Spectrum assignment mechanisms v001 270716 sz

Spectrum assignment mechanismsMobile 360 Africa, Dar Es Salaam 26-28 July 2016

Stefan ZehleCEO, Coleago Consulting Ltd+44 7974 356 [email protected]

www.coleago.com

Agenda

© copyright Coleago 2016Spectrum Workshop

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1 The evolution of mobile operator and spectrum licencing

2 Policy goals in assigning spectrum

3 The rationale for assigning spectrum by means of auctions

4 Spectrum auctions in mature markets

5 Best practice spectrum assignment by means of an auction

6 Best practice in spectrum assignment by means of comparative tender

7 Auction failure in some African markets

8 Solutions to overcome market specific problems

Coleago Consulting – A specialist consulting firm serving the needs of the telecoms, media, technology sectors


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Strategy & Business Planning Strategy development, marketing strategy MVNO and multi-brand wholesale strategy Business planning and business modelling

Telecoms Regulation & Interconnect Accounting separation, price control Interconnect cost modelling, RIO Regulatory consultations

Spectrum Valuations and Auctions Spectrum strategy and spectrum valuation Spectrum auctions & bid strategy Spectrum auction design & reserve prices

Transaction Services Commercial due diligence Tower due diligence Preparation of Information Memorandum

Mobile Network Sharing Mobile Network Sharing Managed Services and Outsourcing Network Audit

Training & Management Development Telecoms Mini-MBA Regulatory capacity building Mobile operator business simulation game

20 years of spectrum related work delivered by a team of experienced consultants

Spectrum valuation and projects completed in 2015/16 During 2015/16 Coleago conducted

spectrum valuation and auction projects in Indonesia, Bangladesh, Denmark, South Africa, the Ukraine, Nigeria, Ghana, Russia, and Myanmar.

Spectrum auction capacity building workshops Coleago delivers per year 5 to 6

capacity building workshops on spectrum related matters. Much of this capacity building work is carried out in conjunction with the GSMA.

In 2015/16 Coleago delivered Best Practice Spectrum Management and Auction workshops in India, Cambodia, China, South Africa, Benin, Tanzania, Gabon, and Mozambique.


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The evolution of mobile operator and spectrum licencing


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Spectrum assignment mechanisms in use


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First come first served

Used in markets with low demand for spectrum, e.g. Mauritius, but otherwise does not constitute best practice

Comparative tender (beauty contest)

The price for spectrum is fixed and licences assigned to operators using a scoring system; criticised for lack of transparency

AuctionSpectrum assigned to highest bidders subject to a reserve price; usually constrained by spectrum caps and other limitations; unfettered auctions are rare

Administered assignment

Used where auctions are unlikely to deliver policy objectives; an option for licence renewal; price may be determined by administered incentive pricing

Mobile operator licencing and spectrum licencing evolved with the mobile industry life cycle


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1985 2015

The era of telecoms liberalisation:

Licencing of competing mobile networks

The growth of mobile: GSM and

1800/1900MHz spectrum allows for additional licences

to be issued

The evolution of mobile for data: Focus shifts to

assigning additional spectrum to existing

operators

1995 2005

The focus of policy objectives evolves with the mobile industry life cycle


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1985 2015

Focus on infrastructure based competition, coverage roll-out

Introduce 3rd and 4th

operators and ensure they are

successful, focus on consumer benefits

Direct additional spectrum for 3G and

4G to existing operators

1995 2005

Comparative tenders were enormously successful in creating competitive mobile markets and delivered huge societal benefits


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1985 2015

Comparative tenders and infrastructure based

competition delivered rapid coverage roll-out

Comparative tenders for 3rd and 4th operators, passive infrastructure

sharing is encouraged and even mandated to ensure success of new entrants The advent of

auctions to assign additional spectrum to existing operators

1995 2005

Maintain sufficient competition as operators

need wider band assignments for LTE

While spectrum auctions are the dominant method of spectrum assignment, their usefulness is questionable in a maturing market


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1985 2015

Comparative tenders(beauty contests)

Auctions dominate

1995 2005

In some cases regulators move away from auctions

Governments are increasingly adding complex conditions and restrictions to auctions to deliver policy goals

France’s assignment of 700MHz in 2015 was an auction but with extensive conditions attached to spectrum. The focus was on managing competition and rural mobile broadband coverage.

The 700MHz in Chile auction focussed on broadband access with nominal prices being paid by operators for spectrum.

New Zealand had a two stage 700MHz auction with caps to ensure that all three operators would acquire spectrum.

