Beauty contest licensing lessons from the 3G process in Sweden

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Telecommunications Policy 29 (2005) 577–593

0308-5961/$ -

doi:10.1016/j.

�CorresponE-mail add

(P. Valiente).

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Beauty contest licensing lessons from the 3G process in Sweden

Per Anderssona, Staffan Hultena, Pablo Valienteb,�

aDepartment of Marketing, Distribution and Industry Dynamics Stockholm School of Economics,

P.O. Box 6501, SE-113 83 Stockholm, SwedenbDepartment of Information Management, Stockholm School of Economics, P.O. Box 6501,

SE-113 83 Stockholm, Sweden

Abstract

This article provides a comprehensive overview of the economic context of the Third Generation MobileCommunication Licensing process carried out in Sweden. The discussion of the mobile licensing processhas been very much centred on auctions. However, beauty contests to award UMTS-licences wereimplemented by a relatively large number of countries. This article investigates the implications of thebeauty contest as the method for selecting 3G licence holders in Sweden. This study was prepared atthe Stockholm School of Economics as part of a series of Telecommunication Case Studies produced at theInternational Telecommunication Union (ITU).r 2005 Elsevier Ltd. All rights reserved.

Keywords: Auction; Mobile 3G; Sweden; Licences; Telecommunications

1. Introduction

Undoubtedly, the two biggest success stories in telecommunications over the last decade havebeen the Internet and the mobile phone. Third Generation Mobile Communication, according tothe UMTS standard, will become an infrastructure providing seamless integration of data andvoice communication. However, the deployment of next generation mobile communication

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telpol.2005.06.005

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resses: [email protected] (P. Andersson), [email protected] (S. Hulten), [email protected]

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P. Andersson et al. / Telecommunications Policy 29 (2005) 577–593578

technology requires access to radio frequencies. Radio bandwidth is considered as a scarceresource that is of social interest and the allocation of licences has consequently been reserved togovernmental institutions.During the 3G spectrum allocation process that took place in Europe around the turn of the

millennium, the two most popular allocation procedures for 3G networks were auctions andadministrative processes, also called the beauty contest or bureaucratic methods (Borgers &Dustmann, 2003). Most economists claim that the auction model is more efficient when it comesto allocating the rights to use scarce resources that are of social interest, such as radio spectrum(cf. Klemperer, 2000; McMillan, 1995). Therefore, a number of earlier studies have focused onauctions and related design issues (cf. Klemperer, 2002; Whalley, 2001; Wofstetter, 2001). Thepresent paper differs from the previous studies in that it focuses on an administrative licensingprocess performed in a particular country. The aim is to provide a better understanding of the useof beauty contests as a spectrum allocation tool on the basis of the Swedish experience. TheSwedish licensing process was special for a number of reasons. The allocation process succeededin attracting a large number of applicants—and the largest number of new entrants—comparableonly with the UK (the United Kingdom has seven times the population of Sweden); moreover,contrary to expectations, a number of incumbent operators were not awarded a licence. The paperdraws conclusions regarding the design of administrative allocation processes in the light of theresults in Sweden.In the next section, a description of advantages and disadvantages of different licensing

procedures is given. Then follows background information about the Swedish Telecom industry.Section 4 describes the Swedish 3G beauty contest: the selection criteria, the applicants, thealliances and the court proceedings after the licences had been granted. Finally, Section 5 presentssome questions and central issues arising from the study.

2. Scarce resource allocation

The allocation of spectrum for 3G mobile telecommunications raises many issues becausespectrum is a scarce and valuable resource. In order to make a selection of operators differentalternatives are available, such as a lottery, a queue system such as First Come First Served(FCFS), auctions, or administrative processes. Both lotteries and queue systems assign licencesquickly, but the random assignment process leaves the way open for speculators without thetechnical expertise to ensure the future provision of services (McMillan, 1995). Therefore, the twomost frequently used ways for selecting 3G-operators are auctions and administrative processes.Most economists claim that the auction is better than the beauty contest because it offers a

more market-oriented, objective and transparent method for awarding licences (cf. Binmore andKlemperer, 2002; Hultkrantz and Nilsson, 2001; Klemperer, 2000; McMillan, 1995). Thestrongest argument in favour of auctions is that firms through their bidding reveal informationabout their estimation of the value of the spectrum. Another advantage is that society gets paidfor a valuable resource and that this money can be used for other purposes (McMillan, 1995).However, the auction-based licensing process also has a number of potential disadvantages. Thehigher fees needed to apply for a licence may discourage participation, especially for new entrants.Efficiency is more likely if participation rates are high. Therefore, the lower fees of beauty

