Spectrum Auction Surprises

Layers of gaming that are rarely acknowledged…

With cases from Bangkok to New Delhi and Rome to Rio de Janeiro, we have seen a few spectrum auctions.  CCAs, SMRAs, sealed bids, multi-band, multi-tier, multi-lot, FDD, TDD, packaged and reverse (three types so far), online vs. quarantined, even outcry auctions as in art houses and trading pits. 

The auction theories have evolved, the rules have gotten more intricate, all aiming to make the process fairer. So why do surprises continue to occur?  Just to keep auction theorists busy?  Or for us keep raising questions.  Is Vickery second price fairer than highest price? Do high prices lead to more capex spending or less?  Do high reserves lead to high or low prices?  Can auction security be counted on or will it be broken in ever newer ways? 

Are bidders the only ones gaming the auction? 

Our first multi-round auction, held in Italy, had one huge surprise. Up to that time no incumbent operator had ever dropped out.  And this should not have happened in Italy.  Still it did.  It had little to do with the new intricate rule, just with the financials... One of the incumbents, Blu, had over 100 passive investors and an ailing lead company.  When Blu withdrew early, as our client had been forewarned, the other bidders kept bidding, not realizing what had happened, resulting in as much as $26 million in extra bids.

At other times bidders who bid higher are right to do so.  In a case in Latin America the winner's bid was seven times the loser's bid.  Irrational bidding, it was called.  In fact, this scared other bidders from a larger auction a few months later, allowing the "irrational bidder" to save itself almost a billion dollars, far more than it "overpaid" in the earlier auction.  In a highly structured auction in Hong Kong, with more rules than we have ever seen (to avoid any unexpected mishaps), a mishap still happened, as only four bidders showed up for the four lots on offer.  With six incumbent operators plus newcomers waiting in the wings this was not going to happen. It did. 

This brings up a policy issue.  Do high auction prices lead to faster or slower network deployment?  Looking at European markets when auctions were first used, we found network deployment was faster in the auction markets than the "beauty contest" ones.  We concluded operators wanted to recoup their large spectrum payments sooner rather than later.  More recently, we found capex investment dropping the year after an auction.  So now operators are choosing short-term between investing in spectrum or in their network.  Different times, different impacts.

Auctions continue to evolve as do bidders' tricks.   Some have moved outside the auction itself. Announcements by bidders before or during the auction of financial results or network sharing agreements with other bidders can impact bidding.  And gaming by government entities should not be overlooked, as we found in India where government differences about the role of auctions played out in public during a major multi-round auction.  (The regulator did not want the operators to overpay and announced its proposal to increase annual spectrum fees. This led financial analysts to downgrade expected auction winners, and quickly the bidding ended.)

Auction surprises, as we have documented in many case studies, have and, we expect, will continue to baffle auction managers, bidders and theorists for years to come.