How spectrum auction prices impact mobile network investment

What is driving prices for
spectrum at auction, and what
effect could this be having on
network investment?
Stefan Zehle, CEO, Coleago Consulting
stefan.zehle@coleago.com www.coleago.com
The 10th Annual European Spectrum
Management Conference
Brussels, 16 June 2015

Agenda
 What is the evidence that spectrum prices are increasing?
 What factors drive prices paid for spectrum at auction?
 What effect does this have network investment?
© copyright Coleago 2015
What is driving prices for spectrum at auctions
1

Evidence that prices paid for spectrum at auction are increasing is hard to
come by, example 800MHz digital dividend prices in Europe
2
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Germany,May-10
Sweden,Mar-11
Spain,Jul-11
Italy,Sep-11
France,Dec-11
Portugal,Dec-11
Denmark,Jun-12
Macedonia,Aug-12
Croatia,Oct-12
Estonia,May-13
Macedonia,Jul-13
Lithuania,Oct-13
Latvia,Oct-13
Finland,Oct-13
Belgium,Nov-13
CzechRepublic,
Nov-13
Greece,Oct-14
Georgia,Jan-15
800MHz prices paid - €/MHz/Pop

But prices paid in the recent US and Canadian AWS-3 auctions are
worrying
 Conventional wisdom states that spectrum below 1GHz is more valuable than
above 1GHz
 Prices paid in Canada (2.45 $/MHz/pop) and the US (2.71 $/MHz/pop) for
spectrum that is only useful from 2017 are worrying.
3
0.00 0.50 1.00 1.50 2.00 2.50 3.00
Canada AWS-3 (2GHz) 2015
US AWS-3 (2GHz) 2015
Canada AWS-1 (2GHz) Feb 2008
US AWS-1 (2GHz) Feb 2007
EU 800MHz average 2010-15
US$/MHz/Pop
Prices Paid

The data Tsunami: 4G users consume more data than 3G users and
existing 4G customers increase their usage, month after month
4
3.2 3.3
2.4
1.3
0.8
1.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Japan South Korea US Canada Germany UK
Gbytes
Monthly Usage per Customer
Jan-14 3G Jan-14 4G
Dec-14 3G Dec-14 4G

How many Gbytes per month per user should operators plan for?
 2 Gbytes?
 5 Gbytes?
 Could we reach
8 Gbytes?
5
0.8
1.5
2.3
8.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Germany UK Saudi Arabia Kuwait
Gbytes
Monthly Usage per Customer
Jan-14 3G Jan-14 4G
Dec-14 3G Dec-14 4G

 How about 1 Gbyte per user per day?
 What if TV Anywhere Apps really take hold?
6
 How many hours does the average American watch TV per day?
– Answer: 2.8 hours
 How much data volume does this represent per month, assuming
HDTV?
– Answer: 0.7 Terabyte (700 Gigabytes)
 If just 4-5% of viewing is via LTE, that’s 1 Gbyte / user / day

Samsung Galaxy S6
 Quad HD screen, i.e. twice normal HD
 4K will be next
7
YouTube
 4K (Ultra HD) video content is
available now

The battle between operators will be over the user experience in urban
environments with high traffic volumes per square kilometre
 The most demanding and high
spending users will migrate to the
operator which is least congested
and hence offers the best user
experience
 Spectrum is a key ingredient in
delivering the LTE capacity required
to keep data traffic moving in a high
traffic density environment
 This is one of the factors explaining
the high price paid in the US AWS-3
auction in February 2015 of
2.71 $/MHz/pop
8

In many markets ever higher reserve prices determine prices paid by
operators
9
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Greece
Belgium
Denmark
France
Portugal
Italy
Spain
Sweden
Germany
€/MHz/pop
800MHz reserve prices and prices paid - €/MHz/Pop
Paid Reserve

Where reserves are low, supply and demand drive prices paid, example
German spectrum auction in 2010
Supply of 800MHz spectrum
 Band 20 (832 - 862 / 791 – 821), six
blocks of 2x5MHz
Demand
 Four operators
 Deploying LTE in less than 2x10MHz
is uneconomic
 All four bidders wanted a minimum 2
blocks each
 E-Plus ended up with nothing
The price paid was driven entirely by
excess demand
 The reserve price for 800MHz
spectrum was a tiny €0.003/MHz/pop
 The price paid amounted to a hefty
€0.73/MHz/pop
Consolidation ensued
 E-plus merged with Telefonica O2
 There are now only three MNOs in
Germany
10

