Spectrum auction

Lore & Background

In the past decade, telecommunications has turned into a highly competitive industry where companies are competing to buy valuable spectrum. This competition has been triggered by technological advancements, privatization, and liberalization. Mobile communication in particular has made many transitions since 2000, moving from second generation (2G) to third generation (3G) to fourth generation (4G) and is now in transition to fifth generation (5G) technology. With more providers in the mobile industry, the competition during spectrum auctions has increased due to more demand from consumers. When the United States made the transition in June 2009 from analog to digital broadcast television signals, the valuable 700 MHz spectrum became available because it was no longer being used by analog TV signals.

In 2007, search giant Google announced that they would be entering the mobile business with their highly popular Android operating system and plans for a mobile broadband system. Google said that they planned to bid for the "C" block of the spectrum auction which correspond to channels 54, 55, and 59 of the lower 700 MHz spectrum and channels 60, 61, 65, and 66 of the upper spectrum 700 MHz which are normally used to construct nationwide broadband services. Around the time of Google's announcement, AT&T and Verizon also announced plans to enter the spectrum auction in order to purchase "C" block spectrum.

Canada held its first spectrum auction in 1999, for Broadband Wireless Access (BWA) spectrum in the 24 GHz and 38 GHz bands. In May 2008, ISED commenced an auction for 105 MHz of spectrum with 40 MHz reserved for new entrants. The auction concluded on July 23, 2008, after 331 rounds and raised $4.25 billion. In August 2011, Canada made the switch from analog to digital television, freeing up spectrum in the 700 MHz band for other uses. In February 2014, the country auctioned additional spectrum in the 700 MHz and 2500 MHz bands to the four major telecommunications players in the country and raised over $5.3 billion.

Reader's Guide

Spectrum auctions represent a significant shift from earlier allocation methods such as beauty contests or direct allocation of licenses. An auction is more transparent and gives rise to less political controversy when compared to other allocation mechanisms, since there is no room for subjectivity in assessing whether an undertaking accomplishes criteria for allocation. Auctions usually raise important sums of money provided there is competition among many bidders.

Despite the apparent success of spectrum auctions, important disadvantages limiting efficiency and revenues are demand reduction and collusive bidding. The information and flexibility in the process of auction can be used to reduce auction prices by tacit collusion. When bidder competition is weak and one bidder holds an apparent advantage to win the auction for specific licenses, other bidders will often choose not to bid for higher prices, hence reducing the final revenue generated by the auction. In this case, the auction is best thought of as a negotiation among the bidders, who agree on who should win the auction for each discrete bit of spectrum. Due to the complicated structure of spectrum auctions, it is not easy to identify collusive from non-collusive bidding, although simple analyses of bid behavior can provide an important basis for recommended changes to the rules and structure of the auctions.

Countries have adopted spectrum auctions with varying designs. In Canada, as telecommunications is an area of federal jurisdiction, Innovation, Science and Economic Development Canada (ISED) holds nationwide spectrum auctions on behalf of the Canadian federal government. Auctions are designed to encourage competition among telecom companies and to not concentrate too much regional or economic power in the hands of single or a handful of firms. As such, auctions are generally set up to favour smaller telecom providers, such as setting aside certain wavelengths that the "Big Three" firms—Bell, Rogers and TELUS—are precluded from bidding on, or reserving certain valuable wavelengths for small firms.

Did You Know?

• New Zealand was the first country to sell rights to use spectrum via auction, in 1996.
• The German UMTS auction in 2000 raised DEM 98.8 billion (EUR 50.8 billion).
• Canada's 2008 spectrum auction lasted 331 rounds and raised $4.25 billion.