Spectrum auction - a bob each way

The government has released information around the make-up of the 700MHz auction, although the all-important pricing has not yet been announced.

As expected it’ll be a straightforward auction process, with ownership (well, management rights) kicking in at the start of 2014.

New Zealand will follow the APT band plan with 45MHz of paired spectrum being made available in 5MHz blocks. That gives us nine possible pairs to bid for.

The maximum limit will be two lots of 15MHz each – markedly less than Telstra’s recent acquisition of 2x20MHz in Australia. However, depending on demand that restriction may be withdrawn during the auction.

Winners will have a “use it or lose it” clause, a “broader obligation to extend mobile cellular coverage” and in addition, may well be able to pay off the cost of the spectrum over a longer period of time, rather than having to plunk down the cash once they’ve won their lot.

This is interesting because there are clearly two competing forces at work here. On the one hand, Treasury will be very keen to see a huge windfall for the coffers. It’s budget time and the government will be keen to reap some reward for flogging off the rights to valuable spectrum.

In Australia the recent auction brought in just on A$2bn (down from the expected A$3bn) so if we fudge the numbers we could be talking about $400-$500m for the rights in New Zealand. The Aussie auction was a bit different (it included another spectrum range as well) so let’s knock that back a bit further to $300m.

That’s $100m from each telco – Vodafone, Telecom, 2Degrees – which is money I’d rather see spent on the network deployment itself.

Which leads to the opposing tension – the true economic gain from deployment. The Crown puts that at about $2.4bn over the next 20 years, something that will only happen if the telcos actually deploy LTE as quickly as possible.

To my way of thinking it’s important we get on and deploy the stuff. $300m today versus $2.4bn over the next 20 years seems a no-brainer, but I’m no politician.

It will be interesting to see what the government means by “broader obligation to extend … coverage”. I would anticipate some form of rural deployment requirement, but that could be a double-edged sword. While Telecom and Vodafone would cheerfully roll out 700MHz LTE in rural New Zealand (they’ve both said as much already), 2Degrees will want to focus on the cities and major population centres first. We will have to work out whether we’re happy to have Vodafone and Telecom dominate the rural space in the short term and whether we should reward them for that during this process.

2Degrees has brought tremendous competition to the mobile market and it would be a shame to see that stymied in the rural space. Having said that, rural New Zealand needs broadband in a hurry and mobile broadband is the best way to deliver that in many areas. So we have a conundrum.

2Degrees has its own economic study, from Venture Consulting, that shows the economic gain of having three mobile players is worth around $12bn over the next nine years. That’s a lot of money to be gained from very little government spend – none, to be precise – compared with the UFB which will cost us taxpayers $1.5bn for a supposed $33bn over 30 years.

The government has released information around the make-up of the 700MHz auction, although the all-important pricing has not yet been announced.

All of this will be put to the test over the next few months. MBIE will consult on the auction process, these additional requirements and how the payment mechanism will work. It’s also looking at whether LTE can sit alongside fixed wireless services in neighbouring bands, which is a very good idea.

But pricing won’t be included in this round of consultation. That will have to wait until nearer to the auction date itself. The Aussies set their reserve too high (Bill Bennett compares previous pricing very nicely here) and it’s important we don’t scare off any potential bidders – most importantly, 2Degrees.

 We haven’t addressed the elephant in the room either. Maori won a major victory at the turn of the century and ultimately paid for a discounted chunk of spectrum which became the backbone of 2Degrees’ network. This time round they’ve been told they’re not getting anything - $30m  (EDIT: not $35m as I had originally) has been set aside for ICT related initiatives instead – but there’s been no word yet on whether a legal challenge will be mounted. That could well derail the whole process.

It’s important we get this right. Mobile services really are the future of telecommunications in many respects and if we stuff this up now it’ll leave us with an anti-competitive market that won’t deliver on any of the economic forecasts.