Aetha: The warning signs of high 5G auction prices by Marc Eschenburg, Partner at Aetha Consulting

This year has already seen a number of spectrum auctions conclude, with a lot of attention being given to recent 5G auctions in Europe. Whereas the Swiss MNOs got through a quick auction and were subsequently fast in launching 5G services, the German auction took nearly 3 months and 500 rounds to complete.

The Swiss auction saw the country’s three main operators - Swisscom, Sunrise and Salt – secure 5G-compatible spectrum in 700MHz, 1400MHz and 3500MHz bands for CHF379m (E344m). Meanwhile, Germany's 5G auction has raised E6.5bn, with four telecoms companies - Deutsche Telekom (DTE), Vodafone, Telefonica Germany (O2D) and 1&1 Drillisch - entering a record 497 rounds of bidding for the 41 blocks of spectrum on offer in the 2 GHz and 3.6 GHz. 

Considering the great disparity in auction outcomes, it’s worth considering what drives such stark differences and look into the signs that will help investors understand whether any of the upcoming auctions - and plenty of those are planned to happen until the end of 2020 - are likely to raise high prices.  

Firstly, the results of auctions are typically a question of demand and supply. This is illustrated by the outcomes of recent auctions for spectrum in the 3.4-3.8GHz range, as shown in the figure below. The figure shows a normalised spectrum price expressed in euros per MHz per population across a range of recent auctions, and it also illustrates the amount of spectrum in MHz that was available to the main mobile operators. 

As the graphic indicates, in auctions where around 100MHz per operator were available, prices were at the lower end of benchmarks. The recent Austrian auction is a great example, where 390MHz was made available across 12 regions. The three nationwide MNOs - A1 Telekom Austria, T-Mobile Austria (now Magenta Telekom) and Hutchison Drei Austria - acquired at least 100MHz in all regions and, in some parts of the country, there was available spectrum left for regional players, namely Mass Response, Liwest, Salzburg AG, Holding Graz. 

In contrast, the less spectrum that was available, the higher prices surged. The German auction is a particularly striking example – with 300MHz being made available, the existing three MNOs would have expected a comparatively inexpensive auction prior to 1&1 Drillisch announcing its participation. The existence of a fourth bidder meant that there were only 70-80MHz available per bidder and prices rose significantly as some of the operators - notably Deutsche Telekom and Vodafone - insisted on requiring at least 90MHz.

Whilst the balance between demand and supply is certainly one of the main drivers of auction prices, some of the auction rules adapted by some nations also had a considerable effect. For example: 

• Spectrum caps can restrict the amount of spectrum that each bidder can acquire and, therefore, reduce competitive tension in an auction. The best example here is the Dutch 2.6GHz auction in 2010, where the caps effectively led to the auction ending after one round of bidding, with each bidder submitting offers up to the capped amount, effectively allowing them to secure spectrum at the starting prices. 

• Reserving spectrum including for new entrants can at times introduce artificial scarcity. Again, looking at the Netherlands, the 2012 multi-band auction reserved 2x10MHz of spectrum in the 800MHz band for a new entrant. This only left 2x20MHz for the three existing MNOs, which all wanted 2x10MHz. As a result, prices for spectrum in the auction skyrocketed. 

• The way in which the spectrum is offered, via so-called “lots”, can also at times affect an auction. In the recent Italian multi-band auction, the available spectrum was offered to the four main MNOs in the form of two lots of 20MHz and two lots of 80MHz. Unsurprisingly, all MNOs bid aggressively to acquire the large lots of 80MHz. If the auction design had allowed each bidder to get a fair share, for example 50MHz, then the final prices could have been lower. 

• Coverage obligations or other licence obligations can also impose a cost on those acquiring the spectrum and can actually lead to bidders paying less. The Swedish 800MHz auction that took place in 2011 is a relevant example of the impact of licence obligations on prices for similar spectrum. In that auction, Telia bought 2x10MHz that had no obligations attached to it. For this spectrum, it paid a premium of about 80-100% compared to the prices paid for the other two available lots of 2x10MHz, with one of these lots including a coverage obligation and the other one having restrictions on the use of the spectrum to avoid interference with digital terrestrial television. 

In conclusion, to get a view of likely price levels before an auction, it is important to analyse the amount of spectrum available to each bidder and to keep an eye out for any rules that are likely to affect the balance of demand and supply, such as spectrum caps, reservations or the lot structure.