DRAFT: FOR LIMITED CIRCULATION

Study for TRAI on Spectrum Allocation Methodologies

Rekha Jain

With support from

Shyam Sundar Sriram

PGP 2009-2011

4/17/2011

2

Executive Summary

• This paper gives an overview of the spectrum allocation process in a variety of countries

including those using beauty contests and auctions. Details of the allocation process for

several countries, including France, UK, Germany, Netherlands etc in Europe and Japan

are provided. Spectrum allocations in Australia, Brazil, Indonesia and South Africa have

been covered, as these are large countries and may have some specific relevance for

India.

• The paper does NOT focus on specifics of auction design, just as it does NOT focus on

the specifics of beauty contest design. The paper highlights the usage of a particular

instrument with regard to the allocation in a particular context.

• Auctions are a fair, transparent and non-discriminatory way of allocating scarce resource.

They work well when competition is high. A judicious mix of auctions, reverse auctions

and administrative allocations needs to be arrived at.

• Designing auctions that have the expected market outcomes needs a lot of thought,

including assessment of bidder behavior, market situation, amount of spectrum, bidding

rules.

• In designing auctions, post allocation activity needs to be thought through. The M&A

framework and whether trading is allowed will influence the outcomes of the allocation

process. Since spectrum auctions are an on-going activity, there must be mechanisms to

incorporate the feedback of various allocation processes into the next allocation process.

There is considerable scope to learn from experience of other nations as well.

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• The complexities in auction design, could lead to some inefficiencies in auction

outcomes, however, such inefficiencies are likely to be worse in a beauty contest. Beauty

contests, by their nature, are tacit attempts by the government to provide state aid.

• Increasingly, more and more countries are using auctions for spectrum allocation,

including those that had earlier adopted beauty contests.

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Part I: The European Experience of Countries in Europe in Auctioning Frequencies in 3G

Bands.

A large number of 3G allocations were made in key European countries during 2000/2002. This

was the peak just before the Internet/telecom bubble burst. During 2000/2002 a number of 3G

spectrum auctions and beauty contests took place whose details are given below in Box 1 and

Table 1. Table 2 gives the details of some of those spectrum auctions.

Box 1: Features of European Spectrum Allocation

• Auction and beauty contest

• 15 tenders from 03/99-02/02

• 7 beauty contests: Finland, Spain, France, Sweden, Portugal,

Luxembourg, Ireland

• 8 auctions: UK, Netherlands, Germany, Italy, Austria, Belgium,

Greece, Denmark

• Total revenue: EUR 109 billion

Source: Jonas Holm (2003)

Table 1 : Countries and Revenues from 3G Spectrum Auctions

Countries Revenue (€ Billion)

Germany 50.1

UK 36.1

Italy 12.2

Spain 3.5

Netherlands 2.7

France 1.2

Austria 0.8

Belgium 0.6

Denmark 0.5

Greece 0.5

Portugal 0.4

Finland 0.1

Sweden 0

Total 108.7

Source: Jonas Holm (2003)

Table 2: Details of Spectrum Auctions

Where # Bidders # Licenses

UK 13 5

Netherlands 9/6 5

Germany* 12/7 4-6*

Italy 8/6 5

Austria* 6 4-6*

Switzerland 10/4 4

Source: (Veronika Grimm et al 2002)

*German auction rule was applied.

All others applied the UK rules

Source: Jonas Holm (2003)

Box 2: Details of the 3G Spectr

Table 2: Details of Spectrum Auctions

# Licenses # Incumbents €/Pop €/(Pop/Lic)

4 630 3.150

5 170 850

6* 4 615 3.690

4 210 1.050

6* 3 103 618

3 19 76

(Veronika Grimm et al 2002)

*German auction rule was applied.

UK rules

Source: Jonas Holm (2003)

Box 2: Details of the 3G Spectrum Auction: Number of licenses and bidders

5

€/(Pop/Lic)

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Details of 3G Allocation Processes

United Kingdom

Box 3: Key Features of UK auction

• March/April 2000

• Modified Simultaneous Ascending Design

• 5 licenses: Two large A and B licenses, three small. Some paired, others not.

• A-licence reserved for new entrant

• 13 bidders: 4 incumbents + 9 new entrants

• 150 rounds, 52 days

• EUR 36 billion – EUR 650 per capita

Auction type: Modified Simultaneous Ascending Design. In order to foster competition,

the British government ensured that new entrants could get at least one license. The

spectrum was divided into 5 parcels with the first parcel reserved for new entrants. Table

3 gives the details of the UK 3G auctions.

Table 3: Details of 3G UK Spectrum Auctioned

License

Paired

Spectrum

(MHz)

Unpaired

Spectrum

(MHz)

Reserve

Price

(£ million)

A (Reserved for a new entrant) 2x15 5 125.0

B 2x15 - 107.1

C 2x10 5 89.3

D 2x10 5 89.3

E 2x10 5 89.3

Source: (Nahik et al n.d.)

This encouraged new entrants and 13 companies took part in auctions (3G (UK) Limited,

BT(3G) Limited, Crescent Wireless Limited, Epsilon Tele.com PLC, NTL Mobile

Limited, One.Tel Global Wireless Limited, One2One, Personal Communications

Limited, Orange,3G Limited, SpectrumCo Limited, TIW, UMTS (UK) Limited,

Telefonica UK Limited, Vodafone Limited, and WorldCom Wireless (UK) Limited).

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Table 4 gives the prices paid by the winners and market share of incumbents prior to the

auction.

Table 4: Prices paid by Winners and the then Existing Market Shares of

Incumbents

Incumbents Market

Share (%)

Winning Bid

£ Billions

BT(3G) Limited 30.1 4.03

One2One Personal Communications Limited

15.4 4.00

Orange 3G Limited 17.2 4.09

Vodafone Limited 37.3 5.96

TIW 4.38

Source: www.3gnewsroom.com/country/uk.shtml

As can be seen there were four incumbent operators, and four blocks of frequencies were

initially planned to be auctioned. This might prevent new entrants from bidding strongly.

Further resale of licenses was not allowed. Hence it was not possible to collude and share

the spoils. Also no bidder was permitted to win more than one license.

The auction was conducted by the Radio Communications agency. There was a long

marketing campaign done by the agency prior to the auction which resulted in nine new

entrants vying for a license. Minimum build out requirements ensured that the licenses

were handed to players who wanted to be in the business of offering mobile services.

In the first round a bidder has to bid at or above the reserve price for a parcel or withdraw

from that round. In subsequent rounds the bidder who bids the highest becomes the

“current price bidder”. In the following round bidders other than current price bidders

were allowed to participate whereas the current price bidders were locked at their bid

price. A firm could bid higher than the current price. In this case this would become the

current price for the next round. When no further bids are received for a given parcel, the

auction is declared closed and the frequency parcels are allotted to the current price

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bidders at the current price. There was intense competition and record revenues of € 39

billion.

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Netherlands

Box 4: Key Features of Auction

• July 2000

• English auction

• 5 licenses of equal size

• 6 bidders: 5 incumbents + one weak entrant

• Versatel/Telfort

• € 170 per capita

There were five incumbents and five licenses. The situation looks very similar to UK

case. Since the incumbents and the number of licenses were equal it was predicted that

the number of new entrants would be very small. Due to this, new entrants entered into

partnerships with incumbents. The weak competition policy allowed Deutsche Telekom,

DoCoMo and Hutchison who were strong in other markets to partner with local

incumbents. Only one weak entrant (Versatel) competed with incumbents in bidding.

Versatel also withdrew once incumbent (Telfort) threatened legal damages. The

government seemingly took no public action to address the grievance of Versatel letting

the only new entrant exit the auction system. The auction ended and less than € 3 billion

were raised in comparison with the projected € 10 billion. Ideally when the incumbent

market power is large, the agency could have followed Anglo Dutch auction similar to

the one in UK. This would have prompted Versatel to bid higher in the sealed bid stage.

This would have also forced incumbents to bid higher in the sealed bid stage thereby

garnering greater revenues.

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Germany

Box 5: Key Features of Auction

• July/August 2000

• English “combinatorial” auction

• Began with 4. Licensed 6 (12 frequency blocks)

• Germany: EUR 615 per capita

• Germany: Success, but also lucky

• No. of licenses < --- > value of licences

The German regulator broke down the paired spectrum into identical blocks and allowed

the bidders to form licenses with aggregated spectrum blocks in contrast to the English

regulator that auctioned fixed number of licenses each prepackaged with fixed amounts

of spectrum.

On sale was 2 × 60 MHz paired spectrum in the 1900-2025 MHz band. These were

broken up into 12 identical, individual blocks of 2×5 MHz each, numbered 1 to 12. In all,

12 spectrum blocks were auctioned using which bidders could form licenses each of 2 or

3 blocks. The reason for this was to let the winners decide the advantage of large vs.

small licenses based on their private valuations. Each firm could win only one license.

The 12 blocks were sold by a simultaneous auction which is similar to previous ones.

These were the four incumbent mobile phone operators: T-Mobil (a subsidiary of

Deutsche Telekom) (T), Mannesmann–Vodafone (M), e-plus (e+), and Viag Interkom

(viag), backed by British Telecom, and three new entrants: Mobilcom (mobi), backed by

France Telecom, debitel (debi), backed by Swisscom, and 3G, backed by Telefonica and

Sonera

Deutsche Telekom and Vodafone–Mannesmann were the incumbent mobile operators

each with a market share of 40% whereas e+ and viag have only a market share of 15%

and 5%, respectively.

