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International Journal of Scientific Engineering and Technology ISSN:2277-1581

Volume No.5 Issue No.1, pp: 81-84 01 Jan.2016

Mobile Spectrum Value and Reserve Price by using Benchmarking


Approaches
Settapong Malisuwan, Wassana Kaewphanuekrungsi, Dithdanai Milindavanij
National Broadcasting and Telecommunications Commission, Thailand

Abstract: Mobile communications spectrum is a scare and An auction price would be expected to lie in the range
essential resource as it is required to satisfy customer demand between the full enterprise value and the cost reduction value for
for telecommunications. It has one of the country’s highest the marginal bidder. International auction values might fall
economic values. Therefore it is critical that between these values but could be outside this range, depending
telecommunications regulatory commissions find choose a on whether the market situation in that country is comparable to
suitable approach to estimate the value of available spectra. that elsewhere. The situation is illustrated in Figure 1 [2].
Spectrum value estimation models range from simple to A judgment is then required about an appropriate range for
complex and some of these estimation approaches may require spectrum values and reserve prices taking account of the
an extended period of time. This paper aims to analyze and proposed form of the auction.
review mobile spectrum value and reserve price by
benchmarking approaches. A case study on 1800 MHz II. Reserve Price
benchmarks of absolute value approach in Asia Pacific in Reserve prices provide starting prices for different lots in an
discussed in this paper. Moreover the relative value ratios of auction and so they are not an estimate of the value that might be
frequency bands are explained. achieved by an auction. There is an inherent degree of uncertainty
Keywords: Mobile, Spectrum value, Reserve price, over the expected value of the spectrum because this is
Benchmarking. determined by bidders’ expectations of markets and regulation
I. Introduction over the next 15-20 years. Reserve prices should therefore be set
In some countries, spectrum is not a private tradable good and below the expected value; otherwise potential bidders may be
so there is no spectrum market that can be referred to provide a deterred from entering the auction (and so reduce competition in
fair market price that could be used by government for pricing the auction) and there is a risk spectrum may be left unsold. If
spectrum licences. It is necessary therefore to derive estimates of spectrum is left unsold significant societal and consumer benefits
spectrum value from either modeling and/or previous auction will be lost [6].
results. There is considerable uncertainty in deriving such Normally, efficiency is the primary objective for a spectrum
estimates. This uncertainty arises because licences have a long auction. There are also secondary objectives of competition,
duration (15 years or more in general), and so forecasts of the transparency and market development, and a tertiary objective of
future are required to derive estimates. Furthermore bidders’ raising revenue for government. The implications of each of these
valuations are based on private information that only the bidders objectives for the level of reserve prices is summarized in Table
themselves know [1]. 1.
Regulators in some countries have faced similar issues when Table 1: Impact of auction objectives on level of reserve prices
setting reserve prices. They have tended to set reserve prices
based on conservative estimates of spectrum value and used a Reserve price
Objective Comments/qualifications
mix of approaches including benchmarking and/or bottom-up up or down
modeling when deriving values, in order to provide a sense check Efficiency Down Set at a low but non-trivial level
on any estimates. to deter collusion and trivial bids,
In general, regulators start from the premise that rational but not so high as to deter bidders
or leave spectrum unsold.
bidders should not pay more than the net present value of future
Competition Down Low reserve prices can
cashflows from use of the spectrum (full enterprise value). Also
encourage entry in the auction
rational bidders should be willing to pay more than the Transparency No impact Reserve price will be published
infrastructure costs saved from having an incremental lot of and this meets the transparency
spectrum (cost reduction value). objective.
Market Down Lower prices encourage entry
Full
development and help ensure all spectrum is
enterprise sold
Value Government Up Price should not be set too high
revenue otherwise spectrum may be
unsold and revenues may be
International Auction price reduced.
auction
values As can be seen, the overall message is to set reserve prices
Cost above trivially low levels but not so high as to deter serious
Reserve reduction bidders and potentially leave spectrum unsold. To avoid this
price value outcome it is necessary to understand the value of the spectrum to
Figure 1: Ranges on spectrum value potential bidders.

