3.5 GHz Auction Rules — Bid Aggressively, Else…
The rules motivate an aggressive bidder to take as much spectrum as possible in the first attempt itself, without waiting for the next, in order to generate maximum competitive advantage
The 3500 MHz band is the core band for 5G worldwide, just like the 1800 MHz band was for 4G. Hence this is the most sought-after band — having a large number of devices and a healthy ecosystem. India has decided to auction this band at a reverse price of Rs 317 Cr /MHz (Pan India). Operators find this price very high. Why? To acquire 100 MHz of the spectrum they have to shell out Rs 31,700 Cr ($ 4 billion USD). But the problem in India does not end just with the price. It aggravates further and spillovers over to the rules of spectrum assignment. These rules favor the aggressive bidder and put a non-aggressive bidder at a significant disadvantage. In this note, I will try to explain how.
Spectrum Assignment Rule
During the auction process, each operator is assigned a rank, which is determined based on the intensity of bidding it had demonstrated during the auction for that specific band. The intensity is measured by various metrics and the ones with higher values are ranked up the ladder. Clause 9.10 of NIA has tweaked this rank-wise assignment for the 3.5 GHz band for this auction as below.
a) If 300 MHz or less is sold in the auction, then the frequency assignment will start from 3600 MHz (instead of 3630 MHz) in the direction of decreasing frequency.
b) If 300 MHz or more is sold, then the quantum of the unsold spectrum will be kept adjacent to 3630 MHz (minus the unsold block). Hence the assignment to the rank 1 bidder will happen only after the unsold block in the direction of decreasing frequency.
One can clearly see that of the total 330 MHz spectrum up for sale, only 170 MHz is available in case less than 300 MHz is sold in the auction (most likely case). Hence, the operators are likely to focus all their energy to seek access to 170 MHz of clean spectrum.
Now how this rule will impact the bidders and what are the possible outcomes? The following section explains.
5G Auction — Possible Outcomes
Since the price of this band is set so high and on top of that 40% of the spectrum is unclean, therefore (as stated earlier), it is unlikely that operators will bid for the full spectrum. Hence, the following picture describes a couple of possible outcomes of the auction.
a) Case 1
Let’s say all the operators bid together less than 300 MHz, then as per the rule, the assignment will have to start from 3600 MHz in the direction of decreasing frequency. Let’s also assume, that the bidder with rank one bids for a full 100 MHz, in that case only 70 MHz of clean spectrum will be left for the 2nd bidder. This means the third bidder has no option but to rest with only the unclean spectrum. Also, if the 2nd bidder wants to bid for the full 100 MHz bands, then a portion of his assignment (30 MHz) will spill over into the portion where the spectrum will not be available in 6 service areas (Karnataka — Hassan; Kerela — Trivandraum; M.P- Bhopal; North East — Shilong; Rajasthan — Jodhpur; West Bengal — Port Blair). Note that the nonavailability will not get just be restricted in these cities but will spill over a much larger jurisdiction beyond these cities, and that may run in hundreds of square km (DoT will provide these details later).
b) Case 2
The following picture describes the scenario2 outcome of the bidding process.
In this case, winner 1 & 2 takes 80 MHz each, and winner 3 takes another 80 MHz (or less) but his assignment is just adjacent to winner 2. In this scenario, whatever spectrum is leftover will become totally useless for both winners (1 & 2) to be taken in a future auction. The reason: both winners will not like to move from their current respective position into the unclean territory with an objective to combine their existing spectrum with the spectrum they are likely to acquire in the next round to drive a continuous block. They will also maintain this strategy even in those circles where the whole spectrum is clean. The reason is to prevent border interference. This interference will happen if two operators are operating in the same block of spectrum in circles that shares boundary with each other (this we have already experienced in the 2300 MHz band). Hence, to prevent such border interference an operator will like to maintain his assignment uniform (in the same frequency block) across all circles. This situation will remain true even when both the winners (1 & 2) end up taking less than 80 MHz spectrum.
Possibility of Harmonization
In all the past auctions, the ranks were used to decide the priority of access to contiguous blocks of 5 MHz. The locations of these blocks didn’t matter, except for the 800 MHz band, where the priority of assignment to the bidder with rank1 was to get spectrum as far from the 900 MHz border. Since all the spectrum within a band got treated more or less on equal footing, harmonization after the auction became a norm. In other words, the location inside the band (frequency spots) did not matter to the bidder as long as he is able to convert his existing fragmented spectrum into contiguous blocks of 5MHz.
But this will no longer be true for the 3500 MHz. The location of the operators within the band will matter now, and no one will like to move into the unclean portion of the band after having been able to secure the spectrum in the clean portion.
Conclusion
It is clear from the above discussion that the frequency assignment rules for the 3.5 GHz band are set such that a bidder will like to bid aggressively in order to secure as much spectrum as it can in the current round itself, as it will be left with very little option to take spectrum in subsequent rounds (in the same band) due to the reason explained above. But the bidder with rank 1 will be advantaged further to take the unassigned spectrum 3600–3630 MHz (30 MHz) if that block does not get assigned to BSNL and DoT opens it in the next round of bidding. Note that this block is just adjacent to the bidder with rank no.1, and will not be suitable for any other bidders. By acquiring this additional spectrum the bidder with rank1 can expand his kitty to 130 MHz (maximum possible) assuming he has bid 100 MHz in the current round. Hence, by Bidding aggressively, and by securing the maximum spectrum, the bidder with rank1 will put itself at a significant competitive advantage compared to his peers.
The bidder with rank2 will have to live with whatever is left of the clean spectrum from the total of 170 MHz. This means if the bidder with rank1 decides to take 100 MHz, then rank2 will be left with only 70 MHz, and if the bidder with rank1 decides to take 130 MHz (maximum possible 40% of 330 MHz), then the bidder with rank2 will be left with 40 MHz only (assuming a total of 300 MHz or less is sold).
The bidder with rank3 will have no choice but to deal with the unclean spectrum.
The reason this is so important is due to the fact that the outcome of this auction and the competitive dynamics resulting from it will get frozen for a long time in absence of any possible harmonization — making the 3.5 GHz band quite unique from all bands that we have experienced anytime in the past.
(Views expressed are of my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
