Best practice spectrum auction workshop, Tanzania 26 May 2015

Best practice in spectrum
auctions and renewal
Workshop for the
Tanzania Communications Regulatory Authority
Dar Es Salaam, Tanzania, 26-27th of May 2015
Presented by
Stefan Zehle, CEO, Coleago Consulting Ltd
+44 7974 356 258 stefan.zehle@coleago.com
www.coleago.com

Agenda
Session 1
 Industry trends influencing spectrum policy
 Policy objectives
 Auctions, reserve prices and licence payment terms
 Digital dividend spectrum auction case study: Mozambique
 Best practice spectrum renewal
Session 2
 Best practice in spectrum auctions illustrated with simple mock auctions
Best Practice in Spectrum Auctions and Renewal 1

Stefan Zehle, MBA
CEO of Coleago Consulting Ltd
 MBA with distinction, University of Westminster, London
 Over 25 years experience
 Director of mobile operator in Algeria
 Delivered over 40 spectrum projects
 Co-author of “The Economists Guide to Business Planning”
2Best Practice in Spectrum Auctions and Renewal

Since 2001, Coleago has offered a wide range of advisory
services to the telecom industry
Strategy & Business Planning
 Strategy Development, Marketing Strategy
 MVNO and Multi-Brand Wholesale Strategy
 Business Planning and Business Modelling
Telecoms Regulation & Interconnect
 Accounting Separation, Regulatory Price
Control
 Interconnect Cost Modelling, RIO
 Regulatory Consultations
Business Transformation & Cost
Reduction
 Cost Reduction
 Mobile Network Sharing
 Restructuring and Turnaround
Transaction Services
 Commercial Due Diligence
 Tower Due Diligence
 Preparation of Information Memorandum
Spectrum Valuations and Auctions
 Running Auctions for Regulators
 Spectrum Strategy and Valuation for Auctions
 Spectrum Auction Bid Strategy and Execution
 Beauty Contest Bid Books
Mobile Network Sharing
 Mobile Network Sharing
 Managed Services and Outsourcing
 Tower Due Diligence
 Network Audit

Coleago has delivered over 70 spectrum related projects
across a wide variety of markets
Markets in which Coleago has conducted
spectrum related projects

Coleago has carried out over 70 spectrum consultation,
valuation, auction and beauty contest licence projects
Completed in 2015
 Argentina - 900/1800 and 700/AWS
 Canada - AWS-3 and 2.5GHz
Completed in 2013-14
 Canada – 700MHz
 Paraguay - multi-band
 Oman - 800MHz & 2.6GHz
 Belgium - 800MHz
 New Zealand - 700MHz
 Myanmar - greenfield
 Australia - 700MHz & 2.6GHz
 UK - 800MHz & 2.6GHz
 Sri-Lanka - 1800MHz
Completed in 2012
 Belgium - 2.6GHz
 Netherlands - multi-band
 New Zealand -1800MHz spectrum
trading
 Switzerland - multi-band
 Russia - 700MHz & 2.6GHz
 Pakistan - 2.1GHz valuation
 Bangladesh - 2.1GHz valuation
© copyright Coleago
2015
What is driving prices for spectrum at auctions
5

The growth in mobile data drives the
need for spectrum
Industry trends influencing
spectrum policy

New technology enables higher data speeds and allows more
traffic to pass through a given amount of spectrum
GSM
 Not well suited to modern data needs
 Download speed of up to 384 kbps with EDGE
technology
3G HSPA
 Spectral efficiency: 0.7 bits / Hz / cell
 Download speed of 42Mbps
LTE and LTE Advanced
 Spectral efficiency: 1.4 bits / Hz / cell (possibly twice
that for LTE-A)
 Download speed of 150Mbps (300 for LTE
advanced)
7
3G HSPA
Best Practice in Spectrum Auctions and Renewal

Demand for mobile broadband requires more mobile network
capacity
8
The mobile data tsunami
 Mobile data traffic is growing at a
very rapid rate in all regions of
the world.
 In many mobile networks data
now exceeds voice.
 Technology alone cannot deliver
the required capacity, additional
spectrum is required

Mobile broadband is a key ingredient for the development of
the digital economy …
 An increase of 10% in mobile adoption
boosts GDP growth by 0.8% (World
Bank, 2009)
 For a given level of total mobile
penetration, a 10% substitution from 2G
to 3G increases GDP per capita growth
by 0.15 % points (Deloitte, 2012)
 Doubling broadband speeds for an
economy can add 0.3% to GDP growth
(Arthur D. Little, 2011)

… and there are tangible benefits to society which illustrate
the impact of mobile data
 A 12% increase in financial inclusion in
developing countries such as India and
Bangladesh
 Healthcare: up to 70% improved
compliance for TB
 10-15% increase in farmer income
 mEducation solutions can significantly
improve the affordability of education
by up to 65%