IJSET@2016 Page 1
International Journal of Scientific Engineering and Technology ISSN:2277-1581
Volume No.5 Issue No.1, pp: 81-84 01 Jan.2016

Efficiency means that all the spectrum is sold and is assigned the extent of competition for licences as well as the level of the
to those operators that value it the most. The release of spectrum reserve price itself.
has the potential to release large benefits to consumers and The ratio of reserve price to auction price possibly varies
society in general from the offer of new and better quality greatly across different auctions in the historical database - from
services, sometimes at lower prices than would otherwise apply. less than 0.1 to 1. It is possible that more than half the data points
These benefits are typically very large as compared with in the benchmark dataset have ratios of above 0.9 [1]. In some
revenues raised from spectrum auctions [3]. countries, governments seeking to raise revenues have set high
The reserve price is the minimum amount at which the reserve prices which resulted in spectrum being sold at or close to
government will sell the spectrum. Reserve prices play multiple the reserve price or even spectrum left unsold. Examples include
roles in auctions. They provide starting prices for different lots in Australia (700 MHz), India (850MHz, 1800 MHz) and Portugal
an auction and as such they are not an estimate of the value that (1800 MHz) [2]. A Lack of demand or competition in the auction
might be achieved by an auction. If set at a non-trivial level is other factors which can lead to high reserve-auction price
reserve prices may deter collusion between bidders and thereby ratios.
promote competition in the auction. Reserve prices should be set On the other hand, regulators seeking to encourage market
below the expected value of the spectrum to potential bidders, entry and more participation in the auction typically opt for lower
otherwise they may deter bidders from entering the auction (and reserve prices. A low reserve price does not necessarily mean
so reduce competition in the auction) and/or reduce demand from auction prices will be low. In the Swedish 1800 MHz auction in
those that do participate in the auction. The higher the reserve October 2011, the auction prices were about 19 times the reserve
price, the greater the risk of spectrum being left unsold. Unsold price.
spectrum is an undesirable auction outcome because of the loss In General, operators will have a different private value of
of economic benefits from spectrum being left idle6. Hence spectrum and the range of values could be large due to the
setting reserve prices involves a trade-off amongst different risks. uncertainty around future market outcomes over the next 15-20
Reserve prices must also be set taking account of the overall years when valuing the spectrum firms have to make 15-year+
auction objectives, namely efficiency, competition, transparency, projections for business plans, changes in technology and
market development and government revenues. regulatory environments, all of which are very uncertain. To
As can be seen, the overall message is to set reserve prices promote competition in the auction, the reserve price will need to
above trivially low levels but not so high as to deter serious be below a marginal operator’s conservative estimate of the
bidders and potentially leave spectrum unsold. While the product spectrum value - otherwise they face a risk of making a loss on
of the reserve price and the quantity of spectrum to be auctioned their investment and will be deterred from participating in the
may be thought of as giving minimum revenue that government auction.
will raise this will only be the case if all the spectrum offered at In many cases, regulators determine to multiply estimates of
auction is sold. This does not always happen; for example in spectrum value by 70%-80% to derive the reserve prices. This is
recent auctions in Australia, India and Portugal reserve prices to attract the marginal operator (in order to promote competition)
were “too high” and spectrum was left unsold. To avoid this as well as to ensure that all lots are sold. The inclusion of the
outcome it is necessary to understand the value of the spectrum marginal operator has a crucial role in the achievement of the
to potential bidders. It is for this reason the telecom regulator policy objective of market efficiency. Having the marginal
needs to examine international auction benchmarks (in this part). operator in the auction increases the chance that the outcome is
In some countries spectrum is not a private tradable good and competitive.
so there is no spectrum market that can be referred to provide a
fair market price that could be used by government for pricing III. Benchmarking Approaches
spectrum licences. It is necessary therefore to derive estimates of There are several approaches for using benchmarking data.
spectrum value from either modeling or previous auction results These include:
(from other countries). There is considerable uncertainty in  Absolute value approach – most common method based
deriving such estimates. This uncertainty arises because (a) on simple average for a selected set of data points
licences have a long duration (15 years or more) which means  Relative value approach – using ratios of benchmark
forecasts of the future are required to derive estimates, and (b) prices for different mobile bands to derive values
bidders’ valuations are based on private information that only the  Distance method – using ratios of the difference/distance
bidders themselves know. between data points for difference frequency bands for a
The future development of mobile communications is highly particular country.
uncertain particularly given the rapid pace of technology change  Econometrics – using econometric models to explain and
and the influence of policy decisions regarding future spectrum estimate spectrum values
release and sector regulation. Bidders may have different
expectations concerning these policy factors as well as different None of the above approaches is perfect and there are issues
business plans and expectations in respect of technology with each one. For example, the absolute and relative value
development and market conditions, all of which will affect their approaches are easy to understand and apply, but do not take
valuations. The expectations of the financial institutions that fund account of differences between countries and outcomes can
the bids are also relevant in determining how much potential depend heavily on the data points chosen. Econometrics seeks to
bidders will pay for spectrum. The expectations of bidders and control for differences between countries but is not well
funders are not known to third parties, such as ourselves or the understood and reliable estimates can be difficult to obtain
regulator. because of large unexplained variability in the data.
The level of reserve price depends on the trade-offs between Spectrum values in higher income countries would be
different auction objectives as discussed above. The ratio of expected to be higher than those in lower income countries, all
reserve prices to auction outcomes also depends importantly on
IJSET@2016 Page 82
International Journal of Scientific Engineering and Technology ISSN:2277-1581
Volume No.5 Issue No.1, pp: 81-84 01 Jan.2016

