Public Sector Spectrum Release (PSSR) Competition and auction design issues for the 2.3 and 3.4 GHz spectrum award, including reserve prices

Transcription

1 Public Sectr Spectrum Release (PSSR) Cmpetitin and auctin design issues fr the 2.3 and 3.4 GHz spectrum award, including reserve prices Statement Publicatin date: 26 Octber 2015

2 Abut this dcument This dcument sets ut Ofcm s decisins n utstanding issues cnnected with the award f the 2.3 and 3.4 GHz spectrum bands. In particular, it sets ut ur decisin t prceed with an auctin f all the newly available spectrum withut impsing spectrum caps, and ur decisin n the reserve prices that will apply t spectrum awarded in the auctin.

3 Cntents Sectin Page 1 Executive summary 1 2 Intrductin 4 3 Cmpetitin issues 7 4 Auctin design including reserve prices 14

4 Sectin 1 1 Executive summary 1.1 This statement sets ut ur final decisins in cnnectin with the 2.3 and 3.4 GHz spectrum award. 1.2 The 2.3 and 3.4 GHz award bands has been released t Ofcm by the Ministry f Defence (MOD) as part f the Gvernment s Public Sectr Spectrum Release (PSSR) prgramme t make 500 MHz f spectrum available fr civil use by A ttal f 190 MHz f new spectrum will be auctined - 40 MHz f spectrum within the 2.3 GHz band ( MHz) and 150 MHz f spectrum within the 3.4 GHz band (at MHz and MHz). 1.3 A further 40 MHz f spectrum in the 3.4 GHz band ( MHz and MHz) is currently held by cncurrent licensees: UK Bradband Ltd and UKB Netwrks Ltd.Either f the cncurrent licensees may apply fr a replacement licence, in which case Ofcm will include thse frequencies in the assignment stage f the auctin. This wuld enable all users f the 3.4 GHz band t have cntiguus spectrum hldings. 1.4 We expect the award frequencies t be f interest t mbile netwrk peratrs (MNOs) and thers invlved with mbile bradband. The particular characteristics f the spectrum t be released, in terms f prpagatin and the penetratin f signals, make it especially suitable fr the latest lng term evlutin (LTE) mbile technlgies. Hwever, alternative uses will nt be precluded if winning bidders have ther plans (subject t cmpliance with technical parameters and cnsequent licence cnditins). 1.5 The final decisins set ut in this statement are, principally: T auctin all the newly available spectrum withut impsing spectrum caps; and T set a reserve price f 10m fr a 10 MHz 2.3 GHz lt and 1m fr a 5 MHz 3.4 GHz lt 1.6 The majrity f decisins in cnnectin with the award were set ut in a statement published n 26 May This dcument shuld be read tgether with that statement, which includes the full reasning fr ur decisins. Hwever, fr ease f reference, ur decisins made previusly are summarised here. Thse decisins are: T hld a cmbined auctin f bth the 2.3 GHz and 3.4 GHz bands using a simultaneus multiple-rund ascending (SMRA) auctin frmat, with tw categries f generic lts, ne fr each spectrum band; T auctin the 3.4 GHz spectrum in 5 MHz lts, and the 2.3 GHz spectrum in 10 MHz lts; 1 1

5 T make detailed auctin design decisins, including: T auctin the spectrum in tw stages, a principal stage, during which the ttal number f 2.3 GHz and 3.4 GHz lts each bidder wins is determined; and an assignment stage, during which the particular lcatin f each f the lts wn by each bidder will be determined; T require bidders t bid fr a number f lts at the given rund prices in each rund. There will be a randm ranking rule t assign standing high bidders; T allw bidders t withdraw their standing high bids in up t five runds. Bidders risk being required t pay the full amunt f the standing high bids withdrawn in certain circumstances; T maintain a relatively limited infrmatin plicy. We will publish the names f qualified bidders in advance f the auctin, and we will release sme limited infrmatin t bidders abut the level f excess demand during the auctin; T allw bidders t express a minimum requirement f up t 20 MHz in the 3.4 GHz band; T impse an eligibility rule whereby each 10 MHz lt in the 2.3 GHz band will be assigned fur eligibility pints, and each 5 MHz lt in the 3.4 GHz band will be assigned ne eligibility pint; T allw bidders t use up t three waivers which allw them nt t place a bid but retain their eligibility; T enable Ofcm t require bidders t match their level f depsits t their bids; T allw UK Bradband t participate in the assignment stage with its existing 3.4 GHz spectrum in rder t allw all licensees t btain cntiguus spectrum; Nt t intervene in the market t prvide additinal UK-specific prtectin t users f licence exempt spectrum in the 2.4 GHz band r any ther civil uses belw the release band; T require crdinatin between services in the 3.4 GHz band and grundbased aernautical radar. This is nt necessary fr maritime radar r permanent earth statins (PES), althugh cperatin may be required with a few PES lcatins n a case by case basis; T require crdinatin between services in the 2.3 and 3.4 GHz release bands and a number f MOD lcatins. The details are included in an Infrmatin Memrandum (IM) published alngside this dcument. The IM includes clarificatin f the lcatins required t prtect Ryal Navy systems, including additinal lcatins arund Prtland and BUTEC (Applecrss), as well as sme airbrne lcatins used by the Ryal Air Frce; 2

