Best practice spectrum auction workshop, Tanzania 26 May 2015

Best practice in spectrum auctions and renewal

Workshop for theTanzania Communications Regulatory AuthorityDar Es Salaam, Tanzania, 26-27th of May 2015

Presented byStefan Zehle, CEO, Coleago Consulting Ltd+44 7974 356 258 [email protected]

Agenda

Session 1 Industry trends influencing spectrum policy Policy objectives Auctions, reserve prices and licence payment terms Digital dividend spectrum auction case study: Mozambique Best practice spectrum renewal

Session 2 Best practice in spectrum auctions illustrated with simple mock auctions

Best Practice in Spectrum Auctions and Renewal 1

Stefan Zehle, MBA

CEO of Coleago Consulting Ltd

MBA with distinction, University of Westminster, London

Over 25 years experience

Director of mobile operator in Algeria

Delivered over 40 spectrum projects

Co-author of “The Economists Guide to Business Planning”

2Best Practice in Spectrum Auctions and Renewal

Since 2001, Coleago has offered a wide range of advisory services to the telecom industry


Strategy & Business Planning Strategy Development, Marketing Strategy MVNO and Multi-Brand Wholesale Strategy Business Planning and Business Modelling

Telecoms Regulation & Interconnect Accounting Separation, Regulatory Price

Control Interconnect Cost Modelling, RIO Regulatory Consultations

Business Transformation & Cost Reduction Cost Reduction Mobile Network Sharing Restructuring and Turnaround

Transaction Services Commercial Due Diligence Tower Due Diligence Preparation of Information Memorandum

Spectrum Valuations and Auctions Running Auctions for Regulators Spectrum Strategy and Valuation for Auctions Spectrum Auction Bid Strategy and Execution Beauty Contest Bid Books

Mobile Network Sharing Mobile Network Sharing Managed Services and Outsourcing Tower Due Diligence Network Audit

Coleago has delivered over 70 spectrum related projects across a wide variety of markets


Markets in which Coleago has conducted spectrum related projects

Coleago has carried out over 70 spectrum consultation, valuation, auction and beauty contest licence projects

Completed in 2015 Argentina - 900/1800 and 700/AWS Canada - AWS-3 and 2.5GHz

Completed in 2013-14 Canada – 700MHz Paraguay - multi-band Oman - 800MHz & 2.6GHz Belgium - 800MHz New Zealand - 700MHz Myanmar - greenfield Australia - 700MHz & 2.6GHz UK - 800MHz & 2.6GHz Sri-Lanka - 1800MHz

Completed in 2012 Belgium - 2.6GHz Netherlands - multi-band New Zealand -1800MHz spectrum

trading Switzerland - multi-band Russia - 700MHz & 2.6GHz Pakistan - 2.1GHz valuation Bangladesh - 2.1GHz valuation

© copyright Coleago 2015

What is driving prices for spectrum at auctions5

The growth in mobile data drives the need for spectrum

Industry trends influencing spectrum policy


New technology enables higher data speeds and allows more traffic to pass through a given amount of spectrum

GSM Not well suited to modern data needs Download speed of up to 384 kbps with EDGE

technology

3G HSPA Spectral efficiency: 0.7 bits / Hz / cell Download speed of 42Mbps

LTE and LTE Advanced Spectral efficiency: 1.4 bits / Hz / cell (possibly twice

that for LTE-A) Download speed of 150Mbps (300 for LTE

advanced)7

3G HSPA

Best Practice in Spectrum Auctions and Renewal

Demand for mobile broadband requires more mobile network capacity

8

The mobile data tsunami

Mobile data traffic is growing at a very rapid rate in all regions of the world.

In many mobile networks data now exceeds voice.

Technology alone cannot deliver the required capacity, additional spectrum is required


Mobile broadband is a key ingredient for the development of the digital economy …

An increase of 10% in mobile adoption boosts GDP growth by 0.8% (World Bank, 2009)

For a given level of total mobile penetration, a 10% substitution from 2G to 3G increases GDP per capita growth by 0.15 % points (Deloitte, 2012)

Doubling broadband speeds for an economy can add 0.3% to GDP growth (Arthur D. Little, 2011)


… and there are tangible benefits to society which illustrate the impact of mobile data

A 12% increase in financial inclusion in developing countries such as India and Bangladesh

Healthcare: up to 70% improved compliance for TB

10-15% increase in farmer income

mEducation solutions can significantly improve the affordability of education by up to 65%


Existing and new spectrum is required for mobile broadband services

11Best Practice in Spectrum Auctions and Renewal

700/800 MHz New spectrum for LTE, in some markets previously used for TV, referred to as “digital dividend” bands

850/900 MHz Originally only used for GSM, progressive redeployment to 3G HSPA and recently to LTE

1800/1900 MHz Originally only used for GSM, progressive redeployment to 3G HSPA and recently to LTE

1700/2100 MHz Currently used for 3G, upgrading to dual carrier HSPA+, LTE deployment in the Americas

2600 MHz New band for LTE

? The mobile industry is seeking over 1GHz new spectrum for mobile broadband

Implications for spectrum management and auctions

Supply of new spectrum Focus on making a maximum of spectrum

available for mobile broadband as fast as possible

Assign new spectrum Assign new spectrum to mobile operators to

facilitate and encourage rapid deployment of 3G HSPA and LTE

New technology in existing spectrum Ensure that new technology, notably LTE, can

be deployed in existing bands


Best practice begins with setting the right policy objectives in the context of a maturing market and LTE deployment

