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Spectrum

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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 fastest auction in the west

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What must surely be the government’s fastest ever auction is over.

In just on a day, Telecom and Vodafone bought the maximum amount of 700MHz spectrum they are allowed currently – two pairs of 15MHz each – and 2Degrees bought two pairs of 10MHz each.

That leaves an additional two pairs of 5MHz unsold.

TUANZ has argued that having an auction is counter productive. We think it would be much better to give the licences for the spectrum to the telcos in exchange for building something we want – rural broadband, for example.

This is the model the government controversially chose for its Sky City convention centre deal. Rather than taking the money for an extension to its gaming licence, the government got Sky City to agree to build infrastructure (a conference centre) in exchange for an extension of its licence.

The parallels are obvious, although the government didn’t like the suggestion, so went ahead with an auction anyway.

Instead of investing money in the networks, the telcos have paid for pieces of paper that give them the right to build in certain 700MHz spectrum ranges. Telecom and Vodafone have each paid $66m while 2Degrees has paid $44m. That means the remaining lot is worth $22m on the same scale.

The government now has to figure out what to do next. Both Telecom and Vodafone have bought as much as they’re allowed, but the government has built in something of a back door. It has asked if they’d like to buy more than they’re allowed on the basis that it hasn’t been sold.

That must be quite tempting for both telcos and for the government, but I’d argue that this would be a very bad outcome for customers. I’d like to see all three telcos with the same amount of spectrum each. That way we can avoid the game playing around “my network is better than your network” and all the rest of the noise that goes with one player having more spectrum than the others.

In Australia, Telstra has bought two lots of 20MHz, Optus has bought two lots of 10MHz and nobody else bothered to bid because the price was so high.

This means Telstra can either offer double the speed that Optus can offer, or keep the speed the same but service double the customer base.

The 4G war in Australia is over before anyone has built a 4G tower. Telstra won.

We would do well to avoid that here. By ensuring all three players have the same amount we can ensure a level playing field when it comes to spectrum at the least.

There are a couple of ways to do that. First, the government can sit on the spectrum until 2Degrees has some funding available.

Given the spectrum can’t be deployed for a couple of years, there’s no rush to hand out the licences right now, so why not wait it out?

The second way would be to give the spectrum to the Hautaki Spectrum Trust. The Trust, you may recall, launched a bid to see the whole auction process and the government’s right to sell off radio waves taken before the Waitangi Tribunal.

That bid failed but the government has agreed to give Maori interests $30m worth of funding for ICT related activities.

If it handed over $20m worth of spectrum instead, the Trust could take that to 2Degrees and increase its shareholding in the company in exchange for the use of that spectrum.

It’s what the Trust did in the first place to get 2Degrees into the market and it makes a lot of sense for all players.

What the government shouldn’t do is rush into a sale to the highest bidder.

Telecom has already come out and said it thinks the spectrum should be shelved – as has 2Degrees, funnily enough – but of course if the government moves to sell it off, Telecom will have to compete for it or see the extra spectrum go to Vodafone for a song.

When you look at 700MHz spectrum in isolation it’s clear we want to see all three telcos on a level playing field. When you look at the sub-1000MHz range in its entirety, it’s clear 2Degrees is well behind the others in terms of spectrum resources. It needs the spectrum so it can compete in terms of pure bandwidth in the 4G world.

We need a strong third player in the market. The changes we’ve seen since 2Degrees launched have been tremendous and to the betterment of the customers. TUANZ wants to see that continue in the 4G world.

Is our telecommunications industry really competitive?

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 One of the
main goals of TUANZ is to encourage competition in the market place. Why?
Because more competition means more choice, a better range of products and
services and better prices.

So how do we
measure competition? The Commerce Commission measures it by looking at the
number of customers each provider has.

That’s OK
but doesn’t really tell the whole story. Better to look at the revenue share
each company has to determine just how the market is shaking out.

In mobile,
that means we have two giants (Vodafone and Telecom) and a minnow (2Degrees)
and a raft of also ran virtual operators that have a minute market share.

In landline
broadband, that means we have two giants (Vodafone and Telecom) a small number
of minnows (Orcon, CallPlus and Snap) and then the rest, mostly niche players
and resellers of service.

