Australian spectrum auction failure

The Australian 700MHz and 2.6GHz spectrum auction results were announced on the 7th of May. The most striking result is that 2x15MHz of the 700MHz spectrum remained unsold because VHA (Vodafone) decided not bid and Optus acquired only 2x10MHz. This poor result is due to the extremely high reserve prices. The reserve price for the 700MHz digital dividend spectrum was set at 1.36 $/MHz/pop. This is 186 per cent of the average price paid in other auctions for digital dividend spectrum as shown in the chart below. Furthermore, by comparison the reserve price for digital dividend spectrum in the recent auction in the UK was only 0.30 $/MHz/pop and in Germany the reserve price amounted to less than one cent / MHz / pop.

Digital Dividend Spectrum Price Paid vs. Australian Reserve

The rationale for freeing up spectrum from analogue TV for use by mobile broadband services is the benefit this brings to the economy.  At the start of the process of the digital switchover, the Australian Mobile Telecommunication Association (AMTA) engaged Spectrum Value Partners and Venture Consulting to determine the net economic benefit generated by redeploying the 700MHz spectrum freed up by the switch-off of analogue television, i.e. digital dividend.  They reported that:  “Allocating the optimal mix of UHF spectrum to mobile operators is forecast to generate a net benefit to the economy of between $7bn and $10bn, depending on which overall market scenario is realised. “ (Getting the most out of the digital dividend in Australia, Spectrum Value Partners and Venture Consulting, April 2009).

This estimate assumed that all of the digital dividend spectrum will be allocated to mobile.  In the event one third of the APT band plan 700MHz spectrum remains unsold whereas 100 per cent of the cost of freeing up the spectrum has been incurred. Therefore potentially several billion dollars of benefit to the economy has been lost as a result of setting reserve prices above the level where weaker operators can earn a normal return of capital employed.

The damage that has been inflicted on the Australian economy does not end there.  Since VHA ended up without spectrum it will further weaken their relevance in the market. Since competition is likely to have been weakened this will reduce the “consumer surplus” from the digital dividend i.e. the benefit consumers would gain in the form of lower prices.

Of course the most direct impact is the lower auction revenue for the Government. The Australian government budgeted in revenue from the auction at least equal to the total reserve, i.e. AS$ 2,894 million. In the event the auction raised only AS$ 1,964 million, i.e. 32 per cent below the target.

The auction failure could hardly be more complete.  Yet, it was widely predicted that with these high reserve prices spectrum would remain unsold, in fact Vodafone said it would not bid unless the reserve prices are lowered.  The outcome says a lot about politician’s lack of understanding of how investment decisions are made and also demonstrates an unwillingness to listen to the industry.

The blame for the ACMA’s auction fiasco lies mostly with the government since the reserve prices were set by Communications Minister Stephen Conroy who set out his stall in his now infamous declaration of “unfettered legal power” over telecommunications “The regulation of telecommunications powers in Australia is exclusively federal. That means I am in charge of spectrum auctions, and if I say to everyone in this room ‘if you want to bid in our spectrum auction you’d better wear red underpants on your head’, I’ve got some news for you. You’ll be wearing them on your head … I have unfettered legal power.”

Conroy clearly told everyone that he had no intention of listening to the industry. The reserve prices were set to plug the Government’s budget deficit. This is the worst way to set reserve prices for spectrum. It is devoid of any rationale and is in effect a hidden tax to be paid for by consumers in form of higher prices.

Although Australians are always good for a bit of fun, I very much doubt that bidders in the Australian spectrum auction wore red underpants on their heads. However, in the light of the spectrum auction fiasco, it is plausible that the Minister now wears a red face.

Written by Stefan Zehle, CEO Coleago Consulting

The end of spectrum auctions?

Last week the UK’s National Audit Office (NAO) announced a value-for-money study of Ofcom’s CCA format spectrum auction, with the presumptions that it should have raised more money. Last week the US Department of Justice Anti-Trust Division made a submission to the FCC, questioning whether spectrum auctions deliver the greatest societal value. In March 2013, the Czech Telecommunication Officer (CTO) cited “excessively high” spectrum prices as the main reason for the cancellation of a spectrum auction. While these events come from three different angles, they in effect question whether auctions are the best method of allocating spectrum to mobile operators. Are we witnessing the beginning of the end of spectrum auctions?

