Digital Dividend, the Danish way

The Danish 800MHz auction stands out from the recent slew of Digital Dividend auctions for a number of reasons. Even though it produced only two winners and some of the lowest prices in Europe, competition in the auction has been effective. And uniquely amongst recent spectrum auctions, the Danish 800MHz auction also took care of allocating fairly demanding coverage obligations alongside spectrum usage rights. As a result, virtually all Danes will have access to fast broadband in the short term.

Digital dividend spectrum for fast wireless broadband coverage

The next generation mobile technology will bring substantial improvements in data communication. A file, song or video can be downloaded in a quarter of the time needed using a typical 3G device, and possibly even less. Several mobile operators are already offering 4G services in Danish cities, using higher frequency spectrum in the 1800MHz or 2.6GHz band.

Higher frequency spectrum has one disadvantage, however. Radio waves in that frequency range do not travel very far, which means that many cell sites are needed to cover a given area. This does not matter so much in densely populated areas, where base stations need to be built in any case to provide capacity – but it makes covering sparsely populated, rural areas rather unattractive. Lower frequencies would be much more suitable for this. With signals travelling farther, fewer cell sites are needed to cover any given area.

The spectrum traditionally used for terrestrial television broadcasting fits the bill perfectly. And with the move from analogue to digital transmission, a sizeable portion of this spectrum has become available. Using this so-called ‘digital dividend’ to bring fast mobile broadband services to areas where there is a need to improve the availability of access to broadband services is therefore an attractive policy option.

Faster services for more users

Improving access to broadband in Denmark however is no mean feat. Basic broadband is available to almost every citizen. At present 99.9% of the population have access to download speeds of at least 2 Megabit per second (Mbps) – virtually all Danes can download a music album in less than 15 minutes. 96% of the population have access to connection speeds of 10Mbps (where the same album downloads in less than three minutes), and a 100Mbps service (where the download takes seconds) is available to almost 40% of the population.1

With virtually everyone enjoying some form of broadband access, improving services means extending the reach of higher bandwidth offerings. The Danish government has an ambitious target that all households and businesses should have access to at least 100Mbps by 2020.2 While 4G networks may not necessarily be able to deliver such an ultra-fast service, they can serve to improve the availability of fast broadband access in the interim.3

Demanding coverage obligations flexibly assigned

Extending broadband coverage is an important policy goal in Denmark and the government has used coverage obligations to achieve this in the past. For instance, the 3G licences awarded in 2001 came with an obligation to serve 80% of the population.

Fast forward to 2012, and coverage obligations are used again in the 800MHz award to drive availability of faster services. And those obligations are fairly onerous – given that availability of basic broadband is sorted, the name of the game now is an obligation to provide services offering download speeds of at least 10Mbps. By comparison, other countries require coverage with services that offer access speeds of 1 or 2 Mbps.4 The Danish regulator identified a list of 207 postcodes where the availability of a 10Mbps service was poor. These postcodes were then grouped into three regions as shown in the figure below.

Postcodes to be covered

Postcodes to be covered

While the coverage obligation in itself was fairly demanding, the Danish auction offered some flexibility in how it would be met. Specifically, the Danish auction allowed individual winners of spectrum to bid for being exempt from the coverage obligation in one or more regions, provided that overall the obligation would still be met.

The coverage obligation was initially attached to all blocks. In the auction, bidders could bid for exemptions from the coverage obligation alongside the spectrum they wished to acquire. Winning a particular regional exemption would exempt the licensee from serving the coverage obligation in that region and winning all regional exemptions would exempt the licensee from the obligation completely. Therefore unlike in other European countries where the coverage obligation had been attached to specific lots, the Danish auction supported a range of spectrum and coverage obligation assignment outcomes. One operator could be assigned the obligation in all three regions or a different operator could be assigned the obligation in each region. The operator would also have the flexibility to choose the spectrum package required to serve the coverage obligation.

