spectrum auction failure in india, october 2016

700MHz spectrum auction failure in India

October 2016

Stefan Zehle, CEO, Coleago Consulting Ltd+44 7974 356 258 [email protected]

The October 2016 spectrum auction in India ended in failure as none of the 700MHz spectrum was sold

ICT development failure as none of the 700MHz spectrum was sold:– Negative consequences for mobile users– A blow to ICT development in India– Failure to deliver National Telecoms Policy

2012 Massive failure to reach the revenue target from

the sale of spectrum:– Based on advice from TRAI, the Government of

India planned to raise Rs 536,239 crores (US$ 80 bn) but only raised Rs 65,789 crores (US$ 10 bn).

© Copyright Coleago 2016 - www.coleago.com1

Agenda


1 Mobile industry evolution to mobile broadband

2 ICT policy objectives in India

3 What determines the value of spectrum to operators?

4 Mobile services revenue and investment in spectrum in India

5 Setting reserve prices to deliver policy objectives

6 Critique of calculating the reserve price for 700MHz spectrum

Mobile industry investment now focuses on mobile broadband and this drives the need for spectrum

Mobile industry evolution to mobile broadband


New technology enables operators to offer faster services and pass more traffic through a given amount of spectrum

GSM Not well suited for modern data needs Download speed of up to 384 kbps

with EDGE technology

3G HSPA Spectral efficiency: 0.7 bits / Hz / cell Download speed of 42Mbps

LTE and LTE Advanced Spectral efficiency: 1.4 bits / Hz / cell

(possibly twice that for LTE-A) Download speed of 150Mbps (300 for

LTE advanced)


3G HSPA

How many Gbytes per month per user should operators plan for?

How about 1 Gbyte per user per day?

What if TV Anywhere Apps really take hold?


How many hours does the average American watch TV per day?

– Answer: 2.8 hours

How much data volume does this represent per month, assuming HDTV?

– Answer: 0.7 Terabyte (700 Gigabytes)

If just 4-5% of viewing is via LTE, that’s 1 Gbyte / user / day

How many Gbytes per month per user should operators plan for?

Samsung Galaxy S6 Quad HD screen, i.e. twice normal HD 4K will be next


YouTube 4K (Ultra HD) video content is

available now

The battle between operators will be over the user experience in urban environments with high traffic volumes per square kilometre

The most demanding and high spending users will migrate to the operator which is least congested and hence offers the best user experience

Spectrum is a key ingredient in delivering the LTE capacity required to keep data traffic moving in a high traffic density environment

This is one of the factors explaining the high price paid in the US AWS-3 auction in February 2015 of 2.71 $/MHz/pop


Mobile broadband is a key ingredient for the development of the digital economy …

An increase of 10% in mobile adoption boosts GDP growth by 0.8% (World Bank, 2009)

For a given level of total mobile penetration, a 10% substitution from 2G to 3G increases GDP per capita growth by 0.15 % points (Deloitte, 2012)

Doubling broadband speeds for an economy can add 0.3% to GDP growth (Arthur D. Little, 2011)


… and there are tangible benefits to society which illustrate the impact of mobile data

A 12% increase in financial inclusion in countries such as India and Bangladesh

Healthcare: up to 70% improved compliance for TB

10-15% increase in farmer income mEducation solutions can significantly

improve the affordability of education by up to 65%


Existing and new spectrum is required for mobile broadband services


700 MHz

1800 MHz

2100 MHz

800/900 MHz

2300 MHz

2500 MHz

New spectrum for LTE, in some markets previously used for TV, referred to as “digital dividend” band

Originally only used for GSM and CDMA, progressive redeployment to 3G HSPA and recently to LTE

Originally only used for GSM, progressive redeployment to LTE

Currently used for 3G, upgrading to dual carrier HSPA+ and LTE

Originally used for WiMax, now a standardised LTE band for capacity

New capacity band for LTE

ICT policy objectives in the context of spectrum assignment

National Telecoms Policy 2012


Vision of the National Telecom Policy 2012


“To provide secure, reliable, affordable and high quality converged telecommunication services anytime, anywhere, for an accelerated inclusive socio-economic development.”