Policy objectives


Policy objectives for the assignment of mobile spectrum are wider than maximising auction proceeds

Promote the highest value use of spectrum

Ensure spectrum is deployed rapidly and widely and the maximum spectral efficiency is extracted

Promote investment and innovation Promote rural broadband access

and increase digital participation rates

Promote competition Promote customer convenience Provide a high net economic return

to the public

Immediate revenue generation by maximising auction proceeds


Tanzania’s ICT policy vision and mission

The National ICT Policy is aligned to the following vision statement:“Tanzania to become a hub of ICT Infrastructure and ICT solutions that enhance sustainable socio-economic development and accelerated poverty reduction both nationally and globally.”

The overall mission of this Policy is:“To enhance nation-wide economic growth and social progress by encouraging beneficial ICT activities in all sectors through providing a conducive framework for investments in capacity building and in promoting multi-layered co-operation and knowledge sharing locally as well as globally.”National information and communications technologies policy, March 2003


Defining the “efficient” use of spectrum

What do policy makers mean when they talk about “efficiency?”An efficient assignment of spectrum means allocating the spectrum to those that generate the greatest economic value to society from the use of the spectrum

What does that mean in practice?An efficient auction involves assigning spectrum to those that value it most highly. If the downstream market is

sufficiently competitive then societal and private values are likely to be closely aligned

Achieving an efficient assignment is often closely aligned with maximising auction revenues

Efficiency is also likely to maximise long term tax receipts


Policy objectives have to be considered in the light of maturing mobile markets


Mobile markets have reached the maturity phase of the industry life cycle Many markets show flat (at least in real

terms) or declining revenues and EBITDA This maturity industry life cycle stage

suggests that policy goals should be revised:– Encouraging new network based

competition is not be appropriate– Taking cash out of the industry is not

sustainable

Maturing markets are characterised by consolidation, not new market entry

Mobile industry consolidation is in full swing The pace and size of cross-border M&A has

been breath-taking, with five mega-deals announced or completed during the past three months.

Markets with consolidation potential include India, Indonesia, Canada, Italy, Germany and Brazil - although regulation is likely to be a constraint in most of these.

Not surprisingly, we are seeing numerous infrastructure sharing deals. Investors should expect further M&A, but at a less frantic pace.


Given the existing spectrum, new entrants will have too little spectrum to compete

In an LTE world, large contiguous spectrum holdings confer particular competitive advantage The exit of some operators in Europe

and the insolvency of Mobilicity in Canada demonstrates that it is impossible to succeed in the market with small spectrum holdings.

When industry logic has driven consolidation, trying to reverse the process by regulation is unlikely to produce societal benefits.


Spectrum set-asides and spectrum caps can lead to inefficient outcomes if not designed with great care

Spectrum set-asides and caps are typically designed to prevent excessive spectrum concentration Measures need to be determined with great care


Potential impact of auction design Examples

Spectrum is acquired by inefficient users who deploy little and fail to gain market share

Chile AWS auction (2009)Canada AWS (2008)

Spectrum remains unsold and hence the economic value is not extracted

Netherlands 2.6GHz (2010)Belgium 2.6GHz (2011)

Spectrum is not deployed and held for resale at a profit for private investors Canada AWS (2008)

Increased spectrum costs for incumbents damage the operator Netherlands 800MHz (2012)

The 2009 AWS auction in Chile focused on stimulating new market entry, but resulted in policy failure

Spectrum caps guaranteed new market entry … A spectrum cap of 60 MHz

effectively excluded the three incumbent mobile network operators - Movistar, Entel and Claro.

Cable television company VTR won 30MHz of the AWS spectrum paying US$3.02 million, and Nextel won 60MHz, paying US$14.7 million.

Revenue raised amounted to a tiny $0.011 / MHz / pop.

… but failed to deliver timely deployment and competition … The new entrants launched one and

a half years after the deadline Today VTR and Nextel together only

have 1.3% market share, nearly three years after the award

… and private investors may pocket the new entrant discount. In a secondary market VTR and

Nextel are likely to sell the spectrum for more than they paid.


Using new spectrum auctions to increase network-based competition is unlikely to succeed

Regulators may wish to consider: Assigning spectrum in a manner which

does not reduce competition while at the same time maximising the benefit of a wide band.

Facilitating a transition from network based competition to other forms of competition.

Focusing on other regulatory remedies if competition is failing, such as a regulated access price offer.


Consolidation is normal when the industry life cycle

reaches the maturity stage

Wide band assignments are required for an

economically and spectrally efficient deployment of LTE

Setting spectrum licence terms to maximise spectrum value to society

Spectrum has no intrinsic value. Value is only created through the use of spectrum.

The more spectrum is used, the more socio-economic value is created. Therefore spectrum licence terms should encourage the maximisation of the use of spectrum.

In practice this means:– Set terms that encourage investment in

the radio access network– Prevent spectrum hording through

coverage roll-out obligations


Coverage obligations attached to spectrum licences

Extending mobile coverage is often a public policy objective Operators cover areas where it is

commercially viable to do so. A licence obligation to extend

coverage beyond these levels reduces the value of the spectrum licence but delivers the policy objective and associated benefits.