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Table 1

Advantages and disadvantages with different allocation models

Licensing process Advantages Disadvantages

Lottery Quick assignment Speculators

Queue system (FCFS) Quick assignment Random assignment

Administrative process (beauty contest) Flexibility Lack of transparency

Auction Transparency Participation

P. Andersson et al. / Telecommunications Policy 29 (2005) 577–593 579

contests, by encouraging larger participation, may provide greater efficiency (cf. Borgers andDustmann, 2003).Moreover Gruber (2002) shows that the inverse relationship between the number of firms in the

industry and the licence fee paid, may lead to ‘‘overbidding’’ (Gruber, 2002 p. 56). This is oftenthe case when licence fees are excessively high in comparison to the number of firms in theindustry. If the entry cost is determined by market-based mechanisms there can be an incentive forfirms to ‘overbid’ for licenses. When the fees paid are very high, industry profits may need toincrease. This could be achieved either through slowing down the roll-out of infrastructure, or inconcentrating on the most profitable regions. Other ways of increasing industry profits includeexit of firms from the market or by collusion (Gruber, 2002, p. 56). In other words, spectrumallocation through auctions could lead to extraction of monopoly profits and not necessarily tothe allocation of scarce resources for the socially best use.A beauty contest consists of allocation of spectrum by governmental agencies that propose

outlines and criteria to be followed in the selection process. Administrative processes are reputedto have several disadvantages: they are slow and cumbersome, in particular if the final decision ischallenged in court. However, their main disadvantage is said to be lack of transparency(McMillan, 1995). One argument in support of beauty contests is that social concerns, such asachieving universal service, can be put into the selection criteria (ITU, 2001). Flexibility in theallocation of licences is also claimed to be an advantage of administrative processes (McMillan,1995, p. 191). In Table 1 above the main advantages and disadvantages of the different allocationmodels are summarised. This paper will discuss the allocation advantages and disadvantages suchas assignment speed, flexibility and transparency, in the light of the Swedish allocation process(presented in Table 1).

3. Background: the Swedish telecom and mobile telephony market in 2001

At the time of the beauty contest Sweden had invested heavily in IT/telecommunication and thecountry was regarded as rich in IT clusters, especially in the south and along the east coast(Lindqvist et al., 2002). Sweden was one of the first deregulated telecom markets: Telia, the formerincumbent was partly privatised on 1st July 1993 and listed on the stock exchange in June 2000.The regulator PTS (The Swedish National Post and Telecom Agency), established in 1993, tried toincrease competition by measures to decrease interconnection charges and facilitate the entry ofnew actors onto the telecommunications market.

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0

1

2

3

4

5

6

7

1993 1994 1995 1996 1997 1998 1999 2000

Europolitan AB

Tele2/Comviq

Telia (GSM)

Telia (NMT)M

arke

t sh

ares

of i

ncu

mb

ent

op

erat

ors

, (in

mill

ion

subs

crib

ers)

Fig. 1. Market shares of incumbent operators. Source: The Swedish Telecommunications Market 2000, PTS.


Mobile telephony was introduced early in Sweden and in 2001 the country had one of thehighest rates of mobile penetration in Europe (around 75% in June 2001),1 along with Finlandand Norway. During the development of mobile telephony, several different systems andtechnologies had been introduced (Molleryd, 1999). Originally, it was intended that Swedenshould have two GSM operators, but a new entrant, Europolitan (formerly NordicTel),successfully lobbied the political system (focussing on job creation, by offering to locate itsheadquarters in an area subsidised by regional aid) to help obtain a licence in 1990. Sweden wasthe only European country with three GSM operators from the launch of the system (Molleryd,1999). Later four licences were allocated for GSM 1800, but Telenordia never started operationsand handed back its licence (Fig. 1).In the year 2000, the number of mobile subscriptions in Sweden increased by 1,212,000 from

5,126,000 to 6,338,000 (PTS, 2001c). This corresponded to an annual growth rate of 24%. Itrepresented an impressive growth in view of the high penetration level that had already beenachieved (Table 2).The increasing importance of mobile telephony is also evident if one looks at its contribution to

the turnover of telecommunication operators in Sweden. Its share of revenue nearly doubled inpercentage terms from 1994 to 2000, (see Fig. 2).A first important step towards the introduction of mobile data services and 3G was the

introduction of GPRS. All three GSM operators had upgraded their networks to support GPRS.Only one operator, Europolitan, had started to offer GPRS-based services to customers by theend of 2000. There were only a few models of GPRS telephones available on the market, but itwas estimated that the market for these phones and services would start to take off during thesecond half of 2001. The PTS’ comments on this were: ‘‘A delay with GPRS means that thewindow of opportunity will probably be closed, this is so because GPRS is viewed by many as a

1According to the statistics of the Swedish National Post and Telecom Agency (PTS) measured as the total number of

subscriptions compared to the total population presented in ‘‘Svensk Telemarknad, Forsta Halvaret 2001’’,

Diarienummer 01-19841, 22 November 2001. Even though people nowadays usually have more than one subscription

this is a well-spread and accepted measure of mobile penetration.

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Table 2

Yearly sales of mobile telephones in Sweden 1993–2000

Year NMT 450 NMT 900 GSM Total

1993 27,000 133,000 44,000 204,000

1994 19,000 274,000 367,000 660,000

1995 9000 87,000 764,000 860,000

1996 4000 136,000 925,000 1,065,000

1997 3000 44,000 1,200,000 1,247,000

1998 2000 2000 1,550,000 1,554,000

1999 5000 1,647,000 1,652,000

2000 1000 2,100,000 2,100,000

Source: Europolitan, Netcom and Telia.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 1995 1996 1997 1998 1999 2000

MobileTelecommunicationsServices

Fixed Telephony

Fig. 2. Distribution of turnover between fixed and mobile telecommunication services 1994–2000. Source: National

Post & Telecommunications Agency 2001.


forerunner of the third generation mobile telephony UMTS, which is expected to break throughinto the market in only a few years’’ (PTS, 2001c p. 39).