National Telecom Policy 2012

The primary objective of NTP-2012 is maximizing public good by making available affordable, reliable and secure telecommunication and broadband services across the entire country. The main thrust of the Policy is on the multiplier effect and transformational impact of such services on the overall economy. It recognizes the role of such services in furthering the national development agenda while enhancing equity and inclusiveness. Availability of affordable and effective communications for the citizens is at the core of the vision and goal of the National Telecom Policy – 2012.


NTP 2012 makes specific reference to spectrum in its objectives

There are specific policy objectives and for spectrum and directives for spectrum pricing

Ensure adequate availability of spectrum and its allocation in a transparent manner through market related processes. Make available additional 300 MHz spectrum for IMT services by the year 2017 and another 200 MHz by 2020. *

Promote efficient use of spectrum with provision of regular audit of spectrum usage.

Spectrum shall be made available at a price determined through market related processes.


* Confusion often arises because documents issued by TRAI add up spectrum from different regions into a total as if having more regions increases the supply of spectrum in India. The 300MHz and 200MHz are nation-wide and not adding up regional spectrum assignments.

How do mobile operators value spectrum


Spectrum has no intrinsic value, investment is required to build networks that extract producer and consumer value from spectrum

Spectrum has no intrinsic value. Value is only created through the use of spectrum.

Spectrum that lies fallow has no value. If operators invest and build networks

which are used, consumer value is created.

However, the investment only takes place if producer value is created, i.e. there has to be a return on investment.

The return on investment needs to be at least as high as that in an alternative investment of similar risk.


Additional spectrum is valued by comparing the Enterprise Value of an operator with vs. without the additional spectrum

The value of spectrum is calculated using Discounted Cash Flow analysis which produces the Net Present Value for two separate business cases – one where the business acquires spectrum and another where the business does not acquire spectrum.

The difference in the value of the business with and without the spectrum is the maximum that the business would be prepared to pay for the spectrum.


Net Present Value with

NPV without

Value

Business value with the

spectrum

Business value without the spectrum

Value of the spectrum

The value of spectrum to an operator is the net present value of incremental cash flows that can be generated from the spectrum

Immediate negative cash flows, i.e. the investment Amount paid for the acquisition of

spectrum Deployment of technology in the new

spectrum

Subsequent negative cash flows Annual spectrum licence fees Additional network operating costs

Subsequent positive cash flows Additional revenue Cost savings



Ok, we understand the additional costs, but to compensate for the investment are there

a) Additional revenues

b) Cost savings

The notion that at an industry level additional investment generates additional revenue is not true

Global investment in mobile broadband continues at a rapid pace.

However, in 2015, global mobile services revenue declined. – Declines were observed in most

developed markets and also for the first time in emerging markets.

Revenue growth in India is barely above inflation. 2014 real growth was only 3.6%.

The notion that additional investment generates additional revenue is simply not true.


Indian mobile services revenue

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Revenue - current prices

While today only 506 million people are connected and there is room for growth, this will only generate little revenue growth

Average Revenue per User (ARPU) has declined dramatically.

By 2020, there are likely to be 734 million unique mobile users in India. However, future users have lower incomes and their ARPU will be below current ARPU.

The growth in data usage by existing customer will add little to overall revenue.


Indian mobile ARPU

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The growth in data traffic far outpaces growth in revenue: There is little incremental revenue from data

In mobile markets world-wide, mobile data growth is exponential. This growth is likely continue and India is no exception.

However, revenue growth - if any - is minimal compared to the growth in data volume.

The notion that investment in LTE generates much additional revenue is erroneous.

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Relationship between mobile revenue and mobile data volume

The acquisition of 700MHz spectrum and deployment of LTE increases costs instead of reducing costs

700MHz LTE radios would be deployed on existing towers, at a minimum on the 900MHz grid.

A wider coverage roll-out obligation may be attached to the 700MHz spectrum.

The 700MHz spectrum be used to carry mobile broadband traffic.

There is no capex benefit in the better propagation characteristics in terms of geographic coverage.

This will result in additional capex and opex.

