Why we can’t let two players dominate the 700MHz spectrum auction

Thank you for the opportunity to submit on the rules regarding the upcoming 700MHz spectrum auction.

TUANZ (the Telecommunications Users Association of New Zealand) is a strong advocate for increased competition, and as such has lobbied hard to improve the conditions for new entrants into the market, so as to increase customer choice.

The mobile market has, as you know, recently moved from a two-player duopoly to a truly competitive environment for the first time and TUANZ is determined to encourage the growth of competition in the years ahead.

The 700MHz auction gives us an opportunity to ensure that competition is continued in the newly emerging world of 4G or LTE networks.
Rather than restating our pro-competition position again, TUANZ would like to see the following issues addressed through the auction process.

1: Fair distribution of spectrum
TUANZ is concerned that any move to allow two players to buy up to 2x20MHz of spectrum will result in a duopoly in terms of 700MHz spectrum. Given that we’ve only just begun to see competition in the mobile space, this would be a catastrophe and TUANZ encourages MBIE to make sure that doesn’t happen. Allowing a maximum of three lots of 2x15MHz each would ensure that an even and fair apportionment takes place.

2: Price
The recent debacle of the Australian spectrum auction shows that too high a reserve price can mean limited competition for spectrum. TUANZ hopes New Zealand can learn from this example and set the reserve price at a level that encourages all three network operators to bid on spectrum.TUANZ suggests looking at recent European pricing as a guideline for reserve pricing.

Notwithstanding Treasury’s keenness to maximise its return through this auction, TUANZ would like to remind all participants that the real benefit of 700MHz spectrum comes through the deployment of networks, not through an initial cash grab. To that end, TUANZ would like to see the reserve price set at a low level so as to give the telcos the funding to deploy networks as quickly as possible.

3: Payment terms
TUANZ suggests two courses of action with regard to the payment terms for any winners. First, payments are suspended until network deployment takes place. Currently there are no devices that will use 700MHz and it will be at least a year post-auction before the telcos are in a position to offer service using 700MHz. It would seem prudent to base payments around this schedule. That supposes there is also a “use it or lose it” clause – something that TUANZ would support.

Second, payments should be spread over the life of the asset – that is, apportioned payments each year for the 18 years of the management rights period. This will help all three mobile network operators to free up cash to spend on the network deployment.

This is in line with the Minister’s comments regarding the true economic value of the spectrum being tied to its use, not to its sale.
TUANZ’s overriding concern in this process is for competition. We have seen what having a third entrant in the market can do in terms of products, service and pricing and we would not like to see the New Zealand market drop back to a two-player duopoly.

(This is TUANZ’s submission on the spectrum auction sale process)

Will we see the return of the cosy duopoly?

The government is gearing up to sell management rights to the 700MHz spectrum in the next few months and hopefully we’ll see LTE mobile service deployed throughout the country in the not too distant future.

The auction itself is key to the future of the mobile telco sector in New Zealand and there are a couple of worrying signs in the information that’s been released so far.

All together we’re looking at 45MHz in total. We have three mobile operators so that would be three lots of 15MHz each. Nice and simple, it means we have equal opportunity for mobile network deployments and each network operator will be able to offer the same level of throughput as the other operators.

However, that doesn’t take into account the technology itself. LTE is clever stuff and will allow network operators to combine together spectrum from a variety of different bands to create a massive network with potential for hundreds of megabits per second.

If that’s to happen, we need to address ownership of all available spectrum, not just the 700MHz spectrum in isolation.

What really worries me, however, is the note in the press release that says the 700MHz spectrum will indeed be sold off in 5MHz blocks with no operator able to buy more than 15MHz. Unless there’s a lack of interest, in which case the Ministry may increase that limit to 20MHz.

Two operators with 20MHz and a third with nothing or at best 5MHz would destroy our newly emerging mobile network competitive market.

For too long we struggled with a cosy duopoly in our mobile market. Two players does not make for a dynamic market – it makes for a carefully managed, steady-as-she-goes, don’t rock the boat approach to pricing and services. It’s natural, it’s what happens in every industry and it’s entirely hopeless.

Today we have three network operators with two and a half networks. If we want to ensure a three player market in 4G (something the Aussies have already got wrong) then we have to ensure the auction is conducted in such a way as to make that a priority.

I know Treasury thinks it can make a windfall from the auction. I know the government will, in these difficult economic times, be eager for a boost to the coffers from those greedy telcos. But the true economic impact comes later, once the networks are deployed. It’s only then, when we have competition and capability, that we see the benefits such deployment can bring. The government itself acknowledges that – now it must manage the bean counters to make sure they don’t get too carried away with dollar signs in their eyes.

I’d go so far as to simply offer up the spectrum at no cost. Think what 2Degrees could do with its network deployment if it didn’t have to invest $100m or more in spectrum. That’s serious money for a network rollout that will bring competition to the masses.

Think I’m a Communist? We have precedent. We’re talking here about a 20 year monopoly on these spectrum lots, given away in the belief that the economic gain will be tremendous. If that sounds familiar then it should – that’s the argument the government uses to sell its Sky City convention centre deal. Why not use the same logic here?