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Auctions and 5G spectrum: be careful what you wish for

Spectrum auctions can make or break 5G’s business case. When it comes to distributing 5G spectrum, it’s clear that competitive auctions remain much more efficient than their administrative process counterparts; however, when poorly designed, auctions can constrain the balance sheets of winning bidders, and analysis shows that there is often a causal relationship between high spectrum prices and lower coverage/poorer qualities of service [1].

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Gabriel Solomon 

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Ensuring plentiful supply and an optimal design approach to how governments launch their spectrum auctions is, therefore, critical. But, so far, this seems to be lacking.

How 5G spectrum auctions are designed will have a material impact on the version of 5G that will be realized in our societies. If the goal is simply to achieve a limited version of 5G that is simply a quicker and more efficient version of 4G, then current spectrum policy and license terms can continue to proceed largely unchanged. But – and not to state the obvious – this would blatantly disregard the very real potential of 5G to transform industries, drive economic development, and improve people’s lives overall. This would disregard the expansive version of 5G – the one whose world-changing potential everyone’s been raving about. For this expansive 5G to be obtained, though – where fast and low-latency connectivity is available everywhere – spectrum policy needs to be changed.

While a number of suboptimal designs currently characterize 5G spectrum auctions today, there are steps that can be taken to improve present methods.  Auctions that incorporate coverage obligations, for example, can help countries benefit from the expansive version of 5G because they tend to incentivise wider, denser deployments of networks merely at the cost of some minor government revenue. Given that 5G is designed to connect billions of machines and technologies as well as people, granular coverage obligations should be offered in exchange for lower spectrum fees. Some regulators are also considering obligations that include consistent levels of quality and experience, encompassing minimum speeds and latency.

An American flood and a European trickle

As the first wave of 5G auctions continues to play out in Europe and the United States, a discernible gap in the amount of spectrum becoming available has emerged between the two regions. With the U.S. President’s declaration that “the race to 5G is a race that America must win,” the Federal Communications Commission has been flooding the market with spectrum, resulting in a vast amount of spectrum licences being sold at historically low prices. By contrast, the spectrum supply in Europe is much more limited. As the table shows below, the average price paid per MHz varies greatly, which correlates closely to the amount of spectrum made available. 

Country Supply (% of 400 MHz) Price per MHz pop (€ cents)
Italy 50% 36
Germany 75% 16.8
UK 37.5%* 13
Austria 97.5% 6
Ireland 87.5% 5
Spain 50% 5
Finland 97.5% 4
*Does not include 120 MHz owned by incumbent UK Broadband (acquired by Three).

In Latin America, Brazil is looking at using a licensing and taxation framework that will accelerate the adoption of 5G services rather than maximise government revenues. Similarly, Colombia has recently enacted a law permitting spectrum to be granted with deployment obligations as well as mechanisms that require local governments to remove deployment barriers in return for prioritized coverage. This also allows for the secondary trading of spectrum and doubles the period of the license term. 

Best practice auctions can beat “beauty contests”

Applying well-designed spectrum auctions is likely to be a better course of action than adopting administrative processes – irreverently dubbed “beauty contests” – in which governments simply award spectrum to those applicants with the most attractive proposals. These “command and control” assignment mechanisms rely on judgements made by spectrum regulators that may be subjective and can be gamed by the operators concerned.

When conducted in a well-structured manner, positive outcomes can be generated from this method. Neither China nor Japan charges upfront fees but, instead, both demand coverage and capacity commitments in return for spectrum, and both countries currently enjoy more dense and expansive connectivity with four times as many base stations per capita as larger European countries. Chile, for example, has historically adopted a command and control spectrum assignment process, and its networks are around three times as dense as those in Argentina, Brazil, Colombia, and Mexico.

Although network densification may be attributed to multiple factors – proper planning rules and low passive infrastructure access costs certainly among them – having an operator’s balance sheet not stretched due to excessive spectrum payments will almost always play a key role. As a critical contributor to the successful realization of expansive 5G, network densification should be an increasingly important consideration for all spectrum assignment policy objectives and, therefore, should be reflected in how spectrum auctions are designed.

To maximise the reach, availability, and quality of 5G connectivity, the following best practices should be implemented in the design of current spectrum auctions:

  1. Align spectrum pricing with policy goals by, for example, including coverage in the pricing objective
    1. Package spectrum into small lots to enable rational and competitive bidding
    2. Avoid sealed bids, reduce complexity, and ensure transparency 
  2. Avoid artificial scarcity by maximising the spectrum available per band – no set-asides, which typically lead to both an inefficient use of the available spectrum and an increase in price (as supply is then restricted)
  3. Maximise license duration to increase asset life and the investment horizon and set out renewal criteria to reduce uncertainty surrounding investment

Finally, for the telecommunications industry to thrive, it needs predictability to allow for such critical necessities as budget planning. By having a clear roadmap of spectrum assignment over the medium to long term, for example, this predictability could be reasonably provided. In addition to this, appropriate consideration must also be given to the secondary trading of licences along with the ability to sublease amounts of spectrum to third parties, thus allowing the digital ecosystem to evolve.

[1] - https://www.gsma.com/spectrum/wp-content/uploads/2019/09/Impact-of-spectrum-prices-on-consumers.pdf

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