IDC Research
has released its annual telco report (oddly not available online in any form
that I can find) which shows a flat to slightly declining market across the
board with no sign of relief for many years to come.

In addition,
despite increased demand for broadband services, revenue shrank slightly and
looks set to continue on that path for some time.

In the
mobile space there’s little better news for telcos. Telecom’s shut down of the
CDMA network, says IDC, means it is now the third place mobile operator by
number of customers, but still number two in terms of revenue.

Yet the
telco market is as vibrant as we’ve seen in many years. Multiple players,
differentiation, all the things that appeal to a wider range of customers and
prices to match.

So is the
market working or isn’t it?

In mobile we
are starting to see competition at its finest. Infrastructure-based competition
is the best we, as customers, can ask for and we have two national networks and
a third on the way.

What’s
important in this space is that we make sure we continue to have three viable
networks, which is why the idea that the government can settle for only two
players in the 700MHz auction is unacceptable to us. We need three or we settle
back into a cosy duopoly with all that entails.

Currently
the mobile market isn’t working quite as well as we’d like. New entrant
2Degrees is still fighting for revenue market share and the dominant players are
learning to respond more rapidly to the changing nature of the market. The new
$19 price point is a great example of this – unthinkable a few years ago and
now hotly contested.

In the
fixed-line market we really do see very little differentiation between ISPs.
Certainly there is some – mostly relating to the thorny issue of content
provision – but for the most part we have monthly plans with an “all your line
can handle” speed and a relatively low data cap. You can find some competition
at a structural level with Vodafone’s recently purchased cable network and from
the fixed-wireless providers and unbundlers, but for the most part it’s any
colour you like so long as it’s black.

That’s only
going to get worse as we move to the UFB, where all inputs are more or less
identical, unless the retail service providers recognise the problem and go out
of their way to shake things up.

As we’ve
said before, telcos spend a huge amount of money on central city offices, on
marketing teams and sales managers and on retail outlets. You’d think they were
selling high-end cars, yet their business model will shortly be closer to that
of the electricity companies and their business costs should move in that
direction as well.

The trick for
customers will be to shop around. I know that sounds easy but the inertia that
we see all too often in the market is an ugly and pervasive thing.

Don’t just
settle for what’s familiar, really consider your needs and what you want from a
telco and see what else there is in the market.

We need to
support and encourage those players that are dynamic, that are offering new and
interesting choices and are really trying to win our business. They tend to be
the smaller players (they’re far more willing to try something new in this industry)
and oddly, they’re the very ones that are most at risk from the copper tax.
They’ve invested in new technology, they’ve tried to shake things up and now
they’re facing increased input costs at a time when they’re yet to reap the
rewards of increased revenue.

Without them
in the industry we’ll all be worse off.

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

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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)

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Unbundling – the elephant in the room

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Ten years ago I wrote dozens of stories about unbundling.

Unbundling was seen by everyone (except Telecom and some of
its financial industry chums) as the panacea to the problem of competition in
the New Zealand landline market.

Basically, wholesale access just wasn’t working and without
the added pressure of unbundling, there was little chance of bringing the price
of broadband down.

Financial advisors were aghast at the idea. How dare you
tinker with the country’s leading stock, they said. I got into a heated
argument with the head of the Shareholders Association who couldn’t see the impact
that high broadband prices were having on every other business in the land.

Eventually we got unbundling. Competitors were welcome to
put their equipment in Telecom’s exchanges and offer their own services over
Telecom’s lines.

I attended the launch at the Ponsonby exchange and it felt
good after discussing it for so long. Finally, we would see the market open up
to competition at its most basic. Finally, we would see differentiated products
and services  and ISPs would be able to
sell me a symmetrical service, or a VDSL service, or one with a terabyte of
data if they wanted. No more “any colour so long as it’s Telecom approved”.

I’m using an unbundled connection to deliver this copy
today. It’s markedly faster than the wholesale equivalent I had before and its
variability is a lot less random. Instead of micro-outages and slowdowns all
day long I get a consistent, quality connection – albeit at ADSL2+ speeds.

However, I’m one of very few customers. Within days of the
launch at the Ponsonby exchange, Telecom announced the closure of most of its
exchanges and the deployment of cabinets deep into the network. It was a cold
and cynical move extremely well played which simultaneously offered some
customers with better speeds (Point Chevalier in Auckland, for example) while strangling
competition in its infancy.

