Excessive financial bidding has forced the Czech Telecommunications Office (CTU) to abort its auction of spectrum in the key 800MHz, 1 , 800MHz and 2 , 600MHz bands. The decision was taken after bidding passed the CZK20bn (US$1b n) mark and appeared set to rise further. The regulator became concerned that operators might not be able to raise the finance needed to support the bids and subsequent network and service deployment obligations. Such a move would not have been in the best interest of consumers and BMI welcomes the CTU's highly unusual decision.
The regulator had hoped that the auction would entice a new player into the Czech Republic's relatively staid mobile market, giving the existing players a much-needed incentive to make their offerings more competitive and to reach out to underserved areas of the country. The licences were to be technology-neutral, but it was broadly expected that the spectrum would be used to deliver 4G LTE services, enabling licensees to more effectively tap latent demand for mobile broadband services.
|ROI Outlook Poor While Mobile Data Growth Is Slow|
|Non-Voice As Proportion Of Service Revenues (%)|
Existing 2G/3G licensees Telefónica O2 , T-Mobile and Vodafone all bid for spectrum, as did prospective new entrant PPF Mobile Services , a new company backed by the private equity fund managed by Petr Kellner. It seems that the existing players bid aggressively to prevent the new entrant from acquiring the lion's share of the spectrum on offer without considering the full financial implications of their actions. However, it is easy to see why they were motivated to do so.
The 1 , 800MHz spectrum could be used to more effectively penetrate rural and underserved areas as its better signal propagation characteristics would require fewer base stations and thus make it more affordable to roll out services to areas where cost remains a major consideration for prospective broadband users. The 2 , 600MHz spectrum, meanwhile, would be useful for penetrating buildings in densely populated areas. The 800MHz spectrum - which has yet to be tapped by any player in the Czech mobile market - offers the greatest potential for an investor, owing to its ability to cover the whole country via a relatively small footprint of transmission towers. As the three existing operators already hold significant chunks of 1 , 800MHz and 2 , 600MHz spectrum, BMI thinks it highly likely that they will bid most fiercely over the rights to the 800MHz band.
Telefó nica O2 - the incumbent - was quick to commend the CTU for its actions, but said that it believed it behaved responsibly throughout the bidding process, implying that it believes its offers for the spectrum were reasonable and that it could still deliver an acceptable r eturn on investment (ROI) to its shareholders. This seems unlikely to BMI , given sluggish growth in mobile non-voice revenues in recent quarters.
Data from O2 and T-Mobile (we have estimated Vodafone's contribution) show that non-voice service revenue accounted for an average of 28% of overall mobile service revenue in 2012. This represents a modest increase from 26.5% in 2011, but , with the level having increased only from 23.5% in 2009, while basic voice revenues have been declining, this suggests mobile data consumption is still a long way off supplanting voice as a revenue generator and, possibly, does not merit excessive investment in spectrum and next-generation technology, even in the long term. In order to subsidise investment in 4G services and assets, operators would have had to set prices very high, and it is possible that PPF Mobile would have ultimately collapsed . This would not have been in the best interests of the consumer and it would have led to restrictions on competition.
Excessive bidding for 3G spectrum in Western Europe in the early 2000s meant that 3G network and service development was compromised from the very beginning and it is unlikely that many of those 3G networks that survive d have yet seen a return on their investment. 3G coverage in markets such as the UK can be quite poor even today . T his impacts on consumption of premium services and it may be that spectrum is not utilised optimally.
In 2012, an auction of 4G spectrum in the Netherlands concluded with operators paying several times more than had been forecast; it is reported that licensees are struggling to justify that investment as consumers prove reluctant to sign up to more expensive 4G services. Even in markets where reasonable prices were paid for 4G spectrum and where consumers are considered to be very open to new technology and services - such as in Denmark, Norway and Sweden - 4G uptake has been very disappointing, even after three years.
The number of devices connecting to mobile networks over the next decade means that operators have to invest in new infrastructure and additional spectrum wherever possible, but as many are unable to leverage that demand owing to a lack of ownership or control over the content that flows through their networks, their only recourse in the short term is to impose higher data usage charges. Some forward-looking operators - such as Telefónica - are taking charge of their destiny by developing applications and content of their own, but this is also a huge financial risk, given their offerings have yet to gain the same kind of traction and brand loyalty enjoyed by third-party suppliers such as Apple 's iTunes and WhatsApp , among many others.
The CTU plans to restart the auction later in 201 3 and has already suggested imposing higher base prices and more stringent bidding rules in order to ensure a more ord erly offer process. Given Telefó nica O2's defiant statement and its parent's interest in tapping the content and applications market , we expect the new auction to again attract considerable interest - despite our concerns that there is very little scope for adding new customer s in this saturated market. As has proven to be the case in many other markets over the last decade, operators remain fearful of being left behind in the 'Connected Everything' market and that fear may continue to blind them to the practicalities of sustainably financing their future ambitions.