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

The end of geography and roaming in telecoms

Today most people are familiar with services such as Skype. Effectively a location independent mobile service, with Skype it does not matter where people call from nor does it matter where the called party is located. Geography has become irrelevant. By the end of Q4 2012, it was anticipated that roughly 50 per cent of international call traffic is likely to have taken place via Skype and similar services rather than traditional carrier traffic.

More and more people are installing Skype on their handsets or using Facetime on their iPhone, and they are getting used to the fact that calling from their mobile phones doesn’t necessarily have to involve the mobile operator. What’s more they also get video telephony. Increasingly people use WiFi on their smartphones, both at home, at work and in public places. The introduction of WPA2 as well as SIM based authentication which allows automatic connection to a WiFi network without signing in makes it easy for users to route their traffic via WiFi and opt out of traditional telephony.  Operators such as Rebtel in Sweden and Republic Wireless in the USA focus on this opportunity – these mobile operators that use WiFi offload “push” their customers to make calls using Skype like services.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan.

During 2013 we will see the start of a fundamental reshaping of mobile telecoms service offerings driven by new services based on the IP Multimedia Subsystem (IMS), the evolution of mobile wholesale as well as regulatory trends. Some operators may go all the way and break the link between the mobile telephone numbers and geography. After all it seems somewhat archaic that in a world where distance does not matter, mobile operator tariffs are still based on location and distance. Location is not an issue with Skype or FaceTime and this is one of the reasons for the success of these OTT operators.

Some operators have already introduced services based on IMS, for example in Canada the Rogers One Number service allows the seamless switching between a smartphone and computer. It allows mobile operators to leverage the proliferation of free WiFi connectivity to in effect extend their network coverage world-wide.  This allows mobile operators to fight back against OTT services such as Skype, WhatsApp and FaceTime by in effect becoming themselves an “OTT over WiFi” player.

There are also traditional mobile services that allow users to avoid roaming charges and thus take at least one aspect of geography out of equation that already exists for voice (Truphone, WoldSIM and other) and data (roamline.com, in collaboration with KPN). The business model is built on exploiting the difference between lower wholesale prices paid by MVNOs versus high inter-operator roaming tariffs by offering customer SIMs with multiple numbers in different countries.

The opportunity to take geography out of mobile pricing is not limited to roaming. For example, Turk Telecom launched a service in Germany and Belgium aimed at the Turkish ethnic segment in these countries. Customers are charged exactly the same amount to call numbers in Belgium or Turkey. Turkcell could add the ability to recharge linked accounts (a Turkish person working in Belgium can recharge the prepaid SIM of relatives in Turkey) and make small mobile payments across borders. Smart, of the Philippines is already going down this route, targeting the Filipino diaspora segment around the world.

As a result of these trends in international call pricing as well as roaming, Geography may soon become irrelevant.

Written by Stefan Zehle, CEO, Coleago Consulting

Do we need telephone numbers?

Already most communications that take place over telecoms networks do not involve telephone numbers. Email and other internet based communications increasingly dominate business and consumer communications. Fixed network voice calls are moving to mobile and Skype like services. By some estimates the last fixed line phone will be retired in 2025. Even if the decline of fixed phones and with it fixed telephone numbers is not that fast, clearly the writing is on the wall.

Meantime in the mobile world, telephone numbers are growing fast. However, sending messages to mobile numbers and calling mobile numbers has started to go out of fashion. Messaging services such as WhatsApp are replacing SMS and increasingly people use Skype on their handsets. Of course Skype also sells telephone numbers, but most Skype users don’t bother to buy one.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan. The key aspect about the new tariff plan is that in terms of pricing it is data centric, with voice playing minor role. Most mobile operators still base their tariff plans on a minute bundle with data added to that, but this will change rapidly as LTE becomes commonplace.

If telephone numbers become obsolete this poses challenges not just for operators but also regulators. The world of telephony is organised around telephone numbers and there is an element of sovereignty in country codes and national numbering plans. If telephone numbers become obsolete, governments have surrendered this sovereignty to the internet. This is a frightening prospect to some governments.

Many aspects of telecoms regulation are number focussed. If people no longer need telephone numbers, national regulatory agencies effectively lose control over telecommunications within their borders as well as internationally. The spat at the December 2012 ITU meeting in Dubai over regulating the internet is only the opening skirmish in what is likely to turn into a major battle.

