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Should auctions always be

considered as the right


approach for spectrum
allocation?
Latin America Spectrum Management Conference,
Rio de Janeiro, May 2014
Stefan Zehle, CEO, Coleago Consulting Ltd
Tel: +44 7974 356 258
stefan.zehle@coleago.com

About Coleago Consulting

A specialist telecoms management


consulting firm

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Copyright Coleago 2014

Since 2001, Coleago has offered a wide range of advisory


services to the telecom industry
Strategy & Business Planning

Telecoms Regulation & Interconnect

Strategy Development, Marketing Strategy

Accounting Separation, Regulatory Price

MVNO and Multi-Brand Wholesale Strategy


Business Planning and Business Modelling

Control
Interconnect Cost Modelling, RIO
Regulatory Consultations

Spectrum Valuations and Auctions

Transaction Services

Spectrum Strategy

Commercial Due Diligence

Spectrum Valuation for Auctions

Tower Due Diligence

Spectrum Auction Bid Strategy and Execution

Preparation of Information Memorandum

Beauty Contest Bid Books

Mobile Network Sharing


Mobile Network Sharing

Business Transformation & Cost


Reduction

Managed Services and Outsourcing

Cost Reduction

Tower Due Diligence

Mobile Network Sharing

Network Audit

Restructuring and Turnaround


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Coleago has carried out over 60 spectrum consultation,


valuation, auction and beauty contest licence projects

Completed in 2013/4

Completed in 2012

Canada 700MHz

Belgium 2.6GHz

Paraguay - multi-band

Netherlands multi-band

Oman - 800MHz & 2.6GHz

New Zealand 1800MHz spectrum

Belgium 800MHz

trading

New Zealand - 700MHz

Switzerland multi-band

Myanmar greenfield

Russia 700MHz & 2.6GHz

Australia 700MHz & 2.6GHz

Pakistan 2.1GHz valuation

UK 800MHz & 2.6GHz

Bangladesh - 2.1GHz valuation

Sri-Lanka 1800MHz

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Challenging the auction


orthodoxy
Should auctions always be considered as
the right approach for spectrum allocation
in Latin America?

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Copyright Coleago 2014

Auctions are the default mechanism for spectrum


allocations
Beauty contests were used at the start
of the mobile industry growth
Difficult to administer, bureaucratic
Open to dispute and vulnerable to

corruption
Since 2000 auctions are the norm in
spectrum allocations
Transparent process (no subjectivity)
Policy objective: maximise economic

efficiency
In theory, whoever values spectrum

the most will produce the greatest


social good
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Implicitly, auctions focus on maximising revenue from


whatever is sold

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Policy objectives for the allocation of mobile spectrum


are wider than revenue generation

Promote the highest value use of

Immediate revenue generation

spectrum
Promote investment and innovation
Promote rural broadband access
Increase digital participation rates
Promote competition
Promote customer convenience
Provide an appropriate rate of return to

the community

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Copyright Coleago 2014

Allocating spectrum on the basis of private valuations


may be at odds with the public good

The key goal of any auction is to guide goods to those who value them
the most. Spectrum auctions help identify the highest value use and
users.
New Zealand Ministry of Business, Innovation and Enterprise - May 2013

The private value for incumbents includes benefits gained by preventing


rivals from improving their services.
The value of keeping spectrum out of competitors hands could be very
high. However, this foreclosure value does not reflect consumer value.
US Department of Justice, Ex Parte Submission before the FCC - April 2013

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Spectrum auctions worked fine in past,


so whats different now?

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We need to rethink the method of allocating spectrum in


the light of maturing mobile markets

Mobile markets have reached the


maturity phase of the industry life
cycle
Many markets show flat, at least in real

terms) or declining revenues and


EBITDA
This maturity industry life cycle stage

suggest that that policy goals should


be revised:

Encouraging new network based


competition is not be appropriate

Taking cash out of the industry is not


sustainable
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Maturing markets are characterised by consolidation, not


new market entry
Mobile industry consolidation is in full
swing
The pace and size of cross-border

M&A has been breath-taking, with five


mega-deals announced or completed
during the past three months.
Markets with consolidation potential

include India, Indonesia, Canada, Italy,


Germany and Brazil - although
regulation is likely to be a constraint in
most of these.
Not surprisingly, we are seeing

numerous infrastructure sharing deals.


Investors should expect further M&A,
but at a less frantic pace.
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Consolidation is likely in large and small American


markets

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Given the existing spectrum, new entrants will have too


little spectrum to compete

In an LTE world, large contiguous


spectrum holdings confer particular
competitive advantage
The exit of some operators in Europe

and the insolvency of Mobilicity in


Canada demonstrates that it is
impossible to succeed in the market
with small spectrum holdings.
When industry logic has driven

consolidation, trying to reverse the


process by regulatory is unlikely to
produce societal benefits.

