A proposal has been raised for the telecom spectrum allocation system to evolve from a price-competition auction model to one that evaluates network quality and coverage. The aim is to overcome an auction structure that raises the cost of securing spectrum and to encourage carriers to invest in networks voluntarily.

Spectrum is a core resource for mobile services. The government has used auctions to allocate spectrum, a limited public resource, efficiently. Carriers submit prices for spectrum rights, and the government imposes network buildout obligations on winning bidders.

But the auction system has had limits in encouraging better service quality, such as expanding telecom facilities and securing coverage. Some have also pointed to overheated price competition for spectrum as a cause of higher telecom bills.

◆Auction-centric spectrum allocation has limits in inducing network investment

The Korea Information Society Development Institute (KISDI) said on May 14 that a "scoring auction" model is needed that combines non-price factors such as network quality and coverage with price-focused auctions. Under the approach, spectrum would be allocated by evaluating a bidder's proposed network buildout level alongside its bid price.

A KISDI report said South Korea used direct regulation in spectrum auctions in 2011, 2013, 2016 and 2018 by setting baseline numbers of base stations by band and requiring operators to build at least a certain proportion within a set period. It said sanctions were possible for failure to meet such obligations, including refusal of spectrum reallocation and the recovery of some bands, to encourage operators to invest in facilities.

That pattern continued in this year's reallocation of 3G and LTE spectrum. The government made a switch to 5G standalone mode (SA) mandatory as a condition for reallocation. By setting spectrum-use conditions first, the government directly set the direction for network advancement.

But the researchers said such direct regulation can increase operators' burdens and lead to inefficient investment. The report said, "If a uniform standard is applied to all operators, some operators may face an excessive compliance burden." For instance, if the same standard is applied even to regions where spectrum demand is low but buildout costs are high, investment could generate costs greater than social benefits.

The recent disagreement between SK Telecom and LG Uplus over the price for reallocating the 2.6 GHz band can also be seen as an example showing the limits of the current spectrum system. Even for the same band, differences in operators' burdens depending on the timing of acquisition, past winning bid prices and reallocation conditions have fueled controversy over fairness.

◆Encouraging voluntary network investment through operator choice

The government also recognises these issues. It has introduced some measures with the character of indirect regulation. When setting reallocation prices for 3G and 4G spectrum expiring in 2021, the government applied an approach that lowered the price depending on how many 5G base stations the three carriers built. The structure reduced the reallocation burden the more 5G base stations were built. It was an example of encouraging 5G investment through price incentives rather than unilaterally forcing a specific buildout level.

Still, carriers must weigh both the burden of reallocation prices and the burden of network investment. KISDI's proposed scoring system is presented as an alternative at this point. The government would disclose scoring criteria in advance, and operators would submit, along with their bid prices, coverage, quality and investment plans. The government would select not simply the highest bidder, but the operator that delivers the greatest social benefit when price and network buildout plans are considered together.

The report said the scoring system can encourage carriers to choose investment levels on their own. Under direct regulation, the government sets a specific quality level as an obligation and operators must follow it. Under a scoring auction, operators decide what level of quality and coverage to deliver by considering their cost structures and market strategies.

A higher quality commitment improves a bidder's score, but it also increases buildout costs. The structure allows competition between an operator offering a high bid but a low investment plan and an operator offering a relatively lower bid but strong coverage and quality plans.

◆Objectivity and predictability of the formula are key

KISDI said that if scoring rules are designed appropriately, the government can achieve higher social welfare than under traditional direct regulation. It said operators, while considering their own profits, would voluntarily choose a socially efficient level of network quality.

But adopting a scoring system is not immediately possible. The main issue is the scoring formula. Winning outcomes can change depending on what weight is placed on bid prices, quality, coverage and investment size. Objectivity in evaluation indicators also matters.

The direction of system design differs depending on whether it looks at clear facility standards such as the number of base stations, or at user-experienced speeds, latency and coverage quality. The key is how sophisticated and predictable an evaluation system the government can create. From carriers' perspective, if investment plans can be recognised in scores, there is an incentive to increase network investment.

The researchers said, "There is a need to design new regulation that can move away from a direct regulation-centred framework while strengthening investment incentives and securing public interest."