That 4G Auction Process Explained

We know the 4G auction will be entirely different to the 3G sale, both in terms of what is being sold and the timing. The earlier spectrum auction took place during the Dotcom bubble. The huge sum paid by the operators last time – £22.5bn – is actually blamed for the slow pace of subsequent investment.

4G is being sold in a time of austerity and in much greater abundance. There are 28 different lots across two bands, as opposed to one band in the 2.1MHz frequency, meaning there is 80 per cent more available today.

So with the auction getting underway today, we asked a spokesperson from telecom regulator Ofcom to explain the bidding process to us.

MM: How long does the auction last for?

Ofcom: It can’t be done over the course of a day – essentially – it’s very, very complicated. There will be numerous rounds depending on how the bidding goes so we couldn’t actually say.

MM: What does it consist of?
Ofcom: Bidding takes place over a secure network. There are 28 different lots across the two spectrum bands – 800 MHz and 2.6 GHz. Ofcom is using the combinatorial clock auction model. Bidders express an interest in a combination of the lots.

Like most auctions, it works on the principle of supply and demand. In the first round, Ofcom assigns prices to each lot of spectrum to work out what the overall demand for that lot is. ‘How many of these lots do you want at this price?’ If demand outstrips supply, the price goes up. The bidders go through rounds until supply meets demand.

MM: What makes one lot more attractive than another?

Ofcom: The bidder might attribute a higher value to a lot of spectrum if they are combining that with another lot. The 800MHz bandwidth is seen as particularly valuable, because lower frequency travels further and can move better through solid objects.

If it’s a higher frequency, it can pack more information in, but cannot travel as far, or move as well through buildings. If the bidder wanted to create a 4G network in an urban area – they might opt for more high frequency – because you can get more data on it.

The bidder might want high and low, so the value that they are willing to pay for one lot depends on whether they’ve got the other spectrum confirmed or not.
MM: So who wins?

Ofcom: All of the seven bidders could walk away with spectrum. After a competition assessment, Ofcom designed the auction to ensure there are at least four national wholesalers at the end of it. But there could be seven.

Three of the operators taking part – EE, Vodafone and O2 – were deemed to already own sufficient spectrum to be able to roll-out a credible 4G network. Although the 3 network, owned by Hong Kong-based Hutchison Whampoa, and the other new entrants – HKT UK (a Hong Kong-based subsidiary of PCCW), MLL Telecom and Niche Spectrum Ventures (a subsidiary of BT Group) – don’t meet the minimum spectrum floor decided by Ofcom, some of the spectrum will be reserved to guarantee that there is a fourth national 4G wholesaler.

The reserve has been set at £1.36bn but the Government has already budgeted with the expectation of raising £3.5bn.

MM: So when will we know the outcome?

Ofcom: This depends on when it starts and how many supplementary rounds there are, where there will be opportunities for bidders to make their best and final offers.

MM: Then what?

Ofcom: The operators will be in a position to start making 4G available to consumers from late spring or early summer.

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