Spectrum fight goes on and on


The Commerce Commission has again delayed giving clearance to Telecom to buy the last block of management rights for 700MHz spectrum.

To recap: the government auction saw three bidders (Telecom, Vodafone and 2Degrees) able to buy a maximum of three lots of spectrum each.

Telecom and Vodafone did just that, but 2Degrees only bought two lots, leaving one block of spectrum on the table.

The advice to government from all parties was that it should remain there until the technology to deploy services on 700MHz was rolled out – implicitly, until 2Degrees could afford the extra block.

But the government decided it wanted the cash, so raffled off the last block to the highest bidder. 

Neither Telecom nor Vodafone would back down, or let the other side get the spectrum cheaply, and ultimately Telecom won, but only by bidding $83m for it. By contrast, each telco paid only $22m for the same sized block in the original round.

Telecom now needs permission from the Commerce Commission to buy the additional chunk and clearly, that’s proving to be a long time in coming.

The problem is that Vodafone has around 300MHz of available spectrum, Telecom 200MHz and 2Degrees around 100MHz of spectrum altogether.

In the all important sub-1000MHz category, Vodafone will have around 60MHz, Telecom about the same and 2Degrees will have around 40MHz.

EDIT: Stuffed up my numbers – the above paragraphs have changed to reflect the real figures. Apologies all.

That means that like for like, Vodafone can pack on three times the number of customers 2Degrees can service, and offer them the same performance. Or, looking at it the other way round, it could offer the same number of customers three times the capacity.

That puts 2Degrees in a very tricky position, and I suspect if Vodafone had won this bidding war for the last chunk the Commission would already have made its mind up and said no.

Telecom, however, is a trickier proposition, positioned as it is half way between the two. Would allowing Telecom to buy the last chunk impact on competition? Should the Commission allow it to go ahead?

TUANZ argued that the last chunks should be left on the shelf, that if either Telecom or Vodafone get to buy it, they’ll put 2Degrees in an almost untenable position. Sure, 2Degrees can offer a service and it will still be able to use the spectrum for 4G services, but one of the beauties of 4G is its ability to aggregate spectrum and use chunks of spectrum scattered far and wide to deliver a service. That means the player with the most spectrum wins.

We already have a perilous situation in telecommunications in New Zealand. We have two players who dominate almost every market segment – mobile, broadband, toll calling, you name it and “Telecom and Vodafone” account for well over 80% of the customer base and revenue.

We need to make sure 2Degrees isn’t shut out of the 4G market, and beyond, and the easiest way is to make sure it has as near a level playing field in terms of access to spectrum as is possible.

I’ve pondered on why the government would auction the spectrum in the way that it has. The auction was conducted in secret, behind closed doors, and unlike previous years has been split into two halves. We’ve only had the first part of the fight – how much spectrum do you want. Once the Commission has decided on this issue, we move on to round two – which blocks of spectrum do you want? Each company will have to bid again to determine where on the 700MHz range their lot lies, and there’s only one reason you would do that – to make more money.

$22m a block is not a huge amount, but it’s only half the battle. We’re yet to see quite how much this contest costs but one thing is clear – customers will end up paying for it one way or another.


Telecom has won the second 700MHz spectrum auction with a bid of $83 million for a block of 2x5MHz spectrum.

I’m sure nobody at Telecom HQ is celebrating, however, because it’s paid around four times as much as it had for the 2x15MHz block it bought last year.

Paying $66m for 2x15MHz was a reasonable amount. It wasn’t cheap, but it certainly wasn’t up there with the kinds of stupidity we saw in the UK and Europe during the 3G spectrum craze of the early 2000s.

All three mobile operators were happy enough with the $22m they paid per block.  I can’t imagine how Simon Moutter and co are feeling right now, but probably they look a bit green. $22m was OK, but $83m? That’s another matter entirely.

Telecom didn’t even want to bid on the remaining block. They argued that the last 5MHz pair should be left on the table for another round of bidding in a few years’ time when 2Degrees could, presumably, afford to buy it.

That made a lot of sense. TUANZ argued against having an auction at all – each of the three network operators should have been given 2x15MHz so as to preserve the competitive market in the 700MHz space, but if we had to have one, any excess spectrum left over shouldn’t be flogged off just to raise cash. Sadly, that’s just what the government has done. Telecom was forced to take part even though it wasn’t keen because it couldn’t allow Vodafone to simply walk away with the extra spectrum. Vodafone, likewise, couldn’t let Telecom have it cheaply either, and unfortunately we’ve seen the telco equivalent of the Cold War end in a huge cost.

Worse, when you look at the overall spectrum holdings you’ll find that 2Degrees has just on 100MHz of spectrum, Telecom has double that and Vodafone has nearly 300MHz of spectrum available to it right across the managed spectrum range.

That imbalance means Vodafone and Telecom already have a huge advantage over 2Degrees when it comes to the total spectrum market and that’s going to be a problem if we want a truly competitive landscape.

Should we care that Telecom has paid a fortune for the spectrum? Surely that’s its problem and good on the government for getting the best dollar for the tax payer? Well yes and no. Telecom will have to find that money somewhere and I’m guessing it wasn’t down the back of a couch. It probably will have to come either from the existing capex budget, which means something else will go by the board, or it’ll be raised from the customers.

