How do you rate a telecom spectrum license? Chinese operators have picked them up for free – part of Beijing's efforts to get a national rollout of 5G. Nevertheless, parts of Europe in recent auctions have been so expensive that at least one company has had to cut shareholder dividends. In the US – where President Donald Trump has declared that "the race for 5G is a race America must win" – spectrum licenses are sold at historically low prices.
The answer to the question will not only determine the future of the resource – referred to as the "lifeblood of the mobile industry" ̵[ads1]1; and the operators themselves, but will also have a major impact on the next step in the evolution of the digital economy.
Carriers claim that 5G will offer a faster and more reliable service for everything from video streaming to advanced virtual reality experiences. Governments see the "flow" of new network technology as fundamental to launching a world of smart cities, autonomous cars and automated factories where faster and more responsive networks can handle huge amounts of data generated by new industries.
For telecom operators, the licenses are "ticket to bicycle" – access to the infrastructure that will be critical to their future success, even existence. For governments, they are no less important, but some cash-strapped administrations have sent mixed signals on how to achieve a balance between raising billions from a sector that is already striving to cut costs, while also stimulating investment in rapid deployment of 5G- services.
That means that two decades after the sale of the 3G spectrum went headlines by recruiting record sums – and almost bankrupting some players – a new spectrum award bonanza is developing. Previously used for everything from academic satellites, to analog TV broadcasts, to wireless microphones used in theaters, airwaves are emptied and sold to the telecom industry for commercial use to meet the insatiable consumer demand for data.
Still, says Jay Goldberg, a consultant with D2D Advisory, for all hypoper operators struggling to say whether they want to profit from the new wireless technology. Much depends on the release of spectrum to deliver the promise from 5G without bankrupting operators, as was almost the case with 3G.
"The risk is that 5G requires large spectrum purchases that are only starting to be profitable in 10 years," he says.
The Race between Nations – including China, South Korea, the United States and the United Kingdom – being the first to launch 5G has prompted another debate over who will dominate the next generation of wireless telephony and harvest the most economical benefit. The US-China trade war has largely been fought over 5G and the role of the Chinese network supplier Huawei in the global industry.
China gave its spectral licenses to the country's telecommunications network in June instead of selling them. The United States then unveiled its largest range of sales ever in July, and may boast a plan to auction, by the end of the year, more airwaves than the country's overall mobile industry currently uses. It has set bids for some of the very high-frequency bandwidth at a value of one-tenth of a percent per megahertz per population, making these airwaves some of the cheapest ever sold.
telephone signals – like an electromagnetic cash cow. The Indian telecom regulator has just proposed to sell spectrum blocks for 5G at a price that is 40 percent above what was charged in other Asian markets.
Auctions in Italy and Germany have collected huge sums. Vodafone was forced to cut its profits for the first time in history following German sales amid industry warnings that the more they spend on the spectrum, the less they need to spend building the network via new masts, servers and base stations.
It appeared to be a thinly veiled threat to European politicians, who want a quick deployment of 5G, but seem reluctant to fix spectrum prices. According to MTN Consulting, spectrum prices accounted for an average of 11.4 per cent of the industry's capital expenditure between 2011 and 2018.
This debate takes place when a new auction round is due to take place, ranging from the UK to India, the US and France in the coming months. They will serve as a further guide to government priorities when it comes to 5G plans.
"Some countries see this as a way of taxing our industry rather than helping new technologies," said Enrique Lloves, Strategic Manager for Telefónica, Spanish Telecom Group. "This money is not coming back to the industry, and that is a concern for us, for consumers and the economy."
Others dispute that high spectrum costs have a knock-on effect on consumer prices.
"There is no evidence that higher spectrum costs have led to higher prices [for consumers]," says Paul Klemperer, the chief architect of the UK's 3G sale in 2000. "If I inherit a house for free it doesn't mean a landlord would did not pay any rent for it. ”
For operators, the dilemma is acute: pay too much and fight to roll out a network, pay too little and they will lose access to 5G, customers and potentially their business
European operators point to the case of Tele2 as an example of how things could go wrong, losing when 4G licenses were sold in Norway in 2013 after the incumbents were ambushed by a new player supported by billionaire Len Blavatnik. Tele2, based in neighboring Sweden, was forced to leave Norway months later.
The rapid growth of the wireless industry in the 1990s, and the value associated with the airwaves, created the auction system that has distributed licenses ever since. The package was originally packaged and distributed for nominal sums in the 1980s to new wireless carriers, such as BT Cellnet and Racal Electronics, the defense company that gave birth to Vodafone in the United Kingdom. Over the course of 15 years, these licenses evolved into a multi-billion dollar industry, largely built on thin air.
However, this approach to the basement stopped in 2000 when the UK 3G auction fetched a staggering £ 22.5bn from five carriers, in what eventually signaled a turning point for both the growth of the mobile industry in Europe and the value placed on the spectrum. . Nevertheless, the euphoria was short lived when 3G auctions in Italy, the Netherlands and Switzerland coincided with the UK's results.