The spectrum is not used as a substitute for other spectrum. There is no cost reduction elsewhere.


The acquisition of 700MHz spectrum and deployment of LTE increases costs instead of reducing costs


Ok, I understand that there are unlikely to be much additional revenues whereas costs will increase.

Nevertheless operators around the world are investing in spectrum and LTE deployment. Why would they do that?

Operators that deliver a relatively better mobile broadband experience could attract high ARPU smartphone users


User experienced speed Probability of coverage

Consistency of speedGeographic coverage

Always best connected value

proposition

The business case for investment in mobile broadband

Innovation, such as investment in new spectrum and deployment of LTE is driven by competition.

If an operator expects that a competitor will move on to the next technology investment cycle, they will follow in order to stay competitive.

The business case is not driven by additional revenue generation but by preventing the loss of revenue.

Investment by all operators maintains the competitive equilibrium, but does not generate additional cash flows.


Some operators had indicated that at the proposed reserve price for 700MHz spectrum they will not bid for this spectrum

Competitive advantage gained may not justify the reserve prices We have seen already multiple cases

of unsold spectrum in India, indicating a flaw in the methodology used to set reserve prices.

If the NPV of the benefits gained from competitive advantage resulting from the acquisition of 700MHz spectrum outweighs the NPV of the reserve price and deployment costs, operators will not bid.

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Growth in investment in spectrum is running ahead of revenue growth

Mobile services revenue and investment in spectrum in India


Revenue growth has not kept up with the increase in the number of users, minutes, SMS, and data traffic


Mobile services revenue in India

Mobile services revenue in India is still increasing in nominal terms.

However, the amount of traffic (minutes, SMS, Mbytes) per unit of revenue increases much faster.

While consumers get an ever better deal, operator returns have suffered.

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In order to sustain the growth, the mobile industry is using ever more spectrum


Spectrum employed for mobile services in India

The spectrum is the average MHz licenced in India.

FDD spectrum is counted as the sum of the uplink and downlink spectrum so that it can be added to TDD spectrum.

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The evidence is there: In India mobile revenue per MHz of spectrum employed declined sharply with the introduction of 3G


Revenue per MHz of spectrum licenced to industry



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Let’s assume all the spectrum proposed for auction is sold in 2016 and examine the relationship between revenue and spectrum.

Depending on the region, on average 160MHz of spectrum is up for auction in 2016


Spectrum employed for mobile services in India

700MHz: 2x35MHz = 70MHz

2100MHz: 2x15MHz = 30MHz

2300MHz: 20MHz

2500MHz: 40MHz

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The pattern of 2010 would be repeated: The revenue per MHz of spectrum will decline sharply


Revenue per MHz of spectrum licenced to industry



Assuming 5% revenue growth in 2016.

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Furthermore, the cost per MHz of spectrum would increase dramatically if spectrum is sold at the recommended reserve prices

The reserve prices recommended by TRAI:– For the totality of spectrum to be

auctioned in 2016 amount to Rs 536,239 Crore - INR 5,362 billion.

– The 700MHz alone accounts for Rs 400,000 Crore – INR 4,000 billion.

The annual mobile services revenue in India in 2015 is estimated at INR 2,000 billion.


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Up to 2015, the Indian mobile industry invested INR Crore 286,706 in spectrum

Year BandPrice INR

CroreCumulative INR

Crore2010 2100 67,718 67,718 2010 2300 38,543 106,261 2012 1800 9,408 115,669 2013 800 0 115,669 2014 900 23,590 139,258 2014 1800 37,573 176,831 2015 800 17,159 193,990 2015 900 72,965 266,954 2015 1800 9,636 276,590 2015 2100 10,115 286,706


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The recommended reserve prices proposed by TRAI far exceed the total investment in spectrum to date

Up to end 2015, the total investment in spectrum stood at INR Crore 286,786.

The sum of all reserve prices in the 2016 TRAI recommendation amounts to INR Crore 536,239.

The figures clearly show how disproportionate the reserve prices recommended by TRAI are.


Investment in spectrum by Indian operators

Investment in spectrum could pay off, if the annualised cost of spectrum is proportionate to revenue

In India spectrum licences have a 20 year term.