The UK has moved to indefinite licences, i.e. spectrum will not be re-auctioned.


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The measures are market specific and appear to

deliver successful outcomes for these specific

markets.

When including special measures in auctions, care must be taken so as not distort the market based approach to spectrum assignment

The cost of spectrum auction distortions a Coleago report for the GSMA to

highlight how flawed spectrum auction rules result in inefficient outcomes and adverse consequences for a country’s economy.

You can download this report from the GSMA website.

www.gsma.com/spectrum/wp-content/uploads/2014/11/The-Cost-of-Spectrum-Auction-Distortions.-GSMA-Coleago-report.-Nov14.pdf


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Policy goals in assigning spectrum


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Policy objectives for the assignment of mobile spectrum are wider than maximising revenue from the sale of spectrum

Immediate revenue generation by maximising auction proceeds

Other policy objectives Promote the highest value use of

spectrum Ensure spectrum is deployed rapidly

and widely and the maximum spectral efficiency is extracted

Promote investment and innovation Promote rural broadband access and

increase digital participation rates Promote competition Promote customer convenience Provide a high net economic return to

the public© copyright Coleago 2016

Spectrum Workshop13

The societal value of assigning spectrum to operators

The return to the community from spectrum auctions goes well beyond any direct payment made to government for spectrum.

Implicitly all governments recognise the trade-off between spectrum fees and wider goals.

Otherwise they would simply auction off monopolies which would undoubtedly bring the highest direct receipts.


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Setting high prices for spectrum is problematic

“[T]he ratio of social gains [is of] the order of 240-to-1 in favour of services over licence revenues…Delicate adjustments that seek to juice auction receipts but which also alter competitive forces in wireless operating markets are inherently risky. A policy that has an enormous impact in increasing licence revenues need impose only tiny proportional costs in output markets to undermine its social utility.

In short, to maximise consumer welfare, spectrum auctions should avoid being distracted by side issues like government licence revenues.”


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Hazlett and Munoz, “What Really Matters in Spectrum Auction Design”, 2010

The rationale for assigning spectrum by means of auctions


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Using auctions to deliver “efficient” use of spectrum

What do policy makers mean when they talk about “efficiency” in spectrum assignments?An efficient assignment of spectrum means assigning spectrum to those who generate the greatest economic value to society from the use of the spectrum.

“The key goal of any auction is to guide goods to those who value them the most. Spectrum auctions help identify the highest value use and users” New Zealand Ministry of Business, Innovation and Enterprise - May 2013


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Based on the theoretical efficiency argument, auctions became the norm is assigning spectrum

Benefits of an auction Transparent and objective May lead to an efficient assignment of

spectrum Does not require regulators to “pick the

winners” Generates revenue for society Generates a sunk cost and so is less

distortionary


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Bidders will not pay more than their valuation

Valuations In preparing for an auction, bidders

will value the blocks they intend to acquire

This establishes how much a block is worth to the bidder

Value created is the difference between the amount bid and the valuation

The bid amount It would be irrational to bid more than

the valuation Bidding less than the valuation does

make sense because the bidder could acquire the lot for less than it is worth to the bidder

However, if a bidder bids much less than it is worth to the bidder, the risk of a competing bidder winning the lot increases


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Spectrum auctions in mature markets


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Policy objectives have to be considered in the light of maturing mobile markets

Mobile markets have reached the maturity phase of the industry life cycle Many markets show flat (at least in real

terms) or declining revenues, EBITDA and free cash flow

This maturity industry life cycle stage suggests that: – Encouraging new network based

competition is not appropriate– Taking cash out of the industry is not

sustainable


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Given the existing spectrum, new entrants will have too little spectrum to compete

In an LTE world, large contiguous spectrum holdings confer particular competitive advantage The exit of some operators in Europe

and the insolvency of Mobilicity in Canada demonstrates that it is impossible to succeed in the market with small spectrum holdings.

When industry logic has driven consolidation, trying to reverse the process by regulation is unlikely to produce societal benefits.


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Allocating spectrum on the basis of private valuations may lead to a reduction in competition, higher prices and less consumer choice

In a mobile broadband world the value of preventing a rival from acquiring their “fair share” of spectrum is large


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“The private value for incumbents includes benefits gained by preventing rivals from improving their services.

