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Bidding on the 4G Spectrum for Mobile Telecommunications

«In mid-2014, the Argentine government introduced a bidding process for the radio spectrum for mobile communications, thus initiating a much-delayed process that will allow for the quality of service, which is currently very low, to improve. The decision had been expected for years, though the announcement that it had been made was surprising.»

Gustavo Fontanals / Argentina, September 2014

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In mid-2014, the Argentine government introduced a bidding process for the radio spectrum for mobile communications, thus initiating a much-delayed process that will allow for the quality of service, which is currently very low, to improve. The decision had been expected for years, though the announcement that it had been made was surprising.

Operators had long argued in favor of the allocation of the spectrum, claiming that their networks had reached their limits and that the main cause of the issues that had been identified was saturation. This is only to be expected, as Argentina has not assigned a new spectrum since 1999, after which there was exponential growth of the number and use of mobile lines. Argentina is currently one of the four countries in Latin America with the lowest amount of spectrum assigned to mobile communications and is the only country in South America that does not have operational LTE networks.

In 2010, the government announced that it would move forward with the bidding process on a portion of the remaining 3G spectrum as a step that would lead into the assignment of new 4G service bands. However, that bidding process was delayed for over two years, and its cancellation was announced in mid-2012 along with the news that that spectrum would be allocated to the state-run company ArSat, which would begin to offer mobile services. The government also announced that no new spectrum would be assigned until the existing operators improved their current services (which required greater investments in their networks) and that when progress was made, ArSat would be one of the main recipients of the new bands.

Then, in a move which represents a departure from the statements that it had made over the past two years, the government announced that it would hold the largest bidding process for the mobile spectrum in the country’s history (covering 180 MHz in the 700 bands and AWS for 4G and 34 MHz of the remaining 3G). The government also stated that ArSat would not receive spectrum or operate directly, and that existing operators are to be the main beneficiaries of the bidding, though not the only ones.

What is the reason for this change? It is mainly a question of time: the current administration is definitely leaving office in December 2015. This is a common situation in the region, as outgoing governments often seek to close concessions or other key sectorial decisions that are within their reach, which allows them to collect funds with few conditions on their use and shape the market. As such, the government assumes that it must take steps if it wishes to close this chapter. At the same time, the investment amounts and time frames for the development of a network by ArSat represent a heavy burden for public resources with far-off and uncertain results. By contrast, allowing private entities to compete for the entire spectrum will allow the government to collect around US$2 billion, apart from the investment amounts. However, the progress is not coming at the best time. It has coincided with the worsening of the debt crisis with holdouts, which increases the cost of bringing funds into the country. The government is also competing for funding with other countries in the region that have undertaken processes to attract investment into this sector (such as Chile, Brazil, Ecuador and Mexico).

In any bidding process, it is important to consider the conditions stipulated, as their design allows for an increase in the collection of funds or prioritization of obligations, and for new competitors to be encouraged or incentives to be provided to established stakeholders. The bidding process that the government proposes seems to be seeking an intermediate point.

It is clear that the process is mainly directed at current operators. The government emphasized that the market in question presents high levels of concentration at the global level, in which established operators have advantages over new participants due to the infrastructure that is available to them. This is true: in these bidding processes, it is common for existing operators to be the only winners because they have a high degree of interest in keeping the market closed and are able to come up with the resources necessary to submit winning bids. As such, it is very likely that Movistar, Personal and Claro will push for the three large open national lots into which the 4G spectrum will be divided and that they will split them in the end. And while the bidding process includes setting aside a specific 4G lot for a newcomer, it is extremely costly that a new player who is willing to build a network from zero will come onto the scene. This is due to the bidding and deployment costs as well as the process of acquiring clients in a market that has a level of penetration of over 130%.

Given this situation, the government seems to be seeking to strike a balance by imposing conditions on those candidates. On the one hand, it set a base price that can be considered high in an attempt to ensure that there is solid income generation beyond the competition. It also set a limit of 15 years on the allocations, which is a new development because until now telecommunications concessions had never had expiration dates. Finally, a series of requirements related to coverage, quality and service provision for the successful bidders was introduced. This regulatory novelty will allow the State to condition the performance of operators through the assignments.

There are many different requirements, which include the need for strong coverage (meant to reach 98% of the population within a five-year period) as well as infrastructure sharing for new networks, provision of national roaming for newcomers, and hosting of Mobile Virtual Network Operators (MVNOs).

The latter seems to be the main mode that is planned for the entry of new operators, mainly for companies and cooperatives that provide landline, pay TV and/or Internet access services in parts of the country, allowing them to complement those offers with mobile services. This burden on the successful bidders seems to be appropriate, because even though MVNOs were identified in legislation beginning in 2000, the operators refused to grant use of their networks. It is important to note that the MVNOs focused on the resale of services, that they did not make the market more dynamic because they used existing networks, and that they generally fail to capture more than 3% of all users.

There is no doubt that it is positive for progress to be made with the allocation of the new spectrum for the provision of next-generation mobile services. In the case of the 700 MHz band, this involves taking advantage of the digital dividend, incorporating a telecommunications spectrum that had been dedicated to radio broadcasting. Though it is unlikely that new operators with a network will enter the field, the gradual emergence of virtual operators or a renewed focus on one of the existing operators will generate a more competitive dynamic. It is also important to consider the fact that the expansion of new services will take several years, but after so many steps forward and then back, it looks like the green flag is finally being raised.

*Gustavo Fontanals is a political scientist who specializes in Telecommunications and is a researcher at Universidad de Buenos Aires, @Phillynewrocker.

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