Sufficient returns must be generated over the period to justify the investment.

A sufficient return is a return equal to the weighted average cost of capital (WACC) of mobile operators which is estimated at 15%.

Next we will examine the annual cost of spectrum in the context of revenue.


If all the spectrum on offer in 2016 is sold at the reserve, the annualised cost of spectrum would increase to INR 1,327 billion

Annualisation spreads the cost of the spectrum licence fee over the asset life, taking account of the cost of capital.– Cost of capital

(WACC):15%, – Asset life: 20 years


Annualised cost of spectrum licence fees

Annualised cost = cost of capital / (1 - (1 / (1+cost of capital)) ^ asset life)

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At the proposed reserve prices, the cost of spectrum as a percentage of revenue is unsustainable

If the totality of spectrum for auction in 2016 were acquired at the reserve price, the annualised cost of spectrum would grow to 67% of revenue.

This figure does not make any sense.


Cost of spectrum licence fees and revenue

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Extracting high spectrum fees from the mobile industry is not sustainable


Demand for Mobile Broadband and Spectrum Need

Up-Front Prices Paid for Spectrum

Licences

LTE Deployment and Backhaul Capex

Network and Spectrum Capex

Revenue

EBITDA

Free Cash Flow

Impact on Operators Balance Sheet

Cash Flow Return on Investment - CFROI

Annual Spectrum Fees

The consequence: The only way to maintain returns is to

reduce investment

Other Opex

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equals

The proposed reserve prices are unrealistic in the light of the cash generation of the Indian mobile Industry


Germany, 2015

USA, 2015

India, 2016

Million € US$ INRSales 17,894 181,798 2,138,681 EBITDA 6,529 78,763 534,670EBITDA % 36% 43% 25%Capex (3,510) (28,874) (296,746)Operating Free Cash Flow (EBITDA - Capex) 3,019 49,889 237,924 (EBITDA - Capex) / Sales 17% 27% 11%Total Spectrum auctioned (MHz) 270 65 160 Auction Proceeds 1,792 30,393 5,362,391

The proposed reserve prices are unrealistic in the light of the cash generation of the Indian mobile Industry


Germany, 2015

USA, 2015

India, 2016

Million INR INR INRSales 1,317,260 12,295,144 2,138,681 EBITDA 480,630 5,326,805 534,670EBITDA % 36% 43% 25%Capex (258,387) (1,952,772) (296,746)Operating Free Cash Flow (EBITDA - Capex) 222,242 3,374,033 237,924 (EBITDA - Capex) / Sales 17% 27% 11%Total Spectrum auctioned (MHz) 270 65 160 Auction Proceeds 131,929 2,055,525 5,362,391Auction Proceeds % of Operating Free Cash Flow 59% 61% 2254%

At INR 5,362 billion, the cost of spectrum as a percentage of operating free cash flow would be 38 times higher compared to the recent expensive auctions in Germany and the US. It is highly unlikely that all spectrum will be sold.

The reserve prices for 700MHz proposed by TRAI are out of proportion to the cash generated by the Indian mobile industry

The reserve prices for spectrum recommended by TRAI are unrealistic INR 5,362 billion is equivalent to:

– Over twice the annual industry revenue

– 22 years' worth of operating free cash flow

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Where will the cash come from?

Mobile industry pre-tax operating free cash flow (EBITDA minus capex)

Avoiding the risk of auction failure

Setting reserve prices to deliver policy objectives


Implicitly, auctions focus on maximising revenue from whatever is sold


Encouraging participation in the auction is necessary to generate the excess demand required for an efficient outcome

Encouraging participation Credible and predictable regulatory

environment Well defined spectrum rights Reasonable coverage and other

licence requirements Clear and unambiguous award

process Material but low reserve prices Multiple lots Potential use of spectrum caps


There must be substantial doubt that all mobile operators will be prepared to bid for 700MHz spectrum in India

Three operators have stated that at the proposed prices there is no business and they will not bid.

