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ERMES-auction in Germany. First simultaneous multiple-round auction in the European telecommunications market
Telecommunications Policy, Vol. 21, No. 4, pp. 297-307, 1997 © 1997 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0308-5961/97 $17.00+0.00
Pergamon PIh S0308-5961(97)00010-4
ERMES-auction in Germany First simultaneous multiple-round auction in the European telecommunications market
Alfons Keuter and Lorenz Nett The paper describes the process of introduction of the European paging standard ERMES (European Radio Messaging System) in Germany. It briefly discusses technical features and market conditions. The main focus of the paper is on the design of an appropriate auction mechanism for licences and frequencies, on its implementation in Germany and on the results achieved. The auction that took place in September 1996 represented the first simultaneous multiple-round auction in the European Telecommunications market. © 1997 Elsevier Science Ltd
Introduction In September 1996, the Federal Ministry of Posts and Telecommunications (BMPT) granted three licences for the operation of paging services networks based on the ERMES standard. The licences as well as the frequencies were allocated by an auction procedure based on Section 11 of the new German Telecommunications Act which became effective in August 1996. The next section of this paper provides a short description of the ERMES standard and its market conditions. The licensing requirements defined by the Ministry are briefly discussed. The specific auction arrangement that was based on a proposal by Wissenschaftliches Institut fiir Kommunikationsdienste (WIK) to the Ministry is then examined. The proposal benefited by the support of Ulrike Berger, J6rn Kruse and Paul Milgrom. The auction design can be considered as a modification of the PCS-auctions in the United States. Results of the auction that took place in September 1996 are described and the paper concludes with lessons for further applications of the auction mechanism.
Technical features and market volume perspectives of ERMES Both authors
are researchers
at the
Wissenschaftliches Institut fer Kommunikationsdienste (WIK) GmbH, Rathausplatz 2-4, D-53604 Bad Honnef (Tel: +49 2224 9225 28(32); Fax: +49 2224 9225 68; Email: [email protected]; [email protected]).
ERMES, the European Radio MEssaging System, has been designed by a group of European paging manufactures, network operators, ETSI and CEC. It is recommended by the CEC as the European Paging Standard as well as by the ITU as the paging standard for international use. ERMES is supported by signatures of a Memorandum of Understanding (MoU), originally signed by 18 countries and meanwhile underwritten by 40 297
ERMES-auction in Germany: A Keuter and L Nett
operators from 23 countries. Countries joining the MoU-group are the members of the European Union (EU) (see Table 1) as well as those of the European Free Trade Association (EFTA). Furthermore, Ukraine, Hungary, Bahrain, Kuwait, Saudi Arabia, Malaysia and the United Arab Emirates (UAE) are members of the ERMES-MoU-group. Great interest in the ERMES standard was declared by the following countries: Poland, Romania, Serbia, Slowenia, the Slovak Republic, Singapore and the United States. In order to create a pan-European standard a common frequency band was chosen for ERMES (169.4-169.8 MHz VHF band). This band was divided into sixteen 25 KHz separate channels which may be allocated to allow more than one operator to provide services and sufficient capacity for anticipated demand. Because of radio interference with public mobile radio bands, domestic cable television reception and other uses of the radio spectrum as well as spectrum use in the neighbouring countries, not all of the 16 channels can be allocated or used nationwide. In Germany, three nationwide frequency bands and a combination of two regionally available frequencies were chosen to be allocated to applicants of a nationwide ERMES paging service. Additionally, 10 of the remaining frequency bands which can be used with different restrictions at the national frontiers were to be allocated to the successful applicants of the first round of the frequency allocation procedure. ERMES differs from older, widely used paging standards, such as POCSAG, in its high signalling rate of 6.25 kbit/s, its battery economy, longer message capacity, higher subscriber capacity per channel and smaller, lighter and better-featured terminals. Features of the system are: its flexible access possibilities (by fixed phone networks, mobile phone networks; data networks; computer modems and ISDN); the different types of possible services (tone, numeric, alphanumeric); different types of calls (individual and group calls); message numbering; storage and retrieval. Up to 1995, a problem for interested customers has been that the choice of pager terminals was restricted to the products of NEC (Japan). Meanwhile ERMES terminals are offered by NEC, Swissphone and Inventel. Acylon Electronics, Swatch and Ericsson have announced to introduce ERMES pagers in 1996. This gives an idea of the growth potential that industry sees for ERMES paging services. After carrying out ERMES roaming trials (pages from Swiss PTT successfully sent from Switzerland to Finland and France as well as from Finland to Ireland) and first roaming agreements (between operators in Switzerland and France and Hungary and Finland), ERMES roaming soon could become reality and an important marketing argument for ERMES (see Figure 1). Paging has found many customers because it is a cheap and easily established mobile communications system. It requires less regulation than the cellular telephony and it is easy to introduce. Tone and numeric paging, although older and potentially less desirable than modern alphanumeric paging, is witnessing a boom in Western Europe. Target groups are mostly 18-39 years old. Massive campaigns are promoting paging and are increasing the revenues by placing more users into systems such as Cityruf and Scall in Germany, Buzz in the Netherlands or Minicall, Tam Tam etc. in France. Especially, the introduction of the calling party pays principle (CPP) supported the huge growth of customer numbers. With its special features such as international roaming, high speed protocols and enhanced capacity, ERMES is expected to be the new
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globally accepted paging standard of the future. Data released by the ERMES MoU group show that six ERMES networks were in operation world-wide at the end of 1995. Three are based in France (Infomobile, TDR and FTMR), two in Hungary (EuroHivo and EasyCall) and one in Saudi Arabia (PTT). The total number of ERMES subscribers at the end of 1995 was estimated at 120000. Following the MoU-group, 20 new ERMES networks are to be launched by the end of 1996, 16 of those in Europe, three in the Middle East and one in Asia. ERMES tendering processes have been run in Sweden, the Netherlands and the UK and were decided upon in autumn 1996. In Sweden, two licences have been awarded to Telia Mobitel and Tele Danmark. In the Netherlands, PTT Nederland and CallMax (owned by German T-Mobil and others) obtained a licence. The British Department of Trade and Industry (DTI) decided to award seven licences to BT Mobile, Mercury Paging, Hutchison Paging, Vodapage, London Pager Company, Paging Network (UK) and Message Telecommunications. In Germany there are three operators already running paging services (POCSAG standard) and the number of all paging subscibers is estimated to be 1.2 million at the end of 1996. These operators are T-Mobil GmbH (formerly DeTeMobil), the mobile arm of national carrier Deutsche Telekom AG, along with its private-sector rivals Mobile InfoServices GmbH (DFR, owned by Thyssen, Motorola and others) and Miniruf (RWE, Tele Danmark and others). All of them declared their interest in launching an ERMES service as soon as possible. As regards potential customers, each of them expects to reach about one million subscribers in the year 2000. The probability to achieve these subscriber numbers will increase once the great number of desirable features and benefits for customers is marketed.
