Auctions as a Spectrum Management Tool

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Auctions as aSpectrum Management Tool

• Presentation to the ITU Radiocommunication Bureau
  Seminar
• Geneva - November 8, 2000
• Ian Munro, Charles River Associates Inc.

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OUTLINE

• History of Spectrum Auctions
• Advantages of Well-Run Spectrum Auctions
• Disadvantages of Beauty Contests
• Auction Myths
• Auction Design and Implementation
• Key Elements of a Successful Auction Process
• Conclusion

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History of Spectrum Auctions

• Late 1980s and early 1990s - New Zealand and
  Australia hold worlds first spectrum auctions
• Some problems encountered, valuable lessons
  learned regarding pre-auction deposit
  requirements, withdrawal penalties, pricing rules
• 1994 - US runs first simultaneous multiple round
  auction
• Highly successful implementation of both advanced
  auction theory and automated bidding system
• 2000 - Many diverse nations have run, or are
  expected to soon run, advanced spectrum auctions

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SMR Auction Implementation
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Advantages of Well-Run Spectrum Auctions (i)

• Economically efficient resource allocation
• The price mechanism of the auction selects those
  bidders who will produce the services most valued
  by consumers, at the lowest cost
• Competitiveness of telecommunications markets
• Auction winners will be the firms most able to
  provide strong competition in the market-place
  for telecommunications services

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Advantages of Well-Run Spectrum Auctions (ii)

• Appropriate compensation for use of the publics
  spectrum resources
• Auctions will generate market prices for
  spectrum citizens are not subsidizing licensees
  through artificially low spectrum prices, while
  at the same time, licence winners pay prices
  reflecting the scarce resource value of spectrum
• Compatibility with a wide range of objectives
• Auction qualification criteria, licence
  conditions, equipment standards, regulations,
  etc., can all be used within an auction framework
  to ensure that policy objectives are met
• Relatively quick and low-cost process

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Advantages of Well-Run Spectrum Auctions (iii)

• Transparency and objectivity
• In a properly designed auction, there are no
  questions as to why the winners won and why the
  losers lost
• The potential for legal challenge of the results
  and other delays is very low
• The objective nature of the auction allows
  bidders to focus on their business cases, rather
  than expending valuable time and resources on
  creating the most attractive predictions or
  promises regarding subjective selection criteria
• When done correctly, bidders are very attracted
  to the process and pleased with its outcome

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Disadvantages of Beauty Contests (i)

• Without auction-determined prices, it is
  extremely difficult to set a fee for spectrum use
• Too low the nations citizens are subsidizing
  telecommunications service providers that may not
  deliver the highest value to customers
• Too high telecommunications companies will be
  deterred from entering the market and bringing
  new service offerings and competition to it
• Beauty contests are particularly troublesome when
  multiple licences are being offered
• How do regulators decide which combinations of
  geographic areas and frequencies should go to
  which applicants?

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Disadvantages of Beauty Contests (ii)

• Subjective and non-transparent process
• May be perceived as being subject to political
  influence - may result in legal challenges and
  delays in provision of services to consumers
• Typical selection criteria require applicants to
  make predictions and promises about outcomes far
  into the future - given rapid rate of change in
  industry, these predictions and promises are
  seldom reliable, furthermore, applicants have an
  incentive to tell regulators what they think they
  will want to hear
• Promises made in applications may turn out not to
  be in the best interests of companies or
  consumers requiring adherence to these promises
  hurts both parties, but allowing changes throws
  the selection process into disrepute

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Auction Myths (i)

• High prices paid in spectrum auctions are
  unfair
• Bidders have complete control over the prices
  they pay in an auction and they have the ability
  to walk away if prices become too high
• How can this be considered unfair? Unfair to whom?

