Based on the Jamaican experience to auction frequencies in the 700 MHz band, we suggest 5 lessons or takeaways other countries could consider.
Since 2012, and as countries within the Caribbean and further afield had been giving this matter attention, we have been discussing the 700 MHz radio frequency band. We also shared our thoughts on Jamaica’s intended auction of parts of its 700 MHz band, which was announced in April 2013. As reported in our weekly news roundups, Jamaica’s auction was subsequently postponed, as too few bids were received for that process to continue. It therefore appeared that sale of those frequencies was in limbo.
However, last week, the Government announced that a deal had been reached with Digicel for the purchase of one of the three 700 MHz bands it had made available for sale. Digicel would be purchasing that band at USD 25 million: just over half the USD 40—45 million reserve price that had been established for the auction process. Regarding the deal, Hon. Philip Paulwell, Minister for Science, Technology, Energy and Mining, was quick to point out that
…In retrospect, it would have been difficult for us to have got as much as we thought there was value in it and even after we were seeking to negotiate, we were way below the US$25 million. People were coming to us at 10. Getting 25 in the end has been quite significant…
(Source: Jamaica Gleaner)
Many countries in the Caribbean appear to be still planning to release their 700MHz spectrum. Hence learning from the Jamaica experience, we suggest 5 lessons or takeaways countries might wish consider in order to determine the optimal approach.
1. Many governments are strapped for cash.
Worldwide, and perhaps more so in the Caribbean, countries are still trying to recover from the global financial crisis that occurred well over five years ago. Many economies have contracted and a raft of fiscal constraints have had to be introduced to manage mounting debt. However, it also means that governments are even more eager for revenue, and are prepared to exploit what few opportunities might be readily available.
In the Caribbean, the telecoms industry appears to be one of the more robust sectors of the economy. Many countries have introduced additional taxes and charges, directly payable by consumers, and to varying degrees there does appear to have been any appreciable decline of revenue or usage. In a nutshell, telecoms can be a very lucrative business.
Further, the increased take-up of telecoms services, and the need for telcos to continually expand and upgrade their networks, may lead governments to believe that they can leverage that perceived demand for additional radio frequency bands and other resources for a premium cost. However, evidenced by the process experienced in Jamaica, there may be some countervailing considerations as to whether it is possible (or prudent) to try to secure top-dollar upfront, or implement alternatives that effectively lower that barrier to entry into the market.
2. It is possible to have an inflated value for a finite resource
Historically, radio frequency spectrum auctions were highly lucrative for the countries that had engaged in them. However, the success of that model required the frequencies on offer to be in demand by a number of bidders. Hence although a reserve price might be set, again, depending on the environment in which the auction is occurring, the final accepted price might far exceed the floor that had been established.
Having said this, and possibly a consequence of the global financial crisis, more recent spectrum auctions have either not had a healthy crop of bidders, or the demand for the bands on offer, which would parlay into a lively exercise. For example, in Australia and its 2013 auction:
…[t]he government failed to sell one-third of the 700MHz spectrum—worth $1 billion—that was up for sale in the Digital Dividend auction. Total revenue for the auction made from 700MHz and 2.5GHz spectrum was $1.96 billion, below the government’s expectations…
…The 700MHz auction lasted only one round, so the spectrum was sold at its reserve price of $1.36 per MHz POP. POP is a telecom term measuring the amount of spectrum owned in a region multiplied by the number of people reached.
The government sold all of the spectrum it had available in the far less expensive 2.5GHz band, but in only three rounds and at prices “only marginally above reserve prices,” the ACMA said…
Source: Computer World)
3. Telcos, like most businesses, are still risk-averse
Over the past five years of economic decline, many businesses have been trying to do more with less. Among other things, they have cut staff, lowered operating costs, whilst aiming to increase efficiency, productivity and profit margins. The telecoms industry, a subset of the wider business environment, has been no different. For example, in LIME financial reports in recent years, there has been a focus on cost containment, maximising their current investments, and profits.
However, although many countries worldwide might finally be on the slow and steady road to economic recovery, experts have noted that the days of extravagant spending by businesses have not (yet) returned. Similarly, telecoms investors might not yet be truly confident in their markets of interest, or new and untested markets,to take a chance that a proposed investment will be successful, which they might have been more inclined to do in the past.
4. The business case must work
In the case of the recent spectrum auction floated in Jamaica, in addition to the USD 40—45 million that the successful bidder would be expected to pay for an allocation in the 700 MHz band, the firm would need to finance the roll out of the rest of the operations needed to deliver new services. When the financing for towers, additional frequencies, backhaul cabling, international gateway access, etc., is considered, along with the technical and administrative manpower that would be needed, a firm might need to budget (at least) another USD 100—150 million in order to begin to offer national coverage in Jamaica.
However, thanks to the focus on productivity and the maximising resources in many businesses, there appears to be an even greater emphasis on ensuring that a rigorous business case is prepared to examine a potential opportunity. Hence factors including size and maturity of the market, projected revenues, cost of doing business, the profitability of the proposed operation and return on investment, would all be carefully considered against the needed capital outlay and risk of the investment before a decision is made.
5. 10% of 100 is better than 100% of 0
This takeaway is a culmination of all of those above. Although countries might be of disappointed with the significantly lower revenues resulting from the sale of frequencies in the 700 MHz band, it may still be to the benefit of a country to facilitate those sales at lower price points.
In most countries, their telecoms sectors are private sector-driven, as government tend not have the resources or wherewithal to successfully manage such operations. In that regard, countries are dependent on the same commercially operated telecoms firms to help them position strategically for global competition and to facilitate the transition to Information Societies and digital economies. Hence, one may argue that in the current climate where spectrum sale prices are lower than what obtained in the past, the wider economic and social benefit to a country should encourage alternatives to be explored to facilitate deployment much needed telecoms infrastructure and services.
Image credit: franky242 (FreeDigitalPhotos.net)