4 Chapter Four: Regulatory and Policy Aspects
4.2 Towards an appropriate licensing framework
Licensing policy governs the structure of markets, procedures for market entry, the number and type of operators, the degree of competition between players, revenues generated for governments, as well as the
efficient supply of services to the public. Licensing plays a particularly important role in the mobile market because, as mentioned previously, the market is based on a limited resource, the radio spectrum. In this regard, the costs and procedures for licensing may facilitate business development, but may also be the source of substantial barriers to entry.
In the first half of 2000, overblown expectations for 3G services resulted in high auction prices for these licences in countries such as the United Kingdom and Germany. Since then, due to the declining value of telecommunication stocks around the world and investor caution over balance sheets, 3G auction prices have been dropping steadily (see Figure 4.2). Moreover, some countries have postponed their licensing process, while others have changed their licensing methods in order to reduce the burden on 3G operators.
Providers of WLAN services, by contrast, are not placed under such heavy burdens in respect of financial or other licence conditions, allowing them greater flexibility, and encouraging smaller players onto the scene.
This is because WLAN technologies make use of unlicensed bands reserved for low radio power equipment and typically reserved for public use. This may create the risk of interference between services, but allows considerable flexibility and versatility for entities wanting to enter the WLAN market—from covering many locations, to covering just one location (such as hotels and restaurants offering WLAN access in a single building), and from charging for services to offering them free of charge. Given the low initial costs for WLAN base stations, and the absence of licence fees, providers can set up their Internet access services quickly and cost-effectively. Some exceptions to the unrestricted provision of WLAN services do nonetheless exist. Regulation and licensing conditions for these cases are examined in section 4.2.2 below.
4.2.1 Licensing policy for 3G mobile services
The most important policy issue for 3G licence allocation is the licensing process. Three basic allocation methods, or minor variants of them, have typically been applied: auction, “beauty contest” and hybrid, each with its particular merits and demerits. Ideally, regulators should select the most profitable and suitable method for their domestic market, in the light of these considerations. Regulators must also decide on the number of licences to be awarded; what proportion of these should be allocated to existing 2G licensees, and what proportion to new entrants. Finally, the fees and conditions that are imposed on successful bidders as part of the licence agreement are a key element in licensing policy.
Figure 4.2: The 3G rollercoaster
Trends in 3G licence prices obtained through auction, in US$ per inhabitant
0 100 200 300 400 500 600 700
03/00 07/00 7/00 10/00 11/00 12/00 12/00 01/01 01/01 03/01 03/01 07/01 09/01 12/01 02/02 UK
Germany
Netherlands
Italy
Austria
Korea (Rep.)
Sw itzland Canada
NZ Australia Belgium
Greece Denmark
Czech Rep.
Taiw an, China
Note: Excludes comparative selection (“beauty contests”) and mixed “hybrid” licensing processes. Horizontal axis is not linear.
Source: ITU research.
CHAPTER FOUR: REGULATORY AND POLICY ASPECTS 71 The auction method for licence allocation
A spectrum auction is a market-based method for awarding licences. Supporters of this method argue that it is a transparent and objective process, which is easy to understand and frees administrators from the pressures of reconciling numerous objectives, including regional employment policy and the support of
“national technology champions”. As shown in Table 4.1, Germany, New Zealand and the United Kingdom are examples of countries that have auctioned 3G spectrum.
However, this approach raises other challenges for policy-makers, particularly in terms of efficient auction design and timing. One concern is that high auction prices make it more difficult for winning bidders to fund network roll-out and service development. Another risk is that the operator with the greatest capacity for monopolization could bid for all mobile licences up for auction, thereby acquiring or maintaining its monopoly status.
Those who criticize auctions argue that 3G bidders may impose higher retail prices on their subscribers in order to recover losses due to licensing costs. This may mean that 3G operators are handicapped in their competition with other broadband media. Another concern expressed by critics relates to cross-subsidization.
If 3G operators with other licences (in domestic or foreign markets) impose high retail prices for these other business services, but adopt relatively low prices for 3G services in order to gain 3G market share, this prevents fair market competition.
The comparative selection process (“beauty contest”)
When adopting a comparative selection approach, the regulator allocates licences to operators who best meet stated pre-set criteria. Typically, governments rate applications according to those criteria and licences are allocated to those whom the government believes best meet the stated requirements. China, Japan and Sweden are examples of countries that have applied this “beauty contest” approach.
One of the disadvantages of this approach is that it puts a much greater burden on policy-makers than an auction, as it requires them to decide between bidders according to a complex scoring system. While some factors can be quantified, other criteria are more difficult to assess. Moreover, the qualitative aspect of the decision-making may leave administrators open to accusations of non-transparency and bias.