Licensing requirements defined by the ministry In Germany, a total of 15 frequencies are available for ERMES paging services. Of these, three frequencies can be used nationally, while twelve are subject to regional restrictions in border regions (hereafter called
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l£RMES-auction in Germany. A Keuter and L Nett
national/regional frequencies). On the basis of this frequency spectrum, four national ERMES licences were subject to tender. Three licences each cover one national frequency, while the fourth licence comprises two regional frequencies which combined to ensure national coverage. The Ministry also intended to award the remaining 10 regional frequencies to the holders of the ERMES licences. The Ministry defined a number of further requirements in advance: firstly, the auction had to take place in two stages. In the first stage of the auction, if appropriate, the four national ERMES licences including the proposed basic frequency specification had to be auctioned. Each bidder had been allowed to buy a maximum of one licence. In the second stage, the 10 remaining regional ERMES frequencies should be auctioned to those bidders who had bought a national ERMES licence. Secondly, the Ministry had laid down in advance a minimum bid of DM 500 000 for the licence itself plus DM 170 000 per frequency. Thus, the minimum bids in the two stages of the auction were as follows: the minimum bid for the three national ERMES licences, each comprising one national frequency, was DM 670 000 per licence. The minimum bid for the national ERMES licence comprising two regional frequencies was DM 840 000. In the second stage of the auction, the minimum bid for the regional ERMES frequencies was DM 170 000 per frequency. Thirdly, an auction was considered appropriate if the candidates regarded the four national licences as heterogeneous and/or if more than four candidates were interested in a licence. In fact, only three applications for ERMES services were submitted. However, it was found out that the applicants regarded the four licences as well as the remaining 10 regional frequencies as heterogenous. Moreover, there were significant value interdependencies between the frequencies. The Ministry therefore decided to allocate licences and frequencies by auction.
Design of the appropriate auction mechanism
1A detailed discussion is presented in: Keuter, A, Nett, L and Stumpf, U, Regeln fer das Verfahren zur Versteigerung von ERMES-Lizenzen/Frequenzen sowie regionaler ERMES-Frequenzen, WlKDiskussionspapier Nr. 165, Bad Honnef 1996, S. 37-60.
In principle, there are a couple of different types of auction mechanisms, some of which already have been used for the auction of licences in the telecommunications area (for example, radio spectrum auctions in New Zealand, Australia, and the US). These types of auctions can be differentiated by: (1) single-round vs multiple-round auctions; (2) sealed bid vs open-bid auctions; and (3) first-price vs second-price auctions. Traditionally, often used auctions are: English Auction, Dutch Auction, Vickrey Auction and the first price sealed bid auction ~. WIK recommended to auction the national ERMES licences simultaneously and electronically in a multiple-round procedure. Simultaneity implies that all of the four licences are open to bids at the same time. The multiple-round procedure means that the auction is basically open. During the auction, the participants can make fresh bids that exceed the previous top bids. The use of electronic systems means that communication between bidders and the auctioneer during the auction is via networked computers. The relevant results of a round of the auction are transmitted to each participant by computer and each participant makes his bid to the auctioneer by computer. Bids are processed automatically through a specially developed software programme. At the beginning of each round of the auction, participants are informed of both the amount of the top bid and of the name of the highest bidder. Participants have to
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ERMES-auction in Germany. A Keuter and L Nett
make their bids independently of one another and confidentially. Hence, in each round, participants make their bids without knowledge of the bidding behaviour of the others. The simultaneous multiple-round procedure ensures an efficient allocation of the basic frequency specifications offered in the first stage of the auction. The procedure tends to attract equal top bids for those licences that are regarded as fully equivalent by the bidders. The procedure can therefore be described as non-discriminatory. The multiple-round nature of the procedure and the information provided on participants' bidding behaviour in the course of the auction process helps to reduce uncertainty among bidders as to the economic value of the licences and to avoid 'unrealistic' top bids (winner's curse). The proposed auction procedure makes it easier for bidders to develop optimum bidding strategies. It suffices for an auction participant to determine the economic value of the licences on offer, and therefore his willingness to pay. He can then carry on bidding as long as a bid does not exceed the amount he is prepared to pay. No resources need to be deployed in advance of the auction to formulate expectations as to other candidates' possible bidding strategies. The electronic bidding process speeds up the procedure and makes it less subject to errors.