4. The Swedish 3G beauty contest

This section describes the Swedish 3G beauty contest—from the time of invitation for tendersto some months after the final verdict—with the aim of better comprehending the design of thebeauty contest in Sweden and its effects. The time span was from May 2000 to June 2001. The

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division into subsections follows the time-line of the beauty contest process. It starts with adescription of the selection criteria. Secondly, the process of selection of the winners, made publicon 16th December 2000 is looked at, with a description of the different actors that applied for alicence. Next follows the market restructuring that took place after the selection process describedin the co-operation and alliances section. Finally, the litigation process and its outcome aredescribed.

4.1. Application criteria

On 12th May 2000, the PTS issued an invitation to all interested parties wanting to providenetwork capacity for UMTS mobile telecommunications services in Sweden (PTS, 2000d). Fourlicences were to be issued, valid until 31 December 2015. The selection of the applicants would bebased on an administrative process using two steps. Sweden was not the first European country toselect future UMTS operators. At this time, some other European countries had alreadycommenced their UMTS licence selection processes.2

The Swedish legislators had given the PTS considerable latitude in deciding how to formulatean invitation to all interested parties to build a telecommunication network, in case the frequencyspace was not sufficient to give everyone a permit. The politicians in power believed that theregulation should be flexible, so as to allow market forces to direct the development of newservices and forms of communication. However, the PTS’ decision to use a beauty contest was alegal interpretation of Swedish law. According to an amendment (SFS, 2000:210) to article 14 inthe Telecommunications Act (1993:597) allocation of licenses, should be performed through openinvitation for participation popularly known as a beauty contest (PTS, 2001d). The licensingprocess was to be issued on the basis of grounds of fact, determined in relation to the aims that thetelecommunication laws were intended to support (the opportunity to have access to efficienttelecommunications at the lowest socio-economic cost). Selection criteria determined in waysother than the intended goals of the laws, e.g. by auction or lottery, were not considered to begrounds of fact (PTS, 2001a).3

Another important reason for using a beauty contest was that it was believed that a rapiddevelopment of 3G would be an essential part of the development of Sweden as an IT nation.Therefore, the PTS focused on two main criteria when choosing operators—namely rapid roll-outand nation-wide coverage. The PTS wrote in a press release after the decision to use a beautycontest: ‘‘In contrast to many other European countries, Sweden and the other Nordic countriesdo not hold auctions to award mobile telephony licences. Swedish law stipulates that licences mustbe allocated on the basis of specific criteria. This is to the advantage of operators and consumersalike, because operators do not have to pay expensive state fees for licences’’ (PTS, 2000b).The contest was organized in the following way. The applicants should submit their

applications no later than 1 September 2000. By that date, they should have paid the applicationfee of 100,000 SEK. The applicants were responsible for all costs of the preparation and

2Finland and Spain using also an administrative allocation process and the UK, The Netherlands and Germany, with

an auction-based selection process.3The regulation of the Swedish Telecommunication sector is principally codified in three different legal documents:

Telelagen (Telecommunication Act), Teleforordning (Telecommunication Ordinance) and Forordning med instruktion

for Post- och telestyrelsen (Ordinance with instructions for the PTS).

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submission of the application. No information could be added by the applicant after theapplication period. The PTS could request further information from the applicant after theapplication date.The initial administration fees paid by applicants did not cover the costs of the PTS in

organizing the beauty contest. The preparation process consumed around 2 man-years on the partof the PTS. From September 2000 to December 2000, the PTS had 8 persons working full-time onthe process and it also hired a couple of consultants.4

If two or more applicants were considered to be closely related they could only obtain onelicence. Therefore, the applicants were asked to describe their ownership structures in order toenable the PTS to assess whether any applicant was closely related or not to another applicant. Asa rule of thumb, a business that had 20% or more of all shares in an applying company wasconsidered to be closely related to that company.The selection process was carried out in two steps. In an initial consideration, an evaluation was

made as to whether the applicants had fulfilled the preconditions for the establishment of aUMTS network. The guidelines stated explicitly: ‘‘Only applicants that satisfy the requirements ofthe initial considerations will advance to the detailed consideration’’(PTS, 2000d). This meant thatall the applicants could have passed this first step if they had shown that they fulfilled thefollowing aspects:

�

4

Financial capacity: The applicant should be able to demonstrate that it has enough capital at itsdisposal to establish the promised network.

�
Technical feasibility: The applicant should demonstrate the network’s reliability, availability,voice quality and other prevalent quality parameters. The applicant should also demonstratethat it had access to appropriate expertise and necessary experience to construct a mobiletelecommunications network.
�
Commercial feasibility: The applicant should present a documented business and market planwith investment plans and financial projections that showed the costs, revenues and resourcesrequired to provide the services.
If a firm or a consortium passed the initial considerations, it was further evaluated in a detailedconsideration. In this step, the operators’ commitments were compared as regards:

1.
Coverage in relation to surface area and population, and 2. the roll-out speed for the networks.
In this second phase the applicants were awarded one credit for every complete unit of 10,000inhabitants in Sweden who were provided with coverage, and one credit for every complete unit of30 km2 in Sweden, which was provided with coverage. However, the surface area couldonly account for a maximum of 20% of the number of credits for population coverage(PTS, 2000d, p. 10).According to the guidance for applicants, ‘‘the PTS, in the conditions of licensing, shall impose

a requirement that the licence holders are to ensure at every phase that at least 30% of the

Interview with Hans Brandstrom and Lars-Erik Axelsson, PTS, 2001-06-08.

