Bidding in 4G auction now under way


Seven companies enter the bidding for spectrum that will enable them to launch 4G services in the UK from late spring

Bidding for 4G spectrum in the UK has begun today in a move that will double the amount of airwaves currently available for mobile broadband services on smartphones, tablets and laptops.

The companies bidding in the auction are EE, O2, Vodafone, Three, MLL Telecom, HKT (UK) Company (a subsidiary of PCCW) and Niche Spectrum Ventures (a subsidiary of BT Group).

Once fees are paid, licences will be granted, enabling operators to start rolling out 4G services from late spring/summer.

Bids are being placed online over secure connections, using software that has been developed specifically for the auction. The bidding will continue over several rounds and is expected to take a number of weeks until the final winners are known.

The companies involved are competing for 28 lots of spectrum in two separate bands – 800MHz and 2.6GHz. The lower of the two is part of the ‘digital dividend’ freed up when analogue terrestrial TV was switched off, which Ofcom said is ideal for widespread mobile coverage. It added the higher frequency is ideal for delivering the capacity needed for faster speeds.

The two bands add up to 250MHz of additional mobile spectrum, compared to the 333MHz currently in use. Both bands are being packaged into smaller lots of spectrum in the auction in a move Ofcom said creates the potential for 4G to be widely available across the UK, while offering the capacity to cope with significant demand in urban areas.

The format being used is called a ‘combinatorial clock’ auction, which has been used by Ofcom in previous auctions and by other regulators in recent spectrum auctions. Ofcom said this format is designed to achieve the most efficient outcome, by putting spectrum in the hands of the bidders who value it most highly, while also ensuring they pay a competitive price.

Each bidder is competing to win a combination of spectrum lots from across both the 800MHz and 2.6GHz bands, with the amount they are prepared to pay for each individual lot depending on how much of the other lots they could get at the same time.

The first stage of the auction is the opt-in stage, which took place last Friday (January 18). Bidders that were eligible to win reserved spectrum (i.e. bidders other than EE, O2 and Vodafone) could choose whether they wanted to bid for that spectrum. If they did, they needed to make a bid at reserve prices for combination of lots that would be enough for them to compete effectively as national wholesalers.

The next part is the ‘clock stage’, which began today, where the auction proceeds through a number of rounds. At the start of each one, Ofcom announces a price for each lot and each bidders then specifies what combination of lots they would prefer to win at those prices. In each round, Ofcom increases the prices for lots that have excess demand until demand matches supply.

In auctions for a single lot, this would be the end process but as bidders have been bidding for a combination of lots, it may be the case here that some of the spectrum lots would go unsold if Ofcom stopped the process.

Ofcom will therefore hold the ‘supplementary bids’ round, where bidders will be able to supplement the bids they have already made with their ‘best and final offers’ for any packages they are allowed to bid for. These bids have to be submitted together as a single batch of sealed bids. The regulator will then work out which combination of all the bids from all the bidders has the highest total value, with this being the winning combination of bids.

Ofcom will then work out how much each winning bidder should have to pay using a ‘second price rule’. Each winner will pay the smallest amount they would have needed to bid in order to win, as on auction website eBay.

It said that if this rule is not used, the bidder who values the spectrum the most might miss out by misjudging what their competitor was bidding, leading to an inefficient outcome where the spectrum is awarded to someone else who values it less.

The final part of the auction is the assignment stage, where winners can bid for the precise frequencies of spectrum they wish to be assigned, and Ofcom will then determine on the basis of the bids who is assigned which frequencies. This will determine, for example, whether a bidder wins spectrum at the top or bottom, or somewhere in the middle, of the 2.6GHz band.

Ofcom said no updates on bidding activity will be given until the auction is finished to reduce any potential risk of strategic bidding which could distort its outcome.

Ofcom chief executive Ed Richards (pictured) said: “Today’s 4G auction is a very significant milestone for the UK’s communications sector. It will release the essential raw material for the next wave of mobile digital services. This will change the way we consume digital media in both our personal and working lives and deliver significant benefits to millions of consumers and businesses across the country.”