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In all 7 bidders competed for 12 blocks of spectrum which could be aggregated into

licenses. Since a license has to have at least 2 blocks, one bidder had to quit at the end of

the ascending auction discouraged entry of weak bidders. Mobilcom made a public

collusive offer to Debitel to use the formers’ network in case Debitel couldn’t get a

license. As expected Debitel quit the bidding process early on it took 126 rounds for one

bidder to exit the auction. Since the blocks were auctioned without pairing it could have

been possible to tacitly collude and then share the spoils. The leading bidders could either

have raised the price and force weak operators to quit or lead the others in collusion.

Finally, the two leading bidders gave up their demand for 3 blocks each and the auction

ended with 6 players each with a smaller license.

The relatively higher prices of 3G in Germany may partly be explained by its size. Since

it is the largest country in Europe, the potential payoff for a German 3G license was

significant.

Strategic games made the auction process more uncertain and helped to explain how the

cost of the licenses skyrocketed to record heights. Each bidder needed to secure only two

blocks to obtain a license but securing three blocks would prevent a competitor from

securing an additional license. One study suggests that the eventual license costs were so

high because of the willingness of the incumbents to try to preempt entry by bidding for

three blocks, thereby forestalling entrance by other possible competitors. If so, then the

auction design created the possibility of a more concentrated mobile market of only five

operators rather than a more competitive one of six. Indeed, two bidders, T-Mobil and

Mannesmann, drove a significant portion of the auction. A second auction for additional

capacity was opened to all bidders that had won at least two blocks in the first auction.

Since this included all the winning bidders, this auction predictably proved to be a failure.

Given the high prices paid by them, the winners decided to jointly construct the networks

in order to reduce roll out costs. The regulator Reg TP, intervened to specify that each

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holder of a UMTS license would be required to build its own networks for twenty-five

percent of the population by the end of 2003, and for fifty percent by the end of 2005 and

that each network needed to ensure its “competitive independence” during the lifetime of

the UMTS license i.e. it allowed for passive infrastructure sharing. However, they were

not allowed to share backbone facilities such as switching centers

France

The French regulator used beauty contests for four of 3G licenses. This number was one

more than the incumbent mobile operators and was intended to promote new entrants.

The price was set at € 4.9 billion which was nearly double the original amount announced

by the regulator. However based on the British auctions the price was justified by the

government. This was more driven by the desire to finance the French pension fund and

reduce the budget deficit. Initially Bouygues Telecom and Suez-Telefonica, Orange

(FranceTelecom) and SFR (Vivendi-Universal) had expressed interest in the bidding

process. However since the entry cost was too high, Bouygues Telecom and Suez-

Telefonica ultimately withdrew from the process.

The official selection criteria were (1) the development of the market and new services;

(2) coverage of the territory; and (3) the government’s aim to make the Internet widely

available. However it was also said that French regulatory authority wanted to promote

the interests of French corporations. It was then thought that beauty contests would

insulate the French incumbent mobile operators from high bids that were seen in other

European countries. ART, the regulatory agency feared that an auction process might

result in current and aspiring French operators may lose against the big foreign rivals and

hence permanently lose access to a fast growing market. The government had hoped to

capture high revenues without the uncertainty of auction in favour of beauty contests.

Hence only two licenses were issued to Orange and SFR. Due to this fiasco, the

government was compelled to call for a second round of auctions to award the remaining

licenses. Also SFR refused to pay the first installment of the license. In Oct 2001 the

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French government revised the entire mechanism. The license price as was reduced to €

0.619 billion or € 41 per capita and the duration was extended from 15 to 20 years, and

the principle of operating fees was opted for. These new conditions were applied

retroactively to the two operators that already hold a licence. Bouygues Telecom was

selected as the third 3G operator

Fourth 3G operator-2009-10

The French regulator launched the process of consultation for a fourth 3G operator way

back in 2006. The tender that was made in 2007 was unsuccessful because the only

qualified bidder “Free” did not meet financial criteria. The motivations for the fourth

license were (Alain Baritault 2009):

1) To further competition and push the existing three operators — SFR, Bouygues

and Orange — to innovate more. A fourth mobile operator in France may boost

the mobile telephony market by 7%.

2) The entrance of a new operator was expected to drive down prices as has

happened in other countries by about 7% (Alain Baritault 2009).

The existing mobile operators tried to block the new entrant by intense lobbying.

However the government went ahead and issued an RFP for a license in one block (price:

€619 million) to which the only respondent was Free (a subsidiary of Iliad). Free which

has about 25% share of DSL market announced that it could pay only in installments.

Meanwhile the operators threatened to sue the French government in European

Commission. The French government split the spectrum into 3 blocks with each block

priced at 206 million and one block reserved for a new entrant. Free was the only eligible

bidder for the 5 MHz license in the 2.1GHz band.

The French beauty contests have served neither the exchequer nor the population well.

French mobile market is amongst the costliest in Europe compared to several other

western European countries as seen below:

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Source: (Mason 2009)

Despite this, the French government has continued with the beauty contest model

irrespective of the encouraging results due to auctions seen in other countries, with the

hope of being able to prop up its domestic players.

Finland1

Finland was the first country to award UMTS licenses and used beauty contests. Each

license for the 3G system was given away for almost free, with only a small

administrative cost to be covered by the winners. Government had hoped that lower fees

would lead to faster roll out and give Finland the advantage of high penetration rates.

1 The portion for Finland, Sweden, Italy, Spain, Portugal, and Belgium is referenced from

http://www.vjolt.net/vol6/issue3/v6i3-a17-Sokol.html accessed on March 31st, 2011

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Italy

Italy adopted a hybrid system: the first phase was a beauty contest in which the Italian

government made preliminary selections of license bidders based on the strength of the

operators’ business plans, followed by an auction among them for the licenses. Another

unique aspect of the Italian auction design was that if there were not enough serious

bidders after the beauty contest greater than the number of licenses, the government

would reduce the numbers of licenses auctioned. However, this policy does not allocate

demand to availability appropriately, and could lead to more concentration than was

warranted by the ground situation. Since the Italian auctions were subsequent to the

German one, many large players, having already paid high license fee, did not participate,

thus raising comparatively lower revenues. Italian regulator switched from a beauty

contest to auction after seeing the results of the UK auction. The Italian auction took

place with only five bidders for five licenses.

Sweden

The Swedish government used a beauty contest format in which it charged a nominal fee

of $11,020 for each 3G license and an additional yearly charge of 0.15 percent of income.

The winners were selected based on roll –out and coverage commitments. The national

operator, Telia, did not win the license. Telia then raised concerns regarding the

subjective behavior of the regulator. Other agencies that were rejected - the DT-led

consortium for financial deficiencies and Sonera led consortium for technical

deficiencies, that also led them to question the assessment of the regulator. This may

point to the general weakness of agency decision-making in license awards over that of

an auction process because of the possible use of subjective criteria. Subsequently,

concerns were raised that the Swedish operators may not be able to roll out the networks

in time, suggesting that a beauty contest did not create an opportunity to roll out service

faster than an auction would have done. The high costs of network roll out led to two of

the four winning groups to build a joint infrastructure for their networks.

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Belgium

Belgium’s auctioned its 3G licenses, but received only the reserve price by the three

incumbent operators for the four licenses. All three were awarded the license.

Participation fee set by the regulator were considered high, and a formal complaint was

lodged with the EC regarding this.

Portugal

Portugal used beauty contest to award licenses and a firm commitment from winners for

an additional $768.4 million to be invested to build up each network before the official

date for launching the new service in January 2002. The winners were all three existing

GSM operators and one new entrant.

Spain

Spain had used beauty contests to allocate for a total value of $432 million in March

2000, prior to the UK and German auctions. After these auctions, the Spanish

government imposed a fee on the operators “to make up for the fee it may have gained

through auctions”. Spain had first believed in the beauty contest approach because it

thought that in return for a low license price, it could obtain commitments by the license

winners that 3G services would be rolled out ahead of those services in other countries by

at least six months. In response to the new fee, the 3G Spanish telecom license holders

argued for postponing the rollout for the new services because of the extra charges. The

service roll out was delayed until June 2002.

Table 5 gives details of data as of 31st August 2006 on almost countries of the European Union

where spectrum allocations were made subsequent to the 2000/2002 allocations. Table 6 gives

the details of recent auctions.

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Table 5: Subsequent 3G Licenses in the European Union (as of 31st August 2006)

Country/ter

ritory

2G licen

ses

3G licenses

available

3G licences

award

ed

Methoda

Date

3G License Winnersb

Albaniac 3 — — — — —

Andorrac 1 1 1 Allocated Jan 2005 STA

Austria 4 6 6 BC+auction Nov 2000 Hutchison 3G, max.Mobil, Mobilkom Austria, ONE, tele.ring, 3G Mobile

Belarusc 4 — — — — —

Belgium 3 4 3 Auction Feb 2001 KPN Mobile 3G, Mobistar, Proximus

Bosnia-Herz.c

4 — — — — —

Bulgariac 3 3 3 TE (1) AL (2)

Mar 2005d

MobilTel, Viva Ventures, GloBul

Croatiac 3 3 2 Tender/AL Oct 2004 T-Mobile, VIPnet

Croatiac 3 1 1 Tender Dec 2004 Treca Sreca

Cyprus (S) 2 2 2 AU (1) AL (1)

Dec 2003e

Investcom, CyTA

Czech Repub.

