On May 26, 2015, OFCOM released a Statement and Consultation for the UK’s next mobile license auction: the Public Sector Spectrum Release, named for frequencies freed up from government and military uses. The auction is planned for the current fiscal year – i.e. before 31 March 2016.
There is a significant amount of capacity at play, 190 MHz, which is made up of 40 MHz in the 2.3 GHz range and 150 MHz in the 3.4 GHz range. Both bands will be for TD-LTE operation, consistent with EU harmonization activities.
The opportunity to conduct the auction, though, comes in the midst of what may turn out to be the biggest reorganization of the UK’s industry in the last 30 years.
The UK industry is in the process of consolidating down to three mobile network operators, with the pending acquisition of O2 by 3, making for a very limited pool of potential bidders. BT had bid on its own in the last UK auction when it acquired 2.5 GHz licenses, but BT is now in the process of acquiring EE. So there could essentially be four possible bidders, assuming no new entrants, and if the incumbent 3.4 GHz operator UK Broadband participates.
OFCOM thus has a challenging puzzle to solve: Whether to auction all the available licenses now or alternatively save some until the industry structure settles down. Doing the former means that there could be an unintended consequence of cementing in a new market structure. Doing the latter could provide the opportunity for a future auction to support a new industry structure and/or potentially promote the entry of one or more new players. OFCOM’s initial proposal is that it should do the latter and proposes to withhold 60 MHz. Stakeholder inputs are due on June 26, 2015 on this point.
At the same time, and following its 2014 consultation on the approach to the auction, OFCOM has now determined:
- It will proceed with a Simultaneous Multi-Round Ascending (SMRA) auction process instead of a Combinatorial Clock Auction (CCA). No doubt the recent success of the US AWS-3 auction in revenue terms reinforced OFCOM’s desire to use the less complex, “first-price” SMRA format.
- The auction will have a principal stage where bidders acquire generic blocks, followed by an assignment stage where bidders will be awarded specific blocks, which are contiguous.
- Information available during the auction will be limited to the round prices along with minimal information on aggregate demand by lot category.
- Bidders will have three waivers and will be allowed to withdraw standing high bids, subject to penalties. They will also have the option of specifying a minimum requirement of up to 20 MHz per band, and thus reducing SMRA-style exposure risk.
- The assignment stage will be decided using a single-round, sealed-bid format and second-price rule. UK Broadband will have the option of participating in the assignment stage only, in order to bid for contiguity (since its existing 40 MHz in the band is actually two 20 MHz non-contiguous blocks).
- Licenses will be issued for both bands in the same process. Licenses will have an indefinite term, but with an initial 20 year period, and they will be tradable and have no specific build-out obligations.
The auction process thus builds on key features of the US SMRA approach, but also adds some complexities such as the way standing high bids are ranked relative to new bids.
LYA has extensive background directly relevant to the context of the auction. LYA has supported clients in three significant and complex auction processes in the last 15 months: the Canadian 700 MHz CCA auction, the US AWS3 SMRA auction and the Canadian 2500 MHz CCA auction. For these auctions, LYA supported clients in development of budgets and bidding tactics by conducting mock auctions and in simulating auction outcomes using robotic bidding agents on the LYA Auction Platform. The particularities of OFCOM’s proposals make preparation and practice even more important:
- A key feature of the LYA Auction Platform is that it allows you to conduct realistic mock auctions, bidding against any number of robotic bidders to test the impact of different options (setting a minimum requirement or not, keeping points longer or shorter, etc.).
- Getting an idea of bidding patterns and implications under different scenarios of demand will be key both to assessing values from the auction but also how best to bid, particularly given the degree of anonymity in the bidding,
- The LYA Auction Platform can be employed to conduct fully automated simulations, randomized around key variables.
Mock auctions with robotic bidders, and fully automated simulations, provide high value input to the planning process and also can save considerable time and resources internally for auction preparation.