The Italian 5G spectrum auction concluded in October raising over EUR6.5 billion, more than twice AGCOM’s pre-auction target of EUR2.5 billion. This was primarily a result of fierce competition for the 3.7GHz band, which went for EUR0.36/MHz/pop, considerably more than recent European 3.4-3.8GHz auctions. So, why did the Italians spend so much on this spectrum? And does it mean we can expect high prices in upcoming 3.4-3.8GHz auctions elsewhere?
Payment by instalments inflated valuations
In contrast to most spectrum auctions, which require winning bidders to pay for their spectrum up-front, the payment schedule in Italy is in four annual instalments (with the bulk of payments being made in 2021). Delayed rather than upfront payments mean that bidders are willing to pay more, inflating competition in the auction – perhaps increasing the price by 33% in this case.
However, this doesn’t fully explain why the 3.7GHz prices in Italy were higher than in other countries (see Figure 1 below).
Figure 1: Prices from 3.4-3.8GHz auctions in 2018 – scaled to a 15-year licence duration and adjusted for annual fees and payment schedule [Source: Aetha Spectrum Fee Database]
Restricted supply intensified competition in the auction
Just 200MHz of spectrum was available in the 3.4-3.8GHz band – a relatively small amount, especially given there are four Italian MNOs all wanting some of the band. In contrast, also in October, 390MHz was auctioned in Finland to just three mobile operators – this larger supply and lower demand lead to a final price of only EUR0.03/MHz/pop.
So why was just 200MHz auctioned of the 400MHz in the 3.4-3.8GHz range?
80MHz of this band is still in use by the government/military. The remaining 120MHz was awarded as WiMAX licences, which expire in 2023. AGCOM is offering six-year extensions to these licences for a fee based on this recent auction. Therefore, it looks unlikely that any additional 3.4-3.8GHz spectrum beyond the 200MHz already auctioned will become available for 5G in the near future.
Lot packaging artificially constrained supply further
The 200MHz was offered as two lots of 80MHz and two lots of 20MHz. Italy has three large mobile operators, with similar market shares and annual revenues. However, this lot structure meant that only two of the three large MNOs could come away with large blocks of 3.4-3.8GHz spectrum – which would allow them to offer competitive 5G services. This created additional artificial scarcity.
A better approach would have been to package the spectrum in smaller lots, such as 5MHz. This would have increased the chance of an efficient outcome, as smaller lot packaging allows for a wider range of outcomes, allowing the market to reach an efficient outcome via bidding. Alternatively, if the spectrum is pre-packaged in larger lots, a smaller range of possible outcomes are available, which may prevent an efficient outcome from being reached.
Can we expect future 3.4-3.8GHz prices to be as high?
The high price paid at this auction was in many ways ‘a perfect storm’ – intense competition, restricted supply and inefficient packaging all contributed to the high price of EUR0.36/MHz/pop.
As we have seen with auctions in other spectrum bands, there are usually outliers where, due to conditions particular to that auction, prices reached heights not seen elsewhere. We expect that the Italian auction falls into this category and that we will generally see lower prices in upcoming 3.4-3.8GHz European auctions.
Figure 2 (below) shows the outcome of the Italian auction, from which other lessons can be learned:
- the 700MHz SDL reserve price was too high
- the 26GHz spectrum sold for EUR0.003/MHz/pop
Figure 2: Outcome of principal stage of Italian 5G spectrum auction
The reserve price for 700MHz SDL was too high
All 2×30MHz of 700MHz FDD band sold for close to reserve price (EUR0.56/MHz/pop). The reserve price of the 700MHz SDL band was EUR0.28/MHz/pop, but these lots received no bids, suggesting that 700MHz SDL spectrum is significantly less valuable than the FDD equivalent. This is due to a range of issues, including less certainty over the future device ecosystem and the fact that the SDL band must be aggregated with a higher frequency band. This is the first European country to put the 700MHz SDL band up for auction – going forward regulators may wish to choose a lower reserve price.
The mmWave spectrum sold for around EUR 0.003/MHz/pop
TIM, Vodafone, WindTre, Iliad and Fastweb were each awarded 200MHz in the 26.5-27.5GHz range, with none of the winning bids being significantly above reserve. Again, this is the first instance of mmWave spectrum being auctioned in Europe – so provides an important data point regarding its value.