3 3 2 Auction Dec 2001f EuroTel Praha, RadioMobil

Czech Repub.

3 1 1 Allocated Feb 2005 Oskar

Denmark 3 4 4 AU/AL Oct 2001 Hi3G Denmark, Orange, TDC, Telia Denmark

Denmark 3 1 1 AU/AL Dec 2005 Sonofon

Estonia 3 3 3 BC/allocated

Jul 2003g Eesti Telecom, Radiolinja, Tele2

Faroe Islesc 2 — — — — —

Finland 3 4 4 BC+annual fee

Mar 1999 Radiolinja, Sonera, Suomen 3G, Telia Finland

France 3 4 2 BC+fee/AL Jul 2001 Orange, SFR

France 3 2 1 BC+fee/AL Sep 2002 Bouygues Télécom

Germany 4 6 6 Auction Jul 2000 E-Plus Hutchison, Group 3G, Mannesmann, MobilCom Multimedia, T-Mobile, Viag Interkom

Gibraltarc 1 — — — — —

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Country/ter

ritory

2G licen

ses

3G licenses

available

3G licences

award

ed

Methoda

Date

3G License Winnersb

Greece 4 4 3 Auction Jul 2001 CosmOTE, Panafon, Stet Hellas

Guernseyc 1 2 1 BC/AL Mar 2003 Wave Telecom

Hungary 3 4 3 Auction Dec 2004 Pannon, T-Mobile, Vodafone

Iceland 3 — — — — —

Ireland 3 4 3 BC+fee Jun 2002h Hutchison 3G Ireland, mmO2, Vodafone Ireland

Ireland 3 1 1 BC+fee Nov 2005 Smart Telecomi

Isle of Manc 1 1 1 Allocated Apr 1999 Manx Telecom

Italy 3 5 5 BC+auction Nov 2000 H3G, IPSE 2000, TIM, Wind, Omnitel

Jerseyc 1 1 1 Allocated May 2006 Jersey Telecom

Latvia 3 3 2 Auction/AL Sep 2002 LMT, Tele2j

Latvia 3 1 1 Auction/AL May 2005 Bitéj

Liechtensteinc

4 4 3 Allocated Jul 2001k Mobilkom, Tele2/Tango, Viag Europlattform

Liechtensteinb

4 1 1 Allocated Oct 2003l Liechtenstein TeleNet

Lithuania 3 3 3 BC+fee/AL Feb 2006 Bité, Omnitel, Tele2

Luxembourg 3 4 3 BC+annual fee

May 2002 EPT, Orange, Tele2

Luxembourg 2 1 1 Tender Jul 2003 LuXcommunications

Macedoniac 2 — — — — —

Malta 2 3 3 Tender/AL Aug 2005 Go Mobile, Vodafone, 3G Telecoms

Moldovac 3 — — — — —

Monacoc 1 1 1 Allocated Jun 2000 Monaco Telecom

Netherlands 5 5 5 Auction Jul 2000 Dutchtone, KPN Mobile, Libertel-Vodafone, Telfort, 3G-Blue

Norwayc 2 4 4 BC+fee+annual fee

Dec 2000 Broadband Mobile, NetCom GSM, Telenor, Tele2

Norwayc 2 2m 1 Auction/AL Sep 2003 Hi3G Access

Norway 2 1m 1 Auction Aug 2006 n/a

Poland 3 4 3 BC/AL Dec 2000 PKT Centertel, Polkomtel, Polska Telefonica Cyfrowa

Poland 3 1 1 Tender+annual fee

May 2005 Netia

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Country/ter

ritory

2G licen

ses

3G licenses

available

3G licences

award

ed

Methoda

Date

3G License Winnersb

Portugal 3 4 4 BC+fee+annual fee

Dec 2000 ONI-Way, Optimus, Telecel, TMN

Romaniac 4 4 2 Tender Nov 2004n

MobiFon, Orange

San Marinoc 1 — — — — —

Serbia-Mont.c

4 — — — — —

Slovakia 2 3 3 Auction Jul 2002 EuroTel, Orange, Profinet.sko

Slovakia 2 1 1 BC+tender Aug 2006 Telefónica

Slovenia 3 3 1 Auction Nov 2001p

Mobitel

Slovenia 3 3 n/a Auction Sep 2006 n/a

Spain 3 4 4 BC+fee+annual fee

Mar 2000 Airtel, Amena, Telefónica, Xfera

Sweden 4 4 4 BC+annual fee

Dec 2000 Europolitan, Hi3G Access, Orange Sverige, Tele2

Switzerlandc 3 4 4 Auction Dec 2000 Dspeed, Orange, Swisscom, Team 3G

Turkeyc 3 — — — — —

UK 4 5 5 Auction May 2000 BT3G, Hutchison 3G, One-2-One, Orange, Vodafone

Ukrainec 5 1 1 Allocated Dec 2005 Ukrtelecom

Source: Whalley and Curwen (2006)

AL=allocated; AU=auction; BC=beauty contest; TE=tender. /AL signifies that, due to insufficient bidders, the

outcome was in practice an allocation at the minimum price.

b Licensees are cited under the names used when the licence was first issued.

c Not an EU member state.

d The three licences were not awarded at the same time or through the same method. MobilTel was awarded its

licence in March 2005 after a tendering process was completed, while Viva Ventures and GloBul were allocated

their licences in April 2005.

e Investcom was the only applicant in an auction, and CyTA was allocated a second licence at the same price.

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f The award of two licences in December 2001 was actually the third occasion on which the Czech Republic had

attempted to award 3G licences. The previous two attempts at a tender, in September and October 2001, both failed

to attract bidders.

g The three licences were not awarded at the same time. Eesti Telecom and Radiolinja received their licences in July

2003, and Tele2 in August 2003.

h The three licences were not awarded at the same time. Hutchison 3G Ireland received its licence in June 2002,

mmO2 in August 2002 and Vodafone Ireland in September 2002.

i Although it technically won the licence, the regulator claimed that Smart had not met all of the prospectus

requirements and the licence was revoked in February 2006. Smart intends to appeal.

j The incumbents got their licences without competition while no-one applied for the new entrant's licence until May

2005.

k The three licences were not awarded at the same time. Viag Europlattform finally accepted its licence in March

2001 while Tele2/Tango and Mobilkom received their licences in July 2001.

l Telecom FL initially refused the offer of a licence. Its owner, Swisscom, then sold the company to the government

in July 2003 and when the transfer was completed in October, the now re-named Liechtenstein TeleNet accepted the

licence.

m These had been returned by the original licensees.

n A further sale of two licences is to take place in late 2006.

o Although it technically won the licence, Profinet.sk did not make the required down-payment and the licence was

revoked in August 2002.

p At the second attempt. An auction planned for May 2001 attracted no bidders. A third attempt is pending.

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Table 6: Details of Recent Auctions in Europe

Country Year Spectrum

Band

MHz

Amount of

MHz

Auctioned

Reserve

price per

MHz

€

Auction

revenues

€ million

Price paid per

MHz

€ thousands

Price paid per MHz

per head of

population

€

Austria 2010 2600 190 40,000 39.53 208 0.03

Denmark 2010 900 10 107,000 1.07 107 0.02

2010 1800 20 27,000 0.54 27 0.005

2010 2600 200 13,000 135.71 679 0.13

Germany 2010 800 60 250,000 3,600.00 60,000 0.73

2010 1800 50 250,000 105.00 2,100 0.03

2010 2000 59.2 250,000 348.00 5,878 0.07

2010 2600 190 250,000 345.00 1,816 0.02

Netherlands 2010 2600 130 10,000 2.63 20 0.001

Finland 2009 2600 190 15,000 3.80 20 0.004

Sweden 2008 2600 190 30,000 225.70 1,188 0.13

Norway 2007 2600 190 13,000 28.88 152 0.03

UK (Northern Ireland)

2007 1800 20 4,000 0.52 26 0.01

Source: Strategy & Economics, PricewaterhouseCoopers (2010)

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Summary

Cumulatively the first set of 3G auctions in Europe gathered nearly $109 billion. There were vast

differences in the amounts amongst various countries. Smaller countries were considered to

have less commercial value, central countries garnered higher amounts due to possibilities of

expansion and cost savings due to fixed cost sharing, richer countries had the highest amount.

The market was initially upbeat about the revenue earning capabilities of 3G. However the

valuations were marked much lower in the year 2001 due to the telecom bubble burst.

Auction amounts reflected various factors: size of the country, scope for revenues, GDP per

capita of the countries, time of auctions, auction design. Countries that started the process early

on had a significant advantage in terms of revenues. Countries that jumped early into the fray

were greatly benefited compared to the countries that came in late. UK and Germany were clear

winners in terms of revenue per population. Almost all countries that went for auction, followed

variations of the ascending price auction which was popularized by United States. Spain was an

interesting example that allocated through beauty contest, but on subsequent auctions in UK and

Germany, raised the fee substantially.

A direct consequence of the high bid prices was that several European operators worked out

strategies to bring down costs. However, there were concerns raised by regulators as in Germany

regarding the extent of network sharing. While operators could share the passive infrastructure,

they could not share the active elements.

Despite the initial hurdles, European, 3G services had picked up significantly by 2007 with

nearly 70 operators providing commercial services and indicated high penetration rates.

