Posts Tagged ‘spectrum auction’

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The end of geography and roaming in telecoms

March 4, 2013

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

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The APT Bandwagon Reaches Cruising Speed

February 13, 2013

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

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Is time running out for the Combinatorial Clock Auction format?

November 29, 2012

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

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Overcoming Objections to AT&T’s Acquisition of T-Mobile USA

November 29, 2011

AT&T’s announcement last week of a $4bn charge in respect of the $39bn take-over of T-Mobile USA indicates a high likelihood that the transaction will not go ahead. This is not necessarily good news for US consumers and shareholders.

Telecoms markets in developed countries are maturing and in some markets revenues are already declining. At this stage of the industry life cycle consolidation would be expected. If there is no further revenue growth the only way in which returns can be maintained without increasing prices is by taking costs out of a business. This is likely to have been the principal driver behind the proposed acquisition.

Much of the opposition to the merger is on grounds of the negative impact on competition at retail level. A solution could be for AT&T to acquire T-Mobile’s network assets but not the rest of its operation, effectively turning T-Mobile into an MVNO. After all, much of the passive infrastructure is probably already owned by tower companies who lease tower space to several mobile operators. Traditionally a very high proportion of a mobile operator’s assets were in the non-active infrastructure – it typically accounted for two thirds of the capital cost of a cell site. The next step would be to share the active RAN and even the whole network. If T-Mobile USA continues to operate as an MVNO this would not affect competition at retail level.

In persuading the US Department of Justice and the FCC to drop their objections to the deal, AT&T might consider introducing accounting separation between its mobile network operating business and its retail business. AT&T’s retail business would buy capacity from the network operating company at the same terms as T-Mobile USA.

The net effect may be positive for all stakeholders:

  • One merged network will have lower operating costs than two networks, i.e. costs are taken out of the industry. This benefit is likely to be shared between consumers in the form of lower prices and shareholders.
  • Although some spectrum may have to be divested, the merging of AT&T’s and T-Mobile’s spectrum assets would make it easier to refarm spectrum to LTE and deploy wide carriers earlier. This means existing spectrum will be used more efficiently in terms of bits per Hertz. With the growth of mobile broadband this yields an economic and societal benefit, as is well documented.
  • There will be a number of further spectrum auctions. With one operator less bidding for spectrum, demand at auction is reduced and prices paid for spectrum are likely to be lower. This will benefit all players in the market.

Written by Stefan Zehle, CEO, Coleago Consulting

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Vive la différence II

September 29, 2011

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

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Vive la différence

August 3, 2011

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

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Greece sets a new record for spectrum auction reserve prices

July 26, 2011

Graham Friend, MD Coleago Consulting’s warning about high reserve prices for spectrum auctions “Rising reserve prices in mobile spectrum auctions are a cause for concern for all, June 28, 2011” was timely indeed. Greece has pushed reserve prices for spectrum to a new high, effectively setting these based on prices paid in other auctions, i.e. benchmarking, but without applying a discount. The reserve price for the renewal of 900MHZ spectrum amounts to €0.41 / MHz / pop. By comparison the German spectrum auction in May 2010 had reserve prices of less than 0.01€ / MHz / pop.

The fact that high prices for spectrum trade off short term cash against long term benefits is well documented. Arguments in favour of a wider consideration of value, rather than licence revenues alone, have been made by Hazlett and Munoz (“What Really Matters in Spectrum Allocation Design”, 2010) amongst others. They note: “In short, to maximise consumer welfare, spectrum allocation should avoid being distracted by side issues like government licence revenues.”

However, Operators could choose not to bid. The example of the French 3G allocation in 2001 springs to mind. At the time, the legal framework for auction did not exist in France. Hence the government fixed the price at a high level, based on the amounts that were paid for 3G licences in the UK and Germany. SFR and France Telecom bought a 3G licence – Bouygues Telecom refused. This put the government into an awkward spot, because it wanted to preserve at least three operators in France. The episode ended with a climb-down by the Government, which substantially reduced the price of the 3G spectrum licence. Bouygues successfully played a game of chicken with the Government and the Government blinked first. The situation is not as clean cut in Greece, because not all operators’ licences expire at the same time, but perhaps there is scope for “bidder’s strike”.

Stefan Zehle, CEO Coleago Consulting

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Rising reserve prices in mobile spectrum auctions are a cause for concern for all

June 28, 2011

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

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Does the law of supply and demand apply to the mobile telecoms sector?

June 20, 2011

The recent Annual EU Spectrum Management Conference, at which Neelie Kroes the European Commissioner for the Digital Agenda provided the key note address, saw speaker after speaker present, the now familiar, forecasts of mobile data demand quickly outstripping the available supply of mobile capacity. In most markets the laws of supply and demand would suggest that when demand exceeds supply, prices should rise so that demand falls until equilibrium is reached. Indeed the invisible hands of the market described by the economist Adam Smith should ensure that that a spectrum “crunch” can never exist or at least not persist for long. However, public policy objectives such as affordable broadband for all seem to have resulted in one of Adam Smith’s hands being tied behind its back. The only solution to excess demand it seems, if the views of many conference presenters is anything to go by, is to increase the supply of spectrum available for mobile services. The normal workings of the law of supply and demand seem to have been suspended in the case of the mobile market.

