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Result of the 2013 multiband auction driven by consistently offensive bidding strategy on the part of all three contenders

Auction design is state-of-the-art

The multiband auction was conducted in the form of a combinatorial clock auction (CCA). This procedure had been previously applied in Austria to assign the 2.6 GHz band and has been used for (multiband) auctions in other countries such as Switzerland, the Netherlands and Ireland. These auctions resulted in highly varying revenues, depending on the amount of competition.

Upon a joint review with a business consulting firm, several adaptations to the procedure were made for Austria. These changes were required due to market conditions and terms of frequency utilisation, the new statutory provisions applying to minimum bids, and the specific circumstances existing in the wake of the Orange takeover. One example here is reduced transparency at an early stage of the auction in order to lower the risk of collusion.

Long clock stage

During the initial stage of the main auction, referred to as the clock stage, bidders were allowed to submit package bids at pre-defined round prices on frequency block combinations from varying categories. The round price for those packages was increased if the demand for blocks exceeded supply in any category. A further round was launched.

The clock stage extended over 72 rounds, with the bidders submitting a total of 216 bids. This stage was already marked by intense competition. The level of demand (as measured in bidding points) continued to reach 130% of supply, for example at round prices of EUR 1.4 billion. Georg Serentschy, Managing Director of RTR’s Telecommunications and Postal Services Division, points out that in round 39 prices were about EUR 1.5 billion and the Telekom-Control-Kommission (TKK), recognising the obvious lack of collusion, decided to increase transparency in order to give bidders a chance to quickly coordinate their frequency needs. Demand during that round amounted to about 115% of supply. Serentschy stated: “To our great surprise, the bidders did not make any use of this opportunity, which would have dampened prices, and instead apparently maintained their offensive strategy without wavering.” The clock stage ended in round 72, with round prices amounting to just over EUR 2 billion. Due to the second price rule, the actual auction revenue at that point in time was about EUR 770 million.

Highly offensive bidding in the sealed-bid stage

The sealed-bid stage was launched after the clock stage. During this stage every bidder was allowed to submit as many as 3,000 supplementary bids. The supplementary bids were subject to price constraints based on the bidder’s behaviour during the clock stage.

The three bidders actually submitted a total of more than 4,000 supplementary bids. More than 65% of these supplementary bids were submitted for the largest permissible combinations of frequency blocks, with a share of some 50% of available frequencies. In addition, the bidders utilised almost to the full the price limits that had applied to these large packages during the sealed-bid stage. On the other hand, price limits for smaller packages were at times only utilised to the extent of between 60% and 70%. These supplementary bids submitted on large frequency packages had a significant effect on the prices offered by the other bidders. At the same time, such bids generally only have a marginal likelihood of winning out in the end. If these bids for very large numbers of frequencies had been ignored when determining the winners and prices, the revenue from the auction would have settled at a level of about EUR 1 billion. Serentschy stated: “In the opinion of the regulatory authority, the price of EUR 2 billion, which was surprisingly high for us, is to be attributed to the consistently offensive strategy followed by the bidders. We would not have seen such a development with a more defensive strategy.”

Relatively little revenue in the assignment stage

The specific frequency bands to be allocated to the successful bidders for the relevant blocks were determined during the assignment stage. The bidders were thus able to submit bids for the position within the band. The revenue achieved through the assignment stage totalled about EUR 1.5 billion.

Effects on network operators’ cost structures

For network operators, acquiring the frequency packages will result in additional depreciation with costs estimated at between 40 and 80 cents per month and customer, thus leading to a depreciation peak, as is the case after every major auction. More dated depreciation items (e.g. GSM) are also reduced over time.

Very high auction revenue but historically not an ‘extreme outlier’

The revenue achieved in Austria is very high compared with other LTE auctions. The average price amounts to some 85 cents per MHz and resident. The prices paid for the 60 MHz arising from the digital dividend were: about 76 cents per MHz and resident in Germany, 72 cents in France, and 44 cents in Portugal (inflation-adjusted). Taking payment terms into account, Ireland’s multiband auction - with identical frequency bands as in Austria - brought in revenues of roughly 60 cents per MHz and resident. This can be compared with the inflation-adjusted average price achieved through the UMTS auctions in 2000, which amounted to 5 cents per MHz and resident in Germany, and 88 cents in Austria. The inflation-adjusted average prices paid for the first two mobile telecommunications licences that were awarded in the 900 MHz band in Austria (Mobilkom and max.mobil) were just under EUR 3.00, while comparable amounts paid for the 1800 MHz licences were 50 cents (Connect) and 60 cents (tele.ring).

Current auction not the ‘last chance’

The additional options open to the bidders once the official decisions have been issued include negotiating defragmentation with the aim of exchanging frequency packages amongst one another, as well as purchasing or selling packages subject to TKK approval. Additional frequencies are also expected to be assigned in other bands in the coming years.

In an initial summary, Serentschy responded to the outcome of the auction procedure as follows: “We assume that every bidder followed a carefully planned strategy and received highly professional advice. However, it must be noted that the bidders had and were aware of two concrete possibilities that would have allowed them to adjust their bidding behaviour to auction progress or to bid less offensively, in this way successfully bidding only about half of the total revenue achieved. These opportunities, which were available during the clock stage and the sealed-bid stage, were neglected by the bidders.”