Spectrum: The golden goose
It's barely two months since the ministerial policy direction on the WOAN (wireless open access network) and high-demand spectrum.
With last week’s announcement from ICASA that it will publish a draft process to license high-demand spectrum before the end of the year, stakeholders will be forgiven for licking their lips in anticipation, hungry for hertz.
However, the process is likely to be anything but smooth and speedy.
ICASA, to its credit, has been quick out of the starting blocks. The ink was hardly dry on the policy direction before it was issuing spectrum-related tenders. One calls for consultants to help determine “fair economic value” for spectrum in the 700 and 800MHz, and 2.3, 2.6 and 3.5GHz bands (think of a number and double it, suggested one wag). Another calls for consultants to “manage the auction process”. A third asks for staff to be trained in spectrum management.
But there are a number of stumbling blocks along the road to high-demand spectrum nirvana.
It is clear from what ICASA is doing that it – correctly – perceives the demand for spectrum from current and would-be licensees as the real bottleneck in the sector rather than the licensing of the WOAN.
Third time lucky?
It’s not called high-demand spectrum for nothing. It’s a demand that has been building since at least 2006, when ICASA first began to look at high-demand spectrum and to consider auctions as a means of assignment. But twice before, ICASA’s attempts to auction this spectrum have come to naught.
In mid-2010, the auction for 2.6GHz and 3.5GHz spectrum was cancelled at the last minute, under controversial circumstances. A second attempt, in 2016, to auction off spectrum (in the 700 and 800MHz and 2,6GHz bands) foundered in the face of litigation from minister Siyabonga Cwele and the imminent release of the ICT White Paper.
This time around, however, ICASA will be issuing an ITA in response to a specific policy direction from the new minister. From that point of view, then, things look far more promising.
However, the policy direction, unfortunately, links two rather separate issues: making high-demand spectrum available; and awarding a licence for the controversial WOAN. What this does is create unnecessary complexities, linkages and dependencies for ICASA, especially given the fact that the timeline for completing a new iECNS process to license a winning WOAN consortium is likely to take longer than a spectrum auction ITA.
Whilst the policy direction does say that both processes “must commence simultaneously”, this is easier said than done. There are a number of linkages that may hinder running the two processes independently and in parallel, including:
- How to determine in advance which high-demand spectrum will not be required for the WOAN, and hence be available for auction.
- How to manage the poorly-defined “offtake” requirement (what exactly is meant by “30% national capacity”, and how is that to be managed “collectively” in a multi-licensee market with a fluid mix of both wholesale and retail providers, if the WOAN is as yet unlicensed?).
- How to deal with any spectrum in bands lower than 6GHz that may be in high-demand for both 4G and 5G, given that the latter is supposedly off the table for now.
- How to manage the high-demand spectrum auction in parallel with the 5G spectrum research required for the follow-up policy direction envisaged for mid-2020.
Auctioning off spectrum
The ability to navigate these linkages so that the licensing of high-demand spectrum is decoupled from the WOAN process will be critical in getting spectrum to the market expeditiously, and into the hands of licensees, either incumbents or new entrants, in a way that will benefit consumers, the sector and the economy as a whole – while at the same time raising revenue for the fiscus.
The spectrum auction is further complicated by a number of pre-conditions attached to its implementation in the policy direction and intended to meet desirable policy and social objectives.
These are somewhat simpler than was contemplated in the 2018 draft policy direction, and deal mainly with universal access and service requirements for “rural and under-serviced areas” and with ensuring diversity and BBBEE in the award.
The provision to cater for possible new entrants has been dropped, presumably to protect the business case for the WOAN.
Two related questions arise in this rather complex scenario.
Firstly, how much is the high-demand spectrum worth?
Conditions attached to spectrum come at a price, no matter how socially desirable they may be. Bidders will factor in the cost of meeting the universal access and service and other requirements when they make their bids. We have already seen protests over the auction terms and conditions from prospective bidders in the German 5G spectrum auction.
Other factors, too, such as the state of the market (can Cell C afford to bid?) and the size and structure of the lots (ICASA’s 2016 ITA was criticised by some on the grounds that some of the lots were far less desirable than others) also affect the likely value of the spectrum on offer.
It’s not called high-demand spectrum for nothing.
Secondly, how does one design an auction to achieve an optimum balance between the benefits to consumers and the sector as whole, on the one hand, and on raising revenue for the fiscus?
Auction design is a complex art, and history is littered with examples of auctions that either failed completely (with no or too few bidders) or that produced unwanted outcomes (such as entrenching incumbent market dominance, or forcing awardees out of the market).
Add to this the need to guard against bid collusion, and to learn the lessons of game theory, and you have an unenviable task ahead.
The GSMA is but the latest in a line of commentators warning against the setting of unreasonably high reserve prices, and against revenue maximisation as a key auction objective. And, while they clearly have an incumbent axe to grind, the consequences of milking a spectrum auction for every treasury cent that can be raised seem clear – higher prices passed on to consumers for service, along with a weakened ability to roll services out to poor communities and to those in rural areas.
ICASA and the minister
Finally, the ability to navigate the challenges of a high-demand spectrum auction will also depend upon a good working relationship between the minister and ICASA, something that currently looks rather scratchy.
ICASA’s press release from last week already hints at tensions over its status and role. ICASA notes it is “considering the policy direction” before finalising its own “position” – a carefully-worded reminder of how the independence provisions in the Electronic Communications Act are specified.
At the same time, the minister is on the recent record as inveighing against the very same independence to the Portfolio Committee, in relation, inter alia, to funds requested by ICASA to run the spectrum auction process described above.
We may still be in for a bit of a bumpy ride.