Uncertainty and risk: the results of spectrum renewal by auction

The use of auctions for spectrum renewal seems pointless and likely only to create uncertainty and risk for operators, says Graham Friend, managing director at Coleago Consulting. New entrants know they are likely to be outbid by incumbents and the uncertainty generated dampens the desire of those incumbents to invest and innovate, which is not good at a time when governments want to see a rapid and extensive roll-out of LTE.

Guest author

November 13, 2013

4 Min Read
Uncertainty and risk: the results of spectrum renewal by auction

In many mobile markets the original 900MHz and 1800MHz GSM licences are currently up for renewal, shortly to be joined by some of the 3G licences issued at the turn of the new millennium. In some markets such as Singapore the 3G renewal process is already underway.

Often the original licences offer little insight into what happens at the end of the licence period and the renewals process is one for which regulators have adopted a wide range of approaches. Some countries such as Portugal have simply renewed the licences, others such as France have renewed some spectrum rights to the existing owners and then re-assigned the remaining rights to others. Some regulators have not adopted this administered approach but have decided to re-auction the spectrum, as has been the approach in Ireland, Switzerland, the Netherlands and Singapore.

There have also been some innovative hybrid approaches such as in Australia and New Zealand where the regulator has provided the current holders with a “right of first refusal” at a government determined price. If the operators in these markets had opted not to retain the spectrum at the proposed price then they could have chanced their arm in an auction. In both cases they took the government price.

Whilst individual operators will probably complain about the results of the various approaches adopted and the amounts they have had to pay it is probably fair to say that so far there have been no major disasters. No operator has had to close up shop due to a loss of spectrum, no outcomes have led to a dramatic shift in the competitive landscape and we are not aware of any major customer disruption suffered.

The Norwegians however may provide the first real upset. Curiously they have selected a first price, sealed bid combinatorial auction model. There is a reason why first price sealed bid auctions are seldom used these days and that is because bidders must bid strategically and if any operator in Norway gets their bidding strategy seriously wrong the outcome could be interesting.

The mobile industry has now been around for more than 25 years in some countries and there have been various releases of spectrum since the start of the industry including 3G spectrum around the new millennium and more recently 2.6GHz spectrum and also 800MHz. Now there is also talk of 700MHz spectrum being allocated.During recent years there has also been a reasonable level of consolidation and any M&A activity has also given the regulator the opportunity to address any spectrum imbalances.

If a regulator has been doing their job well then in most markets by now the spectrum should be shared reasonably evenly between operators. In any case it is our view that the high levels of site sharing and the interest in active sharing and spectrum pooling would suggest that operators no longer regard their networks and the spectrum they hold as core strategic assets. Indeed, their willingness to sign up MVNOs to their networks suggest they are seeking competitive advantage elsewhere.

An auction only works well when there is competitive tension. The problem with an auction for existing spectrum rights is that any new entrant knows they will be outbid by the incumbents so the auction will only be contested by the existing players. The regulator, having worked so hard to avoid spectrum imbalances, will almost certainly put in place caps to ensure that spectrum does not end up being concentrated in just one operator’s hands. The result is that the allocation of the spectrum will change little and, more likely than not, the spectrum will be sold at the regulator determined reserve price as was the case in Singapore.

The use of an auction therefore seems to be rather pointless and creates uncertainty and risk for operators. Risk and uncertainty dampens the desire to invest and innovate which is not good at a time when governments want to see a rapid and extensive roll-out of LTE especially in rural areas. If there are no major spectrum imbalances that are affecting competition then why not simply renew the licences to the existing holders at an agreed price – of course what that price should be is another question altogether and we are watching developments in the UK with great interest.

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