Making sense of the 700 MHz spectrum auction

New Zealand’s 700 MHz spectrum auction went almost to plan. Two of the three bidders, Telecom NZ and Vodafone, walked away with three 5 MHz paired blocks. 2degrees picked up two 5 MHz paired blocks leaving one unsold block.

As Communications Minister Amy Adams pointed out in a press release earlier today, that means three carriers have enough spectrum to build viable 4G networks. This is a good thing. Three carriers means real competition and consumer choice.

Government will eventually pick up cheques for $176 million.

Carrier incentive in spades

The money paid was high enough to make sure the purchasers have every incentive to exploit their new frequencies to the greatest economic advantages – which means New Zealand will get better wireless data services.

And the price was low enough that the cost won’t cripple them. This means the carriers should have enough left over to afford to pay for the network roll out.

This leaves only one fly in the ointment: the single 5 MHz block left on the table.

2degrees leaves 5 MHz on the table

2degrees could have picked it up. Presumably the reserve price of $22 million was too high. Or more likely, 2degrees’ bean counters decided the $22 million asking price plus the millions required to build new towers and install new kit might not deliver enough of a return on the investment.

The rules of the auction say Telecom NZ and Vodafone may be offered the opportunity to buy the extra spectrum. If one of the two did, it would mean a lopsided 700 MHz playing field.

Potentially a player with four 5 MHz blocks could dominate the market. That’s because more spectrum make it possible to push data at fast speeds. So, theoretically if say, Vodafone picked up the remaining 5 MHz pair to have a total of 20 MHz paired, it could offer data speeds that are twice 2degrees could offer with a 10 MHz block.

This is where things get interesting

If the government was only interested in maximising the return on the spectrum auction, it would allow the two bigger carriers to start bidding again. Assuming they both want more spectrum, that would mean they would be likely to offer more than the $22 million reserve price that the other eight 5 MHz blocks sold at.

There’s a potential financial windfall – the government expected to get $198 million from the auction. So far it hasn’t made that amount. A competitive auction would probably push the total revenue past $200 million. I’ve never met a government yet that can find ways to spend extra money that falls into its lap.

On the other hand, there are good arguments to leave the 5 MHz pair on the table for now. Tuanz CEO Paul Brislen argues this in a blog post. He says: “this would be a bad outcome for customers”. Brislen also makes the point that Australia has gone down that path and seen competition effectively ruined because one carrier had the lion’s share of spectrum.

Some telcos agree

2degrees would like the unsold spectrum left on the table. While at first this sounds like a self-serving proposal, there’s more to it than is immediately apparent. Brislen’s competition argument, or something like it gets plenty of support. NBR reports that even Telecom NZ has “no issue” with the idea. Vodafone didn’t comment on the suggestion. This hints at which carrier is keener to pick up the spare 5 MHz. Of course in both cases we could just be seeing what was in the days before gender enlightenment was called ‘gamesmanship’.

So here are the basic choices facing Adams and the government: bank another $22 million or forgo the money for now and keep the market competitive. Competition will almost certainly be worth more than $22 million over the next five or so years. And anyway, that money doesn’t disappear – the government will be able to sell the spectrum later if it chooses. The decision comes down to whether government takes a short-term or long-term perspective.

Clare Curran’s creative idea

One of the most creative ideas comes from Labour’s associate Communications and IT spokesperson Clare Curran. She starts by getting a poke at the government:

The 700 MHz spectrum auction announced today appears to have been somewhat of a clayton’s auction as everyone has paid the same minimum price, leaving Vodafone and Telecom with the lion’s share of the auctioned spectrum and 2 Degrees as the lesser player in this critical market.

Well that’s politics. The next part is interesting:

Despite the concession of ‘pay as you use’ spectrum, 2degrees is clearly struggling to keep up.

It sure looks as if 2degrees is playing catch up. Apparently 2degrees has more mobile customers than Telecom NZ, but on average they each spend less than the people with accounts on the other two networks. The real problem is that running a mobile network means continually going back to invest in more kit while customers continually expect prices to fall.

Curran hits the nail on the head when she says:

If New Zealand is to have a genuinely competitive mobile market then what happens to the unsold spectrum will determine competitive prices for Kiwis in the years ahead.

So, we’ve identified the problem, what are the options. Curran neatly summarises the obvious three approaches before throwing some new and potentially exciting into the mix:

The Minister has three choices: she can either announce a follow-up auction of the unsold spectrum to the highest bidder; put the unsold spectrum on the shelf and not sell it; or keep it as strategic competitive reserve to stimulate competitive activity in the market, such as an incentive to a fourth entrant and for rural purposes only.

Now that’s an original idea. Would 5 MHz paired be enough for an interesting rural play? I don’t know, but it’s good to see fresh thinking.