Why the UK 4G auction raised so little

The British 4G auction raised much less than the government hoped, with proceeds reaching only GBP 2.3 billion versus the government's estimate of GBP 3.5 billion. This is also less than the Dutch auction last December, which raised EUR 3.8 billion. We look here at the possible reasons for the shortfall. 

To start with, what are the most important factors affecting the outcome?

• What's exactly being auctioned? How much spectrum (MHz), which bands ('low' and 'high' spectrum), what is the duration of the licences, what are the roll-out requirements, are the licences technology-neutral, are there reserved lots for newcomers? The main differences in the UK auction were the amount of spectrum (245 MHz versus 360 MHz in the Netherlands) and licence duration (unlimited, with annual payments after 20 years, versus 17 years in the Netherlands). Furthermore, the UK auction only included spectrum in the 800MHz and 2.6GHz bands, while the Dutch auction had frequencies the 900, 1800 and 2100 MHz bands for sale.
• Another important difference is that the Dutch auction offered both new and existing spectrum licences. The UK auction only included new spectrum, making it less urgent for operators to acquire licences to continue their existing services but still important to ensure a future 4G business. The main issue in the UK was how much spectrum is needed to provide a good service in the coming years. Most likely operators saw this more as 'nice to have' rather than 'need to have'. 
• How big is the addressable market? What is the population, penetration, smartphones use, etc. In this the two markets are not very different, apart from the UK of course having a much larger population. However, the UK is also bigger and less densely populated (even if one in four live around London), making network roll-out more expensive. Also important is how active the wholesale market is.
• What is the competitive landscape? The UK has four network operators (EE, Vodafone, O2, 3), the Netherlands just three, meaning the UK market is most likely more competitive. 

All together it's about expected cash flows. There is a high element of uncertainty in this, as an auction is far from an efficient auction. In addition to the above considerations, participants may also be thinking of things like driving up prices in order to increase the financial pain for a rival. Moving beyond the above considerations, we can calculate a spectrum cost per capita, per MHz, per year. This shows that 800MHz spectrum is more in demand than 2600MHz frequencies. These prices only have a limited relevance, but they are notable to consider:

• Netherlands (2600MHz April 2010): 0.006 cent.
• Germany (multi-band auction May 2010): 1.0 cent.
• Belgium (multi-band auction March 2011): 3.2 cent.
• Spain (multi-band auction July 2011): 0.7 cent.
• Sweden (1800MHz October 2011): 0.9 cent.
• Spain (900MHz November 2011): 3.9 cent.
• Belgium (2600MHz November 2011): 0.4 cent.
• Portugal (multi-band auction December 2011): 3.9 cent.
• Denmark (800MHz June 2012): 1.4 cent.
• Ireland (multi-band auction November 2012): 2.9 cent.
• Netherlands (multi-band auction December 2012): 3.6 cent.
• UK (multi-band auction February 2013): 0.9 cent.

The prices vary considerably, but it's clear that low spectrum is generally more expensive than high spectrum. The recent Dutch auction was relatively expensive, but the same was true for a few of the other auctions. The British auction was clearly one of the cheaper ones. 

In the end the main difference in the Dutch and British auctions is the level of market competition. In the Netherlands, competition is less intense, giving spectrum licences a higher value. The licence forms of a very high market entry barrier (apart from the wholesale market, where the prices are still in effect dictated by the network operators). The other main issue was that the Dutch auction included not just 'nice to have' spectrum, but also existing spectrum.

The UK auction is also notable for the return of BT as a mobile operator. The incumbent once owned the O2 network, which it sold in 2005 to Telefonica. Now BT has acquired 2.6GHz spectrum, both paired and unpaired, but it's not yet clear what its plans are for the frequencies.