Auctioning of the ERMES licences Under the rules laid down, each bidder was permitted to buy a maximum of one national licence. WIK recommended implementing this requirement as follows: in any round of the auction, each participant is permitted to bid for no more than one national licence. In the first round, each participant is free to choose which national licence to bid for. In subsequent rounds, a participant has the free choice to bid for any of the four licences only if he has not been the highest bidder for a licence at the start of the round. Any participant who has been the highest bidder for a licence in the previous round is not entitled to bid for the other licences. To encourage participants to bid actively, WIK recommended to make further entitlement to bid conditional upon compliance with an activity rule. An activity rule requires participants in the auction to make a valid bid whenever they are not the highest bidder for a licence at the beginning of the round. The definition of a 'valid bid' is crucial to the activity rule. WIK recommended the following criteria: in the first round, a bid for a licence is valid if it is not lower than the minimum bid. The same applies to subsequent rounds provided that no bid at least equivalent to the minimum bid has been made for the licence. If a top bid has already been made for a licence, a bid in subsequent rounds can be regarded as valid if it exceeds the previous highest bid by a minimum bid increment. The minimum bid increment is calculated as a certain percentage of a basis of calculation which has been the last top bid for the licence in question. Starting with 10% of the minimum bid at the beginning of the auction, the auctioneer is free to decrease the minimum bid increment in the following rounds by lowering the percentage to 5% and 2%. With this dynamic adjustment of the minimum bid increment, the process of the auction can initially be speeded up and, once the top bids came close to the amount bidders are prepared to pay, the auctioneer can choose smaller minimum bid increments. The change from one phase to the next is not laid down in advance, but is subject to the auctioneer's decision during the auction process.
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ERMES-auction in Germany: A Keuter and L Nett
Bids have to be placed within 15 minutes of obtaining the results of the previous round of the auction. Once a bid has been made, a control message is displayed, allowing the bid to be confirmed or amended. Three minutes are allowed for this. The round ends when bids, together with the confirmatory control message, have been received from all the participants entitled to bid or when set time within which bids or confirmation have to be received has expired. The auctioneer is given scope to alter the time limits during the auction if he perceives the necessity for this. The first stage of the auction ends when no valid bid meeting the requirements has been made for any of the four ERMES licences in a round. After 20 rounds, the auctioneer is permitted to limit the auction to a further two rounds. At the end of the auction, each of the four ERMES licences are awarded to the participant who made the highest bid. Awards are made to the bidden price. If no bid has been received for an ERMES licence by the end of the auction, that ERMES licence is not to be awarded.
Auctioning of the regional ERMES frequencies WIK recommended to basically follow the same procedure for the auctioning of the regional ERMES frequencies as for the auctioning of the ERMES licences. Accordingly, stage two of the auction has been simultaneous, multiple-round and electronic. Allowance had been made for special features of the regional ERMES frequencies by modifying some of the rules. The advantages referred to in the first part of the auction equally apply to the second phase. In addition, a simultaneous multiple-round procedure makes it considerably easier for participants to achieve value interdependencies between regional frequencies. Value interdependency means that the economic value of a particular set of frequencies is higher than the sum of the economic values of the individual frequencies. A simultaneous multiple-round procedure considerably simplifies the purchase of efficient sets of frequencies. In the first round, no restrictions had been placed on the auction participants as regards the maximum number of possible bids. From the start of the second round, the maximum number of possible active bids was determined by the number of active bids in the previous round. However, a participant was free to decide which regional ERMES frequencies to actively bid for. An active bid was equivalent to a valuable bid or a highest bid at the beginning of the round. The fixing of minimum bid increments and definition of valid bids recommended for the auctioning of ERMES licences had been similarly applied to the auctioning of the regional ERMES frequencies. Participants in the auction of regional ERMES frequencies had more time to place their bids than in the case of the ERMES licences. The reason for this was that the bidders' calculations were more complex. Bids for regional ERMES frequencies were placed within 30 minutes of receiving the results of the previous round. The auctioneer had again been given scope to alter the time limits during the auction. The auction of the regional ERMES frequencies ended when no more (valid) bids were made for the 10 frequencies in a round. Each of the 10 frequencies was awarded
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ERMES-auction in Germany: A Keuter and L Nett
to the participant with the highest bid. Awards were made to the bidden price. If no (valid) bid had been received for a regional frequency by the end of the auction, that frequency would not have been awarded.
Ensuring serious bidding The bidders' ability to pay is crucial to an efficient outcome of an auction procedure. If a top bidder had been unable to pay, the ERMES licence or regional ERMES frequency concerned would have been auctioned again at a later date. WIK recommended ensuring solvency by applying the following rules: each participant in the auction procedure had been required to provide a deposit. The amount of the deposit had been been set at DM 670 000, the minimum bid for a national ERMES licence. In addition, as a proof of ability to pay for bids exceeding the amount of the deposit, each participant had been required to provide a bank guarantee equal to DM 1.5 million. Furthermore, with regard to ensuring an efficient outcome of the auction procedure, it was important that no dummy bid would be placed. The withdrawal of a bid during the auction could considerably distort the process. The withdrawal of a bid after the end of the auction would have necessitated a fresh auction for the licence or frequency concerned at a later date. The following rules were recommended to prevent dummy bids: if a bid for an ERMES licence or regional ERMES frequency had been withdrawn after the end of the auction, a penalty of 100% of the bid had been imposed. A penalty would also have been imposed in the event of a bid being withdrawn during the auction process. However, an assessment of the specific situation had been necessary. The withdrawal of a bid during the auctioning of ERMES licences could hardly be justified. The penalty payable would have been 40% of the bid. In addition, any participant withdrawing a bid during the auctioning of ERMES licences would have been banned from the rest of the auction. Withdrawal of a bid during the auctioning of the regional ERMES frequencies, on the other hand, could have been justified in some circumstances; for example, if it would become apparent from the development of the highest bid that it would be more efficient for the participant to try to acquire a different set of regional ERMES frequencies. Therefore, if a participant would withdraw a bid during the auctioning of the regional frequencies, he would only have been required to pay a penalty if no bid is subsequently made which exceeded his (withdrawn) bid. If this was the case, however, a penalty would have been imposed amounting to the difference between the (withdrawn) bid and the price at which the regional frequency ultimately had been sold. If the regional frequency had not subsequently been sold in the auction, the penalty would have been 100% of the (withdrawn) bid. Finally, it was crucial that participants would not make any agreements as to bidding behaviour in advance of or during the auction. In case of contravention, WIK recommended that the licences should be withheld or withdrawn from the offending participants. In addition, participants could as far as possible be prevented from communicating with each one another during the auction process.