The way in which the obsolescence of telephone numbers will impact will differ between markets. Some emerging market countries still have not fully re-balanced fixed network tariffs, e.g. Tunisia, Algeria, Kuwait to name a few I am familiar with. Subsidising the cost of the line rental from long distance calls will no longer be possible. For example, in the case of Tunisia the fixed line rental retail price would have to increase by a factor of four to cover costs. Such price increases are politically unacceptable and hence it seems tempting to look for money elsewhere, e.g. from Google, Skype (Microsoft), and perhaps even from the most valuable company on the planet, Apple.

The transition will not be problem- free for developed markets. Already regulators fret over the issue of calls to emergency services. On its website Skype clearly states “Skype is not a replacement for your telephone and can’t be used for emergency calling”.

On the plus side, if telephone numbers become irrelevant, operators and regulators will not have to worry anymore about fixed and mobile number portability.

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

From One to 3 in Austria: Will Hutchison be a consolidator in Europe?

Rumours that Hutchison Whampoa’s 3 Austria is close to sealing a deal to acquire Orange Austria (previously One before being rebranded) for €1.4bn may be good news for the Austrian mobile sector which has seen fierce competition as four operators battled it out in a country of eight million people. It is estimated that in service revenue terms Hutchison has about 6% of the Austrian mobile market while Orange has about 19%. By comparison, Telekom Austria has 44% and T-Mobile has 31 % so the merged entity will still be smaller than its larger competitors.  Although the price seems quite steep at circa 7x EBITDA it may well be justified if 3 Austria can extract hundreds of millions of synergies from the deal by rationalising the networks and avoiding damaging price and subscriber acquisition wars. Post-merger execution will needless to say be critical.

The two other operators in the market (Telekom Austria and T-Mobile) will also benefit and no doubt they will be hoping that the deal is approved by the competition authorities. This might explain, if the press reports are true, why Telekom Austria is so keen to help 3 Austria do the deal by, for example, buying Orange’s discount mobile brand Yesss! as well as some 2.1GHz spectrum and 3,000 redundant base stations. Press reports suggest that 3 Austria will raise up to €300m from these divestments which will lower the overall transaction risk.

In the coming years we expect further mobile network operator consolidation in developed markets as the industry becomes increasingly mature and margins come under further pressure. For Hutchison Whampoa, this represents a new wave of investment in Austria and its 3G business and we wonder if it is not a template to be used in other markets where it is finding the going tough.

Written by Scott McKenzie, Director, Coleago Consulting

How Nokia hopes the new Lumia will light up Asia

The launch of the latest Nokia Lumia smartphones could revive Nokia’s presence across Asia and China in particular, but will they come quickly enough? Both the Lumia 710 and 800 Windows phones are scheduled to be available in Hong Kong, Taiwan, Singapore and India before the end of 2011, and Nokia will no doubt be working hard to avoid the delays which plagued the launch of too many previous models. However, China will have to wait until “the first half of 2012″ before it sees the much-admired fruits of Nokia’s partnership with Microsoft. In the meantime it seems likely that “unofficial” supplies could filter across to the mainland, which may help to sustain interest until the official launch, although only China Unicom’s network is compatible with the 3G technology currently used in these Lumia models.

It could be down to the diverse 3G standards used by China’s three mobile operators: W-CDMA (the technology used most widely throughout the world) is deployed by China Unicom, CDMA2000 (less widely used, but most notably in North America) is deployed by China Telecom and TD-SCDMA (a standard developed in and currently limited to China) is used by the largest operator, China Mobile. Back in August Colin Giles, Global Head of Sales at Nokia, and formerly Director of Marketing for Asia Pacific and Senior Vice President for Greater China, announced that Nokia will be launching TD-SCDMA compatible Windows Phone 7 handsets in China. So it seems likely the delay is to allow Nokia time to engineer versions of the Lumia phones which can operate on the CDMA2000 and TD-SCDMA standards, allowing Nokia to launch its new smartphones with all three of China’s mobile operators.

