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THE BIGGEST AUCTION EVER:

3G LICENSING IN WESTERN EUROPE (A)1

In the spring of 2000, the governments of Austria, Belgium, Denmark, Germany, Great
Britain, Greece, Italy, the Netherlands, and Switzerland were preparing for the sale of licenses
that would allow private operators of third-generation (3G) networks to use certain blocks in the
spectrum of radio frequencies. The governments objectives included the creation of
competitiveness in the resulting telephony market, an efficient allocation of licenses, and the
generation of revenues to supplement governmental budgets. Based on previous experience with
allocation by committee (beauty contests), most Western European governments were
considering the use of auctions to sell their licenses in the private market. Different countries
faced different market conditions, and differed in their preferred choice of auction format.

Third-Generation Wireless Technology

3G wireless technology, a new standard in wireless communication, increased
transmission speeds from 9.5 kilobytes to 2.0 megabytes per second and allowed mobile
telephony to interface with the Internet. The new technology made it possible to broadcast
television signals across mobile-telephone networks, and to provide mobile video-conferencing,
high-speed Internet access, and high-volume e-mailing through mobile telephones (Exhibit 1).
Such applications could revolutionize the professional and recreational use of mobile telephony
and open new frontiers in e-business.
At the time of its introduction, 3G technologys ultimate value was unknown, but
analysts made consistent projections of per capita values across the Western European countries.
Licenses in centrally located countries were thought to be worth a little more than those in
peripheral countries (because of synergistic cost reductions). A countrys greater size and GDP
were also believed to have a some effect on the value of a license.
1

The first part of this title as well as many of the facts herein are taken from The Biggest Auction Ever: The
Sale of the British 3G Telecom Licences, by Ken Binmore and Paul Klemperer, Economic Journal 112 (March
2002).

This case was prepared by Matthias Hild, Assistant Professor of Business Administration, with the assistance of
Avin Dwivedy (MBA 04) and Akash Raj (MBA 04). It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright 2004 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or
otherwisewithout the permission of the Darden School Foundation.

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Current providers of mobile-phone networks with second-generation (2G) technology

had several competitive advantages compared with industry newcomers. They had already
established brand names and significant customer bases. Moreover, they would be able to
upgrade their existing 2G infrastructure and thus avoid the cost of building 3G networks from
scratch. Industry analysts put the value of 3G licenses in Western Europe at (Euro) EUR450 to
EUR650 per capita for an incumbent and EUR300 to EUR550 for a new entrant. Potential 3G
providers had, of course, better estimates of those values, based on a better understanding of their
own capabilities.

Beauty Contests versus Auctions

In January 2001, the French government conducted a beauty contest in its allocation of
3G licenses. In such a contest, firms submitted business plans to a governmental committee that
awarded licenses to what it believed were the best candidates meeting a set of published criteria.
This allocation procedure was not without its problems. Apart from its opaqueness and the
possible semblance of favoritism, beauty contests could be cumbersome and protracted. At the
time, only two companies had agreed to pay the French government a price of EUR330 per
capita. Other potential providers still held out in hopes that they could negotiate a lower price.
Nonetheless, the French government had already done much better than the British government,
which, in its own beauty contest for 2G licenses, had raised a total of only (pounds) GBP40,000
per license.
The generation of revenues was obviously a very important objective in the governmental
sale of airwave licenses. Other objectives included the efficiency of the allocation and the
competitiveness of the resulting telephony market. To ensure a competitive market, each
government would choose the number of licenses for sale and restrict their use to the companies
to which they were awarded. In this one-firmone-license approach, it was, for instance, not
possible for two companies to divide the allocated frequencies between them. Joint ventures
would therefore have to be formed at the beginning of the tendering process. To ensure
efficiency, moreover, companies with the best business plans would get the licenses. Because
better business plans were associated with larger expected profits, efficiency was linked to
maximization of the revenue raised in the sale.
As far as revenue maximization was concerned, the U.S. Federal Communications
Commission (FCC) successfully used an auction format in its 1994 sale of mobile-telephone
licenses, which generated receipts of US$20 billion, twice the commissions own estimate. Most
Western European governments were therefore attracted to the concept of auctioning their
licenses in the private market. What was less clear was the precise format that an auction of 3G
licenses should take.