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promised population coverage takes place through establishment of their own radioinfrastructure. For other parts of the population, the licence holders have the possibility ofsatisfying the coverage requirements by national roaming. However, this does not affect thelicence holder’s obligation to ensure that network capacity of high quality is made available inaccordance with the licence conditions. A licence holder that cannot satisfy the licence conditionsby national roaming is thus obliged to establish its own access network to satisfy its obligations’’(PTS, 2000d, p. 12). The PTS considered that the demand of 30% of the population coveragethrough the operators’ own radio infrastructure was sufficient to guarantee competition.Therefore an operator was allowed to share masts with competing operators.In the evaluation of the applicants’ coverage estimates the PTS required that: ‘‘An area shall be

deemed to be covered where the field strength, measured on the pilot signal from the base station,outdoors at a height of 1.7m, is equal to or exceeds 58 dB_V/m/5MHz.’’ (PTS, 2000d, p. 12). ThePTS did not want to use base stations as the selection criterion per se because such a criterionwould lack support in the telecommunications law (Telecommunications Act, 1993:597) thatstated that everyone should have access to telecommunications on equal conditions. A pure basestation criterion would have been blind to where the base stations were located.Furthermore, it was considered unwise because such a criterion could counteract technical

development. The argument given was that operators could move technology forward bydeveloping different cell structures and selecting different locations for the base stations.The applicants could count their own scores in the detailed consideration. The PTS considered

it important that the applicants themselves could see how well they scored.

4.2. The final choice of operators

4.2.1. Ten applicantsTen participants competed in the beauty contest: Broadwave Communications AB,

Europolitan AB, HI3G Access AB, Mobility4Sweden AB, Orange Sweden AB, Reach OutMobile AB, Tele 2 AB, Telenordia Mobil AB, Telia AB, and Tenora Networks AB. Seven of thecompetitors were consortia formed for the 3G beauty contest and three were the leading mobiletelephone operators in the Swedish market: Europolitan, Tele2 and Telia.In nearly all the consortia, one or more firms had a strong presence in the European or global

mobile telecommunications market. In the Orange consortium, Orange was a partner; in HI3G,Hutchison was a partner; in Reach Out Mobile, Sonera and Telefonica were partners; inMobility4Sweden, Deutsche Telekom was a partner; and in Telenordia, both BT and Telenorwere partners. Broadwave and Tenora Networks were the only participants in the beauty contestthat lacked a major international or national mobile telecommunication player.The PTS did not find an ownership relationship between any two competing applicants.All competitors presented plans that, on their own evaluations, provided good area and

population coverage (employing the base stations necessary to build the appropriate cell structure,defined area, population coverage and transmission speeds). To some extent the choices ofnetwork architecture made by the applicants gave them higher or lower returns in terms ofcoverage and transmission speed. For example, this is why in Table 3, Telia’s 4100 base stationscan cover a bigger area than, for example, HI3G’s 20,184 base stations. Investment costs werelowest for Telia at 6.8 billion SEK and highest for HI3G at 36.9 billion SEK. In the case of two

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Table 3

Some key figures for the competitors in the Swedish beauty contesta

Name of

consortium or

operator

Number of base

stations phase 1

Estimated costs Area coverage and

share of population

in phase 1

Rollout speed—

start, etc.

Participating firms

Broadwave

communications

AB

4700 at the end of

2003

14.7 billion SEK 32750 km2 September 2002 Tele1 Europe AB,

Western Wireless

81% 90% at end of

phase 3

International

2G/3P Group

You Communication

Rix Telecom

Europolitan AB 20000 at the end of

2003

27.5 billion SEK 165,259 km2 January 2001

100% 100% at end of

phase 1

HI3G Access AB 20184 at the end of

2003

36.9 billion SEK 224,724 km2 January 2002 Investor (40%)

100% 100% at end of

phase 1

Hutchison (60%)

Mobility4Sweden

AB

8760 at the end of

2003

15.3 billion SEK 395,520 km2 January 2002 T-Mobil International

AG

100% 100% at end of

phase 1

Utfors AB

ABB

Orange Sweden AB 8635 at the end of

2003

19.7 billion SEK 364,528 km2 August 2001 Orange PCS,

Bredband Mobil AB,

Skanska AB

100% 100% at end of

phase 1

NTL Ltd., Schibsted

Reach Out Mobile

AB

5238 at the end of

2003

15.8 billion SEK 259,944 km2 April 2001 Sonera (45%)

100% 100% at end of

phase 1

Industri Kapital

(35%)

Telefonica (20%)

Tele 2 AB 10186 at the end of

2003

17.7 billion SEK 112,666 km2 October 2001

100% 100% at end of

phase 1

Telenordia Mobil

AB

7200 at the end of

2003

14.0 billion SEK 181,346 km2 January 2002 BT (90%)

98% 98% at end of

phase 1

Telenor (10%)

Telia AB 4100 at the end of

2003

6.8 billion SEK 308,661 km2 January 2002

100% 100% at end of

phase 1

Tenora networks

AB

7550 at the end of

2003

11.2 billion SEK 290,038 km2 January 2002 Ratos (25%)

100% 100% at end of

phase 1

Nomura (55.1%)

Teracom (19.9%)

Source : Sweden 3G Case Study.aThe table is based on PTS (2000d).


