UK SPECTRUM AUCTION: ACTUAL BID DATA REVEALS MORE ABOUT THE AIMS AND BUDGETS OF THE W

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The release of the detailed bid data provides a fascinating look into the operators' strategies, which could hold many valuable lessons for future combinatorial clock auctions around the world.

The UK spectrum auction is over. The winning bidders have been determined, the spectrum assignments within each band set and the required payments calculated. In the interests of transparency, Ofcom has now published the round-by-round bids made by each operator. This is the first time that this level of detail on the bids made during a combinatorial clock auction (CCA) has been published, and provides a unique insight into elements of the bidders' auction strategies.
The auction was a highly complex CCA with a second price rule, so both the bidding strategies and the task of determining the winning bids were far from straightforward. In this article, we examine – at a high level – some of the more interesting points that we can glean from this detailed bid data. In keeping with the auction process itself, we start by considering the bids in the principal stage of the auction (the primary and supplementary rounds) and then consider bids in the assignment stage.
The primary and supplementary rounds: significant variation in bidding strategies

Vodafone won 2×10MHz of 800MHz, 2×20MHz of 2.6GHz FDD and 25MHz of 2.6GHz TDD spectrum. It bid strongly throughout the primary rounds (the 'clock stage'), tending to reduce demand later than other operators thereby demonstrating a high willingness to pay. Given that no final price cap was in place for this auction, no bidder was guaranteed to win its final clock-stage package, but bidders did have the ability to secure this package by raising their bid sufficiently in the supplementary round. Vodafone did this, but also increased the size of its winning package by placing supplementary bids for larger packages. Through clever bidding in the primary rounds, Vodafone could also use the lack of final price cap to its advantage by bidding above final clock-round prices for some additional spectrum, comfortably securing a package of spectrum that appears to be very much in line with its goals.
Telefónica UK (O2) and Hutchison 3G UK (3) won 2×10MHz and 2×5MHz of 800MHz spectrum, respectively. Both operators bid for 2.6GHz in the supplementary round, but these bids did not end up as part of the winning combination. O2 ended the clock stage with 2×10MHz of 800MHz (and one lot of low-power 2.6GHz, which it likely never intended to win), so was faced with a difficult choice as it entered the supplementary round. When working within a fixed budget, a bidder can either put it all towards the spectrum it really wants or bid for more spectrum, which effectively reduces the amount it is bidding for its preferred package and, as a result, its chances of winning it. O2 made bids of up to almost GBP1.35 billion, but assigned the majority towards securing 2×10MHz of 800MHz, leaving only a small amount towards adding 2×10MHz of 2.6GHz. In the end, O2 paid only GBP550 million for its high-value 800MHz, so could have comfortably won some 2.6GHz within its budget. The operator was not to know this in advance, of course, and may be an unhappy loser of 2.6GHz spectrum in the sense that it might have been prepared to buy some at the prices others ultimately paid. Nonetheless, its apparent primary goal of winning 800MHz was achieved.
Everything Everywhere's (EE's) approach and result is more difficult to gauge. It began bidding on the maximum amount of spectrum that its cap would allow: 2×20MHz of 800MHz and 2×20MHz of 2.6GHz.1 At a clock price of GBP316 million, EE reduced demand for 800MHz to 2×10MHz and increased demand for 2.6GHz to 2×30MHz. At GBP403 million, it dropped demand for 800MHz to zero and switched to 2×40MHz of 2.6GHz, before switching to only TDD spectrum by the end of the clock stage. This left EE with many options in the supplementary round, when it placed a large number of bids for a very wide range of packages to eventually win 2×5MHz of 800MHz and 2×35MHz of 2.6GHz. Whether this was its preferred package is not easy to tell. What is clear is that EE could have won no 800MHz, or 2×10MHz of 800MHz given plausible alternative bidding strategies from its competitors. With the benefit of seeing all operators' bids, it seems that winning large amounts of 2.6GHz spectrum at the cost of more 800MHz was always likely. One possibility could therefore be that EE overestimated the demand from others for 2.6GHz, which could be explained by O2 and 3's supplementary round bids for 2.6GHz not being as high as the primary rounds might have suggested.
Niche Spectrum Ventures (a subsidiary of BT Group) bid strongly for either 2×10MHz or 2×15MHz of 2.6GHz and ultimately secured the latter, in addition to 20MHz of 2.6GHz TDD. How BT chooses to use this spectrum will be of particular interest to many observers. MLL Telecom and HKT were not successful in winning spectrum and their bidding strategies seem to indicate budgets of about GBP1 million and GBP10 million, respectively, to secure some TDD spectrum.
Following the principal stage of the auction, the winning packages and the majority of the required payments were determined, as set out in Figure 1. For some operators, there were small additional payments as a result of the assignment stage, which is described in more detail in the section below.
Figure 1: Operators' payments in the UK's 2013 spectrum auction, by stage [Source: Analysys Mason, 2013]
Operator Principal stage payment (GBP) Assignment stage payment (GBP) Lots won
Everything Everywhere (EE) 588 876 000 0
2×5MHz 800MHz
2×35MHz 2.6GHz
Hutchison 3G UK (3) 225 000 000 0 2×5MHz 800MHz
Niche Spectrum Ventures 186 476 000 15 061 179
2×15MHz 2.6GHz
20MHz 2.6GHz TDD
Telefónica UK (O2) 550 000 000 0 2×10MHz 800MHz
Vodafone 790 761 000 12 099 143
2×10MHz 800MHz
2×20MHz 2.6GHz FDD
25MHz 2.6GHz TDD
The assignment stage: network sharing and interference concerns drive bidding

Bidding was generally much more subdued during the assignment stage for individual lots. The largest point to consider for most bidders was the coverage lot in 800MHz. This was auctioned separately from the other 800MHz spectrum and therefore did not feature in the assignment stage. Bids in the principal stage suggested that most bidders considered the cost of the obligation to be low. The winner, O2, did not distinguish to any significant degree between its bids for the coverage obligation and non-coverage obligation lots, while Vodafone's bids for the two options suggested it had calculated a cost of between GBP0 and GBP30 million, depending on what other spectrum it won. EE appeared to be less prepared to bid for the coverage obligation relative to other 800MHz lots.
At the assignment stage, the strongest bidder for 800MHz was Vodafone, which appears keen to have avoided the lowest-frequency lots. This might have been the result of concerns about interference with DTT, but is more likely to have been driven by a desire to make network-sharing arrangements with O2 easier.2 EE also placed some lower bids, which resulted in a payment of about GBP8 million for Vodafone. At 2.6GHz, Niche and Vodafone both bid reasonably high amounts to avoid being adjacent to the TDD spectrum they were most likely to win. The safest way to do this was to secure spectrum in the middle of the band, which Niche did through a bid of more than GBP60 million (although ultimately only a payment of around GBP15 million).
The release of the detailed bid data provides a fascinating look into the operators' strategies. While little can be determined with any real certainty, the information nonetheless holds many valuable lessons for future CCAs around the world.
Analysys Mason is a leading advisor to operators and regulators on spectrum valuation, spectrum auctions and related matters. For more information about our services, please contact us.
1 The relative amounts could have been different, but the overall cap of 2×105MHz of spectrum meant that EE could win at most 2×40MHz.

2 O2 won the coverage lot that was fixed at the top of the 800MHz band. Vodafone was therefore likely to have preferred a lot as close as possible to the top of the band so that it would allow the operators to share antennas with lower risk of inter-modulation interference.