The £3.5bn price tag slapped on the 4G auction is a ‘political football’ and will not affect how the sale will happen, Ofcom’s chief executive has said.
Seven bidders will take part in next month’s 4G auction. As well as the UK’s four operators – EE, O2, Vodafone and Three – three other players have emerged who will push for spectrum for backhaul use. These are BT’s Niche Spectrum Ventures vehicle, HKT, a subsidiary of Hong Kong conglomerate PCCW, and backhaul specialist MLL Telecom. As expected, the auction will not lead to a dramatic new entrant into the mobile industry.
Earlier this month, Chancellor George Osborne said he expected the auction to raise £3.5bn, a figure that has been disputed by operators as too ambitious. Ofcom CEO Ed Richards said the regulator ‘did not have a duty to raise a particular amount of money for the Exchequer’. He said the auction was structured to ensure competition and a broad coverage of services.
He said the sale suited ‘the so-called age of austerity’ and said not to compare it to the ‘significantly different’ 3G auction, which raised £22.5bn last decade. He also cautioned against comparing the sale to recent auctions in the Netherlands and Ireland, which overshot some analysts’ estimates.
He revealed he first heard the £3.5bn prediction when George Osborne revealed it in parliament. He said the price tag was ‘a political football’ and that the auction’s success should not be judged on that.
He said: ‘We will be judging the auction ourselves on whether we believe it has successfully produced an efficient outcome in which the bidders are able to express their preference during the process and it’s such that we’re confident that the spectrum will be used in the most efficient way.
‘We will not be judging it by the amount it raises, whether it raises more than £3.5bn or less than £3.5bn. I’ve no idea which it will be.’
Following the outcome of the auction, Ofcom will set new licence fees for 2G spectrum. There is a fear among operators that if the auction does not raise the amount sought by the Government, it could claw back cash through licence fees. Richards refused to be drawn on whether this might be the case and said the fees would be set ‘to reflect the market value’. However, he said it did not follow that a lucrative auction could lead to high fees, and vice versa.
ANALYSIS – How sweets from the tuck shop and eBay help to explain the 4G auction. By Graeme Neill
One of the most complicated issues around the 4G auction is how the thing actually works – operators will exasperatedly sigh when you ask them to explain it and try to get away from you as quickly as possible. During Ofcom’s recent press briefing, Graham Louth, Ofcom’s director of spectrum markets, attempted to make things clearer by encouraging journalists to take part in a fake auction – featuring bags of sweets.
If we take different types of sweets to represent the different lots of spectrum on offer, the auction works as follows: Ofcom asks us if we want to buy bags of Wriggly Worms (or 800MHz spectrum) with a starting price of 20p, and bags of Cola Bottles (or 2.6GHz spectrum) with a starting price of 10p. I want two bags of Wriggly Worms and three of Cola Bottles so I tell Ofcom this. I cannot increase the number of bags I want at a later stage, but can leave the auction at any time. I also need to agree to pay whatever amount the auction raises, as in all auctions. So at the end of it all if those bags of Wriggly Worms go for £20 each and I’m the last one standing, then that’s my own stupid fault.
Still with me? Ofcom then increases the price of the bags of sweets from 10p, with the bidders dropping out as the prices get too high for their wallets. There comes a point when demand meets supply, and I get my sweets if I am prepared to pay for them and am still in the auction.
What I pay is slightly more than what the last bidder to drop out was prepared to. So it’s like when you win an auction on eBay – you only pay enough to beat the next bidder’s bid. Now this might open Ofcom to criticism. EE (for example) may be prepared to spend £1bn on spectrum but end up getting it for only £500m. ?This kind of auction is fine when it is a matter of saving a few pence on eBay but when Ofcom is dealing with hundreds of millions of pounds, this is potentially lost public revenue.
Now this is where it gets slightly complicated. When the lots have been allocated, there are bound to be a few lots left behind – one or two stray bags of Cola Bottles. Different operators will bid for different groups of spectrum and it is unlikely it will all fit nicely together, with everything sold and everyone happy. There are apparently 2,000 potential outcomes of the auction.
A further round of bidding will take place. Each operator will outline alternative combinations of spectrum that they would like, and how much they are willing to pay for them. Ofcom will determine from the bids and how the market can be balanced across four operators, who will get the Wriggly Worms. I mean spectrum.