(http://www.3g.co.uk/PR/April2007/4516.htm accessed on March 30, 2011)

Complexity in dealing with post allocation processes were significant, both where beauty contest

were used and otherwise. Despite the complexity required in designing good auctions, there were

no issues regarding the transparency of allocation. Nations that had used beauty contest in the

past are significantly moving towards auctions (as highlighted in Tables 5 and 6). The cells in

23

Table 5 that show a “beauty contest” have many times used it as a qualification criterion and had

used auctions for allocations.

24

Part II:

o The international practices in allocation of spectrum in various bands, i.e.,

2G, 3G, 4G, etc.

o In respect of the international practices in allocation of spectrum in various

bands, experience of countries namely Australia, Brazil, Canada, China,

Egypt, France, Germany, Indonesia, Japan, Malaysia, New Zealand, Russia,

South Africa, UK, USA, Pakistan and Sri Lanka are required to be covered

under the proposed study.

Question 2 (i) and 5 are similar and are clubbed together.

25

Part II: International Experience in Various Bands

International Experience – 2G

The band of frequencies in which 2G (GSM) commonly operates is shown below

System Band Uplink

(MHz)

Downlink

(MHz)

Channel

number

T-GSM-380 380 380.2–389.8 390.2–399.8 dynamic

T-GSM-410 410 410.2–419.8 420.2–429.8 dynamic

GSM-450 450 450.4–457.6 460.4–467.6 259–293

GSM-480 480 478.8–486.0 488.8–496.0 306–340

GSM-710 710 698.0–716.0 728.0–746.0 Dynamic

GSM-750 750 747.0–762.0 777.0–792.0 438–511

T-GSM-810 810 806.0–821.0 851.0–866.0 Dynamic

GSM-850 850 824.0–849.0 869.0–894.0 128–251

P-GSM-900 900 890.2–914.8 935.2–959.8 1–124

E-GSM-900 900 880.0–914.8 925.2–959.8 975–1023, 0-124

R-GSM-900 900 876.0–914.8 921.0–959.8 955–1023, 0-124

T-GSM-900 900 870.4–876.0 915.4–921.0 Dynamic

DCS-1800 1800 1710.2–1784.8 1805.2–1879.8 512–885

PCS-1900 1900 1850.0–1910.0 1930.0–1990.0 512–810

Source: (3gpp n.d.)

The following sections are sourced from:

(Spicer 1996) (Burns et al 2001) (European Commission 2006) (European Commission,

Comparative Assessment of licensing regimes 2002) (Quick scan spectrum awards in the

Netherlands 2010)

26

New Zealand

Bands in which GSM operates: 900, 1800

Spectrum management initially followed a centrally administered system. Towards the late 80’s

legislation was introduced to make spectrum tradable. Since 1995 all spectrum assignments are

done by auctions. In 1990, 3 new licenses were issued using a sealed bidding mechanism. It was

a second price auction which meant that the highest bidder paid only the second highest amount.

Three types of rights are defined

Management rights: Manage nationwide frequencies for 20 yrs. A manager can issue sub

licenses within a band

License rights: Provides the holder rights to use the band in a given area

Apparatus license: Where management rights have not yet been created non tradable licensing

scheme is use.

Management and usage rights are simultaneously auctioned to allow the bidders to form

strategies

France

Bands of operation: 900, 1800

In 1994 a single PCN license was assigned using comparative tender (beauty contest). The non

European ownership was limited to 20% of the shares of the participating consortium leading to

only 3 qualified international consortia participating tender. The DGPT (General Directorate of

Posts and Telecommunications) took efforts to make it a transparent process. However due to the

involvement of senior politicians in the auction it appeared that the decision was swayed by

political conditions instead of technical merits. The selection criteria included the stability of the

consortium, likelihood to create competition, job creation, network roll-out, and mobile network

operating experience and financing options. Political involvement, cap on ownership structure

and too few licenses were the major deterrents to success.

27

Currently 3 operators selected via competitive tender (beauty contest) are operating in the 2G

cellular space. A spectrum license is not required. However spectrum assignment and spectrum

fees are required to be paid. A service license (typically 15 yrs) and Network license (15 yrs) are

required to provide service and operate the network. A hybrid of Administrative pricing and

beauty contests was used for 3G, GSM, WLL licenses. France telecom and SFR (Orange) were

given direct licenses. However the third operator (Buoygues) was selected via a beauty contest.

There are no more frequencies available for new entrants. All operators in France have the same

amount of spectrum and there are no problems in spectrum allocation. However, due to the

scarcity of spectrum, only a small number of operators with their own network infrastructures

can enter the mobile market

Germany

Band: 900, 1800 MHz

Analog cellular license was assigned to existing wire line operator.

First digital cellular license was assigned without any competitive process. Financial criteria

have never been used to assign licenses. A spectrum license is not required. However spectrum

assignment and fees are required to be paid. A service license (typically 20 yrs) and Network

license (20 yrs) are required to provide service and operate the network. T Mobile was assigned

GSM license via direct allocation. T Mobile is the subsidiary of state sponsored Deutche

Telecom. Remaining 3 operators were selected via beauty contest. Auctions used to license 3G

operators and 4G operators. Beauty contests held for WLL licenses

United Kingdom

Band: 900, 1800 MHz

The first analog license was issued to existing wire line operator. Second license was issued via

comparative tender (similar to beauty contest). Oftel was one of the first regulatory agencies to

award PCN licenses in 1989. Cell net and Vodafone were the key players then and the duopoly

was thought to increase penetration rate of analog phones

28

While awarding licenses for the GSM bands, Oftel used a beauty contest with no financial

criteria. There were 8 international consortia who had applied. Due to the lack of financial

criteria, two winners requested permission to be merged into a single entity in 1992. A financial

criterion based assessment would have helped Oftel assess the financial viability of the operators

before granting a license.

There are 4 GSM operators in UK. In the UK, all spectrum licenses are subject to annual renewal

(excluding UK licenses which have been auctioned), however such renewal will take place so

long as the fee is paid on time and the compliance with service license is met. A separate service

license is required to provide the cellular service.Cellnet, Vodafone were assigned spectrum via

direct allocation without any competitive processes. The remaining two operators were selected

by beauty contests. It has been announced that all future licensing of major national and regional

networks will be based on auctions.

Ireland

Band: 900, 1800MHz

The Ministry of Energy, Transport and Communication wanted to use an auction to assign the

second GSM license. However the EC put a cap of $24 million on the financial bid. To increase

the transparency of the process the ministry selected other criteria such as roll-out time line, tariff

regimes, customer benefits, and employment opportunities. However the process was marred by

the government’s refusal to divulge decision process and the bidders appealed to the EC. This

lack of transparency reduced the bidder’s confidence in the system. If the government had

included financial criterion, it would have greatly increased the perceived success and the

bidders would not have complained against the system.

In the Ireland, all spectrum licenses are subject to annual renewal, however such renewal will

take place so long as the fee is paid on time and the compliance with service license is met. A

separate service license is required to provide the cellular service. The spectrum fee is calculated

based on the amount of spectrum and the band.

29

Totally there are 3 operators offering GSM service in Ireland. Initial license granted to

incumbent analogue cellular operator (Eircell). Subsequent licenses awarded by beauty contest.

Financial bid was one of the criteria. A cap of € 12.7 M was imposed. Eircell was mandated to

pay the same amount as that paid by the winner of 2 license. Administrative pricing has been

used for GSM and this has been designed to reflect scarcity value of spectrum. This is also

applicable to access fee and annual charges for provision of these services.

Netherlands

Band: 900, 1800 MHz

Initial license awarded to incumbent (KPN) in 1994, further license awarded by beauty contest in

1995.A spectrum license (for 15 years) is required which would be periodically renewed.

However, only registration is required to provide service. A separate service license is not

mandatory. Auction bid amount and initial administrative fees are payable upon issue of

spectrum license. The remaining charges and fees are payable annually. The auction in 1998 was

for two combined GSM 900 / GSM 1800 licenses, each comprising 2 x 15 MHz in the 900 MHz

band & 2 x 5 MHz in the 900 MHz band. Further 16 new GSM licenses in the 1800 MHz were

also offered, each comprising between 2 x 2.4 and 2 x 4.4 MHz. The process was designed such

that applicants could acquire a maximum of 1 combined license or 16 licenses in the 1800MHz

band. The two incumbent operators were excluded from bidding for the combined licenses to

promote new entry. Also they were prohibited from using the 1800 MHz frequencies for 2 years.

In setting the spectrum fees, promotion of spectral efficiency, simplicity and transparency, cost

recovery are the most important criteria. Auctions have been used for GSM and 3G mobile

licenses. Beauty contests are no longer used for spectrum allocation

30

Japan

(Matsunaga 2006)

Band: Non GSM

Nippon Telegraph and Telephone Corporation (NTT) held monopoly until 1988. In 1987, the

first mobile service was initiated. Nippon IDO and DDi cellular group entered the mobile phone

market. They were given separate geographical coverage areas. The duopoly structure remained

until 1994 when digital phones were introduced. In 1995, NTT personal group and DDI group

started the PHS service which was different from the mobile technologies elsewhere. Tu Ka

group entered the market along with other new entrants. The current oligopoly is in place for

many years.

