Industry Canada proposes spectrum auction change

That thunderous rush of footsteps you may have heard today was the sound of cellphone carrier executives running to the nearest dictionary — and their wallets.

The cause was an announcement Wednesday from Industry Canada that it plans to use a “combinatorial clock auction” (or CCA) for the upcoming 700 MHz and 2500 MHz spectrum auctions.

If the department’s plan stands, this will be format around which billions of dollars will be spent on bids in the next two years by wireless carriers.
The 700 MHz band is hotly desired for its efficiency and ability to carry signals through buildings. Here’s how valuable Industry Canada thinks it is: The department proposes a formula that would set the value of opening bids on all blocks of spectrum available total just over $897 million.
Here’s where that figure comes from: The department has carved the country into 14 regions for the auction. Each region has five prime blocks with paired spectrum, and two blocks of unpaired spectrum. The proposed opening bids on the prime spectrum for all of the 14 regions would total almost $162 million for each block. Multiply that times five. The biggest chunk of that would be $69.3 million for spectrum covering southern Ontario alone — again, that would be the opening bid, and there are five blocks in southern Ontario.
The total opening bids for each of two less-prime unpaired blocks of spectrum across the country would total $44.357 million.
Having seven blocks of spectrum available in each geography for purchase means no one carrier can get a monopoly of spectrum in any geography. But the auction is structured in such a way that bidders have to fight.

Industry Canada has asked carriers for written comments on the CCA and the proposed opening bids before it sets the format in stone.

To help them understand the format, it will hold a six hour information session to explain it all on May 30 in Ottawa. The session will also be Webcast.

One of the speakers will be Peter Cramton, a professor of economics at the University of Maryland and an expert on auction theory and practice, who is a co-director of the auction format project.

The few – and prized – spectrum auction experts in the world who advise carriers on such things know about CCAs, but for those who don’t here’s a quick primer:

According to the Web site of Australia’s telecom regulator, the Australian Communications and Media Authority, several countries will use a CCA format in the near future, including Australia, Britain, Switzerland and Ireland.

The site describes a combinatorial clock auction as “a price clock-based auction method used to sell multiple items in a single process.”

The goal is to provide bidders with the flexibility to bid on different combinations of spectrum across the several bands. For the 700 MHz auction, to be held early next year, Industry Canada has already divided the available spectrum into seven blocks. 
The 2008 Canadian spectrum auction, which saw the entry of bidders including the parent companies of Wind Mobile, Mobilicity and Public Mobile, used a format called Simultaneous Multiple Round Ascending. Briefly, in an SMRA auction all licences across the country are auctioned simultaneously over a series of rounds. In each round, bids are submitted on individual licences at the announced prices. At the end of each round, a standing high bidder is identified for each licence. After a break, a new round is started. The auction ends when a round passes in which no new bids are received on any licences.
From the government’s point of view the 2008 was a smashing financial success, raising $4.24 billion. It also drew complaints from incumbent carriers that the structure encouraged reckless bidding from new entrants and pushed prices up too high. It appeared from the bidding that some new entrants bid on spectrum in many areas across the country, and only when the auction was near its close did they seriously decide what they really wanted.
For its part, Industry Canada has to structure an auction to get the best possible price for taxpayers, who own the spectrum. But in its briefing paper the department acknowledged that one problem with the 2008 auction was that it opened the possibility that a carrier could win some but not all of the licences in areas needed for its service.
Under a CCA auction, instead of bidding on individual licences participants can bid on a package of licences in a province or across the country.
Industry Canada explains it this way:  “One of the key attributes of the CCA is the use of package bidding, wherein for each round the participant specifies the set of licences that it would like, at the announced prices, creating a single bid for a package. The package bid is treated as an all-or-nothing bid and the package is awarded in its entirety, or not at all.”
By bidding on a package of licences, the risk of getting caught with unwanted licences is eliminated, the department says, given that only the bid for the entire package can be a winning bid, and not the components of that package.
Industry Canada is proposing to tweak the format in such a way that groups of licences will be contiguous. Carriers want contiguous frequencies that are close to the spectrum they already own.
Where does the clock come in? There will be two bidding rounds. In the first stage there will be “clock rounds”, a series of rounds where there are bids for a package of licences with a floor set by Industry Canada. This, the department says, is the “price discovery” stage of the auction. There will be a follow-up a single round where bidders can make additional bids for packages of licences at prices that they set, subject to limits that are based on their clock round bids.
In the second round, what Industry Canada calls the “assignment stage,” the remaining winning bidders can make additional bids.
This is a very brief outline of the 71-page process. Other complex rules will apply to help keep bidding going and prevent bidders from conspiring to keep prices down. Bidders are forbidden from talking to each other, but they might be able to interpret what a competitor is doing by its bidding pattern. One change from 2008 is that participants won’t get data from Industry Canada on what others are bidding on. This will mean bidders can concentrate on pricing, the department argues.
The department hopes the new format will result in a shorter auction than the one in 2008, which dragged on for 331 rounds over several months (to the benefit of the previously mentioned $4.25 billion, and the detriment of the winners who had to write the cheques).
It isn’t clear if a shorter auction will mean less money for the government. But the government is proposing that anyone wanting licences covering the entire country will have to put down a $156.6 million deposit.
Officials at carriers couldn’t be reached for comment on what they think the advantages and disadvantages of the proposed structure are.

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