6 T specify the licences t be auctined, including the fllwing technical and nn-technical licence cnditins: Fr the 2.3 GHz band, t mandate full synchrnisatin and enable licensees t use the permissive blck edge mask between adjacent licensees; Fr the 3.4 GHz band, t mandate a TD-LTE frame alignment but nt the frame structure; licensees using the specified frame structure can use the permissive blck edge mask between adjacent licensees, but licensees using a different frame structure are required t use the restrictive blck edge mask; Indr small cells in a dmestic envirnment (r ther indr lcatins where harmful interference is nt caused t anther licensee) d nt need t synchrnise but may use the permissive mask between adjacent licensees; Licences will be issued fr an indefinite perid with an initial term f 20 years; Licences will be issued n a nn-exclusive basis; The 2.3 GHz licences will cver Great Britain 2, and the 3.4 GHz licences will cver the whle f the UK. Licences will exclude territrial seas and areas f adjacent inland waters, althugh individual requests fr licensed use f the frequencies by ther users (e.g. fr wind farms) will be cnsidered; The newly available spectrum will be tradable under the prvisins f the Mbile Trading Regulatins; There will be n cverage bligatins r use-it-r-lse-it bligatins 1.7 The decisins set ut in ur statement f 26 May 2015 and in this statement are given effect by regulatins made under Sectin 14 f the Wireless Telegraphy Act 2006 (WTA). This statement is published alngside a Ntice f ur prpsal t make such regulatins ( ). We have als published a detailed Infrmatin Memrandum ( ) 2 England, Sctland and Wales, but nt Nrthern Ireland. In additin, exclusin znes will apply in The Outer Hebrides, Isle f Skye and The Small Isles 3

7 Sectin 2 2 Intrductin Decisins set ut in this statement 2.1 This statement sets ut Ofcm s decisins n utstanding issues fr the 2.3 and 3.4 GHz spectrum award. Cmpetitin issues (see sectin 3) 2.2 Our initial prpsals n cmpetitin issues were set ut in a cnsultatin published in Nvember alngside prpsals n a range f ther matters related t the 2.3 and 3.4 GHz award, including nn-technical licence cnditins and auctin design and prcess. 2.3 Hwever, we did nt include cnclusins n cmpetitin when we published a statement in May cntaining ur decisins n the ther matters n which we had cnsulted. Instead, we used part f the May 2015 dcument t cnsult n an alternative cmpetitin measure t that prpsed in the Nvember 2014 dcument. 2.4 This further statement reaches cnclusins n cmpetitin issues having cnsidered stakehlder respnses t bth the Nvember 2014 and the May 2015 cnsultatins. Auctin design, including reserve prices (see sectin 4) 2.5 The statement als sets ut sme further decisins in relatin t auctin design, including ur decisins n reserve prices. Our Nvember 2014 cnsultatin nted a range f figures within which we said ur reserve prices shuld fall. In ur May 2015 dcument, we said the final figure shuld be determined as clse t the auctin as pssible, in rder t take accunt f current circumstances. Legal framewrk 2.6 The legal framewrk within which we have taken ur decisins was set ut in the Nvember 2014 cnsultatin and summarised in the May 2015 cnsultatin. The full detail is nt repeated here. Hwever, we highlight the fllwing aspects: Principal duties under the Cmmunicatins Act Our principal duties under Sectin 3 f the Cmmunicatins Act 2003 are: t further the interests f citizens in relatin t cmmunicatins matters; and t further the interests f cnsumers in relevant markets, where apprpriate, by prmting cmpetitin. 2.8 In carrying ut ur functins, sectin 3(2) prvides that we are required, amngst ther things, t secure the ptimal use fr wireless telegraphy f the electrmagnetic

