How the spectrum auction works

When Industry Canada held the last auction for cellular spectrum three years ago, it took 14 business days over three weeks to end.

But no one is betting how long the next auction for 65Mhz of spectrum, which starts May 27, will take. In 2005, 12 companies bid on 306 licences across the country. This time 27 groups are bidding for 292 licences.

Complicating the auction is that many bidding this time are inexperienced newcomers who will be fighting exclusively over 40Mhz of spectrum set aside for them.

[For a special look at some of those newcomers, see this feature.]

At least one member of a bidding team, looking at the recent 38-day auction in the U.S., fears this one will drag into September. That may be pessimistic, but for the past 14 years Canadian and American auctions for valuable airwaves have been deliberately framed not to be speedy but to ensure pricing doesn’t skyrocket to the detriment of consumers, brings in fair revenue to governments and prevents collusion.

As a result, bidding teams have been scrambling for weeks to hire consultants who are not merely experts in the process, but in particular specialists in game theory.

Industry Canada will run the auction online through a secure Web site. It will have three stages, with several rounds within each stage. A round ends when the government decides there isn’t enough bidding to continue. There will set a time limit on each round, which will get shorter than the previous one.

The bidders can bid simultaneously on any of the 292 licences, which have been carved into municipal, regional and provincial sizes.

Simple, no?

No. The bidding process is actually complex structure of money and points. Each licence has been assigned a series of points for the spectrum available in the area and the population, which frames the opening bids the government has already set. So, for example, 20Mhz of spectrum for Prince George, B.C. is worth eight points and bidding will open for it at $699,170. For the populous Southern Ontario licence, 20Mhz of spectrum is worth 360 points with an opening bid of $50,150,154.

Each bidder has already had to put a deposit down on points to play in the auction, under a formula based on those minimums. For example, Globalive’s $235 million deposit bought it 1,892 points. During the auction, participants will bid on each licence with money, but they have to also keep in mind the total points of the licences they are bidding on. Because to keep things hot, the government forces participants to bid an increasing percentage of their points in each of the rounds.

The limit hasn’t been set yet, but interim rules stated that in Stage One each participant had to bid on licences totaling total between 70 and 80 per cent of their points in each round. The Stage Two minimum is 80 to 90 per cent of their points, and in the final Stage all of their points.

For example, assume the Stage One limit is 70 per cent and the mythical Oxnard Wireless Corp. has 1,000 points. It must bid on licences totalling at least 700 points in each round. In Stage Two it must bid on licences totaling 800 to 900 points, and in the final round it has to bid on licences totaling 1,000 points.

Bidders lose points for not hitting their minimums, and therefore won’t be able to bid on as many licences in the following stage. That obviously will have an impact on the bidder’s ability to win as many licences as it wants.

There are possible penalties for withdrawing a bid.

Participants can’t get away with tiny bids, either, or huge ones to scare away competitors. Industry Canada has set the bid increments for each stage at a higher of 15 per cent of the standing high bid or $2,000 per licence point. So if the standing high bid on a particular licence is $1 million, the bid increment is $150,000.

The bidding software shows the increments for each licence as the auction goes along, allowing participants to merely click on a checkmark box to signal a willingness to bid that level. In the later stages of the auction the bid increment will get smaller to allow participants greater precision in their bids, and to keep the auction moving.

While each bidders’ computer will show the value of every bid, to prevent any signaling or collusion the names of the bidders will only be known after the end of each round.

A three-day closed mock auction will be held starting May 21 so participants can get used to the system.

The 2005 wireless spectrum auction netted Ottawa $56.6 million. With more than twice the number of bidders this time, including newcomers anxious to be the fourth national wireless provider, that number is sure to be exceeded.

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