Results from the German ERMES-auction Finally, there have been three applications for an ERMES paging licence from the following companies: T-Mobil GmbH, Mobile InfoServices
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ERMES-auction in Germany. A Keuter and L Nett Table 2. Result of stage 1 (Auction of the ERMES licences). Licence Licence 1 (Channel 7) Licence 2 (Channel 11) Licence 3 (Channel 13)
Licensee
Top bid (=price)
Mobile InfoServices GmbH Miniruf GmbH T-Mobil GrnbH
670 000 DM 673 000 DM 670 000 DM
GmbH and Miniruf GmbH. They are already running paging services based on the POCSAG standard (Scall, Telmi, Quix). In a preliminary stage of the awarding process the interested companies had to prove that they possess technical competence and that they meet the material conditions for the operation of ERMES services as laid down as minimum requirements for participants in the procedure. Furthermore, the candidates had to declare that they wished to take part in the auction procedure, and, after special training during which participants had been made familiar with the hardware and software, that they understood the mechanism and that they accepted the auction rules. The Ministry checked their financial strength by demanding the payment of a security deposit. In addition, as a proof of ability to pay for bids exceeding the amount of the deposit, each participant had been required to provide a bank guarantee. The auction of the four national ERMES licences and its frequencies lasted about 30 minutes and the results are shown in Table 2. While Mobile InfoServices and Minruf got their licence with their first bid, remaining T-Mobil failed to get its preferred licence 1 in its first step. It decided not to bid more for licence 1 but to switch to licence 3. Licence 4, connected with two regional licences and a minimum bid of 840 000 DM, obviously did not attract the interest of any participant. These frequencies may be allocated in a later auction. The subsequent auction of the 10 regional ERMES frequencies lasted nine rounds. It became obvious that the participants competed for some of the frequencies while other frequencies did not get any bid. The reason for this could either be that they regarded the frequencies as heterogenous and of different value or that the licencees wanted to ensure value interdependencies with their national frequency or both. At the end, all of the three bidders got nearly the same number of frequencies, but the time they needed to ensure getting the ones they preferred differed. Miniruf initially had chosen channels 8-10 and channel 3. It dropped channel 3 which was taken by Mobile InfoServices offering a higher bid. But it was willing and able to compete successfully against T-Mobil for the obviously higher valued channel 9 and got nearly all frequencies it had chosen in the first round of this second part of the auction. Mobile InfoServices initially only succeeded in getting channel 1. In the second and third round it lost this channel to T-Mobil but won channel 12 from that carrier. By a higher bid Mobile InfoServices was able to get back channel 1 but it lost in competition with T-Mobil concerning channel 12. Because of T-Mobil's willingness to pay more for channel 12, Mobile lnfoServices decided to switch to channel 2 which up to this round had not received any bid and subsequently could be bought at its minimum bid. Although T-Mobil succeeded in getting three frequencies in round one, it became apparent that it had planned either to get some more regional frequencies and/or other, possibly higher valued, frequencies. By bidding more, it attached Miniruf to its channel 9 as well as some time later--Mobile InfoServices to channel 1. But because both carriers
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ERMES-auction in Germany." A Keuter and L Nett Table 3. Result of stage 2 (Auction of the regional ERMES frequencies). Channel Channel Channel Channel Channel Channel Channel Channel Channel Channel Channel
1 2 4 ,5 6 8 9 10 12 15
Licensee Mobile InfoDienste GmbH Mobile InfoDienste GmbH Mobile InfoDienste GrnbH T-Mobil GmbH T-Mobil GmbH Miniruf GmbH Miniruf GmbH Miniruf GmbH T-Mobil GmbH T-Mobil GmbH
Top bid (=Price) 211 000 DM 170 000 DM 191 000 DM 171 000 DM 171 000 DM 170 000 DM 214 000 DM 170 000 DM 208 000 DM 171 000 DM
answered with higher bids on these two frequencies T-Mobil came back to channel 12 which it meanwhile had lost due to a higher bid of Mobile InfoServices, as mentioned above. It succeeded in getting this frequency and decided also to bid for channel 6 which also did not get any bid in the first round. Final result and frequency allocation of this highly interesting bidding procedure is shown in Table 3. Ensuring the satisfaction of all participants, a short procedure and low expenses, this result could never have been achieved by any alternative awarding procedure. Consequently, the result of this first simultaneous multiple-round auction in the European telecommunications market can be considered as efficient.
Summary Which lessons can be drawn from the development and outcome of the German ERMES auction? First, auctioning licences, frequencies or, more generally, rights in the telecommunications sector has been proven an innovative and efficient awarding mechanism. Second, the specific auction rules as well as the whole procedure, including preliminary checks of participants, software design etc., can be developed by European specialists. Avoidence of serious faults of the past---concerning the determination of the specific kind of auction needed as well as the development of a complete, consequent and closed auction mechanism-has been achieved by intensive study of formerly used auction mechanisms and lessons drawn from them. The multiple-round nature proved to be able to provide information, reduce uncertainty and avoid unrealistic top bids (winner's curse). The activity and the minimum bid increment rules encourage participants to actively bid and this avoids wasting time. Relatively high penalties helped to avoid the withdrawal of bids as well as the danger of distortions of the whole process by collusive behaviour. Finally, the deposit payable in advance and the bank guarantee helped to ensure the bidders' ability to pay for the objects bought. In summary, the complete framework of auction rules achieved to civilize all participants and led to the desired efficient outcome of the auction. Reservations expressed in advance concerning the success of the auction have been withdrawn since its outcome. Remaining critics focusing on the relatively low monetary result of the auction can be countered by referring to the primary aim of the process: the determination of the most suitable users of the licences and frequencies by an objective, comprehensible and non-discriminatory mechanism--in other words: efficiency, not money, was the target.
