Spectrum Licensing & AuctionsKaren Wrege,

KB Enterprises, LLC

iWeek 2009

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Elements of Spectrum Management

Spectrum Allocation Defining Service and assignment rules Assignment Enforcement

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ICASA Bandplan Options

ICASA presented 3 options

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Bandplan Issues

Incumbents occupy 65 MHz so 125 MHz remains

Guard bands will be necessary for TDD & FDD to coexist

Band Plan will require reshuffling to accommodate FDD

Allocation impacts assignment mechanism

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Overview of Assignment Options

First In Time Lottery Beauty Contest Auction “Hybrid” process

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Assignment Options

Per the General Notice, ICASA is considering: A purely comparative evaluation process; or A purely competitive evaluation process; or A combination of the two. For ease of

reference, the Authority shall refer to combination of the competitive and comparative evaluation processes as truncated granting methodology.

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ICASA Assignment Methodology Concerns

Concerns for Comparative Process Opaque and Non-transparent Requires Ranking Applications

Concerns for Competitive Process Risk of Collusion Spectrum acquisition costs being passed through to

consumers ICASA documents appear to favor the

“truncated granting methodology” -- a hybrid approach

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Arguing Against A Beauty Contest

A beauty contest component, even if paired with an auction is problematic:

Difficult to be objective, non-discriminatory and transparent

Litigation risk Difficult to set selection criteria and evaluate. Often favors incumbents Often a lengthy process Because it is a subjective process there is no

guarantee that it will not disqualify an applicant that could build out a network effectively

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Incorporating Social Objectives into an Auction

Strict eligibility requirements Bidding credits for small businesses, disadvantaged

individuals and women New entrant set-asides Spectrum caps for incumbents to promote new entrants Lease fees in lieu of full payment for spectrum licenses Strict build out requirements Establishing objective use or lose spectrum policy

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Auction Components

Definition of product being sold (property rights and responsibilities) Bidding

Auction Deposits (Must be enough to level the playing field and attract serious bidders)

Who is allowed to bid? (Eligibility requirements) How are bids presented? (One time or Multiple rounds) How much must bids be beaten by? (Bid increments)

Information Are current bids revealed? (Hiding bid identities during the auction helps to

reduce strategic gaming) Are winners identified? (Transparency of process)

Clearing Who gets what and at what price? (First or Second price)

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Auction Rules Matter

Regulators want bidders to tell the truth, but.. Bidders might do better by lying (e.g., by forming a ring or by

colluding) All auctions types are subject to some sort of manipulation by

collusion among buyers, sellers, and/or auctioneer. Bidders need to be wary of “winner’s curse” (bidder who wins believes

they overpaid) Encourage bidder participation – more competition, reduces ability to

collude. Minimize/eliminate exposure and aggregation risks - bidders that win

some but not all of their desired licenses Allow bidders flexibility to pursue back up strategies without increases

exposure risks

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Choosing an Auction Type

Sequential vs. simultaneous auctions Simultaneous auction takes into account complementarities and

substitutability of spectrum licenses.

Single round vs. multiple round auctions Multiple round allow bidders to help avoid the “winners curse” and allow for

price discovery during the auction.

Simplicity vs. more complex auctions Depends on the number of licenses, bidder sophistication, and degrees of

complementarities and substitutability of the licenses in the auction.

Clock auctions vs. Simultaneous Multiple Round Auctions Clock auctions are generally simple for bidders to participate in but may

require additional measures to deal with overshooting.

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International Auction Practices in 2.5 and 3.5 GHz bands Most countries have used an auction to

allocate spectrum in these bands Some countries have allocated spectrum

nationally, while others have opted for regional allocations

Most countries have auctioned 2.5 and 3.5 GHz bands separately

Spectrum generally will be allocated on a “technology neutral” basis

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International Experiences:

In June 2002, Nigeria held a single round combinatorial auction for 3.5 GHz spectrum

UK and the Netherlands plan to auction spectrum using a combinatorial clock auction with final round stages to choose high bidders and assign specific frequencies. Paired and unpaired spectrum assigned through the auction mechanism.

Denmark recently issued a consultation document proposing a combinatorial clock auction using the CEPT bandplan.

New Zealand in December 2007 chose a SMRA auction method with defined paired and unpaired spectrum blocks in the 2.3 and 2.5 GHz bands

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International Experiences:

Sweden and Norway opted for SMR auctions with switching rules where paired and unpaired spectrum was pre-defined

Italy auctioned 3.5 GHz licenses using a first price sealed bid auction method in early 2008

Germany auctioned 3.5 GHz licenses using a Simultaneous Multiple Round Ascending Auction format

Taiwan used a hybrid “beauty contest”/Auction process Hong Kong used an SMR format where paired and unpaired

spectrum was pre-defined. Jamaica conducted a hybrid “beauty contest”/sealed bid auction

in early 2009. The auction failed to meet the established reserve price.

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Recommendations

Develop auction application without subjective evaluation criteria (no hybrid approach) Minimizes litigation risk Minimizes entry costs

Include self certification language on pre-auction application to include: Eligibility requirements Technical capabilities Financial capabilities Collusion rules

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Recommendations

Facilitate robust competition Consider incentives for new entrants Facilitate Low entry costs to increase competition

Keep it simple Consider assigning 2.5 and 3.5 GHz licenses in separate

processes Implement a simple SMRA auction design that is well tested Use robust commercially available software Make it easy for participants to understand and participate Use a straightforward bidder interface

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Recommendations

Eliminate collusion Establish strict, enforceable anti-collusion rules

Eliminate strategic gaming Do not reveal bidder identities before or during the auction Minimize demand reduction

Keep it secure Encrypt bids

Provide transparency in the process Publish bidder identities after the auction

Thank YouKB Enterprises, LLC

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iWeek 2009