Other operators may come to the same conclusion because of the risk of paying more than their rivals. – If only one or two operators bid and obtain one

block each at the reserve, the remaining blocks will either remain unused for many years or be auctioned at a lower price later.

– Competitors could acquire the spectrum at the lower price and hence gain competitive advantage because their cost base will be lower.


High reserve prices are prone to distort auction outcomes and harm the public interest in a number of ways.

Spectrum may be left unsold and hence unutilised. This represents a productivity loss to society and reduced auction receipts.

National imbalances in spectrum holdings may be exacerbated.

An unnecessarily high cost burden may be imposed on the industry, leading to adverse downstream consequences in terms of roll-out, competition and consumer choice.


Potential impact of auction design ExamplesSpectrum remains unsold and hence economic value is lost to the country

India 850MHz (2012, 2013)Australia 700MHz (2013)

Higher costs are imposed on operators than necessary and deployment slows down

Australia 700MHz (2013)Belgium 800MHz (2013)

Driven by the desire to plug a hole in the budget, Australia set extremely high reserve prices for 700MHz


700/800MHz Digital Dividend Spectrum Reserve Prices Compared

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Finland - Q4/2013New Zealand - 10/2013

Spain - 7/2011Canada - Q4/2013Portugal - 12/2011

France - 12/2011Italy - 9/2011

Australia - 5/2013

US$ / MHz / Pop

The Australian APT 700MHz auction resulted in a loss to society and is an example of policy failure

Potential socio-economic gain for Australia?

Is the spectrum actually used?

Can operators deploy the 700MHz band as cost effectively?

Is there competition to drive down prices?

Between AU$ 7bn and AU$10bn

2x15MHz of 2x45MHz unsold hence not all of the potential socio-economic gain is realised

Only Telstra obtained 2x20MHz, can deploy at lowest cost; Optus obtained only 2x10MHz

One operator, Vodafone, did not obtain any spectrum and the leading operator Telstra increased its competitive advantage, thus reducing competition


There are now multiple cases of auction failure due to high reserve prices

Auction failures due to high reserve prices are multiplying:– Australia, 2013– Mozambique, 2015– Ghana, 2015– Brazil, 2015– Senegal, 2016

High reserve prices were driven by Government budget targets but failed on two accounts:– Because not all or none of the spectrum was

sold, there was a significant budget shortfall.– The aim of the auction was to sell all of the

spectrum and this was not achieved.


There are now multiple cases of auction failure due to high reserve prices

An auction with unsold spectrum is not only an embarrassment for the government but also causes real harm to society.– Spectrum, which could have been used to

bring broadband for all, lies fallow. – Ordinary people and the economy lose out.

Even if the spectrum is auctioned later at a lower price, a delay in deploying LTE in the 700MHz spectrum causes damage to India.– “… Indian GDP … would have been higher

by an estimated $26.3 billion (at PPP). .. were spectrum, for 3G licenses or others, made more readily available” Thomas W. Hazlett, Broadband for all, May 2011.


The reserve prices for 700MHz proposed by TRAI are out of proportion to the cash generated by the Indian mobile industry

The reserve prices for spectrum recommended by TRAI are unrealistic INR 5,362 billion is equivalent to:

– Over twice the annual industry revenue

– 22 years' worth of operating free cash flow

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Where will the cash come from?

operating free cash flow (EBITDA minus capex)

The reserve prices for 700MHz proposed by TRAI carry a high risk of a failed auction

The prices for spectrum recommended by TRAI are unrealistic Over twice the annual industry revenue 22 years' worth of operating free cash flow

The risk of auction failure is high Failure to sell all the spectrum Failure to raise the cash Failure to deliver the National Telecoms Policy Not getting the 700MHz deployed would be a

failure to take account of the needs of the unconnected, i.e. the very people who could benefit the most

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Reserve prices that are more than 200% of industry operating free cash flow carry a very high risk of auction failure


Reserve prices and risk of auction failure

zone of success

The mobile industry in India simply does not generate sufficient cash to pay anywhere near the recommended total reserve price.