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ERMES-auction in Germany: A Keuter and L Nett
The German Telecommunications Act has introduced the auction as standard awarding procedure of rights in the telecommunications sector. Its first application has proven the advantages of the procedure. Due to the large number of outstanding comparable awarding processes in Europe--resulting from the liberalization of the European telecommunications sector~ifferent regulatory bodies already stated their interest, and application of the flexible mechanism to other European countries is likely.
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Pergamon PIh S0308-5961(97)00010-4
ERMES-auction in Germany First simultaneous multiple-round auction in the European telecommunications market
Alfons Keuter and Lorenz Nett The paper describes the process of introduction of the European paging standard ERMES (European Radio Messaging System) in Germany. It briefly discusses technical features and market conditions. The main focus of the paper is on the design of an appropriate auction mechanism for licences and frequencies, on its implementation in Germany and on the results achieved. The auction that took place in September 1996 represented the first simultaneous multiple-round auction in the European Telecommunications market. © 1997 Elsevier Science Ltd
Introduction In September 1996, the Federal Ministry of Posts and Telecommunications (BMPT) granted three licences for the operation of paging services networks based on the ERMES standard. The licences as well as the frequencies were allocated by an auction procedure based on Section 11 of the new German Telecommunications Act which became effective in August 1996. The next section of this paper provides a short description of the ERMES standard and its market conditions. The licensing requirements defined by the Ministry are briefly discussed. The specific auction arrangement that was based on a proposal by Wissenschaftliches Institut fiir Kommunikationsdienste (WIK) to the Ministry is then examined. The proposal benefited by the support of Ulrike Berger, J6rn Kruse and Paul Milgrom. The auction design can be considered as a modification of the PCS-auctions in the United States. Results of the auction that took place in September 1996 are described and the paper concludes with lessons for further applications of the auction mechanism.
Technical features and market volume perspectives of ERMES Both authors
are researchers
at the
Wissenschaftliches Institut fer Kommunikationsdienste (WIK) GmbH, Rathausplatz 2-4, D-53604 Bad Honnef (Tel: +49 2224 9225 28(32); Fax: +49 2224 9225 68; Email: [email protected]; [email protected]).
ERMES, the European Radio MEssaging System, has been designed by a group of European paging manufactures, network operators, ETSI and CEC. It is recommended by the CEC as the European Paging Standard as well as by the ITU as the paging standard for international use. ERMES is supported by signatures of a Memorandum of Understanding (MoU), originally signed by 18 countries and meanwhile underwritten by 40 297
ERMES-auction in Germany: A Keuter and L Nett
operators from 23 countries. Countries joining the MoU-group are the members of the European Union (EU) (see Table 1) as well as those of the European Free Trade Association (EFTA). Furthermore, Ukraine, Hungary, Bahrain, Kuwait, Saudi Arabia, Malaysia and the United Arab Emirates (UAE) are members of the ERMES-MoU-group. Great interest in the ERMES standard was declared by the following countries: Poland, Romania, Serbia, Slowenia, the Slovak Republic, Singapore and the United States. In order to create a pan-European standard a common frequency band was chosen for ERMES (169.4-169.8 MHz VHF band). This band was divided into sixteen 25 KHz separate channels which may be allocated to allow more than one operator to provide services and sufficient capacity for anticipated demand. Because of radio interference with public mobile radio bands, domestic cable television reception and other uses of the radio spectrum as well as spectrum use in the neighbouring countries, not all of the 16 channels can be allocated or used nationwide. In Germany, three nationwide frequency bands and a combination of two regionally available frequencies were chosen to be allocated to applicants of a nationwide ERMES paging service. Additionally, 10 of the remaining frequency bands which can be used with different restrictions at the national frontiers were to be allocated to the successful applicants of the first round of the frequency allocation procedure. ERMES differs from older, widely used paging standards, such as POCSAG, in its high signalling rate of 6.25 kbit/s, its battery economy, longer message capacity, higher subscriber capacity per channel and smaller, lighter and better-featured terminals. Features of the system are: its flexible access possibilities (by fixed phone networks, mobile phone networks; data networks; computer modems and ISDN); the different types of possible services (tone, numeric, alphanumeric); different types of calls (individual and group calls); message numbering; storage and retrieval. Up to 1995, a problem for interested customers has been that the choice of pager terminals was restricted to the products of NEC (Japan). Meanwhile ERMES terminals are offered by NEC, Swissphone and Inventel. Acylon Electronics, Swatch and Ericsson have announced to introduce ERMES pagers in 1996. This gives an idea of the growth potential that industry sees for ERMES paging services. After carrying out ERMES roaming trials (pages from Swiss PTT successfully sent from Switzerland to Finland and France as well as from Finland to Ireland) and first roaming agreements (between operators in Switzerland and France and Hungary and Finland), ERMES roaming soon could become reality and an important marketing argument for ERMES (see Figure 1). Paging has found many customers because it is a cheap and easily established mobile communications system. It requires less regulation than the cellular telephony and it is easy to introduce. Tone and numeric paging, although older and potentially less desirable than modern alphanumeric paging, is witnessing a boom in Western Europe. Target groups are mostly 18-39 years old. Massive campaigns are promoting paging and are increasing the revenues by placing more users into systems such as Cityruf and Scall in Germany, Buzz in the Netherlands or Minicall, Tam Tam etc. in France. Especially, the introduction of the calling party pays principle (CPP) supported the huge growth of customer numbers. With its special features such as international roaming, high speed protocols and enhanced capacity, ERMES is expected to be the new
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globally accepted paging standard of the future. Data released by the ERMES MoU group show that six ERMES networks were in operation world-wide at the end of 1995. Three are based in France (Infomobile, TDR and FTMR), two in Hungary (EuroHivo and EasyCall) and one in Saudi Arabia (PTT). The total number of ERMES subscribers at the end of 1995 was estimated at 120000. Following the MoU-group, 20 new ERMES networks are to be launched by the end of 1996, 16 of those in Europe, three in the Middle East and one in Asia. ERMES tendering processes have been run in Sweden, the Netherlands and the UK and were decided upon in autumn 1996. In Sweden, two licences have been awarded to Telia Mobitel and Tele Danmark. In the Netherlands, PTT Nederland and CallMax (owned by German T-Mobil and others) obtained a licence. The British Department of Trade and Industry (DTI) decided to award seven licences to BT Mobile, Mercury Paging, Hutchison Paging, Vodapage, London Pager Company, Paging Network (UK) and Message Telecommunications. In Germany there are three operators already running paging services (POCSAG standard) and the number of all paging subscibers is estimated to be 1.2 million at the end of 1996. These operators are T-Mobil GmbH (formerly DeTeMobil), the mobile arm of national carrier Deutsche Telekom AG, along with its private-sector rivals Mobile InfoServices GmbH (DFR, owned by Thyssen, Motorola and others) and Miniruf (RWE, Tele Danmark and others). All of them declared their interest in launching an ERMES service as soon as possible. As regards potential customers, each of them expects to reach about one million subscribers in the year 2000. The probability to achieve these subscriber numbers will increase once the great number of desirable features and benefits for customers is marketed.