The value of keeping spectrum out of competitors’ hands could be very high. However, this ‘foreclosure value’ does not reflect consumer value.”US Department of Justice, Ex Parte Submission before the FCC - April 2013

Options for spectrum auctions in mature markets


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New market entry unlikely

Each incumbent gets a “fair share”, but auction proceeds are

low because there is no real bidding

Set high reserve prices

Unfettered auction among incumbents

Auction proceeds may be high, but increased industry

consolidation and reduced competition results

Spectrum caps to preserve existing competition with 3

operators (small market) to 4 operators (large market)

Focus on other policy

goals

What then is the point of an

auction?

High reserve prices are prone to distort auction outcomes and harm the public interest

Spectrum is unsold and hence unused. This represents a productivity loss to society and reduced auction receipts.

National imbalances in spectrum holdings may be exacerbated.

An unnecessarily high cost-burden may be imposed on the industry, leading to adverse downstream consequences in terms of roll-out, competition and consumer choice.


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Spectrum remains unsold and hence economic value is lost to the country

India 850, 900, 1800, 2100 MHzAustralia 700MHz (2013)Bangladesh 2100MHzGhana 800MHz (2015)Mozambique (2013)

Higher costs are imposed on operators than necessary anddeployment slows down

India 2100 & 2300MHz (2010)Australia 700MHz (2013)Belgium 800MHz (2013)

Set high reserve prices

The reserve price for the 700MHz auction in Chile was set to deliver rural development policy objectives

The 700MHz spectrum award process in 2014 focussed on connectivity and competition policy objectives … connect 1,281 rural towns and 500

schools obligation to build fibre mandated MVNO access and roaming

… rather than extracting money from the mobile industry. The reserve price was small. Auction proceeds amounted to only

0.017 $/MHz/pop.


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Note: Per capita GDP in Chile: US$ 15,700

Focus on other policy

goals

Best practice in spectrum assignment by means of an auction


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Policy objectives should guide the design of spectrum auctions, rules and reserve prices

Policy objectives are the starting point Set feasible policy objectives

Competition Promoting new entry is not efficient at this stage of

the industry life cycle Create conditions where economies of scale can

materialise while maintaining competition

Coverage obligations Coverage obligations can be an important element

in delivering policy objectives Coverage requirements should not be linked to

specific bands

Spectrum Workshop28© copyright Coleago 2016

Technical and economic efficiency in spectrum auctions

Technical efficiency considerations Maximise the amount of available spectrum Assign available spectrum together rather than

artificially ration Ensure a minimum channel size of 10MHz for LTE Avoid fragmentation of spectrum Make spectrum technology neutral

Ensure an efficient assignment of spectrum Adopt proportional measure to promote

downstream competition Allocate spectrum to those that value it most highly Prevent speculators


Spectrum auctions can and do deliver efficient outcomes, but different auction formats have different challenges

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Single round sealed bid auction

No opportunity for price discovery, can lead to lower bids and hence auction revenue or may result in regret for the winner

Single round sealed bid auction with 2nd

price rule

Winner pays the price of the second highest bidder and therefore eliminates the risk of “regret”. No opportunity for price discovery which can lead to price discrepancies.

Simultaneous Multi-Round Ascending (SMRA) auction

Simple ascending auction gives opportunity for price discovery but aggregation risk* is present as there is no package bidding

SMRA auction with augmented switching

More complex form of SMRA where bidders can in certain circumstances alter bids to reduce aggregation risk*

Combinatorial Clock Auction (CCA) with

2nd price rule

In theory, economically efficient and avoids aggregation risk* but extremely complex and not very transparent with clock and supplementary rounds. Can lead to major price discrepancies.

* If blocks are complementary, the risk that a bidder is stuck with an unprofitable subset of its desired package. Spectrum Workshop

© copyright Coleago 2016

Key characteristics of the two main multi-round auction formats

Design Principle SMRA CCA

Supports simultaneous award of spectrum in multi-bands ✔✔✔ ✔✔✔

Exposure and fragmentation risks (can be overcome) ✘ ✔✔✔

Flexibility over the use of specific or generic lots ✔✔ ✔

Transparency of bidders and bids ✔✔✔ ✔✔

Certainty over lots awarded ✔✔✔ ✘

Certainty over prices paid ✔✔✔ ✘

Avoids ‘regret’ ✔ ✔✔

Avoids adverse price asymmetries ✔✔✔ ✘

Simplicity and ease of presentation and transparency of results ✔✔ ✘

Promotes all spectrum being sold ✔✔ ✘

31Spectrum Workshop

© copyright Coleago 2016

Implications for best practice

Best Practice Single round auctions should be avoided in favour of multi-round formats Sequential auctions should be avoided to reduce substitution and exposure risk Generic lots should be preferred to avoid aggregation risk Regulators should prefer greater transparency rather than less The auction design and rules should be as simple as possible The design should seek to minimise the scope for strategic bidding When placing a bid there should be a high certainty regarding the lots, price

and expenditure of the bidder


Avoiding unsold blocks

Ending an auction with unsold spectrum is inefficient and reflects badly on the auctioneer The economic and societal value of spectrum

is only realised if traffic passes through Spectrum that is unsold at auction does not

generate any revenue for the state Running a separate auction for unsold lots

increases uncertainty for bidders and imposes an additional administrative burden

