1 November 2021

After 200 days and 1727 rounds of bidding, Portugal’s mammoth 5G auction finally closed last week. ANACOM’s choice of auction format significantly prolonged the auction – alternative auction formats would have closed the auction much sooner. New entrants were successful, with two bidders acquiring spectrum in both the main and new entrant phases of the award. Despite both the long auction and high levels of competition, though, the prices paid by winners remained relatively moderate.

Auction design fiasco

The Portuguese Prime Minister António Costa described the auction format chosen by ANACOM as “obviously the worst possible auction model”. There were two major issues with the format:

• Use of small increments in the bid price each round – just 1% for the vast majority of the auction
• Use of the SMRA format with many lots in individual bands.

In an SMRA (Simultaneous Multi-Round Ascending) auction, participants bid on individual lots, meaning that the price of each individual lot rises independently. It is a widely used, easy to understand auction format which is perfectly suited to many cases – the main drawback is that it can lead to long auctions.

This was exactly what happened in Portugal. The number of lots, combined with the small bid increments, created a perfect storm. The auction had 58 lots, including 40 10MHz lots in the 3.6GHz band. Therefore, in a situation where two operators were competing over a single additional 10MHz lot, it would take 40 rounds for the price of all 3.6GHz lots to rise by just 1%.

Casting the mind back to 2019, a similar situation occurred in the German 2100MHz / 3.6GHz award – although the use of higher bid increments meant that this auction lasted three rather than ten months. In such circumstances, the use of a package clock auction (as used recently in Switzerland and Romania) or an SMRA-clock hybrid format (as used recently in the UK and Australia) would have progressed these important 5G spectrum awards significantly faster, as the prices of every lot in each band would rise each round.

New entrant success

We previously wrote about the potential for new entrants to succeed in the Portuguese market. The auction result revealed that not one but two operators cleared one of the key barriers to success: acquiring sufficient spectrum to build out an economically viable network. In fact, both new entrants (Digi Romania-affiliated Dixarobil and Másmóvil-backed Nowo) acquired not only the spectrum set aside for them in the new entrant auction but also 40MHz each in the 3.6GHz band, which will enable them to offer reasonable quality 5G services.

However, this potential shift from three to five operators in the market, which would dramatically increase the levels of competition, should be taken with caution. History suggests that five-player markets tend to consolidate and consistent rumours about a merger between Másmóvil and Vodafone in Spain suggest one option to achieve this. We also note that the combined spectrum holdings of Dixarobil and Másmóvil would generate a fourth player with a strong enough portfolio to challenge the incumbents on network quality.

We also note that Dense Air acquired more spectrum to support its neutral host model, complementing licences it previously acquired on the secondary market in Portugal.

Low prices paid

Despite the large number of bidders (hence elevated competition for spectrum), the headline prices paid were not particularly high – however, Portugal’s high annual fees meant that the overall benchmark prices are moderate. This is perhaps a function of the amount of spectrum available – with 400MHz of 3.6GHz on sale and the three smaller bidders happy to settle for a combined 120MHz, moderate prices are an understandable result.

Looking at prices paid in the two key 5G “pioneer bands”, we see that competition in the 700MHz band was limited, with prices well below European benchmarks. In the 3.6GHz, with six bidders acquiring spectrum, prices were relatively high – comparable to the German 5G award, but still lagging the Italian 5G auction.

Figure 1: European 5G benchmarks [Source: Aetha]