Existing and new spectrum is required for mobile broadband
services
11Best Practice in Spectrum Auctions and Renewal
700/800 MHz
New spectrum for LTE, in some markets previously used for TV,
referred to as “digital dividend” bands
850/900 MHz
Originally only used for GSM, progressive redeployment to 3G
HSPA and recently to LTE
1800/1900 MHz
Originally only used for GSM, progressive redeployment to 3G
HSPA and recently to LTE
1700/2100 MHz
Currently used for 3G, upgrading to dual carrier HSPA+, LTE
deployment in the Americas
2600 MHz New band for LTE
?
The mobile industry is seeking over 1GHz new spectrum for
mobile broadband

Implications for spectrum management and auctions
Supply of new spectrum
 Focus on making a maximum of spectrum
available for mobile broadband as fast as
possible
Assign new spectrum
 Assign new spectrum to mobile operators to
facilitate and encourage rapid deployment of
3G HSPA and LTE
New technology in existing spectrum
 Ensure that new technology, notably LTE, can
be deployed in existing bands

Best practice begins with setting the right
policy objectives in the context of a
maturing market and LTE deployment
Policy objectives

Policy objectives for the assignment of mobile spectrum are
wider than maximising auction proceeds
 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
 Immediate revenue generation by
maximising auction proceeds

Tanzania’s ICT policy vision and mission
The National ICT Policy is aligned to the following
vision statement:
“Tanzania to become a hub of ICT Infrastructure and
ICT solutions that enhance sustainable socio-
economic development and accelerated poverty
reduction both nationally and globally.”
The overall mission of this Policy is:
“To enhance nation-wide economic growth and social
progress by encouraging beneficial ICT activities in
all sectors through providing a conducive framework
for investments in capacity building and in promoting
multi-layered co-operation and knowledge sharing
locally as well as globally.”
National information and communications technologies policy,
March 2003

Defining the “efficient” use of spectrum
What do policy makers mean
when they talk about
“efficiency?”
An efficient assignment of
spectrum means allocating the
spectrum to those that generate
the greatest economic value to
society from the use of the
spectrum
What does that mean in practice?
An efficient auction involves
assigning spectrum to those that
value it most highly.
 If the downstream market is
sufficiently competitive then
societal and private values are
likely to be closely aligned
 Achieving an efficient assignment
is often closely aligned with
maximising auction revenues
 Efficiency is also likely to
maximise long term tax receipts

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 and EBITDA
 This maturity industry life cycle stage
suggests that policy goals should be
revised:
– Encouraging new network based
competition is not be appropriate
– Taking cash out of the industry is not
sustainable

Maturing markets are characterised by consolidation, not new
market entry
Mobile industry consolidation is in full
swing
 The pace and size of cross-border M&A has
been breath-taking, with five mega-deals
announced or completed during the past
three months.
 Markets with consolidation potential include
India, Indonesia, Canada, Italy, Germany
and Brazil - although regulation is likely to
be a constraint in most of these.
 Not surprisingly, we are seeing numerous
infrastructure sharing deals. Investors
should expect further M&A, but at a less
frantic pace.

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 set-asides and spectrum caps can lead to inefficient
outcomes if not designed with great care
Spectrum set-asides and caps are typically designed to prevent excessive
spectrum concentration
 Measures need to be determined with great care
Potential impact of auction design Examples
Spectrum is acquired by inefficient users who
deploy little and fail to gain market share
Chile AWS auction (2009)
Canada AWS (2008)
Spectrum remains unsold and hence the
economic value is not extracted
Netherlands 2.6GHz (2010)
Belgium 2.6GHz (2011)
Spectrum is not deployed and held for resale at
a profit for private investors
Canada AWS (2008)
Increased spectrum costs for incumbents
damage the operator
Netherlands 800MHz (2012)

The 2009 AWS auction in Chile focused on stimulating new
market entry, but resulted in policy failure
Spectrum caps guaranteed new
market entry …
 A spectrum cap of 60 MHz
effectively excluded the three
incumbent mobile network operators
- Movistar, Entel and Claro.
 Cable television company VTR won
30MHz of the AWS spectrum paying
US$3.02 million, and Nextel won
60MHz, paying US$14.7 million.
 Revenue raised amounted to a tiny
$0.011 / MHz / pop.
… but failed to deliver timely
deployment and competition …
 The new entrants launched one and
a half years after the deadline
 Today VTR and Nextel together only
have 1.3% market share, nearly
three years after the award
… and private investors may pocket
the new entrant discount.
 In a secondary market VTR and
Nextel are likely to sell the spectrum
for more than they paid.

Using new spectrum auctions to increase network-based
competition is unlikely to succeed
Regulators may wish to consider:
 Assigning spectrum in a manner which
does not reduce competition while at the
same time maximising the benefit of a wide
band.
 Facilitating a transition from network based
competition to other forms of competition.
 Focusing on other regulatory remedies if
competition is failing, such as a regulated
access price offer.
Consolidation is
normal when the
industry life cycle
reaches the maturity
stage
Wide band
assignments are
required for an
economically and
spectrally efficient
deployment of LTE

Setting spectrum licence terms to maximise spectrum value to
society
 Spectrum has no intrinsic value. Value is
only created through the use of spectrum.
 The more spectrum is used, the more
socio-economic value is created.
Therefore spectrum licence terms should
encourage the maximisation of the use of
spectrum.
 In practice this means:
– Set terms that encourage investment in
the radio access network
– Prevent spectrum hording through
coverage roll-out obligations

Coverage obligations attached to spectrum licences
Extending mobile coverage is often
a public policy objective
 Operators cover areas where it is
commercially viable to do so.
 A licence obligation to extend
coverage beyond these levels
reduces the value of the spectrum
licence but delivers the policy
objective and associated benefits.
The economic benefit of wider
coverage is likely to exceed lower
auction receipts.