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Using new spectrum auctions to increase network-based


competition is unlikely to succeed

Regulators may wish to consider:


Consolidation is
normal when the
industry life cycle
reaches the maturity
stage

Wide band allocations


are required for an
economically and
spectrally efficient
deployment of LTE

Allocating spectrum in a manner which

does not reduce competition while at


the same time maximising the benefit
of a wide band.
Facilitating a transition from network

based competition to other forms of


competition.
Focusing on other regulatory remedies

if competition is failing, such as a


regulated access price offer. The
conditions attached to Hutchison
Threes acquisition of Orange Austria
can serve as an example.
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Competition is now the main concern in auction design

At the maturity stage of the industry life In a highly concentrated industry with

cycle we can expect consolidation but


not new market entry, at least at
network level.
Ensuring competitive markets with the

existing number of operators becomes


a policy goal.

large margins between price and


incremental cost of existing wireless
broadband services, the value of
keeping spectrum out of competitors
hands could be very high. Submission of
the United States Department of Justice before
the Federal Communications Commission (April
11, 2013)

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Alright, we are unlikely to get new network based


marketing entry, but why not still have auctions?

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Options for spectrum auctions in mature markets

New market entry unlikely

Spectrum caps to preserve


existing competition

Unfettered auction among


incumbents

Each incumbent gets a fair


share, but auction proceeds are
low because there is no real
bidding

Auction proceeds may be high,


but increased industry
consolidation and reduced
competition results

Set high
reserve prices

What then is the


point of an
auction?

Focus on
other policy
goals

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High spectrum prices conflict with other policy goals

High reserve prices are not a good


approach to spectrum auctions
High reserve prices of auction rules

designed to increase auction revenue


have a market distorting effect
Focusing on one policy goal, i.e. to

maximise immediate auction revenue


will come at the expense of other
policy goals
Even if a large amount of money is

raised up-front this may reduce overall


economic value in the long term

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Excessive reserve prices lead to unsold spectrum, such


as in the APT 700MHz auction in Australia, May 2013

Australia Reserve

1.35

Average 700/800MHz

0.73

UK - 2/2013

2x15MHz of 2x45MHz
unsold

0.65

Denmark - 6/2012

0.37

France - 12/2011

0.88

Portugal - 12/2011

0.56

Italy - 9/2011

0.81

Spain - 7/2011

0.49

Sweden - 3/2011

0.58

Germany - 5/2010

0.91

USA - 2/2008

1.28
-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

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

US$ / MHz / Pop

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Setting high prices for spectrum is problematic

[T]he ratio of social gains [is of] the order


of 240-to-1 in favour of services over
licence revenuesDelicate 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.

Hazlett and Munoz, What Really Matters in


Spectrum Allocation Design, 2010

In short, to maximise consumer welfare,


spectrum allocation should avoid being
distracted by side issues like government
licence revenues.
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But why cant we simply set high prices for spectrum,


surely the industry can pay up?

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To fulfil societal goals for mobile broadband connectivity,


mobile operators require large amounts of spectrum

Radiocommunication Study Groups


Document 5D/XX-E, Sep 2012
The GSMA has commissioned
Coleago to undertake some initial
spectrum requirement estimates for
IMT to the year 2020. A report on
this work from Coleago is attached
indicating the total spectrum
required for IMT of 1600 to 1800
MHz for the year 2020. The GSMA
believes this is a reasonable
number.
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Extracting high spectrum fees from the mobile industry is


not sustainable
Prices Paid for Spectrum
Demand for Mobile
Broadband and Spectrum
Requirement

+
LTE Deployment and
Backhaul Capex

Tangible (Network) and


Intangible (Spectrum)
Capex
Revenue

Impact on Operators
Balance Sheet

EBITDA
EBITDA Margin %

=
Free Cash Flow

Return on Capital
Employed (ROCE)
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When returns drop below the cost of capital, investment


ceases to flow into the industry

Cash flows from operations are


declining

Capital expenditure pressure is


increasing

Operators in Latin America have seen

Capex in the Latin American mobile

EBITDA margins decline in recent


years.

industry is set to increase driven by


LTE deployment.

In Q2 2013, the average service

However, this is only the investment in

revenue EBITDA % margin for Latin


America was 34.3% compared to
39.4% in North America and EBITDA
cash flows showed a significant yearon-year decline.

tangible assets.
Spectrum capex is a key variable in

determining total capex.

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How can we do things differently?

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2009 AWS auction in Chile focused on stimulating new


market entry, but resulted in policy failure
Spectrum caps guaranteed new
market entry

but failed to deliver timely


deployment and competition

A spectrum cap of 60 MHz, effectively

The new entrants were unable to

excluding the three incumbent mobile


network operators - Movistar, Entel
and Claro.
Cable television company VTR won

VTR and Nextel together only have

30MHz of the AWS spectrum paying


US$3.02 million, and Nextel won
60MHz, paying US$14.7 million.
Revenue raised amounted to a tiny

$0.011 / MHz / pop.

launch their 3G mobile service until


May 2012, one and a half years after
the October 2010 deadline.
1.3% market share, nearly three years
after the AWS spectrum licence award.
and private investors may pocket
the new entrant discount.
In a secondary market VTR and

Nextel are likely to sell the spectrum


for more than they paid.
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The 2014 700MHz licence award in Chile broke new


ground and is likely to deliver the 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.
Auction proceeds amounted to a

relatively tiny 0.017 $/MHz/pop.


The reserve price in Australia was set

at 1.35 $/MHz/pop - 78 times higher.


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Questions?

Stefan Zehle, MBA


CEO, Coleago Consulting Ltd
Tel: +44 7974 356 258
stefan.zehle@coleago.com