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.

Recommendations
Develop auction application without subjective evaluation criteria (no hybrid approach)
Minimizes litigation risk
Minimizes entry costs
Include self certification language on pre-auction application to include:
Eligibility requirements
Technical capabilities
Financial capabilities
Collusion rules

Recommendations
Facilitate robust competition
Consider incentives for new entrants
Facilitate Low entry costs to increase competition
Keep it simple
Consider assigning 2.5 and 3.5 GHz licenses in separate processes
Implement a simple SMRA auction design that is well tested
Use robust commercially available software
Make it easy for participants to understand and participate
Use a straightforward bidder interface

Recommendations
Eliminate collusion
Establish strict, enforceable anti-collusion rules
Eliminate strategic gaming
Do not reveal bidder identities before or during the auction
Minimize demand reduction
Keep it secure
Encrypt bids
Provide transparency in the process
Publish bidder identities after the auction

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Spectrum Auctions for iWeek South Africa KB Enterprises

by KB Enterprises LLC on Nov 10, 2009

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Spectrum Auctions for iWeek South Africa KB Enterprises — Presentation Transcript