The 2014 700MHz licence award in Chile broke new ground
and is likely to deliver rural development policy objectives
The 700MHz spectrum award process
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.
 Auction proceeds amounted to a
relatively small 0.017 $/MHz/pop

Technical considerations for the efficient use of spectrum
Spectrum packaging is a critical
aspect of spectrum assignments
Factors to be considered are:
 organisation of the lots
– the band plan
 size of each lot
 use of generic or specific lots
 contiguity of lots
 geographical reach of lots
– regional or national
There may be a trade-off between
efficiency and competition

Efficient assignment requires the timely availability of large
amounts of spectrum
 The Swedish telecoms regulator PTS is
at the forefront of best practice
spectrum assignment and
management.
 PTS shall increase the availability of
useful spectrum through least restrictive
conditions, in the work for international
harmonisation, assignments at a good
rate to meet demand, and promotion of
secondary trading. PTS Spectrum Strategy,
Draft summary of the consultation report, Feb
2014
 PTS’s spectrum strategy recognises
that spectrum which is held back and
hence not used, delivers no socio-
economic value.
The estimated total spectrum
requirements for both the RATGs
1 (pre-IMT, IMT-2000, and its
enhancements) and 2 (IMT-
Advanced) are 1,340 MHz and
1,960 MHz for lower user density
settings and higher user density
settings, respectively.
Future spectrum requirements estimate for
terrestrial IMT, Report ITU-R M.2290-0,
(12/2013)

When a new band is released, all of the spectrum in that band
should be made available at once
Auctioning small amounts of
spectrum is inefficient
 When few lots are on offer demand
will exceed supply by a greater
factor. High auction prices will reduce
investment.
 Small amounts of spectrum increase
deployment costs and prevent
operators from delivering true mobile
broadband services.
 LTE and LTE advanced require an
assignment of at least 2x10MHz or
2x20MHz of contiguous spectrum per
operator.
Holding back spectrum increases
operators’ costs and hence retail
prices
 With mobile broadband, capacity is
an issue; more spectrum reduces
site build capex and site opex
 Band 7 (2.6GHz) with 2x70MHz
FDD is a key capacity resource of
mobile operators
 Making this available to mobile
operators will deliver a policy
objective of affordable mobile
broadband

Ensuring a minimum block size of 2x10MHz is key for efficient
LTE deployment
 Deploying LTE in 2x15MHz costs
around $3,900 per MHz; deploying in
only 2x5MHz costs $9,900 per MHz.
 The maximum downlink speed in
15MHz is 112 Mbps compared to only
35 Mbps in 5MHz.
 Potential solutions:
– Assign wide enough bands to
individual operators
– Allow spectrum sharing so that
operators who hold, say 2x5MHz
each, may jointly deploy in
2x10MHz
– Allow spectrum trading
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1 Carrier 3 Carriers
US$
Capex per LTE e-NodeB
eNodeB equipment 5MHz Carrier Cost

The 700MHz band plan for Africa (Digital Dividend 2)
There is only 2x30MHz available
 The four main mobile operators in
Tanzania cannot end up with
2x10MHz each
 Had Band 20 (800MHz) been
allocated to mobile operators this
would not have been such a great
problem
Potential solutions for Tanzania
 Allow spectrum sharing so that
operators who hold, say 2x5MHz
each, may jointly deploy in 2x10MHz
 Allow spectrum trading
 Reclaim under-used or unused Band
20 (800MHz) spectrum
A B C D E F
703 733 758 788
Digital Dividend II
A B C D E F
Uplink Downlink

How many operators can a market support?
Reaping economies of scale and the
benefit of LTE deployment in a wide
band
 The fewer operators there are in a
market, the higher the economies of
scale.
 Lower operator costs can translate
into wider coverage and lower retail
prices.
 Fewer operators mean spectrum can
be deployed in wider blocks:
– Reduces deployment costs
– Delivers higher speeds
Three to four operators provide
effective competition
 There is sufficient consumer choice
 All operators provide a better quality
of service and user experience
compared to a fragmented market

Let’s look at the National information and communications
technologies policy, March 2003
The problem identified in the policy
document:
 The lack of an overall policy and poor
harmonisation of initiatives, have led
to random adoption of different
systems and standards, unnecessary
duplication of effort, and waste of
scarce resources, especially through
the loss of potential synergies.
 Therefore, this National ICT policy
deploys a broad-based national
strategy to address Tanzania’s
developmental agenda.
The solution in terms of one of the
policy objectives:
 Enhance synergy, economies of
scale and productivity in all ICT
matters.
National information and communications
technologies policy, March 2003