Let’s start with a fundamental argument against spectrum auctions. Last week the US Department of Justice Anti-Trust Division made an Ex Parte Submission to the FCC In the Matter of Policies Regarding Mobile Spectrum Holdings. “The Department believes that a set of well-defined, competition-focused rules for spectrum acquisitions, particularly in auctions, would best serve the dual goals of putting spectrum to use quickly and promoting consumer welfare in wireless markets.” The Anti-Trust Division of the DoJ is concerned with competition thus it strives to prevent the emergence of monopolies or oligopolies to ensure that end-users benefit from competitive markets. The DoJ previously voiced its concern with regards to spectrum auctions but it is not the first to realise the potentially negative effects of auctions.

Policy makers believed that market based allocation through competitive auctions were the best method to allocate spectrum in as much they would generate greatest societal benefit. When all bidders are equal, a spectrum auction may well be preferable to a beauty contest style spectrum allocation which lacks objectivity and transparency. It is in that sense that spectrum auctions played a useful role while the wireless industry went through its growth phase.

Auctions are said to be economically efficient if they allocate spectrum to the bidder who places the highest private value on the spectrum. Economic efficiency assumes that the bidder who generates the highest private value also generates the highest social value. If the two diverge then the outcome is not efficient as it is the maximisation of social value that is critical to efficiency. The bidder with the highest private value may therefore not necessarily be the bidder who generates the highest social value.

Coleago has carried out many spectrum valuations projects and a key task is to identify the sources of spectrum value. In many cases the largest source of value was the “blocking value”, i.e. the value to the bidder of keeping out a new entrant or preventing a smaller competitor from acquiring sufficient spectrum resources to compete effectively in the mobile broadband market. The DoJ refers to this as the “foreclosure value” as distinct from “use value”. Regulators are often desperate to prevent this and may set aside spectrum for new entrants (e.g. AWS in Canada, 2008), try to ensure that recent new entrants survive (e.g. 800MHz auction in France, 2010), or set spectrum caps.

Despite the issues highlighted above telecoms regulators are still keen on spectrum auctions and now favour the Combinatorial Clock Auction (CCA) format. A combinatorial auction has many benefits, but also limitations, particularly in a mature mobile market. An unfettered CCA favours large bidders and, depending on the rules, may allow vexatious bidding purely to impose costs on others. Hence regulators introduce all manner of rules to undo what a combinatorial auction is all about, namely to allocate spectrum to the highest bidder. Such “auction limitation rules” include band specific or overall caps, band specific obligations, limitations to bid based on market share, high reserve prices, roaming rules, deployment rules, etc. The imposition of such limitations invalidates the central hypothesis of a combinatorial auction with a second price rule; they are a misuse of this auction format. These limitations are also a tacit admission that auctions are no longer an appropriate spectrum allocation mechanism.

The auction orthodoxy has been further discredited by high reserve prices. In some cases reserve prices are so high that operators merely buy “their share” of the spectrum on offer at the reserve price. The Greek spectrum auction in November 2011 was a fine example. The combined reserve price was set at €82 million and the combined bid value amounted to €82.52 million. In other cases auction formats and reserve prices lead to extremely high prices in terms of €/MHz/pop, taking large amounts of money out of the industry. This is rather schizophrenic. On the one hand governments are taking billions out of the wireless industry and on the other hand they try to promote the building of broadband networks.

In this context the most bizarre event is the cancellation of the multi-band spectrum auction in the Czech Republic in March 2013. The Czech Telecommunication Officer (CTO) cited “excessively high” spectrum prices as the main reason for the cancellation, fearing these high prices would lead to higher prices for mobile broadband and slower deployment. Setting aside the point that the CTO’s arguments are not supported by economic theory, if the CTO does not believe in market based solutions, why have a spectrum auction in the first place?

The CTO’s reaction to high “high prices” is thrown into sharp relief by the announcement of the UK’s National Audit Office (NAO) on 15th of April 2013 to conduct a value-for-money study of Ofcom’s CCA format spectrum auction. The auction which concluded in February 2013 raised £2.3bn, which was £1.2bn less than the UK Chancellor of the Exchequer budgeted for. Apparently the NAO does not believe that the CCA delivered what it should and is taking a politician’s budget target as an indication of the “right price”, and this despite the fact that Ofcom made clear that the primary objective of the auction was not to maximise the amount of money raised.