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applicants—Broadwave and Telia—the PTS estimates of the area coverage were significantlysmaller than the applicants’ calculations (PTS, 2000c).

4.2.2. And the winner isyAccording to the PTS (2000c), four competitors failed in terms of technical feasibility and one

failed in terms of financial capacity. Broadwave could, according to the PTS, only cover 6538 km2

with its 4700 base stations and not the 32,750 km2 described in their application. The consortiumwas also found lacking in its financial capacity, business plan and expertise. Tenora Networkscould not demonstrate that it had the necessary financial capacity. In addition, the quality of thenetwork (1 h unplanned failure per day) created problems for the business plan according to thePTS. The PTS also stated that Tenora had not demonstrated how it would obtain the necessaryequipment for the network.The Mobility4Sweden consortium made a miscalculation in its consideration of financial

capacity. The consortium could not show how the participants would cover losses in the first yearsof operation once the initial funding had disappeared.Reach Out Mobile AB was excluded because the consortium (a) failed to convince the PTS that

the members could create a sufficiently viable project organization and (b) the network’stransmission speeds (64 kbit/s) in rural areas were too low.The most surprising result of the first step was that Telia, Sweden’s former telecommunication

monopolist, was excluded. Telia failed because it was unsuccessful in achieving the signallevel required by the PTS in the network. One important reason for this was that Telia committeditself to building only 4100 base stations. The PTS wrote in its decision that Telia would needto construct three times more base stations in the countryside than stated in its applicationif it were to fulfil the coverage demands. The PTS found that Telia’s area coverage was lowerthan its estimates (291,278 km2 compared with 308,661 km2). Even worse, the assessment of thePTS was that the low number of base stations gave much lower transmission speeds (32 kbit/s)than in the business model Telia had presented. For example, videoconferencing was deemedimpossible by the PTS in more than half of Telia’s proposed UMTS network. Consequentlythe PTS concluded ‘‘The feasibility of the business plan is in this respect inadequate’’ (PTS,2000c). Five consortia passed the criteria in phase one: Europolitan, HI3G, Orange, Tele2and Telenordia.In phase two the applicants were evaluated as regards area and population coverage as well as

roll-out speed. All five competitors in phase two obtained the maximum score for area coverage.Telenordia had promised a population coverage of 98% at the end of 2003. The other fourcompetitors promised that nearly 100% of the population should have access to UMTS at theend of 2003. Therefore Europolitan, HI3G, Orange and Tele2 were awarded the four licences.These four operators obtained the highest possible number of credits (3977), while Telenordiaobtained 3940.The PTS will continue to monitor the development of the 3G networks. Three important

deadlines were fixed for the end of 2003, 2006 and 2009. In reality, the only important control datewas January 2004, since the four winners promised to complete their networks before that date. Ifthey have not performed in accordance with their commitments, the PTS may order the licenceholder, subject to a default fine, to comply with the licence conditions. Under certaincircumstances, the PTS can also revoke the licence.

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4.2.3. Rationale behind the final choice

Two applicants failed in the selection process because of many mistakes made in theapplications, and mainly due to the fact that they had insufficient experience of mobiletelecommunications operations. Among the experienced and financially strong operators,technical feasibility and willingness to invest became the two most important factors.Reach Out Mobile and Telia were not willing to commit themselves to building high-quality

networks. Reach Out Mobile was not able to present a sufficiently credible project organizationand its transmission speeds were too low. Telia’s signal level and its transmission speeds weretoo low. Mobility4Sweden did not demonstrate how it planned to finance the operation in thelonger run.The PTS did not evaluate the logistics of the construction of the networks and the financial

viability of the proposals. The agency assumed that actors with expertise and financial strengthwere able to make correct decisions and predictions in these matters. Interestingly, the PTS didnot consider the following issues to be problematic: (a) Rapid roll-out speed (for example,Europolitan and HI3G planned to build 700 base stations a month); (b) high investment costsrelated to revenue (HI3G planned to spend 36.9 billion SEK, over five times more than Telia);(c) sites for base stations. For example, HI3G and Orange had no previous presence in theSwedish mobile telecommunications market, which meant that they had to find new sites for alltheir base stations.Another problematic feature of the selection process was that the four winners all obtained the

maximum score in the detailed consideration. What would have happened if five or moreapplicants had scored the maximum credits? Telenordia was only marginally more cautious and itlost. Telia could probably have afforded a more committed bid.It was not the number of base stations per se in the final round that selected the winners. It is

important to note that the decisive factor excluding Telia and Reach Out Mobile was not areacoverage but rather network quality. In conclusion, it appears that the PTS rewarded toughcommitted players that made costly far-reaching promises.

4.3. Co-operation and alliances after the selection process

The major alliances formed between the four licensed operators (and with Telia which did notreceive a licence), during the 6 months after the beauty contest, can be summed up in the followingsteps.