As consolidation sets it, spectrum auctions will be less competitive and
hence the reserve price may matter more, German auction, June 2015
Policy objectives in German SMRA
spectrum auction, May 2015
 Deliver wide area mobile broadband
coverage
 Provide incumbent operators with
planning certainty
 Maintain network based competition
Conditions for 700MHz DD2 spectrum
 Relatively low reserve at
0.09€/MHz/pop
 Coverage obligation of 98% of
population
Supply of spectrum
 6 blocks of DD2 700MHz spectrum
 7 blocks of 900MHz renewal
 10 blocks of 1800MHz renewal
 8 blocks of 1500MHz TDD
Demand for spectrum from three
bidders
 Deutsche Telekom
 Vodafone
 Telefonica (O2)
11

German SMRA auction, June 2015 – multiple factors explain bidding
behaviour
12
0
50
100
150
200
250
1 9 17 25 33 41 49 57 65 73 81 89 97 105113121129137
€Million
Round #
Germany spectrum auction average per block prices
700MHz 900MHz
1800MHz 1500MHz
As of round 143

The German multi-band SMRA produced surprising results, such as higher
prices for 1800MHz compared to 900MHz and 700MHz spectrum
13
Result
 700MHz sold at reserve
 Others bands sold above
reserve
 Factor that impacted on price
paid are:
– Reserve price
– coverage rules
– economics of LTE deployment
– renewal or new spectrum,
– existing holdings
– the SMRA auction format
– bidder behaviour
as of round 143
0.00
0.05
0.10
0.15
0.20
0.25
0.30
700MHz
900MHz
1800MHz
1500MHz
€/MHz/pop
German auction June '15, reserve
and prices paid - €/MHz/pop
Paid Reserve

What is your policy objective?
700MHz auction in Chile in 2014 The 700MHz spectrum award process
focussed on connectivity and
competition policy objectives …
 cover 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
14

15
Is there a linkage between high spectrum prices and
investment in mobile broadband?

The sunk cost argument fails the reality test and high prices for spectrum
are likely to slow down network investment
Sunk costs should not matter …
 Prices paid for spectrum at auction are
a sunk cost.
 Economic theory tells us
– Past invest decisions are a sunk
cost
– Sunk costs have no bearing on
future investment decisions
– Sunk costs have no impact on
pricing decisions
… but evidence shows that they do.
 There is theoretical and empirical
evidence that sunk costs do matter:
– Al-Najjar, Nabil I., Baliga, Sandeep and
Besanko, David A, “The Sunk Cost Bias
and Managerial Pricing Practices”, October
2005
– Do Sunk Costs Matter? R. Preston
McAfee, Hugo M. Mialon, and Sue H.
Mialon, April 7, 2007
– On the Relevancy of Future Sunk Costs,
Mark J. Shrader, Kent A. Hickman,
Gonzaga University, Journal of Applied
Business and Economics vol. 12(1) 2011
 Cash is not unlimited, investors require
returns. © copyright Coleago 2015
16

High spectrum prices are likely to reduce to flow of capital to the industry
Other economists have focused on
the impact that excessive auction fees
might have on the cost of capital.
The higher the cost of capital, the lower
the business case for investment, e.g. in
marginal (rural) coverage
 This relies on empirical observations
that capital markets are not 100%
efficient, and that investors may have
budget constraints which limit
investment.
 These budget constraints may be
worsened by excessively high auction
fees.
– For example, after the 3G auctions
many of Europe’s largest mobile
operators became heavily indebted,
share prices fell and their ability to
raise funds for future investment
was undoubtedly restricted.
17

In the light of future spectrum requirements current spectrum price levels
are not sustainable
 The amount of spectrum per user is
increasing.
 Revenues are flat, so the cost of
spectrum – capex and opex – as a
proportion of revenues increases.
 With the several 100’s of MHz required
for LTE and 5G current prices for
spectrum are not sustainable.
 In future, the cost of spectrum in terms
of €/MHz/pop needs to decline.
18
Revenue
Quantityofspectrum
Spectrumcapexand
opex

A specialist Telecoms Management
Consulting Firm
About Coleago Consulting
19

Since 2001, Coleago has offered a wide range of advisory services to the
telecom industry
20
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
21
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
22

Further information: www.coleago.com
Contact
Stefan Zehle, MBA
Tel: +44 7974 356 258
stefan.zehle@coleago.com
CEO, Coleago Consulting Ltd
23

How spectrum auction prices impact mobile network investment

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