In most markets the mobile industry is now mature. Rather than new market entry consolidation is the name of the game. This is what is to be expected in maturing markets in any industry. The emphasis should therefore be to ensure that consumers have choice and prices are as low as they can be. This is not necessarily achieved by insisting on spectrum auctions and insisting that there is a large number of competing network operators. Sooner or later regulators will abandon the dogma of auctions and accept that the industry is heading for consolidation, at least network level and may devise administered spectrum allocation mechanism which “distribute” new spectrum among a reasonable number of operators, perhaps 3 or 4 in each market, depending on absolute size.

The DoJ’s filing does not call for an end to auctions, but it clearly voices the opinion that unfettered spectrum auctions are not in the public interest. Implicit in the DoJ’s approach is the belief that government knows best and is best placed to determine what number of network operators generate the greatest benefit to society. However, it is questionable that the public interest is best served by such an approach particularly since governments have erred on the high side with regards to the number of operators that a market can sustain. Enforced competition at network level leads to the destruction of value as has happened for example in Canada, Australia and some other markets. In any event, regulators start to have problems of a different kind: how to deal with global oligopolies created by successful OTT players.

Written by Stefan Zehle, CEO Coleago Consulting

Towards a single EU telecoms market

In a speech delivered at Mobile World Congress 2013, Neelie Kroes, European Commissioner for Digital Agenda, called for the creation of a single telecoms market in the EU. Kroes iterated that it would be of great benefit to the European telecoms industry as well as consumers. There are numerous aspects to this, but mobile telecoms and notably spectrum allocation is most notably one of the focal points.

In recent times, common EU policy has led to the harmonisation of mobile spectrum and technology in the form of GSM at 900MHz and 1800MHz. One could argue that it is this which kicked off the global boom in mobile communications as a result of delivering low equipment prices (terminals and network) as well as international roaming. The benefits to both the European industry and users are undeniable. Mobile communications is now a global business and with the inclusion of multiple LTE bands on chipsets, harmonisation is perhaps a little less important from the technology perspective, but it still matters from a business perspective.

Spectrum allocation mechanisms and prices paid by operators are driven by national policy objectives. Some governments (e.g. Finland) rightly think that spectrum should be made available to operators as cheaply as possible since ultimately this generates the greatest benefit to society. Others (e.g. Ireland and Greece) focus on immediate cash generation. Views on competition may also differ. The 800MHz auction rules in France are a good illustration of a government ensuring the survival of the 4th entrant, whereas in the highly competitive UK market, competition does has not been a big issue in the recent spectrum auction.

These policy differences result in very different costs for mobile operators and yet there is an assumption that prices, notably wholesale prices should be standardised across the EU. Clearly there is a contradiction.

Another key point in pushing for an EU wide approach to telecoms regulation is that cross-border mergers should be made easier in the EU. The fragmentation of telecoms services provision within the EU is a barrier to the single market. An innocent bystander might ask a whole series of questions which demonstrate that the current EU mobile and fixed regulatory environment is unsatisfactory, for example:

—Why is it that a call on a mobile network within a country tends to be included in the bundle whereas a call to a neighbouring country is usually priced at a premium?

—Austria has a smaller population than Bavaria, so why does T-Mobile run Austria as a separate business from its German operation?

—Why are mobile numbers portable within a country but not within the EU?

The current structure of the EU telecoms industry and markets are an artefact of national telecoms regulation. Faced with competition from global OTT players who are not bound by national regulatory regimes, it is the European telecoms companies who suffer. Both industry and end-users would greatly benefit from a truly EU wide approach to telecoms policy and regulation.

Written by Stefan Zehle, CEO, Coleago Consulting

The APT Bandwagon Reaches Cruising Speed

On the 7th of February Brazil made the decision to make available 698MHz-806MHz for mobile broadband services. The frequencies are those of the Asia Pacific Telecommunity (APT) band plan. ANATEL, Brazil’s regulator, now has the authority go ahead with clearing and the allocating this 700MHz spectrum to mobile operators for mobile broadband use. This should help Brazil to achieve the goals of the country’s national broadband plan (Plano Nacional de Banda Larga).

Of course the process will take time because the process of moving terrestrial TV from analogue to digital will be lengthy. In some parts of Brazil the spectrum could be cleared as early as 2016. Given the size of the country, a regional approach to opening the band to mobile broadband may be possible, although this potentially creates an interference problem.

