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Spectrum fight goes on and on

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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.

Cash versus competition

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Say what you like about the mobile market in New Zealand, but competition has finally arrived and it’s been worth the wait.

With 2Degrees joining the fray, we finally have a market that’s beginning to deliver results in favour of the customers.

Roll over minutes, shared data, more realistic pricing for roaming – all of this has come as a result of 2Degrees entering the market.

Having three network operators has meant a healthy tension between parties. With one player you get ripped off. With two you get the cosy duopoly, but with three you have a natural balance that means the telcos can never sit back and relax but instead must always fight for market share.

So why has the government decided to give all that away in favour of raising a few million dollars more for the consolidated fund?

One of the key bedrock components of a mobile network is radio spectrum. If one network has a lot of it, they can jam more customers onto your network than a network that doesn’t have a lot of it.

It’s simple really – more customers or more speed or, if you’ve got enough of the stuff, both.

Currently the 4G wars are just starting out. Vodafone launched first, and Telecom has just jumped in as well. Both offer 4G services on existing spectrum, but both they and 2Degrees want to move to the holy grail of spectrum, the 700MHz range, as quickly as possible. Most of New Zealand would be considered “rural” in any other developed country and the lower the radio spectrum range, the further the signal propagates. That means 700MHz is much better for 4G than 1800MHz or 2600MHz or any of the other bands the telcos have bought.

Spectrum is sold in pairs and Vodafone and Telecom have both bought the maximum they could – 2x15MHz each. Newcomer 2Degrees has only bought 2x10MHz, which leaves 2x5MHz sitting there.

Instead of waiting till later to sell the chunk, the government has decided to allow Vodafone and Telecom to cage fight until only one is standing. And it will be a fight, because neither company can afford to allow the other one to have that advantage in the market.

Currently both have paid $66m for their chunks. Whoever wins this fight will have to pay considerably more per megahertz for the next block and that’s just stupid. That’s money that is better spent on the network itself not on a piece of paper.

Telecom has already said it would rather not fight over the remaining spectrum and supported putting it on the shelf. Vodafone, however, was happy to remain in the competition and since Vodafone has said it will bid, Telecom has kept its options open by saying it will as well, if forced to.

It means this government is quite happy with a 4G world where one player has double the spectrum of another player, with all the downside that means for the third entrant and for the customers as a whole.

Another way to look at the spectrum share is to consider the entire sub-1000MHz category. Telecom and Vodafone both have a huge chunk of the available spectrum and 2Degrees is battling along with only a fraction. This extra auction does nothing to address that imbalance, instead it exacerbates it.

It will be very difficult for 2Degrees to challenge the big two in the 4G world now. It was always going to be difficult because it’s late to the 4G party, has a smaller marketing budget and still needs to build out its network coverage. Now it has to win market share with a lesser allotment of spectrum as well.

From a competition point of view this is the worst outcome on offer.

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Aussies show us the way to avoid

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(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.

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.