Licensing requirements defined by the ministry In Germany, a total of 15 frequencies are available for ERMES paging services. Of these, three frequencies can be used nationally, while twelve are subject to regional restrictions in border regions (hereafter called
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l£RMES-auction in Germany. A Keuter and L Nett
national/regional frequencies). On the basis of this frequency spectrum, four national ERMES licences were subject to tender. Three licences each cover one national frequency, while the fourth licence comprises two regional frequencies which combined to ensure national coverage. The Ministry also intended to award the remaining 10 regional frequencies to the holders of the ERMES licences. The Ministry defined a number of further requirements in advance: firstly, the auction had to take place in two stages. In the first stage of the auction, if appropriate, the four national ERMES licences including the proposed basic frequency specification had to be auctioned. Each bidder had been allowed to buy a maximum of one licence. In the second stage, the 10 remaining regional ERMES frequencies should be auctioned to those bidders who had bought a national ERMES licence. Secondly, the Ministry had laid down in advance a minimum bid of DM 500 000 for the licence itself plus DM 170 000 per frequency. Thus, the minimum bids in the two stages of the auction were as follows: the minimum bid for the three national ERMES licences, each comprising one national frequency, was DM 670 000 per licence. The minimum bid for the national ERMES licence comprising two regional frequencies was DM 840 000. In the second stage of the auction, the minimum bid for the regional ERMES frequencies was DM 170 000 per frequency. Thirdly, an auction was considered appropriate if the candidates regarded the four national licences as heterogeneous and/or if more than four candidates were interested in a licence. In fact, only three applications for ERMES services were submitted. However, it was found out that the applicants regarded the four licences as well as the remaining 10 regional frequencies as heterogenous. Moreover, there were significant value interdependencies between the frequencies. The Ministry therefore decided to allocate licences and frequencies by auction.
Design of the appropriate auction mechanism
1A detailed discussion is presented in: Keuter, A, Nett, L and Stumpf, U, Regeln fer das Verfahren zur Versteigerung von ERMES-Lizenzen/Frequenzen sowie regionaler ERMES-Frequenzen, WlKDiskussionspapier Nr. 165, Bad Honnef 1996, S. 37-60.
In principle, there are a couple of different types of auction mechanisms, some of which already have been used for the auction of licences in the telecommunications area (for example, radio spectrum auctions in New Zealand, Australia, and the US). These types of auctions can be differentiated by: (1) single-round vs multiple-round auctions; (2) sealed bid vs open-bid auctions; and (3) first-price vs second-price auctions. Traditionally, often used auctions are: English Auction, Dutch Auction, Vickrey Auction and the first price sealed bid auction ~. WIK recommended to auction the national ERMES licences simultaneously and electronically in a multiple-round procedure. Simultaneity implies that all of the four licences are open to bids at the same time. The multiple-round procedure means that the auction is basically open. During the auction, the participants can make fresh bids that exceed the previous top bids. The use of electronic systems means that communication between bidders and the auctioneer during the auction is via networked computers. The relevant results of a round of the auction are transmitted to each participant by computer and each participant makes his bid to the auctioneer by computer. Bids are processed automatically through a specially developed software programme. At the beginning of each round of the auction, participants are informed of both the amount of the top bid and of the name of the highest bidder. Participants have to
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make their bids independently of one another and confidentially. Hence, in each round, participants make their bids without knowledge of the bidding behaviour of the others. The simultaneous multiple-round procedure ensures an efficient allocation of the basic frequency specifications offered in the first stage of the auction. The procedure tends to attract equal top bids for those licences that are regarded as fully equivalent by the bidders. The procedure can therefore be described as non-discriminatory. The multiple-round nature of the procedure and the information provided on participants' bidding behaviour in the course of the auction process helps to reduce uncertainty among bidders as to the economic value of the licences and to avoid 'unrealistic' top bids (winner's curse). The proposed auction procedure makes it easier for bidders to develop optimum bidding strategies. It suffices for an auction participant to determine the economic value of the licences on offer, and therefore his willingness to pay. He can then carry on bidding as long as a bid does not exceed the amount he is prepared to pay. No resources need to be deployed in advance of the auction to formulate expectations as to other candidates' possible bidding strategies. The electronic bidding process speeds up the procedure and makes it less subject to errors.