The economic benefit of wider coverage is likely to exceed lower auction receipts.


The 2014 700MHz licence award in Chile broke new ground and is likely to deliver rural development policy objectives

The 700MHz spectrum award process focussed on connectivity and competition policy objectives … connect 1,281 rural towns and 500

schools obligation to build fibre mandated MVNO access and roaming

… rather than extracting money from the mobile industry. Auction proceeds amounted to a

relatively small 0.017 $/MHz/pop


Technical considerations for the efficient use of spectrum

Spectrum packaging is a critical aspect of spectrum assignmentsFactors to be considered are: organisation of the lots

– the band plan size of each lot use of generic or specific lots contiguity of lots geographical reach of lots

– regional or national

There may be a trade-off between efficiency and competition


Efficient assignment requires the timely availability of large amounts of spectrum

The Swedish telecoms regulator PTS is at the forefront of best practice spectrum assignment and management.

PTS shall increase the availability of useful spectrum through least restrictive conditions, in the work for international harmonisation, assignments at a good rate to meet demand, and promotion of secondary trading. PTS Spectrum Strategy, Draft summary of the consultation report, Feb 2014

PTS’s spectrum strategy recognises that spectrum which is held back and hence not used, delivers no socio-economic value.

The estimated total spectrum requirements for both the RATGs 1 (pre-IMT, IMT-2000, and its enhancements) and 2 (IMT-Advanced) are 1,340 MHz and 1,960 MHz for lower user density settings and higher user density settings, respectively. Future spectrum requirements estimate for terrestrial IMT, Report ITU-R M.2290-0, (12/2013)


When a new band is released, all of the spectrum in that band should be made available at once

Auctioning small amounts of spectrum is inefficient When few lots are on offer demand

will exceed supply by a greater factor. High auction prices will reduce investment.

Small amounts of spectrum increase deployment costs and prevent operators from delivering true mobile broadband services.

LTE and LTE advanced require an assignment of at least 2x10MHz or 2x20MHz of contiguous spectrum per operator.


Holding back spectrum increases operators’ costs and hence retail prices With mobile broadband, capacity is

an issue; more spectrum reduces site build capex and site opex

Band 7 (2.6GHz) with 2x70MHz FDD is a key capacity resource of mobile operators

Making this available to mobile operators will deliver a policy objective of affordable mobile broadband

Ensuring a minimum block size of 2x10MHz is key for efficient LTE deployment

Deploying LTE in 2x15MHz costs around $3,900 per MHz; deploying in only 2x5MHz costs $9,900 per MHz.

The maximum downlink speed in 15MHz is 112 Mbps compared to only 35 Mbps in 5MHz.

Potential solutions: – Assign wide enough bands to

individual operators – Allow spectrum sharing so that

operators who hold, say 2x5MHz each, may jointly deploy in 2x10MHz

– Allow spectrum tradingBest Practice in Spectrum Auctions and Renewal 29

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1 Carrier 3 CarriersU

S$

Capex per LTE e-NodeB

eNodeB equipment 5MHz Carrier Cost

The 700MHz band plan for Africa (Digital Dividend 2)

There is only 2x30MHz available The four main mobile operators in

Tanzania cannot end up with 2x10MHz each

Had Band 20 (800MHz) been allocated to mobile operators this would not have been such a great problem

Potential solutions for Tanzania Allow spectrum sharing so that

operators who hold, say 2x5MHz each, may jointly deploy in 2x10MHz

Allow spectrum trading Reclaim under-used or unused Band

20 (800MHz) spectrum


A B C D E F

703 733 758 788

Digital Dividend II

A B C D E F

Uplink Downlink

How many operators can a market support?

Reaping economies of scale and the benefit of LTE deployment in a wide band The fewer operators there are in a

market, the higher the economies of scale.

Lower operator costs can translate into wider coverage and lower retail prices.

Fewer operators mean spectrum can be deployed in wider blocks:– Reduces deployment costs– Delivers higher speeds

Three to four operators provide effective competition There is sufficient consumer choice All operators provide a better quality

of service and user experience compared to a fragmented market


Let’s look at the National information and communications technologies policy, March 2003

The problem identified in the policy document: The lack of an overall policy and poor

harmonisation of initiatives, have led to random adoption of different systems and standards, unnecessary duplication of effort, and waste of scarce resources, especially through the loss of potential synergies.

Therefore, this National ICT policy deploys a broad-based national strategy to address Tanzania’s developmental agenda.

The solution in terms of one of the policy objectives: Enhance synergy, economies of

scale and productivity in all ICT matters.

National information and communications technologies policy, March 2003


Summary of best practice

Policy objectives Set appropriate policy objectives

Competition Promoting new entry is not efficient at this stage of the industry life cycle Create conditions where economies of scale can materialise while maintaining

competition

Coverage obligations Coverage obligations can be an important element in delivering policy objectives Coverage requirements should not be linked to specific bands


Summary of best practice

Technical efficiency considerations Maximise the amount of available spectrum Assign available spectrum together rather than artificially ration Ensure a minimum channel size of 10MHz for LTE Avoid fragmentation of spectrum Make spectrum technology neutral

Ensure an efficient assignment of spectrum Adopt proportional measure to promote downstream competition Allocate spectrum to those that value it most highly Prevent speculators


Assigning spectrum transparently and efficiently

Auctions, reserve prices and licence payment terms


Beauty parades lacked transparency and regulators could not overcome a huge information asymmetry

