SOMEONE WHO KNOWS THE PRICE OF EVERYTHING AND THE VALUE OF NOTHING.

OSCAR WILDE’S DEFINITION OF A CYNIC,NOW COMMONLY APPLIED TO ECONOMISTS.

AASHISH AND SIDDHARTH

Spectrum Auctions

Selling a House

A house worth 30 LakhsIn an auction

you get 30 thousand your neighbour gets 3 crores

The house: Spectrum – radio waves in thin air, used by telecom companies to operate networks

More broadly, radio frequencies of electromagnetic spectrum used for wireless communications

The Context

Defining the market: The sellers: USA, UK, countries the world over The buyers: Telecom companies The people responsible: Economists

Limited amount of spectrumScarcity = …………………………………..Governments own the spectrum, give usage rights The process is through auctions, though

government can give it for free, on a first-come-first-served basis

Why Auctions?

Demand for spectrum is high and the supply limited

Best way to ensure optimal utilisation is to auction it

Legitimate source of revenue for a resource that will be put to commercial use

Best way to raise revenue for the government

“I am personally in favour of allotment of spectrum through auctioning for ensuring transparency. However due to various legalities involved, it is not possible to auction 2G spectrum. In this connection, I would like to bring to your notice that the existing operators have got spectrum in the past ‘free of cost’ and it may not be tenable under law to auction spectrum as it is discriminatory and capricious.” ~ Mr A Raja, Communications and IT Minister, a year ago

The First Auctions

The US GovernmentSpectrum Auctions in 90s

The Problem A company bidding for one state wants neighbouring states

• Cheaper to run adjacent networks Solved by setting up parallel networks

Successful first auctions – then, things went awry…

Selling a $300,000 house for $3,000

Theorists got complexities right, … but missed simple things

The mistake:publishing results with area codes

Firms gave preference signals to avoid high bidding

Looks like cheating, but can you prove it?

Three years after the first auctions, April 1997: auctions raised 1% of the expected auction amount

How did this happen?

Imagine your house a few buyers

Tacit collusion – buying a big pie cheapCompensation – sharing the piePerpetuating – let’s do this next time too

The biggest humiliation for Game Theory

Game Theory

Game theorist: a game is any activity in which one’s prediction of another’s act affects what one decides to do

Such games include Love Poker Nuclear war Bidding for thin air in an auction

Driving Good payoff: I drive on the left and the opposite person on the

right Good payoff: I drive on the right and the opposite person on the

left Bad payoff: We drive on the left side of the road – a hospital trip Bad Payoff: We drive on the right side of the road - Hospital

Payoffs

Every bidder has some idea of profits from a license

Governments’ challenge is to determine: Which telecom cos. are best operators How much the licenses are worth to them The best value for the tax payer Value for end-users of mobile services

The Criterion for this: making it happen The Price it is ready to pay to conduct auctions This can be reduced by:

Sifting out Cheap Talk and Empty Promises Making bidders put their money where their mouth is

Not for the weak-hearted

The New Zealand Experience

Vickery Auctions Second price sealed bid auction This kind of auction shoots up the prices offered by

bidders In auctions, the price is set by the second highest bidders

anyway

Reactions of the Public The government made the highest bids public Criticism from the press on comparing bids with prize

money

Then the UK Government

A bold step After the mockery of game theory in New Zealand and the US Auction theorists made a strong case for auctions

The Plan The Simple Auction Anyone who is participating, must submit a bid Those who want to drop out must leave

Theory As prices rise, those who find it unprofitable will leave Existing bidders will get signals when people are leaving Will revise bids Traditional auctions: observer indistinguishable from

participant

The Process

Companies without in-depth knowledge quit first

If price rises without anyone leaving Leaders are confident that others are participating The signal is that market prospects are strong

Collective wisdom of buyers tested Forces each bidder to reveal his or her valuation

It collects cash as it does soTap-ping the market

The UK auction in action

13 Bidders in March 20004 established, 9 New5 licenses for 3G services, 1 reserved for a new

entrantThis leads to competition

Prevents established players taking up all the licensesOption of delaying auction if something goes

wrongTested among students and on computer

simulations

Hope: That this works!

The Process

Short online rounds of half an hour eachBidders had to submit new bids or

withdrawTwo rounds a dayResults posted for everyone to seeExpectations: £ 2-3 Billion Not in the lead? Bid or withdraw!Switching bids between licenses allowedFirms bid on the license that offered

the best value at the time Forging Ahead – you got to keep on moving on…

The Process (contd.)

Competition for license A fed into others (transferability) every time the price of A rose above the rest, the other licenses

looked like bargains. When the established firms raised the price, the underdogs

flipped back to bidding on license A

Because bidders never know when the auction is going to end, they need to make sure they are always comfortable in their current position.

The best strategy is to look at all the licenses and submit a new high bid on whichever license looks like the best value.

If none looks like a good value at the time, then the right move is to withdraw.

So, What Happened?