Brazil’s decision means that the APT eco-system is gaining the scale which confirms it as a mainstream solution for LTE deployment. This means the 700MHz APT band plan may appear in chipsets and more devices earlier rather than later.

Many Asian countries have committed to the APT plan. However, the clearing of the band appears to be slow and countries such as India have only just launched 3G and therefore Region 2 may not be the main driver in developing the device eco-system. The confirmation of the adoption of the APT band plan in Latin America indicates that it will become well-established in Region 2. In addition some African countries have also looked at the APT band plan and the Russian 700MHz allocation is reasonably close to the APT band plan. Therefore we may see the APT band plan being adopted in also in Region 1.

Exhibit 1: 700MHz Allocation in Russia & APT Band Plan

700MHz Plans	Mobile Transmit	Centre Gap	Mobile Receive
700MHz in Russia	720 MHz to 750 MHz = 30 MHz	750 MHz to 761 MHz	761 MHz to 791 MHz = 30 MHz
APT Band Plan	703 MHz to 748 MHz = 45 MHz	748 MHz to 758 MHz	758 MHz to 803 MHz = 45 MHz

Written by Stefan Zehle, CEO, Coleago Consulting

Is time running out for the Combinatorial Clock Auction format?

Earlier this month, I attended the Spectrum Management Forum 2012 in Munich and was interested to hear several presenters criticise the Combinatorial Clock Auction (CCA) format. The CCA format which has clock and supplementary rounds where bidders bid on indivisible packages of spectrum and where prices paid are determined by a second price rule has in the last few years found increasing favour by many governments for spectrum auctions. Under the second price rule, the price a winner of a particular package pays for its spectrum is determined entirely by competitors’ bids.

Supporters of the CCA format, claim that it results in more economically efficient outcomes and reduces aggregation risk where there may be complementarities between lots e.g. between high and low band spectrum.

Most of the criticisms of the CCA format relate to the fact that it is incredibly complex to prepare for, that the outcome is not very transparent and it can lead to perverse results. But there are other issues that for instance competitors can “game” the system and drive up prices paid by other bidders by bidding on larger packages that they do not sincerely want to win. In addition it represents a difficult issue for companies to deal with from a corporate governance point of view in terms of establishing bid limits and deciding whether to bid sincerely.

We can confirm that complexity is a serious issue as one CCA auction that we have been involved in required our client to value more than one hundred thousand different spectrum packages to prepare for the supplementary round. In terms of strange results there have been several auctions where there have been very large disparities in prices paid e.g. the 2012 Swiss multi-band auction and the 2010 Danish 2.6GHz auction.

We have worked with most major auction formats and while CCA was introduced with good intentions we are starting to doubt that the benefits outweigh the disadvantages.

Written by Scott McKenzie, director, Coleago Consulting

EU approves refarming of 2.1GHz 3G band to LTE – what does this mean for mobile technology harmonisation?

On the 5th of November the European Commission decided to open the current 3G 2.1GHz band (IMT Band 1) for 4G. This follows the liberalisation of the 1800MHz and 900MHz bands for GSM. In its press release the EU states: “The decision enforces the harmonised liberalisation of the 2GHz band (1920-1980 MHz paired with 2110-2170 MHz) in all member states, avoiding internal market fragmentation in the future use of this band.” However, an unavoidable consequence is that in the short term this will lead to less harmony in the industry.

While member states are now obliged to allow operators to introduce LTE in the 2.1GHz band, the timing of this will depend on a) the ramp down of 3G/HSPA traffic in the network of individual operators and b) the availability of LTE band combinations in handsets, tablets and other devices. In a previous blog, I commented on the unfortunate choice of LTE band combinations in the European version of the iPhone5 which incorporates only one of three LTE bands deployed in the Europe. The issue is not trivial because iPhones, which generate vast amounts of data traffic, account for around 20% of smartphone sales in the EU but can only make use of LTE in the 1800MHz band.

Twenty years ago the EU’s efforts in respect of harmonisation was the cornerstone of the success of GSM which laid the foundation for the global growth in mobile telecoms. Harmonisation is an essential ingredient to drive economies of scale, avoid technology barriers to competition within markets, and enables international roaming. However, the introduction of LTE and the multiplication of mobile (IMT) bands will lead to less harmonisation.

Chipset vendors such as Qualcomm as well as device manufacturers have to decide which technologies and band combinations to incorporate in chipsets and handsets. In the short term this results in uncomfortable compromises because only a limited number of LTE bands can be accommodated in handsets.