Operators were required to prepare “bid books” The process was

– time consuming– costly– largely works of fiction– subjective– lacking transparency

The asymmetry of information persisted

Regulators still had to “pick winners”


Hybrid beauty parades and revenue shares


A combination of bid book and “auction” were also usedBidders sometimes had to compete on the “revenue” share with government penalises efficient use of

spectrum incentives cost cutting rather than

offering new services impacts prices as it alters the

marginal cost of services

Revenue shares are distortionary and inconsistent with efficiency

Discouraging speculators

Discouraging speculatorsThere have been instances of speculative bidding, with the view to reselling the spectrum later. Spectrum is unused, sometimes for

several years Speculators extract cash from the

industry which could be spent on deployment

Regulators should ensure that: Only bona-fide mobile operators enter

an auction by setting eligibility criteria Attach a “use it or lose it” obligation to

spectrum


Auctions are increasingly accepted as best practice for assigning spectrum and pricing

Benefits of an auction Transparent and objective Consistent with multiple policy

objectives Ensures an efficient assignment of

spectrum Does not require regulators to “pick

the winners” Generates revenue for society Generates a sunk cost and so is less

distortionary Quick and cost effective


Implicitly, auctions focus on maximising revenue from whatever is sold


Policy objectives for the assignment of mobile spectrum are wider than maximising auction proceeds

Promote the highest value use of spectrum

Ensure spectrum is deployed rapidly and widely and the maximum spectral efficiency is extracted

Promote investment and innovation Promote rural broadband access and

increase digital participation rates Promote competition Promote customer convenience Provide a high net economic return to

the public

Immediate revenue generation by maximising auction proceeds


High reserve prices are prone to distort auction outcomes and harm the public interest in a number of ways

Spectrum may be left unsold and hence unutilised. This represents a productivity loss to society and reduced auction receipts.

National imbalances in spectrum holdings may be exacerbated.

An unnecessarily high cost-burden may be imposed on the industry, leading to adverse downstream consequences in terms of roll-out, competition and consumer choice.


Potential impact of auction design Examples

Spectrum remains unsold and hence economic value is lost to the country

India 850MHz (2012, 2013)Australia 700MHz (2013)Mozambique (2013)

Higher costs are imposed on operators than necessary and deployment slows down

Australia 700MHz (2013)Belgium 800MHz (2013)

Driven by the desire to plug a hole in the budget, Australia set extremely high reserve prices for 700MHz


700/800MHz Digital Dividend Spectrum Reserve Prices Compared

0.00 0.09

0.13 0.25

0.30 0.30 0.32

0.42 0.49

0.47 0.56

0.60 0.80

1.35

- 0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

Germany - 5/2010Netherlands - 12/2012

Denmark - 6/2012Sweden - 3/2011

UK - 2/2013Switzerland - 2/2012

Finland - Q4/2013New Zealand - 10/2013

Spain - 7/2011Canada - Q4/2013Portugal - 12/2011

France - 12/2011Italy - 9/2011

Australia - 5/2013

US$ / MHz / Pop

The Australian reserve prices were set higher than prices paid at auction in other countries


1.28

0.91

0.58

0.49

0.81

0.56

0.88

0.37

0.65

0.73

1.35

- 0.20 0.40 0.60 0.80 1.00 1.20 1.40

USA - 2/2008

Germany - 5/2010

Sweden - 3/2011

Spain - 7/2011

Italy - 9/2011

Portugal - 12/2011

France - 12/2011

Denmark - 6/2012

UK - 2/2013

Average 700/800MHz

Australia Reserve…

US$ / MHz / Pop

700/800MHz auction prices paid vs. Australian reserve prices

The Australian APT 700MHz auction resulted in a loss to society and is an example of policy failure

Potential socio-economic gain for Australia?

Is the spectrum actually used?

Can operators deploy the 700MHz band cost effectively?

Is there competition to drive down prices?

Between AU$ 7bn and AU$10bn

2x15MHz of 2x45MHz unsold hence not all of the potential socio-economic gain is realised

Only Telstra obtained 2x20MHz, can deploy at lowest cost, Optus obtained only 2x10MHz

One operator, Vodafone, did not obtain any spectrum and the leading operator Telstra increased its competitive advantage, thus reducing competition


Lessons learned from the Australian 700MHz auction

High reserve prices are not a good approach to spectrum auctions They have a market distorting effect Regulators might not achieve their

policy objectives Even if a large amount of money is

raised up-front this is likely to reduce overall economic value in the long term


The societal value of allocating spectrum

The return to the community from spectrum auctions goes well beyond any direct payment made to government for spectrum.

Implicitly all governments recognise the trade-off between spectrum fees and wider goals.

Otherwise they would simply auction off monopolies which would undoubtedly bring the highest direct receipts.


Setting high prices for spectrum is problematic

Hazlett and Munoz, “What Really Matters in Spectrum Auction Design”, 2010

“[T]he ratio of social gains [is of] the order of 240-to-1 in favour of services over licence revenues…Delicate adjustments that seek to juice auction receipts but which also alter competitive forces in wireless operating markets are inherently risky. A policy that has an enormous impact in increasing licence revenues need impose only tiny proportional costs in output markets to undermine its social utility.

In short, to maximise consumer welfare, spectrum auctions should avoid being distracted by side issues like government licence revenues.”