4.3.1. December 2000: the announcement of the 3G winners

After the announcement of the four 3G licensees, it became clear that most operators and othercompanies involved in the application process had back-up plans that could be activated. Themost attractive co-operation partners were considered to be the large operators with an extensiveestablished customer base in 2G (Telia, Tele2 and Europolitan), large powerful content providers(Schibsted, Rix Telecom), infrastructure owners (Teracom, Utfors) and construction companies(Skanska, NCC, ABB). Along with Orange and Tele2, who earlier had stated an interest inalliances, Telia also stated an open interest in establishing co-operative ventures.When the announcement of the four winners was made, the fallout effect of the largest Swedish

operator Telia not receiving a licence overshadowed all other discussions. Major structural

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changes and consolidation of the whole 3G industry were expected. Telia had acquired a licence inNorway but not in Sweden. With this surprising result, Tele2 immediately became the onlyoperator that could present a truly Nordic position in 3G (with licences in Sweden, Finlandand Norway).Europolitan immediately signed preliminary agreements with two major system suppliers,

Ericsson and Nokia, in order to guarantee a rapid construction of the new 3G systems.The media immediately began to question the financial budgets and market estimations made in

the applications. It was widely expected that all four winners would need to engage in co-operativeinitiatives (not only financial) to be able to fulfil promises made in the applications. The twonewcomers without any previous position in mobile telephony in Sweden (HI3G and Orange)were frequently put forward as partner candidates for Telia.5 A major argument was that bothnewcomers would need an established incumbent operator to be able to handle the heavy financialinvestments needed.

4.3.2. January 2001: two major co-operation deals are announcedIn January 2001, negotiations among the four 3G operators as well as operators outside the

winning group intensified. On the 8th of January 2001, the first major co-operation deal wasannounced. Telia announced it was closing a deal with Tele2, one of the four winners, and one ofTelia’s major competitors in the GSM market. A new joint company was to be formed (laternamed Svenska UMTS AB), where Tele2 and Telia would each own 50%. There were furthernegotiations to expand the co-operation to include the Norwegian market. The deal wasconsidered a major threat to the three other 3G operators. The planned 3G system would useTelia’s and Tele2’s GSM networks, which were built using different supplier technologies. WhileTelia mainly used Ericsson and Nokia, Tele2 had deals with Siemens and Motorola. The jointorganisation would inherit a very large customer base, a possible cause for objection by theSwedish Competition Authority. The PTS’ reactions to the Swedish media’s focus on theTelia-Tele2 deal was an announcement stating that Tele2 formally owned the licence and wouldbe responsible for the 3G network whether or not it put the venture into a separate company(PTS, 2001b).In late January 2001, a second major co-operation deal was announced. Europolitan and HI3G

announced they were going to collaborate in the construction of new 3G infrastructure networks,principally in the rural areas outside Stockholm, Gothenburg and Malmo. The plan was tocollaborate in an infrastructure covering roughly 70% of the population. The two companiesplanned to co-operate in the construction and maintenance of the 3G network but to keepseparate the development and distribution of customer services. In the beauty contest,Europolitan and HI3G had been the two companies promising the highest levels of investment.

4.3.3. Spring 2001: negotiations on co-operation with building constructorsIn April 2001, only Orange was still without an alliance partner. However, Orange and the

other operators continued to negotiate. The media reported on the failure of Orange to establishthe necessary co-operation initiatives and also on internal tensions between the four companies inthe Orange group (France Telecom, Bredbandsbolaget, Skanska and Schibsted). In May 2001,

5Dagens Industri, 18 December 2000 (one of Sweden’s leading business newspapers).

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Orange was involved in negotiations with one of the two alliance groups, Europolitan-HI3G. Thelatter was reported to be open to letting in a third partner in the construction of their 3G network.Important partners in this phase of negotiations were the three major building constructors

involved in the construction of the infrastructure: Skanska, Peab and NCC. All three constructorshad created separate joint ventures focused on the telecom industry and had begun to acquiretelecom companies in preparation for a 3G boom. In May 2001, NCC announced that a majordeal with Tele2 had been concluded concerning the first phases of the construction of Telia’s andTele2’s new 3G network.Other important negotiations entered critical phases during the spring of 2001. Negotiations

with the Swedish associations of local municipalities, Kommunforbundet, and a stateorganisation, Boverket, concerning the placement of base stations and antennas were on theverge of breaking down. It was argued that the operators were not co-ordinated in thesenegotiations. Later, the Swedish Defence Ministry and The Swedish Aviation Administration alsobecame involved in negotiations on the construction and placement of base stations.The original plans to invest 100 billion SEK in four totally separate 3G networks were rapidly

being reformulated. In May 2001, it was even asserted that the ‘‘four 3G companies will constructnot more than two 3G networks’’.6 It was argued that 3G Infrastructure Services AB (EuropolitanVodaphone and HI3G, later including Orange) and Svenska UMTS AB (Telia and Tele2) wouldconstruct these two networks.

4.4. Effects of the beauty contest: court proceedings

After the PTS had presented its selection of the four winners, the decision was contested incourt, most importantly by Reach Out Mobile, Telia and Telenordia. Reach Out Mobile’sprincipal complaint was that it was wrong to reject the consortium’s application on the grounds ofpossible problems in the project organization and the building of the network since any licenceholder would face the same problems.The basic argument put forward by Telia and Telenordia against the PTS decision was a

discussion about the number of base stations needed to get good area and population coverageand sufficient transmission speeds (Lansratten, 2001, pp. 108–110, 112–113). Telia asked thecounty administrative court for the following: (a) In case the court did not issue a UMTS-licenseto Telia it should set aside the decision by the PTS and return the matter to the PTS for a newevaluation, (b) Telia further claimed that the PTS had wrongfully designed the procedure as if itwere a question of public purchasing and, because of this, it had made a number of formalmistakes. Telia asked the county administrative court to freeze the contested decision (Lansratten,2001, p. 29). Telenordia for its part asked that the court should return the matter to the PTS for anew evaluation. Telenordia asserted that Orange would not achieve the area coverage it hadpromised in its application and that the PTS in its evaluation had not correctly combined theStatistical Office’s (SCB) statistical material and the applicants’ coverage maps (Lansratten, 2001,pp. 51, 54 and 113).The winning applicants also hired legal advisors to represent them in court in case the

proceedings should create problems for them. The PTS had issued all the licences in one single

6Dagens Nyheter 12 May 2001 (Sweden’s largest morning newspaper).

