Market Mechanisms for Spectrum Allocation

1. Market Mechanisms for Spectrum Allocation Presented to Spectrum Allocation, a Network Insight seminar Professor Reg Coutts Director,

2. Summary • Review of market mechanisms • Some recent licence allocations of interest • Difficulties in the process • Conclusion Lessons from a "down under" perspective!

3. APPLICATION BEAUTY CONTEST AUCTION Commercial spectrum allocation • By application • First come first served (if sufficiently well dressed) • Appropriate, provided that supply exceeds demand • By beauty contest • Transparency of process a problem • By market mechanisms • Auction or tender • Transparent? • Efficient?

4. Why auction? • “Commercial users have best understanding of commercial value” • Efficient • Minimal bureaucracy • Fast allocation • Fair • Transparency • Tends to reduce distortion At least, that's the theory!

5. Other Objectives... • Bidders and “market value” • Enhancing global reach • Protecting related investments • Blocking additional competition • Governments and “efficient allocation” • Promoting competition (e.g. new entrants) • Social benefit • Raising revenue • Recognising industry objectives

6. Spectrum prices in PCS Phase I (1998) • 800MHz • Sydney/Melbourne/Brisbane: $0.30/MHz/pop • Adelaide/Perth/Canberra: $0.08/MHz/pop • Regional and Remote: $0.04/MHz/pop • 1800MHz • Sydney/Melbourne: $0.12/MHz/pop • Brisbane: $0.06/MHz/pop • Adelaide/Perth/Regional: $0.03/MHz/pop Prices in $US

7. PCS Auction Phase II • 24 January to 15 March 2000 • 30MHz in 2.5MHz lots in 5 cities • 138 rounds • Siemens did not bid • Primus withdrew at round 83 • Optus withdrew at round 105 • Telstra spent $78.6 million • Vodafone spent $55.3 million • One.Tel spent $523.1 million • Hutchison spent $670.9 million • Total revenue $1,327,735,500 = $US 756 million • 4 times government estimate! No mobile. Competes with One.Tel in long distance. Optus resale, rolling out GSM1800. Now active Optus resale, no infrastructure. No public plans. Data network?

8. Prices in Phase II • Sydney • $US1.78/MHz/pop (1420% increase) • Melbourne • $US1.60/MHz/pop (1420% increase) • Brisbane • $US0.25/MHz/pop (310% increase) • Perth and Adelaide • $US0.11/MHz/pop (270% increase)

9. Lessons from Australian PCS Auctions • “Values” very different at different time • Depends very much on the immediate market • Commitment can be costly! • One.Tel spectrum essential to support network under construction • Hutchison very aggressive • First real international indication of Hutchison’s intent Don't assume bidders are competant or rational!

10. A B C D E 1 2 3 4 5 6 7 3G Licences • Auctioning • Licences • Specific or highest value • Highest amount or % of revenue • Blocks or lots • Beauty Contests • Technical requirements • Social requirements • Financial requirements • Licence fees

11. European 3G auctions • UK • Auction structure to force new entrant • Extraordinary prices! • Holland • Allegations of unfair play • Germany • Problems of transparency • Italy • Auction structured to raise revenue • Ignored the 2G market structure in Italy!

12. 3G beauty contests • Sweden • Incumbent failed to win licence • Litigation in process... • Korea • Technology-specific requirements • France and Belgium • Very high licence fees based on German prices • Licences left unallocated!

13. Hong Kong 3G Beauty Contest + Auction • Beauty Contest pre-condition • Royalty payment scheme • Open Network policy Highly bureaucratic and interventionist! Not such a bad thing...

14. Enel PTC Centertel Polkomtel 3G Company Relationships France Telecom British Telecom Japan Telecom Mobilcom Diax Telenor Group 3G Tele Danmark Sonera Vivendi KPN Libertel 3G Blue Telfort Broadband Mobile Enitel Orange Deutsche Telekom Hutchison Vodafone Dutchtone Viag Interkom Mannesmann Mobilfunk E-plus T.mobil Telefonica Wind Omnitel Andala BEN Xfera Airtel Amena Team 3G dspeed Swisscom AG Tele.ring Connect Austria Mobilkom Austria MAX.mobil IPSE TIM NTT DoCoMo Europolitan Hi3G Access OniWay Telecel Austria Telekom One-2-One TIW The Globalisation Push 14

15. LICENCE Bureaucratic process • Policy • Often unclear • Consultation process • Infrequent and not transparent • Lobbying by self-interested parties, not LTIE! • Issues • Packaging/bundling of spectrum and licences (including caps etc) distorts market • Difficult to find an independent view!

16. Auction process • “Right” model for each situation • Must run its course • Initial stages: Posturing • Intermediate: Declaration of intent • End game • Little evidence yet of resale market • Certainly not “open” resale! • Spectrum comes with technology attached • Distorts auction process • A means by which governments extract monopoly rent AUCTION

17. Future alternative? • Online exchange for radio frequency spectrum rights • Macquarie Bank: Spectrum Desk • Creation of secondary radio spectrum market • Both buyer and seller auctions take place between anonymous participants on website • Charge brokerage based on value of transaction • Benefits • Reduced barriers • Increased liquidity • Concentrated demand • Greater market integrity

18. Conclusion • Admin versus Market? • Both have their “war” stories • Australian process appears functional • Right mix of “market” and “admin” process • Technology neutrality - a managed “illusion” • Auction process has been consistently distorted internationally • Monopoly rent-seeking focus by some governments • 3G in Europe • Both market and admin failure in evidence