Furthermore, the refarming of existing spectrum to LTE and the simultaneous introduction of new LTE bands poses a challenge to operators because of the difficulty in forecasting capacity utilisation by band and technology. The roll-off of 3G in band 1 illustrates this problem. The band consists of 2x60MHz. In markets with four operators, each may have 2x15MHz. Deploying LTE in less than 2x10MMz does not make much sense and hence operators may wait to refarm band 1 from HSPA to LTE until the residual HSPA traffic can be squeezed into 2x5MHz. Of course some operators have deployed HSPA in the 900MHz band, but this offers only a total of 2x35MHz. Some operators may also worry that fitting HSPA into 2x5MHz means the end of dual carrier HSPA. However, by the time this issue arises all serious data users will have moved on to LTE and therefore this is unlikely to be an issue.

Coleago has already been confronted with LTE eco-system issues while valuing spectrum for operators who participate in spectrum auctions where billions of Euros or Dollars are at stake. The evolution of the LTE device eco-system, the diffusion of devices with different band combinations, and the LTE deployment in different bands follows an un-even and at times unpredictable path. Combined the uncertainties surrounding inter-band aggregation to produce higher headline speeds creates increased complexity into the spectrum valuation problem.

These problems are unavoidable on the road toward networks that only use LTE / LTE advanced. What matters is how these problems are managed.

And there are not only problems for network operators but also for policy makers in maintaining a harmonised EU-wide service, for example access to emergency services particularly in rural areas. In order to mitigate the problem some EU wide measures may be necessary. Should each country designate one mobile operator to keep GSM alive until a final sun-set date and similarly should the same be the case in respect of HSPA? The cost of this could be borne jointly by the industry so that an individual operator is not disadvantaged. A universal service obligation (USO) mechanism could be put in place to allow operators to bid for the role of the legacy network provider with the bidder who asks for the lowest subsidy winning the USO contract. Such measures may accelerate refarming to LTE, thus maximising spectral efficiency while maintaining an EU wide legacy service for an appropriate time.

Written by Stefan Zehle, CEO, Coleago Consulting

AT&T plans shutdown of 2G network

On Friday, the 3^rd of July AT&T announced that it plans to shut down its 2G network “approximately” by the 1^st of January 2017. The main objective is to refarm spectrum currently used for 2G to LTE and eventually save network opex.  This affects both high band spectrum, for example PCS (Band 2, 1900MHz) and low band 850MHz spectrum (band 5). The process of refarming started some time ago and the announcement of the 2G network shutdown has been anticipated.

The majority of the spectrum will have been refarmed from well before January 2017. Over the years the residual 2G (GSM) traffic will be transported over an ever smaller sliver of spectrum.  Operators like AT&T, who are not well endowed with spectrum, make an enormous effort to refarm spectrum to HSPA and LTE to meet the challenges of the surge in mobile broadband traffic. However, legacy customers are an issue. Usually customers who make the least usage and have the lowest bills hang on to their old phones the longest. Although this is not the case with AT&T, some operators are still selling 2G only phones, particularly to prepaid customers, because of the lower cost of handsets. One might think that leaving a few MHz of spectrum for GSM would make good business sense since it cannot be refarmed because it is not enough for the minimum 5MHz block size required for HSPA and LTE.  However, at some point the cost of operating the legacy 2G network outweighs the revenue made from these customers.  The term “customer” includes M2M devices, and it is here where another problem might arise.

Forward looking operators have long realised that there is a direct relationship between the devices sold and network opex and capex.  Working closely with the network department, some marketing departments took the decision to remove 2G only handsets from their line-up. While this might mean slightly higher handsets subsidies, this is offset by earlier network cost savings. Operators who manage this process well will reap the benefits. Of course, in markets where operators do not control distribution – as is the case in markets dominated by prepaid – the lack of control over what devices customers use is a problem that is hard to overcome.

The process of refarming presents operators with other dilemmas. For example, operators run already 2 technologies (GSM and HSPA) in the lower bands, 850MHz in North America and 900MHz in Europe.  While today the device eco-system does not support LTE in 850MHz or 900MHz, it is only a matter of time before such devices become available. For operators who chose the right vendor and agree good terms, a two-step technology migration can be relatively painless.