The economics of unbundling dozens of lines in a cabinet are
a lot harder than unbundling thousands of lines in an exchange. Telecom knew
this and by cabinetising its network it denied roughly half of the market to
its ISP rivals.

All of which should be ancient history but is suddenly
extremely important again.

Post de-merger Telecom is now on the countdown to being able
to unbundle that same network, now owned by Chorus and that’s proving to be a
major bargaining chip in the fight over Chorus’s wholesale pricing.

As part of the Telco Act introduced in 2011, Telecom isn’t
allowed to unbundle until the end of next year. Not coincidentally, that’s in the
same time frame that Chorus will be required to move from “retail minus”
pricing to “cost plus” pricing for its wholesale service.

Chorus has had warning that this was coming since before it
was incorporated.  It’s had a three year
delay built in to this change to allow it time to prepare itself, according to
the regulatory impact statement prepared by officials on the Telco Act. Even
its own prospectus signals the problem that the move will present for the
company.

Chorus is, however, hell bent on making sure the price doesn’t
drop precipitously.  This is entirely
proper – Chorus is an incorporated company and has shareholders to consider. It
must by law maximise their return on investment and if that means standing up
at a Commerce Commission hearing and saying with a straight face that it doesn’t
see why a move to cost based pricing will result in much of a change to its
price, then so be it.

Unbundling is, however, the elephant in the room.

If Chorus convinces the Commerce Commission or indeed the
Minister that the move to cost-based pricing is absurd and that the price of wholesale
broadband should remain high, then that gives Telecom the trigger it needs to
unbundle the network.

Telecom has roughly 55% market share of all broadband
services and if it jumped into the unbundling market, it would significantly
impact on Chorus’s revenue stream.

At the Commission’s conference, Telecom said it doesn’t want
to unbundle. That wouldn’t be its first choice because the cost would be quite
high and that money should be better spent on fibre services. But, if Chorus
keeps its wholesale price where it is today, Telecom will have no choice but to
consider it.

That should make Chorus’s blood run cold. If Telecom
unbundles, it joins Vodafone, CallPlus and Orcon as both the largest buyers of
wholesale service and largest unbundlers of the copper network.

Ten years ago I’d have thought that was a good thing. Today,
staring as we are down the barrel of a fibre deployment, it’s a complete waste
of everyone’s money.

Ten years ago it would have made a world of difference to
the competitive landscape. Today, it’s throwing money away on an outdated
technology. Yet that’s precisely what will happen if Chorus is successful in
its mission to keep the wholesale rate high. Ultimately it will be
counter-productive and result in less money being spent on fibre services and
an entrenched ISP market that has invested heavily in copper. That may well
delay the retail ISPs’ move into the fibre world at a time when it will be
critical that we all move as quickly as possible.

Looking back on unbundling it hasn’t delivered the hoped for
benefits. The old Telecom did a tremendous job of keeping competition at bay
for as long as possible and then hacking it off at the knees once it was
allowed in. If we’d had access to unbundled capability when we should have the
landscape would be quite different today. It was an opportunity that we missed
because of a world view that said we have one strong telco and that’s all we
need.

If that sounds familiar, it should.

 

Get secret pricing deals off the table – Consumer, InternetNZ, TUANZ

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“Trying to do a deal on prices would undermine the important role an independent regulator has to play in setting them.”

“Customers are poorly served by the telecommunications industry working together in secret to fix the price of wholesale broadband.”
Media release – 13 July 2013

Consumer, InternetNZ and the Telecommunications Users Association responded today to a report in the Dominion Post that the telecommunications industry was seeking to negotiate a price for the wholesale copper broadband service known as UBA.
A Commerce Commission conference to help determine the regulated price of that service concludes in Wellington today, with the telco industry negotiations understood to seek to influence a forthcoming discussion paper on a regulatory review of the Telco Act announced by Communications Minister Amy Adams in February.

TUANZ CEO Paul Brislen says the best way to resolve the issue of pricing rules for a monopoly service like UBA is through open and transparent discussion. “If the report in today’s paper is accurate, it seems that some in the industry would prefer to see a deal done in private, and without the scrutiny of users,” he says.

