Spectrum allocation principles, considerations related to auctions

1. SPECTRUM ALLOCATION:
AUCTIONS FOR DEVELOPING
COUNTRIES
FINAL PROJECT FOR GSMA ADVANCED SPECTRUM MANAGEMENT COURSE

2. Summary
 Spectrum is a scarce resource that is critical for the development of a nation
 Arguably, the most efficient allocation is through spectrum auctions
 However, for a developing country that is considering spectrum auction, it needs to
consult widely on the following:
 Incentives that can encourage investment need to be balanced with public policy
objectives
 Administrative allocation vs market-based allocation
 Effects of high spectrum price on investment and consumer prices
 Measures to ensure competition

3. Spectrum regulation
 In allocating scarce spectrum, the regulator has to balance between many different
objectives and many stakeholders
 Transparency is paramount: every action must be transparent
 Non-discrimination must be seen to be upheld
 Consultation with stakeholders is critical on:
 The spectrum roadmap
 The method and rules to allocate spectrum (i.e. beauty contest, auctions)
 The spectrum licence details
 This is essential to ensure certainty in the industry and would encourage
investment and ultimately benefit end-users
Source: wik-Consult (2005), Study for the Federal Network Agency: Towards more flexible spectrum regulation, pp.6,7

4. Balancing between objectives
Market-based incentives
 Granting operators technology
neutral licences
 For example: allowing 4G networks to
be deployed on 900MHz or 1800MHz
spectrum (originally for 2G spectrum)
 Sufficiently long licences
 This will ensure allow operators to be
able use the spectrum and have
certainty in recouping investment
 Hence, this leads to continual
investment and upgrading of
networks and allow end users to
enjoy the benefits
Public interests
 Public interest requirements to be met
 For example: spectrum set aside for
emergency services, military and other
uses for public interests
 For example: rural coverage may be
important for regulators but there is less
commercial incentive for operators
 Interference to be minimized
 For example: use of frequencies for
different services may lead to
interference
 Hence, the freedom of use of spectrum
by different operators needs to be
balanced with public interests
Source: wik-Consult (2005), Study for the Federal Network Agency: Towards more flexible spectrum regulation, pp.6,7,14

5. Spectrum allocation mechanisms
Administrative allocation Market-based allocation
 The price is set by the market - involves
spectrum auctions and spectrum
trading (in secondary market)
 More efficient allocation of spectrum as
it is allocated to the operator that most
highly values it
 Theoretically this means that the
operator that won at an optimal market
price will not immediately sell it off and
obtain windfall gain
 Potentially free from political
interference
 However, the regulator can influence
the prices through setting the reserve
prices (for example)
 The regulator set the price based on
recovery of cost for spectrum
management
 For example: costs to issue spectrum
licences, maintain databases, conduct
spectrum monitoring, international
coordination and enforcement
 Administrative incentive pricing can
also be used
 This reflects the opportunity cost of
spectrum while also incorporates
incentives and is used in the UK.
 Developing countries start with this
method and later move to market-
based approach
Source: ITU(2017), Guidelines for the review of spectrum pricing methodologies and the preparation of spectrum fee
schedules, pp.3,4,13

6. Spectrum pricing principles (based on ITU
recommendation)
 All users should pay spectrum charge which is:
 Calculated fairly and without discrimination
 Be proportionate to the amount of bandwidth used
 Reflect value to society (i.e. frequencies used for public services may be subject to lower
charges)
 Spectrum users should be consulted on adjustments in charge
 The pricing structure:
 Should be clear, transparent and comprehensive
 Should reflect scarcity of spectrum and level of demand
 The cost of spectrum regulation should not be born by the state
 The spectrum charge should be used to recover costs of spectrum regulation and not to
maximize government revenue
 The spectrum charges should be specified in law
Source: wik-Consult (2005), Study for the Federal Network Agency: Towards more flexible spectrum regulation, pp.36-37

7. Spectrum price components
 These components should be considered in an aggregate manner:
 Upfront reserve price – Some countries such as Sweden and Germany set modest but
non-trivial to deter frivolous bids; others such as France set reserve price closer to
perceived value of spectrum
 Competitive premium – This is determined by the market, often used in combination with
upfront reserve price
 Annual fees – These cover the administrative cost of managing spectrum
Upfront reserve
price
Competitive
premium
(in auction, if any)
Annual fees
Source: GSMA (2017), Effective Spectrum Pricing: Supporting better quality and more affordable
mobile services, p.2
Source: GSMA (2017), Effective Spectrum Pricing: Supporting better quality and more affordable mobile services, p.2, 3

8. Effects of high spectrum price
 Dampens investment incentives
 Too high spectrum reserve prices can
result in spectrum being unsold
(depriving consumers of benefits)
 For example: France’s 3G auction in
2000 where there was difficulty to
allocate the 3rd and 4th licences
 Reduces return of investment to
operators resulting in overall
reduction in investment
 GSMA’s study found a correlation
between lower spectrum costs and
higher wireless scores (i.e. in terms of
coverage, number of subscribers and
average speed) (p.29)
 Spectrum cost is an important factor
in differentiating network investment
of different countries
 Increases consumer prices
 Too high spectrum reserve price
favours the incumbent to the
detriment of new entrants or smaller
competitors
 For example: Smaller Mexican
operators bought lesser spectrum (or
did not participate) in Mexico’s 2016
AWS auction
 High spectrum prices combined with
lack of competition could result in
higher prices paid by consumers
 GSMA’s study found a correlation
between lower spectrum costs and
lower consumer prices for data
services (p.31)
 Higher spectrum costs directly affect
competition between operators
Source: GSMA (2017), Effective Spectrum Pricing: Supporting better quality and more affordable mobile services,
pp.13,14,29,31,40,42,45

9. Ensuring competition in market
 Preventing a monopoly of spectrum
being held by a single operator (i.e.
the incumbent)
 Spectrum hoarding that prevents
others from using it
 Impose spectrum caps or create
certain licences with a fixed minimum
amount of spectrum;
 Rules on spectrum trading
 The regulator can withdraw spectrum
usage rights
Source: wik-Consult (2005), Study for the Federal Network Agency: Towards more flexible spectrum regulation, pp.32-36

10. Concluding remarks
 Spectrum allocation and in particular, spectrum auctions are complex in nature
 This is because the regulator has to balance between many different opposing
objectives
 Learning from other countries’ success stories is a starting point:
 The criticality of ensuring a transparent and non-discriminatory process
 The importance of spectrum price (spectrum reserve price and annual fees) on
investment and consumer prices
 The safeguarding of competition in the market
 Balancing with other public interests

11. Bibliography
 GSMA (2017), Effective Spectrum Pricing: Supporting better quality and more
affordable mobile services
 International Telecommunication Union (ITU) (2016), Guidelines for the review of
spectrum pricing methodologies and the preparation of spectrum fee schedules
 wik-Consult (2005), Study for the Federal Network Agency: Towards more flexible
spectrum regulation