Summary of best practice
Policy objectives
 Set appropriate 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

Summary of best practice
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

Assigning spectrum transparently and
efficiently
Auctions, reserve prices and
licence payment terms

Beauty parades lacked transparency and regulators could not
overcome a huge information asymmetry
Operators were required to prepare
“bid books”
 The process was
– time consuming
– costly
– largely works of fiction
– subjective
– lacking transparency
 The asymmetry of information
persisted
 Regulators still had to “pick winners”

Hybrid beauty parades and revenue shares
A combination of bid book and
“auction” were also used
Bidders sometimes had to compete
on the “revenue” share with
government
 penalises efficient use of
spectrum
 incentives cost cutting rather than
offering new services
 impacts prices as it alters the
marginal cost of services
Revenue shares are distortionary
and inconsistent with efficiency

Discouraging speculators
Discouraging speculators
There have been instances of
speculative bidding, with the view to
reselling the spectrum later.
 Spectrum is unused, sometimes for
several years
 Speculators extract cash from the
industry which could be spent on
deployment
Regulators should ensure that:
 Only bona-fide mobile operators enter
an auction by setting eligibility criteria
 Attach a “use it or lose it” obligation to
spectrum

Auctions are increasingly accepted as best practice for
assigning spectrum and pricing
Benefits of an auction
 Transparent and objective
 Consistent with multiple policy
objectives
 Ensures 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
 Quick and cost effective

Implicitly, auctions focus on maximising revenue from
whatever is sold

Policy objectives for the assignment of mobile spectrum are
wider than maximising auction proceeds
 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
 Immediate revenue generation by
maximising auction proceeds

High reserve prices are prone to distort auction outcomes and
harm the public interest in a number of ways
 Spectrum may be left unsold and
hence unutilised. 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.
Potential impact of auction design Examples
Spectrum remains unsold and hence
economic value is lost to the country
India 850MHz (2012, 2013)
Australia 700MHz (2013)
Mozambique (2013)
Higher costs are imposed on operators than
necessary and deployment slows down
Australia 700MHz (2013)
Belgium 800MHz (2013)

Driven by the desire to plug a hole in the budget, Australia set
extremely high reserve prices for 700MHz
700/800MHz Digital Dividend Spectrum Reserve Prices Compared
0.00
0.09
0.13
0.25
0.30
0.30
0.32
0.42
0.49
0.47
0.56
0.60
0.80
1.35
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
Germany - 5/2010
Netherlands - 12/2012
Denmark - 6/2012
Sweden - 3/2011
UK - 2/2013
Switzerland - 2/2012
Finland - Q4/2013
New Zealand - 10/2013
Spain - 7/2011
Canada - Q4/2013
Portugal - 12/2011
France - 12/2011
Italy - 9/2011
Australia - 5/2013
US$ / MHz / Pop

The Australian reserve prices were set higher than prices paid
at auction in other countries
1.28
0.91
0.58
0.49
0.81
0.56
0.88
0.37
0.65
0.73
1.35
- 0.20 0.40 0.60 0.80 1.00 1.20 1.40
USA - 2/2008
Germany - 5/2010
Sweden - 3/2011
Spain - 7/2011
Italy - 9/2011
Portugal - 12/2011
France - 12/2011
Denmark - 6/2012
UK - 2/2013
Average 700/800MHz
Australia Reserve…
US$ / MHz / Pop
700/800MHz auction prices paid vs. Australian reserve prices

The Australian APT 700MHz auction resulted in a loss to
society and is an example of policy failure
 Potential socio-economic gain for
Australia?
 Is the spectrum actually used?
 Can operators deploy the 700MHz
band cost effectively?
 Is there competition to drive down
prices?
 Between AU$ 7bn and AU$10bn
 2x15MHz of 2x45MHz unsold
hence not all of the potential socio-
economic gain is realised
 Only Telstra obtained 2x20MHz,
can deploy at lowest cost, Optus
obtained only 2x10MHz
 One operator, Vodafone, did not
obtain any spectrum and the
leading operator Telstra increased
its competitive advantage, thus
reducing competition

Lessons learned from the Australian 700MHz auction
High reserve prices are not a good
approach to spectrum auctions
 They have a market distorting effect
 Regulators might not achieve their
policy objectives
 Even if a large amount of money is
raised up-front this is likely to reduce
overall economic value in the long term

The societal value of allocating spectrum
 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.

Setting high prices for spectrum is problematic
Hazlett and Munoz, “What Really Matters in
Spectrum Auction Design”, 2010
“[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.”