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decision. This meant that if the court accepted the claims by Reach Out Mobile, Telia andTelenordia, all licences could be revoked. From the PTS’ point of view, the danger with thecontested decision was that the launch of 3G networks could be delayed. The PTS had consideredthat appeals against the decision would probably be made, but they were not allowed by Swedishlaw to insert a disclaimer preventing the applicants from challenging their decisions.The real complication in the selected procedure occurred when the complainants moved the

matter to the county court. The difficulty was that there were eight parties in the courtproceedings (the PTS, three consortia that complained that they had not obtained a licence andfour licence winners who wanted to defend their licences) while normally legal disputes involvingthe state only have one other party. To manage the complexity of the matter the court decided toconsider all the potential disputes in one judgement (Lansratten, 2001, p. 83).The county administrative court decided in June 2001 that the PTS decision was correct and

rejected most of the complaints, although it offered some criticisms of the organisation of thebeauty contest. The strongest remark made by the court was that the method used by the PTS tocompare the applicants’ maps with the statistical office’s map seemed ‘‘unscientific’’ butnevertheless the procedure in this particular case had been conducted in an acceptable way(Lansratten, 2001, p. 114). An additional criticism concerned the transparency of consultants’work in developing the guidelines prior to the selection of operators. During the courtproceedings, the operators claimed that all information (even handwritten notes) used in theprocess of setting the evaluation criteria should have been made public. Another type of objectionrelated to the legal grounds for the contest. The court noted that the contest between the applyingcompanies, although allowed by the telecommunications law, contained particular proceduralrules, which deviated from the constitutional law’s instructions that should have been formulatedin law or regulation.It was unique in Swedish jurisprudence that a state agency’s decision could form the basis for a

legal challenge, with many different parties, (namely the PTS and the awarded operators, Teliaand Telenor). This was especially challenging because the PTS had not defined by statute orregulation the rules for carrying out the license allocation process in either law or in an ordinance(Lansratten, 2001, p. 83).Following the court’s decision, Telia and Telenordia stated that they would not appeal against

the verdict. The potentially negative impact on a rapid roll-out was therefore mitigated especiallysince the county court rapidly rejected Telia’s application for an injunction.

5. Final considerations

What conclusions can be drawn from the Swedish experience? A number of issues have beenraised in the description above. Let us now analyse this evidence in the light of the aspectsdescribed in Table 1 above concerning the advantages and disadvantages of different allocationmodels in terms of speed of allocation, participation, flexibility in the selection of applicants,degree of transparency, etc.First, participation in the Swedish allocation process was high. As a consequence, the group of

the applicants included some of the most advanced mobile telecommunications operators inEurope. In addition the participants included not only established actors, but also new entrants.

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Consequently there was a greater probability that the applicants were the more preferable playersfrom the total population of operators. The reasons for high participation are twofold. On the onehand, there was considerable interest in the Swedish market, due to its leading position in thetelecommunication industry, and on the other hand, the use of an administrative process alsofavoured participation. Ceteris paribus it is more likely that participants, especially smallerentrants, withdraw from auctions than from administrative processes, for financial reasons. Inaddition the authors find no evidence to support the participation of speculators, since allparticipants were committed to the roll-out of the new infrastructure.Secondly, the time frame of the allocation process was three-and-a-half months approximately.

Compared to the auctions carried out in Europe, this time span is larger but in some cases thedifference is not so great. The UK, the Netherlands and Italy took almost 2 months to auctiontheir licences, whereas Germany allocated licences in 18 days and Austria in one day. Some maypoint to May 2000 as the start of the Swedish process when the PTS issued the selection criteriaand applicants started to work on the applications. However, this paper considers thatindependently of the allocation model that is used, candidates have to be involved in thedevelopment of the application for a licence long before the actual allocation date. Compared tosome auctions, the administrative process need not be regarded as time-consuming, especiallytaking into consideration the fact that the life-span of the licences was approximately 15–20 years.However, a problem with administrative processes like beauty contests or public bids is that adecision can be challenged. As a consequence the final decision can be contested in court. This wasthe case in the Swedish process where the PTS’ decision was contested in court by some of theapplicants. However, the court’s decision not to inhibit the PTS’ decision helped to mitigate theeffect of the trial proceedings on the launch of 3G networks. One lesson from the Swedish casewas that issuing several licences in one decision may be more risky and therefore policy agentsmay want to issue separate decisions for each licence allocated.Thirdly, the lack of transparency has been a major issue discussed in relation to the

