16th CCRP Workshop, 11-12 July 2013
Spectrum floors in the UK 4G
auction: an innovation in
regulatory design
Geoffrey Myers
Visiting Professor in Regulation, LSE, [email protected]
(Director of Competition Economics, Ofcom)
1
4G auction: 70% increase in amount of mobile spectrum
Pre-auction spectrum holdings
45MHz of 2.6GHz
(unpaired):
• E: 9 lots of 1x5MHz
2x70MHz of 2.6GHz
(paired):
• C: 14 lots of 2x5MHz
2x30MHz of 800MHz:
• A1: 4 lots of 2x5MHz
• A2: 1 lot of 2x10MHz
(with coverage
obligation: 98%
indoors by end 2017)
2
4G auction: effect on competition
Traditional competition measures: set-aside or caps
•
Pattern of spectrum acquisition in 4G auction will influence competition in the mobile
market for years to come
– Valuable spectrum
• Smaller amount of high-value spectrum at low frequency, 800MHz, providing advantages in
cost and/or quality of indoor and indoor coverage
• Larger amount of spectrum at higher frequency, 2.6GHz: useful for capacity
•
Based on a forward-looking competition analysis, Ofcom’s policy objective through the
auction was to promote at least 4 credible national competitors
– ie at least maintain current market structure (given large barriers to entry)
– Competitors at risk, H3G or new entrant, needed spectrum in auction to have minimum portfolio:
capability to provide sufficient coverage, capacity & speed to be effective constraint on rivals
•
Traditional approach would be to reserve spectrum (set-aside) or impose caps
•
Set-aside: Ofcom might reserve the wrong spectrum, failing to optimise net effect of:
– Value of H3G/new entrant for preferred spectrum portfolio; and
– Opportunity cost to other bidders denied access to reserved spectrum
•
Caps: indirect method to achieve desired objective; and to ensure enough of right
spectrum for H3G/new entrant caps would have been restrictive on other operators
– Caps were imposed in 4G auction but for different purpose of avoiding highly asymmetric
distributions of mobile spectrum
3
3
Spectrum floors in 4G auction
Innovative competition measure
•
Better approach is flexible spectrum reservation, ie floors
– Not pre-specified spectrum, but one from choice of portfolios
– Reservation can differ between different types of bidder, eg smaller incumbent (H3G) versus
new entrant
•
Because their pre-auction spectrum holdings were very different, spectrum floors
were different, depending on the type of eligible bidder [reserve prices also shown]
– H3G:
• 2x5MHz of 800MHz (1xA1) [£225m]; or
• 2x20MHz of 2.6GHz (4xC) [£60m]
– New entrants:
• 2x15MHz of 800MHz [(3xA1) [£675m]; or
• 2x10MHz of 800MHz plus 2x10MHz of 2.6GHz (1xA1 + 2xC) [£480m]
•
Then auction within an auction:
X



– Eligible bidders for spectrum floors compete against each other for the reserved spectrum
• 4-16% of spectrum in the auction
– Other bidders (and eligible bidders beyond their floors) compete for unreserved spectrum
– Choice of spectrum floor is determined by competition between the two sub-auctions, ie
selected spectrum floor maximises bid value subject to constraint of one eligible bidder
winning one floor (or larger package including floor)
– Winning floor intended to optimise net effect of:
• marginal value to eligible bidder for floor; and
• additional opportunity cost to other bidders
4
4
Auction outcome
Winning packages and prices
H3G’s winning spectrum floor for
which it paid the reserve price
5
Choice of H3G’s winning spectrum floor: 1xA1, not 4xC
H3G’s marginal value for 1xA1 exceeds opportunity cost to other bidders
Bids
H3G: £565.5m
H3G’s marginal
value of £165m
for 1xA1 versus
4xC
H3G: £400.5m
Reserve
price of
£60m
Additional opportunity
cost to other bidders:
their combined
marginal value of
£107m for 1xA1 versus
4xC
Reserve
price of
£225m
4xC
1xA1
(2x20MHz of 2.6GHz) (2x5MHz of 800MHz)
Package
H3G’s bidding strategy
Floor at reserve price (H3G was only bidder for reserved spectrum)
•
By bidding marginal values equal to differences in reserve prices, H3G guaranteed
that it would pay at most the reserve price for its winning spectrum floor
– If H3G won the floor preferred for it by other bidders (ie that maximised their bid value – in
practice, 4xC), auction rule was that H3G would pay reserve price because spectrum reserved
– In the alternative, as was the case in practice, if H3G won other bidders’ less preferred floor
(1xA1), H3G would pay the higher of:
• Reserve price of winning floor (1xA1, £225m)
• Reserve price of other bidders’ preferred floor (4xC, £60m) plus additional opportunity
cost (ie their lost bid value from less preferred floor being selected, £107m)
– For H3G’s price to be higher than reserve price, opportunity cost to other bidders would need
to exceed difference in reserve prices
• But in that case, H3G’s marginal value would be less than opportunity cost, so it would
not win that floor
– So H3G’s bidding strategy ensured that it would only win other bidders’ less preferred floor if
price was no higher than reserve price
•
Likely that H3G’s true marginal value for 1xA1 over 4xC at least as large as the £165m
in its bids
– If not, H3G could have bid lower marginal value and still guaranteed it would pay no more
than reserve price for winning floor
•
Only marginal values bid by H3G were relevant to outcome and prices, so absolute
level of bids may over- or under-state true values
7
Concluding thoughts
Benefits of flexibility: market information better than regulator’s
•
Article in Financial Times (14 March 2013) quoted H3G as being “astonished that it [the
auction] resulted in their company acquiring the treasured low frequency spectrum at
Ofcom’s reserve price”
•
H3G’s bidding strategy guaranteed it would win a spectrum floor at reserve price
•
H3G’s marginal value for 1xA1 (2x5MHz of 800MHz) versus 4xC (2x20MHz of 2.6GHz) of
£165m turned out be higher than additional opportunity cost to other bidders of £107m
– Perhaps H3G expected other bidders to have higher opportunity cost
•
Even if some found the result surprising, it reflected consistent pattern of bids made
– For example, opportunity cost of other bidders was reduced by EE’s preference (at the margin) for
4xC over 1xA1 (eg negative opportunity cost for EE of -£14m)
•
An innovative element of flexibility in spectrum floors proved to be relevant in 4G auction
– In addressing market failure that pattern of spectrum acquisition might weaken downstream
competition, avoided regulatory failure that could have occurred with simple spectrum set-side
– Regulator reserving the wrong pre-specified spectrum of 2x20MHz of 2.6GHz in false belief that
would minimise net cost of reservation
8
Annex: Operators’ post-auction spectrum holdings
Overall cap
Sub 1 GHz
cap
9
Breakdown of additional opportunity cost for 1xA1 vs 4xC
Mixture of positive and negative marginal values
Bids
H3G: £565.5m
Net positive
additional
opportunity cost of
£121m from
rearranging 3xC
and 9xE between
EE, Niche, Telefonica
and Vodafone
H3G: £400.5m
Reserve
price of
£60m
Reserve
price of
£225m
Additional opportunity
cost to other bidders
(including EE): their
combined marginal
value of £107m for 1xA1
versus 4xC
Negative additional
opportunity cost to EE:
its marginal value of
-£14m for 1xA1 versus
4xC
4xC
1xA1
(2x20MHz of 2.6GHz) (2x5MHz of 800MHz)
Package