Benchmarking based on auction outcomes is not an appropriate method to set reserve prices

The value of spectrum to a mobile operator is specific to its business and based on a discounted cash flow forecast for the business.

Prices paid at an auction reflect outcome based on the value operators assign to spectrum in that country under a particular set of circumstances.

More recently prices paid reflect high renewal prices. For example, the cash strapped government in Greece in 2011 set extremely high reserve prices to renew spectrum. Operators had the choice to pay up or shut down.


Benchmarking

Setting reserve prices based on cost

Two costs of allocating spectrum to mobile can be identified.

Reserve prices should be set to compensate for the higher of either one of those costs: – The opportunity cost, i.e. the value

that would be generated from the next best alternative use of the spectrum.

– The cost of moving incumbent users to free up the spectrum for mobile use.

Example New Zealand, 700MHz auction 2013 announcementThe reserve price for each of the nine lots of 5 MHz paired has been set at NZ$22 million [NZ$198 million in total].The Government has spent $157 million clearing the 700 MHz band to allow the spectrum to be used for 4G mobile networks.Communications and Information Technology Minister Amy Adams, 700MHz auction announcement, 4 Sep 2013


The reserve price for the 700MHz auction in Chile in 2014 was set to deliver rural development policy objectives

The 700MHz spectrum award process focussed on connectivity and competition policy objectives … connect 1,281 rural towns and 500

schools obligation to build fibre mandated MVNO access and

roaming

… rather than extracting money from the mobile industry. The reserve price was small. Auction proceeds amounted to only

0.017 $/MHz/pop.


Note: Per capita GDP in Chile: US$ 15,700

Benchmarking reserve prices between countries only works if the policy objectives are the same

Policy objective in spectrum auctions in India Explicit policy objective to maximise

receipts from spectrum auction No other aspect is taken into

account

What are the policy objectives in Tanzania? “Tanzania to become a hub of ICT

Infrastructure and ICT solutions that enhance sustainable socio-economic development and accelerated poverty reduction both nationally and globally.”

“To enhance nation-wide economic growth and social progress by encouraging beneficial ICT activities in all sectors through providing a conducive framework for investments in capacity building …..”

National information and communications technologies policy, March 2003


Using benchmarking to set reserve prices implies that you abandon your

own policy objectives and instead have these set by the countries you

benchmark against.

In setting reserve prices, consider the reality of Tanzania

Per capita GDP of Tanzania is only US$ 700, thus limiting the revenue potential for mobile operators (EU GDP / capita US$ 35,530)

Network capex per covered head of population in Tanzania is higher than in many European markets.– Tanzania is a very large country with a low

population density (56 pop / sq.km in Tanzania vs. 112 in the EU)

– There is little existing fibre for backhaul purposes

The mobile industry in Tanzania is already relatively highly taxed


Offering the option of upfront versus staggered payments constitutes best practice

“Allowing staged payment will enable mobile network operators to invest immediately in building their 4G networks to increase their service to New Zealanders.” Communications and Information Technology Minister Amy Adams, 700MHz auction announcement, Sep 2013

In principle, operators can reflect the timing of payments in their valuations. However, requirements to pay the full amount as a lump sum may have a disproportionate impact on more highly geared operators, which could threaten auction efficiency.

Offering the option of upfront versus staggered payments, subject to a market-based interest rate, reduces this risk and therefore constitutes best practice.


A case study in how not to conduct a spectrum auction

Digital dividend spectrum auction case study: Mozambique


Digital switchover completed: 2x30MHz of 800MHz spectrum available for auction

There are three mobile operators present in Mozambique: Mcel, Movitel, and Vodacom.

Mozambique successfully freed up the 800MHz band.

The whole Digital Dividend 1 spectrum 800MHz band (band 20) consisting of 2x30MHz was available for auction to mobile operators.


To create auction tension the regulator, INCM, decided to only auction 5 out of 6 blocks

The INCM correctly realised that:– There would be no new entrant, – To deploy efficiently each operator

would require at least 2x10MHz In order to create competition between

the 3 bidders, INCM only offered 5 of the 6 available 2x5MHz blocks for sale.

There was a cap of 2x10MHz in this auction using the SMRA format


A B C D E F

791 821 832 862

IMT Band 20 Band Plan

The only possible outcome:– Two operators with 2x10MHz and

one with 2x5MHz. – One lot would have been unsold;

the economic benefit to Mozambique is reduced by 17%.

– In a 3 player market one operator would have been weakened with negative consequences for competition.

A B C D E F

Uplink Downlink

The reserve price for each block was unreasonably high: All of the spectrum remained unsold

The reserve price in Mozambique The INCM set the reserve price per

2x5MHz block at US$ 30 million. The population of Mozambique is 26

million, so the reserve price is 0.115 US$ / MHz / pop.


Benchmarking this reserve price In a fiercely contested auction in

Germany in 2010 (4 operators bidding for 6 blocks) the price paid was 0.91 US$ / MHz / pop.

In Mozambique the GDP per capita is US$ 610.

The GDP per capita in Germany is US$ 47,250

Adjusting the Mozambique reserve price for GDP per capita relative to Germany produces a reserve price of 8.94 US$ / MHz / pop (US$ 0.115 / 610 x 47,250 = US$ 8.94)

On a GDP adjusted basis, the reserve in Mozambique was around

10 times higher than prices paid elsewhere for digital dividend

spectrum

All the spectrum is unsold

The regulator’s objectives were clearly stated in the draft resolution

Article 3 Objectives The objectives of the present auction are:

– Ensure the efficient utilization of the frequencies object of the auction;– Promote competition maximizing benefits for the users.

