GSMA says spectrum auctions can distort operator costs and performance

via flickr © (CC BY 2.0)

via flickr © (CC BY 2.0)

  • It's always been a bone of contention so the GSMA decided on some research
  • Is there a causal link between high spectrum pricing and subsequent operator performance?
  • The GSMA claims it’s found one

The problem of apparently ballooning spectrum pricing stimulated by auctions raises its ugly head every time there is a new generation of cellular technology and new spectrum assets up for sale. With 5G spectrum coming to the block, auction fear and distrust is back.

The worst case scenario in terms of runaway spectrum prices probably played out way back at around the turn of the millenium when 3G cellular was on the starting blocks. Such was the level of expectation for 3G, that the prices pledged simply went through the roof. Those players already in the game had to bid and had to win, otherwise it would have been CEO firing time for the losers. 

That caused some players to bid way beyond their means.

In the UK the prices paid by BT played a large part in it deciding to sell off its mobile asset, Cellnet, just to right its balance sheet.

So calling out “Who likes spectrum auctions?” at a high level telecoms conference is unlikely to see a forest of raised hands. The fear lingers.

Government or regulatory direction of auction design is not necessarily a way to extract the most cash - spectrum assignments can also be managed to meet coverage objectives (which is the way cellular started started out). 

Earlier this year Denmark’s telecoms regulator baited low frequency spectrum blocks with a reserve price of zero. The catch was that a winning telco had to meet coverage requirements in underserved areas. 

But for the most part, spectrum auctions are generally seen by the telecoms industry as government cash cows and it has tended to work up a storm of indignation in response. 

How now cash cow?

The GSMA has just released what it’s describing as a ‘pioneering report’ on auctions and, as far as can be determined, their impact on the overall mobile ecosystem. 

In the report - entitled ‘The Impact of Spectrum Prices on Consumers’ (view it here) - it claims it’s found strong evidence linking high spectrum prices to negative consumer outcomes - such as slow network rollout, reduced quality of service, poor mobile coverage (and, not mentioned, consumer pricing).  As Amazon might put it, “People who bought 3G technology also bought new spectrum.”

It has identified a list of negative consumer outcomes which it believes can be confidently linked to high spectrum prices and other spectrum management decisions for the period 2010–2017: 

1. In developed countries, high spectrum costs played a significant role in slowing the rollout of 4G networks and drove a long-term reduction in 4G network quality. 

2. In developing countries, spectrum prices were, on average, almost three times more expensive than in developed countries in relation to expected revenues. In these countries, high spectrum costs slowed down the rollout of both 3G and 4G networks and drove long-term reductions in overall network quality. 

3. In the countries studied with the highest spectrum prices, the average mobile operator’s 4G network would cover 7.5% more of the population if they had acquired spectrum at the median spectrum price. 

4. The timing of spectrum awards has a significant impact on mobile coverage. For example, if an operator was assigned 4G spectrum at least two years earlier, their 4G network population coverage would on average be 11–16 percentage points higher (all else being equal). The rollout of 3G networks was also significantly delayed in markets that licensed spectrum late, with 3G coverage levels up to 12% lower during the rollout period in those markets. 

5. The amount of spectrum licensed to operators had a significant impact on network quality. Over the period of analysis, an additional 20 MHz of 4G spectrum increased average download speeds by between 1 and 2.5 Mbps (equivalent to an increase of up to 15%).

So an open and shut case?

Not quite. The GSMA authors point out that there always exist very large differences (variations) in  metrics such as slow network rollout, reduced quality of service, poor mobile coverage and so on, between countries. So it’s been very hard to argue that, amongst all the variables, high spectrum prices stand out as a major brake on overall operator performance. 

The report states that “work has been needed to establish whether this is a causal relationship rather than a correlation. Meanwhile, some economists and spectrum policy experts have argued that the cost of spectrum is sunk and so should not affect operators’ consumer pricing or investment decisions.” 

It’s easy to conclude that this inconclusiveness is a long-standing frustration for the GSMA (and presumably for telcos also arguing their case). So the GSMA says it set out to nail a causal link and has done so by employing “econometric models”.

Econometric modeling is a forecasting technique that mixes historical data and key assumptions to predict an economic outcome - the researchers claim that this is the first time (to its knowledge) that it’s been used to predict the outcome of spectrum pricing. 

Having done so, the idea is that governments and regulators, in both developed and developing countries, can confidently take the GSMA findings  into account when planning their approach to spectrum assignment. 

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