1st Week: Bidding went smoothly Total revenue rose steadily After about 25 rounds of bidding, bidders were committed

to around £400 million for each license. After 50 rounds of bidding the total stood at £3 billion:

what the government had been hoping to raise.

Bidders were staying in the auction. All 13 companies continued submitting bids regularly The prices of the licenses kept rising without any sign

of slowing down

Success!!!

As the auction rolled on, the press started to take interest

Photographs of the design team appeared in newspapers

The bidding moved through (TR):Round 60 (£4 billion)Round 70 (£5 billion)Round 80 (£7 billion)

The auction was becoming a victim of its own success: it was lasting too long

Jitters in the US stock market Fears of stock market crash spreading in the UK Could derail the economy

Success???

April 3: After almost a month: £10 billion (£200 or almost $400 per person in the UK)

One of the bidders, Crescent dropped outThe auction then started to change quicklyThat afternoon, in round 95, a second bidder,

the 3G-UK consortium, dropped outThe next morning, in round 97, a third bidder,

Spectrum, also quitSome other bidders were stalling for time by

playing their “waivers” to stay in without raising a bid

The Turnaround

In round 98 Epsilon withdrew. The next day, at lunchtime on April 5, One-Tel quit.After 93 rounds of bidding without any withdrawals,

the auction had lost 5 bidders in 8 rounds in 3 days.What kept them going so long?Perhaps it was pride

Nobody wanted to drop out first. Once Crescent quit, others who had been waiting for a chance quit soon after.

There’s more to this story, of course…

In Retrospect

Game Theorists: bidders were learning from each others’ bids about valuation of 3G licenses’ worth This was one of the advantages of the auction’s transparent design

Taking into account Crescent’s doubts, other bidders who were also having second thoughts were tipped into withdrawing

The auction had seen a sudden run of withdrawals.

BUTBy the middle of April total revenue topped £29

billionThe Biggest auction in modern history

Lessons to be Learnt

Revenue outcome in spectrum auctions is tentative

If spectrum allocation is inefficient, a highly efficient auction will deliver poor results The distinction between “allocation of spectrum” and

“assignment of spectrum” allocation defines different characteristics of spectrum such

as frequency band, geographic area, time period, use restriction

assignment refers to the allotment of spectrum

Lessons to be Learnt

One size does not fit all Many discretionary parameters enter into auctions Decide in advance: what variant, details of the design

Always an element of uncertainty regarding what will work and what will not

Difficult to establish cause-and-effect relationships even in ex post facto analysis of auction results absence of counterfactuals

Lessons to be Learnt

Complex decisions to be taken at the planning stage “Packaged bidding” – a bundle of licences with large

complementarity can earn more auction revenue per licence than sequential bidding for individual licences

Such decisions require careful planning and analysis

May require a framework of efficient clearing of encumbered spectrum if a vacant band is unavailable

Lessons to be Learnt

Winner in an auction may not use licences efficiently However, the terms and conditions or rights and restrictions in a

licence can be framed appropriately to safeguard public interest But these conditions affect bidders’ willingness to pay for the

licence e.g. Swan and Unitech in the recent 3G bungle-up

Regulators should be sceptical of any request by the winning bidders to change the terms of the auction after the contest Such auctions may be a fall-back strategy to the “win-at-any-cost”

outcome of wireless telephony auctions e.g. Regulators in England and Germany denied the requests of

the companies after the 3G auction to reduce the licence fees

References (yes, we worked for it)

Telecommunications Research Project, Spectrum Management (Hong Kong University)

The Undercover Economist, Ch 7 (The Men Who Knew the Value of Nothing), Tim Harford

Economic and Political Weekly, 26 April 2006, Editorial (Spectrum Woes)

Economic & Political Weekly, 13 September 2008, The International Experience of Spectrum Allocation, Maanas Bhattacharya

Economic and Political Weekly, 20 September 2008, A Critique of Spectrum Management in India, Rohit Prasad, V Sridhar

The Current Contextual Indian Scenario

(in case there’s time and interest)Where there is time there will be interestWhy?Because time is money and money creates

interestBut this interest may be short-livedWhy?Because time is running outDidn’t get it?Meet us at Tifanys after class!

http://economictimes.indiatimes.com/News/Economy/Variety_of_spectrum-sharing_options_/articleshow/

3683496.cms

Given that emerging technology does provide avenues to considerably boost spectral efficiency, what's surely necessary is reform of spectrum policy so as to shore up both demand and supply of new technology, and innovation in delivery of telecom services.

Rationalisation of the charges would make much sense. The idea ought to be to optimise usage of the electromagnetic spectrum for cellular operators, including with realtime secondary trading. The provision of such a secondary market, where blocks of spectrum can be "rented" out for a few seconds or months would be pathbreaking indeed.

http://www.indianexpress.com/news/raja-swears-by-fair-play-blames-cartel-for-scam/382854/

The controversy surrounding Raja is that he accorded licences and spectrum at cheap rates to a host of new applicants, of which two new licence-holders, Unitech and Swan, made a fortune by selling a part of their stakes. The two companies, which received spectrum for a measly amount of up to Rs 1,651 crore, recently sold some of their stakes at a valuation of around $2 billion without having any skeletal structure in place, subscribers or knowledge of the telecom business.