The value of spectrum dropped rapidly as Europe's largest telecommunications companies spent too much on capturing the 3G market. BT was forced to fish out its mobile arm after the UK and German auctions crippled the balance with too much debt. When the 4G spectrum was auctioned in the UK 13 years later, only £ 2.3bn was collected, leaving George Osborne, the then Chancellor, and pledged a $ 1.2bn deficit in public finances after budgeting with a much higher income from sales.
There are many ways to auction specs from "at the same time several round rising" styles, to the right beauty contests and sealed envelope bids. Their success or failure is determined by a number of factors, including the number of licenses offered, the amount of spectrum sold, and the conditions attached to each license, such as geographic coverage obligations. They can be designed to encourage new entrants – by offering more licenses than existing networks – or to check larger companies that already have huge spectrum reserves by introducing caps.
How the spectrum blocks are cut can also have an effect. An almost equal distribution of lots can reduce competition tension, while wildly different blocking, as was the case in Italy, can generate a tender when operators fight not to be left with a minor part of the airwaves.
A poor design can lead to a market distortion where some bidders pay too much for the spectrum or get less than they need to compete. "It's very, very difficult to figure out what the best strategy can be," says an economist who specializes in spectrum auctions. "These auctions are just so complicated."
For a time, this was not a problem. The failure of 3G to meet expectations had put a damper on the auctions. In 2016 and 2017, sales in Slovakia, Spain, Ireland and the Czech Republic generated modest sums. That changed with the UK's spectrum sale in 2018 which can be used for 5G services. The £ 1.35 billion spent by the UK's four operators looked low, but with less spectrum on sales, the price per megahertz turned out to be a double market estimate.
More was to come. A populist government in Italy brought in € 6.5 billion from an auction last October, which had been structured so that only two of the four mobile networks in the country would secure large spectrum blocks. Nick Read, CEO of Vodafone, which stumped up € 2.4 billion for its slice of Italian spectrum, said the "artificial auction" had not created a fair balance for the industry.
The result sent shock waves through the sector. Bosses, already under pressure to invest billions in 5G and network expansion, were now forced to pay through the nose for the spectrum to do so. The Italian auction put a price per megahertz of € 0.35 per capita compared to € 0.036 in Finland in a sale held the same week.
In June, Germany withdrew € 6.6 billion – more than double what was expected – from a 5G auction. Bidding had been pushed higher by Drillisch, a smaller mobile operator, but also by Berlin's decision to carve out a quarter of the spectrum for industrial users such as the automotive industry that plans to use the faster network technology to develop more advanced production methods. This created a scarcity for the four remaining players who wanted to secure spectrum for commercial use.
Dirk Wössner, a member of the Deutsche Telekom Board, said that the high price had left a "bitter taste". "The network development in Germany has had a significant setback," he said. “The price could have been much lower. . . Network operators now lack money to expand their networks. "
Asked if he fears that the upcoming British auction could turn into another bidding generation," said Philip Jansen, BT chief executive: "I really hope not. It doesn't help anyone. "
Whether auction results prove to be a" nightmare "for Germany and Italy is unclear – 5G is still far from declining as a mainstream service. Still, the debate over how to best allocate spectrum, even in countries trying to win, is raging
"Recent spectrum auctions in the United States did not pull the demand we have seen before, "she says." We need to understand why. We should recognize that the success of our future auctions depends on developing a new class of spectrum interests that can join the ranks of those bidding on airwaves and promoting new ones. wireless innovation. ”
Spectrum war: How to avoid" bedlam "eventually led to a frenzy
Spectrum has not always been seen as a potential cash cow by governments. Nobel laureate Ronald Coase first settled the case for the sale of radio airwaves in 1959, but the proposal was first called as a recipe for "ethereal bedlam". Radio frequencies thus remained under close control of governments around the world until 1990 when New Zealand became the first country to hold a spectrum auction.
It paved the way for the first US auction in July 1994. The five-day process generated $ 617m in bids and proved to be a landmark in the history of telecommunications, with $ 60bn collecting 87 auctions over the next two decade. The economists behind the 1994 auction were later awarded the Golden Goose Award by Harvard University, which found that they had used game theory to free the United States from "wireless herring."
The UK's 3G auction six years later set a new stage for successful sales as 13 bidders vigorously fought for one of five licenses to launch a 3G network.
The United Kingdom was the first country to hold a 3G auction at a time when cash-rich telecommunications companies were engaged in a global catch.
It was so successful because it struck the right balance between enticing new players to bid while discouraging existing players, which became a hallmark of subsequent auction processes.
Adding too much complexity to auctions can also produce a sub-optimal result with bidders who are either cut off from bidding or unsure of the best strategy.
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