Aussies show us the way to avoid

(This post first appeared on NBR's website)

The Australian telco market continues to be a fantastic source of information on how not to run a telecommunications sector.

The results of the 700MHz spectrum auction continue the trend of recent years with what can only be described as a road smash of a result. New Zealand , which is yet to announce formally how it will auction off our own 700MHz spectrum management rights, would do well to learn from the Australia debacle.

Firstly, the Aussie government set the reserve price so high that Vodafone Australia pulled out of the bidding altogether.

Vodafone Australia has a few issues, to put it mildly, not least of which is a declining market share and a network that suffers under the strain, but what better way to reinvent yourself than with a shiny new network based on the best spectrum available.

Australia set its spectrum at A$1.36 per megahertz, per head of population – roughly double what the European nations settled on. New Zealand is yet to announce its price per megahertz per head of population, but I would hope the Australian result would be cause any in Treasury to take a deep breath.

Only three companies bid in the auction – Telstra, Optus and dark horse entry TPG Internet. By being greedy, the Australian government lost one bidder entirely and a second bidder – TPG Internet – didn’t bother with the 700MHz spectrum at all, bidding only for the cheaper, less desirable 2500MHz lots.

The end result is that Telstra has bought two lots of 20MHz each (you need pairs of spectrum for this technology – one for upload and one for download), Optus has two lots of 10MHz each and TPG none.

The impact on competition of allowing one provider to have more spectrum than the others is quite devastating. In the mobile space, spectrum equals bandwidth, which means the more spectrum you have, the more customers you can fit onto your network.

That means before building anything, Telstra has won the 4G battle. Its costs per customer are effectively half of Optus’s costs, meaning it can charge less and still offer a better service that its nearest rival. Competition in the 4G space is over before it begins.

On top of that, the price each telco has paid is astounding. Telstra bought its two lots plus some more in the 2.5GHz band for a little over A$1.3bn. Optus paid nearly A$700m and the total auction brought in almost A$2bn for the government coffers.

That may sound tremendous – more money for hip operations and to get the country back into the black – but it comes at a cost. The telcos won’t be able to build new networks at quite the same rate because they’ve spent so much on the spectrum itself. In the UK in 2000, the cost of spectrum for 3G was so high (NZ$70 billion by the end of the auction) that BT went cap in hand to the government and tried to give its spectrum back. No dice, said the government and BT had to sell off its mobile division and get out of the mobile game entirely to survive.

Here in New Zealand we’re told by the government that it values the economic gains a 4G network will bring over and above the direct cash injection into Treasury’s coffers.

I hope so, because a similar auction over here would potentially cause tremendous damage to a market that has only recently become competitive.

The introduction of 2Degrees into the mobile market has shaken up the sector like nothing else before it. New price points, new services, an astonishing growth rate – 2Degrees is one of the most successful new entrants anywhere in the world.

But if it was forced to bid for 700MHz on this kind of scale, it would end up with management rights but no ability to use those rights. We certainly wouldn’t see a network on any scale from 2Degrees for quite some time.

While 2Degrees can roam onto Vodafone’s network, that’s not as good a proposition as having three competing network operators and if 2Degrees were, for whatever reason, unable to bid or to secure enough spectrum, its ability to compete in the 4G world would simply disappear.

We can’t allow that to happen. Our spectrum auction must be set with competition and economic growth in mind, not a quick win for Treasury.