Spectrum Auctions Hurt Mobile Consumers

The vast amount of money raised by the two latest mobile communications spectrum auctions has been welcomed by the governments of India and Germany—and why wouldn't cash-strapped governments invite a process that has made them richer by $14.5 billion and $5.5 billion, respectively? The Indian auction delivered more money than predicted, the German one less.

Those sums are of course dwarfed by the cash raised by the spectrum auctions 10 years ago in Germany, where the government collected about $67 billion, and in the U.K., where the government found itself richer by $35 billion, thanks to operators desperate for the right to launch third-generation mobile networks.

The bankrupting of PCS operators following the U.S. auctions in the late 1990s rapidly became a distant memory as governments around the globe realized that radio spectrum is, arguably, among the most valuable commodities on earth. During the past decade, as mobile communications have exploded into a worldwide market, governments have been quick to seize further opportunities for windfall cash.

Yet I would argue that the crucial strategic importance of radio spectrum means it should be not be treated as a salable commodity. Over the 1980s and 1990s, the vast majority of spectrum allocations were "beauty contests" decided on the basis of expertise and capability. Most of the time this concept worked quite well, and the winning operators delivered services that met and exceeded the tender specifications. It is safe to say that over time, beauty contests have delivered fewer problems and higher value to society than have airwave auctions.

Governments as Profiteers

Today, spectrum is vital to every area of society. The connected world runs on spectrum: It's not just clever marketing that led to the naming of Britain's O2 (TEF). The "oxygen" brand identity is a statement of fact. But somewhere along the way, as the cash registers began ringing, the regulators have abrogated their responsibilities and morphed into profiteering auctioneers.

To be sure, with the increasing complexity of the mobile communications market, the spectrum allocation process has become more difficult. But that's no reason to take the easy route, where money alone dictates who gets to exploit a limited resource and operate a service of growing importance to society. Without recourse to business plans or viability, it is now just a process in which the highest bidder wins and the regulator acts merely as a referee.

Incumbent operators that have already invested in infrastructure and systems have no choice but to up their ante and pay the price for additional bandwidth. Thus the cost of spectrum continues to inflate in a vicious circle—a circle that only the regulator can break. Cost also strangles the market, with the barrier to entry increasing for each mobile generation. With 3G, there were a few new entrants (many of which have since fallen by the wayside), while with LTE, the "fourth-generation" Long-Term Evolution networks, there will be none.

Leading to Consolidation?

The economic value of an operating licence has increased beyond all predictions over the past 20 to 30 years. Operators are bidding for the right to rent spectrum because the market has moved toward selling off one of the most important resources of the 21st century. Spectrum auctions without a doubt define a clear winner—but do auctions fulfill the other requirement of delivering affordable and high-quality mobile communications to their countries?

Auctions mean bidders can end up overpaying for licences, which has a negative impact on their ability to invest in networks, serve customers, and return profits to shareholders. We appear to have learned nothing from the early 3G auctions, even after it became clear that investors wouldn't get their money back. The early rollout of 3G was patchy; coordination between network, handset, and services availability was poor; and consumers lost faith as the reality of the "next generation" failed to live up to its promise, despite the huge price paid by operators for the opportunity to deliver.

This time round, there is already talk of operator consolidation in both the German and Indian markets as the outlay required to secure spectrum leaves too little in the bank to build out a respectable network. The cost of the Indian spectrum means that no single company is offering nationwide coverage, so roaming agreements may have to be brokered.

A Punishing Tax

In May, Vodafone's (VOD) Vittorio Colao was quoted prior to the end of the Indian 3G auction as saying: "Spectrum should not be seen as something that the government must use to squeeze money out of private capital." Yet the auction process is pulling money out of a sector that is fighting increased competition from Internet services, tumbling subscriber revenues, and a desperate need to invest in infrastructure to keep pace with global demand. Vodafone has written down the value of its Indian business by 25 percent due to the highly competitive nature of the country's mobile market.

The multiple billions of dollars raised by the auction process represent a punishing tax on the industry. Every dollar spent by an operator on winning at auction is depriving communities of investment. Some 200 million people in India are living below the poverty line—surely it would be better for the operators to build and extend life-changing mobile networks, rather than add money to government coffers.

The next wave of spectrum allocation is for LTE services. With the advent of true mobile broadband, mobile communications have become critical to the economic health of any country. Governments need to focus on spectrum allocation processes that encourage the provision of high-quality mobile services, i.e. infrastructure investments, and award spectrum on the basis of operator capability—not by setting up licensing conditions that are nothing but a tax on mobile communications.