Benchmarking based on auction outcomes is not an
appropriate method to set reserve prices
 The value of spectrum to a mobile
operator is specific to its business and
based on a discounted cash flow
forecast for the business.
 Prices paid at an auction reflect
outcome based on the value operators
assign to spectrum in that country
under a particular set of
circumstances.
 More recently prices paid reflect high
renewal prices. For example, the cash
strapped government in Greece in
2011 set extremely high reserve prices
to renew spectrum. Operators had the
choice to pay up or shut down.
Benchmarking

Setting reserve prices based on cost
 Two costs of allocating spectrum to
mobile can be identified.
 Reserve prices should be set to
compensate for the higher of either
one of those costs:
– The opportunity cost, i.e. the value
that would be generated from the
next best alternative use of the
spectrum.
– The cost of moving incumbent
users to free up the spectrum for
mobile use.
Example New Zealand, 700MHz
auction 2013 announcement
The reserve price for each of the
nine lots of 5 MHz paired has been
set at NZ$22 million [NZ$198
million in total].
The Government has spent $157
million clearing the 700 MHz band
to allow the spectrum to be used for
4G mobile networks.
Communications and Information
Technology Minister Amy Adams, 700MHz
auction announcement, 4 Sep 2013

The reserve price for the 700MHz auction in Chile in 2014
was set to deliver rural development policy objectives
The 700MHz spectrum award
process 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 $/MHz/pop.
Note: Per capita GDP in Chile: US$ 15,700

Benchmarking reserve prices between countries only works if
the policy objectives are the same
Policy objective in spectrum
auctions in India
 Explicit policy objective to maximise
receipts from spectrum auction
 No other aspect is taken into
account
What are the policy objectives in
Tanzania?
 “Tanzania to become a hub of ICT
Infrastructure and ICT solutions that
enhance sustainable socio-economic
development and accelerated
poverty reduction both nationally and
globally.”
 “To enhance nation-wide economic
growth and social progress by
encouraging beneficial ICT activities
in all sectors through providing a
conducive framework for investments
in capacity building …..”
National information and communications technologies policy,
March 2003
Using benchmarking to set reserve
prices implies that you abandon your
own policy objectives and instead
have these set by the countries you
benchmark against.

In setting reserve prices, consider the reality of Tanzania
 Per capita GDP of Tanzania is only US$ 700,
thus limiting the revenue potential for mobile
operators (EU GDP / capita US$ 35,530)
 Network capex per covered head of
population in Tanzania is higher than in many
European markets.
– Tanzania is a very large country with a low
population density (56 pop / sq.km in
Tanzania vs. 112 in the EU)
– There is little existing fibre for backhaul
purposes
 The mobile industry in Tanzania is already
relatively highly taxed

Offering the option of upfront versus staggered payments
constitutes best practice
 “Allowing staged payment will enable mobile
network operators to invest immediately in building
their 4G networks to increase their service to New
Zealanders.” Communications and Information Technology
Minister Amy Adams, 700MHz auction announcement, Sep 2013
 In principle, operators can reflect the timing of
payments in their valuations. However,
requirements to pay the full amount as a lump sum
may have a disproportionate impact on more highly
geared operators, which could threaten auction
efficiency.
 Offering the option of upfront versus staggered
payments, subject to a market-based interest rate,
reduces this risk and therefore constitutes best
practice.

A case study in how not to conduct a
spectrum auction
Digital dividend spectrum auction
case study: Mozambique

Digital switchover completed: 2x30MHz of 800MHz spectrum
available for auction
 There are three mobile operators
present in Mozambique: Mcel,
Movitel, and Vodacom.
 Mozambique successfully freed up
the 800MHz band.
 The whole Digital Dividend 1
spectrum 800MHz band (band 20)
consisting of 2x30MHz was available
for auction to mobile operators.

To create auction tension the regulator, INCM, decided to only
auction 5 out of 6 blocks
 The INCM correctly realised that:
– There would be no new entrant,
– To deploy efficiently each operator
would require at least 2x10MHz
 In order to create competition between
the 3 bidders, INCM only offered 5 of
the 6 available 2x5MHz blocks for
sale.
 There was a cap of 2x10MHz in this
auction using the SMRA format
A B C D E F
791 821 832 862
IMT Band 20 Band Plan
 The only possible outcome:
– Two operators with 2x10MHz and
one with 2x5MHz.
– One lot would have been unsold;
the economic benefit to
Mozambique is reduced by 17%.
– In a 3 player market one operator
would have been weakened with
negative consequences for
competition.
A B C D E F
Uplink Downlink

The reserve price for each block was unreasonably high: All of
the spectrum remained unsold
The reserve price in Mozambique
 The INCM set the reserve price per
2x5MHz block at US$ 30 million.
 The population of Mozambique is 26
million, so the reserve price is
0.115 US$ / MHz / pop.
Benchmarking this 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)
On a GDP adjusted basis, the
reserve in Mozambique was around
10 times higher than prices paid
elsewhere for digital dividend
spectrum
All the spectrum is unsold

The regulator’s objectives were clearly stated in the draft
resolution
Article 3 Objectives
 The objectives of the present auction are:
– Ensure the efficient utilization of the frequencies object of the auction;
– Promote competition maximizing benefits for the users.
Source: Draft Resolution nº 31 /CA/INCM/2012

