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 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

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

Margin squeeze issues are attracting increased attention

With the roll-out of Next Generation Networks in the fixed telecoms world and increased network sharing in LTE mobile networks, margin squeeze is attracting increased attention. What’s at stake is to maintain competitive retail markets in a situation where multiple service providers use the network of a network operator which also competes in the retail market.

A margin squeeze may occur where a vertically integrated operator sells both the retail service and an essential wholesale input to that service. Specifically, a squeeze arises when the difference between the operator’s retail price and its wholesale price is too small for an efficient competitor to: i) purchase the wholesale input; ii) provide the remaining inputs needed to create the retail services and iii) sell the retail service on a profitable basis. In practice, there are two main scenarios in which margin squeezes may occur.

Firstly, where the price of a wholesale service is regulated on a retail-minus basis the difference between the retail and wholesale price may be too small for an efficient competitor to compete and make a profit. Secondly, where the wholesale price of the vertically integrated operator is regulated but its retail service is not, retail prices could be set at a level which does not allow competitive operators to be profitable. The intention in such a case could be for the incumbent to drive competitors out of the market so that it can put up its retail price – short term pain for possible long term gain. Looking in more detail at the two cases, retail-minus regulation is used by certain regulators for some fixed network services.

For example, the UK regulator Ofcom has argued that retail minus may be appropriate for certain innovatory services where there is considerable uncertainty about service performance and it is important to encourage new investment. For this reason Ofcom has not imposed price regulation on BT’s VULA service (next generation bitstream) although the service is subject to a number of conditions.

However, it does require that VULA prices are set at a level which ensures there is no margin squeeze. In its draft recommendation on non-discrimination obligations of 7 December the European Commission outlines an approach for NGA (but not legacy access networks) which has something in common with Ofcom’s. The recommendation proposes that NRAs should not maintain or impose cost-orientation on NGA wholesale inputs providing certain conditions are met such as equivalence of input and the satisfactory outcome of an economic replicability (margin squeeze) test. In mobile networks, national roaming charges and prices paid by MVNOs are often set on the basis of commercial negotiations although this may accompanied with the potential threat of retail minus if that does not work.

In practice, commercial negotiation often does the trick, particularly when there are a number of operators in the market, but there is always the possibility of retail minus in the background and hence, the possible need to identify what the margin actually is. As mobile telecoms moves from a voice orientated business to LTE, it becomes increasingly difficult to determine what margins are because there is no clear relationship between data volumes and revenue.

Margin squeeze tests can also be applied in situations where wholesale prices are required to be cost orientated. A potential problem arises in situations where the margin squeeze test is failed since this could result in wholesale prices being set below costs – indeed, this has happened in Austria.

Setting wholesale prices below cost is warranted in situations where the incumbent is trying to squeeze competitors out of the market but seems inappropriate where prices have been reduced to remain competitive in the market. For this reason regulators and competition authorities need to take account of the prevailing circumstances when acting on margin squeeze tests where wholesale input prices are subject to cost orientation.

In this context it is interesting to note that the European Commission Draft Recommendation on non-discrimination obligations does not propose the use of margin squeeze testing for legacy access networks, where cost orientation is required. According to a 2009 ERG survey, 12 NRAs have a procedure to carry out margin squeeze tests and, indeed, a large number of tests have been conducted.

The importance of testing is likely to increase in the future, for example in the context of NGA network rollout. Given the increasing recognition that setting wholesale inputs in NGA networks on a cost orientated basis may have a negative impact on roll-out, margin squeeze testing will inevitably become an essential part of an NRA’s regulatory toolkit. Finally it’s worth saying something about margin squeeze tests themselves. Put simply there are many types of test and the appropriate way to conduct a test will depend on the circumstances under consideration.

In many cases regulators and competition authorities may do well to test for margin squeeze using two or more different methodologies. To give some idea of the approaches/issues involved: tests can be conducted on an ex ante basis or an ex post basis;— tests can be conducted either on an Equally Efficient Operator basis (essentially the incumbent’s costs) or a Reasonably Efficient Operator basis (the costs of a potential competitor). The Commission’s recommendation has, probably sensibly, come out in favour of the former; —tests can examine either projected or realised cash flows and/or look at year by year results.

There are arguments in favour of both approaches;for bundled products tests can be carried out either on a product by product basis or at the level of the aggregate bundle; A further and crucial factor to consider is the period over which the test is to be conducted. This is particularly important for new innovative products such as Next Generation Access where it may take a number of years to achieve a positive rate of return.

Written by Jonathan Wilby, Senior Consultant, 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

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

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