things being equal, because consumers in these countries would The average value for all 1800/1900 MHz data points is THB
have higher ability and willingness to pay for mobile services. 10.51/MHz/pop (spot) and THB 7.25/MHz/pop (PPP). Like the
Also the higher the level of urbanization the lower the cost of 850/900MHz band, there is considerable variation in the data as
network provision and the greater the spectrum value, all else indicated by the standard deviation and the 95% confidence
being equal. intervals. Overall the 1800/1900 MHz bands are around 40-50%
While we recognize that differences in income levels could lowers than the 850/900 MHz. Again, the Asia Pacific values are
have an impact on operator profitability and so spectrum value, higher as they mainly consist of awards for high income
the actual relationship between spectrum value and income is not countries. For lower income countries the average values are
a simple linear one. For example, this can be seen in Figure 2 much lower - around THB 6/MHz/pop.
below where we plot value/MHz/pop against GDP/capita [2]. Figure 3 shows the average values of the 1800/1900 MHz
There are some very low values for high income countries and awards for the different sub-sets of data points. The relative
vice versa, reflecting amongst other things different stages of values among the three groups are similar to the 850/900 MHz
market development, and differences in regulation and benchmarks with Asia Pacific awards having the highest average
competition in markets. Furthermore some econometric studies value compared to lower income groupings.
have found that effect of GDP per capita on spectrum value,
while positive, is very small [5]. Making a simple one to one
adjustment will result in very low estimates of spectrum value.