Setting reserve prices for 700MHz spectrum consistent with policy objectives will guarantee success and generate immediate revenue

Setting reserve prices at a level that guarantees success is highly likely to deliver higher budgetary receipts There are 7 blocks of 2x5MHz on offer. There

are around 8 potential bidders per circle. The economics of LTE mean that each bidder

would like at least two blocks, i.e. aggregate demand will be at least for 16 blocks.

Demand for 16 blocks is much higher than the supply of 7 blocks. Prices will tick up in the auction until a true market value is found.

The auction would be a success for the users of mobile broadband, policy makers and operators.

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Setting a realistic price is likely to increase immediate auction receipts and deliver multiplier gains

A potential scenario: Reserve price at 10% of the TRAI recommended figure All seven blocks are sold 50% above the reserve

price, the auction receipts amount to INR 649 billion.

There would be multiplier gains well in excess of the immediate auction receipts.– Increase in GPD and associated tax receipts. – Increased competition because more

operators will have acquired spectrum which is likely to result in consumer surplus due to lower retail prices.

– Rural India would get access to mobile broadband faster, thus enabling Digital India.

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Selling just one or two blocks of 700MHz spectrum at the proposed reserve prices is highly unlikely

Deploying LTE is just one block is highly inefficient, operators would want two blocks.

At the recommended reserve price two 700MHz blocks nation-wide would cost INR 1,143 billion.

India’s biggest operator, Bharti Airtel, has a revenue of around 600 billion, the licence would be almost 2 times annual revenue and 10 years’ worth of operating free cash flow.

Looking at the other end of the scale, the state owned operators generate a revenue from mobile of around INR 132 billion. The licence would represent over 8 times their annual revenue.

All of the 700MHz is likely to remain unsold, generating zero revenue for the government.

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How can we do things differently?

The reserve price for the 700MHz auction in Chile in 2014 was set to deliver rural development policy objectives

The 700MHz spectrum award process focussed on connectivity and competition policy objectives … connect 1,281 rural towns and 500

schools obligation to build fibre mandated MVNO access and roaming

… rather than extracting money from the mobile industry. The reserve price was small. Auction proceeds amounted to only

0.017 $/MHz/pop.


Note: Per capita GDP in Chile: US$ 15,700

Policy objectives for the allocation of mobile spectrum are wider than maximising auction proceeds

Delivering policy objective vs. immediate revenue generation by maximising auction proceeds


A simple valuation problem

What would you rather have?

US$ 10,000 today

or

US$ 100,000 in three years

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The auction objective in Chile focussed on maximising the net present value of the spectrum and NPT-2012 sets the same objective

NPT-2012 recognises that maximising the NPV of spectrum is the key objective“The primary objective of NTP-2012 is maximizing public good by making available affordable, reliable and secure telecommunication and broadband services across the entire country. The main thrust of the Policy is on the multiplier effect and transformational impact of such services on the overall economy.”

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Setting high prices for spectrum is problematic and in the case of India is inconsistent with policy objectives

Hazlett and Munoz, “What Really Matters in Spectrum Allocation Design”, 2010

“[T]he ratio of social gains [is of] the order of 240-to-1 in favour of services over licence revenues…Delicate adjustments that seek to juice auction receipts but which also alter competitive forces in wireless operating markets are inherently risky. A policy that has an enormous impact in increasing licence revenues need impose only tiny proportional costs in output markets to undermine its social utility.

In short, to maximise consumer welfare, spectrum allocation should avoid being distracted by side issues like government licence revenues.”


Recommendations for setting reserve prices for spectrum

In a spectrum auction, reserve prices should be set to deliver policy objectives, namely the maximisation of net present value (NPV) for India. – The NPV of spectrum for India consists of the

immediate auction receipts, and the much larger multiplier effect.

A successful auction encourages participation to ensure that demand for spectrum exceeds supply. This means operators will bid up the price to a level where supply equals demand. This is the market value of spectrum.

Setting prices above the industry free operating cash flow carries a high risk of auction failure.

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The reserve price proposed by TRAI are unlikely to maximise auction receipts

Critique of calculating the reserve price for 700MHz spectrum


The value of spectrum to a mobile operator

The value of spectrum to an operator is the net present value (NPV) of incremental cash flows that can be generated for acquiring that spectrum.

