Ever since the Federal Communications Commission began auctioning spectrum rights in the mid 90s nearly all regulators around the world have relied on market mechanisms, such as auctions, to allocate and value spectrum. Regulators recognised that mobile operators themselves were best placed to value mobile spectrum and that the role of the regulator was to design an auction that encouraged operators to reveal their valuations and allocated spectrum to those that valued it most highly. Such an approach should yield a, close to, economically efficient use of spectrum which is a common objective for policy makers. Regulators would however set a reserve price which represented the minimum price they were prepared to accept for the spectrum. The conventional wisdom was to set a low but “non-trivial” reserve price in order to discourage “frivolous bidders”. During the 90s, the Dot Com era and in most recent auctions the actual prices paid have been determined after many rounds of competitive bidding and the final prices were higher than the reserves. However, there is a noticeable trend amongst regulators in auctions for new spectrum such as lots in the 2.6GHz and Digital Dividend frequency range as well as for existing spectrum such as 900MHz and 1800MHz to set a much higher level of reserves than in previous auctions. Specific examples of high reserves compared to historic levels and other auctions include the proposed auctions in Ireland and Switzerland as well as the current auctions in Spain. The trend towards higher reserve prices is a concern for all.
Regulators continue to rely on spectrum auctions to value and allocate spectrum and indeed in some countries, such as Germany, the use of auctions is written in law. However, their confidence in the effectiveness of auctions is being shaken by low levels of auction participation – especially in the case of renewal of existing spectrum
holdings. For spectrum auctions to generate economically efficient outcomes they rely upon competition amongst bidders. However, when the number of bidders matches or is less than the available spectrum such competition will be absent and the spectrum will be sold at the reserve. The absence of excess demand and competition is
increasingly likely as markets mature and potential new entrants recognise the typically higher valuations placed on spectrum by incumbents compared to Greenfield operations and may decide not to participate. This was exactly the experience of the Singaporean and Norwegian regulators in their auctions of existing 900MHz spectrum holdings in 2008 and 2004 respectively. As regulators may expect to only receive the reserve price the level of reserves is receiving a much higher level of attention.
Regulators may have amongst their objectives the goal of capturing for society part of the private value of a natural scarce resource such as spectrum. With auction prices failing to reflect operators’ private values due to a lack of competition regulators are seeking to estimate the market value for themselves. A typical approach for regulators is to use benchmarks from previous auctions however benchmarking is generally a blunt instrument and the results are heavily influenced by whether the high 3G prices achieved during the Dot Com book are included. As a result regulators are considering developing their own bottom-up valuations to supplement any benchmarking evidence. Indeed at a recent workshop on spectrum valuation in Brussels the majority of the participants were regulators. The task of valuing spectrum is a role that regulators have historically accepted they are poorly placed to perform.
If spectrum is likely to be sold at reserve and regulators are seeking to estimate market values in order to set reserves then this should be a cause of concern for all. Spectrum valuation is a challenging exercise even for the operators who are best placed to conduct the activity. If reserve prices are set too high in error then the spectrum may be left unsold and this will lead to a significant loss of economic efficiency. High reserves may also deter participation in the auction which only serves to reinforce the lack of potential competition within the auction and in subsequent downstream markets. If spectrum prices are based on reserves and spectrum is allocated to the incumbents then the process effectively becomes an administered approach and could suffer from a lack of transparency.
Regulators should make every effort to encourage participation in an auction and if the auction is expected to be competitive they should set low but non-trivial reserves. However, if an auction is unlikely to be competitive then regulators should question the value of holding an auction at all and consider introducing other measures such as
Administered Incentive Pricing to ensure economic use of the spectrum. As with the use of AIP in markets like the UK and New Zealand, if spectrum is going to be priced based on an administered approach then the approach should be inclusive, transparent and involve those that understand the value of spectrum the best, the operators.
By Graham Friend, Managing Director Coleago Consulting