8 spectrum; and the availability thrughut the UK f a wide range f electrnic cmmunicatin services. 2.9 Sectin 3(4) requires us, in carrying ut ur functins, t have regard t certain factrs as appear relevant in the circumstances, including the desirability f encuraging investment and innvatin in relevant markets; and the desirability f encuraging the availability and use f high speed data transfer services thrughut the UK In perfrming ur duty under Sectin 3 f furthering the interests f cnsumers, we must have regard, in particular, t the interests f thse cnsumers in respect f chice, price, quality f service and value fr mney. Duties under the Wireless Telegraphy Act Sectin 3 f the Wireless Telegraphy Act (WTA) impses a number f further duties relating t spectrum management. Amngst ther things, in carrying ut ur spectrum functins, we are required t have regard t the extent t which the spectrum is available fr use; and t the demand, bth current and future, fr the use f the spectrum In carrying ut thse duties, Sectin 3(2) requires us t have regard t (amngst ther things) the desirability f prmting the efficient management and use f the spectrum; the ecnmic and ther benefits that may arise frm the use f wireless telegraphy; and the develpment f innvative services and cmpetitin in the prvisin f electrnic cmmunicatins services. Eurpean Cmmissin decisins relevant t the 2.3 GHz and 3.4 GHz bands 2.13 On 21 May 2008, the Eurpean Cmmissin adpted a decisin (Decisin 2008/411/EC) which sught t harmnise the cnditins fr the availability and efficient use f the MHz frequency band fr terrestrial systems capable f prviding electrnic cmmunicatins services in the EU. On 2 May 2014, the Eurpean Cmmissin adpted Decisin 2014/276/EU12, which amended Cmmissin Decisin 2008/411/EC, primarily in relatin t the technical cnditins in cmpliance with which the band shuld be made available. Any award f the 3.4 GHz band has t be cmpliant with the Cmmissin Decisin In relatin t the 2.3 GHz band, ECC Decisin (14)02 sets ut harmnised technical and regulatry cnditins fr the use f the band MHz fr Mbile/Fixed Cmmunicatins Netwrks. The ECC Decisin is nt mandatry, but in awarding the MHz frequencies we are fllwing the technical parameters agreed at the Eurpean Cnference f Pstal and Telecmmunicatins Administratins (CEPT) We had expected a final EC decisin t have been issued befre publicatin f this dcument, fllwing the release earlier this year f a draft text. Hwever, the Radi Spectrum Cmmittee is awaiting the preliminary results f trials underway in Member States aimed at making the band available n the basis f licensed shared access (LSA). 5 The Radi Spectrum Cmmittee will als cnsider ptential cexistence 5 Whilst the LSA trials are f interest t spectrum managers and users in an envirnment where sharing is sught (which is the case in sme EU Member States) they are f little direct relevance t the spectrum t be released under the current prpsals in the UK. 5

9 issues between 2.3 GHz LTE and Wi-Fi in the licence-exempt 2.4 GHz band. As a result, the Radi Spectrum Cmmittee is nt nw likely t cnsider a draft harmnisatin decisin befre the secnd half f In respect t cexistence issues, we nte the extensive wrk already carried ut by Ofcm t investigate these matters. We have n reasn t questin the rbustness f ur analysis r ur cnclusin that the risk f interference t users f the 2.4 GHz band is very lw. We als nte that the UK award f the frequencies within the 2.3 GHz band means there will be a 10 MHz gap between the tp f any LTE use and the bttm limit f uses in the 2.4 GHz licence exempt band, which is nt necessarily the case in ther jurisdictins. Granting licences 2.17 In accrdance with Sectin 10 and Schedule 1 f the WTA, Ofcm may grant licences in accrdance with prcedures prescribed in regulatins made by Ofcm. Where Ofcm decides t award licences by auctin, it makes specific regulatins fr thse purpses, in accrdance with Sectin 14 f the WTA. The decisins set ut in this statement and the statement published n 26 May 2015 are given effect t by such regulatins and a Ntice f ur prpsal t make such regulatins is published alngside this statement. Cexistence 2.18 We nte that sme respndents t the May 2015 statement and cnsultatin submitted cmments abut the cexistence f LTE mbile services in the 2.3 GHz band with sme licence exempt devices which perate in the nearby 2.4 GHz band (2400 t MHz), in relatin t which we set ut ur decisin in the May statement The majrity f these submissins repeated pints already made and cnsidered previusly. A cnfidential respnse included the results f sme additinal testing. Hwever, we have seen n new evidence which wuld lead us t recnsider ur wn cnclusins. Next steps 2.20 As nted abve, this final statement is published alngside a frmal Ntice f ur prpsal t publish auctin regulatins. Interested parties nw have ne mnth t make any cmments r bservatins n the draft regulatins. Please see the Ntice dcument itself fr further details ( We currently expect applicatins fr the auctin taking place in December 2015 with initial depsits at that time. Further depsits will be required in January when eligibility pints will be determined, with bidding cmmencing shrtly thereafter. 6

10 Sectin 3 3 Cmpetitin issues 3.1 In this sectin, we cnsider the cmpetitin issues arising frm the 2.3 and 3.4 GHz award and set ut ur decisins n whether we shuld apply caps n the amunt f mbile spectrum a single peratr can hld. 3.2 We have cnsulted n cmpetitin issues twice: first in Nvember 2014, and then in May In ur Nvember 2014 cnsultatin we presented a cmpetitin assessment based n there being fur natinal whlesale mbile netwrk peratrs EE, H3G, O2 and Vdafne. We prpsed a spectrum cap fr the 2.3 and 3.4 GHz award as a safeguard against very asymmetric hldings arising frm the auctin. 3.4 Then, in ur May 2015 statement, we cnsulted n an alternative cmpetitin measure in light f tw annuncements f ptential changes in the mbile market. First, n 5 February 2015, BT annunced its intentin t acquire EE. Then, n 24 March 2015, it was annunced that Hutchisn Whampa (wner f the H3G netwrk i.e. Three ) had reached agreement t acquire O2 frm its current wner Telefónica. 3.5 The remainder f this sectin cnsiders each f ur cnsultatins in turn, and the respnses f stakehlders, befre setting ut ur decisins n cmpetitin issues fr the award. Our Nvember 2014 cnsultatin 3.6 The Nvember 2014 cnsultatin described the then current mbile market. We said the existence f fur natinal whlesale suppliers was gd fr cmpetitin. 3.7 We identified a cntinuing grwth in cnsumer demand fr mbile bradband, and said that mbile netwrk peratrs may need t expand their current capacity in rder t remain cmpetitive. One way t expand capacity was t acquire and use mre spectrum. 3.8 We said that, in ur view, there were n significant cmpetitin cncerns which related nly t the 2.3 GHz band and nt the 3.4 GHz band. We therefre cnsidered bth the auctined bands tgether in ur cmpetitin assessment. 3.9 We said a certain degree f asymmetry in spectrum distributin culd reflect beneficial differences in cmmercial strategy amng peratrs e.g. by encuraging innvatin. Hwever, very asymmetric spectrum hldings culd give rise t cmpetitin cncerns and lead t significant cnsumer harm We said we wuld be cncerned if ne f the peratrs which already had a cmparatively large share f mbile spectrum EE r Vdafne were t acquire all f the 2.3 and 3.4 GHz frequencies. Hwever, we cnsidered that an utcme with such a very asymmetric distributin was unlikely t result frm the 2.3 and 3.4 GHz auctin because f the large vlume f spectrum available Instead, we said it was likely there wuld be several winners f spectrum in the auctin. We nted that thse peratrs with relatively lw spectrum hldings were 7