Figure 3: Average values of the 1800/1900 MHz awards [2]

2. Relative Value Approach


The relative value approach to benchmarking is based on the
Figure 2: value/MHz/pop against GDP/capita [2] changing propagation characteristics of spectrum as frequencies
Therefore, in many cases, instead of using GDP/capita increase. In general, the lower the frequencies, the better the
adjustments, we can stick with the convention of normalizing by propagation characteristics are – higher building penetration and
population but examine the effect of income by looking at larger outdoor coverage.
subsets of the data points for lower income countries. Sub-1 GHz frequency bands (Lower 1 GHz frequency bands)
are especially valuable for mobile operators to provide coverage
1. Absolute Value Approach: Thailand’s Case Study on to remote, rural areas and inside buildings. They experience
1800MHz Benchmarks lower attenuation and travel a longer distance than frequencies
above 1 GHz. This means that all else constant, fewer base
Table 2 describes the data for the 1800/1900 MHz awards for stations are required to cover an area using sub-1 GHz spectrum
all benchmark countries and for Asia Pacific countries. The compared to 1-3 GHz spectrum as illustrated in Figure 4. Sub-1
values reported are in real THB in 2013 prices. GHz spectrum also provides better in-building coverage which
enhances quality of service in high density urban areas.
Table 2: Value/MHz/pop for 1800/1900 MHz benchmarks (THB
2013) [2]

GDPpc (PPP)
All countries Asia Pacific
< US$30,000
Spot FX PPP Spot FX PPP Spot FX PPP
Average 10.51 7.25 14.00 10.39 5.84 5.20
Min 0.74 0.27 0.74 0.44 0.74 0.44
Max 39.08 37.49 39.08 37.49 26.31 26.45
Standard
12.07 9.59 15.36 12.64 7.25 7.49
deviation
95% Figure 4 Coverage advantage of sub-1 GHz spectrum [2]
confidenc 5.83 – 3.54 – 3.68 – 1.09 – 0.97 – 0.17 –
e 15.19 10.97 24.31 18.88 10.70 10.24
intervals* The comparative advantage of sub-1 GHz spectrum is often
Data reflected in the auction prices paid by mobile operators as shown
28 11 11 in Figure 5 – although other factors (e.g. level of competition in
points
Note: * t-distribution the auction) may also drive up prices. Based on our benchmark
dataset, the value of 850/900 MHz spectrum is about twice that of
the 1800/1900 MHz and AWS/2100 MHz bands. It can also be
IJSET@2016 Page 83
International Journal of Scientific Engineering and Technology ISSN:2277-1581
Volume No.5 Issue No.1, pp: 81-84 01 Jan.2016

seen that the 1800MHz and 2100MHz bands have roughly the benchmarking approached. Case studies on 1800 MHz
same average value. benchmarks and relative value ratios of frequency bands are
discussed in this paper.

REFERENCES

i. NBTC/ITU Report, 900MHz and 1800 MHz Spectrum


Valuation Report, April 28, 2014.
ii. NBTC, Spectrum Valuation Report 2015 (Internal report),
September 2015.
iii. Hazlett and Munoz (2010), “What really matters in Spectrum
AllocationDesign,”
http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?artic
le=1159&context=njtip
Figure 5: The relative value ratios of frequency bands [2] iv. Hazlett and Munoz (2009) provide evidence showing these
IV. Conclusion losses can be very large compared with auction revenues. “A welfare
analysis of spectrum allocation policies”, T Hazlett and R Munoz, RAND
Benchmark approach is an estimation which involves
Journal of Economics, Vol 40, No 3, Autumn 2009.
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considered to be the most appropriate spectrum value assessment Dotecon for ComReg. Award of 800 MHz, 900 MHz and 1800 MHz -
method as it allows us to compare with international standard. Fifth benchmarking report, March 2012
Reserve price in a spectrum auction is the minimum acceptable vi. Settapong Malisuwan, Noppadol Tiamnara, and Nattakit
payment the government should tax such that it reflects the Suriyakrai, "A Study of Spectrum Valuation Methods in
spectrum value. This research provides a basic principle of Telecommunication Services," International Journal of Trade,
calculation of mobile spectrum value and reserve price by Economics and Finance vol.6, no.4, pp. 241-246, 2015.

IJSET@2016 Page 84

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