The “hybrid” selection processes
Some countries have adopted a hybrid method to allocate licences. In order to be eligible to bid, applicants have to pre-qualify in terms of criteria similar to those established for straight-out “beauty contests”.
Licences are then allocated on the basis of an auction. By their nature, such pre-qualification processes can potentially be complex, time-consuming and contentious, and the scope for subjective interpretation of the rules and requirements increases the risk of litigation and delay in introduction of the new service.
Nevertheless, such processes can be used to help ensure that potential holders of 3G licences have the expertise, capability and will to meet social and policy objectives required by government. Box 4.2 describes the 3G licensing process in Hong Kong, China5, where the number of bidders was initially whittled down in the beauty contest component, and a final selection was subsequently made by auction.
Number of licences
When determining how many 3G licences to issue, it is important to take into account the current market environment, expectations about future demand for services, and supply side considerations such as necessary frequency bands for each operator’s network business. In many high-income countries, what is called the “n+1” model has been adopted for licensing. Under this model, the number of 3G licences allocated equals the number of existing 2G licences, plus one additional licence.6 Typically, the amount of spectrum available for IMT-2000 services should allow for between three and six new 3G mobile telephony licences in a given market. Taking into account licences awarded to date, the average number of 3G licences awarded is four per country (see Table 4.1).
Table 4.1: Allocation of 3G mobile licences in selected countries worldwide Country No of
licences Mobile
incumbents Method Date awarded Amount bid, US$ million Australia 6 3 Regional auction March 2001 610
Austria 6 4 Auction November 2000 618
Belgium 4 3 Auction March 2001 421.2
Czech Republic 2 2 Auction December 2001 200 Denmark 4 3 Sealed bid auction September 2001 472 Finland 4 3 Beauty contest March 1999 Nominal
France 4
(2 awarded, 2 still on
offer)
3 Beauty contest + fee (Auction for two outstanding licences closed in May 2002)
July 2001 (Results of revived auction due in September 2002)
4.52 billion (subsequently reduced
to 553 million each, plus 1% of revenue)
Germany 6 4 Auction August 2000 46’140
Greece 3 3 Hybrid July 2001 414
Hong Kong, China
4 6 Hybrid September 2001 Minimum 170 each plus royalties Israel 3 3 Beauty contest + fee December 2001 157.1
Italy 5 4 Hybrid October 2000 10’180
Japan 3 3 Beauty contest June 2000 Free
Korea (Rep.) 3 2 Beauty contest + fee August 2001 2’886 Malaysia 3 3 Beauty contest December 2001 Nominal
Netherlands 5 5 Auction July 2000 2’500
New Zealand 4 2 Auction January 2001 59.9 Norway 4 2 Beauty contest + fee November 2000 88 Singapore 3 (+1?) 3 Cancelled auction April 2001 165.8 Slovenia 1 2 Cancelled auction December 2001 82.2 Spain 4 3 Beauty contest + fee March 2000 480 Sweden 4 3 Beauty contest December 2000 Nominal Switzerland 4 2 Auction December 2000 119.8 Taiwan, China 5 4 Auction February 2002 1’400
UK 5 4 Auction April 2000 35’400
Total (25) 99 + 79 13 auctions 9 beauty contests 3 hybrid
105’286 +
Source: ITU Briefing Paper on the “Licensing of 3G Mobile” available at: http://www.itu.int/osg/spu/ni/3G/index.html,
Comparative Assessment of the Licensing Regimes for 3G Mobile Communications in the European Union and their Impact on the Mobile Communications Sector, European Commission, Directorate-General Information Society, Final Report, 25 June, 2002, and 3GNewsroom.com at: http://www.3gnewsroom.com/index.htm.
CHAPTER FOUR: REGULATORY AND POLICY ASPECTS 73 Box 4.1: 3G licence prices in France: “times they are-a-changing”
ART reduces 3G licence fees
In August 2000, the French regulator, the Autorité de Régulation des Télécommunications (ART), announced the allocation of four licences for 3G services using a comparative selection (“beauty contest”) method, with payment of an initial up-front fee. In January 2001, only two incumbent operators applied for the four 3G licences on offer, after two other candidates dropped out of the race, primarily due to inability to pay the fee of € 4.95 billion (US$ 4.52 billion). The winners, France Telecom (parent company of mobile operator Orange) and SFR, were awarded 3G licences in July 2001. It was initially decided that the licensees should pay half the entire fee in the first two years: in September and December 2001, 1/8 of the total per month; in March, June, September, December 2002, 1/16 of the total per month. The other half was to be paid over the following 13 years, in yearly instalments. When the first payment was due however, SFR displayed reluctance to hand over its payment. In November 2001, ART amended the licensing conditions, reducing the licence price to € 619 million (US$ 553 million). This amount is equivalent to the first payment owed by licensees under the earlier conditions. It also added a fixed one per cent charge on revenue and extended the term of the licence from 15 to 20 years.
