Mallinson: Spectrum auctions need to generate investment, not just government revenue

Keith Mallinson

The market consensus is that in recessionary times economic growth is best stimulated by fostering infrastructure investment. Governments can help with their own capital projects, public/private co-investments, grants, state-backed loans and so on. The opposite is to tax infrastructure investors' investment initiatives. However, the latter is what effectively occurs most severely when governments contrive spectrum auctions with the myopic aim of only maximizing financial receipts and bidders are willing to overpay.

Once bitten, twice shy

Europe's millennial 3G spectrum auctions raised enormous amounts of money for exchequers, but the high costs took a huge toll on "winning" bidders. In the UK, a bidding bonanza raised £22.5 billion (€26.3 billion). Times have changed enormously, with very different expectations today. The 3G auction was at the height of the dotcom boom, economic conditions deteriorated and the 3G dividend was a long time coming. Some economists argue that sunk costs in spectrum purchases have little effect on consumer pricing decisions when competition is fierce and undercutting. Yet the resulting poor financial performance has deterred or prevented operators from making sufficient infrastructure investments or paying top-dollar prices again in subsequent auctions.

Thankfully for the investment and market development prospects of 4G in the UK, prices were below expectations in the recent UK spectrum auction. UK mobile operators are to pay a total of only £2.34 billion (€2.74 billion) this time, significantly below the government's expectation of £3.5 billion. Telecoms regulator Ofcom recently announced that after more than 50 rounds of bidding, EE, 3UK, BT, Telefónica's O2 UK and Vodafone had all won a share of the LTE spectrum.

Whereas politicians had their eyes on the booty to support investment in entirely different sectors, the money saved by operators might instead be spent building the urgently-needed LTE networks that will use this spectrum. The UK is far behind many other developed nations in deploying LTE. Ed Balls, the shadow chancellor, wrong-footed the government by boasting at the Labour party's annual conference last October that, if in power, he would spend the expected higher figure of auction proceeds on building 100,000 "affordable" homes .

Quid pro quo

Prices paid for spectrum are significantly determined by how allocations are made and by how desperate the process makes bidders in their attempts not to be left out. Playing the equivalent of "musical chairs" with fewer allocations than bidders to maximise scarcity is a sure way to drive up prices; but payments have severely damaged some operators, and put them close to bankruptcy in some cases with the millennial 3G auctions.

In other nations, governments and operators are still misjudging things; but in one case authorities have the humility to correct its mistakes. In the Czech Republic, the telecoms regulator has decided to suspend its 4G spectrum auction there because bidding prices are so high that it would hamper investment and lead to excessive mobile broadband prices for consumers.

Spectrum is a scarce resource that should not be given away, or underpriced with no strings attached. In Germany and Russia, for example, the desire to exploit operators' need for more spectrum has been tempered by recognition that mobile broadband is the best means of bridging the digital divide and providing Internet access rapidly and on the most widespread basis. With suitable conditions such as buildout requirements, it is better to leave the money in the mobile sector than transfer it out to spend elsewhere. Developing fixed and mobile broadband should be about making it universally available, not just providing it to those in urban areas and selected development zones.  

The overriding objective in weak economies, including the UK (which is potentially heading for a third recession since 2008), should be to promote infrastructure investment. However, there is no better candidate for this than mobile broadband in this information age.

The trick in auction design is to encourage sufficient competition among bidders while also ensuring that there are adequate incentives for the operators and their financial backers to build out networks rapidly and on a widespread basis. New infrastructure satisfies a public need that generates revenue and its construction creates a multiplier effect in the economy as equipment vendors and network constructors are paid and then also spend their earnings in the economy. More sober bidding with lower spectrum prices this time will accelerate mobile broadband infrastructure development, and enable rapid and widespread adoption.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor publishes an Extended Mobile Broadband Forecast. This includes network equipment, devices and carrier services to 2025. Further details are available at: Find WiseHarbor on Twitter @WiseHarbor.