Spectrum Management Policies : Striking the balance between sustainability and competition

1. Spectrum Management Policies:Striking the balance between sustainability and competition By Ing. Joanna Formosa Borg Senior Technical Specialist - MCA

2. Contents • Basic concepts • Trends in spectrum management • Practical Example of Spectrum Assignment

3. The Value of Spectrum • Spectrum is a valuable national resource: significant economic and social value to a nation • Economic value –> new services, increased user productivity, issue of affordability for operator and customer • Social value -> broadcasting / education, emergency services, etc. Spectrum should be managed in the most efficient and effective way AND Spectrum management techniques should be flexible

4. Spectrum Management - Key Objectives • Facilitate access to spectrum with as few constraints as possible • Ensure that spectrum is used efficiently • Avoid harmful interference between spectrum users • Promote competition • Facilitate innovation • Protect the consumer • Improve choice and quality of services

5. Spectrum Management - Principles Key to strike the balance between sustainability and competition is in: Working towards these objectives whilst adhere to these principles:

6. Contents • Basic concepts • Trends in spectrum management • Practical Example of Spectrum Assignment

7. Entertainment Information Broadcasting Convergence Communication Fixed Mobile Convergence • Until a few years ago • One Network = One Service • The key trend today is represented by convergence • Network Convergence • Service Convergence • Need to establish a flexible parameters for spectrum usage • Wireless Access Policy for Electronic Communications Services

8. Spectrum Harmonisation • In certain instances one has to consider spectrum harmonisation • This offers both constraints and benefits • International harmonisation is required for cross-border movement of certain systems (ships, aircrafts, mobile communications) • Harmonisation lowers potential for interference • Global harmonisation allows: • equipment manufacturers achieve larger economies of scale • operators achieve a rapid rollout of new services • Harmonisation can lead to inefficiencies • Spectrum usage • Regulatory delay • To achieve harmonisation countries might also be required to migrate existing users of spectrum to other bands

9. Contents • Basic concepts • Trends in spectrum management • Practical Example of Spectrum Assignment

10. Spectrum Assignments • An assignment is the ultimate process to put into practice spectrum management principles • Whilst there is considerable international co-ordination in the allocation of spectrum • Each state has the prerogative to assign spectrum • The main tool to achieve our objectives lies in the design of the spectrum assignment process

11. What Triggers a Spectrum Assignment? Government Decision Request from interested Party Define high-level policy

12. Policy Definition • Represents a high-level framework for the assignment • Outlines government position on a number of issues: • Technology to be used • Services to be offered • Spectrum ‘packaging’ • Any particular licence obligations • Pricing • Assignment mechanism • These are critical success factors for the whole process

13. Critical Success Factors (1) • Technology/Service neutrality or harmonisation? • How will the spectrum be packaged? • Predefine the number of lots assigned to each licensee? • Allow applicants to apply for as much spectrum as they need? • FDD or TDD? • Decisions will impact effectiveness of technology neutrality • Should we impose specific licence obligations? • Nationwide rollout obligation • Rollout of a specific service • Assignment Methodology: • Administrative assignment • First come / first served • Comparative process ex. Beauty contest • Competitive process ex. Auction • Hybrid solutions

14. Critical Success Factors (2) • Pricing is perhaps the most difficult and crucial decision one has to take • Several factors to be considered: • Establish a fair price for a scarce national resource • Encourage efficient use • If price is too high: • Disincentive for new entrants • Successful applicants could experience financial difficulties when it comes to network deployment • … sometimes these could actually be conflicting • Various forms of pricing lend themselves to different needs • Assignment methodology could influence pricing decision

15. Outline of the Process Government Decision Request from interested Party Define high-level policy Consultation Finalised High-level policy Assignment process starts

16. The Assignment Process • The policy clearly stipulates the framework for assignment • The technology and service, if any • The price • or at least the reserve price in case of an auction • The spectrum packaging • The assignment method • But the design of the assignment process still needs to be defined • This usually consists of two stages • The call for application – which tests market demand • The second stage – if demand exceed supply • Auction or Beauty Contest

17. Thank you for your attention ! Any Questions?

18. Past Assignments: Lessons Learnt • Consultation process: • Introduced second round of consultation: • Enabled Authority to discuss possible changes to original proposals to take on board feedback received in the first round • This helped refine process and get stakeholders on board • Assignment process: • Open call • Ensured any interested party could apply –> strengthening market competition • Adopted a hybrid of beauty contest and auction • Initial qualification phase (similar to beauty contest) ensured that successful applicants would be capable of meeting licence obligations. • No ranking -> the ultimate selection left to the market through auction