The solution If an auction has a risk of unsold lots, specify in

the auction rules how these unsold lots will be sold in a second phase of the same auction


Best practice in spectrum assignment by means of a comparative tender


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Spectrum assignment by comparative tender, the principles

A comparative tender is also known as a “beauty contest”. Beauty is subjective, but a well run comparative tender can be objective.

A comparative tender for the assignment of spectrum to one or several operators should have the following characteristics:– It must be a transparent process using a

predefined set of selection criteria.– The selection criteria should be translated

into scores which lead to an objective selection of the winning tenders.

– A spectrum fee, if any, should be stated in the tender document. The spectrum fee is not a selection criteria.


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Advantages of spectrum assignment by comparative tender

Advantages

Allows non-financial aspects to be taken into account

Can focus on efficient use of spectrum

Administrative costs usually lower than an auction

Quick and easy to execute

If a price is applied, this generates revenue for government

Considerations

For example competition related aspects

Efficient use of spectrum can be built into scoring


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Potential disadvantages of spectrum assignment by comparative tender and measures to overcome these

Potential disadvantages

Opaque if award is based on judgement concerning quality of the bid.

Spectrum will be assigned to operators who promise the most with no assurance of delivery.

Price may be set too high so no bids are forthcoming

Measures to be taken

Set objective scoring criteria in line with policy objectives and ensure transparency of the process.

Strong enforcement of measurable non-price criteria required with substantial fines and forfeiture threat.

Set a conservative price which minimises this risk.


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Setting the price for spectrum in a comparative tender

Assignment of spectrum by comparative tender requires a price to be set for the spectrum.

Benchmarking may be used, but with caution:– Adjust benchmark prices for population and

GDP per capita– Compare spectrum in similar bands, for

example 2100MHz and 2600MHz spectrum is different

– Ignore outliers, such as 2100MHz auction in India

Do not only use simple prices paid benchmarks– Benchmark the overall cost of spectrum to the

industry as a percentage of free cash flow© copyright Coleago 2016

Spectrum Workshop38

Transparency and objectivity must be an overriding design criteria for spectrum assignment by comparative tender

The challenge Lack of transparency and lack of

objectivity in selecting the winner are rightly the main criticism of spectrum assignment by comparative tender.

The solution Take steps to ensure:

– Utmost transparency– Objective selection criteria and a

clear scoring system


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Policy objectives, selection criteria and scoring

Best practice There should be a clear link between

the policy objectives and the selection criteria.

It must be possible to quantify the selection criteria.

It is likely that some policy objectives will be more important than others. This should determine the relative weighting in the scoring system.

Common mistakes A long list of criteria that do not relate

to the policy objectives. Non-quantifiable criteria. The tender document requests a long

list of detail which is not relevant to the selection.


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An unnecessarily long list of criteria and detail does not translate into a more objective process. In fact it tends to obscure the process.A comparative tender can be done on the basis of numerical information in table format on three to five pages

Auction failure in some African markets


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Mozambique: The reserve price for each block was too high and all of the spectrum remained unsold

800MHz spectrum auction in 2013, none of the spectrum was sold There were 3 potential bidders for six

2x5 MHz blocks. To restrict supply, one of six blocks

was withheld from the auction. The reserve price per 2x5 MHz block

was US$ 30 million, equivalent to 0.115 US$ / MHz / pop.

Benchmarking the reserve price In a fiercely contested auction in

Germany in 2010 (4 operators bidding for 6 blocks) the price paid was 0.91 US$ / MHz / pop.

In Mozambique the GDP per capita is US$ 610.