Auctioning of the ERMES licences Under the rules laid down, each bidder was permitted to buy a maximum of one national licence. WIK recommended implementing this requirement as follows: in any round of the auction, each participant is permitted to bid for no more than one national licence. In the first round, each participant is free to choose which national licence to bid for. In subsequent rounds, a participant has the free choice to bid for any of the four licences only if he has not been the highest bidder for a licence at the start of the round. Any participant who has been the highest bidder for a licence in the previous round is not entitled to bid for the other licences. To encourage participants to bid actively, WIK recommended to make further entitlement to bid conditional upon compliance with an activity rule. An activity rule requires participants in the auction to make a valid bid whenever they are not the highest bidder for a licence at the beginning of the round. The definition of a 'valid bid' is crucial to the activity rule. WIK recommended the following criteria: in the first round, a bid for a licence is valid if it is not lower than the minimum bid. The same applies to subsequent rounds provided that no bid at least equivalent to the minimum bid has been made for the licence. If a top bid has already been made for a licence, a bid in subsequent rounds can be regarded as valid if it exceeds the previous highest bid by a minimum bid increment. The minimum bid increment is calculated as a certain percentage of a basis of calculation which has been the last top bid for the licence in question. Starting with 10% of the minimum bid at the beginning of the auction, the auctioneer is free to decrease the minimum bid increment in the following rounds by lowering the percentage to 5% and 2%. With this dynamic adjustment of the minimum bid increment, the process of the auction can initially be speeded up and, once the top bids came close to the amount bidders are prepared to pay, the auctioneer can choose smaller minimum bid increments. The change from one phase to the next is not laid down in advance, but is subject to the auctioneer's decision during the auction process.
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Bids have to be placed within 15 minutes of obtaining the results of the previous round of the auction. Once a bid has been made, a control message is displayed, allowing the bid to be confirmed or amended. Three minutes are allowed for this. The round ends when bids, together with the confirmatory control message, have been received from all the participants entitled to bid or when set time within which bids or confirmation have to be received has expired. The auctioneer is given scope to alter the time limits during the auction if he perceives the necessity for this. The first stage of the auction ends when no valid bid meeting the requirements has been made for any of the four ERMES licences in a round. After 20 rounds, the auctioneer is permitted to limit the auction to a further two rounds. At the end of the auction, each of the four ERMES licences are awarded to the participant who made the highest bid. Awards are made to the bidden price. If no bid has been received for an ERMES licence by the end of the auction, that ERMES licence is not to be awarded.
Auctioning of the regional ERMES frequencies WIK recommended to basically follow the same procedure for the auctioning of the regional ERMES frequencies as for the auctioning of the ERMES licences. Accordingly, stage two of the auction has been simultaneous, multiple-round and electronic. Allowance had been made for special features of the regional ERMES frequencies by modifying some of the rules. The advantages referred to in the first part of the auction equally apply to the second phase. In addition, a simultaneous multiple-round procedure makes it considerably easier for participants to achieve value interdependencies between regional frequencies. Value interdependency means that the economic value of a particular set of frequencies is higher than the sum of the economic values of the individual frequencies. A simultaneous multiple-round procedure considerably simplifies the purchase of efficient sets of frequencies. In the first round, no restrictions had been placed on the auction participants as regards the maximum number of possible bids. From the start of the second round, the maximum number of possible active bids was determined by the number of active bids in the previous round. However, a participant was free to decide which regional ERMES frequencies to actively bid for. An active bid was equivalent to a valuable bid or a highest bid at the beginning of the round. The fixing of minimum bid increments and definition of valid bids recommended for the auctioning of ERMES licences had been similarly applied to the auctioning of the regional ERMES frequencies. Participants in the auction of regional ERMES frequencies had more time to place their bids than in the case of the ERMES licences. The reason for this was that the bidders' calculations were more complex. Bids for regional ERMES frequencies were placed within 30 minutes of receiving the results of the previous round. The auctioneer had again been given scope to alter the time limits during the auction. The auction of the regional ERMES frequencies ended when no more (valid) bids were made for the 10 frequencies in a round. Each of the 10 frequencies was awarded
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to the participant with the highest bid. Awards were made to the bidden price. If no (valid) bid had been received for a regional frequency by the end of the auction, that frequency would not have been awarded.
Ensuring serious bidding The bidders' ability to pay is crucial to an efficient outcome of an auction procedure. If a top bidder had been unable to pay, the ERMES licence or regional ERMES frequency concerned would have been auctioned again at a later date. WIK recommended ensuring solvency by applying the following rules: each participant in the auction procedure had been required to provide a deposit. The amount of the deposit had been been set at DM 670 000, the minimum bid for a national ERMES licence. In addition, as a proof of ability to pay for bids exceeding the amount of the deposit, each participant had been required to provide a bank guarantee equal to DM 1.5 million. Furthermore, with regard to ensuring an efficient outcome of the auction procedure, it was important that no dummy bid would be placed. The withdrawal of a bid during the auction could considerably distort the process. The withdrawal of a bid after the end of the auction would have necessitated a fresh auction for the licence or frequency concerned at a later date. The following rules were recommended to prevent dummy bids: if a bid for an ERMES licence or regional ERMES frequency had been withdrawn after the end of the auction, a penalty of 100% of the bid had been imposed. A penalty would also have been imposed in the event of a bid being withdrawn during the auction process. However, an assessment of the specific situation had been necessary. The withdrawal of a bid during the auctioning of ERMES licences could hardly be justified. The penalty payable would have been 40% of the bid. In addition, any participant withdrawing a bid during the auctioning of ERMES licences would have been banned from the rest of the auction. Withdrawal of a bid during the auctioning of the regional ERMES frequencies, on the other hand, could have been justified in some circumstances; for example, if it would become apparent from the development of the highest bid that it would be more efficient for the participant to try to acquire a different set of regional ERMES frequencies. Therefore, if a participant would withdraw a bid during the auctioning of the regional frequencies, he would only have been required to pay a penalty if no bid is subsequently made which exceeded his (withdrawn) bid. If this was the case, however, a penalty would have been imposed amounting to the difference between the (withdrawn) bid and the price at which the regional frequency ultimately had been sold. If the regional frequency had not subsequently been sold in the auction, the penalty would have been 100% of the (withdrawn) bid. Finally, it was crucial that participants would not make any agreements as to bidding behaviour in advance of or during the auction. In case of contravention, WIK recommended that the licences should be withheld or withdrawn from the offending participants. In addition, participants could as far as possible be prevented from communicating with each one another during the auction process.
