Intelligence Brief: Spectrum auctions – when do they pay off? – Mobile World Live

Intelligence Brief: Spectrum auctions – when do they pay off?

01 OCT 2019

Since spectrum auctions in the mobile sector first became widespread in the 1990s, they have tended to generate one of two headlines. Either there is a “spectrum bonanza”, where more money is raised than expected, or “Government loses out” by getting less money than it was hoping for. In this respect, the record-setting high prices that UK and German operators paid for 3G spectrum almost 20 years ago still seems to influence some of the expectations amongst governments and industry analysts.

But when analysing spectrum awards, we should not lose sight of the impact on consumers.

A debate on this topic has persisted for years, with lots of discussions about economic theory and sunk costs. Do high spectrum prices – especially those driven by government policies rather than market demand – have an impact on the amount that operators invest in their networks or on the prices they charge to their customers? Or can spectrum awards be used to generate more revenues for public services without harming consumers of mobile services?

In fact, very little evidence has been gathered to determine how consumers are affected by spectrum prices. The research that has been carried out is generally inconclusive. We therefore recently published a study that isolates the impact of spectrum pricing on consumer outcomes, including network coverage, quality and mobile prices. Looking at 229 operators in 64 countries (including both developing and developed markets) over the period 2010-2017, the research presents strong evidence of a causal link between high spectrum prices and negative consumer outcomes. Specifically, we found that:

  • High spectrum costs played a significant role in slowing the roll-out of next generation mobile networks in both developed and developing countries;
  • More expensive spectrum reduced network quality, as measured by download and upload speeds and latencies;
  • Countries that released spectrum early and in larger quantities saw quicker 3G and 4G network roll-out than countries that released spectrum later and/or in smaller amounts;
  • High spectrum costs are associated with higher consumer prices in developing countries, though this is not conclusive and so further research is needed.

What does this mean for spectrum policy?

First, as economists are often fond of saying, “there is no free lunch”. governments that want to maximise revenues from spectrum auctions can continue to pursue this as an objective but they will now do so in the knowledge that it will have a negative impact on the development of mobile services. This is incompatible with other objectives to expand access to 4G and 5G as enablers of economic growth and sustainable development. Ultimately, policy-makers have to make a decision on what trade-offs they are willing to accept.

Second, auctions can deliver inefficient outcomes when they are poorly designed. One example of this is in relation to reserve prices. If these are set too high then precious spectrum may go unsold – as in the case of India (2016), Bangladesh (2018) and Ghana (2015 and 2018) – or force operators to pay more than they would otherwise. Another example is when governments artificially limit the supply of spectrum to operators, for example through set-asides (such as the German 3.5GHz auction in 2019) or large and mismatched lot sizes (such as the Italian 3.5GHz auction in 2018). The lesson from this is that auctions will not automatically deliver an efficient outcome if they are designed to achieve several objectives. Policy-makers must decide what their priorities are.

Lastly, spectrum should be released to the market as soon as there is a business case for operators to use it. In a market where long-term value, innovation and cost reductions are driven through short technology cycles (5G has been launched within ten years of the first 4G LTE networks), unnecessary delays to spectrum awards risk harming network roll-outs and leaving people behind. An up-to-date spectrum roadmap also alleviates uncertainty.

As we move into the 5G era, in many countries the temptation to maximise spectrum revenues will remain – the potential sums involved are often too large to ignore. But if governments want to ensure that spectrum is utilised to support affordable, high quality mobile services for the benefit of citizens, then the best way of achieving this is for operators to pay market-driven prices for spectrum that are not distorted by auction design or other policies.

We’ll know we are moving in the right direction when ‘high’ and ‘low’ auction revenues stop making the headlines and instead generate the same level of media interest as other aspects of spectrum management policy.

Kalvin Bahia – Economist – GSMA Intelligence

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.