Spectrum Auctions for iWeek South Africa KB Enterprises

Spectrum Licensing & Auctions Karen Wrege, KB Enterprises, LLC iWeek 2009

Elements of Spectrum Management

Definition (Service Rules)

Allocation (License Definition)

Assignment

Enforcement

Overview of Assignment Options

First In Time

Lottery

Beauty Contest

Auction

“ Hybrid” process

First In Time

Attributes:

Administrative award process

Award based on the order in which applications are received

Advantages:

Quick

Low litigation risk since selection criteria is simple and straight forward

Inexpensive

Fair and efficient in situations where demand does not exceed supply

Disadvantages:

Inefficient if demand exceeds supply

Does not compare applications against each other to determine best assignment

Lottery

Attributes:

Random assignment of licenses if demand exceeds supply

May includes some applicant pre-qualification criteria

Advantages:

Quick (depending on complexity of pre-qualification process)

Low cost (depending on complexity of pre-qualification process)

Fair (everyone has an equal chance of winning)

Disadvantages:

Does not compare applications to determine best use

Possibility of windfall profits if secondary trading is allowed

May encourage speculators if there is lax pre-qualification or low entry costs

Beauty Contest

Attributes:

Comparative selection (merit-based)

Regulator publishes evaluation criteria (and fee, if any)

Advantages:

Regulator has high degree of discretion

Can involve many different objectives (e.g. social objectives)

Disadvantages:

Difficult to define criteria that can be compared objectively

Subject to favoritism/corruption

Litigation risk

Incentive for applicants to overstate their capabilities

Large burden on applicants to create complete & compelling business case.

Auctions

Attributes:

Spectrum awarded to the highest bidder

Can include other factors beyond price (e.g. minimum quality of service)

Advantages:

Well designed auctions lead to an efficient outcome

Fair and transparent

Well designed auctions (and software) can be straightforward for bidders

Extracts scarcity value of spectrum

Disadvantages:

If poorly designed, may lead to overpayment and strategic manipulation

Problems if design does not take into account potential market failure risks

Prices paid can potentially slow down service roll-out

Hybrid Process

Attributes:

Combination of “Beauty Contest” and auction

Those passing the beauty contest proceed to the auction

Advantages:

Gives regulator more discretion than in a pure auction

Potentially avoids some risks of a pure beauty contest

May reduce incentives for applicant to over-state their capabilities

Extracts value of spectrum

Disadvantages:

Retains many of the disadvantages of beauty contests

Time consuming and risk litigation by unsuccessful applicants

Could produce less competitive auction and increase possibility of collusion

ICASA Bandplan Options

ICASA presented 3 options

Bandplan Options

ICASA found option 1 unworkable because of incumbent allocations at 2500 MHz

ICASA found option 2 undesirable because it is not technology neutral

This leaves option 3, a flexible bandplan – but this may not be as flexible as it first seems

Flexible(?) Bandplan

Given the incumbents at 2500 - 2570, a “flexible bandplan” would require relocation to allow for FDD pairing

Source: Martyn Roetter

Bandplan Issues

Incumbents occupy 65 MHz so 125 MHz remains

Guard bands will be necessary for TDD & FDD to coexist

Band Plan will require reshuffling to accommodate FDD

Allocation impacts assignment mechanism

Assignment Options

Per the General Notice, ICASA is considering:

A purely comparative evaluation process; or

A purely competitive evaluation process; or

A combination of the two. For ease of reference, the Authority shall refer to combination of the competitive and comparative evaluation processes as truncated granting methodology .

ICASA Assignment Methodology Concerns

Concerns for Comparative Process

Opaque and Non-transparent

Requires Ranking Applications

Concerns for Competitive Process

Risk of Collusion

Spectrum acquisition costs being passed through to consumers

ICASA documents appear to favor the “truncated granting methodology” -- a hybrid approach

Choosing Auctions As Part of the Assignment Mechanism

Multiple types are used for spectrum, including:

First Price Sealed Bid

Second Price Sealed Bid

Simultaneous Multiple Round Ascending (SMR)

SMR with Switching Rules

Ascending Clock

Auction Types: First Price Sealed Bid

Only one opportunity to provide bid – must know price information.

