Summary Report On 28 GHz Auction

Auction Outcome

Three licences in each of the fourteen licence regions were on offer. At the end of the auction, between them, six bidders won sixteen licences in seven of the regions. Licences were awarded to all successful bidders in December 2000. The prices they paid were at or a little above the reserve prices, which demonstrated that, contrary to the fears of those who criticised the selection process, auctions do not inevitably lead to spiralling bids.

The number of licences sold was lower than might have been expected from the level of interest shown by operators earlier in the year. Auctions do not guarantee that licences will sell. But they do reveal how operators value the spectrum and whether they are prepared to obtain spectrum at that valuation for the development of commercial operations.

The auction as an auction process worked well. Its administration ran smoothly and all bidders found the bidding system easy to use. However, some bidders found that the rules did not enable them, in a way that was acceptable to themselves, to obtain all of the licences they might have wished to, for example by increasing their activity in the latter stages or switching channels post-auction.

Factors Contributing To The Auction Outcome

In our post-auction examination of the auction outcome we looked at recent trends in the telecomms industry, deriving information from analysts, press comment and research reports. We also had discussions with some of the bidders and some non-participants.

Some of the key points that emerged were:

Changing stock market sentiment in the six months running up to the auction had depressed share prices of telecomms companies and reduced companies' ability to raise finance to fund major investment in new licences and network infrastructure.

The downturn in the telecomms sector made operators risk averse. Even those who bid in the auction concentrated either on the potentially most profitable regions or on regions that included existing customers or abutted regions where they already had an interest.

There was concern that auction prices would be too high to allow an acceptable return on investment. This was based on press reports - which were unfounded - of expected proceeds of £1bn, and on the evidence of the 3G auction.

Reserve prices were not on the whole a disincentive to bidders. Other costs, in particular the cost of building networks and infrastructure, were a more important factor: they substantially outweighed the cost of spectrum at the reserve price.

Many operators are committed to rolling out services in other European countries and this had stretched their resources.

BFWA is commercially untested in Europe and it is part of a wider broadband access market that is highly competitive. This makes it difficult to develop a business case that is attractive to financial backers. Some small companies have said that they could more easily establish a viable business case if they were the only BFWA operator in a region.

Smaller companies who were interested in bidding were discouraged by the requirement to pay up front all, or at least 50%, of the licence fee.

Awarding Unsold Licences

Since the end of the auction there has been substantial interest shown in the unsold licences. We have therefore been looking at how these might be awarded.

First, it should be noted that the Government must not compromise possible future auctions, or indeed the 28 GHz auction itself. Unsold licences will not be sold off immediately at less than the reserve prices. Also, the licence and payment terms will remain the same when selling off licences in regions where one or two licences were sold in the auction.

We could change what is on offer in a variety of ways, by:

allowing deferred payments over the full 15 year licence period;

offering licences on a 12 month renewable basis;

relaxing licence restrictions to allow the spectrum to be used in support of 3G networks;

re-defining licence areas to cover "hot spots" rather than large regions.

We could change the way that it is offered by accepting that, in general, companies acquire resources when they wish to exploit them. Rather than holding an auction or beauty contest at a defined date, we would place the unsold licences "on the table", at the existing reserve prices, and they would be open for bids. A company could place a bid when it decided that market conditions were right. This would trigger an auction for that licence if other companies were interested in bidding. This process would continue until all the licences were taken up or the Government decided to withdraw the offer.

Next Steps

The Agency would like early comments on the ideas outlined in the previous section so that we can assess whether we need to change what is on offer as well as change the way that it is offered. The aim is to make licences available by the summer.

Comments should be sent to Jacqui O'Mahoney by 9 March 2001. Her e-mail address is jacqui.omahoney@ra.gsi.gov.uk and her telephone number is 020 7211 0324.

13 February 2001