11 likely t have the highest intrinsic valuatins fr additinal frequencies and were therefre likely t succeed in acquiring sufficient vlumes at auctin We said it was unlikely a cmpetitr with a lwer intrinsic value wuld be willing t utbid the higher value bidder fr strategic reasns - because f the large vlume f spectrum being auctined and the lack f certainty that such strategic bidding wuld reduce cmpetitin. Such a cmpetitr wuld need t pay nt nly abve its wn valuatin, but als abve the market value and, because f the large vlume available, fr a large amunt f excess spectrum it did nt actually need We cnsidered whether it was necessary t impse any cmpetitin measures at all, given the large vlume f spectrum available and the lw likelihd f very asymmetric hldings actually arising Hwever, n balance, we pted t set ut prpsals fr a safeguard cap t ensure there was n pssibility at all that an utcme with very asymmetric hldings and the cnsequent risk f cnsumer harm might arise. Our preferred ptin was fr a cap n verall hldings f relevant mbile spectrum f 310 MHz (abut 37%). We said this was prprtinate t guard against future ptential cmpetitin cncerns withut ging further than necessary. Cnsultatin respnses 3.15 In respnse t the Nvember 2014 cnsultatin, sme peratrs, ntably H3G and Telefónica/O2, expressed supprt fr ur prpsed spectrum cap r suggested there shuld be tighter caps. Vdafne als supprted a cap. Other stakehlders, including BT and EE, said caps were nt needed BT argued that asymmetric hldings were nt a primary cncern in the current auctin. The large vlume f spectrum available meant it shuld be pssible fr thse with the greatest need fr spectrum t be able t acquire it withut the need fr spectrum caps Orange said auctin cnstraints shuld nly be enfrced if there was clear evidence t indicate a significant risk f undesirable utcmes. It nted that Ofcm cnsidered the risk t cmpetitin t be lw, and argued that a spectrum cap therefre seemed illgical EE similarly argued that an verall spectrum cap (r any ther cmpetitin cnstraint) was unjustified and disprprtinate t the cmpetitin cncerns identified in the cnsultatin. It submitted that Ofcm had nt presented sufficient evidence t justify the need fr a cap In cntrast, H3G s respnse expressed full supprt fr the idea f a spectrum cap and said it shuld be set at an even tighter level than 37%. It suggested a level f 33% was mre apprpriate. H3G pinted t evidence f bad utcmes frm spectrum auctins elsewhere in the wrld where n caps were set r caps set t high, such as the USA UK Bradband als said a cap f 37% was t high and that it wuld nt ensure sufficient spectrum wuld be guaranteed t new entrants and/r fr innvative r specialist services. It said future market develpments might mean spectrum reservatin was actually the mst apprpriate apprach. 8