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Auction Formats
The most common auction formats for the sale of multiple objects (in this case, 3G
licenses) by a single seller were derivatives of the simple design of auctions for the sale of a
single object. The three most typical formats for a single-object auction are the ascending
(English) auction and the sealed-bid auction, either in its first- or second-price version. In the
English version of an ascending auction, bidders successively top each others bids until no one
wishes to bid any further. At that point, the highest bidder wins the object at his or her bid price.
In a sealed-bid auction, participants submit sealed bids, unbeknownst to each other.2 The auction
ends after only one round, with the highest bidder winning. In the first-price variant of that
auction, the auctioneer sells the object to the winner at the winners own (highest) bid. In a
sealed-bid second-price auction, the object is sold to the winner at the second-highest bid price.
Auctions of multiple objects expand on the design of those three basic types. In all those auction
formats, the seller can set a reserve price that specifies the smallest amount a potential buyer has
to pay in order for the sale to take place.
Simultaneous ascending auction (FCC auction)
The FCC pioneered the simultaneous ascending auction for the sale of multiple airwave
licenses, and is similar to the ascending auction for a single object. The prices on each object rise
independently, until no one wishes to bid any further. The auctioneer may impose additional
rulesfor instance, limiting each participant to bidding on, at most, one item in each round
(thereby also limiting each bidder to buying, at most, one object). The same participant might,
however, bid on different items in different rounds. To remain in the game, each participant
either has to have the highest bid on some item in the previous round or else raise the bid on
some item by at least the smallest required increment. After each round, all bids are revealed,
and the auction ends when the remaining participants no longer raise their bids.
Sealed-bid price-discriminatory auction
Each participant submits (possibly several) closed bids on the objects being auctioned. As
in the sealed-bid first-price auction for a single object, the highest bidders win, and pay their own
bid prices. Orders at the lowest accepted bid (stop-out price) are partially filled. The term
discriminatory refers to the fact that bidders might pay different prices for the same item. The
U.S. Treasury used this auction format to sell part of its weekly bond offerings. When the objects
within a batch differed (as with 3G licenses), the first stage of the auction determined the
candidates eligible to bid in a subsequent simultaneous ascending auction. This second stage of
the auction started from the bid prices of the first stage, and determined the final allocation of the

Investment bankers typically referred to sealed-bid auctions as Dutch auctions. Unfortunately, that label was
also used to describe a different auction format, used in the Dutch flower market, in which the auctioneer
incrementally lowered the announced price of an object until one of the bidders stopped the process and paid the
price announced at that time.

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heterogeneous objects among bidders. The U.S. Treasury used that type of auction until 1998 to
sell its marketable securities.
Sealed-bid uniform-price auction
Each participant submits (possibly several) closed bids on the objects being auctioned.
The highest bidders win, and pay a uniform price. Depending on the design, that price is either
the clearing price at which all items could be sold (the lowest winning bid) or the highest
nonwinning bid price (as in the sealed-bid second-price auction for a single object). When, for
instance, four bidders each wins one of four licenses auctioned, the clearing price is either the
fourth- or fifth-highest submitted bid. That auction format was widely used in France for initial
public offerings and, since 1992, by the U.S. Treasury. When used to sell a batch of
heterogeneous objects (e.g., 3G licenses), the auction determines the candidates eligible to bid in
a subsequent simultaneous ascending auction. The second stage of the auction starts at the bid
prices from the first stage, and determines the final allocation of the heterogeneous objects
among bidders.
Anglo-Dutch auction
A British team of government advisers developed this combination of an ascending and a
sealed-bid auction. Assuming there are four objects for sale, the first stage is an ascending
(English) auction in which participants increase their bids until only five bidders remain. In a
second round, to select the final four winners, the remaining bidders enter sealed bids, in which
they could increase (but not decrease) their bids from the first round. Depending on the design,
the four winners of the sealed-bid auction commit either to the price of their own bid, or to a
price equal to the fourth-highest bid. When the objects for sale are homogeneous, the auction
ends at that point. When the objects are heterogeneous and bidders prefer certain objects to
others, however, the auction is concluded by a final phase in which the winners of the first two
rounds enter a simultaneous ascending auction that starts at their price commitments from the
earlier rounds.