InternetNZ Acting Chief Executive Jordan Carter says “Industry discussion and input on the policy framework and to help inform the regulatory review is a good thing, because government decisions should be well informed”.
Consumer CEO Sue Chetwin says “A line is crossed if specific prices are being discussed – that moves the matter from an intelligent debate about the best possible policy framework, to what looks like a stitch-up – or worse, a cartel”.
These kinds of back room deals are rarely good for consumers and it puts us in the awful position of the industry sitting down together to set pricing without reference to either customers or to the regulator, say the three Chief Executives.

None of our organisations are in the loop with these conversations, and none of us want to be. We won’t talk about prices, and neither should the industry: that’s a job for the Commerce Commission. We will make our points about the review in public. We urge the industry to take the same view.

“Setting the rules and setting the prices are two different jobs. The review is about reviewing the pricing rules. The regulator has the job of setting the prices. Trying to do a deal on prices would undermine the important role an independent regulator has to play in setting them. Without that protection, consumers are unlikely to get a fair deal,” the CEOs conclude.

The government and the big corporation

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For the better part of a decade, we watched as one
government after another chose to back the needs of Telecom over and above the
needs of the broader industry or the voters of New Zealand.

Time and again we heard from Maurice Williamson, minister of
communications for most of the 1990s, that if Telecom continued to step out of
line he would be forced to act. In the end the voters acted and a new era of
regulation began.

I often wondered why a political animal like Williamson
would get so far off side with his voting constituents. Why he couldn’t see the
constant growl of angry customers and a brow-beaten industry. Williamson isn’t
stupid – he’s played the parliamentary game for a very long time and knows that
ultimately the voters will conduct his performance review and if he wants to
retain power, that’s all he should be concerned with.

He was also one of only a handful of MPs to have a
smartphone (a BlackBerry if memory serves) and one of the few who would answer
emails. I remember one outraged journalist at the time being told he couldn’t
be added to the press release email list because the government wasn’t made of
money. These days it’s getting the buggers to stop adding us to the lists
that’s uppermost in mind.

Reg Hammond, over at InternetNZ, has an interesting take on
the matter. He suggests that for the big decisions Telecom sidestepped the
minister and went straight to the PM and that something similar may well have
happened with the furore over Chorus’s wholesale price determination.

Chorus denies this, as does the current minister of
communications, Amy Adams, but on the day the Commerce Commission announced its
draft determination the first responder from the government was indeed the
Prime Minister, who suggested that the Commission could make all the
recommendations it liked and that it was up to the government to decide whether
to go with those recommendations or not.

Sorry, but that’s not how the regulatory regime works – the
Commission gets to decide the price point because that’s the only way to keep
governments at arm’s length.

You need to keep governments out of such regulatory matters
because governments are typically compromised – they are large-scale investors,
they are large-scale customers and they are the policy makers. To include
‘regulator’ in that line-up is to court disaster as we saw during the 1990s in
both New Zealand and Australia.

The regulatory regime set up in 2001 was extremely light
handed and it failed to deliver results for quite some time. Spectacularly, it
saw New Zealand receive the dubious honour of being the only country apart from
Mexico to reject unbundling of the local loop. Mexico, let us not forget, is
home to the richest man in the world – Carlos Slim – who made his money out of
telecommunications. Currently Slim controls 70% of the mobile market in Mexico
and 80% of the fixed line market and the Mexican government is hoping to
introduce some kind of regulation that will reduce his control of what they
have belated realised is the backbone of the nation’s infrastructure.

If we had one provider with that level of control you’d hope
it would incur the wrath of the regulator because one player at that level is
tantamount to disaster for the users and for the country as a whole. Australia
saw Telstra rise to that level and beyond in the 1990s but because the Aussie
government retained ownership long after it should have divested its
shareholding, the regulator was unable to break Telstra’s stranglehold on the
infrastructure. The reign of CEO Sol Trujillo is best remembered for his hiring
of a team of former colleagues to produce a strategy for the company which was
paid for by Telstra and which ensured he received his bonus for delivering said
strategy on time. Oddly, it looked remarkably like the strategy of his
predecessor and after four years of declining revenue (Wikipedia claims he
underperformed the Aussie stock market by 20% costing the company A$25bn) he
left with a grand payout as only telco bosses can receive.

Today the Australian market is a mess, with Telstra
dominating both fixed and mobile sectors, no strong second-place competitor in
sight and a government unable to achieve its potential even with a promised
A$42bn spend on fibre.