ART accepted applications for the other two licences up until May 2002, with the final outcome to be announced in September 2002. One of the drop-outs from the earlier process and the third largest GSM operator in France, Bouygues Telecom, has already submitted a bid in the revived auction—observers expect it may be the only application. Bouygues forecasts the cost of the new network to be € 4 billion over seven years (in addition to the licence fee).
Source: Autorité de Régulation des Télécommunications (ART); Total Telecom News, 15 May 2002; Public Network Europe, May 2002.
Box 4.2: Hong Kong’s licensing process, or how to do it well Hong Kong’s hybrid method based on royalties
Hong Kong not only has one of the highest teledensities in Asia, but it also has one of the highest mobile densities in the world with 5’701’700 subscribers in 2001, representing over 59 per cent of total telephone subscribers. It is not surprising that it is ranked first in ITU’s Mobile/Internet Index (see Table 10 in the Statistical Tables section in the Annex).
The promising environment that now exists for 3G is largely due to the balanced and successful management of Hong Kong’s third-generation licensing process. The regulator, OFTA, opted for a hybrid process consisting in a pre-qualification process followed by spectrum auctioning. The process took place in several stages, with applications invited from operators using any of the family of IMT-2000 standards, subject to compatibility with existing standards. Furthermore, OFTA decided to allow existing 2G operators, whether successful or not in obtaining 3G spectrum, to use any IMT-2000 standard within their assigned 2G frequency bands for 3G services, when equipment becomes commercially available. Rather than a purely fee-paying system, royalty payments, with a schedule of minimum payments, were introduced by OFTA, in order to minimize the financial burden on operators.
The results of the process were announced in September 2001, with 3G licences awarded to four successful bidders, namely: Hong Kong CSL Limited (joint-owned by Telstra Corporation and Pacific Century CyberWorks);
Hutchison 3G HK (joint-owned by Hutchison Whampoa and NTT DoCoMo); SmarTone 3G and Sunday 3G (Hong Kong). Under the regulatory framework of open network access, the 3G licensees are required to open up at least 30 per cent of their capacity for use by mobile virtual network operators (MVNOs) and/or content and service providers. Also in October 2001, OFTA published its guidelines for the application of Public Non-Exclusive Telecommunications Service (PNETS) licences and invited applications from potential MVNOs. OFTA has thus sought to ensure that competition be enhanced and the market be kept as vibrant and balanced as possible.
By the end of May 2002, six companies had obtained MVNO licences in Hong Kong. They are currently using 2G technology for service provision, with plans to migrate to 3G technology once the networks are ready.
Source: ITU case study on third-generation licensing in Hong Kong SAR and China, available at http://www.itu.int/osg/spu/casestudies/index.html.
3G Licence conditions
Regulators have imposed specific obligations on licensees, such as duration of the licence, date of commencement of operations and the coverage of a certain percentage of the territory or population. These obligations are often secured by the threat of sanctions. Table 4.2 shows various examples of how 3G licence conditions can affect the market after licensing.
Despite the promise of 3G mobile services, the payment of high licence fees will only be warranted for a licensee if the market lives up to expectations. This may seem like common sense. But experience has shown that estimating the growth potential of the market is not always easy, with many early licensing processes having involved exorbitantly high fees, with the result that operators were knocked flat when the telecoms bubble finally burst. Figure 4.2 shows the trends in 3G licence prices per inhabitant obtained through auction, in selected economies. In the first group—the United Kingdom, Germany, Netherlands and Italy—
bidders paid a high sum per capita, making it potentially difficult for them to recover licence costs.
Subsequently, in the light of dashed market hopes, 3G licence prices dropped dramatically. In early 2002, over 20 countries had already allocated 3G licences using a range of fees, methods and conditions (see Table 4.1), offering useful lessons for 3G licensing policy in the future.
The European 3G bidders, notably in Germany and the United Kingdom, are suffering from very high 3G licence fees. They have appealed to regulators to alleviate the burdens placed on them. The European Union has looked into this issue, and announced that, in principle, 3G licensing conditions should not be changed, in order to ensure a predictable environment and legal certainty favourable to long-term investments.7 It is, however, encouraging increased infrastructure sharing for cost efficiency.
Some countries have chosen to adopt licensing methods that charge licence fees in proportion to the number of users, such as Sweden (annual levy of 0.15 per cent income yearly, in proportion to operators’ income) and Japan (annual licence fee per handset, in proportion to the number of handsets in circulation). This method reduces the initial payments owed by licensees, even though there is a risk that operators may lose incentives to use the spectrum more efficiently. Overall, this method imposes a lesser financial burden on operators, as did the unique royalty scheme introduced in Hong Kong (see Box 4.2).