National Differences
Different countries faced different market situations that had to be taken into account
when determining the proper auction format. Key differences among countries were the number
of available licenses, the number of 3G incumbents, and the sequence in which countries would
bring their licenses to market. Exhibit 2 shows the timetable of license sales in 2000 and 2001.
This list describes the situation in each national market and a possible auction format.
Great Britain
The British market was dominated by four incumbents. Owing to engineering constraints,
the 3G spectrum could at first be split into only four licenses. At that point, the British

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government favored the use of an Anglo-Dutch auction. In early 2000, engineering advances
eventually enabled the British government to offer five licenses rather than four. The government
then decided to conduct a simultaneous ascending auction in which participants would be limited
to bidding on, at most, one license per round. In addition, one of the licenses would be reserved
for a new entrant by excluding all 2G incumbents from bidding on that license.
The Netherlands
The Dutch government decided to use a simultaneous ascending auction for its five 3G
licenses. The country had five current operators.
Germany
The German government chose to auction 12 blocks of spectrum, which companies could
bundle into licenses of either two or three blocks. For instance, the blocks could be divided into
four licenses of three blocks each, five licenses of three two-block and two three-block bundles,
or six licenses of two blocks each (Exhibit 3). The German government envisioned using a
simultaneous ascending auction. Two of the four incumbents had a dominant market share of
40% each.
Italy
The Italian government was considering a simultaneous ascending auction, with the
additional rule that the number of licenses would be reduced to one below the number of serious
bidders. Italy had four incumbent 2G operators.
Austria
The Austrian government also intended to auction 12 blocks in a fashion similar to the
German model. The country had four incumbents.
Switzerland
With three 2G incumbents in its market, the Swiss government decided to use a
simultaneous ascending auction for four licenses. The government was considering allowing
agreements among bidders to share the use of licenses.
Belgium
The Belgian government intended to offer four licenses in its market of three incumbents,
using a simultaneous ascending auction. One of the incumbents had two-thirds of the market
share.

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Greece
With three incumbents in its market, the Greek government intended to offer four
licenses, using a simultaneous ascending auction.
Denmark
The Danish government intended to sell four licenses in a sealed-bid uniform-price
auction in which the winners of the four licenses would have to pay the fourth-highest bid. The
country had four incumbent operators.

Getting Ready
The sale of 3G licenses was a politically sensitive issue that could, to some extent, affect
how voters would perceive the governments economic competence. Though governments were
hoping that auctions could supply additions to their budgets, they also hoped to achieve an
economically efficient allocation of resources. Yet, some of the proposed auction formats had
never before been used on such a large scale. As the date of the first auctions drew closer, many
politicians wondered if their designs would produce the intended effects.

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-7Exhibit 1
THE BIGGEST AUCTION EVER:
3G LICENSING IN WESTERN EUROPE (A)
Wireless Technology
2G Wireless
The most common
technology in 2000

2.5G Wireless
The best available technology
in 2000

3G Wireless
The new technological
standard

Features include:
Phone calls
Voice mail
Receive simple e-mail
messages

Features include:
Phone calls/fax
Voice mail
Send/receive large email messages
Web browsing
Navigation/maps
Data updates

Features include:
Phone calls/fax
Global roaming
Send/receive large email messages
High-speed Web
Navigation/maps
Video conferencing
TV streaming
Electronic agenda &
meeting reminder

Speed: 10 kb/sec

Speed: 64144 kb/sec

Speed: 144 kb/sec2 mb/sec

Time to download 3-minute

MP3 song:
3141 minutes

Time to download 3-minute

MP3 song:
69 minutes

Time to download 3-minute

MP3 song:
11 seconds to 1.5 minutes

Source: 3G Newsroom.

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-8Exhibit 2
THE BIGGEST AUCTION EVER:
3G LICENSING IN WESTERN EUROPE (A)
Timeline of 3G Sales
Great Britain
Netherlands
Germany
Italy
Austria
Switzerland
Belgium
Greece
Denmark

March 2000
July 2000
July 2000
October 2000
November 2000
November 2000
March 2001
July 2001
September 2001

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-9Exhibit 3
THE BIGGEST AUCTION EVER:
3G LICENSING IN WESTERN EUROPE (A)

Examples of Block Bundles under Constraints in German and Austrian Auctions

Block Block
1
2
License 1

Block
3

Block Block
4
5
License 2

Block
6

Block Block
7
8
License 3

License 1

License 2

License 3

License 4

License 1

License 2

License 3

License 4

Block
9

Block Block
10
11
License 4
License 5

License 5

License 6

Block
12