Crisis forces restart of digital dividend allocation plans

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In 2011 two procedures for spectrum allocation were launched in Italy. The first was a spectrum auction to allocate the external digital dividend (ie, frequencies in the 800, 1800, 2000 and 2600 megahertz (MHz) bands) to TLC operators for the purpose of developing commercial terrestrial radio systems and public electronic communications, including mobile broadband networks and third and fourth-generation telecommunications systems.

The second is a ‘beauty contest’ for the allocation of the internal digital dividend – six digital terrestrial television multiplexes. Following to the withdrawal of one of the main participants – Sky Italia is contesting the final regulation, which it considers to be biased in favour of incumbent operators – and the approval of three parliamentary motions requiring the government to restart the relevant spectrum allocation procedure on a basis that takes account of the financial value of the participant’s offers, Mr. Corrado Passera, Minister of  economic development, announced on January 20th that the beauty contest will be suspended for a 90 days period.

Providing that “during the years the technological and market framework significantly changed”, Mr. Passera said, the suspension of the beauty contest procedure will be necessary in order to “decide the destination of the frequencies at hand. Since the frequencies are a scarce and precious resource, we are taking some time to find solutions more consistent with the growth, equity and austerity plan of this government”.

As a result of these developments, the beauty contest may yet be cancelled, in which case the Italian Communications Authority and the Ministry of Economic Development would be required to issue new tender rules and to publish an invitation to tender for the allocation of the internal digital dividend.

This update recaps the two allocation procedures and briefly analyses their similarities and differences, as well as the key aspects and business opportunities.

Auction for external dividend (TLC frequencies)

The decision to launch a public auction to allocate the external dividend was taken on December 13 2010, upon approval of the Financial Stability Law 2011. The ministry published the invitation to tender on June 28 2011, setting a minimum price of €2.4 billion (for all bands), in accordance with Section 1.13 of the law.

Five companies submitted applications and four – Telecom Italia, Wind, Vodafone and H3G – had their applications accepted. The rights were assigned for a total price of over €3.9 billion, exceeding the minimum by over €1.5 billion. (However, the 2000 MHz band attracted no offers and remains unassigned.) Winning operators must fulfill certain obligations by specified deadlines; otherwise, new auctions will be necessary to reallocate their frequencies. In future, changes to the 700 MHz and 1400 MHz frequencies may make new blocks of frequencies available for broadband services.

Internal dividend (TV frequencies) – beauty contest or auction?

On July 8 2011 the ministry published the final regulations on the procedure for allocating the internal digital dividend. These six digital terrestrial frequencies will be available following analogue switch-off, which is scheduled for early 2012, and should be assigned for the purpose of establishing six national digital television networks.

The regulations specify that the allocation of the internal dividend is not to be carried out by auction; thus, the participants are not to be ranked on the basis of the financial value of their tenders. Instead, they must be assessed on other criteria, such as their technical infrastructure plan, their business plan, and their experience of operating terrestrial television networks.

Eight of the operators that submitted applications before the September 6 2011 deadline have been accepted. They are Canale Italia, Telecom Italia Media Broadcasting, Elettronica Industriale (part of the Mediaset group), Sky Italia, Prima Tv, Europa Way, 3lettronica Industriale and Rai.

The allocation has not yet been finalized and it is now suspended for 90 days, but Sky Italia has cast doubt on the procedure by announcing its withdrawal from the contest. It considers the rules of the procedure to be unfair, arguing that they favour the incumbent operators. Moreover, Sky Italia maintains that the procedure is too slow to allow the participants to plan their investments in the long term.

The suspension of the procedure does not necessarily mean that an auction will be launched for the allocation of the frequencies in question, which could yet be assigned through a beauty contest that takes account of the financial value of the participants’ bids – the two approaches are not mutually exclusive.

Comment

The experience of recent months shows that the choice between auction and beauty contest must be based on an assessment of actual needs and circumstances. It is clear that during the current financial crisis, the primary public need is to monetise resources – as much and as soon as possible – from any available source, including the allocation of the internal digital dividend. This need was arguably less urgent or apparent when the beauty contest was launched, but the state of Italy’s economy could yet give the plans for Italy’s digital networks a decisive twist.

This article was originally edited by, and first published on, www.internationallawoffice.com – the Official Online Media Partner to the International Bar Association, an International Online Media Partner to the Association of Corporate Counsel and European Online Media Partner to the European Company Lawyers Association. Register for a free subscription at www.internationallawoffice.com/subscribe.cfm . The following version of the article was modified by the authors in order to be up to date with the latest developments.

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