12 3.21 Telefónica/O2 suggested spectrum shares were already t asymmetric and said Ofcm did nt appear t appreciate the threat t dwnstream cmpetitin if the current asymmetries were perpetuated. The PSSR award presented an pprtunity fr Ofcm t intervene in the primary market t secure dwnstream mbile cmpetitin acrss all segments in the shrt-t-medium term. It prpsed additinal spectrum caps n particular bands in additin t the verall cap prpsed by Ofcm. Our further cnsultatin f May Fllwing publicatin f ur Nvember 2014 cnsultatin, BT annunced its prpsed acquisitin f EE (in February 2015) and H3G annunced its intentin t acquire the O2 business frm Telefónica (in March 2015). Our May 2015 cnsultatin cnsidered cmpetitin issues afresh in light f these develpments and restated ur bjective t bring the 2.3 and 3.4 GHz spectrum int use as quickly as pssible, in line with ur duties t further the interests f cnsumers and cnsistent with ur duty t secure the ptimal use f spectrum Hwever, we said it may be much less apprpriate fr us t use a spectrum cap mechanism t address cmpetitin cncerns in a scenari where the market (and cnsequently spectrum hldings) may change at shrt ntice - and pssibly at the same time as the auctin. We therefre sught the views f stakehlders n an alternative apprach We said ur bjectives in respect t spectrum wuld be best achieved by having as many regulatry tls as pssible at ur dispsal t address future cmpetitin cncerns, shuld they arise. Accrdingly, we prpsed t give urselves the ptin f withhlding sme f the 2.3 and/r 3.4 GHz spectrum frm the auctin - and awarding it instead at a later date. We said there wuld be n spectrum caps in these circumstances. Cnsultatin respnses 3.25 Eleven stakehlders submitted respnses addressing the questin f hlding back sme f the 2.3 and 3.4 GHz spectrum, fur f them in cnfidential respnses. Nncnfidential respnses were received frm BT, EE, H3G, Intel, Samsung, Telefónica/O2 and Vdafne. All f thse respndents wh addressed the prpsal giving us the ptin f withhlding spectrum frm the award expressed ppsitin t the idea. Sme respndents submitted detailed arguments, but a cmmn theme was that an award f the spectrum in tw stages risked distrting the auctin and creating perverse utcmes One stakehlder identified a substitutin risk acrss the tw awards. Anther, Vdafne, said there was a risk f creating artificial scarcity if the award was split, driving up the price. Cnversely, ptential bidders culd hld back frm bidding, in the knwledge that further spectrum wuld be released subsequently N stakehlder expressed any supprt fr the prpsal While we did nt seek views n the timing f the award, many stakehlders cmmented n this. While sme stakehlders supprted ur intentin t prceed as planned, the majrity submitted that in light f the prpsed BT/EE and H3G/O2 transactins, we shuld delay the award. They submitted that prceeding with the award as planned risked leading t an inefficient utcme, because sme parties may nt be able t take part in the auctin and because it wuld be difficult t value the spectrum in the face f current market uncertainty. Sme argued fr a delay until 9

13 decisins by the cmpetitin authrities were knwn, whereas thers argued we shuld wait fr the reslutin f the transactins. Assessment f cmpetitin issues 3.29 In light f stakehlder respnses t ur Nvember 2014 and May 2015 cnsultatins we nw need t cnsider hw best t prceed with the 2.3 and 3.4 GHz spectrum award and whether any cmpetitin measures shuld be impsed We nte the uncertainties in the market caused by the prpsed BT/EE and H3G/O2 transactins, and that this culd affect the spectrum hldings f three f the fur natinal whlesalers, plus BT We als nte that final decisins n the prpsed transactins are nt a matter fr Ofcm t determine, but fr the relevant cmpetitin authrities. In reaching their decisins, it is up t thse cmpetitin authrities t cnsider the impact f any mergers n cmpetitin in terms f relative market psitins, including spectrum hldings We have given further cnsideratin t bth ur Nvember 2014 prpsal fr a spectrum cap and ur alternative prpsal set ut in the May 2015 cnsultatin. We have assessed whether either apprach remains apprpriate against the backgrund f the ptentially changing market cnditins We nte the divided pinins f respndents t the Nvember 2014 cnsultatin n the questin f asymmetry in the distributin f spectrum and the need fr spectrum caps. Thse with cmparatively lw current spectrum shares had the greatest cncerns abut asymmetry and s supprted the applicatin f caps at r belw the level we prpsed (37%). Other respndents argued there was n need fr cmpetitin measures at all We cntinue t believe that peratrs d nt need t have the same, r clse t the same, shares f spectrum in rder fr there t be strng cmpetitin. This is because spectrum is nt the nly way f adding capacity and because it is in any case nt necessary fr natinal whlesalers t have the same capacity in rder fr all t be capable f being a cmpetitive cnstraint n rivals That said, very asymmetric spectrum hldings culd still give rise t cmpetitin cncerns. In particular, peratrs with lw vlumes f spectrum culd face higher csts in increasing capacity The prpsal fr a cap, set ut in the Nvember 2014 cnsultatin, was based n the circumstances prevailing at the time, with fur natinal whlesalers. In that scenari, we said the award culd give rise t very asymmetric spectrum hldings if certain cmpanies acquired all f the newly available spectrum. As nted abve, we believed this was unlikely t happen in reality. Hwever, the minimal dwnsides f applying a safeguard cap were utweighed by the ptential upsides f guarding against very asymmetric hldings, hwever unlikely this was t arise The market circumstances are nw mre uncertain than when we prpsed the safeguard cap. We therefre need t cnsider whether a cap is still the mst apprpriate apprach There are a number f alternative scenaris that might arise in the shrt t medium term. It is nw pssible that the market (and certain spectrum hldings) may becme 10