Spectrum was offered as a 2x10MHz ‘A’ block located at the bottom of the 800MHz, with the rest of the band being split into four generic ‘B’ blocks (2x5MHz). Winners of any B block would have to cover all three regions, unless they also won an exemption from covering particular regions. Because the A block was subject to usage restrictions to protect adjacent DTT transmission, the winner of that block would have to cover postcodes in the green region only, unless accompanied by an exemption.

In order to ensure that the coverage obligation would be met, a bidder bidding for a spectrum package with exemptions was required to place a reserve price bid for the same spectrum package without any exemptions. Therefore, a bidder who wanted to participate in the auction had to be prepared to serve the coverage obligation if it were awarded spectrum at the reserve price. Reserve prices were kept at a moderate level not to discourage participation in light of this requirement, which ensured that the coverage obligation could always be assigned if suitable spectrum was sold.

Keeping the number of available exemptions in each region below the number of winners,5 the price of exemptions could then be determined in the auction alongside the price of spectrum.

Overall, this process ensured that the coverage obligation would be assigned in the most effective manner. The most efficient operator with the lowest cost of serving the obligation should have the lowest willingness to pay for an exemption and is thus least likely to win the exemption in that region. Through competition in the auction, both spectrum and the coverage obligation would be efficiently assigned. This minimised the risk that spectrum (and thus the obligation) might not be assigned.

A happy ending

In the end, there were only two winners in the auction. TDC won 2x20MHz of spectrum – twice the amount of any other operator in Europe to date. TT-Network, a joint venture between TeliaSonera and Telenor, paid the lowest price per population in Europe for their 2x10MHz licence, and secured an exemption from serving out the coverage obligation.6 In light of this result, has the auction achieved the government’s objectives?

Given that there was no specific revenue raising objective for the 800MHz auction, the fact that licence prices were low is moot. Rather, the main objective was to ensure that both spectrum and the 10Mbps coverage obligation would be efficiently assigned. This was achieved by enforcing bids that could fulfil the coverage obligation as a pre-condition for participating in the auction, and only selecting outcomes in which the coverage obligation was fully met. The low licence prices are thus simply a feature of these restrictions and the moderate reserve prices.

A more appropriate measure of success is to look at whether the coverage obligation assigned in the process will ultimately bring fast broadband to virtually all Danes. With three out of the four mobile operators having access to digital dividend frequencies, 4G services will be available to virtually everyone in Denmark with the coverage obligation ensuring that those in more remote locations are not left behind.

 

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Footnotes

  1. See Danish Business Authority’s 2011 broadband mapping: “Bredbåndskortlægning 2011, version 8th March 2012”. []
  2. See The High Speed Committee’s 2010 statement: “Denmark as a high-speed society”, and the Danish Business Authority’s 2011 broadband mapping, ibid. []
  3. Although 4G networks are capable to provide theoretical peak speeds of over 100Mbps, in practice, users will experience somewhat reduced speeds. When TeliaSonera launched its 4G network at the end of 2010, it estimated average speeds of between 10-40Mbps. []
  4. Germany and Sweden required the provision of a service that would allow a user to experience download speed of 1Mbps while Italy imposed a slightly higher bar of 2Mbps. France defined its service required in terms of theoretical peak speed of 30Mbps while Portugal defined the required access speed to be that subscribed to by the lowest quartile of consumers. Spain specified an access speed requirement of 30Mbps though there is no clarity whether this would be a peak or average user experience speed or some other metric. []
  5. In coverage area 1, the number of exemptions available is the total number of winning bidders less one. In coverage area 2 and 3, the number of exemptions available is the number of winning bidders of B lots less one. []
  6. As a matter of comparison, operators in other European countries paid between two and eight times what TT-Network did in the Danish auction for essentially the same frequencies. TT-Network won frequencies in the range of 791-801MHz paired with 832-842MHz. Other European countries however may impose different usage conditions than Denmark on the use of these frequencies. []

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