The winners can then develop the property at a sensible pace. For most parcels, the methodology is moot. The minimum price for the auction is likely to be the sale price for all but the most choice parcels (see “US public land policy and applications for the Moon and Mars”, The Space Review, July 26, 2004) and that would apply to the cash payment in most methodologies. The FCC went through the whole gamut of alternative allocation methodologies and settled on auctions as the best one. This is the same methodology used to settle the American West and the Oklahoma Territory. Auctions have also resulted in very efficient petroleum extraction.

Furthermore, if a combinatorial auction is conducted, a property auction can be a proxy for a transportation franchise auction. That is, a transportation developer that needs a monopoly can make an all-or-nothing bid for all the property on the Moon. If that bid exceeds the sum of all the other best bids, then the property could be awarded to that winner.

If any antitrust policy is imposed on lunar real estate, it is wise to have that antitrust policy sunset. That is, if the policy starts out at 20% max ownership, it should rise to 33%, then 50%, as time goes by and still no real estate is developed. By allowing concentration, policy should use non-parametric ways to implicitly subsidize entry in-kind.

While talking me out of auctioning the Moon is unlikely to work, I certainly would support race legislation if it were the only legislation out there. Auctions may be a tougher sell than races. If auctions were an easy sell, you might see me out on the tarmac like Carmack.

What can you do with the rights?

Hopefully, you will be able to exclude people or at least demand compensation for uninvited guests. I certainly am glad that the US Constitution forbids quartering of soldiers in my house. Having international guests visit when their space ship gets a flat would be novel the first time or two, but it would get pretty old pretty quick if they decided to overstay. The current Outer Space Treaty and the Moon Treaty treat space stations like science stations and not like people’s houses. Can we maybe limit international cooperation to the UN lunar youth hostel?

I would also like to be able to fence in my front yard. Sure I would leave a right of way for buggy traffic, but I do not really want anyone running over my prize silicon orchids. Can I have my vacuum space above my head designated a no-spaceflight zone for 1000 meters? Sure, sound doesn’t carry in space, but I do not want to be buzzed (singed?) by the neighbor kid in his new two-seater rocket. If I say and do certain things, maybe I can get that imposed as a sanction on me even if I can’t get that as a right.

I would hope to be able to stake mineral rights claims, airless space claims, and spectrum claims. I want lunar patent rights, lunar copyrights, and lunar trademarks. I want telecom, cable, electricity, and water rights of way. Give me all of the breadth of choices of property rights I can buy on Earth.

How do you keep the property rights?

If you can do nothing and still keep the property rights, property rights become an option on development. Seeing as there are no hotels on the Moon and no transportation service to the Moon, the option value of building is worth something while a right such as Wasser’s right to own if you occupy would be valueless today. While the future value of a right that requires build may be a huge incentive to develop, the value of an option would be even higher.

If there are settlers on the Moon, then the difference between the ability to do nothing and the requirement to occupy would be the option value on abandonment and reoccupation. I know that I really like the fact that I can leave my house in the morning and still have it in the afternoon. I am also really ashamed that we went to the Moon 35 years ago and never went back.

There are still some bands of the C-block digital PCS spectrum that have not been built out because it was tied up in bankruptcy court for years. Even though it was auctioned in 1996 and again in 1999, the wheels of justice took years to figure out what to do. Perhaps we can come up with a 10- to 30-year abandonment rule that would allow the property to revert or be reauctioned or whatever. The build-out requirements or occupation requirements need to be well-specified, and not just for the courts.

At one extreme, if build-out requirements are onerous, real estate will be worthless because all the money to keep the real estate would have to be spent on development. Looser build-out requirements must be carefully specified in order to have any bite. Alan’s proposed legislation that requires, “The claimant must commit to consistently make good faith efforts to promptly offer, or arrange for, safe reliable transportation to and from the settlement to all, regardless of nationality, who are willing to pay a fare sufficient to cover expenses and a reasonable profit.” might be satisfied by someone saying, “Go buy an Ariane and a Soyuz.” These sorts of loopholes can and do end up in final regulations. I headed bid strategy for a fixed wireless company in the Brazil mirror auction to be a single competitive local telephone company and determined that using satellite telephone could nullify the requirement for a pricey build-out.

Build-out requirements or having a hearing to award the franchise to the most beautiful company may result in the Moon getting settled quickly as developers sink money that would otherwise have gone into an auction, a race, or a hasty uneconomical build-out plan. Argentina got a speedy build-out of a cell phone system by holding a beauty contest and selecting the fastest plan. Of course, they left a lot of money on the table that could have been raised by an auction and, perhaps more importantly, could have ended up with superior system that could have been built by the auction winner. I am skeptical of build-out requirements. Getting there first was done 35 years ago. I think we should err on the side of economic efficiency this time around even if it means waiting a few more years before the face of the new Moon lights up.

Whether you favor races or auctions, the Moon is the new frontier of government, law, and business. Lunar property rights can hasten or slow development and make development more or less profitable. Some policy choices can result in a thriving economy like the American West, the New World, or Alaska. Other policy can result in a sparsely settled scientific international reserve like Antarctica.

Sam Dinkin of Austin, Texas is a regular columnist at the Space Review. He can be reached at (888) 434-6546 and thespacereview@dinkin.com.

Home