Today, I’m taking a break from the Miscellaneous series, a series of posts about random miscellany in life. Instead, I will delve into some more serious economic topics like Elanor (hah! I wish!). More specifically, I’ll be talking nonsense about WiMAX in Malaysia.

In the year 2000, the United Kingdom decided to auction off 3G airwaves. Designed by Ken Binmore (his book, Fun and Games is a good read, but way too expensive. Go to the library to read it like I did), Paul Klemperer and team, the UK auction of 3G airwaves ended up as one of the most successful auctions in history, raising £22.5 billion. The auction had been surprisingly simple - based on simple competition theory: You can’t compete, out you go. It was an open auction, so the general public and the competitors to the 4 licenses know who was in the race, and how much each bid.

In Malaysia, however, airwave licenses, including the licenses for WiMAX airwaves were awarded in a “beauty contest” of sorts (unfortunately, there are no official websites where I can confirm the method of awarding the licenses, a sad case of the lack of transparency in Malaysia - something to be addressed in another article). [other sources: theEdge Daily Article | theEdge Daily Interview]

They call it a “tender evaluation” though. And what happens is that the prospective licensees submit their proposals to the Government (or in this case, the MCMC - Malaysian Communications and Multimedia Commission). The MCMC will then evaluate each proposal based on the technical capabilities, price offered for the licence (or maybe the price for the licence is fixed) and various other factors. Then the MCMC decides who to award the licences to.

Not a bad idea, if MCMC knows truly the individual capability of each company. But as with information asymmetry goes, there is no perfect information about the true capabilities of the companies competing for the license. The MCMC will have only information from the tender proposals, which can be skewed. An example of such a failure would be the 3G licence being awarded to MiTV, which to this date, has no updates on how it plans to use the 3G licence.

Then there is also the fact that in this closed-door decisions, you (meaning the general public as well as the competitors) do not know what is behind the closed doors. Anything could happen while the committee is making decisions on who to award the licence. Corruption, for one, could happen. It causes controversy. For example - the Spanish 3G airwaves licensing caused many legal and financial problems that spanned a few years. Another thing that could happen is favoritism. Paul Klemperer noted that

…some governments make no secret of choosing beauty contests precisely because of the possibilities for favoring their ‘national champions’ over foreign firms. But such protectionism is unlikely to benefit consumers or taxpayers.

If you thought that sounded familiar… think DiGi, which is partially owned by Telenor, and their failed bid to acquire a 3G licence and a WiMAX licence.

Also, there is cost to be factored in. It is time consuming for evaluations to happen. The evaluation of WiMAX licences has been ongoing since September 2006, with some hiccups along the way. By contrast, the UK 3G airwave licence auctions too little more than a month, with maximum amount of profits (enough to half the UK income tax)

In short, what the MCMC is doing is inefficient.

And a more efficient way would of course be the auction. True, there might be collusion and whatnot by auctions, but the auction designed by Ken Binmore, Paul Klemperer and team was of such simplicity that collusion couldn’t happen - if a company couldn’t keep up with the bid, it has to withdraw.

If auctions similar to those designed by Binmore, Klemperer et. al. were used, only companies fully capable of deploying WiMAX would be bidding for it. To deploy WiMAX, the government estimated about RM 300 million investment for infrastructure alone, but as proven in other countries, the amount is more than that. Sprint-Nextel, for example, already planned to spend about $1.1 billion in 2007, and is planning to spend another $2 billion in 2008. The point I am stressing here is that it requires shitloads of money to afford running a WiMAX service. On the WiMAX auction, only companies able to spend that much money would continue to bid, as prices get higher.

One might argue that some companies will continue to bid even when the prices get too high. I agree, but then it is a case of balancing risk with investment. You’d never know if WiMAX is actually going to be the Next Big Thing (with capital letters to warrant its importance). If a company deems that the benefits of investing in WiMAX outweighs the risks of WiMAX dying out, then it would be possible that they would bid higher. But think like a rational man for a moment: there will come a time, where the risk would outweigh the benefit, and it would be irrational to continue bidding. By bidding, a company “puts money where the mouth is”. It means that the company is fiscally able to run a WiMAX service. If the company continues bidding when the prices get too high, they would come to realise that they would be running at a loss, or is unable to recoup. No company would want to run at a loss. They would quit. This leaves only the capable ones continuing their bids.

Here, one might again, argue, this is a form of discrimination and protectionism for the already-established companies. Paul Klemperer and team noted this issue, and obviously came up with a fix - payment of licensing fee in mixed form of royalties and lump-sum payment. This encouraged the newcomers to the telco industry to get a hold in the pie. Naturally, this, and the Anglo-Dutch design of the auction by Binmore, Klemperer et. al., came to much fierce criticisms from the telco incumbents.

Which leads us back to the issue on WiMAX. If anyone noticed, none of the previously established telcos like Maxis, Celcom, and DiGi got a licence. According to theEdge,

…3G spectrum holders would be side-stepped if other candidates have the capability to roll out WiMAX on concerns that they may not roll out WiMAX wholeheartedly.

This is something I personally do not get. Business is business, and any rational business would seek to maximize profits. They would acquire the WiMAX licence in view of profits, of course. And if the market demands it, they would have to beat competition to better improve their services.

Another argument one might put up against auctioning of airwaves is that the companies that won the auction would charge extremely high prices to cover their high cost of acquiring the said licences. However, basic economics speaks of strength from scarcity - would they charge any lower since there are only 4 licences available?

The current beauty contest/tender evaluation system has selected relatively unknown companies (though backed by known companies like YTL, Green Packet, and REDtone), and several people (like Hidayat) have seen this to be unfair to DiGi and other incumbents. Is it really unfair that DiGi and Maxis didn’t get it?

We wouldn’t know. And that is exactly the problem with beauty contests. There are too many unknowns, but in an auction, like the market, forces these unknowns to be knowns. Through auctions, one can tell if a company is truly capable of performing or not. If anything, the prices they pay are small benchmarks of their capabilities.

DiGi, I’d have to say, having looked at their business growth rate (using the stock market as an indicator), would be fiscally capable of deploying WiMAX, and I suppose they are technically capable as well, being able to piggyback WiMAX on their already available telco towers. On the other hand, the Government doesn’t want just a few companies to monopolize the telco market, so maybe the exclusion of DiGi was not so much of a political one (like during the issuing of 3G licences, where DiGi didn’t win a bid, where many people suspect mainly because it was still partially owned by Norweigian telco company, Telenor), but an economical one. Which begs the question: Why didn’t they use an auction instead?

We wouldn’t know if the choices selected by MCMC will perform or not, however the government had already set targets for the four winners of the WiMAX licence to start deploying their services by this year. So we will know if the beauty contests were effective or not. But it definitely is NOT efficient, since there is so much more to be gained with so much less effort.

Cool? DiggDel.icio.usTechnoratiFeedsterFurl
RSS feed for comments on this post  |  TrackBack URI for this post