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Spectrum Management: Into the 21st Century
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6.1 This chapter deals with the considerations that will affect whether spectrum pricing should take the form of auctions or administrative pricing and with the application and design of auctions. The following chapter deals with the details of administrative pricing.
6.2 Auctions are, in principle, the Government's preferred method of spectrum pricing. They have a number of important benefits, including economic efficiency, transparency and speed, compared to alternative assignment methods. They enable the price of spectrum to be set directly and objectively by the market rather than administratively by the spectrum manager and are thus more likely than administrative pricing to lead to an optimal distribution of spectrum. They can accelerate the introduction of new services and provide effective incentives for spectrum efficiency.
6.3 Internationally, a number of countries have auctioned spectrum. There have been a number of notable successes, especially in the USA where a novel form of auction, described below, has been pioneered.
6.4 The fact that spectrum is already occupied is not necessarily a bar to auctioning it. Experience in the USA and New Zealand shows that spectrum can be successfully auctioned with ‘sitting tenants’, provided there are suitable safeguards in place to strike an equitable balance between the rights of new and existing users. The new owner would then be free to negotiate with the sitting tenants about compensation for their migration from the band or the price of their continued presence. This has the potential to speed up band clearance considerably compared to the alternative of allowing a lengthy transitional period so that existing users have time to re-equip.
6.5 Despite the advantages of auctions, their effectiveness depends on the number of bidders and the value of the lot or lots. If there are too few bidders, there may be collusion. If there are too many, the process may become unmanageable. If the value of an individual lot is too small, the costs of running and participating in the auction may exceed the value of what is being bid for. Auctions require much planning and arranging so it is difficult to use them where there are short term fluctuations in demand.
6.6 Auctions are most suitable where:
· the individual lots of spectrum have a high value, so transaction costs are not excessive by comparison;
· the number of lots is not unmanageably high;
· lots are fairly standard where there is more than one;
· there is a reasonable number of potential bidders, so as to reduce the risk of collusion, but not so many as to make the process unmanageable.
6.7 For example, auctions could be used in the following circumstances:
· for national or regional services where there are more well-qualified applicants than can be accommodated in the spectrum available. Possible examples include spectrum for new national or regional telecommunications services, additional fixed access radio services or future mobile services;
· to promote the release of analogue broadcasting spectrum, subject to satisfactory safeguards for existing broadcasters and future users;
· to select the manager of a block of spectrum where it is desired to set up a commercial SMO.
6.8 The Government has no plans to auction individual local pbr or fixed link assignments as their value is too low and their number too large for auctions to be practicable. But blocks of pbr or fixed links spectrum could be auctioned in future as part of the process of selecting SMOs.
6.9 A number of different designs of auctions are described in the NERA/Smith spectrum pricing study. No one type of auction is ideal for all circumstances. However, many of the problems experienced with spectrum auctions appear to have been successfully addressed by the simultaneous multi-round auction design that has been pioneered in the USA by the Federal Communications Commission (FCC). This involves conducting the auction over an unlimited number of rounds. Bids are sealed but each bidder can see at every stage the highest current bid for each lot. All lots remain open until no higher bid is submitted for any of them.
6.10 The procedure is described in more detail in the spectrum pricing study. Although more complex than the single sealed bid procedure used to auction some broadcasting franchises in the UK, the bidding process is far more open and allows bidders to take account of alternatives as the bidding proceeds, to change their strategy accordingly and to aggregate individual lots to provide a national service or fill in gaps in existing coverage. It seems to ensure that similar lots are sold at similar prices and is especially suitable where a number of lots that are not identical but not completely dissimilar are to be sold. The method has generally been accounted a success both by the FCC and bidders.
6.11 The choice of auction type in the UK will depend on the circumstances and the nature of the spectrum to be auctioned. But a simplified form of the simultaneous multi-round auction could have a number of attractions.
6.12 A number of the responses to the consultative document on the future management of the radio spectrum expressed concern about a perceived unfairness in auctions that result in large variations in winning bids for similar lots and the risk that large users might corner the market to exclude small businesses or competitors. But these concerns can be met by careful design of the auction process.
6.13 Whatever type of auction is adopted (eg single sealed bid or simultaneous multi-round), there will be safeguards against collusion and cartels. These could include:
· reserve prices;
· down-payments, bonds and penalties;
· ‘use it or lose it’ provisions;
· restrictions to prevent a single bidder acquiring an undue concentration of licences that could affect competition.
6.14 Through careful auction design, the Government will aim to ensure that auctions do not diversely affect diversity in radio use, including non-business applications, and that small businesses, including local community radio stations, are not precluded from accessing spectrum.
The Government would welcome views on the proposals in this chapter for the application and design of spectrum auctions
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