Source: Draft Resolution nº 31 /CA/INCM/2012


Best practice was ignored and none of the objectives were achieved

There was a limited consultation, but:– responses from operators with regards to the excessively high reserve price

were ignored, and– advice against leaving one block was ignored.

The government did not raise any money from the spectrum auction Spectrum that could have been put to good use for mobile broadband lays fallow

and society loses out Operators have to find alternative, more expensive solutions to deploy LTE

mobile broadband The government loses out because it does not garner tax receipts from mobile

broadband services The economy loses out because the development of the digital economy

enabler, LTE, is slowed downBest Practice in Spectrum Auctions and Renewal 60

The use of spectrum auctions may not be appropriate in the case of existing spectrum rights

Best practice spectrum renewal


Extending existing licences poses different problems

Licence extensions or renewals are now common as many 15 or 20 year licences come to the end of their term Not obtaining a licence extension or

renewal may put a viable business at risk.

There is evidence that mobile operators reduce investment as the end of the term approaches.

If licences are not extended, considerable disruption would result with a cost to consumers, employees and the attraction for future investment


Spectrum renewal is often best managed through some form of administrative process

The risk of incumbents failing to retain spectrum creates a significant risk to efficiency Spectrum should be awarded to

those that value it most highly Incumbent operators are likely to be

those that value it most highly Efficiency usually implies that

incumbents should retain their existing spectrum at auction

New entrants recognise this and auction participation for new spectrum is likely to be low

Low participation is likely to lead to a lack of competition in an auction for existing spectrumIf auctions are non-competitive then they will not deliver an efficient outcome

Spectrum is usually best renewed through an administered process


Solutions for licence extensions or renewals

Harmonise licence expiry dates In many markets licences do not expire at the same

time. Some regulators harmonised licence expiry by granting partial extensions, e.g. Ireland.

All expiring spectrum could then be auctioned together, thus eliminating the predatory bidding problem that may otherwise arise from asymmetries.

Use an administered method with pricing based on opportunity cost Recognise that auctioning spectrum that is in use by a

successful mobile operation is not necessarily the best method.

An administered process based on the opportunity cost to other potential users (AIP) may be a better solution.


A range of approaches have been adopted

Examples of renewal

65

SingaporeSMRA Auction

SwitzerlandCCA Auction

IrelandCCA Auction

AustraliaRight of First

Refusal

New ZealandRight of First

Refusal

FranceAdministered renewal

and re-assignment

PortugalAdministered renewal

NetherlandsCCA Auction


Implications for best practice

Best Practice There should be a presumption of renewal in favour of the incumbents An administered process will often be more appropriate Some form of Administered Incentive Pricing should be used to determine the

cost of spectrum


Challenges in selecting the best auction format and rules

Best practice in spectrum auctions


In most cases involving the assignment of new spectrum the conditions for the use of an auction are likely to be present

When to use auctions An appropriate auction design can be

formulated that meets policy objectives The monetary value of the licence is

relatively high, justifying the costs of running the auction

Where there is a need for transparency to avoid potential legal challenges and increase confidence in the regulatory body

There is excess demand for the lots to ensure an efficient outcome


Encouraging participation in the auction is necessary to generate the excess demand required for an efficient outcome

Encouraging participation Credible and predictable regulatory

environment Well defined spectrum rights Reasonable coverage and other

licence requirements Clear and unambiguous award

process Material but low reserve prices Multiple lots Potential use of spectrum caps


Bidders will not pay more than their valuation

Valuations In preparing for an auction, bidders will value the lot(s) they intend to acquire This establishes how much a lot is worth to the bidder If bid amount is equal to the valuation, then the bidder does no create additional

value for its business

The bid amount It would be irrational to bid more than the valuation Bidding less than the valuation does make sense because the bidder could

acquire the lot for less than it is worth to the bidder However, if a bidder bids much less than it is worth to the bidder, the risk of a

competing bidder winning the lot increases


First Price, Sealed Bid Auction

Assumptions Each of you represents a different mobile operator You are competing for a single block of spectrum The value of the block is said to be “common”

– The true value of the block is the same for all operators You have each estimated the value of the block, but with error

– Some will have over and others, under, estimated– You do not know if your valuation is an over or under estimate

Auction Rules On a sheet of paper write your name, your valuation, and the amount you bid.

Fold it over to keep it secret and hand to the auctioneer. The highest bidder wins and pays their bid


Spectrum auctions can go horribly wrong

A story from IstanbulThe Turkish GSM auction held in 2000 offered two GSM licences The government wanted to maximise

revenue To ensure that there were two

operators each bidder could acquire at most one licence

A sequential first price sealed bid was used

The reserve price in the second auction was determined by the price in the first auction

What do you think happened?


