4G spectrum auction in the UK: were the prices paid low or merely average? - Analysys Mason comment

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Article by Philip Bates, Senior Manager, Analysys Mason

LONDON, UK – 22 FEBRUARY 2013 - The UK's 4G spectrum auction may have raised less than the government hoped – GBP2.3 billion (EUR2.7 billion) rather than the GBP3.5 billion (EUR4.1 billion) that the Treasury had been counting on – but how does the amount paid compare with recent auctions in other European countries?

Answering this question is not as simple as it sounds because Ofcom chose a format known as a 'combinatorial clock' auction, where participants bid for packages of spectrum and a complex algorithm is used to calculate the final allocation of spectrum and the payments due. However, if we make certain assumptions about the relative value of different types of spectrum, we can estimate what the prices for individual bands would need to be to give the amounts paid by the winners. We can then compare these prices against the amounts paid in other European auctions.[1]

Hutchison 3G UK ('3') obtained 2×5MHz of 800MHz of spectrum at the reserve price of GBP225 million (EUR261 million), so we restrict our analysis to the other four winners (BT, Everything Everywhere (EE), Telefónica UK (O2) and Vodafone). We found that assuming values of GBP0.44 (EUR0.51) per MHz per pop for the 800MHz spectrum, GBP0.07 (EUR0.08) for the 2.6GHz paired spectrum and GBP0.04 (EUR0.04) for the 2.6GHz unpaired spectrum, while assuming that the coverage obligation (which applies only to O2) carries a cost of GBP10 million (EUR12 million), gives answers that are within 1% of each winning bid announced by Ofcom on 20 February 2013.

It is interesting to note that in order to find results that are a close match to each of the actual prices paid, it is necessary to assume a low cost for the coverage obligation, suggesting that O2 does not believe it to be particularly onerous.[2]

Our estimate of the UK 800MHz price is very close to a straight average of the prices paid in other European 800MHz auctions (see Figure 1), although it is about 20% lower than the population-weighted average (given that the prices paid in France, Germany and Italy were all higher than those paid in the UK). As well as factors relating to the auction design and the competitive environment in each country, the lower price may be a reflection of difficult market conditions and the increased likelihood since the World Radiocommunication Conference 2012 that the 700MHz band will be harmonised for mobile use across Europe after 2015, thus increasing the supply of low-frequency spectrum.

Our estimate of the UK 2600MHz price is slightly above the average price paid in other European countries (see Figure 2). Among the 'big five' European economies, only France has achieved a higher price. The relatively high price paid in the UK may reflect the greater number of bidders for the 2600MHz spectrum (BT, which does not currently operate a mobile network in the UK, eventually won 30MHz of paired and 20MHz of unpaired spectrum) or the growing support for TD-LTE in the 2600MHz unpaired band.

In summary, the value raised by the UK auction appears a little low, but not totally out of line with relevant benchmarks. Perhaps the real reason for the difference between the results and the initial government estimates is that many – including the Treasury – implicitly expected the UK to raise an amount above the benchmark average.

Link to article on Analysys Mason website: http://www.analysysmason.com/About-Us/News/Insight/4G-spectrum-UK-Feb2013/

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Note to editors: Two graphics to accompany this article are available on request:

  • Figure 1: Prices paid in EU 800MHz auctions [Source: Analysys Mason, 2013]
  • Figure 2: Prices paid in EU 2600MHz auctions [Source: Analysys Mason, 2013]

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