Licensing principles
In addition to the licensing methods and conditions, the overall principles guiding the licensing process also need to be established by regulators. In the selection process, regardless of the method chosen, regulators should try to develop quick, efficient, transparent and objective criteria. As underlined by ITU’s workshop on 3G licensing held in September 2001, “For credibility reasons, licence award processes should be transparent and open to full public scrutiny. This is why objectivity and stability in the licensing process are essential, in order to ensure that regulatory risk is minimized. The fast-moving world of telecoms also means that award processes should be designed to happen as quickly as is feasible.” 8
As regards licence fees, these are typically used to fund governmental activities. Ideally, however, these funds should be re-invested in the same sector, for instance to assist with spectrum clearance, or to help bridge the digital divide, rather than being used for unrelated purposes.9
Efforts to harmonize policy within the European Union have not yet made much headway. In the licensing process for European Union countries, some operator groups (consortia) applied for 3G licences in several different countries, and some were licensed with totally different licensing conditions applying each time.
Based on the analysis and experiences of 3G licensing policy in European Union countries, a report assessing the various 3G licensing regimes was released by the European Commission in June 2002.10 This report lists the following five principles for spectrum assignment exercises and regulation of spectrum-based services for policy-makers and regulators:
• Build spectrum assignment on the notion of a “sustainable market”;
• Allow for the gradual introduction of a new technology and/or new capacity;
• Design the process for spectrum assignment so as to minimize distortions;
• Align licence conditions and other regulatory levers to allow for financial stability;
• Support the take-up of market demand.
CHAPTER FOUR: REGULATORY AND POLICY ASPECTS 75 Table 4.2: Matching 3G licence conditions with key areas of regulatory focus
Possible key areas of regulatory focus 99999999Primary focus 9999Secondary focus Key 3G licence
conditions and
circumstances Industry
structure Pricing Interconnection Customer access
Quality of
Service Comments
Number of
licences
99
On average, 3G licensing allowed for one additional mobile operator per market; Number of 3G licences equals the number of networks built.Award method
99 9
Highest bidding operators were awarded a 3G licence.Relative timing
of the award
99
Number of interested candidates for 3G awards went down after mid-2001, in line with market expectations.More spectrum for 3G new
entrant
99 9
Aimed at allowing for a level playing field for new entrant versus existing 2G operators with a 3G licence.Payment
modalities
9 9
Modalities did not substantially affect industry structure.Licence duration
99
Defines duration of 3G services provisioning on the mobile market.Spectrum size
99 99
Given scarcity of 3G spectrum, increased spectrum size per operator implies fewer licences Roaming rights /obligations
99 99 99
Defines use of networks by other operators;improves overall service availability.
Access
obligations
99 99 99
Defines potential for service providers in a market.Source: “Comparative assessment of the licensing regimes for 3G mobile communications in the European Union and their impact on the mobile communications sector”, European Commission Directorate-General Information Society.
Para-national, international and inter-regional bodies have an important role to play in defining such principles and in establishing guidelines and, given their fundamentally neutral status, may provide the best framework for policy harmonization.
4.2.2 Licensing policy for WLAN11 services
Regulation and licensing policy for WLAN services are likely to become a hot topic owing to a number of reasons. First, interference between household and other appliances and WLAN services is likely to be an increasing problem. Second, the “open” nature of the bands in question can be an irresistible invitation to users to sidestep charges.
As outlined in Chapter two, the WLAN systems that hold the most promise are IEEE 802.11b (Wi-Fi) and 802.11g, both operating in the 2.4 Ghz band, and 802.11a, operating in the 5.2 GHz band. In most countries, the two frequency bands, 2.4GHz and 5.2GHz, do not require a licence for use and were originally allocated for low-power applications.12 One upshot of this is that operators can start WLAN operations more quickly than mobile phone operations, because they need not go through a licensing procedure or pay for licences. In some countries however, commercial exploitation of these unlicensed bands is prohibited (see Box 4.3). One
As outlined in Chapter two, the WLAN systems that hold the most promise are IEEE 802.11b (Wi-Fi) and 802.11g, both operating in the 2.4 Ghz band, and 802.11a, operating in the 5.2 GHz band. In most countries, the two frequency bands, 2.4GHz and 5.2GHz, do not require a licence for use and were originally allocated for low-power applications.12 One upshot of this is that operators can start WLAN operations more quickly than mobile phone operations, because they need not go through a licensing procedure or pay for licences. In some countries however, commercial exploitation of these unlicensed bands is prohibited (see Box 4.3). One