14 mre cnslidated, subject t decisins by the cmpetitin authrities. In thse circumstances, the risk f very asymmetric hldings arising wuld be reduced even further because spectrum ther than 2.3 GHz and 3.4 GHz wuld be likely t be mre evenly distributed althugh we cannt knw the utcmes fr sure We need t cnduct the 2.3 and 3.4 GHz award in a way that is, n balance, best suited acrss a range f pssible scenaris. In sme scenaris - e.g. if prpsed market cnslidatins are apprved and spectrum hldings are mre evenly distributed as a result - a cap culd prve t be bth verly restrictive and unnecessary as a cmpetitin measure. Fr example, a cap culd prevent the peratr mst cnstrained by the cap frm btaining a large blck f cntiguus spectrum which may be required t deliver very fast dwnlad speeds. Such services may be highly valued by sme cnsumers in future, althugh current demand is uncertain. In circumstances where spectrum hldings may change shrtly befre r even during the auctin prcess, there may als be practical difficulties in applying a cap We cntinue t believe that an award f all the newly available frequencies means bidders with higher intrinsic valuatins will have the pprtunity t acquire apprpriate amunts f spectrum, fr the reasns utlined abve Additinally, we believe the likelihd f a single bidder utbidding all the ther bidders in the auctin, r acquiring a very large vlume f spectrum, is lwer as a result f decisins set ut in ur May 2015 statement. These included the chice f a simultaneus multiple-rund ascending auctin (SMRA) as the frmat fr ur award In ur SMRA design, the price fr lts within each band will be the same r very similar 6. In rder t utbid all the ther bidders, r t acquire a very large amunt f the spectrum, a bidder wuld need t keep n bidding n a large amunt f the lts available. This in turn wuld have the effect f increasing the price fr all the spectrum in that band available in the auctin. Such a strategy culd hwever fail, and the bidder might end up winning a smaller amunt f the spectrum at a high price ptentially a price that exceeds the bidder s valuatin fr that smaller amunt f spectrum Finally, we nte that 40 MHz f mbile spectrum in the 1.4 GHz band held by Qualcmm at the time f ur cnsultatins has nw been sld t ther peratrs. 20 MHz has been acquired by H3G and 20 MHz by Vdafne 7. Our decisins 3.44 We have nted the universal ppsitin amng respndents t ur May 2015 prpsal t retain the ptin f withhlding sme spectrum frm the 2.3 and 3.4 GHz award We acknwledge that the cncerns expressed by stakehlders abut the negative impact n the current award may be valid. In particular, we agree that uncertainty abut the cnditins n which we wuld make the spectrum held back available in the future culd intrduce further challenges t bidders. Bidders wh perceived the 6 Under the particular rules fr ur award, the final lt prices within each lt categry may differ by a price increment. 7 On 22 September 2015, we set ut a decisin t grant cnsent t the tw trades. The decisin is available at 15/statement/trade-f-frequencies-statement.pdf 11

15 spectrum held back t be a substitute r a cmplement t the spectrum available in the first award might need t frmulate assumptins abut the cnditins and the utcme f a ptential secnd award. If these assumptins turned ut t be wrng, the utcme f the first award culd be less efficient. On balance, and taking accunt f stakehlder views, we have therefre decided against prceeding with ur May 2015 prpsal. Instead, we will prceed with an award f all the newly available spectrum, withut hlding back any f the frequencies We turn nw t the questin f spectrum caps. Given the finely balanced nature f the arguments that led us t prpse a cap in the first place we believe the arguments in its favur are nw sufficiently weakened t tip the balance in favur f an award withut caps. We als nte that circumstances may change such that there is greater risk f a spectrum cap leading t an inefficient utcme (because it may be t restrictive), and there may be practical difficulties in enfrcing a cap We have therefre decided t prceed with an auctin f all the available spectrum withut applying cmpetitin measures We recgnise that the prpsed mergers currently create uncertainty in the market and that there is a risk that this uncertainty has an impact n the award. The cmpetitin authrities will make a decisin n the BT/EE merger twards the end f Nvember (subject t any statutry extensin, which may delay the decisin by up t eight weeks). H3G ntified its prpsed acquisitin f O2 t the Eurpean Cmmissin n 11 September. Cnsideratin f this transactin by the Eurpean Cmmissin may take until May 2016 r later. Apprval f either transactin culd be subject t remedies, which may either delay cmpletin f the transactin r take further time t implement fllwing cmpletin f the transactin, thereby sustaining the uncertainty. The merger decisins culd als be appealed We recgnise that there may be sme benefits t delaying the auctin until there is mre certainty in the market, in particular in cnsidering cmpetitin measures. Hwever, because we cnsider that prceeding withut a spectrum cap is apprpriate as set ut abve, and fr the reasns set ut belw, we d nt think we shuld delay the auctin Delaying the award carries risks, and n balance we believe that we shuld prceed with the auctin as planned. We have taken this decisin in light f ur statutry duties, in particular ur duty t secure the efficient management and use f the spectrum, having regard t the availability fr use f and demand fr spectrum, and the benefits fr innvatin In this respect, we cnsider that spectrum efficiency is usually best achieved by bringing available frequencies int use as sn as pssible fr the benefit f cnsumers spectrum is a valuable and scarce resurce and it is rarely efficient t leave it unused. We als nte the cntinuing grwth in demand fr mbile bradband services and the need fr spectrum capacity t address that demand. Further, while availability f equipment which can use the band may be relatively limited, we cnsider that clarity arund the award and the availability f spectrum will prvide additinal mmentum t the develpment f the equipment ecsystem We nte that cmpanies perate in an ever-changing market envirnment and ften have t take decisins, including strategic decisins, in light f nging uncertainty. We have taken this int accunt in deciding hw t prceed. 12