Despite the refarming of 2G spectrum to HSPA or LTE, operators will still require significantly more spectrum to serve the exponential increase in mobile broadband traffic in urban areas.  Governments and the WARC need to work hard to free up spectrum in a harmonised manner around the globe so that consumers and businesses can benefit from mobile broadband services. Harmonisation is key, because this would deliver the greatest economies of scale and ensure seamless regional device interoperability.

Written by Stefan Zehle, CEO, Coleago Consulting

Misguided approach to licencing MVNOs in Egypt

On the 8^th of May 2012 the National Telecommunication Regulatory Authority (NTRA) of Egypt indicated that it is preparing to accept tenders for a new mobile virtual network operator (MVNO) licensee. The NTRA aims to form a committee and define the necessary regulatory framework for the introduction of MVNOs within three months. In 2011 Saudi Arabia’s regulator took a similar MVNO licencing approach.

Regulators in many emerging markets have not grasped the essence of an MVNO nor do they appear to understand that there is no need for a restrictive licensing regime for MVNOs.  Of course mobile network operators require a licence, because they need to construct sites, require way-rights and most importantly they require spectrum licences. The latter point is particularly relevant because spectrum is a limited resource.

There is nothing that limits the number of MVNOs that could operate in a country other than their ability survive in a competitive market. Witness the 50 or so MVNOs in the Netherlands, if governments wish to bring the market benefits of MVNOs to their country they should allow anyone to operate an MVNO, perhaps with a simple authorisation to ensure that the MVNO adheres to telecoms regulations already in place. Once the authorisation is granted, the MVNO could then obtain a numbering range and whatever else it needs to operate. Certainly there should be no fee payable other than a cost based administration charge.

Instead of a restrictive licensing regime for MVNOs, international gateways or other telecoms services, regulators in emerging markets should endeavour to create liberalised mobile wholesale and retail markets as we see in many European markets and North America.  This may well require a fundamental shift in political thinking. One of the key reasons why many countries in emerging markets, such Egypt or India are so attached to licensing, not just in field of telecoms, is that it allows them to exert state control and extract hefty licence fees.  State control, for example restricting innovative tariffs or business models, hinders the development of a vibrant telecoms and mobile broadband market and holds back the economies in those countries.  Liberalising telecoms would be an excellent initiative to stimulate growth and bring mobile broadband internet access to the maximum number of people.

Written by Stefan Zehle, CEO, Coleago Consulting

India: A graveyard for mobile operator’s return on capital employed

The Indian telecoms regulator TRAI published its “Recommendations on Auction of Spectrum” 23rd April, 2012.  The recommendations can be downloaded from the TRAI website in form of a rather funnily named PDF file “Finally final recommendation230412.pdf”.

TRAI proposes an amazingly high reserve price for the 1800MHz spectrum which was confiscated due to the previous corrupt allocation process. TRAI proposes reserve prices for each region or circle, amounting to a nation-wide equivalent of Rs. Crore 3,622 (€ 521 million) per paired 1 MHz of spectrum with 33 per cent of the licence fee paid upon licence award and the remainder starting after two years over a period of 10 years. Using a discount rate of 10 per cent (the approximate current base rate in India) this works out at €0.148 per MHz per pop.

TRAI based its decision on the prices paid for the 2.1GHz spectrum in 2008. Coleago previously commented on the extraordinarily high prices paid then, the main factor being the restricted supply of spectrum. The acquisition of 3G spectrum had a seriously negative effect on return on capital employed for the winning operators.

TRAI commented that the reserve price in terms of per MHz per pop is not so different from prices paid in some European auctions. That is correct; the average price paid for 1800MHz spectrum in 2010 to 2011 in Germany, Greece, Portugal and Italy amounted to €0.129 per MHz per pop. However, the Eurozone per capita GDP is US$32,521 whereas the per capita GDP in India amounts to a mere US$1,389.

The whole idea of setting reserve prices for the 1800MHz spectrum at 80 per cent of 3G auction prices, adjusted for inflation and the better propagation characteristics of the 1800MHz spectrum compared to 2.1 GHz spectrum is unreasonable.  Surely the point of an auction is to find out what the value of the spectrum is?

The recent trend of setting very high reserve prices started among the highly indebted countries of Europe. In countries where reserve prices have been very high, such as the spectrum licences renewal in Greece, the price paid at auction was the reserve price. Operators cannot do without spectrum and they are therefore sitting ducks for Governments to extract cash. The somewhat unprofessional argumentation and process put forward by TRAI illustrates that this is merely about extracting maximum cash from the mobile industry in India.

