Governments Set For €20bn Spectrum Dividend, says KPMG

Revenues from spectrum auctions across Europe could be in the region of €20bn (£17bn) between 2011 and 2015, according to KPMG’s Spectrum Monitor study.

While next year’s spectrum auction may fall short of the revenues raised in 2000 and 2001, KPMG notes that it raises a number of complex and strategic issues for governments, regulators and operators alike.

KPMG’s latest research looks at how Governments consider the question of how to allocate spectrum to maximize revenue and social welfare through allocation procedures that guarantee a competitive market structure and coverage. It also looks at how operators are seeking to secure spectrum at the right price, in order to cope with exploding data traffic, and often stagnating revenues per users.

Set against the backdrop of the current economic downturn, this adds up to increased pressure on operators’ cash flows, since the forthcoming round of auctions will not only require significant capital outlay for the spectrum, but also for the subsequent roll-out of new mobile technologies such as Long Term Evolution (LTE).

KPMG’s Spectrum Monitor estimates that from more spectrum will be auctioned in Europe over the next three to four years than has been auctioned over the past decade. It also estimates that the total value of proceeds generated through auctions of spectrum over the same period may be in the region of €20bn in Western Europe alone, which KPMG notes is a significant investment for operators. At least two thirds of the auction proceeds are expected to come from the digital dividend transfer (the switch from analogue to digital TV) in Western Europe, which will free up the valuable 700/800 MHz band.

“Many Governments will be eyeing up spectrum auctions as a way to raise some sought-after revenue,” says Benoit Reillier, a director in KPMG’s Economics and Regulation practice. “While it will not make a structural difference to the level of the deficit in many countries, it will certainly go some way towards European governments’ garnering of more cash in the short to medium term.”

But Reillier cautions mobile operators that they need to understand the policies and mechanisms put in place by their country’s government and regulator for the allocation of spectrum, since the way the auctions are designed will have a critical impact on the prices they have to pay. “The question of the affordability of spectrum is particularly critical, given the current pressure on operators’ cash flows,” he says.

KPMG says that, in order to inform their business and regulatory strategy, operators will need to consider carefully a number of key factors, including the technology mix of their networks; the timing of roll out; the extent to which some infrastructure may be shared across operators to reduce costs; and the substitutability of other technologies, including fixed ones, as well as the level, structure and dynamics of data traffic demand and pricing.

“Today’s operators remain willing to pay substantial sums for radio spectrum. However, the outcome of what are increasingly complex spectrum allocations will, in my view, continue to remain uncertain for several months to come due to the myriad of issues that need to be negotiated,” Reillier concludes.