Best practice was ignored and none of the objectives were
achieved
 There was a limited consultation, but:
– responses from operators with regards to the excessively high reserve price
were ignored, and
– advice against leaving one block was ignored.
 The government did not raise any money from the spectrum auction
 Spectrum that could have been put to good use for mobile broadband lays fallow
and society loses out
 Operators have to find alternative, more expensive solutions to deploy LTE
mobile broadband
 The government loses out because it does not garner tax receipts from mobile
broadband services
 The economy loses out because the development of the digital economy
enabler, LTE, is slowed down

The use of spectrum auctions may not be
appropriate in the case of existing
spectrum rights
Best practice spectrum renewal

Extending existing licences poses different problems
Licence extensions or renewals are now
common as many 15 or 20 year licences
come to the end of their term
 Not obtaining a licence extension or
renewal may put a viable business at
risk.
 There is evidence that mobile operators
reduce investment as the end of the
term approaches.
 If licences are not extended,
considerable disruption would result with
a cost to consumers, employees and the
attraction for future investment

Spectrum renewal is often best managed through some form
of administrative process
The risk of incumbents failing to
retain spectrum creates a
significant risk to efficiency
 Spectrum should be awarded to
those that value it most highly
 Incumbent operators are likely to be
those that value it most highly
 Efficiency usually implies that
incumbents should retain their
existing spectrum at auction
New entrants recognise this and
auction participation for new
spectrum is likely to be low
Low participation is likely to lead
to a lack of competition in an
auction for existing spectrum
If auctions are non-competitive then
they will not deliver an efficient
outcome
Spectrum is usually best renewed
through an administered process

Solutions for licence extensions or renewals
Harmonise licence expiry dates
 In many markets licences do not expire at the same
time. Some regulators harmonised licence expiry by
granting partial extensions, e.g. Ireland.
 All expiring spectrum could then be auctioned together,
thus eliminating the predatory bidding problem that may
otherwise arise from asymmetries.
Use an administered method with pricing based on
opportunity cost
 Recognise that auctioning spectrum that is in use by a
successful mobile operation is not necessarily the best
method.
 An administered process based on the opportunity cost
to other potential users (AIP) may be a better solution.

A range of approaches have been adopted
Examples of renewal
65
Singapore
SMRA Auction
Switzerland
CCA Auction
Ireland
CCA Auction
Australia
Right of First
Refusal
New Zealand
Right of First
Refusal
France
Administered renewal
and re-assignment
Portugal
Administered renewal
Netherlands
CCA Auction

Implications for best practice
Best Practice
 There should be a presumption of renewal in favour of the incumbents
 An administered process will often be more appropriate
 Some form of Administered Incentive Pricing should be used to determine the
cost of spectrum

Challenges in selecting the best auction
format and rules
Best practice in spectrum
auctions

In most cases involving the assignment of new spectrum the
conditions for the use of an auction are likely to be present
When to use auctions
 An appropriate auction design can be
formulated that meets policy objectives
 The monetary value of the licence is
relatively high, justifying the costs of
running the auction
 Where there is a need for transparency
to avoid potential legal challenges and
increase confidence in the regulatory
body
 There is excess demand for the lots to
ensure an efficient outcome

Encouraging participation in the auction is necessary to
generate the excess demand required for an efficient outcome
Encouraging participation
 Credible and predictable regulatory
environment
 Well defined spectrum rights
 Reasonable coverage and other
licence requirements
 Clear and unambiguous award
process
 Material but low reserve prices
 Multiple lots
 Potential use of spectrum caps

Bidders will not pay more than their valuation
Valuations
 In preparing for an auction, bidders will value the lot(s) they intend to acquire
 This establishes how much a lot is worth to the bidder
 If bid amount is equal to the valuation, then the bidder does no create additional
value for its business
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

First Price, Sealed Bid Auction
Assumptions
 Each of you represents a different mobile operator
 You are competing for a single block of spectrum
 The value of the block is said to be “common”
– The true value of the block is the same for all operators
 You have each estimated the value of the block, but with error
– Some will have over and others, under, estimated
– You do not know if your valuation is an over or under estimate
Auction Rules
 On a sheet of paper write your name, your valuation, and the amount you bid.
Fold it over to keep it secret and hand to the auctioneer.
 The highest bidder wins and pays their bid

Spectrum auctions can go horribly wrong
A story from Istanbul
The Turkish GSM auction held in 2000
offered two GSM licences
 The government wanted to maximise
revenue
 To ensure that there were two
operators each bidder could acquire at
most one licence
 A sequential first price sealed bid was
used
 The reserve price in the second
auction was determined by the price in
the first auction
What do you think happened?