There was a significant failure to achieve policy objectives

A story from Istanbul The value of a licence depends on

how many players there are A smart bidder placed a very

aggressive bid– Higher than the value of the

spectrum in a two player market– But below the value of a single

player market

The outcome The smart bidder won the first

auction at a price above what any rational bidder would pay to enter a two player market

The second licence went unsold

Policy failure The regulator’s competition

objective was not met

However, promoting excessive competition can be equally damaging


The “winner’s curse” and bidding strategy in a first price, sealed bid auction

The value of the licence was common to all biddersBidders estimated the value with error The average value of all bidders is

likely to be correct– assuming the estimates are

evenly distributed about the mean

By definition – if you win, you must have over paid

Bidders appreciate the risk and so must “shade their bid”

Bid shading can give rise to an inefficient outcomeThere is no “dominant strategy” as to how much to shade If a strong bidder (high value)

shades a lotand

A weak bidder (low value) shades a little

Then the weak bidder could win resulting in an inefficient outcome


Existing rights were auctioned in a combinatorial sealed bid in Norway resulting in a loss of efficiency and competition

The Norwegian experienceCombinatorial sealed bid auction Incumbent Tele2 expecting to be the

weakest of the incumbents and no real competition from a new entrant shaded aggressively

A new entrant bidding aggressively beat Tele2

Tele2 has since announced its exit from the Norwegian market, with a sale of its assets to rival TeliaSonera


Auction Example: Second Price Sealed Bid


2nd Price, Sealed Bid Auction

Assumptions You each have an individual valuation for the spectrum You have confidence in your valuation

Auction Rules On a sheet of paper write your name, your valuation, and the amount you bid.

Fold it over to keep it secret and hand to the auctioneer. The highest bidder wins, but pays the amount of next highest bidder


Bidding Strategy

Dominant StrategyIn this auction there was only ever one number to bid If you bid less than your valuation

– You risk losing and regretting that you did not bid more– You are an unhappy loser

If you bid more than your valuation– You risk winning and regretting paying more than the value– You are an unhappy winner

The “Dominant Strategy” is to bid your valuation

Please feel free to change your bid if you wish


Did we achieve an efficient assignment of spectrum with our First Price, Sealed Bid auction?

Was the spectrum awarded to the operator who valued it most highly?


What about a second price auction

Was the spectrum awarded to the operator who valued it most highly?


A second price sealed bid auction delivers an efficient outcome and spectrum is priced at its opportunity cost

The opportunity cost of spectrum: What would have been the auction receipt had the winning bidder not been present?


Winner’s bid

2nd highest bidder’s bid

Opportunity Cost

Unhappy Loser

Happy WinnerHappy Loser

Issues in single round auctions

Advantages Quick Low cost Encourages participation

Disadvantages High dependence on business

planning No opportunity to learn about

common value Perceived as risky Harder to implement when multiple

lots and multiple bands being auctioned simultaneously

Generally regarded as not best practice


Auction Example: Ascending Clock Auction


Ascending clock auction

Assumptions You each have an individual valuation for the spectrum You have confidence in your valuation

Auction Rules I will announce a series of prices Keep your hand up if you are happy to buy one lot at the clock price

– You cannot put your hand down and later put it up again– This is an “activity rule”, i.e. if you are interested you must keep bidding, you

cannot sit on the side-lines and come in later with bid Bids will increase at the rate of [x]


Ascending clock auction

Advantages Simple Quick Opportunity for learning Perceived as less risky

Challenges Activity rules required to ensure

honest bidding Creates a challenge when there are

multiple blocks

If multiple spectrum blocks are on offer, auction these simultaneously.


Overcoming issues that arise with different auction formats

Risks for bidders in an auction– Substitution risk– Exposure risk

Ensuring sincere bidding Avoiding inefficient outcomes, notably fragmentation Avoiding unsold lots


Substitution risk

Definition of a Substitute“Two items are said to be substitutes if an increase in the price of one item leads to an increase in demand for the second item.”

For example If the price of chicken goes up then

people will buy more lamb – chicken and lamb are said to be substitutes

If the price of 900MHz spectrum goes up the operators will demand more 800MHz

Substitution Risk The risk that a bidder acquires a

specific spectrum lot for a given price when it would have preferred to have acquired a substitute spectrum lot at a lower price

If an auction creates substitution risk then the auction outcome may not be efficient

Problem: Sequential auctions create substitution risk

Solution: Auction blocks simultaneously using SMRA format


Simultaneous Multi Round Ascending (SMRA) format

How does an SMRA work? An auction where multiple lots are auctioned simultaneously comprising a

number of rounds and where the prices of the lots increase in each round Lots and prices paid are based on the final round with certainty

An example Six blocks of 700MHz spectrum are auctioned simultaneously Bidders can bid on one or more blocks in each round The price increases in each round as long as there is more than one bid per

block, i.e. there excess demand The auction stops when the number of bids is equal to the number of lots, i.e.

there is no more excess demand Can also be used to sell blocks in different frequency bands simultaneously


Exposure or fragmentation risk

Definition of a Complement“Auction lots are said to be complements if the value of the lots together is greater than the sum of the individual parts. If the price of one lot goes up the demand for the other diminishes”For example Two contiguous blocks are more

valuable than two non-contiguous blocks

Acquiring a national footprint in a regional auction has greater value than the sum of the individual regional licences

Exposure Risk A bidder seeking to aggregate

complementary lots bids on the basis of their synergistic valuation

The bidder is then outbid on one lot and is left with a stranded lot at a price greater than its stand alone valuation

Economically inefficient outcomes and challenges in strategy arise

Problem: SMRA auctions createexposure risk


Exposure Risk: Auctioning specific blocks of spectrum in parallel may lead to non-contiguous assignments