Source: (Matsunaga 2006)

31

Japan allotted the spectrum licenses via the Administrative command and control mode. The

government defines license conditions and examines license applicants to choose the players

who will benefit the nation the most. The general comparative process employed in European

countries involves defining a set of criteria (technical and financial) and examining each

applicant based on the criteria to see if all conditions are met. In the case of 3G licensing, MIC

Japan carried out a beauty contest based on 5 criteria. However since the number of applicants

were equal to the number of licenses the beauty contest did not yield the desired results. Under

the command and control model, competitors are excluded, foreigners banned, new technologies

delayed, artificial scarcity created and fortunes made in reselling licenses. Today with the huge

information asymmetries between regulator and the enterprises command and control model is

bound to fail. Further it masks fairness, exaggerates delays in processing information.

The process followed in Japan is as follows

a) Submit an application to MIC

b) Evaluate the applications

c) Allocate the spectrum

If more applicants apply than the spectrum available, the ministry compares the business plans

and selects the applicant. The criteria for such selection are not clear leading to total lack of

transparency. A spectrum use fee is collected based on the costs incurred by the government in

monitoring, managing the system.

United States

Band: 1900, 850 MHz

The first cellular licenses were awarded to wire line providers. It assigned the second using

comparative hearings, and later, lotteries. In a beauty contest the interested parties will begin

hearing. But due to the complex nature of selection criteria they would end up litigating in a

court of law. The judge was forced to determine the best applicant using complex criteria to

serve the national interests. Even lotteries were used to assign licenses. Only the lottery

participation fee was charged. This was similar to state run lotteries with each applicant assigned

32

a certain number and the winner determined by random selection. This process generated lots of

money for the state coffers and also from the resale of licenses. However the process lacked any

incentive or penalties for roll out typically lead to delay in service initiation.

The most famous of the US spectrum assignment was the successful grant of 99 Broadband PCS

licenses using a simultaneous multi-round auction which began December 5, 1994 and ended

March 13, 1995. Totally 30 bidders had prequalified to bid and 17 were chosen. It resulted in

massive windfall gains of $7billion to the US treasury. The method was very fair and there were

no complaints from the bidders regarding the assignment method. The simultaneous multi-round

design of the auction including regional and national licenses with well thought out rules ensured

transparency and confidence of the bidders in the system.

Canada

Band: 1900, 850 MHz

Industry Canada is the government department responsible for regional economic development,

investment and innovation. In Dec 1995 Industry Canada assigned two national 30 MHz and two

national 10 MHz PCS licenses using beauty contest whose selection criteria were promoting job

creation and investment, encouraging technological innovation, and promoting competition.

Fifteen consortia submitted proposals for regional but the ministry turned down their requests

under the pretext that the market will not be able to sustain 3 new competitors of equal

bandwidth. 4 consortia received licenses including 2 incumbent operators. Each received 10

MHz of bandwidth. Since regional licensing could not be issued and Industry Canada

autocratically decided who would get the license reduced the bidder’s confidence. Many

operators wanted a 3 license but were not given. The lack of commitment to provide third

license and regional licenses limited the success of the assignment. Since there was uncertainty

regarding regional licenses, bidders could not form strategies to create business plans for

regional licenses.

33

Netherlands

Recent 2010 auctions in the 2.6 Ghz band

(Reuters 2010) (Analysys Mason 2010)

Paired and unpaired frequency blocks (totaling 190 MHz) in the 2.6 Ghz band were auctioned in

April 2010. The unpaired spectrum was unsold. The revenue raised was about EUR 2.6 million

or EUR 0.0012/capita.

Source: (Analysys Mason 2010)

In this auction the Dutch Economy Ministry had limited the number of incumbent operators

participating in these auctions. A spectrum cap of 55MHz had been placed on operators to

promote new entrants. The following chart shows the incumbents and new entrants and their

backgrounds.

34

Source: (Pricewaterhouse Coopers 2010)

Source: (Pricewaterhouse Coopers 2010)

35

It can be seen that Ziggo, Tele2 are cable operators offering internet, fixed line telephony

services. However they do not have an installed base of mobile subscribers. Incumbent operators

lodged a complaint in the court. However the Rotterdam court ruled in favor of the ministry. The

incumbent operators KPN and Vodafone successfully bid for 20 MHz each and Deutsche

Telekom's T-Mobile acquired 10 MHz. In total KPN, Vodafone and T-Mobile were limited to

winning 2×25 MHz of paired spectrum in total. The remaining 2×40MHz of paired spectrum

plus 60MHz of unpaired spectrum were left for the new entrants. Ziggo is owned by private

equity firm Warburg Pincus and Cinven. Ziggo bid for 40 MHz of the total 190 MHz. Tele 2 also

bid for 40 MHz. Both Ziggo and Tele2 acquired 40 MHz through the auctions. The following

table (Table 7) shows the spectrum licenses owned by each player and Table 8 gives the details

of the winning bids.

Table 7: Overview NL Spectrum Licenses owned per player

900 MHz 1800 MHz 2100 MHz 2600 MHz

KPN Number of base station sites: 8,200 (NL)

• 2 x 12.4 • 2 x 20 • 2 x 14.8

• 1 x 5

• 2 x 10

Vodafone • 2 x 11.4 • 2 x 5.2 • 2 x 14.6

• 1 x 5.4

• 2 x 10

T-Mobile • 2 x 20

• 1 x 10

• 2 x 5

Ziggo - - -

UPC - - - • 2 x 20

Tele 2 Operates as MVNO

Operates as MVNO

Operates as MVNO

• 2 x 20

Source: (Pricewaterhouse Coopers 2010)

There was no demand for the unpaired spectrum. Further since demand equaled supply the actual

bid price was just above the reserve price. The objectives as set forth earlier by Dutch politicians

were satisfied: allowing two new mobile players. However the revenues were undermined as a

result of spectrum caps and lower demand for new frequencies. It has to be seen if the Dutch

market can support all the players. The vast majority of European markets have four or fewer

mobile operators. The UK market, which is more than four times larger than the Dutch market,

has just consolidated from five operators to four. The new entrants operating in the high

36

frequency band will require a large number of base stations for a nationwide roll-out. This would

require high capital expenditures. Hence the viability of the new entrants is yet to be ascertained.

It could possibly lead to a spectrum resale or a total sell out of the business.

Table 8: Winning Bids in the Dutch Spectrum Auction

Licensee Frequencies

acquired

Amount paid

(EUR)

Price paid per MHz per

population (EUR)

Vodafone 2 x 10 MHz (lots 1-2)

200,000 0.0006

Ziggo/UPC 2 x 20 MHz (lots 3-6)

1,009,000 0.0015

T-Mobile 2 x 5 MHz (lot 7)

109,000 0.0007

KPN 2x10 MHz (lots 8-9)

909,000 0.0027

Tele2 2 x 20 MHz (lots 10-13)

400,000 0.0006

Source: (Analysys Mason 2010)

KPN has paid more than 4 times compared to Vodafone. Although it appears that KPN has

overpaid, it has to be seen in the context of the actual bands. KPN has successfully won

frequencies in the middle of the spectrum band. This is to avoid interference both at the top and

the bottom of the band. Hence KPN has paid more to avoid the edge of the band to avoid

interference. The same was observed in Swedish auctions when H3G paid EUR0.013 per MHz

per population more to be in the middle of the band.

In conclusion, the low revenues generated for the paired spectrum may not be the right indication

of prices. The spectrum caps forcibly masked the latent demand for 2.6GHz spectrum from the

existing three mobile operators.

37

Overview of Recent Spectrum Allocations in Australia, Brazil, Indonesia and South Africa

Australia

Radio spectrum for mobile phone services in Australia was first auctioned in 1997. Since then,

spectrum has been divided and traded between industry firms to support new mobile services,

most notably high speed mobile data services using HSPA or 3G frequencies.

A number of recent auctions in different bands that have taken place:

• 2010-2025 MHz band: Spectrum auctions have taken place for metropolitan and regional

licenses for 15 MHz in the 2010-2025 MHz (15 MHz unpaired in 8 metropolitan and

regional areas) and price based licence over-the-counter in the 1900–1920 MHz band and

2010-2025 MHz in regional and remote Australia, subject to roll out conditions. There

were pre-determined reserve prices that varied significantly from $82 - $2000, generating

nearly $30,000. A total of 265 applications were received but spectrum availability

allowed the ACA to issue only 156 licences. The licences were issued subject to rollout

obligations to encourage deployment of services and prevent spectrum hoarding. In late

2006, the ACMA’s enforcement of rollout conditions lead to licences again becoming

available for re-issue in some areas of high demand.

In September 2007, the ACMA invited applications for the not-renewed, fixed point-to-

multipoint apparatus licences in the 1900–1920 MHz band in these high demand areas. In

view of the demand, it decided to use a price-based process for the reallocation. The

spectrum made available was in regional and remote areas of Australia for wireless

access services (WAS), which include wireless connection of businesses and households

to the internet and to the public telephone system. As previously, the licences were not

available in all areas as the 1900–1920 MHz band was subject to spectrum licensing

arrangements in metropolitan and in some surrounding regional areas. Again roll-out

obligations applied.

38

Where there was only one applicant for a licence in an area, the ACMA offered that

applicant the opportunity to acquire the licence for its pre-determined price of $82 per lot

(that is, without conducting an auction).

On 20 December 2007, the ACMA conducted an open outcry auction to allocate licences

in areas where conflicting applications were received

• 3575–3700 MHz band: (30 MHz bandwidth available in any given area), Fixed point-to-

point and fixed satellite services, an administrative process where applications were

received over the counter (OTC) in identified geographic areas; and a price-based (PBA)

in other pre-defined areas where applicants participated in an auction to determine the

"right to apply" for the issue of apparatus licences.