16 3.53 Our current intentin is t pen applicatins fr the auctin during December, and fr bidding t start early next year. 13

17 Sectin 4 4 Auctin design including reserve prices 4.1 This sectin f the dcument sets ut ur final decisins n reserve prices fr the auctin. It als cvers sme ther details f the auctin prcess. Reserve prices - backgrund 4.2 In the Nvember 2014 cnsultatin we prpsed reserve prices fr the auctin f 1 millin per 5 MHz lt fr the 3.4 GHz band and in the range f 2.5 millin t 5 millin per 5 MHz lt fr the 2.3 GHz band. We said reserve prices set at this level wuld prvide rm fr relevant price discvery, while still addressing cncerns abut gaming in the auctin althugh sme specific additinal factrs were relevant fr each band. 4.3 Hwever, in ur May 2015 statement and cnsultatin, we said we shuld set the final level f reserve prices as clse t the actual auctin as pssible. This wuld allw us t take accunt f the latest market infrmatin and any changes in market cnditins. Based n the respnses we had received t the cnsultatin, we culd see n reasn t vary the prpsals set ut in the Nvember 2014 cnsultatin. 4.4 In the May 2015 statement and cnsultatin we als nted that, n 16 February we published a prvisinal decisin and further cnsultatin n annual licence fees fr 900 MHz and 1800 MHz spectrum. This included a mre refined analysis f auctin prices and pprtunity csts frm the 2013 auctin fr the unpaired (TDDcmpatible) 2.6 GHz band (as a by-prduct f further analysis f the 800 MHz and paired (FDD-cmpatible) 2.6 GHz bands). 4.5 These shwed generally higher figures fr prices and pprtunity csts f unpaired 2.6 GHz than we reprted in the Nvember 2014 award cnsultatin. We nted that this tended t strengthen the case fr the reserve prices we prpsed, including prices at the tp end f the range fr the 2.3 GHz band. Cmments n Statement 4.6 Telefónica/O2 was the nly respndent t submit cmments n the level f reserve prices. It expressed cncern abut ur apprach f setting high reserve prices. It saw the risk f cllusin as lw (assuming we prceed with a cmbined award after the tw merger prcesses are reslved), given the evidence f strng demand fr PSSR spectrum. It als nted that Ofcm has prpsed ther measures, such as limited transparency, which make tacit crdinatin mre difficult. It believed such measures were sufficient t ease cncerns regarding strategic demand reductin. It said there was n case fr setting higher reserve prices than thse prpsed in ur first PSSR cnsultatin. Our assessment 4.7 We have decided t prceed with reserve prices f 1 millin per 1 MHz in the 2.3 GHz band and 200,000 per 1 MHz in the 3.4 GHz band; that is 10 millin per

18 MHz lt in the 2.3 GHz band and 1 millin per 5 MHz lt in the 3.4 GHz band. We believe this is an apprpriate apprach fr the fllwing reasns: The tp end f ur prpsed range fr the 2.3 GHz spectrum is mre in line with the evidence n the relevant auctin prices and pprtunity csts in ur 2013 auctin, as we explain abve; We remain f the view that very lw reserve prices may prvide incentives fr bidders t attempt t bring the auctin t an earlier end, thereby acquiring the spectrum at a significant discunt t its true market value; We als remain f the view that reserve prices have a rle t play in making gaming less likely. We nte that these reserve prices are n higher than thse prpsed in ur Nvember 2014 cnsultatin. Additinal auctin issues Price increments 4.8 In its respnse t ur May 2015 statement, Telefónica/O2 argued in favur f small price increments between principal runds in the auctin. N ther respndent cmmented n price increments. Telefónica/O2 prpsed the fllwing caps n price increments: N mre than 5% f the previus rund price; and N mre than 10% f the reserve prices. 4.9 Telefónica/O2 presented tw reasns fr favuring these limits: Standing high bidders, under ur rules, may nt bid fr fewer lts than the number f lts where they are standing high bidders. Telefónica/O2 believes this may be very cnstraining, unless price increments are kept at a reasnable level. The auctin culd end with sme bidders having all their winning bids priced at the current rund price, and thers having all their winning bids priced at the previus rund price. Whether r nt Ofcm maintains the pay-as-bid pricing rule r switches t uninfrm pricing, as suggested by Telefónica/O2, it cnsiders that this reinfrces the argument that Ofcm shuld cmmit t using small price increments We agree with Telefónica/O2 that price increments shuld be set cautiusly. Whilst we think the ability t cntrl the pace f the auctin is an imprtant tl fr the auctineer, we als recgnise there are gd reasns t prvide a degree f predictability t bidders In the May 2015 statement, we said we expected t set price increments f n less than 2% and n mre than 20% frm ne rund t the next The prpsal put frward by Telefónica/O2 t set an abslute limit based n a fixed prprtin f the reserve price seems t us unduly restrictive. While this might be apprpriate in the early runds, when the price is clse t the reserve price, in a 15

