1. Centre for Telecommunications Information Networking ………………………………………... Centre for Telecommunications Information Networking (CTIN) University of Adelaide www.ctin.adelaide.edu.au 1 Market Mechanisms for Spectrum Allocation Presented to Spectrum Allocation, a Network Insight seminar Professor Reg Coutts Director,

2. ………………………………………... 2 Summary Review of market mechanisms Some recent licence allocations of interest Difficulties in the process Conclusion

3. ………………………………………... 3 Commercial spectrum allocation By application –First come first served (if sufficiently well dressed) –Appropriate, provided that supply exceeds demand By beauty contest –Transparency of process a problem By market mechanisms –Auction or tender –Transparent? –Efficient? APPLICATION BEAUTY CONTEST AUCTION

4. ………………………………………... 4 Why auction? Commercial users have best understanding of commercial value Efficient –Minimal bureaucracy –Fast allocation Fair –Transparency –Tends to reduce distortion

5. ………………………………………... 5 Other Objectives... Bidders and market value –Enhancing global reach –Protecting related investments –Blocking additional competition Governments and efficient allocation –Promoting competition (e.g. new entrants) –Social benefit –Raising revenue –Recognising industry objectives

6. ………………………………………... 6 Spectrum prices in PCS Phase I (1998) 800MHz –Sydney/Melbourne/Brisbane: $0.30/MHz/pop –Adelaide/Perth/Canberra:$0.08/MHz/pop –Regional and Remote:$0.04/MHz/pop 1800MHz –Sydney/Melbourne:$0.12/MHz/pop –Brisbane:$0.06/MHz/pop –Adelaide/Perth/Regional:$0.03/MHz/pop Prices in $US

7. ………………………………………... 7 PCS Auction Phase II 24 January to 15 March 2000 30MHz in 2.5MHz lots in 5 cities 138 rounds –Siemens did not bid –Primus withdrew at round 83 –Optus withdrew at round 105 –Telstra spent $78.6 million –Vodafone spent $55.3 million –One.Tel spent $523.1 million –Hutchison spent $670.9 million Total revenue $1,327,735,500 = $US 756 million –4 times government estimate! Optus resale, no infrastructure. No public plans. Data network? Optus resale, rolling out GSM1800. Now active No mobile. Competes with One.Tel in long distance.

8. ………………………………………... 8 Prices in Phase II Sydney –$US1.78/MHz/pop (1420% increase) Melbourne –$US1.60/MHz/pop (1420% increase) Brisbane –$US0.25/MHz/pop (310% increase) Perth and Adelaide –$US0.11/MHz/pop (270% increase)

9. ………………………………………... 9 Lessons from Australian PCS Auctions Values very different at different time –Depends very much on the immediate market Commitment can be costly! –One.Tel spectrum essential to support network under construction Hutchison very aggressive –First real international indication of Hutchisons intent

10. ………………………………………... 10 3G Licences Auctioning –Licences Specific or highest value Highest amount or % of revenue –Blocks or lots Beauty Contests –Technical requirements –Social requirements –Financial requirements –Licence fees ABCDE 1 2 3 4 5 6 7

11. ………………………………………... 11 European 3G auctions UK –Auction structure to force new entrant –Extraordinary prices! Holland –Allegations of unfair play Germany –Problems of transparency Italy –Auction structured to raise revenue –Ignored the 2G market structure in Italy!

12. ………………………………………... 12 3G beauty contests Sweden –Incumbent failed to win licence Litigation in process... Korea –Technology-specific requirements France and Belgium –Very high licence fees based on German prices –Licences left unallocated!

13. ………………………………………... 13 Hong Kong 3G Beauty Contest + Auction Beauty Contest pre-condition Royalty payment scheme Open Network policy

14. ………………………………………... 14 The Globalisation Push 14

15. ………………………………………... 15 Bureaucratic process Policy –Often unclear Consultation process –Infrequent and not transparent –Lobbying by self-interested parties, not LTIE! Issues –Packaging/bundling of spectrum and licences (including caps etc) distorts market –Difficult to find an independent view! LICENCE

16. ………………………………………... 16 Auction process Right model for each situation Must run its course –Initial stages: Posturing –Intermediate: Declaration of intent –End game Little evidence yet of resale market –Certainly not open resale! Spectrum comes with technology attached –Distorts auction process –A means by which governments extract monopoly rent AUCTION

17. ………………………………………... 17 Future alternative? Online exchange for radio frequency spectrum rights –Macquarie Bank: Spectrum Desk Creation of secondary radio spectrum market –Both buyer and seller auctions take place between anonymous participants on website –Charge brokerage based on value of transaction Benefits –Reduced barriers –Increased liquidity –Concentrated demand –Greater market integrity

18. ………………………………………... 18 Conclusion Admin versus Market? –Both have their war stories Australian process appears functional –Right mix of market and admin process –Technology neutrality - a managed illusion Auction process has been consistently distorted internationally –Monopoly rent-seeking focus by some governments 3G in Europe –Both market and admin failure in evidence