If we look at the New Zealand market similar competition
alarm bells should be ringing. We have two companies that don’t just dominate
the market, they ARE the market. Telecom and Vodafone account for 90% market
share of the mobile revenue and a similar number in the fixed line space. At any
level of the market, whether it be local calling, toll calling, mobile data,
backhaul, international connectivity or TXT messaging, in terms of revenue we
see two names repeated over and again.

Yes, we have 2Degrees winning customers in the mobile space.
Yes, we have CallPlus and Orcon and others fighting the good fight in the fixed
line space. But when it comes to revenue we’re in single digits for market
share for everyone other than Telecom and Vodafone.

This isn’t a situation the market can sustain or which the
government can ignore. The question is, how will the government handle the
responsibility of getting us out of this situation? Sidelining the regulator is
not a good start.

Next week the Commerce Commission will hold its conference
to discuss the issue of Chorus’s wholesale pricing. TUANZ will be attending and
I’ll report back in next week’s newsletter.

 

Mobile

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Telecom has announced its plans for a 4G network rollout. Starting in October, the country’s biggest telco will start with the main centres and work its way out to smaller centres, deploying an 1800MHz network similar to Vodafone’s.

I’ve been using the Vodafone 4G network around central Auckland for the past week or so and two things have become apparent – speed tests suggest quite a degree of variability at this stage, and the speed test app uses quite a bit of data. I’ve hit my 1.5GB limit for the first time ever and still have half a month to go to the end of my period.

The variability is a concern. I’ve only tested when my phone says it has an LTE connection but the range extends from 3.3Mbit/s down, 1.39Mbit/s up through to 88.69/47.22, which singed my fingers ever so slightly. I typically see a score in the 20Mbit/s range for download and about 15Mbit/s up.

This is only a category three device, of course. The Cat 4s are out later this year and both Vodafone and Telecom say they’ll have them on offer – that raises the lid on theoretical maximums to 150Mbit/s which quite frankly is astonishing.

My usage has changed as a result. If I’ve got downtime somewhere I tend to flip through the news stories and now each one pops as if I were in the newsroom itself. No lag whatsoever. I’ve had to hit refresh a couple of times thinking the Stuff app had stuck again on old news, but no. It was brand new news. Even BBC video clips load with an unheralded ease.

Which of course means I can watch more, and do more, with my phone. Which means I use more data. Which means I will need more data and if Telecom can offer that, I would hope it will see the competitive nature of the telcos brought to the fore, which will be very nice indeed.

Both Telecom and Vodafone have said they will roll out 4G services on the RBI towers and this for me is the best part of the whole launch. Rural New Zealand is poorly served for broadband and mobility – having both delivered in a timely fashion will be great news. Better still, once you’ve got a tower in place with fibre backhaul the speeds per customer off each of these towers should be really quite good. Your rural LTE experience could well be better than the urban equivalent, with its higher density of users per tower.

Because the towers are paid for as part of the RBI programme the cost of rollout is greatly reduced and that means the telcos will be more likely to put kit on those towers.

But both telcos have said they’ll need to wait for the auction of the 700MHz spectrum before they do so. My understanding of radio frequency issues borders on the ignorant (although not as ignorant as those cell tower protestors) but my understanding is that the footprint of each tower at 700MHz is far superior to that of 1800MHz and that the ability to operate over rural landscapes (trees, cliffs, water) is much better.

Vodafone tells me the amount of spectrum available will influence the speed capability. It has a lot of 1800MHz spectrum and will end up with a lesser amount of 700 so that too will impact on the speeds and throughput, but all told whatever the rural user gets it’ll be a lot better than today.

So where are we at with the auction? The minister has said we’ll have one (step one) and that they’ll announce details later on this year (step two) but we’re none the wiser as to how the auction will be run, what size blocks of spectrum will be allocated or what the reserve price will be.

In Australia the reserve price set by government was so high Vodafone Australia pulled out of the auction entirely.

There will be a degree of tension within the government regarding the auction. On the one hand, Treasury will (I’m sure) be pushing the government to maximise its return on investment. That is, make sure the auction brings in as much money as possible. Perhaps we’ll see one block of 20MHz and two of 15MHz (or similar) in order to push bidders towards the bigger block. The more spectrum the more throughput so that will be attractive and that will drive up the bidding.