A further example of the bizarre TRAI recommendations is the proposal to set the annual Spectrum Usage Charges. In paragraph 3.152, TRAI states that “Any such charge should be only to cover the administrative costs attendant with resource management”. TRAI then proposes to set the Spectrum Usage Charge at “1 per cent of the Adjusted Gross Revenue” of operators.  There is of course absolutely no link between an operator’s revenue and the administrative costs of TRAI. This illustrates that this is really just another cash grab by TRAI.  No doubt this money will be put to good use by the Indian Government. Transparency International (TI) ranks India, 95 in its Corruption Perceptions Index (CPI) with a score of 3.1 compared to 9.5 for New Zealand (rank #1). Investing in India is not for the faint hearted

Written by Stefan Zehle, CEO, Coleago Consulting

The new iPad illustrates the importance of mobile broadband spectrum and the device eco-system

The New iPad was launched early March 2012 in many markets world-wide. It appears to be a highly desirable device.  Among its many features Apple touts 4G connectivity. However, a closer look reveals that only the American region 4G bands, namely 700MHz and 2100MHz have been included in the radio chip set.  Of course the device also includes 3G connectivity and here it is compatible with European 3G/HSPA in the 2100MHz band and also in the 900MHz band.

It is likely that  Apple will launch a European iPad version with LTE at 800MHz and 2.6GHz, but in the meantime there is a problem. In Europe, not many operators have refarmed the 900MHz spectrum to 3G HSPA and some operators do not hold any 900MHz spectrum.  This means in Europe mobile broadband access for the iPad is restricted to more densely populated areas where 3G is available in the 2.1GHz band.

This gives T-Mobile and Vodafone in Germany a marketing advantage. The most ardent iPad fans are probably also high voice spenders and can be locked in with a 24 months contract. Even if a European device becomes available in 6 or 12 months, in the meantime O2 and E-Plus are disadvantaged.  For O2 this is all the more annoying because they spend €1.15 billion to acquire 800MHz spectrum in May 2010.  Of course E-Plus who does not have any 800MHz spectrum will remain disadvantaged for the foreseeable future.This matters, because the new iPad is a desirable device and customers making device choices will also have to make mobile operator choices.  Take Germany as an example.  Vodafone, T-Mobile and O2 each purchased 2x10MHz of the digital dividend 800MHz spectrum in the May 2012 auction and deployed LTE and, under the terms of the licence, rolled out the network first in rural areas.  Vodafone and T-Mobile hold 2×12.5MHz of 900MHz spectrum whereas E-Plus and O2 only hold 2x5MHz.  This means Vodafone and T-Mobile are in a position to refarm 2×5 MHz of the 900MHz spectrum to WCDMA whereas the two other operators will find it near impossible.

The lesson here is that spectrum matters, as device manufacturers have to make chipset choice.  The multiplication of bands and technologies introduces technology barriers to competition and switching. This is a very different situation compared to the relatively harmonised GSM world of the past.

From an operator’s perspective, spectrum diversity provides the best device eco-system insurance. However, in Europe where only 2x30MHz of 800MHz spectrum is available, markets with more than three network operators are facing a problem if regulators are keen on packaging the spectrum in a minimum block size of 2×10 MHz.  There are of course benefits of deploying LTE in a channel wider than 10MHz, but the benefits are overstated. Spectral efficiency in terms of bits per MHz only increases marginally when moving for 5 to 10 or even 20 MHz wide channels.  While headline speeds are higher, the user experience is governed by other factors such as the number of concurrent users in a cell, distance to the cell edge, or the position within a building. In contrast the negative impact on competition resulting from different spectrum allocations, particularly in the lower band is very real.

One disturbing aspect about the European iPad launch is that even in Europe, Apple highlights the 4G capability, yet it is not compatible with the European 4G bands. Could Apple not have waited a couple more months and introduced also a European version with LTE 800, LTE 2600 and possible also LTE1800? Of course there is a little asterisk and a footnote “4G coverage is not available in all areas and varies by carrier”. Not all areas? That’s putting it mildly. Not anywhere in Europe would be a more appropriate statement.  Some disappointed buyers will take a dim view of Apple’s marketing tactics.

Written by Stefan Zehle, CEO, Coleago Consulting