Even if additional spectrum can be prized away from the broadcasters, the military and other users and made available to mobile operators there is still the issue of persuading the operators to invest in the infrastructure to realise the capacity benefits. For an operator to invest it needs to expect to make a reasonable return on that investment. One of the key drivers for the exponential growth in data is the prevalence of unlimited mobile data tariffs. If unlimited tariffs remain the norm then any investment in incremental capacity may largely be swallowed up by customers on unlimited tariffs generating little incremental revenue benefit for operators. When incremental revenue expectations are low developing a business case which generates expectations of a reasonable return on significant infrastructure investment is challenging.

Many studies have shown that mobile is often the highest value use of radio spectrum and that mobile telephony is an enabler of wider economic growth. Policy makers are therefore right to consider making more spectrum available for mobile services. However, policy makers should also recognise that they are reliant upon the business cases and resulting commercial decisions of mobile operators to realise the benefits of additional spectrum. Policy makers may have to accept that even if more spectrum is made available then mobile broadband prices may still have to increase to persuadeoperators to invest to help close the gap between supply and demand. Perhaps the law of supply and demand does apply to the mobile sector after all.

Written by Graham Friend, Managing Director, Coleago Consulting

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How to participate successfully in a spectrum auction

June 16, 2011

Surging mobile data growth and network congestion have created demand for additional spectrum. Governments seeking to reduce national borrowing are anxious to auction additional spectrum to raise revenue whilst also promoting access to broadband services. Mobile operators have little choice but to participate or potentially suffer a loss of competitive advantage.

The last time spectrum was at the top of the sector’s corporate agenda was 10 years ago when governments auctioned 3G spectrum. For most companies the experience and knowledge of the 3G auctions of 2001 has long since been forgotten and many companies must learn how to navigate a spectrum auction all over again. Based on our experience from over 40 spectrum awards we present the keys to successful spectrum auction participation.

Lobby, lobby, lobby: Operators should be proactive in lobbying for an auction design and associated rules, such as those relating to spectrum caps, which best serves their needs. Arguments should be presented in a language that regulators understand such as economic efficiency and promoting competition.

Valuation, valuation, valuation: Bidders must have a clear view on the value of the spectrum lots being auctioned – not only individually but also the value of any synergies arising from geographic combinations, combinations of blocks providing wider channels to benefit from technologies such as LTE or optimal combinations of low and high frequency spectrum which together offer both coverage and capacity benefits.

Clear auction objectives: Economists and auction designers assume that all mobile operators only seek to maximise shareholder value but such assumptions are seldom shared fully by boards. Auction objectives are often couched in terms of obtaining pre-defined blocks of spectrum as cheaply as possible or avoiding any adverse differentials in price for similar lots compared to other bidders. The bid team requires a clear and unambiguous statement from management as to its objectives in the auction.

Know your limits: Economists also assume that mobile operators have unlimited access to funds and are not budget constrained. Few, if any operators are in this luxurious position and management will wish to impose bid limits on the bid team. The bid team need clear guidance on bid limits and how they relate to auction objectives and interact with the valuations of spectrum lots and combinations of lots.

The devil is in the detail: Auction design has improved significantly in the last 10 years which should have made developing bidding strategy more straightforward. However, auction designers are being asked to achieve an ever broader range of auction objectives such as encouraging new market entry, increasing or maintaining competition, promoting investment in rural coverage and ensuring contiguous spectrum to promote efficiency. As a result the use of multi-stage auctions, 2nd price rules, caps, eligibility rules and linkages to spectrum usage fees for existing spectrum holdings have made developing bidding strategy more challenging. Operators should pay close attention to the detailed auction rules especially if they do not have a pure shareholder maximisation objective and are budget constrained to ensure they have a robust bidding strategy.

Know thy enemy: In some auction formats there is scope for strategic bidding (not bidding “honestly” and “sincerely” based on your valuation) or no choice but to bid strategically (as is the case in some sequential and first price sealed bid auctions) and in such auctions estimating accurately the value of spectrum to your competitors and the their bid limits is as important as knowing your own valuation.

Practice, practice, practice: A bidding strategy is only as effective as its execution Auctions involve high stakes and can be highly pressurised occasions and bid teams need robust protocols and procedures, including disaster recovery, to ensure they can execute the bidding strategy effectively. With some auctions requiring the entry of large numbers of bids (such as the proxy stage of a combinatorial clock auction) or the constant adjustment of valuations to reflect synergies (such as in the case of regional auctions) the bid team is well advised to have developed and tested auction support tools to automate these processes prior to the live auction.

Be prepared to walk away: Successfully participating in an auction may involve walking away with nothing if prices rise above the company’s valuation. It is better to walk away and to have avoided destroying shareholder value than to pay a price above the value of the spectrum.

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