Dramatic license: state and operators clash over spectrum auction

The telecom market erupted last week as the preliminary information on the much trumpeted hundred-million-euro auction of telecom licenses was announced. The stakes are huge since the event could reshape the market and decide the allocation of spectrum for the next 15 years. State officials and industry leaders did not see eye to eye on the length of licenses, starting prices or how the event should push the industry forward.

Otilia Haraga

“After 15 years, it is time to reconfigure access to the spectrum for at least the next 15 years. The mobile communications sector needs more and more of it. This year represents a historic opportunity for long-term access to spectrum in Romania,” said Catalin Marinescu, president of telecom authority ANCOM.

Up for grabs is spectrum in the bandwidth 800 MHz, 900 MHz, 1800 MHz and 2600 MHz, which will be allocated until 2029.

“If all the spectrum put up for auction is sold, the Romanian state could cash in EUR 700 million,” said Marinescu. The winners should pay for the licenses by July 2013. Payment can no longer be made in installments.

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The auction was conceived to allow at least four companies to provide mobile communication services by 2029. State representatives said they had learned from the example of other European states and were prepared for everything, including the possibility that one of the current operators could lose its license.

Discussions that took place last week between state officials and leaders of the telecom companies generated some differences of opinion.

A KPMG report presented by Mihai Rada, director for technology, media and telecommunications, found that telecom companies’ direct contribution to the Romanian economy totaled more than EUR 1.6 billion. The report took into consideration telecom players Orange Romania, Vodafone Romania, Cosmote Romania, Telemobil (taken over by Cosmote) and RCS&RDS, reporting that their cumulated turnover represented 3 percent of Romania’s GDP last year.

“In Central and Eastern Europe, Romania has the highest number of mobile operators,” said Rada.

However, state representatives objected to this view. “Let us not forget that Telemobil is in the same group as Cosmote. So it could be said that there are only three and a half players on the market,” said Valentin Mircea, vice-president of the Competition Council. “Competition on the Romanian market is starting to soften. 2012 should bring a re-launch of the market to see which players will fight to provide better services at lower prices,” added Mircea.

Industry leaders repeatedly stressed that Romania is one of the countries with the lowest ARPU (average revenue per user) in Europe and the industry direly needs long-term predictability.

“The margins we are making are much lower compared to other countries. We need a certain time span to obtain a return on investment. Mobile telephony requires a very high investment upfront,” said Stefanos Theocharopoulos, CEO of Cosmote Romania.

At the end of last year, the ARPU on the local market was EUR 6.9. By comparison, in the Czech Republic it was EUR 18 and in the UK EUR 47. “This is how far we have to go to catch up to other countries in Western Europe, while investments in infrastructure are comparable. Romanians want premium quality at minimum prices,” said Rada.

However, the authorities added that a decline in the ARPU is not unusual, given that the market is coming to maturity.

“We do not like statements such as: let us end this price war because prices are too low. There is no such thing as low prices from our point of view,” said Mircea.

The issue of what price the operators should pay for the spectrum was another thorny topic.

STARTING PRICES*

Licenses allocated for 15 years (2014-2029)

• EUR 35 million per block of spectrum in 800 MHz

• EUR 40 million per block of spectrum in 900 MHz

• EUR 10 million per block of spectrum in 1800 MHz

• EUR 4 million per duplex block of spectrum in 2600 MHz

• EUR 3 million per simplex block of spectrum in 2600 MHz

Licenses allocated for 15 months

• EUR 3.4 million per block of spectrum in 900 MHz

• EUR 800,000 per block of spectrum in 1800 MHz

*Starting prices proposed by ANCOM must be approved by government decision

“The state wants fierce competition during this auction, in order to push up the price of the acquisition. We want to bring as much money to the state budget as possible,” said Marius Fecioru, state secretary in the Ministry of Communications.

But industry leaders warned that high license costs could prove to be an impediment to investing in future technologies.

Insiders warned the state not to focus solely on price. “By and large, in the first 15 years we have not used spectrum to generate revenue for governments. The intention should be that the spectrum ends up in the right hands. It should not be to create artificial competition among the operators to maximize government revenues,” said Richard Feasey, director of public policy at Vodafone Group.

Telecom player RCS&RDS has already made public its position on the charges proposed by ANCOM. “The starting prices are too high. ANCOM should encourage competition and leave prices at a lower level,” said Valentin Popoviciu, business development director at RCS&RDS, who added, “Licenses should be paid for in installments.”