With Nokia struggling to maintain its market position in Asia and across the world, clearly an earlier launch in China would have been preferable. However, this strategy does give Nokia one potential advantage against the iPhone: Apple doesn’t have a TD-SCDMA version either and it looks unlikely it ever will. That hasn’t stopped China Mobile from selling the iPhone through a network of partners, acquiring around 10 million iPhone users so far. The iPhone can use China Mobile’s 2.5G network for voice calls and text messaging, but users are limited to wifi for high speed data services. To promote this growth in high value customers, China Mobile is offering rebates in the form of gift cards to customers who buy an iPhone through one of its partners and sign up to a 2g voice and wifi package. In an increasingly competitive market, this “subsidy” is unlikely to be an attractive long term solution for the operator to retain high value customers, and it’s not a good solution for customers who want to use their apps wherever they go. However, many customers prefer these limitations to the unreliable coverage of Apple’s official iPhone partner, China Unicom (although the operator is now working hard to improve its service). So if Nokia is able to offer versions of the Lumia smartphones that work on the 3G network of China’s largest operator, China Mobile, that could be a win-win for both Nokia and the operator. Nokia has been building TD-SCDMA feature phones for several years, so it has the expertise to solve the hardware problems. Hopefully its close relationship with Microsoft will ensure a smooth integration of these radios with the Windows software as well. Once again though, timing is critical: 2012 sees the end of Apple’s exclusive 3-year deal with China Unicom and is also likely to see the launch of the iPhone 5, which just might support the 4G technology (TD-LTE) that China Mobile is currently building, although recent reports suggest that Apple and China Mobile have failed to agree a deal, as the operator wants a cut of Apple’s app revenues as well. So Nokia needs to exploit this opportunity quickly whilst also lining up its 4G Windows Mobile phones for the next round in the battle. And that means also pushing Microsoft for better 4G LTE support in the Windows Phone 7 operating system.

And what of the other major competitor in Nokia’s smartphone war, Android? Nokia is being squeezed on all sides here, from both lower cost local brand phones and huge global players like Samsung and HTC. With Android smartphones available for as little as 1,000 Yuan (around USD160) in China, it seems likely the cheapest Lumia model will come in at around twice that price. However both Microsoft and Nokia expect that cost to fall as cheaper and more powerful processing chipsets and cheap WVGA (typically 800 x 480) screens reduce the cost of a phone capable of supporting the complexity and power of Windows Phone 7. Add to that Nokia’s excellence in hardware engineering and phone design, and the relatively straightforward integration of Windows Phone 7 with the Windows desktop which is particularly prevalent across Asia, and Nokia may be in with a chance of arresting its recent steep decline in the smartphone sector. These new Windows phones could do particularly well with customers who have yet to make the jump to a smartphone (ie they don’t already have an investment in apps, loyalty and learning how to use a particular smartphone OS effectively). Our guess is that Nokia is hoping the Chinese market for these premium smartphone products won’t accelerate too quickly, leaving it behind.

Written by Robert Filkins, Managing Consultant, Coleago Consulting

Vive la différence II

The French telecoms regulator announced at the end of last week that they have finished the 2.6GHz auction process begun in June.

	FDD Allocation (MHz total)	Price (m€)	€/MHz/POP	Obligatory MVNO access
Orance	40	287	0.110	Y
SFR	30	150	0.077	N
Bouygues	30	228	0.116	Y
Free Mobile	40	271	0.104	Y
TOTAL	140	936	0.102

The format used in France was a first price single round sealed bid which meant there was no opportunity to learn and can lead to disparities in prices paid. As if to illustrate this point, one player (SFR) got the spectrum at the reserve and did not need to commit to hosting MVNOs.Although the price per MHz per pop does not look outrageous compared to some other 2.6 GHz auctions (e.g. Denmark and Sweden for example), it is 4.5x that seen in Germany in 2010 and this might be (partially) explained by the fact that the reserve price level set in France was a lot higher than that in Germany – 25x on a per MHz POP basis.

The 800MHz digital dividend spectrum is now to be launched before year end.

Written by Scott McKenzie, Director, Coleago Consulting

Vive la différence

The French telecoms regulator ARCEP announced the terms of the country’s 800 MHz and 2.6 GHz spectrum auction process in June. There are several noticeable features of the process: firstly the bands are being sold off sequentially with the 2.6GHz spectrum being auctioned in September and the 800MHz in December; secondly the auction is a first price sealed bid format, which is rather uncommon these days given the potential drawbacks with this format; and thirdly the reserve prices have been set at a very high level which is consistent with the worrying trend we have seen in other countries lately.