The value depends on the business case which includes many variables. The propagation characteristics of a particular band are only one aspect of the business case.

The price paid in a previous auction was based on the business case at that time. It is no indication of the value of spectrum under different circumstances.


You are in a desert and about to die of thirst; what is the value of a bottle of water to you?

You are in a desert and about to die of thirst.

Someone is offering to sell you a bottle of water for $1,000 and you happen to have $1,000 on you.

Would you pay?

If yes, the value of the bottle of water to you under these circumstances would be $1,000.

Does that represent the market value of a bottle of water?

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TRAI calculates the reserve price for 700MHz based on prices paid for 1800MHz spectrum

“The Authority recommends that reserve price of 700 MHz band should be equal to four times reserve price of 1800 MHz.”

However, from an operator perspective there is no linkage between prices paid for 1800MHz in the past with the value operators may attach to 700MHz spectrum.

At the time of the 1800MHz auctions, operators had no choice but to buy the spectrum. Without the spectrum they could not have continued operations.

Therefore the value of the spectrum to operators at that time was the value of the entire business in that circle.

The business case for acquiring 700MHz spectrum is very different and hence the value of 700MHz spectrum to operators is different.

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The notion that low band spectrum is more valuable that high band spectrum does not meet the reality test

The 2015 multi-band auction in Germany resulted in higher prices for 1800MHz compared to 700 and 900Mhz spectrum.

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The 900MHz and 1800MHz spectrum were renewals and the 700Mhz and 1500MHz was new spectrum

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€/MHz/pop Reserve Price

Price Paid

900MHz 0.093 0.24

1800MHz 0.044 0.30

700MHz 0.093 0.21

1500MHz 0.046 0.10

Renewal of existing licences, required for business continuity

New spectrum, auctioned for the first

time

Comparing the 2010 and 2015 auctions provides a good illustration that prices for spectrum are driven by the value operators attach to it

A comparison of the 800MHz (2010) and 700MHz (2015) spectrum auctions in Germany provides a good example. – 2010: 2x30 MHz of 800MHz

spectrum on offer alongside other spectrum

– 2015: 2x30MHz of 700MHz spectrum on offer alongside other spectrum

800MHz and 700MHz spectrum have similar propagation characteristics.

From a technical perspective there is little difference between the two bands.

Did operators pay similar prices for the spectrum?

73

Prices paid in the past are no indication of the value of spectrum to operators in future auctions

Many sources of value which were present in the 800MHz auction were not present in the 700MHz auction and there were some other situational differences.

Consequently the price paid for– 800MHz spectrum in 2010 was

€0.73/MHz/pop – 700MHz in 2015 was only

€0.21/MHz/pop.

This example illustrates that it would be wrong to use the 800MHz prices paid to set the reserve price for 700MHz spectrum.

The same holds true in general: Prices paid in the past are no indication of the value of spectrum to operators in future auctions.

Therefore benchmarking is not a suitable methodology to establish reserve prices.

74

As long as demand exceeds supply, low reserve prices do not lead to low auction proceeds

Despite a reserve price of less than 1 cent per MHz / pop, the 2010 auction produced very high price for 800MHz spectrum.

There was demand for 8 blocks but only 6 blocks were available.

75

0.004 0.103

0.91

0.21

0.000.100.200.300.400.500.600.700.800.901.00

800MHz 2010 700MHz 2015

US$

/ M

Hz

/Pop

Reserve Price Price Paid

2010 and 2015 auctions in Germany, reserve prices and prices paid compared

Conclusions

The value of spectrum does not depend solely on propagation characteristics, other factors are larger.

Prices paid in the past are no indication of the value of spectrum to operators in future auctions.

When demand exceeds supply, prices paid for spectrum will be high even if reserve prices are low.

76

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

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Completed in 2013-14 Canada – 700MHz Paraguay - multi-band Oman - 800MHz & 2.6GHz Belgium - 800MHz New Zealand - 700MHz Myanmar - greenfield Australia - 700MHz & 2.6GHz UK - 800MHz & 2.6GHz Sri-Lanka - 1800MHz

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