Raja said that the 2G spectrum was not auctioned because Trai did not favour it and that there was nothing wrong in diluting equity by issuing fresh shares as opposed to sale of promoter's equity ... In fact, the Telecom Commission, upon Raja's insistence, would deliberate on a proposal on Tuesday to prohibit promoters from selling their equity for three or five years from the date of issue of a licence.

http://www.indianexpress.com/news/telecom-spectrum-allocation-scam-worth-rs-18k-cr-involved/383124/

SP general secretary Amar Singh said that 'many national and multinational Telecom companies are using more than their share of spectrum allocated to them by TRAI and are violating its norms and a scam of Rs 18,000 crore is going on'.

Singh who was talking to reporters after meeting the Prime Minister Manmohan Singh in New Delhi said, "national and multinational telecom companies like Vodafone, Airtel and Idea are violating TRAI norms."

http://timesofindia.indiatimes.com/Business/Trai_against_change_in_spectrum_fee/articleshow/

3690422.cms

The ministry has argued that Trai has itself noted the need for "equal competition" and differential treatment to a new entrant as compared to existing players in the wireless sector will not represent a level playing field — particularly so as subscriber acquisition cost for a new entrant is likely to be much higher than for incumbent wireless operators.

Raja said that Trai discussed various options regarding entry fee for UASL regime. It recommended that for fixing entry fee for migrating to UASL regime, the entry fee for fourth cellular operators shall be the amount payable for migration to the new regime offering convergence.

The minister pointed out that Trai's view was that existing players have to improve efficiency of utilisation of spectrum. And if the government ensures availability of additional spectrum, then in the existing licensing regime, they may introduce additional players through a multi-stage bidding process.

http://news.moneycontrol.com/india/news/business/tele-cos-to-pay-one-time-fee-for-spectrum-over-62-mhz/

20/01/365186

Telecom companies will have to shell out big bucks for additional spectrum. Telecom minister A Raja said that not only would the annual fee of these operators be increased, but the exchequer would stand to make Rs 4000-5000 crore as a one time fee for spectrum allocated over 6.2 mhz.

A Raja, Communications and IT Minister announced that Bharti Airtel would have to pay a one time fee for spectrum above 6.2 mhz in 9-10 circles. Analysts say this could be anywhere between Rs 500-2000 crore. Idea would have to shell out the one time fee for 7 circles post its acquisition of Idea. Vodafone would have to pay for 8 circles, Aircel for 2 circles and BPL for 1 circle.

A Raja, Communications & IT Minister said, "This controversy arose after Unitech Wireless sold 60% stake to Telenor for Rs 6100 crore when it had paid just Rs 1650 crore for telecom license for 22 circles. According to analysts the exchequer has lost out on Rs 60,000 crore by not auctioning spectrum.

http://www.thehindubusinessline.com/2008/11/07/stories/2008110752350400.htm

In a blow to existing GSM mobile companies, the committee set up by the Department of Telecom to look at the issue of revenue separation between 2G and 3G services has taken a view that this was not a practical solution.

The committee has taken the view that it will be difficult to verify and audit the operator's network and, therefore, bifurcating revenue is not practical.

"Though it is technically possible to employ complex software tools and the call data record to distinguish traffic carried on spectrum meant for 3G services from traffic carried on spectrum meant for 2G services, this computation will be exponentially complex to verify and audit. Segregation of 2G and 3G revenues is thus ruled out on practical grounds," said a DoT internal note.

To address issues related to level playing field, the panel has suggested that stand alone 3G operators could be asked to pay 3 per cent of their annual revenues as spectrum charge. Those who have less than 6.2 Mhz of 2G spectrum combined with 3G spectrum may be asked to pay 4 per cent of the revenues and those with more than 6.2Mhz could be asked to pay a total of 5 per cent of their annual revenues.

If this proposal is accepted by the Telecom Commission then it will hit the GSM player's revenues. Instead of paying just one per cent of the revenues from 3G services, they will have to pay between 4 per cent and 5 per cent.

CDMA operators, on the other hand, are in favour of this move as they will have to pay a maximum of 4 per cent revenue share since none of them have more than 5 Mhz of 2G spectrum.

http://www.business-standard.com/india/storypage.php?autono=339541

Stung by growing accusations, especially from the Left, that the government sold spectrum for second-generation (2G) licences cheaply, Union Minister for Communications and IT A Raja has directed the Telecom Commission to revise licence terms for new telecom operators.

The Commission, which will hold a meeting on Tuesday, is looking at imposing a promoter lock-in of three to five years for the eight new licence-holders. The moratorium will be imposed on promoters who have more than 10 per cent equity in the telecom company and whose net worth has been considered by the government when it issued the licences. Promoters, however, will be allowed to bring in a new partner by expanding the company's equity.

New operators said they would be forced to seek court intervention since a lock-in would violate the licence agreement signed with the government. The agreement does not have a clause prohibiting a promoter from selling equity.