The areas in which the OTC process was used are those assessed as having low

contention and sufficient spectrum available for allocation; while, those for which the

PBA process will apply have been assessed as having high contention or the likelihood of

demand for spectrum exceeding supply.

• 526–820 MHz (bands IV and V of the broadcasting services bands): These service

bands arose as a consequence of the digital dividend. The ACMA had intended

completing allocating channels A (channel A must be used for services which can be

received on domestic digital television receivers (in-home receivers) and B (permitted to

be used for a wider range of uses including services such as mobile television) by

auction, an initiative or the previous Government, prior to the federal election in

December 2007. However, this proved not to be possible because of the emergence late

in the process of a number of technical and policy issues requiring Government decisions.

The ACMA suspended work on the initiative after the change in government at the

election to await advice from the current Government.

On 4 November 2009, one of the two channels was assigned to community broadcasting

in capital cities, allowing community TV stations (to date only operating in capital cities)

39

to simulcast their services until the switch to digital-only television in capital cities in

2013. In a green paper on digital dividend, released on 6 January 2010, the Government

proposed rolling one, and after 2013 possibly both, of the two channels into the dividend.

• 694—820 MHz band: The government proposed to identify 126 MHz of contiguous

digital dividend in the upper section of the Band V ultra-high frequency (UHF) television

band through refarming. Auction details were not available.

Brazil

A public bidding process is mandated for all frequency allocations when there is a contention.

The bidding would take into account the “highest licensing price for the right use of the

frequency, best coverage offering, best quality of use, taking into account the best possible use of

the frequency channel and priority of public interest service over restricted ones” (Open

Spectrum for Development Report, APC, November, 2010). Similar criteria apply for

broadcasting licenses, such as amount of time dedicated to new programs, cultural or educational

programs.

The amounts generated from the 3G “bidding” (1.9 GHz) were R$5.3 billion. Since at the time of

bidding (2007), many municipalities did not have mobile services, the winning bidders were

required to develop services simultaneously in high and lower revenue potential areas

simultaneously.

In 2007, Anatel changed the allocation of 3.5 GHz from fixed wireless to mobile, and one of the

criteria for auction was the distribution of mobile services to cover one mobile phone per

inhabitant by October 2010.

Reports indicated that there were concerns regarding the transparency and the bias towards

certain political and economic group. Over time, though, the bidding process has tended to favor

the highest price bidders. Between 1997-2008, of the 1000 authorizations made, nearly 93%

were awarded on the basis of the highest bid, rather than the proposed technical quality.

While it appears like a bidding process is being followed, it is essentially a beauty contest, albeit

one that is become more like a price based auction.

40

Indonesia

3G Auctions

Two operators PT CAC and PT NTS got 2*5 MHz in the IMTS 2000 band, based on beauty

contests. The license fee was based on a complex formula incorporating the economic zone,

number of BTS, power levels etc. When additional 3 bands of 2*5 MHz each were to be

awarded, Indonesia followed an auction mechanism. There was a two round sealed bid

simultaneous auction, with the winning bidder having to pay twice its bid amount as a one time

licensing fee and an annual fee, which was selected to be lowest quoted bid amongst all

participants. The auction process generated significant revenue. Simultaneous 2 round sealed bid

auction with a cap that each bidder could bid for up to 2 blocks

Auctions were also used for Wimax licenses in the 2.3 for 802.16d - and 3.3-GHz band in

January 2010. Of the 73 telecom companies that participated in the bidding, eight winners were

chosen for the 15 franchise zones. Each regional zone will have a maximum of two operators.

Winning bidders are required to use 30% local content for CPE and 40% for base stations.

Indonesia has been successfully able to move from a beauty contest regime to auctions.

South Africa

South Africa’s first attempt to set up an independent spectrum table of allocations occurred in

January 1996 with the launch of a spectrum re-planning project called SABRE (South African

Band Re-planning Exercise). Until very recently, South Africa has not offered any spectrum for

auction. This changed with the announcement of an auction of spectrum in the 2.6GHz and

3.5GHz bands in May 20010.

Auctions

2.6GHz Spectrum

Three new licenses in the 2.6GHz spectrum was to be auctioned a conventional ascending

price process nationally in blocks up to a maximum of 30MHz. There was a reserve

price of R70,000 and there were roll out obligations, and a requirement for 30%

41

Historically Disadvantaged Individuals (HDI) ownership of any company bidding on

spectrum. Failure to achieve 50% penetration in two years would constitute grounds for

forfeiting a spectrum license.

3.5GHz Spectrum

Two licenses of 30MHz regional licenses in every district and municipality in South

Africa. This amounts to 104 licenses being offered. Similar to the 2.6GHz auction, a use-

it-or-lose-it principles will apply, and successful applicants will be required to cover 50%

of the municipal area within two years. The reserve price for this auction is set at

R250,000 and again is refundable for unsuccessful applicants.

Administrative Allocations

Administrative allocations were done for GSM Mobile in the 900MHz, 1800 MHz, 3G,

CDMA, WiMax and Microwave links

GSM

Both MTN South Africa Ltd. and Vodacom Group (Pty.) Ltd were granted licenses to

operate cellular services in the 900Mhz band in 1993. A third operator (Cell C) was

granted an operator license in 2001 and received a license in the 900MHz and 1800 MHz

bands. In 2003, access to the 1800MHz spectrum was given on a temporary basis to

MTN and Vodacom in exchange for free SIM cards for the poor. Finally, in 2005, MTN

and Vodacom were officially granted licenses to operate in the 1800MHz band.

3G

MTN and Vodacom were granted 3G spectrum licenses in the 2100MHz band in 2004.

Since divesting its stake in Vodacom in 2009, Telkom has begun to offer 3G services in

the 2100MHz spectrum.

CDMA

In March 2007, Neotel was granted a license to operate fixed wireless services in the

800MHz band.

42

WiMax

To date ICASA has issued national spectrum licenses for commercial WiMAX services

to iBurst, Sentech (2.6 GHz), Telkom and Neotel (3.5 GHz)

Microwave

A number of spectrum licenses have been granted for microwave back-haul in spectrum

ranging from 1.4GHz range to ranges in 6-8Gz, 15GHz, and 38GHz.

Based on the experience of Australia, Brazil, Indonesia and south Africa, there is a move towards

shifting from a beauty contests to an auction mechanism. Australia uses a judicious mix of

administrative allocations (where demand is scarce) and auctions. It adopted auctions for

competitive scenario in 1997. Shifting from a beauty contests to an auction mechanism could

have some problems, as exemplified in South Africa and Brazil, but is feasible as indicated in the

case of Indonesia.

Table 9 gives the details of the spectrum allocations across various countries in different bands.

43

Table 9: Experiences in Various Bands in Selected Countries

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

New Zealand

four nationwide lots suitable for WiMAX type services (two in the 2.3 GHz band and two in the 2.5 GHz band) and four nationwide lots suitable for either WiMAX or cellular type

services.

Wimax

215 4.32 $4.40 4.4 18-Dec-07 Simultaneous multiple round

with active rules

Ministry of Economic affairs/Radio spectrum

management

Japan 60 Mhz in 2Ghz as blocks of 2x20Mhz

3G 60 127 ? Jun-00 No contest,

direct allocation

NTT DoCoMo,

Jphone, KDDI

Ministry of internal affairs and

communication

France 2.1Ghz, 5Mhz 3G 5 59.33 € 240 Dec-09 Only one candidate

Free mobile- part of Illiad group annual report has no specific info

from 3G

ARCEP

Sri Lanka 2 Ghz 3G 5 19.89 $4 Million + annual

fee

$4 Million + annual

fee

2006 not transparent Bharti Airtel - no data on Sri Lanka revenues from 3G…But overall turnover Rs

Sri Lanka's Telecommunications Regulatory Commission

(TRC)

44

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

955,293,000..loss

Rs 3,056,009,000

Germany 800 MHz, 1.8 GHz, 2 GHz, and 2.6 GHz

4G

LTE

Over 350 MHz

82.11 €4380 $5500 Simultaneous Multiple Round Auction

Deutsche Telekom, Vodafone, Telefónica, KPN winners. Each each secured two 10MHz blocks in the 800MHz band (the most valuable range). Altogether, 41 blocks were sold in the auction: KPN paid €283.6 million for eight spectrum blocks, Deutsche Telekom doled out €1.3 billion for 10 blocks, Telefónica put down Є1.38 billion for 11 blocks, and Vodafone walked away with 12 blocks for €1.42

billion

Federal Network Agency(FNA)

45

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

Australia 1900-1920 MHz (20 MHz unpaired in all State and Territory capital cities),1920-1980/2110-2170 MHz (2 x 60 MHz paired in all State and Territory capital cities except Canberra),1935-1980/2125-2170 MHz (2 x 45 MHz paired in Canberra),1960-1980/2150-2170 MHz (2 x 20 MHz paired in

regional areas)

3G 125 MHz of paired spectrum and 40 MHz of unpaired spectrum were auctio

ned

19.6 $1,168.90 $1,168.90 2001 Simultaneous multiple round (SMR) auction over 19 rounds. In the paired spectrum no bidder was permitted to acquire more than 2 x 15 MHz in State and Territory capital cities, and 2 x 10 MHz in designated regional areas. No bidder was permitted to acquire more than 5 MHz of the 20 MHz of unpaired spectrum (1900—1920 MHz) in State and Territory

capital cities

Successful Bidders were AAPT (ACT) Pty Ltd,3G Investments (Australia) Pty Ltd,CKW Wireless Pty Ltd,Hutchison Telecommunications (Australia) Ltd,Optus Mobile Pty Ltd,Telstra 3G Spectrum Holdings Pty Ltd, Vodafone Pacific

Limited

Australia communication Authority

(ACA)

46

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

Indonesia 3 blocks (of 2 x

5 MHz) 3G 30

Mhz 245.45 Per license

fee: Upfront fee: $40million + Annual fee of $3million over 10 years. Nearly $ 1 billion to

state

Per license fee: Upfront fee: $40million + Annual fee of $3million over 10 years. Nearly $ 1 billion to state

2006 Simultaneous 2 round sealed bid auction with a cap that each bidder can bid for upto 2 blocks. Each winner has to pay: An up-front fee amounting to the double of its own bid price and an annual fee amounting to the lowest offered among the

winners.

