U.K. auction of 4G spectrum raises one-third less than forecasted

The United Kingdom's auction of spectrum for fourth-generation mobile wireless services last month raised a total of 2.34 billion pounds, about a third lower than what the government had projected. Ofcom, the U.K.'s telecom regulator, said in a release Feb. 20 that the U.K. government raised 2.34 billion pounds, or $3.63 billion, in the 50-round auction of 800 MHz and 2600 MHz mobile spectrum that began on Jan. 23. The total is nearly a third lower than the 3.5-billion pounds that the government projected before the auction and a fraction of the 22.5 billion pounds the government raised in 2000 when it auctioned spectrum licences to support third-generation mobile networks. Matthew Howett, an analyst at U.K. research firm Ovum, said in a phone interview that wireless carriers today have a better idea of how much they should pay for mobile spectrum than they did in the early 2000s, when the dot-com boom made it seem they were “sitting on a pot of money.” He said U.K. carriers paid about the right value for the frequencies in February's auction, which licensed 60 MHz of 800 MHz spectrum and 185 MHz in the 2600 MHz band. “Arguably, you could say that operators have learned from the other auctions that have gone before it to have a sense of what they should pay,” Howett said. “The amount the operators paid for the spectrum was fairly reasonable, I think.” In Canada, the 700 MHz band will serve the same purpose as the 800 MHz band in the United Kingdom. The Industry Department announced last week that it will auction 700 MHz licences starting Nov. 19. followed by the licensing of the 2500 MHz spectrum band for mobile services a year later. Like 800 MHz spectrum, frequencies in the 700 MHz band are valued by mobile operators because they carry strong wireless signals over longer distances and into buildings and underground spaces. Scotia Capital forecasts that Canada's 700 MHz spectrum auction will generate proceeds of about $2.6 billion for the federal government, with each incumbent telco spending an average of about $750 million. In 2008, Industry Canada auctioned 105 MHz of spectrum for mobile services, primarily in the AWS (1700 MHz and 2100 MHz) and PCS bands (1850-1990 MHz), raising a total of $4.25 billion in proceeds. In a Jan. 28 research note, Canaccord Genuity telecom analyst Dvai Ghose speculated that Canadian carriers could pay similar prices for the 700 MHz spectrum as that paid in an American auction of 700 MHz in 2008, which worked out to roughly $1.43 per megahertz per capita for the four “prime” blocks in each licence area. Those American auction prices would be 19 per cent lower than the $1.77 per megahertz per capita that, in Canada, incumbent carriers BCE Inc., Rogers Communications Inc. and Telus Corp. paid on averaged for AWS spectrum in 2008. One reason for lower revenues in Canada's upcoming 700 MHz auction, Ghose said, could be the financial challenges of new entrant carriers, which reduces competition for the spectrum blocks. “Despite the fact that 700 MHz is a lot more attractive than AWS, incumbents may pay a lot less at the 700 MHz spectrum auction,” Ghose wrote. Howett said it is difficult to determine how much operators paid in the U.K. for individual spectrum blocks in either the 800 MHz or 2600 MHz bands due to conditions and restrictions Ofcom imposed and the use of a combinatorial clock auction format, in which carriers bid on packages of spectrum blocks. Industry Canada, which has not projected revenues for the 700 MHz auction, will also use a combinatorial clock auction format. In its release, Ofcom said Everything Everywhere Ltd., a joint venture between France Telecom S.A. and German operator Deutsche Telekom AG, paid almost 589 million pounds for 10 MHz of 800 MHz spectrum and 70 MHz of 2600 MHz spectrum, while Vodafone Group Plc paid 790 million pounds for 20 MHz of 800 MHz spectrum and 65 MHz of the 2600 MHz band, some of which is “unpaired” and less suitable for carrying mobile phone calls. BT Group Plc subsidiary Niche Spectrum Ventures Ltd. paid 186 million pounds for 50 MHz of 2600 MHz spectrum, 20 MHz of which was unpaired. Hong Kong-based Hutchison Whampoa Ltd. won 10 MHz of 800 MHz spectrum that Ofcom had reserved for a new, national wholesale provider, and paid the “reserve price,” or the lowest bid allowed, at 225 million pounds. Telefónica S.A. paid 550 million pounds for 20 MHz of 800 MHz spectrum that included a “coverage obligation” for the company to roll out indoor reception services to at least 98 per cent of the population by the end of 2017, Ofcom said. Bruce Kirby, vice-president of strategy and business development at Canadian new entrant carrier Public Mobile Inc., said in a telephone interview that Telefónica paid about 70 cents per megahertz per capita for its 800 MHz spectrum. Hutchison 3G was the only carrier to place a minimum bid on the block set aside for a new national wholesale provider, he said, and paid about 54 cents per megahertz per capita. He estimated that Niche Spectrum paid approximately 12 cents per megahertz per capita for its 2.6 GHz spectrum when accounting for the paired and unpaired bands. “That's right in line with a bunch of other auctions and trading that goes on in that spectrum,” Kirby said in an interview conducted before Industry Canada's release of the final action details last week. In a release earlier this month, consulting firm Lemay-Yates Associates said U.K. auction revenues that fell below the government’s expectations could cause regulators in other countries to reconsider their reserve prices for spectrum auctions. The firm said reserve prices that are set too high can reduce competition and revenues by discouraging bidders from participating. Industry Canada's proposed reserve prices for the 700 MHz auction total $897.3 million, which Lemay-Yates said is 60 per cent below the prices used in the U.S. for its 2008 auction of 700 MHz spectrum. That American auction represented the global “high water mark” for 4G spectrum revenues, the firm said. “All subsequent auctions for digital dividend spectrum have so far resulted in lower values,” Lemay-Yates said. Howett said regulators should pay more attention to achieving policy and competition objectives than raising revenues, pointing to the U.K.’s reserve of one 10 MHz block of 800 MHz spectrum for wholesale and two blocks for a provider committing to service rollouts. Projecting auction revenues is often “meaningless,” Howett said, noting “it's all dependent on how bidders behave in the auction.” Industry Minister Christian Paradis told reporters last week that Industry Canada’s priorities for the auction are competition, not revenues. “We’ll see the outcome from this, but I cannot say that we forecast two, three, four times . This is not the way we drafted it,” the minister said. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Simon Doyle at sdoyle@thewirereport.ca

U.K. auction of 4G spectrum raises one-third less than forecasted

News | March 11, 2013

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