Bidders submit their bids independently and are prohibited from sharing information.

Highest bidder wins. Winner pays its bid. Losers pay nothing.

But when bidding below value, you risk regret.

Optimal bid strategy trades off risk of not winning & gain from winning with lower bid.

Bidding your valuation guarantees you get no surplus, thus:

Best strategy is to bid less than true valuation (shading).

$200 $150 $300 High Bidder Pays $300

Second Price Sealed Bid

Only one opportunity to provide bid – must know price information.

Bidders submit their bids independently and are prohibited from sharing information.

Highest bidder wins. Winner pays highest losing bid. Losers pay nothing.

William Vickrey won 1996 Nobel prize for his work on this subject

Encourages bidders to bid to their private valuations, protects against an enormous erroneous bid.

Called “incentive compatible”.

High Bidder only pays $201 $200 $150 $300

Simultaneous Multiple Round (SMR)

All items are auctioned simultaneously.

Bidding progresses through a series of discrete timed rounds.

Standing high bids are determined at the close of each round.

Prices increase on all licenses that were bid on in the previous round.

The auction closes after a single round in which there are no new bids on any of the licenses.

Highest bidder on each item wins it and pays the price bid.

SMR with Switching Rules

Switching Rules allow bidders to move freely to substitutable licenses during the auction as prices rise.

Bidders who have standing high bid on a lot may switch their bid to another lot.

Facilitates aggregations.

Ascending Clock Auction

Simultaneous ascending auction (like SMR).

Generally used to sell multiple identical items.

At the end of each bid round, prices increase if there is excess demand.

Bidders choose whether to accept or reject the new announced prices.

The auction closes when the number of bids equals the number of licenses (supply=demand).

The winning bidders all pay the required bid amount and each of them is assigned an identical license.

Clock auctions can also be combined with a subsequent phases to deal with bids for packages of complementary licenses.

Arguing Against A Beauty Contest

A beauty contest component, even if paired with an auction is problematic:

Difficult to be objective, non-discriminatory and transparent

Litigation risk

Difficult to set selection criteria and evaluate.

Often favors incumbents

Often a lengthy process

Because it is a subjective process there is no guarantee that it will not disqualify an applicant that could build out a network effectively

Arguing for a Pure Auction Approach

More flexible and responsive than selling at a fixed price

Less haphazard than negotiations

Simplicity in determining market-based price (price is set by the bidders competing)

Minimizes transaction costs

Allows mechanization of process

Opens market to more participants

Can speed up the time of negotiations

Ideal for Internet execution

Can still meet social objectives

Incorporating Social Objectives into an Auction

Strict eligibility requirements

Bidding credits for small businesses, disadvantaged individuals and women

New entrant set-asides

Spectrum caps for incumbents to promote new entrants

Lease fees in lieu of full payment for spectrum licenses

Strict build out requirements

Use or lose spectrum policy

Desirable Properties for an Auction

Wide participation

Efficiency: Goods go to entity that values them the most

Incentive compatible

Flexible and Robust

Dynamic

Transparent

Simple

Rules to maximize social welfare

Auction Components

Definition of product being sold (property rights and responsibilities)

Bidding

Auction Deposits (Must be enough to level the playing field and attract serious bidders)

Who is allowed to bid? (Eligibility requirements)

How are bids presented? (One time or Multiple rounds)

How much must bids be beaten by? (Bid increments)

Information

Are current bids revealed? (Hiding bid identities during the auction helps to reduce strategic gaming)

Are winners identified? (Transparency of process)

Clearing

Who gets what and at what price? (First or Second price)

Auction Rules Matter

Regulators want bidders to tell the truth, but..

Bidders might do better by lying (e.g., by forming a ring or by colluding )

All auctions types are subject to some sort of manipulation by collusion among buyers, sellers, and/or auctioneer.

Bidders need to be wary of “winner’s curse” (bidder who wins believes they overpaid)

Encourage bidder participation – more competition, reduces ability to collude.

Minimize/eliminate exposure and aggregation risks - bidders that win some but not all of their desired licenses

Allow bidders flexibility to pursue back up strategies without increases exposure risks

Choosing an Auction Type

Sequential vs. simultaneous auctions

Simultaneous auction takes into account complementarities and substitutability of spectrum licenses.