The GDP per capita in Germany is US$ 47,250

Adjusting the Mozambique reserve price for GDP per capita relative to Germany produces a reserve price of 8.94 US$ / MHz / pop (US$ 0.115 / 610 x 47,250 = US$ 8.94)


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On a GDP adjusted basis, the reserve in Mozambique was around

10 times higher than prices paid elsewhere for digital dividend

spectrum

Ghana: The 800MHz auction in Ghana in December 2015 resulted in only one LTE operator

Ghana 2015 800MHz auction 2 lots of 2x10MHz of 800MHz

offered via auction Reserve price of US$ 67.5 million

per lot Existing spectrum is not technology

neutral

MTN became the sole LTE operator MTN acquired 2x10MHz for

US$67.5 million (US$ 0.13 / MHz / pop)

Failure to achieve policy goals Unsold spectrum means spectrum

lies fallow instead of contributing to GDP growth

Competition issues arise Future policy challenges in

assigning the remaining spectrum


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Senegal: Spectrum auction boycott in January 2016 forced negotiations that led to a sale in June 2016

Spectrum on offer 800MHz 2x30MHz in 3 blocks 700MHz 2x20MHz in 4 blocks 1800MHz 2x30MHz in 3 blocks

Reserve price Reserve price XOF 30 billion (US$

49.86 million) for each of the 20-year licences

January 2016 headline “Senegal’s incumbent cellcos ‘boycott’

4G licence tender; ARTP invites bids from new entrants”

In June 2016, the assignment progressed The ARTP restarted the 4G licensing

process and in June 2016 concluded the assignment of 2x10MHz of 800MHz and 2x10MHz 1800MHz for Sonatel for XOF 32 bn (US$ 53.8 million)


Solutions to overcome market specific problems


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Market based spectrum assignment constitutes best practice

Spectrum assignment by auction has delivered excellent outcomes for consumers, investment and revenue generation in the majority of markets.


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Implicitly all policy makers recognise that unrestricted auctions do not deliver policy objectives

All regulators introduce limitations on bidding such as caps and impose a number of criteria such as coverage.

Why is this necessary when an auction in theory delivers an efficient assignment?

The answer is that assignment by a pure auction will not deliver policy objectives …

… and the more limitations are imposed on an auction the further one moves away from the raison d’être of an auction.


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Kenya: An administered solution to assigning 800MHz spectrum to preserve competition

Market concentration made an auction impossible In a three operator market Safaricom

has a rather large market share. An auction would have cemented the

current situation because smaller players - Airtel and Telecom Kenya (Helios) - are unlikely to have had a business case to pay significant amounts for the 800MHz spectrum.

The Communications Authority of Kenya rightly concluded that an auction would not deliver policy objectives.

Administered assignment at a price which the weakest operator could justify The regulator assigned 2x10MHz to

each of the three operators for US$ 25 million each.

The price amounts to a mere US$ 0.025 / MHz / pop.

Policy goals were delivered All spectrum assigned A chance to maintain competition US$ 75 million raised for the state


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An innovative solution for 700MHz spectrum assignment in Zealand delivered policy objectives

The 700MHz auction presented a risk of going from a 3 player to a 2 player market 700MHz APT band plan consists of 9

blocks of 2x5 MHz. The economic minimum an operator

would want to acquire is 2 blocks. The two large operators, Telecom New

Zealand (Spark) and Vodafone would easily outbid 2degrees, a weak late 3rd

entrant and acquire 4 blocks each. One block would have been left unsold

and 2degrees’ ability to compete would have been severely hampered.


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5 5 5 5 5 5 5 5 5

5 5 5 5 5 5 5 5 5

APT 700MHz (Band 28)

703 748

758 803

An innovative solution for 700MHz spectrum assignment in Zealand delivered policy objectives

The solution: A two stage auction with caps in the first stage In stage 1, the cap on bidding was 3

blocks. 2degrees bid for two blocks and the

other for 3 blocks each. All operators acquired the blocks at the

reserve price of NZ$ 22 million per 2x5 MHz block.

In stage 2 the caps were removed and the unsold block put to auction. It was bought by Telecom New Zealand for NZ$ 83 million.

The auction design delivered and an excellent outcome Competition maintained with

a 3 player market. 2nd stage auction was market

based and delivered demand driven auction revenue for the state.


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Best practice in selecting and auction format and rules requires a formal and transparent consultation with stakeholders

Do not use the cookie cutter approach and copy from another country. The auction format and rules should be developed in a market context.

Auction theory is complex: Obtain advice from spectrum auction experts.

Use restrictions on bidding such as caps with great care in order to avoid distortions.

Develop a proposal, including a discussion of alternatives and rationale for the preferred auction format and rules.

Publish and consult with stakeholders, notably the mobile operators.

Publish the final document, including discussion on rationale and respond to points raised in submissions from stakeholders.


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Questions?


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