That much money would have paid for (by my calculation) an additional 160 cellsites around the country, which would have been very nice to see in rural New Zealand. Instead, Telecom will have a nice piece of paper that says yes, it can build a cellphone network in the 700MHz range.

The good news is this isn’t a done deal. The Commerce Commission still has to assess whether or not the extra spectrum breaches the Commerce Act in terms of market dominance. We’d argue that yes, it does and I’d go further and say that both the telcos and the customers would be better off if we set aside this auction and leave the last 5MHz pair on the shelf for the time being.

The year ahead

Looking ahead, this year is going to be quite a busy one in terms of telecommunications, so I hope you all had a good rest of the new year break.

Normally I head off to the Coromandel to a secret location where I pitch a tent, make do without running water or electricity and where my phone (and everyone else’s) simply fails to find a signal.

This is fantastic because it means I am completely cut off from my normal life and rest is guaranteed. We kayak, we swim, we eat well, and while the kids can run around all night if they want, I go to bed and rise with the sun.

It’s a chance to switch off, to renew my batteries (as it were) and to do something completely removed from my normal existence and I love it.

But if I had to live like that every day, I’d go nuts. Running water and electricity are pretty key, but as the owners of the farm where I stay have pointed out, the need for decent telecommunications is critical.

They have a 15 year old son who can’t call his friends, can’t play games, can’t do any homework, can’t read newspapers or go online in any way shape or form for the entire time he’s at home. The exchange is too far away for DSL to work well and besides, the cabinet is full. There’s no cellphone signal from any provider and oddly not a single wireless ISP operates on the north eastern side of the Coromandel. Why? I have no idea.

This summer has been the last straw for him and he’s declared that as soon as he’s able he’ll be off to the city or at least to an internet café that can let him connect to the world.

It’s not just him – all of rural New Zealand faces this challenge and we urbanites face it with them. If we lose the rural communities we lose so much of what makes New Zealand unique. It’s not just a cultural thing, it’s the basis for our entire economy as well. Boost our farmers’ productivity by a couple of percent and we’ll all be better off.  Reduce their ability to compete (as we’re surely doing for those that don’t have access) and the inverse will also be true.

Rural broadband must be a key priority for the year ahead. However, the key component of delivering such connectivity – spectrum – is already being sorely tested.

Both Vodafone and Telecom are fighting over the remaining pair of 5MHz spectrum in the 700MHz range and, if the rumours are to be believed, are already bidding more for that pair than both bid for the 15MHz blocks they’ve already bought. Why? Because the government has decreed that the remaining block must be sold off and neither company can afford to allow the other to win, hence the price war.

This is ridiculous.

Both companies already have more than enough 700MHz spectrum and neither particularly wanted to bid for the last block.

Both companies have plenty of spectrum in the sub-1000MHz range that can be re-purposed for future network technologies and which could be readily deployed in rural New Zealand but because of the government’s greed and short-sightedness (there’s really no other way to look at it), they’re forced to spend money on a piece of paper instead of on rural cellsites.

The Commerce Commission has to grant permission for the winner to have so much spectrum so I have high hopes it’ll do the right thing and refuse to give the go-ahead.  All three telcos will be relieved if that’s the outcome – Telecom, 2Degrees and Vodafone – because the alternative is one player wins the 4G battle but at such a huge cost.

Which brings us to the question of government and the upcoming election. I’m told the likely date is November but it’s up to the Prime Minister to decide, which means it could be earlier if he sees an advantage to going sooner rather than later.

And there may well be an advantage in that. Currently Labour have yet to announce many of its policies and are lagging behind in the polls. The Greens have always had a strong ICT policy (its views on cellphones and cellsites notwithstanding) and the other minor parties are starting to display a keen interest, possibly as a result of the Chorus debacle.

And then there’s Kim Dot Com and the Internet Party.

Putting aside personality for a moment, I’ve long wondered why we don’t have a tech-focused party. MMP lends itself to such issue-led parties and I’m surprised we haven’t seen more of them. The Greens are a perfect example: why not ICT as well?

The question of course making the numbers will be determined by the policies of the Internet Party and we have yet to see those, but I am heartened by any party that raises the profile of ICT issues and if nothing else, the other politicians will have to improve their understanding of ICT to compete and that’s no bad thing.

The final issue on the table must be our lack of international connectivity. I have high hopes that 2014 will see an end to this idea that we are fine and that another cable isn’t needed. One of the various projects has to get off the ground this year and I hope it will see us connected to the US rather than Australia. If we’re to build an ICT industry in New Zealand to rival dairy farming we need to have that connection to the US – anything less will see us become an offshoot of Australia and we might as well give up our sovereignty at that point and become a second Tasmania.

What are the other issues you’d like to see on the agenda this year? You’ll note I haven’t included Chorus and there’s a reason for that. The problem and the resolution lie within Chorus itself and it’s up to the company now to figure out how to complete its contractual obligations. If it can’t, then no doubt we’ll talk more but for now the ball is firmly in Chorus’s court and I trust there it will remain until the company comes to its senses.

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

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

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

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
) and it’s important we don’t scare off any potential bidders – most importantly,

 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.

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.