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Auction Myths (ii)

• Bid prices paid for spectrum will be passed
  through to consumers of telecommunications
  services
• Consumer prices are determined through
  competition in the consumer services market-place
• Bid prices for spectrum are based on the profits
  companies can expect, given their cost structures
  and the quantity of services they will sell at
  competitively-determined consumer prices
• Thus bid prices are a function of, among other
  things, consumer prices - not the other way around

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Auction Design and Implementation (i)

• Traditional, simple auction formats (oral out-cry
  or sealed tender bidding) may be useful in some
  cases
• Often, more advanced formats such as simultaneous
  multiple round (SMR) auctions are preferable
• SMR auctions generally have these attributes
• Related items are put up for bidding
  simultaneously
• Bidding occurs over a series of discrete rounds
• Activity rules and minimum bid increments are
  used to maintain a reasonable pace for the
  auction
• Bidding closes simultaneously on all items

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Auction Design and Implementation (ii)

• Other SMR auction parameters include
• Bid withdrawals may be allowed
• The identity of bidders may be masked
• SMR auctions are preferable to more simple
  auction designs for the following reasons
• Bidders are able to build the aggregation of
  geographic areas and frequencies they need and,
  compared to sequential auctions, have less chance
  of ending up with unusable combinations of
  licences
• Bidders are able to gather information from
  watching the activity of competitors, reducing
  the likelihood of the winners curse and
  resulting in efficient outcomes and market prices

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Auction Design and Implementation (iii)

• SMR auctions are now commonly run over the
  Internet with user-friendly software
• For small auctions, it is also possible, although
  somewhat more cumbersome, to run an SMR auction
  locally over a Local Area Network, or to have a
  paper-based auction with bids being submitted
  over FAX or by hand on-site

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Key Elements of a Successful Auction Process (i)

• Well-defined licences
• Precise definition in terms of geography and
  bandwidth, clear technical rules regarding
  interference management
• Licence tenure and renewal mechanisms long
  tenures recommended
• Transferability and divisibility allowing
  post-auction trading in the secondary market is
  recommended
• Licence use maximum possible flexibility in
  terms of both technologies and services is
  recommended

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Key Elements of a Successful Auction Process (ii)

• Well-defined policies and rules
• Pre-auction consultation is extremely valuable
• Policies and licence conditions should be clearly
  defined before the auction
• Bidders should have confidence that policies and
  licence conditions will be applied fairly and
  equally to all participants and will not be
  changed capriciously
• Auction rules should also be clearly defined
  before the auction and should be extremely
  thorough to avoid loopholes and preclude
  strategic gaming of the auction
• Pro-competitive policy framework
• Limits may need to be placed on the amount of
  spectrum that any one bidder can acquire

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Key Elements of a Successful Auction Process (iii)

• User-friendly process
• Application and qualification process should not
  be unduly onerous or costly
• Avoid requiring reams of documentation that are
  not truly required to make bidder qualification
  decisions
• Application process should be objective
• Auction system should be robust, user-friendly,
  and efficient

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Conclusion

• The advantages and benefits of well-designed
  spectrum auction processes are clear
• There is now a strong, world-wide track record of
  successful implementation of spectrum auctions
• Administrations with modest budgets and less
  developed telecommunications infrastructures can
  also benefit
• Advanced, yet user-friendly, auction designs and
  automated bidding systems are available
• Bidders need no more than a personal computer
  with an Internet connection

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Thank you for your time today

• Please visit CRAs auction software demonstration
  booth
• For more information on CRAs spectrum auction
  services, please contact
• Dr. Chris Doyle, London, 44-20-7556-7829,
  cdoyle_at_crai.co.uk
• Dr. Brad Miller, Boston, 1-617-425-3384,
  bmiller_at_crai.com
• Dr. Bridger Mitchell, Palo Alto, 1-650-847-2222,
  bmitchell_at_crai.com
• Mr. Ian Munro, Boston, 1-617-425-3308,
  imunro_at_crai.com
• Or visit our web-site
• www.crai.com