Spectrum assignment mechanisms v001 270716 sz

Spectrum assignment
mechanisms
Mobile 360 Africa, Dar Es Salaam 26-28 July 2016
Stefan Zehle
CEO, Coleago Consulting Ltd
+44 7974 356 258
stefan.zehle@coleago.com
www.coleago.com

Agenda
© copyright Coleago 2016
Spectrum Workshop
1
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
Spectrum Workshop
2
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.
Spectrum Workshop
3

The evolution of mobile operator and
spectrum licencing
Spectrum Workshop
4

Spectrum assignment mechanisms in use
Spectrum Workshop
5
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
Auction
Spectrum 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
Spectrum Workshop
6
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
Spectrum Workshop
7
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
Spectrum Workshop
8
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
Spectrum Workshop
9
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.
Spectrum Workshop
10
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
Spectrum Workshop
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Policy goals in assigning spectrum
Spectrum Workshop
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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
Spectrum Workshop
13

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.
Spectrum Workshop
14

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

The rationale for assigning spectrum
by means of auctions
Spectrum Workshop
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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
Spectrum Workshop
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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
Spectrum Workshop
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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
Spectrum Workshop
19

Spectrum auctions in mature
markets
Spectrum Workshop
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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
Spectrum Workshop
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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.
Spectrum Workshop
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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
Spectrum Workshop
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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
Spectrum Workshop
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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.
Spectrum Workshop
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Spectrum remains unsold and hence
economic value is lost to the
country
India 850, 900, 1800, 2100 MHz
Australia 700MHz (2013)
Bangladesh 2100MHz
Ghana 800MHz (2015)
Mozambique (2013)
Higher costs are imposed on
operators than necessary and
deployment 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 $/MHz/pop.
Spectrum Workshop
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Note: Per capita GDP in Chile: US$ 15,700
Focus on
other policy
goals

Best practice in spectrum
assignment by means of an auction
Spectrum Workshop
27

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 Workshop
28© 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 Workshop

Spectrum auctions can and do deliver efficient outcomes, but
different auction formats have different challenges
30
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

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 ✔✔ ✘
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Spectrum Workshop

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
Spectrum Workshop

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
Spectrum Workshop

Best practice in spectrum
assignment by means of a
comparative tender
Spectrum Workshop
34

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.
Spectrum Workshop
35

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
Spectrum Workshop
36

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.
Spectrum Workshop
37

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
Spectrum Workshop
38

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
Spectrum Workshop
39

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.
Spectrum Workshop
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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
Spectrum Workshop
41

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)
Spectrum Workshop
42
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
Spectrum Workshop
43

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
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)
Spectrum Workshop

Solutions to overcome market
specific problems
Spectrum Workshop
45

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.
Spectrum Workshop
46

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.
Spectrum Workshop
47

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
Spectrum Workshop
48

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.
Spectrum Workshop
49
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.
Spectrum Workshop
50

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.
Spectrum Workshop
51

Questions?
Spectrum Workshop
52

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