Public Sector News

 

Bidding in 4G auction under way

The UK’s largest ever mobile spectrum auction is now under way, with seven bidders competing to acquire new airwaves suitable for superfast mobile broadband services.

The following organisations are bidding in the auction:

 

  • Everything Everywhere Limited
  • HKT (UK) Company Limited (a subsidiary of PCCW Limited)
  • Hutchison 3G UK Limited
  • MLL Telecom Ltd
  • Niche Spectrum Ventures Limited (a subsidiary of BT Group plc)
  • Telefónica UK Limited
  • Vodafone Limited

The new spectrum will almost double the amount of airwaves currently available for mobile broadband services on smartphones, tablets and laptops.

Ed Richards, Ofcom Chief Executive, said: “Today’s 4G auction is a very significant milestone for the UK’s communications sector.

“It will release the essential raw material for the next wave of mobile digital services. This will change the way we consume digital media in both our personal and working lives and deliver significant benefits to millions of consumers and businesses across the country.”

Protecting competition

The UK is the most price competitive mobile phone market in Europe1. Healthy competition means that UK consumers benefit from better services at lower prices than most other countries in the world. In order to maintain competition, Ofcom has designed the auction to ensure that at least four different operators have sufficient spectrum to be credible national 4G wholesalers. The net benefit of doing this, for consumers and the UK economy as a whole, will be very significantly greater than any immediate financial benefits from revenue raised by the auction.

Bidding process

Bids are being placed online over secure connections, using software that has been developed specifically for the auction. The bidding will continue over several rounds and is expected to take a number of weeks until the final winners are known.

No updates on bidding activity will be provided until the conclusion of the auction (see: ‘How the auction will work’ below). Due to the nature of the auction, it is important that information about the bids being placed remains confidential until the auction concludes to reduce any potential risk of strategic bidding which could distort the outcome of the auction.

Once fees are paid, licences will be granted, enabling operators to start rolling out new networks. It is expected that services will be launched by a range of providers from late spring / summer 2013.

Auction lots

Bidders will be competing for 28 lots of spectrum in two separate bands – 800 MHz and 2.6 GHz. The lower frequency 800 MHz band is part of the ‘digital dividend’ freed up when analogue terrestrial TV was switched off, which is ideal for widespread mobile coverage.

The higher frequency 2.6 GHz band is ideal for delivering the capacity needed for faster speeds. These two bands add up to 250 MHz of additional mobile spectrum, compared to 333 MHz in use today. Both bands are being packaged into smaller lots of spectrum for the auction.

This combination of low and high frequency spectrum creates the potential for 4G mobile broadband services to be widely available across the UK, while offering capacity to cope with significant demand in urban centres.

Auction design

The auction format being used in the 4G auction is called a ‘combinatorial clock’ auction, which has been used by Ofcom in previous auctions and by other regulators in recent spectrum auctions around the world. This format is designed to achieve the most efficient outcome – putting the spectrum in the hands of the bidders who value it most highly, while also ensuring they pay a competitive price. Below is a guide to how the format works.

How will the auction work?

The format of the auction is based on basic principles of supply and demand. It takes place over a number of rounds as described below.

Combination of lots

The first point to understand is that each bidder is competing to win a combination of spectrum lots from across both the 800 MHz and 2.6 GHz bands. The amount they are prepared to pay for each individual lot will vary depending on how much of the other lots they could get at the same time. The auction lets people tell Ofcom what they would pay for specific combinations.

Opt-in round

The first stage of the auction is the opt-in stage – which took place on 18 January 2013. At this stage, bidders that were eligible to win reserved spectrum (i.e. bidders other than Vodafone, Telefónica and EE) could choose whether they wished to bid for that spectrum. If they wished to do so, they needed to make a bid at reserve prices for combinations of lots that would be sufficient for them to compete effectively as national wholesalers.

Principal stage (clock stage)

In the next stage of the auction (the clock stage), which started today, the auction proceeds through a number of rounds. At the start of each round Ofcom announces a price for each lot and each bidder then specifies what combination of lots they would most like to win at those prices. In each subsequent round Ofcom increases the prices for lots that have excess demand, until eventually demand matches supply. At this point the clock stage ends.

Supplementary bids round

If this were a simple auction for a single lot then this would be the end of the process, but because bidders have been bidding for combinations of lots, it could well be that at this point some of the spectrum lots would go unsold if Ofcom simply stopped the process (for example because the last price rise for some lots led to a sharp reduction in demand). Ofcom will therefore hold a single further round of bidding, called the ‘supplementary bids’ round. This is where bidders are allowed to supplement the bids they have already made with their ‘best and final offers’ for any of the packages that they are allowed to bid for. These supplementary bids have to be submitted together as a single batch of sealed bids.

Ofcom will then work out which combination of all of the bids from all of the bidders has the highest total value. This will be the winning combination of bids.

Second price rule

Having identified the winning combination of bids, Ofcom will then work out how much each winning bidder should pay using a so-called ‘second price rule’. Each winning bidder will pay the smallest amount that they would have needed to bid in order to win – as on auction website eBay.

If the second price rule was not used, the bidder who values the spectrum the most might miss out by second guessing and misjudging what their competitor was bidding – leading to an inefficient outcome where the spectrum is awarded to someone who values it less.

Assignment stage

The final stage of the auction is the assignment stage. Winning bidders can bid for the precise frequencies of spectrum that they wish to be assigned and Ofcom will determine on the basis of the bids who is assigned which frequencies. This process determines, for example, whether a bidder wins spectrum at the top or bottom, or somewhere in the middle, of the 2.6 GHz band.