How to participate successfully in a spectrum auction

Surging mobile data growth and network congestion have created demand for additional spectrum. Governments seeking to reduce national borrowing are anxious to auction additional spectrum to raise revenue whilst also promoting access to broadband services. Mobile operators have little choice but to participate or potentially suffer a loss of competitive advantage.

The last time spectrum was at the top of the sector’s corporate agenda was 10 years ago when governments auctioned 3G spectrum. For most companies the experience and knowledge of the 3G auctions of 2001 has long since been forgotten and many companies must learn how to navigate a spectrum auction all over again. Based on our experience from over 40 spectrum awards we present the keys to successful spectrum auction participation.

Lobby, lobby, lobby: Operators should be proactive in lobbying for an auction design and associated rules, such as those relating to spectrum caps, which best serves their needs. Arguments should be presented in a language that regulators understand such as economic efficiency and promoting competition.

Valuation, valuation, valuation: Bidders must have a clear view on the value of the spectrum lots being auctioned – not only individually but also the value of any synergies arising from geographic combinations, combinations of blocks providing wider channels to benefit from technologies such as LTE or optimal combinations of low and high frequency spectrum which together offer both coverage and capacity benefits.

Clear auction objectives: Economists and auction designers assume that all mobile operators only seek to maximise shareholder value but such assumptions are seldom shared fully by boards. Auction objectives are often couched in terms of obtaining pre-defined blocks of spectrum as cheaply as possible or avoiding any adverse differentials in price for similar lots compared to other bidders. The bid team requires a clear and unambiguous statement from management as to its objectives in the auction.

Know your limits: Economists also assume that mobile operators have unlimited access to funds and are not budget constrained. Few, if any operators are in this luxurious position and management will wish to impose bid limits on the bid team. The bid team need clear guidance on bid limits and how they relate to auction objectives and interact with the valuations of spectrum lots and combinations of lots.

The devil is in the detail: Auction design has improved significantly in the last 10 years which should have made developing bidding strategy more straightforward. However, auction designers are being asked to achieve an ever broader range of auction objectives such as encouraging new market entry, increasing or maintaining competition, promoting investment in rural coverage and ensuring contiguous spectrum to promote efficiency. As a result the use of multi-stage auctions, 2nd price rules, caps, eligibility rules and linkages to spectrum usage fees for existing spectrum holdings have made developing bidding strategy more challenging. Operators should pay close attention to the detailed auction rules especially if they do not have a pure shareholder maximisation objective and are budget constrained to ensure they have a robust bidding strategy.

Know thy enemy: In some auction formats there is scope for strategic bidding (not bidding “honestly” and “sincerely” based on your valuation) or no choice but to bid strategically (as is the case in some sequential and first price sealed bid auctions) and in such auctions estimating accurately the value of spectrum to your competitors and the their bid limits is as important as knowing your own valuation.

Practice, practice, practice: A bidding strategy is only as effective as its execution Auctions involve high stakes and can be highly pressurised occasions and bid teams need robust protocols and procedures, including disaster recovery, to ensure they can execute the bidding strategy effectively. With some auctions requiring the entry of large numbers of bids (such as the proxy stage of a combinatorial clock auction) or the constant adjustment of valuations to reflect synergies (such as in the case of regional auctions) the bid team is well advised to have developed and tested auction support tools to automate these processes prior to the live auction.

Be prepared to walk away: Successfully participating in an auction may involve walking away with nothing if prices rise above the company’s valuation. It is better to walk away and to have avoided destroying shareholder value than to pay a price above the value of the spectrum.

Graham Friend is Managing Director of Coleago Consulting

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One comment

  1. Avatar Karen Wrege 20/06/2011 @ 5:46 pm

    I agree with most of your advise. I would add that it is critical for bidders and consultants to understand the auction design fully before lobbying a position. The economists that design these auctions have the advantage of understanding the designs as they are intended. Once the regulator starts tweaking the rules, the economists have to run their own experiments to fully understand the ramifications of the rule changes. For example, the impact of competition constraints in the UK and activity rules in combinatorial clock auctions are not always intuitive. It is absolutely critical for participants to run experiments with mock auction software that completely replicates the proposed rules before taking a position that could intuitively seem right but that actually is counter to what the bidder is really after in the auction.

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