Since the auctions are sequential there is what game theorists call exposure risk which is due to the complimentary nature of 800MHz and 2.6GHz spectrum – i.e. a risk of overpaying for 2.6GHz spectrum as their bid price is based on an assumption they also win 800MHz and then fail to do so. In other words, should they bid on the 2.6GHz spectrum assuming no synergies with the 800MHz band and then risk not getting their desired allocation at 2.6GHz?

Given the fact that the format to be used in each stage is a single round first price sealed bid auction with no opportunity for price discovery, there is inherently a risk to significantly overpay – the so called “winner’s curse”. Equally there is a potential “loser’s curse” where a bidder might narrowly miss out on a spectrum block it might have been prepared to pay more for. With such a format, a bidder needs to study its own and competitors’ likely valuations as well as bidding intentions carefully to ensure successful participation and avoid embarrassing outcomes.

As we have seen in other European countries, which have announced forthcoming spectrum auctions (see our recent blog post on the Greek auction for example), the regulator is setting the reserve prices at a very high level in order to guarantee a high minimum revenue – in this case €2.5bn. If we compare the reserve prices set for the auction held in Germany in 2010 for example, it is striking that on a €/MHz/POP basis the French reserve prices have been set at 100x and 25x for the 800 MHz and 2.6 GHz bands respectively (although note the format used in Germany was multi-round). Although high reserve prices do discourage frivolous participation they also undoubtedly favour the bidders with deeper pockets and it could be argued that if the regulator really believed in market forces (since they are holding an auction) then they should set a low reserve and let the market decide.

Scott McKenzie, Director Coleago Consulting

A fundamental flaw in the Indian 3G spectrum auction design

The Indian telecoms market is divided into 22 telecoms circles and with a population of over a billion each circle has an average population of 52 million which means that the average circle looks like a country somewhere between Italy and South Korea. Indeed many of the larger circles have populations similar to Germany and some are even twice as large. The sheer scale of the Indian mobile market is staggering.

It is not surprising therefore that the auction designers assumed that operators such as Reliance, Bharti and Vodafone would treat the circles as prizes worth winning in isolation and not as part of a pan-Indian spectrum strategy. To put it another way they assumed that the value to an operator of Circle A plus Circle B would be no greater than the sum of the parts.

Where no synergies are assumed to exist, auction designers often opt for a simultaneous multi-round auction or SMRA design where bidders place bids on individual circles in isolation. This design works well provided that there are no synergies or complementarities between circles. However, as the recent comment from Bharti below reveals some operators aspired to a pan-Indian footprint as they clearly anticipated synergies from combining circles.

“The auction format and severe spectrum shortage along with ensuing policy uncertainty drove the prices beyond reasonable levels. As a result, we could not achieve our objective of a pan-India 3G footprint in this round.” Bharti

Those synergies may arise from purchasing scale economies as well as marketing and branding benefits but the important thing from an auction design perspective is that the value of Circle A plus Circle B is greater than the sum of the parts.

When synergies exist a SMRA auction gives rise to what game theorist’s call aggregation risk. Aggregation risk is the risk that arises when you place bids on a combination of individual circles which collectively justify paying a higher price due to synergies than simply the sum of all the prices you would have been prepared to pay for circles based on their stand alone valuations. The risk is that you are then outbid on one of the circles in your desired combination which destroys the value of your synergies but you cannot step back from your other winning bids on the remaining circles. A situation can arise where the bidder ends up having to pay more than the value that he can generate from his sub optimal combination of circles. The situation can also arise where the bidder has to continue to bid on key circles such as Delhi and Mumbai in order to protect the value that is embedded in his bids on other circles – this may well have been the case in the Indian 3G auction.

Had the auction designers taken greater account of the value of a pan-Indian footprint they may well have selected an alternative auction structure such as some form of combinatorial auction. In a combinatorial auction bidders bid for packages of circles and they are guaranteed to receive the whole package of circles or nothing at all. Had a combinatorial approach been adopted Bharti would not have faced aggregation risk and it would have had the opportunity to express with greater confidence the value it placed on a pan-India footprint. A combinatorial approach may not have resulted in the frustrations that they are currently expressing and could have resulted in a more economically optimal allocation of spectrum.