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

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

Wireless Industry Consolidation in the USA: AT&T’s blocked acquisition of T-Mobile

The troubles of T-Mobile go back many years and are related to inferior spectrum holdings: “We were late with 3G”, said Neville Ray, SVP, engineering and operations T-Mobile USA, in March 2009. Since then T-Mobile acquired spectrum in several auctions and launched 3G, but it still has an inferior spectrum position. Spectrum auctions, beloved by the FCC, often cause reduced competition in wireless markets because the business case for spectrum auctions always looks better for larger operators. One of the largest components in deciding how much to bid for spectrum is the value arising from denying spectrum to rivals. If the US government had wanted more competition at network level it could have chosen a method of spectrum allocation other than unfettered auctions.

However, developments in the wireless industry have moved the goalposts and sooner or later the Justice Department will have to relent on its opposition to the proposed acquisition.  In developed wireless markets there is now very little growth in the wireless industry revenue, i.e. the industry is mature.  At this point of the industry life cycle management focus shifts from seeking revenue growth to taking out costs, for example through consolidation.

The physical network is increasingly a commodity, whereas there is increasingly fierce competition at retail level. In many markets consolidation at network level went hand in hand with increased competition at retail level with the launch of multiple Mobile Virtual Network Operators (MVNOs) and branded resellers. If the Justice Department and the FCC are concerned with competition they could make approval conditional on incorporating provisions into the acquisition that make it easier for MVNOs to enter the US market. Having said that, T-Mobile’s case is not helped by the smoking gun in T-Mobile’s past: In October 2009 Deutsche Telekom’s CFO Timotheus Hoettges insisted there was no need for further consolidation of the US wireless market: “There are four national players in the US market for 300 million households, while in Europe, where we have 350 million households, there are 50-70 operators.”

Written by Stefan Zehle, CEO, Coleago Consulting

Making sense of recent European spectrum auctions

Regulators across Europe are busy this year auctioning spectrum in the 2.6GHz spectrum frequency range as well as other frequencies including the 800MHz Digital Dividend. 800MHz spectrum is clearly of great value to operators as the equivalent US auction demonstrated. The low frequency allows the radio signal to propagate further which means that fewer base stations and hence capital expenditure is required to provide coverage compared to higher frequencies such as 2.6GHz. This makes the spectrum ideal for supporting mobile broadband services at manageable levels of cost. The lower frequency range also provides better in-building penetration and as mobile broadband usage seems to be predominantly in-doors, this further increases its attractiveness. The first significant auction of spectrum in the 800MHz band is currently taking place in Germany and bidding levels have already reached 0.67 $/MHz/Pop. At this level the price paid is greater than the prices paid in the heady days of the Dot Com book for 3G spectrum in Denmark and Austria but it is still considerably lower than the US 700MHz auction average of 1.18 $/MHz/Pop. If German prices reached this level it would also put them on a par with the auctions of 3G spectrum in the Netherlands and Italy at the start of the new millennium. Prices would then have to increase by more than three fold to reach the German 3G auction price levels. Prices may well continue to move higher but with few other benchmarks available it is too early to draw any significant conclusions regarding this spectrum band but at present the bidding levels look reasonable.

In contrast to 800MHz there has been much greater activity in relation to 2.6GHz spectrum. Norway, Finland and Sweden auctioned their spectrum in 2007, 2008 and 2009 respectively. This year the Netherlands and Denmark have already concluded their 2.6GHz auctions, the auction in Germany is on-going and at least a further six 2.6GHz auctions are expected at some point during 2010 (France, Spain, Poland, Portugal, Switzerland and Belgium are all expected to hold auctions this year). Mobile operators will be busy preparing their 2.6GHz business cases in preparation for the auctions and in doing so they will be attempting to make sense of the results of the spectrum auctions that have already taken place. This is no easy task when the highest price paid so far in Europe (Sweden, May 2008) is almost 135 times greater than the lowest (the Netherlands, April 2010). Analysis is further complicated by the fact that in most auctions the paired spectrum (FDD) has commanded a premium to un-paired (TDD) spectrum which in some cases attracted no bids at all (Netherlands). However, in the case of Finland the result was reversed with the TDD spectrum priced at a premium to FDD.

Attempting to make sense of these results requires the consideration of a great many factors. The timing of the auctions is important as some occurred before the start of the on-going financial crisis. The licence conditions attached to the spectrum, such as coverage requirement, should also be considered. These vary from regulator to regulator and the more onerous the coverage requirements, for example, the less valuable the spectrum. However, in the end, the final price paid in an efficient auction will determined by relative levels of spectrum supply and demand. The regulators have taken different approaches when it comes to supply and have auctioned blocks ranging from 2x5MHz to 2x20MHz and everything in between. Caps on total spectrum holdings have also been imposed in some cases. The fewer unique blocks that are offered the greater is the potential for demand to outstrip supply. On the demand side the most significant factor is the number of incumbent operators and in Europe this varies from 2 in Norway to 4 in markets like Denmark and Sweden. There has also been demand from new entrants usually arising from the existing cable operators such was the case in the Netherlands. In addition to the number of potential bidders demand will also be influenced by operators’ expectations of future mobile data traffic. Mobile data traffic is growing exponentially and no one has a clear view of where demand levels will be in 15 or 20 years time which is the typical term for the new spectrum licences. Not only must operators contend with uncertainty over traffic levels there also remains uncertainty over what levels of data throughput can actually be achieved when technologies such as LTE and MIMO are implemented in this frequency range and have matured. On the issue of TDD versus FDD it would seem that there is a reasonably clear trend that the FDD spectrum is more valuable than the TDD spectrum however this is not always the case and the relative valuations can vary significantly.

Despite a reasonable number of 2.6GHz auctions having taken place it is almost impossible to draw any firm conclusions especially as the design of each auction is also subtly different which can have a major impact on participant’s bidding strategies and ultimately the price paid. As a result, for any operator facing a 2.6GHz auction little conclusive insight can be drawn from the results of the 2.6GHz spectrum auctions to date. Therefore in order to prepare for an auction a country, operator and auction specific business case will be required to value the spectrum and to allow the operator to bid with confidence.