There was a significant failure to achieve policy objectives
A story from Istanbul
 The value of a licence depends on
how many players there are
 A smart bidder placed a very
aggressive bid
– Higher than the value of the
spectrum in a two player market
– But below the value of a single
player market
The outcome
 The smart bidder won the first
auction at a price above what any
rational bidder would pay to enter a
two player market
 The second licence went unsold
Policy failure
 The regulator’s competition
objective was not met
However, promoting excessive
competition can be equally
damaging

The “winner’s curse” and bidding strategy in a first price,
sealed bid auction
The value of the licence was
common to all bidders
Bidders estimated the value with error
 The average value of all bidders is
likely to be correct
– assuming the estimates are
evenly distributed about the
mean
 By definition – if you win, you must
have over paid
 Bidders appreciate the risk and so
must “shade their bid”
Bid shading can give rise to an
inefficient outcome
There is no “dominant strategy” as to
how much to shade
 If a strong bidder (high value)
shades a lot
and
 A weak bidder (low value) shades a
little
Then the weak bidder could win
resulting in an inefficient outcome

Existing rights were auctioned in a combinatorial sealed bid in
Norway resulting in a loss of efficiency and competition
The Norwegian experience
Combinatorial sealed bid auction
 Incumbent Tele2 expecting to be the
weakest of the incumbents and no real
competition from a new entrant shaded
aggressively
 A new entrant bidding aggressively beat
Tele2
 Tele2 has since announced its exit from the
Norwegian market, with a sale of its assets
to rival TeliaSonera

Auction Example: Second Price Sealed Bid

2nd Price, Sealed Bid Auction
Assumptions
 You each have an individual valuation for the spectrum
 You have confidence in your valuation
Auction Rules
 On a sheet of paper write your name, your valuation, and the amount you bid.
Fold it over to keep it secret and hand to the auctioneer.
 The highest bidder wins, but pays the amount of next highest bidder

Bidding Strategy
Dominant Strategy
In this auction there was only ever one number to bid
 If you bid less than your valuation
– You risk losing and regretting that you did not bid more
– You are an unhappy loser
 If you bid more than your valuation
– You risk winning and regretting paying more than the value
– You are an unhappy winner
 The “Dominant Strategy” is to bid your valuation
Please feel free to change your bid if you wish

Did we achieve an efficient assignment of spectrum with our
First Price, Sealed Bid auction?
Was the spectrum awarded to the
operator who valued it most
highly?

What about a second price auction
Was the spectrum awarded to the
operator who valued it most
highly?

A second price sealed bid auction delivers an efficient
outcome and spectrum is priced at its opportunity cost
The opportunity cost of spectrum: What would have been the auction
receipt had the winning bidder not been present?
Winner’s bid
2nd highest bidder’s
bid
Opportunity
Cost
Unhappy
Loser
Happy Winner
Happy Loser

Issues in single round auctions
Advantages
 Quick
 Low cost
 Encourages participation
Disadvantages
 High dependence on business
planning
 No opportunity to learn about
common value
 Perceived as risky
 Harder to implement when multiple
lots and multiple bands being
auctioned simultaneously
Generally regarded as not best
practice

Auction Example: Ascending Clock Auction

Ascending clock auction
Assumptions
 You each have an individual valuation for the spectrum
 You have confidence in your valuation
Auction Rules
 I will announce a series of prices
 Keep your hand up if you are happy to buy one lot at the clock price
– You cannot put your hand down and later put it up again
– This is an “activity rule”, i.e. if you are interested you must keep bidding, you
cannot sit on the side-lines and come in later with bid
 Bids will increase at the rate of [x]

Ascending clock auction
Advantages
 Simple
 Quick
 Opportunity for learning
 Perceived as less risky
Challenges
 Activity rules required to ensure
honest bidding
 Creates a challenge when there are
multiple blocks
If multiple spectrum blocks are on
offer, auction these simultaneously.

Overcoming issues that arise with different auction formats
 Risks for bidders in an auction
– Substitution risk
– Exposure risk
 Ensuring sincere bidding
 Avoiding inefficient outcomes, notably fragmentation
 Avoiding unsold lots

Substitution risk
Definition of a Substitute
“Two items are said to be substitutes if
an increase in the price of one item
leads to an increase in demand for the
second item.”
For example
 If the price of chicken goes up then
people will buy more lamb – chicken
and lamb are said to be substitutes
 If the price of 900MHz spectrum goes
up the operators will demand more
800MHz
Substitution Risk
 The risk that a bidder acquires a
specific spectrum lot for a given price
when it would have preferred to have
acquired a substitute spectrum lot at
a lower price
 If an auction creates substitution risk
then the auction outcome may not be
efficient
Problem: Sequential auctions create
substitution risk
Solution: Auction blocks
simultaneously using SMRA format

Simultaneous Multi Round Ascending (SMRA) format
How does an SMRA work?
 An auction where multiple lots are auctioned simultaneously comprising a
number of rounds and where the prices of the lots increase in each round
 Lots and prices paid are based on the final round with certainty
An example
 Six blocks of 700MHz spectrum are auctioned simultaneously
 Bidders can bid on one or more blocks in each round
 The price increases in each round as long as there is more than one bid per
block, i.e. there excess demand
 The auction stops when the number of bids is equal to the number of lots, i.e.
there is no more excess demand
 Can also be used to sell blocks in different frequency bands simultaneously