19. Past Assignments: Lessons Learnt (2) • Assignment Process • Introduction of Brokered Meetings (prior to auction stage) • Led by an independent party • Meetings held individually with applicants • Final proposal given to all applicants • All had to agree for proposal to become finalised • Gave possibility to all qualified applicants to find a mutually acceptable solution for the spectrum assignment • Guarantee of spectrum assignment • Spectrum acquired at base price • When spectrum assigned is already in use by existing operators: • Brokered meetings useful to balance the need for continuity of service and market needs/competition

20. WAPECS • WAPECS is a framework: • for the provision of electronic communications services within a set of frequency bands to be identified and agreed between European Union Member States • in which a range of electronic communications services may be offered on a technology and service neutral basis • provided that certain technical requirements to avoid interference are met, • to ensure the effective and efficient use of the spectrum • and the authorisation conditions do not distort competition 470-862 MHz (digital dividend?) 880-915 MHz / 925-960 MHz (900 MHz GSM) 1710-1785 MHz / 1805-1880 MHz (1800 MHz GSM) 1900-1980 MHz / 2010-2025 MHz / 2110-2170 MHz (3G) 2500-2690 MHz (3G expansion) 3.4-3.8 GHz (BWA)

21. CSF - Technology • Should government impose the technology to be used? • Promote economies of scale ex. UMTS band • Less potential for interference • Refrain the market from evolving as the technology advances ex. GSM band • Bar a more efficient technology from being deployed • Need to strike the right balance between harmonisation and flexibility • Technology neutrality must be introduced carefully and after adequate studies are carried out • Greater potential for interference

22. CSF - Services • Should government define the services to be deployed? • Limits innovation – negative effect on consumers • Limits operators flexibility to compete esp. in view of triple / quad play offers • Deemed to favour incumbent • Ensure that a given service is offered • Need to develop a compromise ex. • Offer broadband connectivity • … and any other service

23. CSF - Licence Obligations • Licence obligations can help us achieving specific objectives • Effectiveness of the process • Ex. Include bid elements undertaken by successful applicants during the beauty contest (more of which later) • Realisation of Government’s objectives • Ex. Impose nationwide coverage in an effort to bridge digital divide • Effective use of spectrum • Ex. Impose a ‘use it or lose it’ clause to avoid spectrum hoarding

24. CSF - Licence Obligations • These obligations have to be used very carefully • Could create constraints in terms of flexibility for successful operators ex. Malta’s BWA assignment • Licence term • This has an impact on the attractiveness of the licence • Must be sufficiently long to ensure an adequate return on investment Clearly stipulate penalties for non-compliance

25. CSF - Spectrum Packaging • Spectrum subdivision directly affects future deployments • A spectrum package is defined in terms of: • Amount of spectrum • Mode of operation (FDD / TDD) • The mode of operation mainly relates to how the technology functions • FDD – frequency channels are paired • Ex. GSM: The base station transmits of one frequency and the mobile transmits on another paired frequency • TDD – No pairing exists • Ex WiMax: Transmissions are distinguished in terms of time slots

26. CSF - Spectrum Packaging In defining the mode of operation a technology could be preferred over another

27. CSF - Spectrum Packaging

28. CSF - Pricing • Fixed Fee: • Initial one-off fee or Annual fee • Annual fee could be either fixed or varies according to an established formula • Gives visibility to market players • If set at the right value – acts as an incentive for efficient use • Fixed & Variable Fee: • Ex. Fixed fee (one-time or annual) + % revenue • Good incentive for new players • Low fees at the start of the operation • Over time fee is no longer conducive to efficient use • As revenues increase – the variable part could become greater than the fixed fee • Incentive for operator to buy more spectrum than it actually needs?

29. CSF - Pricing • Fixed & Variable Fee: • Ex. Fixed fee of €7000 per channel and a variable fee of 2% revenue • Assume revenue of €5,000,000 • Variable fee: €100,000 • 5 channels: €135,000 • 6 channels: €142,000 • Minimal increase in licence fees !!! • Variable Fee: • This is a possibility but not so popular

30. CSF - Assignment Methodology • A number of methods exist • Administrative assignment • First come / first served • Comparative process ex. Beauty contest • Competitive process ex. Auction • Hybrid solutions All serve diverse needs

31. CSF - Administrative Assignment • Used in very specific cases to support national development • Public interest ex. defence • International agreements ex maritime and aviation • Still one has to ensure efficient use of spectrum • Assess the requests • Try to optimise where possible • Review periodically say every 5 years

32. CSF - The Market Demand • In most cases assignment should reflect market demand • Usually done through a public call for applications • This also fulfils transparency obligation Call for Applications Does Demand exceed Supply?

