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Czechs pull plug on 4G spectrum auction after carriers bid too much

Radio spectrum auctions are generally supposed to be about assigning spectrum in the most efficient way, so that new mobile services run as well as possible. That said, they also make money for governments, and some see this as their primary purpose.

Not so the Czech telecoms regulator, CTU, which has suspended the country’s auction of spectrum in the 800MHz, 1800MHz and 2.6GHz bands because the carriers bid too much. The private equity firm PPF and the local businesses of telecoms giants Deutsche Telekom, Telefonica(s tef) and Vodafone(s vod) had collectively bid 20 billion crowns ($1.03 billion) before the regulator pulled the plug, saying investments of that level would mean unreasonably high prices for consumers.

“When announcing the conditions in the first half of last year, we stressed that the main motivation of the auction was the quick availability of a 4G network for Czech citizens and the possible entry of a fourth operator — never about profits for the state,” CTU chairman Pavel Dvorak said in a statement (I’ve used an English translation of the quote from Reuters).

Even though the reserve for the Czech auction was only $377 million, the billion-dollar figure doesn’t appear that high on the face of it: the UK spectrum auction last month pulled in $3.6 billion, and the Dutch auction in December accrued $5 billion.

What’s wrong with raising too much? At the extreme end of the scale, we have the 3G spectrum auctions of a decade ago — there, carriers paid tens of billions for their licenses, effectively causing an industry-wide crash from which they and their vendors took years to recover. Let’s remind ourselves of what EU digital agenda commissioner Neelie Kroes had to say back in January, in reaction to the Dutch result:

“Was nothing learned from previous auctions for UMTS [3G] frequencies, when the share price of KPN dropped substantially and the ecosystem of small supply companies in the telecom sector was severely damaged? … Telecom companies paid high prices. KPN saw a further decline in its credit rating. Prices for attracting money for infrastructure investments are expected to rise. The rollout of high-speed internet will slow down and the suppliers will be put out of business. This ‘Christmas gift’ could be a huge burden for the sector, and for all other businesses, entrepreneurs and citizens who need super-fast mobile internet.”

Dvorak cited Kroes in his statement, pointing out that allowing excessive auction revenues would clash with his agency’s mandate of creating conditions for efficient investment. And so, the Czech Republic can look forward to a rebooted spectrum auction, hopefully sometime later this year.

3 Responses to “Czechs pull plug on 4G spectrum auction after carriers bid too much”

  1. I can provide an insider view from the Czech Republic:
    Pavel Dvorak contributed substantially to the creation of a mobile oligopoly since he was first appointed chairman of CTU back in 2006. One of his first decisions was to declare mobile services as fully competitive and ceased to regulate the market of mobile voice origination. As a result of this decision, all foreign investors withdrew from the country with the exception of mobile operators Telefonica, T-Mobile and Vodafone. When the crisis hit the Czech Republic, margins of mobile operators continue growing while they were falling elsewhere in Europe. Besides high prices, we have one of worst 3G networks in Europe which is a result of a low level of investments over several years. Between 2006 and 2011, Telefonica and T-Mobile, the leading two operators, were generating an average oligopoly margin of US$ 1 billion per year, including an average investment deficit of US$ 200 mil. By the time the auction was opened last year, the oligopoly margin had accumulated to US$ 6 billion and the investment deficit to at least US$ 1 billion.
    Although the official objectives of the auction included increasing competition, technological innovation, removing digital divide etc., detailed terms and conditions were carefully designed to discourage any potential new entrant so that the spectrum on offer can be distributed among incumbent operators. Indeed, there was no interest in the auction from abroad but the unexpected participation of PPF, the largest local private equity group, disrupted Dvorak’s plans.
    The fact that he decided to cancel the auction without prior consulting his decision with the Council of CTU and without informing the Minister of Industry and Trade as well as the Minister of Finance support a speculation that he had received a request to cancel the auction from one of the incumbents who could not effort to continue bidding for the most coveted 800 MHz spectrum against PPF. While this is a pure speculation, although widely spread among local insiders, consequences of his decision are entirely different from his press statement. The main beneficiaries of his decision are incumbent operators who can extend their oligopoly position and launch LTE in re-farmed 1800 MHz band without facing a new competition and without having to meet roll-out criteria. In fact, Telefonica and T-Mobile have already announced such plans. They have an ideal opportunity to capture lucrative markets in large towns before any new competition arrives after the auction, if this ever happens.
    While I share the view that operators’ cash should be rather spent on investments than on additional spectrum fees to the government and Dvorak’s decision appears to be in line with this approach, his real objectives are far from being that enlightened and consumers are not in the centre of his interest.
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  2. ʞǝɹɐɯ sɐɯoʇ

    While the auction cancellation might be praised by many, the supervising Minister of Industry and Business dares to differ, and has warned not to support Dvorak at the CTU head ballot which takes place in April when Dvorak’s second term finishes. The reason, minister Kuba says, is failure of the auction, which started back in November. Many experts agree, pointing out the screwed auction setup. Consumers whine, however, as the LTE network deployment will be significantly delayed.