implementation of administrative processes. Accusations such as favouritism or corruption(Klemperer, 2000) have frequently been made against administrative processes. Borgers andDustmann (2003, p. 245) analyse lack of transparency according to three more explicit arguments,namely vague selection criteria, unclear final decision and bias towards incumbents or whatKlemperer (2000) calls ‘‘National Champions’’. The first step in the Swedish process (feasibilitytest) was changed due to lack of transparency. One particular problem concerned thetransparency of the consultants’ work in developing the selection guidelines. On the other handthe criteria concerning the beauty-contest itself was clear and moreover, published in advance. Alesson is that making consultants’ reports available to the public could have increasedtransparency.The detailed consideration (step 2 in the process) was based on a score and therefore involved

more quantitative selection criteria. This facilitated the selection process although, as notedabove, all applicants that were awarded licences presented top scores in their applications. Apossible solution to this problem is not to let the applicants present their own scores. In additionthe final decision was published in detail on the PTS website shortly after the names of thesuccessful applicants were made public (PTS, 2000c). Finally no evidence is found to support biastowards National Champions since two out of four 2G operators (Telia and Telenordia) were notawarded a licence.

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To sum up, lack of transparency did indeed occur during the pre-process, mainly in thepreparation of the selection criteria: this could have been avoided if documentation had beenmade public. However, there is no evidence of vague selection criteria, ambiguous decisionmaking or bias towards incumbents. Therefore, Binmore and Klemperer’s observation (2002)regarding litigation and the still-continuing political debate in Sweden, cannot be used as anargument for favouritism or corruption, since this was absent in the Swedish process.The authors’ conclusion, after the analysis of the Swedish beauty contest, is that design

issues regarding administrative-based processes have been much less closely examined and a closerlook at the implementation of such allocation schemes should be placed on the future policyagenda. Nevertheless it is important not to throw out the beauty-contest baby with thebureaucratic bath-water.

References

Binmore, K., & Klemperer, P. (2002). The Biggest Auction Ever: The Sale of the British 3G Telecom Licences. The

Economic Journal, Vol. 112. Oxford, UK: Blackwell Publishers (March).

Borgers, T., & Dustmann, C. (2003). Awarding telecom licenses: The recent European experience. Economic Policy,

215–268.

Gruber, H. (2002). Endogenous sunk costs in the market for mobile telecommunications: The role of licence fees. The

Economic and Social Review, 33(1), 55–64.

Hultkrantz, L., & Nilsson, J. E. (2001). New offers—an ESO report about auctions and purchasing. Swedish Ministry of

Finance (DS 2001:40) (in Swedish).

ITU. (2001). Chairman’s report from the workshop on licensing of 3G mobile. Document 3G/11 September 2001

(www.itu.int/3G).

Klemperer, P. (2000). Spectrum on the block. The Asian Wall Street Journal, October 5, p. 8 and available at

www.paulklemperer.org

Klemperer, P. (2002). What really matters in auction design. Journal of Economic Perspectives, 16(1), 169–189.

Lindqvist, G., et al. (2002). Svenska klusterkartor: En statistisk inventering av kluster i Sverige. Uppsala: CIND.

Lansratten. (2001). Judgment of 27 June 2001 (case no. 499-01). County Administrative Court (also in www.pts.se).

McMillan, J. (1995). Why auction the spectrum. Telecommunications Policy, 19(3), 191–199.

Molleryd, B., 1999. Entrepreneurship in technological systems—The development of mobile telephony in Sweden. Doctoral

thesis, The Economic Research Institute, Stockholm School of Economics, Stockholm.

PTS. (2000b). Beauty contest to decide five UMTS licenses in Sweden, Press Release—February 22. Swedish National

Post and Telecom Agency (www.pts.se).

PTS. (2000c). Decision of 16 December. Stockholm: Swedish National Post and Telecom Agency (www.pts.se).

PTS. (2000d). ‘‘Invitation for applications for licenses to provide network capacity for mobile telecommunications

services in Sweden in accordance with UMTS/IMT-2000 Standards and GSM Standards. Guidance for Applicants’’,

Swedish National Post and Telecom Agency (www.pts.se).

PTS (2001a). Bemotande av Telias overklagande av UMTS-beslut daterat 2001-03-23 [Response to Telia’s appeal against

the UMTS-decision from the 23 March 2001]. Stockholm, Swedish National Post and Telecom Agency (www.pts.se).

PTS. (2001b). Press Release (8 Januari 2001); Telelagen lagger inga hinder for samarbete mellan Tele2 och Telia nar

UMTS-nat byggs [The elecommunications Act sets no obstacles to cooperation between Tele2 and Telia for building

the UMTS-network], Swedish National Post and Telecom Agency (www.pts.se).

PTS. (2001c). The Swedish Telecommunications Market 2000. Stockholm: Swedish National Post and Telecom Agency

(www.pts.se).

PTS. (2001d). Yttrande over Telias overklagande av UMTS-besult daterat 2001-03-12 [Statement about Telia’s appeal

against UMTS-decision from the 12 March 2001]. Stockholm: Swedish National Post and Telecom Agency

(www.pts.se).

http://www.itu.int/3G

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Whalley, J. (2001). 3G, Auctions and Changing Collaborative Patterns within the Mobile Communications Industry.

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Conference, Dublin (Ireland).

Further Reading

PTS. (2000a). Applying for UMTS licenses in Sweden. Swedish National Post and Telecom Agency (www.pts.se).

http://www.ManagementScience.org

http://www.pts.se

Documents

Beauty contest licensing lessons from the 3G process in Sweden