33. CSF - First come/first served • Used when there is sufficient spectrum to fulfil market needs • Demand equals Supply ex. 3 applicants for 3 bands • Various options to fulfil demand ex fixed links • One still has to ensure efficient use • Accurate assessment of request • An adequate fee structure • Periodic review

34. CSF - Competitive Process Auction • Based largely on monetary terms • The highest bidder gets the goods • Potential problems that could arise • Successful player pays a very high price – winner’s curse • Collusion between participants • Lack of visibility of what the others are bidding • Hoarding • Design is very critical • Various variations possible • … this need only be considered after the policy is defined ! • Some regulators publish consultations concerning the auction design – this is not a legal requirement

35. CSF - Comparative ProcessBeauty Contest • Gives the opportunity to fulfil specific objectives • Cultural diversity • Nationwide coverage esp. in remote areas • Delivery of a specific service • Price is set at the start of the process • Winners are not solely determined on price but need to ‘bid up’ on other aspects • Ex. rollout and coverage • Number of employees • Innovative services

36. Beauty Contests vs Auctions Beauty Contest Auction Transparency Low cost of operation Very efficient Can lead to excessive pricing Auction design critical • Gives importance to factors other then monetary terms • Price is defined a priori • Difficult for NRA to determine the correct price • Lengthy process • Decision is very subjective • Could lead to legal disputes Hybrid option also possible

37. The Call for Applications • Usually very simple – mostly based on policy • Defines basic criteria / requirements • Provides administrative details such application procedure • Eligibility requirements: • Applicants must not be related in any way • Submission of all required documentation / fees • Bid bond / Bank guarantees • Sum of money that can be called by the Authority any time • Linked to certain clauses to ensure that applicant: • Obeys call for application rules • Honours application if supply equals demand • Participates in second stage, if applicable • Honours highest bid (beauty contests / auctions), if applicable • Honours the licence obligations

38. The second stage • If demand exceeds supply then a second stage is required • Usually either an auction or beauty contest • Some important criteria to keep in mind: • Spectrum caps • Useful if total flexibility in the spectrum packaging is adopted • Cap should be such as to allow licensees the possibility to deploy innovative services • During call for applications no caps need to be applied • Could still opt to adopt spectrum caps from application stage • If demand exceeds supply • Spectrum caps useful to avoids hoarding by an operator • Ensure equitable access • The design criteria for each method are included in the following slides

39. Beauty Contest Design • Various criteria can be used to select successful applicants • Managerial Competence and Experience • Applicants organisational structure • Including information on mother companies • Proposed team structure • CV of key company officers • Or proposed qualifications for key management positions • Past projects undertaken by organisation • Financial Standing • Historic financial performance ex. last 5 years

40. Beauty Contest Design • Technical • Proposed network design • Rollout plan • Key design features such as redundancy • Commercial considerations • Project’s business plan • Project financing • Endorsement of bank loans • Financial Projections ex for first 5 years of operation • Balance sheets, Profit & Loss, Cash flow statements • Key ratios ex. NPV or IRR

41. Beauty Contest Design • Others • New entrant • Services to be offered • Criteria need to be: • Objective • Can be met by both new entrants and incumbents • Quantifiable

42. Beauty Contest Marking

43. Beauty Contest Marking

44. Beauty Contest Design The MOST IMPORTANT concepts are that: • Avoids: • Having disconnected areas in submission • Skewing the overall results through strength in a given area Submission must be analysed HOLISTICALLY & Applicants must have a PASS in all areas

45. Auction Design • A number of designs exist – most popular being: • Sealed bid • Simultaneous ascending auction (SMA) Sealed Bid: • Considered to reflect the true market value of the spectrum for each player • Methodology is very simple • Creates considerable uncertainty • Some variations include having highest bidder paying the second price • Considered to result in a fairer price

46. Auction Design - SMA • Theoretically should reflect the market value of the spectrum for each player • Price could be driven up by competition • Still the company in question has to answer to its shareholders • Eliminates uncertainty • Everyone knows what the highest price is at any point • Full visibility of situation in other lots • Particularly if applicants are bidding for more than 1 lot • Usually done using software system over the Internet • Design can be complex • Very easy to include other criteria such as spectrum caps • Extremely fair and transparent • Extra slides showing sample website interface

47. Auction Design - Hybrid • Another methodology was developed that is a hybrid of the sealed bid and SMA • Combinatorial Clock Auction

48. Auction Design The MOST IMPORTANT concept is that: This avoids having applicants raising the price and then bowing out Constraints should be in place for HIGHEST bid

49. Auction – Website Interface

50. Auction – Website Interface