Saudi Arabia first in MENA to allocate 700 MHz spectrum to mobile

The first spectrum auction in Saudi Arabia has raised SAR5.8 billion ($1.6 billion), for 50 MHz in the 700 MHz band and 66 MHz in the 1800 MHz band. This is the first time spectrum in the 700 MHz band has been allocated in MENA. By introducing free-market tools to estimate the value of spectrum and deferring payments over several years to ease the financial burden on operators, the Saudi regulator (CITC) has moved to a more modern approach to spectrum management.

New spectrum is divided between three incumbents and a newcomer

The spectrum assignment in Saudi Arabia is the first time an auction has been used in the country to allocate mobile spectrum. Regulator CITC has historically preferred the more direct approach of an administrative assignment.

In this auction, the Saudi regulator offered: 50 MHz in the 700 MHz band (the first time the Digital Dividend band has been offered in the country) at a reserve price of SAR2.1 billion ($560.3 million), and 70 MHz of previously unassigned spectrum in the 1800 MHz band, also at a reserve price of SAR2.1 billion.

To increase the level of competitiveness in the mobile Saudi market, CITC reserved 2×10 MHz in each of the auctioned bands to a new player.

All three existing Saudi mobile operators (STC, Mobily and Zain) participated in the clock auction, along with a new market entrant. Notably, it was the first successful assignment of 700 MHz to mobile services in MENA; the band was claimed by STC and newcomer GO Telecom. The remaining operators – Zain and Mobily – have invested in the 1800 MHz band only.

Figure 1: Spectrum assignments and required payments
Source: GSMA Intelligence

Spectrum licences will be valid for 15 years from 1 January 2018. The bidding was competitive, with final prices reaching 145.4% of the reserve level for 700 MHz and 140.7% for 1800 MHz. The cost of spectrum reached 0.50 and 0.34 $/MHz/pop for the 700 and 1800 MHz bands respectively. These are moderate values compared to prices paid by Mobily in 2004 ($3.25 billion for 3G licences and approximately 6.71 $/MHz/pop). The operators are not obliged to pay the whole sum upfront – only 30% is payable by the end of 2017; instalments will then be spread equally over 10 years from 2019 onwards.

Reasonable payment conditions encourage investment in 4G deployment

The release of a new 700 MHz band and an additional solid block of spectrum in the 1800 MHz band will contribute to deployment of high-speed mobile broadband services in the country as part of national transformation plans for 2020–2030. As of the end of 2016, 4G connections reached 17.8% of total connections in Saudi Arabia – a figure expected to increase to over 41% by the end of 2020, which is comparable with forecasts for other countries in the Middle East. CITC obliged STC and GO, winners of the 700 MHz licences, to provide 10 Mbps downlink speeds to at least 85% of population within the given timeline, to ensure steady development of 4G networks (four years for STC; eight years for new entrant GO).

Figure 2: 4G connections as a percentage of total mobile connections in select countries in the Middle East
Source: GSMA Intelligence

Because of the deferred payment system, the annual commitment of the total licence cost in 2017 will reach only 3.1% of total annual mobile revenues in Saudi Arabia and will drop to 0.7% annually from 2019. Deferred payments make the investment less costly from the perspective of present value than if operators paid upfront. With payments spread over 11 years, the cost of spectrum drops from the potential upfront payment of 0.50 $/MHz/pop to a NPV of $0.34 for 700 MHz and from $0.34 to $0.24 for 1800 MHz (estimated weighted average cost of capital of 7.18%).

By enabling a deferred payment system and using an uncomplicated auction mechanism, Saudi authorities have moved towards a modern and more operator-oriented spectrum management process that will help the mobile industry facilitate socioeconomic growth in the future.