SPECTRUM ON SALE

* Granted for 15 years, starting April 6, 2014

42 duplex blocks of 5 MHz each:

• 6 blocks in 800 MHz

• 7 blocks in the 900 MHz

• 15 blocks in 1800 MHz

• 14 blocks in 2600 MHz

3 simplex blocks of 15 MHz each in 2600 MHz

*Granted for 15 months, expire on April 5, 2014

• 5 duplex blocks in 900 MHz

• 6 duplex blocks in 1800 Mhz

Sources on the telecom market say the final acquisition price will depend on the degree of involvement of RCS&RDS, which is an important player with operations in Romania, Hungary, the Czech Republic, Slovakia, Croatia, Serbia, Spain and Italy, in the auction.

And RCS&RDS has already announced it is very interested. The operator said it would pay special attention to spectrum in the lower bandwidth of 800 MHz and 900 MHz.

However, it is taking into consideration the other frequencies as well. “All the packages in the auction are attractive. We will certainly want to acquire licenses for the lower frequencies of 800 MHz and 900 MHz. We will probably also bid also for other licenses in the 1,800 MHz and 2,600 MHz ranges. Our goal is to supply 4G services to our clients,” said Popoviciu.

RCS&RDS has complained that it is not being allowed to compete on an equal footing with other companies since it does not have access to the 900 MHz frequency.

Furthermore, the company has been seeking compensation since 2009 for not being granted radio spectrum in 900 MHz, like its competitors Orange, Vodafone and Cosmote.

“The European Commission decided that, if there are countries where some operators do not have spectrum in 900 MHz, then they should be compensated. ANCOM is saying that the compensation measure is the auction, but we do not believe this to be so,” said Popoviciu.

He gave the example of France, where telecom operator Iliad received spectrum in the 900 MHz frequency, after the allocation was revised and some was taken from other operators.

According to Popoviciu, Ovum conducted a survey for ANCOM that found that RCS&RDS was at a disadvantage, but the compensation failed to arrive. “We have lost EUR 350 million, being denied access to the 900 MHz bandwidth,” he said.

Disagreements between the state and telecom industry also arose in relation to the length of time for which the spectrum should be allocated.

The Competition Council questioned whether 15 years was not too long a duration for the licenses. “A shorter time span would be welcome because then the competition could be re-launched,” recommended Mircea. Moreover, he said that an ascending price auction favors the operators already present on the market. “If the goal is to create a more competition-driven climate, the solution could be a descending price auction,” Mircea suggested.

But industry pundits think 15 years is the minimum term that can be stipulated for the allocation of the spectrum. “Just imagine how the industry would have worked if the licenses had been given for two years,” said Feasey. “The best solution would have been to give operators sufficient time but the next most important objective is to create the possibility to retain the spectrum they already have.”

“The period I worry about is the next couple of years, because if we get that short period wrong, this would be the third year in a row that the European mobile industry contracts. How we manage this transition period between the last 15 years and the next 15 years is then key point,” he concluded.

OPERATORS’ INVESTMENTS

Orange Romania has invested in excess of EUR 2 billion in Romania. “Telecom operators can hardly delocalize. We are investing heavily and we will not close our factory,” said CEO Jean Francois-Fallacher. “There are 2,500 employees working for Orange. 300 of our employees from Cluj, Timisoara and Bucharest are working for other Orange branches abroad. Orange paid RON 800 million in tax last year,” said Fallacher.

“ARPU in Romania is one of the lowest in Europe. It was more expensive to buy a coffee and a croissant than a prepay card”

Vodafone Romania has invested EUR 2.8 billion in Romania. “At Vodafone, we employ 4,000 people,” said CEO Inaki Berroeta. Over the past five years, Vodafone and its employees paid EUR 1.2 billion to the state budget. Of this sum, EUR 920 million were taxes on profit and dividends and EUR 105 million were license and regulation taxes. Vodafone employees contributed EUR 135 million.

 “I nearly had a heart attack at teh end of last year: there were three days left and we did not have a license.”

Cosmote Romania, the third largest player on the mobile market, has 2,400 employees. “If we also include Romtelecom, we provide employment for around 10,000 people. The investment made in Romania by OTE has so far amounted to EUR 3 billion,” said CEO Stefanos Theocharopoulos.

“The Romanian government needs to be realistic about the fees the operators can pay in this business environment.”

RCS&RDS had invested approximately USD 1 billion in the development of the company’s network by 2010. Estimations on the market put RCS&RDS’s business at USD 800 million. According to Popoviciu, the company’s ARPU is a little below the market average.

“Starting prices are too high. ANCOM should encourage competition and take prices to a lower level. Also, license fees should be paid in installments.”

CALENDAR

March 14, 2012 – documents published for public consultation

April 17, 2012 – deadline for observations

April 30, 2012 – deadline for the modification of documents

Yet to be set – adoption of gvt. emergency ordinance on freeing up spectrum in 830-862 MHz, 1747.5-1785 MHz, 1842.5-1880 MHz, 2500-2690 MHz

Yet to be set – gvt. adoption of  decision regarding starting price of license taxes

May 1, 2012 – official publication of final version of auction documents