Results from the German ERMES-auction Finally, there have been three applications for an ERMES paging licence from the following companies: T-Mobil GmbH, Mobile InfoServices
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ERMES-auction in Germany. A Keuter and L Nett Table 2. Result of stage 1 (Auction of the ERMES licences). Licence Licence 1 (Channel 7) Licence 2 (Channel 11) Licence 3 (Channel 13)
Licensee
Top bid (=price)
Mobile InfoServices GmbH Miniruf GmbH T-Mobil GrnbH
670 000 DM 673 000 DM 670 000 DM
GmbH and Miniruf GmbH. They are already running paging services based on the POCSAG standard (Scall, Telmi, Quix). In a preliminary stage of the awarding process the interested companies had to prove that they possess technical competence and that they meet the material conditions for the operation of ERMES services as laid down as minimum requirements for participants in the procedure. Furthermore, the candidates had to declare that they wished to take part in the auction procedure, and, after special training during which participants had been made familiar with the hardware and software, that they understood the mechanism and that they accepted the auction rules. The Ministry checked their financial strength by demanding the payment of a security deposit. In addition, as a proof of ability to pay for bids exceeding the amount of the deposit, each participant had been required to provide a bank guarantee. The auction of the four national ERMES licences and its frequencies lasted about 30 minutes and the results are shown in Table 2. While Mobile InfoServices and Minruf got their licence with their first bid, remaining T-Mobil failed to get its preferred licence 1 in its first step. It decided not to bid more for licence 1 but to switch to licence 3. Licence 4, connected with two regional licences and a minimum bid of 840 000 DM, obviously did not attract the interest of any participant. These frequencies may be allocated in a later auction. The subsequent auction of the 10 regional ERMES frequencies lasted nine rounds. It became obvious that the participants competed for some of the frequencies while other frequencies did not get any bid. The reason for this could either be that they regarded the frequencies as heterogenous and of different value or that the licencees wanted to ensure value interdependencies with their national frequency or both. At the end, all of the three bidders got nearly the same number of frequencies, but the time they needed to ensure getting the ones they preferred differed. Miniruf initially had chosen channels 8-10 and channel 3. It dropped channel 3 which was taken by Mobile InfoServices offering a higher bid. But it was willing and able to compete successfully against T-Mobil for the obviously higher valued channel 9 and got nearly all frequencies it had chosen in the first round of this second part of the auction. Mobile InfoServices initially only succeeded in getting channel 1. In the second and third round it lost this channel to T-Mobil but won channel 12 from that carrier. By a higher bid Mobile InfoServices was able to get back channel 1 but it lost in competition with T-Mobil concerning channel 12. Because of T-Mobil's willingness to pay more for channel 12, Mobile lnfoServices decided to switch to channel 2 which up to this round had not received any bid and subsequently could be bought at its minimum bid. Although T-Mobil succeeded in getting three frequencies in round one, it became apparent that it had planned either to get some more regional frequencies and/or other, possibly higher valued, frequencies. By bidding more, it attached Miniruf to its channel 9 as well as some time later--Mobile InfoServices to channel 1. But because both carriers
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ERMES-auction in Germany." A Keuter and L Nett Table 3. Result of stage 2 (Auction of the regional ERMES frequencies). Channel Channel Channel Channel Channel Channel Channel Channel Channel Channel Channel
1 2 4 ,5 6 8 9 10 12 15
Licensee Mobile InfoDienste GmbH Mobile InfoDienste GmbH Mobile InfoDienste GrnbH T-Mobil GmbH T-Mobil GmbH Miniruf GmbH Miniruf GmbH Miniruf GmbH T-Mobil GmbH T-Mobil GmbH
Top bid (=Price) 211 000 DM 170 000 DM 191 000 DM 171 000 DM 171 000 DM 170 000 DM 214 000 DM 170 000 DM 208 000 DM 171 000 DM
answered with higher bids on these two frequencies T-Mobil came back to channel 12 which it meanwhile had lost due to a higher bid of Mobile InfoServices, as mentioned above. It succeeded in getting this frequency and decided also to bid for channel 6 which also did not get any bid in the first round. Final result and frequency allocation of this highly interesting bidding procedure is shown in Table 3. Ensuring the satisfaction of all participants, a short procedure and low expenses, this result could never have been achieved by any alternative awarding procedure. Consequently, the result of this first simultaneous multiple-round auction in the European telecommunications market can be considered as efficient.
Summary Which lessons can be drawn from the development and outcome of the German ERMES auction? First, auctioning licences, frequencies or, more generally, rights in the telecommunications sector has been proven an innovative and efficient awarding mechanism. Second, the specific auction rules as well as the whole procedure, including preliminary checks of participants, software design etc., can be developed by European specialists. Avoidence of serious faults of the past---concerning the determination of the specific kind of auction needed as well as the development of a complete, consequent and closed auction mechanism-has been achieved by intensive study of formerly used auction mechanisms and lessons drawn from them. The multiple-round nature proved to be able to provide information, reduce uncertainty and avoid unrealistic top bids (winner's curse). The activity and the minimum bid increment rules encourage participants to actively bid and this avoids wasting time. Relatively high penalties helped to avoid the withdrawal of bids as well as the danger of distortions of the whole process by collusive behaviour. Finally, the deposit payable in advance and the bank guarantee helped to ensure the bidders' ability to pay for the objects bought. In summary, the complete framework of auction rules achieved to civilize all participants and led to the desired efficient outcome of the auction. Reservations expressed in advance concerning the success of the auction have been withdrawn since its outcome. Remaining critics focusing on the relatively low monetary result of the auction can be countered by referring to the primary aim of the process: the determination of the most suitable users of the licences and frequencies by an objective, comprehensible and non-discriminatory mechanism--in other words: efficiency, not money, was the target.
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The German Telecommunications Act has introduced the auction as standard awarding procedure of rights in the telecommunications sector. Its first application has proven the advantages of the procedure. Due to the large number of outstanding comparable awarding processes in Europe--resulting from the liberalization of the European telecommunications sector~ifferent regulatory bodies already stated their interest, and application of the flexible mechanism to other European countries is likely.
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