Potential non-contiguous assignments are a key drawback of a regular Simultaneous Multi Round Ascending Auction (SMRA)

Not technically efficient Vulnerable to anti-competitive bidding (e.g. attempt to isolate individual blocks)

90

A B B A C C

Example: Bidders B and C have contiguous assignments, while A’s assignment is fragmented, thus increasing deployment costs and reducing efficiency

700MHz Band Plan assigned in 2 x 5 MHz blocks


Solutions to overcome exposure (fragmentation) risk in an SMRA (1)

Allow operators to declare an economic minimum An operator may end up with 1 block but only wants 2 blocks or nothing. By

declaring ahead of the auction an economic minimum of 2 blocks, the one block provisional win would be avoided.– This may require adding a second stage to an auction to sell unsold blocks

Auction generic blocks Where one block is impaired, e.g. the lowest block in the 700MHz band, this

block can be auctioned as a specific block and the 5 others as generic blocks.– This solution is used for the 700MHz band in the German auction, starting in

May 2015 The winning bidders agree among themselves how to assign specific blocks. If no agreement in reached between operators, then regulator intervenes and

decides based on objective criteria (consumer welfare, reduced capex)


Solutions to overcome exposure (fragmentation) risk in an SMRA (2)

Allow “augmented switching” during the auction Augmented Switching allows bidders to go after contiguous blocks of spectrum

and to switch active bids between lots as the auction progresses.

Add an assignment stage to an SMRA auction The assignment stage is where winning bidders have the opportunity to make

additional bids to express their preferences for specific block assignments within the generic blocks that they have won.


A combinatorial auction format can overcome fragmentation risk but has many disadvantages

Combinatorial Clock Auction (CCA) Suitable when different types of

spectrum are auctioned at once An auction format which allows

bidders to express demand for combinations of lots at a given set of prices which tick up during each round of a clock phase

Usually followed by a supplementary round where additional bids can be paid

Lots awarded and prices are determined on the basis of a “generalised” 2nd price rule

A CCA has many drawbacks Extremely complex, difficult to

understand and run Costly to execute Significant uncertainty over outcome Risk of predatory bidding strategies

designed to raise the costs incurred by rivals

A problematic auction format


Avoiding unsold blocks

Ending an auction with unsold spectrum is inefficient and reflects badly on the auctioneer The economic and societal value of spectrum

is only realised if traffic passes through Spectrum that is unsold at auction does not

generate any revenue for the state Running a separate auction for unsold lots

increases uncertainty for bidders and imposes an additional administrative burden

The solution If an auction has a risk of unsold lots, specify in

the auction rules how these unsold lots will be sold in a second phase of the same auction


Other aspects of best practice

Spectrum auctions have a significant impact on the mobile industry and ICT development

Auctions can go very wrong, good auction rules are required to ensure that a spectrum auction is a success

Two aspects are critical in an SMRA– Activity rules– Provision of information to bidders


Activity rules are required for an efficient auction

Activity rules Stop bidders from sitting on the side-lines and coming in with a late bid Stop bidders concealing information Promote honest or sincere bidding Manage the speed of the auction

An example In a raising auction a bidder cannot stop bidding in round 8 and then start again

in round 11

The solution Eligibility points cans be used to enforce activity on a round by round basis:

Keep bidding or you lose points and your next round of bidding is restricted.


Information and transparency

Greater transparency is generally preferable Greater transparency helps reduce

common value uncertainty Reduced common value uncertainty

leads bidders to bid more aggressively leading to higher revenues


Best practice provision of information to bidders before and during an auction

Before the auction List of eligible bidders participating in the auction Eligibility points purchased

During auction at the start of each round show the following information Activity phase For each block the highest bid amount and the name of the bidder For each block the minimum and maximum next bid Number eligibility points per bidder Number of remaining waivers Number of remaining withdrawals List of bidders who left the auction


While no format appears to be perfect, policy makers need to consider the problems associated with each


Vulnerability of auction format CCA SMRA1st price sealed

bid

2nd price sealed

bidInefficient allocations due to budget constraints in conjunction with lack of visibility over price exposureMaterial price disparities, bidders end up paying different amounts per MHzRisk of predatory bidding strategies designed to raise costs incurred by rivalsInefficiencies caused by difficulties in aggregating optimal spectrum packagesEconomic inefficiencies caused by demand moderation strategiesCostly to execute, difficult to understand lack of transparency

Implications for best practice

Best Practice Auctions should be used whenever possible Single round auctions should be avoided in favour of multi-round formats Sequential auctions should be avoided to reduce Substitution and Exposure risk Generic lots should be preferred if appropriate Regulators should prefer greater transparency rather than less The auction design and rules should be as simple as possible The design should seek to minimise the scope for strategic bidding When placing a bid there should be a high certainty regarding the lots, price

and expenditure of the bidder


Best practice in selecting and auction format and rules

Do not use the cookie cutter approach, simply copying from another country

The auction format and rules should be developed in a market context

Auction theory is complex: Obtain advice from spectrum auction experts

Develop a proposal, including a discussion of alternatives and rationale for the preferred auction format and rules

Publish and consult with stakeholders, notably the mobile operators

Publish the final document, including discussion on rationale and respond to points raises in submissions from stakeholders


Best practice spectrum auction workshop, Tanzania 26 May 2015

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