Single round vs. multiple round auctions

Multiple round allow bidders to help avoid the “winners curse” and allow for price discovery during the auction.

Simplicity vs. more complex auctions

Depends on the number of licenses, bidder sophistication, and degrees of complementarities and substitutability of the licenses in the auction.

Clock auctions vs. Simultaneous Multiple Round Auctions

Clock auctions are generally simple for bidders to participate in but may require additional measures to deal with overshooting.

International Auction Practices in 2.5 and 3.5 GHz bands

Most countries have used an auction to allocate spectrum in these bands

Some countries have allocated spectrum nationally, while others have opted for regional allocations

Most countries have auctioned 2.5 and 3.5 GHz bands separately

Spectrum generally will be allocated on a “technology neutral” basis

International Experiences:

In June 2002, Nigeria held a single round combinatorial auction for 3.5 GHz spectrum

UK and the Netherlands plan to auction spectrum using a combinatorial clock auction with final round stages to choose high bidders and assign specific frequencies. Paired and unpaired spectrum assigned through the auction mechanism.

Denmark recently issued a consultation document proposing a combinatorial clock auction using the CEPT bandplan.

New Zealand in December 2007 chose a SMRA auction method with defined paired and unpaired spectrum blocks in the 2.3 and 2.5 GHz bands

International Experiences:

Sweden and Norway opted for SMR auctions with switching rules where paired and unpaired spectrum was pre-defined

Italy auctioned 3.5 GHz licenses using a first price sealed bid auction method in early 2008

Germany auctioned 3.5 GHz licenses using a Simultaneous Multiple Round Ascending Auction format

Taiwan used a hybrid “beauty contest”/Auction process

Hong Kong used an SMR format where paired and unpaired spectrum was pre-defined.

Jamaica conducted a hybrid “beauty contest”/sealed bid auction in early 2009. The auction failed to meet the established reserve price.

South Africa Licenses

2.5 GHz Band

Nationwide license areas

30 MHz blocks

4 licenses

Technology Neutral

3.5 GHz Band

Designated Geographic Catchment areas

At most 28 MHz per operator

2 licenses per geographic area

Technology Neutral

ICASA Policy Objectives from the Electronic Communications Act

The policy objectives set forth in the Electronics Communication Act are broad and far reaching and include the following social objectives:

Promote the empowerment of historically disadvantaged persons, including Black people, with particular attention to the needs of women, opportunities for youth and challenges for people with disabilities;

Ensure that broadcasting services and electronic communications services, viewed collectively, are provided by persons or groups of persons from a diverse range of communities in the Republic;

Provide assistance and support towards human resource development within the ICT sector;

Ensure the provision of a variety of quality electronic communications services at reasonable prices;

Promote the interests of consumers with regard to the price, quality and the variety of electronic communications services;

Self-Certification in Auction Applications

Consider Self-certification process in the pre-auction application that could include the following:

that the applicant is legally, technically, financially and otherwise qualified pursuant to the Electronic Communications Act;

that the applicant has at least 30% (thirty percent) direct Black Economic Empowerment;

That the applicant is not affiliated or does not hold more than 5% in another applicant in the same band;

that the applicant is the real party in interest in this application and that there are no agreements or understandings other than those specified in this application;

That the applicant has not been granted a radio frequency spectrum license by the Authority within the designated range, to which the application relates;

Self-Certification in Auction Applications (Con’t)

that the applicant is aware that, if upon inspection, this application is shown to be defective, the application may be dismissed without further consideration, and certain fees forfeited. Other penalties may also apply;

except as explicitly provided in the Rules, that the applicant has not entered into and will not enter into any explicit or implicit agreements or understandings of any kind with parties not identified in this application regarding the amount to be bid, bidding strategies or the particular license on which the applicant or other parties will or will not bid;

that if a bidding credit eligibility is claimed, the applicant is eligible for any special provisions set forth in the Rules applicable to this auction and consents to audits, as set forth in the Rules, to verify such status; and

Self-Certification in Auction Applications (Con’t)

that the applicant is and will, during the pendency of its application, remain in compliance with any service specific qualifications applicable to the licenses on which the applicant intends to bid including, but not limited to, financial qualifications.

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