The outcome was that three companies acquired one block each (2.5 MHz): PT Telkomsel, PT

Excelcomindo,

PT Indosat

Ministry of communication and information

technology

47

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

United

States 700 MHz 52 304.06 18957 $18,957 3/18/2008 SMRA 101 bidders won

1090 licenses. Lower frequencies ensure longer transmission distances and the resultant reduction in base station

investments

FCC

Denmark 2500-2690 MHz and 10 MHz at

2010

4G/3

G

200

MHz 5.49 DKK

1,010 $168.15 5/6/2010 Combinatorial

Clock Auction Ministry for

Science, Technology and Innovation (National IT and Telecom

Agency)

48

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

Netherland

s 2500-2690 MHz 4G/3

G 130 16.61 2.6 $3.20 4/22/2010 Conbinatorial

Clock Auction with allocation

round

Dutch Economy

Ministry

Finland 2.6 GHz 4G/3G

190 5.31 3.8 $5.60 11/23/2009 SMRA/Switching

Finnish Ministry of Transport and Communication

s/ FICORA

United

Kingdom 542-550 MHz Digita

l terrestrial

TV

8 c. 656,000 (Cardif

f area)

£0.01 £0.014 2/25/2009 SMRA Not applicable as the auction is not for cellular

services

Ofcom

United

Kingdom 758-766 MHz Digita

l terrestrial

TV

8 c. 2,292,000 (Manchester

area)

£0.01 $0.014 2/2/2009 SMRA Not applicable as the auction is not for cellular

services

Ofcom

49

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

United

Kingdom 1452-1492 MHz Mobil

e multimedia, wireless broadband, mobile

audio

40 61.2 £8.3 $16.2 5/14/2008 Combinatorial

clock

Not applicable as the auction is not for cellular

services

Ofcom

United

Kingdom

10 GHz, 28 GHz, 32 GHz,

40 GHz

5,384 61.2 £1.4 $2.8 2/22/2008 Combinatorial

clock

Not applicable as the auction is not for cellular

services

Ofcom

United

Kingdom

1781.7-1785/1876.7-

1880 MHz

Wireless telegr

aphy

6.6 61.2 £3.78 $6.9 5/2/2006 Single-round

sealed bid

Not applicable as the auction is not for cellular

services

Ofcom

Brazil 1.8 GHz in 2G

2.5 GHZ, 3.5GHz, 10.5

MHz for 3G

Wima

x

3G

120 198 2010 Simultaneous multiple round

with active rules

TIM, VIVO, CLARO, OI,

NEXTEL

Anatel, Ministry of Communication(minicom)

50

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

Canada

1710-1755 and 2110-2155; 2xSat 1900;

1670-1675

Advanced wireless spectrum,

3g

105 33,212

696 3.4 billion

4.25

billion

27th May,

2008

SMRA

( simultaneous multiple round

with active rules)

Rogers, TELUS, Bell, Quebecor, Glabative, DataA/v, Shaw, Sasktel, MTS,

Bragg

Canadian radio television and Telecommunication commission

(CRTC)

Egypt

2.3, 2.5, 3.3, 3.5 GHz, unlicensed

5.8 GHz

Wima

x 78.1

Multi-round auctions for

spectrum

Egypt national telecom regulatory authority (NTRA)

Pakistan 450 MHz,

1.9GHz, 3.5GHz

Wireless local loop (WLL

)

152 192 2004 Marathon

bidding process

World call, M/S com, Waird WLZ, Telecard, DV Com, Burraq Telecom, Cyber internet, Sachal

soft tech

Pakistan Telecommunication Authority

(PTA)

Malaysia

1920 to 1965, 2110 to 2155, 2010 to 2025

MHz

Wima

x, 3G 24.5

26.5

billions 2002 Beauty contest

Celcom BERHAD, E-touch Sdn Bhd, Telecom Malaysia Berhad, TimeSat Sdn Bhd, UMTS Sdn

Bhd

Malaysian Communications and multimedia commission

(MCMC)

51

Country Band(s)

classification

MHz Sold

Population

(Million)

Total

proceeds/

Benefits to

exchequer

(Million)

Total

proceeds

$US m

illion

Auction

Close

(Yr/Mo/Dt) Auction Type Bidders info Spectrum

owner/

spectrum

Licensor

Russia

2.5 GHz, 3.5GHz, 5.8

GHz

Wima

x, 4G 139 2010

Electronic Simultaneous

multiple round

Yota, Rostelcom, Megafon,

Skylink

State Commission for radio frequencies

South

Africa

2.6 GHz, 3.5

GHz

Wima

x 49.9 2010 Highest qualified

bids

Vodacom, MTW, MWEB, TELKOM, VOX Data Pro

South Africa broadcasting corporation (SABC)

Philippines 3.5 GHz, 3.75

GHz

Wima

x 90.5 2008

China 3G 200 2008 China Mobil, TD-SCDMA, China Unicom,

China Telecom

52

Summary

Wherever beauty contests were used, there were complaints of lack of transparency. Bid amounts

for beauty contest difficult to arrive at. It is difficult to justify beauty contest outcomes on grounds of

transparency. In designing auctions, post allocation activity needs to be thought through. Since

spectrum auctions are an on-going activity, there must be mechanisms to incorporate the

feedback of various allocation processes into the next allocation process. There is considerable

scope to learn from experience of other nations as well.

The complexities in auction design, could lead to some inefficiencies in auction outcomes,

however, such inefficiencies are likely to be worse in a beauty contest. Beauty contests, by their

nature, are tacit attempts by the government to provide state aid.

53

Part III: The pros and cons of auction vs administered pricing

mechanisms or beauty contests, in respect of spectrum allocations

Some characteristics of spectrum that could have a bearing on the mechanism and outcomes of

the allocation process:

a) Fully renewable

b) Interdependencies due to signal overlay/ could cause interference if not managed

properly

c) All frequency bands are not alike. Different frequencies have different propagation

characteristics and their usage varies accordingly.

Therefore, spectrum allocation regime and the property rights should reflect some aspects of

these characteristic. However, the policy and regulatory regime surrounding the allocation and

assignment, the situation prior to the allocation/assignment, as well as the likely scenario post the

allocation. Some factors that characterize each of these stages are given below:

54

Post-service

• M&A

• Trading

Market entry/Competitive environment

• Strategic review of spectrum

• New entrant

Citizen services

Service provision

• Spectrum allocated

• Mandated roaming

• Property rights

Pre-service provision

(Allocation instruments and

processes)

55

To highlight the basic difference in auctions and administered pricing mechanisms or beauty

contests (beauty contest) as a licensing mechanism, auctions are market based and other

commonly used methods including beauty contests are non-market based as shown below:

Methods of licensing and assigning frequencies

Market-Based Non-market-based

Auctions First-come,

First-served

Administrative

Processes (such

as Beauty

Contest)

Lotteries

56

Allocation Instruments

The visibility of the telecommunications sector and the prior experience of 3G licensing in

Europe and the UK have shaped the perspectives of several Asian regulators and policymakers

including those in India in identifying appropriate mechanisms for allocation. Since European

bids through auctions had gone extremely high, most regulators in Asian countries were wary of

an auction mechanism; however, this perspective needs to be analyzed as traditionally auctions

are considered the most efficient mechanism to allocate scarce resources to entities that value

them most, in a transparent, objective way.

It is true that some auctions have not had the intended outcomes, but that has been the result of

poor design. Auction design requires a great deal of thought and attention to detail for it to be

successful. Simultaneous multiple-round auctions in the PCS band (A, B, D and E bands)

designed by the FCC in the USA were considered successful, as was the fourth cellular license in

India; however, operators do not support auctions as they feel they will have to pay a price that

will reduce their profits. Although economic analysis of spectrum auctions has often focused on

fees extracted from bidders, outcomes should also evaluate the speed with which spectrum is

made available to operators, and the consequent increase in the consumer surplus.

Post-2000, some analysts have linked problems with European telecommunications firms to the

high prices paid by them for 3G licenses. This has been interpreted sometimes to indicate that

auctions are an inappropriate mechanism; however, this is not the right perspective. Bidders

voluntarily bid high and, if their operations are subsequently hurt, it means it was a bad business

decision, for which they need to pay. Operators have the option of choosing the level of bids,

investing in an alternative business, or opting out of bids to possibly buy the winners later. Poor

performance in the telecommunications sector was not limited just to companies that had

‘overbid’, but was spread across companies in the USA and also included those that had not bid.