Exposure or fragmentation risk
Definition of a Complement
“Auction lots are said to be
complements if the value of the lots
together is greater than the sum of the
individual parts. If the price of one lot
goes up the demand for the other
diminishes”
For example
 Two contiguous blocks are more
valuable than two non-contiguous
blocks
 Acquiring a national footprint in a
regional auction has greater value
than the sum of the individual
regional licences
Exposure Risk
 A bidder seeking to aggregate
complementary lots bids on the basis
of their synergistic valuation
 The bidder is then outbid on one lot
and is left with a stranded lot at a
price greater than its stand alone
valuation
 Economically inefficient outcomes
and challenges in strategy arise
Problem: SMRA auctions create
exposure risk

Exposure Risk: Auctioning specific blocks of spectrum in
parallel may lead to non-contiguous assignments
 Potential non-contiguous assignments are a key drawback of a regular
Simultaneous Multi Round Ascending Auction (SMRA)
 Not technically efficient
 Vulnerable to anti-competitive bidding (e.g. attempt to isolate individual blocks)
90
A B B A C C
Example: Bidders B and C have contiguous assignments, while A’s assignment is
fragmented, thus increasing deployment costs and reducing efficiency
700MHz Band Plan assigned in 2 x 5 MHz blocks

Solutions to overcome exposure (fragmentation) risk in an
SMRA (1)
Allow operators to declare an economic minimum
 An operator may end up with 1 block but only wants 2 blocks or nothing. By
declaring ahead of the auction an economic minimum of 2 blocks, the one block
provisional win would be avoided.
– This may require adding a second stage to an auction to sell unsold blocks
Auction generic blocks
 Where one block is impaired, e.g. the lowest block in the 700MHz band, this
block can be auctioned as a specific block and the 5 others as generic blocks.
– This solution is used for the 700MHz band in the German auction, starting in
May 2015
 The winning bidders agree among themselves how to assign specific blocks.
 If no agreement in reached between operators, then regulator intervenes and
decides based on objective criteria (consumer welfare, reduced capex)

Solutions to overcome exposure (fragmentation) risk in an
SMRA (2)
Allow “augmented switching” during the auction
 Augmented Switching allows bidders to go after contiguous blocks of spectrum
and to switch active bids between lots as the auction progresses.
Add an assignment stage to an SMRA auction
 The assignment stage is where winning bidders have the opportunity to make
additional bids to express their preferences for specific block assignments within
the generic blocks that they have won.

A combinatorial auction format can overcome fragmentation
risk but has many disadvantages
Combinatorial Clock Auction (CCA)
 Suitable when different types of
spectrum are auctioned at once
 An auction format which allows
bidders to express demand for
combinations of lots at a given set of
prices which tick up during each
round of a clock phase
 Usually followed by a supplementary
round where additional bids can be
paid
 Lots awarded and prices are
determined on the basis of a
“generalised” 2nd price rule
A CCA has many drawbacks
 Extremely complex, difficult to
understand and run
 Costly to execute
 Significant uncertainty over outcome
 Risk of predatory bidding strategies
designed to raise the costs incurred
by rivals
A problematic auction format

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

Other aspects of best practice
 Spectrum auctions have a significant impact on the mobile industry and ICT
development
 Auctions can go very wrong, good auction rules are required to ensure that a
spectrum auction is a success
 Two aspects are critical in an SMRA
– Activity rules
– Provision of information to bidders

Activity rules are required for an efficient auction
Activity rules
 Stop bidders from sitting on the side-lines and coming in with a late bid
 Stop bidders concealing information
 Promote honest or sincere bidding
 Manage the speed of the auction
An example
 In a raising auction a bidder cannot stop bidding in round 8 and then start again
in round 11
The solution
 Eligibility points cans be used to enforce activity on a round by round basis:
Keep bidding or you lose points and your next round of bidding is restricted.

Information and transparency
Greater transparency is generally
preferable
 Greater transparency helps reduce
common value uncertainty
 Reduced common value uncertainty
leads bidders to bid more
aggressively leading to higher
revenues

Best practice provision of information to bidders before and
during an auction
Before the auction
 List of eligible bidders participating in the auction
 Eligibility points purchased
During auction at the start of each round show the following information
 Activity phase
 For each block the highest bid amount and the name of the bidder
 For each block the minimum and maximum next bid
 Number eligibility points per bidder
 Number of remaining waivers
 Number of remaining withdrawals
 List of bidders who left the auction

While no format appears to be perfect, policy makers need to
consider the problems associated with each
Vulnerability of auction format CCA SMRA
1st price
sealed
bid
2nd price
sealed
bid
Inefficient allocations due to budget
constraints in conjunction with lack of
visibility over price exposure
Material price disparities, bidders end up
paying different amounts per MHz
Risk of predatory bidding strategies
designed to raise costs incurred by rivals
Inefficiencies caused by difficulties in
aggregating optimal spectrum packages
Economic inefficiencies caused by
demand moderation strategies
Costly to execute, difficult to understand
lack of transparency

Implications for best practice
Best Practice
 Auctions should be used whenever possible
 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 if appropriate
 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

Best practice in selecting and auction format and rules
 Do not use the cookie cutter approach,
simply copying 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
 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 raises in submissions from
stakeholders

Best practice spectrum auction workshop, Tanzania 26 May 2015

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Best practice spectrum auction workshop, Tanzania 26 May 2015