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It is not a secret that the current macroeconomic conditions do not present a favorable outlook for radio spectrum auctions in Latin America. Hence, licensing postponement has become a familiar event in Latin America as governments are trying to avoid the problems of recent spectrum auction processes: lower than expected bids or simply absenteeism from the process.
Of course, spectrum licensing is not as simple as it may appear from far away as many interests — both internal and external — are at stake on this process. One of the reasons that governments look into spectrum licensing is to raise necessary cash for their generally deficit-driven budgets. Undoubtedly, spectrum licensing needs to continue in a region with asymmetrical wireless technologies adoption rates.
The negative repercussions of postponement
One point where no divergence exists among governments, operators and industry associations is that spectrum-licensing postponement is detrimental to market development. Although mentioned in numerous occasions, the negative repercussions are worth repeating:
- Postponement prolongs incumbent operators’ customer acquisition strategies, limiting the potential addressable market of new entrants. This in turn causes licenses to depreciate in value thus decreasing the government’s potential revenue as well as the number of parties interested in participating in the auction.
- Postponement limits the inflow of foreign direct investment, as license winners will have to invest not only in acquiring spectrum but also in infrastructure, operational and administrative costs, and advertisement. Besides the statistical negative impact on GDP, the immediate social impact is the noncreation of numerous direct and indirect jobs in a region characterized by high rates of unemployment.
- Postponement may create congestion on the spectrum auction schedule, as the national regulatory agencies will have to determine how the delay will affect the rest of their spectrum auction itinerary. Regulators will have to either prioritize which spectrum licenses it wants to auction first or risk the fact of running simultaneous auctions for different spectrum bands. Since many operators have expressed interest in acquiring licenses on different portions of the spectrum, the lack of a coherent schedule will undoubtedly limit the number of parties submitting bids during the auction process as financial constraints will force companies to “pick and choose” which licenses it wants to acquire.
Governments need to realize that the golden times of telecom investment are gone and prioritize what their main objectives are. If they are seriously concerned about fostering telecom services growth and consumers well-being, governments should explore alternatives licensing options that will permit an increase in the number of service providers in the country. This in turn will contribute to an increase on the overall telecom services penetration and will stimulate better rates, quality of service and customer service. The licensing alternatives are an auction process, a beauty contest and a hybrid process. It is important to note that attitudes toward the two types of license award models differ from country to country.
Alternative No. 1: the auction process
The typical auction scenario — as seen in Venezuela, the Netherlands or the United Kingdom — sees the licenses auctioned simultaneously, with the prospective licensees bidding for each one individually. All participants are usually allowed to bid for any or all of the offered licenses, although some countries may reserve some spectrum bandwidth for the incumbent (i.e., Uruguay) or new entrants (i.e., Western Europe 3G licenses). Bidders may drop out of the auction proceedings at any stage, and are eliminated from the remainder of the proceedings should they secure a successful bid. To support their commitment to the auction, it is usually required that the bidders place a non-refundable deposit in order to enter the bidding proceedings. This deposit may be raised as the auction progresses.
The disadvantage of an auction process is that high upfront investments on spectrum licenses may hurt the finances of the auction winners, preventing them from fulfilling their network deployment schedules.
Alternative No. 2: the beauty contest
Traditionally during a beauty contest — as observed in Chile, France or Sweden — each prospective licensee presents the respective governmental/regulatory authority with a plan of action. This presentation would normally include the bidders rollout plans, their pricing plans, as well as their service plans. The adjudicators are then free to choose which companies they feel have the optimum business model. Following the beauty contest, the successful companies are then (normally) required to pay a small predefined sum for the license — with some regulators requiring licensees to relinquish a portion of their total income on a annual basis. Furthermore, government utilizing this licensing model may require stricter deployment/investment commitments from new entrants that were spared from high spectrum licensing fees.
The main disadvantage of a beauty contest is that the award process is based on subjective criteria. This provides for the failed bidder, as seen in the Meteor award in Ireland, to contest the results via the courts. If the subsequent court ruling is in favor of the original failed bidder, legal proceedings can be dragged out for two or more years as the case gets referred to an Appeal Court. This also results on having the spectrum license ‘hostage’ to the courts.
Alternative No. 3: the hybrid model
The two models — the auction and the beauty contest — may be held exclusively, or they can be combined. In some situations, a beauty contest is held as a first round in order to identify the companies with the best proposals, as well as to simplify the auction process. The successful companies may then compete in the auction, or second round.
The future outlook: Auctions continue to have the upper hand
Although there’s legitimate concern that high auction license fees could ultimately negatively affect end-users, as operators are forced to charge high prices for services in order to recoup their expenses. Some optimists believe that the market value of the licenses at auction represents a dividend to the government of the future financial returns that the operators derive from their license. Furthermore, the monies paid by the successful bidders will galvanize them to adopt aggressive and innovative revenue stream models, so as to recoup the license fees and network investments in order to yield a profit, which will result in an increase of telecom services penetration in the country.
There’s no argument that each of the available spectrum licensing models have its advantages and disadvantages. Once again, the question that needs to be answered by Latin America’s regulatory entities is: What is the ultimate goal of granting a wireless concession? If the response is to diminish the fiscal deficit then an auction would be the prefer method to accrue the necessary capital. On the other hand, if the government’s main goal is to increase the penetration of telecom services the best method is a beauty contest. Of course, Latin American governments would greatly benefit if the latter alternative was chosen but as recent events across the region have showed it is very unlikely that this path — at least for mobiles licenses — will be taken.
Finally, regardless of the licensing process chosen by the regulatory authorities the fact is that current competitive conditions in most Latin American markets make the entrance of a new facilities-based operator highly improbable. Under this scenario, other measures such as lifting current spectrum caps become necessary to promote greater participation on spectrum licensing processes. Otherwise, the future only holds a large list of abandoned spectrum licensing processes throughout the region.
Jose Otero is president of Signals Consulting. Follow him on Twitter (@Jose_F_Otero) or email him at info@signalstelecom.com
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