THE UPCOMING UK 4G AUCTION
In this blog we look at the upcoming UK 4G auction timing, likely bidders and the important issues of auction structure and spectrum valuation.
The 4G bands and auction timing
The two 4G bands planned to be auctioned by Ofcom next year are:
· 2.6GHz: This band which spans 2500-2690MHz was identified for 3G “expansion” when the original 3G spectrum was allocated at 1.9GHz and 2.1GHz at the ITU’s World Radio Conference in 1992. Moreover, it was subsequently confirmed as a mobile data band in 2000 at the later ITU World Radio Conference in 2000.
· 800MHz: The band which spans 790-862MHz in Europe[1] is being released as a consequence of the switch from analogue to digital TV, the so called digital dividend spectrum.
4G LTE[2] is widely accepted as the evolutionary next step for 3G based networks (including HSPA and HSPA+) although LTE requires new bands such as the 2.6GHz and the 800MHz. Technology manufacturers are focusing their resources on developing equipment at these bands. Ofcom first started to consider the release of the 2.6GHz bands as a standalone auction as early as 2007. However, this process became mired in legal challenges prior to the recent resolution of the 2G liberalisation matter. Ofcom announced[3] in January 2011 that 3G services will be now be allowed over MNO’s 2G[4] spectrum holdings (and to eventually make these bands fully technology neutral allowing 4G services using LTE) paving the way for a revised timeline for the release of the 2.6GHz and combining it with the 800MHz spectrum freed up by the digital dividend. As we see in Figure 1, the UK 4G spectrum auction has lagged similar auctions in other EU countries.
Date | Country | Bands |
Nov 2007 | Norway | 2.6GHz |
May 2008 | Sweden | 2.6GHz |
Nov 2009 | Finland | 2.6GHz |
Apr 2010 | Netherlands | 2.6GHz |
May 2010 | Germany | 800MHz/2.1GHz/2.6GHz |
May 2010 | Denmark | 2.6GHz |
Sept 2010 | Austria | 2.6GHz |
Mar 2011 | Sweden | 800MHz |
1H 2012 | UK[5] | 800MHz/2.6GHz |
1H 2012 | France[6] | 800MHz/2.6GHz |
Figure 1Timeline of recent and upcoming 4G LTE auctions in Europe
Ofcom has put forward a suggested auction design in its consultation document[7] (March 2011) which will lead to at least 4 national spectrum owners each with at least the following blocks of spectrum:
· 2x5MHz of sub 1GHz spectrum and 2x20MHz of 2.6GHz Or
· 2x5MHz of sub 1GHz spectrum and 2x15MHz of 1800MHz Or
· 2x10MHz of sub 1GHz spectrum and 2x15MHz of 2.6GHz Or
· 2x10MHz of sub 1GHz spectrum and 2x10MHz of 1800MHz Or
· 2x15MHz of sub 1GHz
Given the current spectrum holdings of the existing MNOs (as detailed in Figure 2), Ofcom is also suggesting that spectrum caps are put in place to deter spectrum hoarding. These spectrum caps are:
· A maximum holding of 2x27.5MHz of sub 1GHz
· A total maximum holding of 2x105MHz
However, the sub 1GHz spectrum cap will only likely limit O2 and Vodafone as only they already own qualifying sub 1GHz spectrum. The overall spectrum cap is not material i.e. it is significantly large at 2x105MHz compared to existing and potential holdings and is therefore unlikely to affect the auction bidding process.
In Figure 3 we present a view on the likely bidders in the auction. Some of the key takeaways from an initial assessment of the auctions design and the likely bidders are as follows:
· MNOs are incentivised to underbid because spectrum fees payable on their existing 900/1800MHz will be based on the prices paid at the 4G auction.
· Network rollout requires substantial infrastructure hence likely to prevent new entrant apart from BT.
· H3G may not enter 800MHz but focus on capacity play using existing 3G investments and augment this with 2.6GHz. H3G may also be open to JV or acquisition.
· Competitive intensity at 800MHz likely to be higher (economics attractive and supply of spectrum is low i.e. 60MHz) compared to 2.6GHz (190MHz).
· German auction is likely to be a good indicator of pricing (800MHz raised 3.5Bn Euros whilst 2.6GHz raised 344M Euros).
· MNOs are highly unlikely to bid via a consortium e.g. MBNL[8] (a network sharing JV between T-Mobile and H3G). MNOs see spectrum as core long lived (20 year) strategic asset (unlike sites and equipment).
Figure 2 MNO existing spectrum holdings
Figure 3 Likely bidders in UK 4G auction
To ensure an adequate return on capital, 4G auction bidders will value spectrum assets, like any asset, using two techniques:
· Relative valuation using benchmarks from similar transactions
· Intrinsic valuation typically using a discounted cash flow model
In order to use relative valuation techniques, it is vital to have a significant number of data points. Spectrum valuation benchmarks use a metric based on the price paid for the spectrum divided by the unit of spectrum and the population covered. Typically this is expressed as $/MHz/Pop (or €/MHz/Pop). In Figure 4 we see how recent similar auctions provide a set of benchmarks some of which will be relevant to the UK situation.
Figure 4 Prices paid at spectrum auctions for 700MHz to 3.5GHz since 2008
As for a valuation based on a discounted cash flow (DCF) model, each bidder’s business and use case for the spectrum will be different. The ability of existing MNOs to leverage existing assets (e.g. networks, sites, brands etc.) puts these players in a position such that they are likely to be willing to pay more for the spectrum. To ensure an adequate return on capital, when constructing a DCF model, key issues to consider are:
· Ensuring that the discount factor reflects the project risk
· Ensuring that the value from the spectrum is captured within a realistic time horizon (i.e. to avoid over reliance on the terminal value)
Lastly, on the issue of valuation, one point of note for potential bidders in the UK 4G auction is the auction design. Ofcom have chosen a Combinatorial Clock Auction (CCA) design which it previously used in both the 10-40GHz[9] and the L-Band[10] auctions. A CCA is very difficult to game and if a bidder does try to game the outcome, it can lead to unintended consequences e.g. acquiring spectrum blocks that are not the ones that the bidder wanted. Hence, when entering a CCA, it is very important to have a clear valuation in mind for the spectrum blocks that a bidder wishes to acquire.
[1] In North America this spans 698-806MHz whilst in Asia it is consistent with the European bands
[2] LTE stands for Long Term Evolution
[3] http://stakeholders.ofcom.org.uk/consultations/900-1800mhz-wireless-telegraphy/statement
[4] 900MHz and 1800MHz
[5] http://stakeholders.ofcom.org.uk/consultations/combined-award/
[6] http://www.arcep.fr/uploads/tx_gspublication/consult-800-2600-thd-270710.pdf
[7] http://stakeholders.ofcom.org.uk/consultations/combined-award/
[8] http://www.mbnl.co.uk/
[9] http://stakeholders.ofcom.org.uk/spectrum/spectrum-awards/completed-awards/1040award/notices/
[10] http://stakeholders.ofcom.org.uk/spectrum/spectrum-awards/completed-awards/award_1452/
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