19 rund with a higher price it may unduly restrict the ability f the auctineer t influence the pace f the auctin While we are nt impsing an abslute limit n the level f the price increment, we think it is unlikely that we will increase prices by mre than 10% frm ne rund t the ther, and it wuld nt be ur intentin t d s. We nte, fr example, that a 10% increment ver five successive runds wuld result in prices being apprximately 60% higher than in the first rund. Hwever, we cannt at this stage knw what the level f demand will be and we d nt therefre intend t fetter ur discretin in the way suggested by Telefónica/O Neither will we cmmit t a lwer limit fr the price increments. There might be sund reasns t reduce increments t less than 2% during the principal stage. This is particularly relevant as, in the SMRA frmat we have adpted, bidders may nly respnd t rund prices, and nt bid prices f their wn chsing. In rder t reduce the risk f price vershting 9, we may need t set lw price increments in later runds In any case, we will chse the relevant price increment with cautin and taking int cnsideratin the particular circumstance f each rund. Depsits 4.16 A depsit f 100,000 will be required at the time f applicatin. Additinal depsits can be made befre Ofcm determines the eligibility limits applicable t each bidder in the first rund f the principal stage f the auctin. During the principal stage we will require, at the end f each day, that bidders have n depsit with Ofcm sufficient funds t cver their cmmitments, r a prprtin f thse cmmitments t be ntified by Ofcm. Bidders will be allwed ne wrking day t increase their depsits if necessary and, if they fail t have the required amunt n depsit, will nt be able t make any new bids At the end f the principal stage, bidders will be required t have n depsit an amunt sufficient t cver all their cmmitments, befre prceeding t the assignment stage. If they fail t have sufficient funds n depsit at this pint they will have a zer bid entered in the assignment stage fr all the assignment ptins applicable t that bidder. Fllwing the assignment stage rund, bidders will need t increase their depsit s that it cvers the highest bids made in the assignment stage rund; if they d nt, their assignment stage bids will be reduced t zer Fllwing the qualificatin perid we will refund depsits as sn as pssible t thse nt qualified and thse wh withdrew during the perid allwed fr such withdrawals. There will be n ther refunds until the end f the grant stage. Assignment stage restrictins n adjacency 4.19 In its respnse t the May 2015 cnsultatin, Telefónica/O2 als presented a suggestin related t particular assignment ptins in the assignment stage The cmpany supprted ur prpsal fr a sealed bid, single rund frmat with a secnd price rule fr the assignment stage - as well as ur prpsal regarding the 9 By price vershting, we mean a circumstance where we set a price which exceeds the highest price bidders wuld be willing t bid n. If sme r all f the bidders wuld be willing t bid at a price higher than the previus rund price but lwer than the final price set by us, then the final result might nt be the mst efficient. 16

20 placement f unsld lts, and ur apprach fr including UK Bradband 3.4 GHz hldings in the assignment stage Hwever, Telefónica/O2 suggested that Ofcm shuld cnsider amending the assignment rules such that bidders winning smaller amunts f spectrum are placed adjacent t each ther. As an example, Telefónica/O2 nted that in the 2.3 GHz band, if the spectrum is split 20:10:10, there is a pssibility that the tw bidders each winning 10 MHz may want t trade r share the spectrum in the future. If Ofcm des nt guarantee adjacency f smaller amunts f spectrum, Telefónica/O2 believed there was a pssibility that a winner f 20 MHz culd have strategic value t bid in rder t place itself in the middle, and blck such trading r sharing arrangements by the ther winners Having cnsidered the arguments, we d nt think we shuld restrict assignment stage ptins t thse where particular bidders are adjacent t each ther. We understand there are many pssibilities where particular bidders might wish t trade r share their spectrum hldings, and we d nt believe there are sufficient grunds t rule ut particular nes. In the example prvided by Telefónica/O2, whilst it is true that tw bidders wh acquire 10 MHz each may want t trade with each ther, it is als plausible that a bidder wh acquires 10 MHz may wish t trade its licence t the ne that acquires 20 MHz. We therefre will nt change ur prvisins fr the assignment stage in this regard. Assignment stage multiple split assignments 4.23 In accrdance with the plicy set ut in the May 2015 statement, we nw wish t make it clear that in the event that we cannt include the frequencies currently held by UK Bradband Ltd and UKB Netwrks Ltd in the 3.4 GHz band in the Assignment Stage, we will rule ut assignment ptins where a bidder wuld have its frequencies split in mre than tw blcks This is incrprated in the draft Regulatins we publish alngside this statement. Infrmatin during the auctin 4.25 In the illustrative auctin prcedures which we published as an annex t ur May 2015 statement, we included a preliminary list f infrmatin t be made available t bidders during the curse f the auctin We have nw included a cmprehensive list f the infrmatin t be made available t bidders in the draft regulatins which we publish alngside this statement At the end f the principal stage, we will publish n ur website the ttal financial liability f all bidders including bth the base price fr the lts wn and any payments related t withdrawals. During the principal stage, we intend t publish n ur website, fr each spectrum band: The rund price in the last principal stage rund f the day; and The level f excess demand in multiples f 20 MHz (as mre fully described in the draft regulatins) At the end f the auctin, we will annunce which specific frequencies were wn by which bidders and the ttal price paid. In due curse, we will publish the individual bids in every rund. 17