On the other hand, the economic value of the spectrum lies mostly in its use and the less the telcos spend on spectrum the more they’ll have for network deployment. The cost of spectrum in the UK in 2000 saw BT almost bankrupted and in Europe several telcos did indeed go to the wall. The rollout of 3G was far less aggressive than we’d hoped and the user uptake took several years to get going.

Three equally sized blocks would lead to only a couple rounds of bidding while the three telcos sort out which one is going to buy each block and then they’ll stop bidding. That means less income for the Crown but a faster deployment of network in rural areas.

TUANZ would like to see three equally sized blocks and a reasonably low reserve price to encourage the telcos to deploy. My concern is that 2Degrees be squeezed out of the 4G race with too high a price and that would be a disaster for the industry as a whole, particularly given how much change a truly competitive industry has delivered.

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Virtual competition

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In the UK Tesco is a major supermarket chain but also
a serious player in the telco space. It’s gone from simply selling mobile
phones in blister packs to the full suite of Tesco-branded services, from
mobile to fibre. You can download movies, listen to unmetered streaming music,
buy toll calling packages and so on.

Tesco isn’t alone in this. Virgin Mobile is one of the
world’s leading mobile brands and has shaken up every market that it’s entered.
It operates in eight countries around the world, including Australia, the US
and UK, and it regularly scores highly in customer satisfaction surveys.

Neither company owns a network or ever intends to.
They are virtual operators and I’m curious as to why we have nothing on the
same scale in New Zealand.

Mobile virtual network operators (MVNOs in the
parlance) are operating here, but are so far below the radar as to be
non-existent.

Black+White launched with much fanfare but has almost
vanished since then. CallPlus and Orcon –both big-name brands in the ISP space
– have mobile offerings but you’d be hard pressed to find anyone using them.
The plans seem uninspired somehow and certainly can’t compete with the big
names, Vodafone and Telecom, despite using their networks.

In Australia MVNOs account for 13% of the market, yet
in New Zealand the total for all MVNO offerings is probably in single figures.

I think I can see why – MVNOs in New Zealand are on
account only, and New Zealand is predominantly a prepay market. Immediately,
most of New Zealand’s customers are unable to consider switching to an MVNO
provider because there is no prepay option.

Neither Telecom or Vodafone offer prepay MVNO services
and I wonder why that is. Vodafone in particular has a large percentage of its
customer base on prepay – could it be that Big Red doesn’t want to risk
cannibalising its own customer base?

Until MVNOs have access to prepay services and can
build their own plans and tariffs, we’re not going to see the kind of dynamic
marketplace that the UK or Australia has and that’s a loss for customers.

We’ll be asking the government to explicitly include
MVNOs in its review of the Telecommunications Act with a view to better
understanding the barriers to competition and why it is that a model which
works so well overseas simply doesn’t in New Zealand.

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The Big Hairy Audacious Goal

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The Commerce Commission has cleared Vodafone’s bid to buy
TelstraClear, paving the way for the merger.

However, there doesn’t appear to be any form of ongoing
monitoring or caveats on the deal. Vodafone had already indicated it would not
be buying all of TelstraClear’s spectrum assets as that would exceed the limits
on 2100MHz spectrum and would also potentially be a barrier to approval. That
aside, we had expected to see some kind of monitoring regime put in place
specifically for this merger. Market dominance is now effectively in the hands
of two players – Telecom and Vodafone – and TUANZ would have liked to see some
kind of additional monitoring put in place to assure customers that no cosy
duopoly could emerge. Presumably the Commission felt either it couldn’t impose
such a regime or that existing market monitoring was enough.

From the Commission’s press release:

“In reaching its decision, the Commission considered that
the merged entity would continue to face competition from Telecom, as well as
Orcon, Slingshot and other smaller businesses in providing fixed line voice and
broadband services to residential and small business customers”.

The Commission says there was no significant business
overlap between Vodafone and TelstraClear – something that has been painfully
obvious for many years now. Hopefully the two combined together will have the
ability to shake up the market and to challenge Telecom for the number one spot
– a long-held goal of Vodafone CEO Russell Stanners.

Time will tell – and TUANZ will be keen to see the results
of any competitive tension in the market.