In the wake of high prices for 3G auctions in Europe, there was a general belief that auctions

create problems for firms that participate, as they bid high, consequently loosing the business

57

case for successful deployment. However, companies in Europe that bid high had actually

valued the spectrum highly in view of the hype surrounding the Internet in 2001/2001. This just

shows that companies are responsible for understanding the technology-market dynamics and

will pay if they do not. The Internet bubble burst led to a downfall of almost all companies,

including those that had not participated in 3G. So, it was not auctions per se that led to the

downfall of these companies.

High prices did lead companies to think innovatively for reducing costs as by sharing

infrastructure. However, the European and some examples of poorly designed auctions (C&F

block PCS auction in USA) led several Asian regulators to not consider auctions as an allocation

mechanism (TRAI consultation paper, Philippines), without recognizing that the problems were

not related to the instrument

In any case, spectrum is just one of the inputs required for service provision and operators in a

competitive scenario are likely to offset such costs against efficiency gains elsewhere in the

service provision chain. It is likely that such auctions (especially if these are for small amounts

of spectrum), could lead to fragmentation of spectrum, leading to an increase in service provision

costs; however, a regime for spectrum trading or mutual exchange could remove this bottleneck.

If high prices for service are a concern, then the Government could reduce/remove the custom

duty and other duties on import of wireless equipment for telecommunications services, while

also supporting development of indigenous research and development (R&D) and manufacturing

to further bring down prices. If prices are not determined by any market mechanism, there are

likely to be contentions regarding the level of price, as happened in the Philippines. In

developing countries, it is considered possible that high auction prices will lead to higher

consumer prices and hence lower penetration; however, enough competition and falling prices of

technology will ensure that prices will come down, as happened in India. Thus, governments

need not be wary of auctions and therefore preclude themselves from choosing more efficient

methods of allocation.

58

Post-service issues

It is expected that, once the services start, the extent of market mechanisms adopted by

regulators in the areas of M&A and spectrum trading will influence the commercial outcomes in

a post-service scenario. Regulators need to provide a framework where M&A are facilitated

while maintaining the competitiveness of the sector so that the consumer has choices and

competitive pricing.

Comparing Auctions and Beauty Contests

Auctions provide an “objective, comprehensible and non-discriminatory” process for allocation.

Auctions being market mechanisms, a well designed auction mechanism can allocate scarce

resources to those who value it most. A well designed auction mechanism must take into account

market situation, bidder behavior, and must be supported by adequate institutional mechanisms

(Jain, 2006). Auction design will evolve and each subsequent iteration must involve the lessons

from the past.

Auctions work well when the access to the market is competitive as when there are more bidders

than spectrum bands. Japan and Netherlands are examples, where this was not the case. In such

cases, simple administrative allocation works best, with the mechanism of periodic review to

ensure that as and when the market becomes competitive, spectrum can be provided

competitively. For national goals, such as universal access, public safety etc, reverse auctions

could work well as exemplified in the Indian USOF case. This is an example where even if

commercial incentives are low, governments can infer the market value of the service, and by

using competition, ensure it gets the best priced services.

While it may appear that beauty contest provide an objective mechanism for allocation of

resources, in reality, devising the criteria for allocation is an extremely complex process, tends to

59

be opaque and often leads to political and legal controversies (as happened in the metro cellular

licenses for Delhi and Mumbai in 1992 in India, Spanish, Swedish and Philippines 3G licenses)

(Jain, 1999; Jain 2010). Further, auctions are considered a transparent mechanism,

Second, assigning weightages for various attributes is highly subjective. (Jain, 2010).

Administrative criteria for assessing “deserving candidates” could be faulted for being far

removed from market realties and performance as administrators do not have first-hand

knowledge of market conditions to assess what weightages in the criteria lead to better outcomes.

Third, evaluation against the criteria in most cases is likely to be subjective as administrators are

likely to assess some forms of business plans, none of which can be “objectively” evaluated (as

happened in the metro cellular licenses for Delhi and Mumbai in 1992 in India (Jain et al (1998);

airport privatization of Delhi and Mumbai (Jain et al (2007) amongst other cases.

Evaluating firms on the basis of their tariffs and roll outs is extremely difficult as administrators

are in position to judge the veracity of the business models of players. Specification of future

tariff prices for any product is difficult (it depends not only on the material costs but business

relationships, firm strategy, long term contracts, volumes, likely innovations). To monitor roll

outs is also difficult as market conditions are likely to change over the duration of the license and

players may like to shift their roll out obligations, geographically or over time from the original

specification. Then the whole purpose of the first evaluation is questionable.

So while it may be said that beauty contest are easier to design, but our arguments indicate that

designing the criteria, the weightages and evaluation are complex factors to deal with. So, this

process can be very time consuming and cumbersome and open to legal challenges

60

Regarding prices of services based on whether spectrum was won through beauty contest or

through auctions, the argument that high prices in auctions will result in higher prices to

consumers: first, firms will offer services at rates that maximize profits. Second, spectrum is just

one of the elements in service delivery. Companies may cover higher spectrum costs by

developing innovations in technology or business models. Determining prices administratively

is, therefore, complex. On the other hand, reserve price or license fee in beauty contests cannot

reflect market realities for reasons cited above. Further, by the same logic, lower prices in beauty

contests need not necessarily reflect in lower prices to consumers. The example of 3G in France

discussed above highlights this aspect. Any rational firm will try to increase its price to what

consumers will pay, even if the sunk cost of a license is low. Beauty contests may have

pernicious secondary effects. First, the lack of transparency means that government-favored

firms will be more easily able to win than firms that would provide the best service. Second, the

favored firms can use the cost savings from the beauty licenses in one market to subsidize their

entry into other markets that use the auction system since they will not be as burdened by a

higher debt service that payment for licenses in an auction might cause.

With beauty contest, a significant issue is the determination of license fee. Since spectrum is a

public resource being given to private entities for their business (while of course serving an

important economic need of the nation), there must be a way to value it objectively and ensuring

that citizens get appropriate returns on it. When license fee are set administratively, then there is

no way to benchmark them against the market. Such fees may not reflect the true commercial

value of the spectrum. This is illustrated in the Indonesian case where they had a complex

formula incorporating the bandwidth, power levels, economic condition of the area that was

served, bandwidth etc, in the first round of 3G allocations through beauty contest, which was

replaced by an auction in the second round of allocation. The formula was open to questions

regarding the assumptions made in the model, much like the Subscriber linked criteria in the

Indian 2G case!

While it does appear that beauty contest allow the policy maker to incorporate national goals

(such as high weightages to historically disadvantaged groups) or bundling commercially

61

attractive areas with those that are not, or mandated indigenization programs, in the long run,

such mandates are not successful on the ground. The reason is that while at the time of

application for licenses, operators will indicate high levels of compliance with the stated goals,

even if they are commercially unviable, but will have difficulty in deploying them. Often times,

such mandates are used to win the allocation. This is illustrated in the Indian case where all

bidders in the 1992 metro licenses had indicated a high level of indigenization in the handsets in

their business plans but could/did not implement the same. The reason is that the policy makers

are using the vehicle of telecom service provision with indigenization program and service

providers do not directly influence the manufacturing programs.

Under ideal conditions of a benevolent state, omniscient regulator and moderate technical

uncertainty, beauty contests may be the optimal method. However this is rarely the case.

In summary we can compare the methods based on the following parameters:

Efficiency

• In terms of productive and allocative efficiency, auctions are a more efficient way to

allocate spectrum licenses. Auction is based on a single criterion of price and hence

depends on the valuations of the bidders. This reduces the risk of the regulators. On

the other hand for a relatively new technology beauty contests with periodic payment

or access fee may increase the risks of the regulator. Since the bidders will be in a

better position to assess future profits than the regulator, this assessment could cause

additional risks. In these scenario auctions appears to be a better method than beauty

contests as beauty contests also require a complex weightage of several qualitative

criteria.

• In the case of new technology, since the market is yet to develop, bidders may bid

much higher for the resource. Hence winners curse may be more pronounced in the

case of auctions. The French case is a suitable example. The entry fee was set very

high based on British auctions. However, the uncertainty ensured that the players

were debt laden for many years. Hence the state can be as short sighted as the market

or the private player.

62

• Auction inherently extracts information by forcing bidders to reveal their valuation.

Beauty contests on the other hand request for information. Auction lowers the

informational asymmetry and hence is better especially when the state is at an

informational disadvantage. However, auction design must ensure deterrence of

collusion among participants.

• Both auction and beauty contest try to extract a portion of the surplus earned by

enterprise owning the spectrum. The two approaches can be considered equivalent

only if the state is positioned at par with the market in assessing the use of the

resource. However the superiority of a state administered fee over market is quite

questionable.

• The complexities in auction design, could lead to some inefficiencies in auction

outcomes, however, such inefficiencies are likely to be worse in a beauty contest.

Beauty contests, by their nature, are tacit attempts by the government to provide state

aid.

Transparency

• Auction procedure is definitely superior to beauty contests from the view point of

transparency. The auction rules are precisely defined well in advance and they are not

subject to modification later. However, beauty contests leave the contract conditions

open for negotiations as happened with the French allocation.

• Beauty contests permit the modification of procedure based on newer information

that was previously unavailable. But whatever is gained by flexibility, the regulator

risks loss of credibility if the rules are changed often.

In designing auctions, post allocation activity needs to be thought through. Since spectrum

auctions are an on-going activity, there must be mechanisms to incorporate the feedback of

various allocation processes into the next allocation process. There is considerable scope to

learn from experience of other nations as well.

63

64

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