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Mobile carrier 2degrees wants the Commerce Commission to step into the 700 MHz spectrum auction.

Brandishing a recently commissioned Covec report, the company says auctioning the remaining unsold pair of 5 MHz spectrum to Vodafone or Telecom NZ will undermine market competition.

The report has that argument the other way round. It says competition between carriers would be “substantially enhanced” if the watchdog vetoed Vodafone and Telecom NZ’s applications to buy the extra spectrum.

That sounds plausible.

More spectrum means better 4G

Whoever holds the most 4G spectrum gets to offer the fastest data speeds. All other things being equal – they’re not but stick with me here – this means the auction winner will own the best and most commercially attractive 4G service.

In other words, a relatively small extra investment could buy a commanding market position.

That’s too good an opportunity for a carrier to miss.

Vodafone in the box seat

The most likely winner will be Vodafone. It has the deepest pockets which means it can bid more. It also has the largest, most lucrative customer base. That means Vodafone will recover any investment faster than a rival. Buying the additional spectrum will lock the company in a market leader for the foreseeable future.

Telecom also has the option to bid for the spectrum.

Regardless of who wins the battle for the last block, it’s clear 2degrees will be left with the smallest amount of spectrum. And that means it will be weakest 4G player.

The Covec report says letting the dominant players buy the spectrum will leave 2degrees with higher long-term capital costs and less ability to win high-value customers.

The state of mobile market competition

In the Commerce Commission’s 2012 Telecommunications Market Annual Report Vodafone’s mobile market share is at 42 percent, Telecom NZ has 37 percent while 2degrees is on 20 percent.  The remaining 1 percent is MVNOs, which was mainly TelstraClear which has since become part of Vodafone.

These numbers are simply the share of mobile connections. Not all connections are equal. One industry insider told me, off the record, that when it comes to revenue share, Vodafone has more than half the market. That’s because the company’s customers spend more on their phones.

Telecom NZ’s customers are also more lucrative than 2degrees. It’s possible 2degrees accounts for less than 10 percent of mobile revenues.

While Vodafone has a more extensive network than 2degrees, the costs of running a nationwide mobile network are fixed. The business model means companies need to get their customer numbers and average revenue per customer sitting nicely above the cost of building and running a network.

Vodafone is clearly on the right side of that equation. Telecom NZ is somewhere on the right side of the balancing act. 2degrees almost certainly is not. Despite quickly building market share, the company is struggling to turn a profit.

What is the right competition policy here?

Governments and regulators want to encourage competition, but not necessarily at the cost of discouraging investment. 2degrees has done much to bring about a competitive mobile market in New Zealand, but the cost of doing so has been huge.

There’s a risk all that work will be undone, that 2degrees is not a viable alternative and we return to a cosy duopoly. Oddly, that’s not what Vodafone or Telecom NZ wants. From their point of view, it’s important that there is a least the perception of market competition – that way there’s little political pressure to intervene in the market.

On the other hand, not auctioning the unsold spectrum also carries risks. And intervention to protect the weakest player in a three-way market starts to look like punishing winners, rewarding losers – hardly the way to get the best out of the overall market.

You could also argue that auctioning the remaining spectrum to the highest bidder will maximise the economic value of the spectrum and deliver the greatest benefit to the largest number of New Zealanders.

It’s unlikely 2degrees will get its way. There’s little political support for its position and no mobs of interest groups lighting torches and gathering pitchforks to march in the company’s defence.

That won’t happen until someone – perhaps the Prime Minster – blurts out in public there’s a possibility the company will go bankrupt. Which is the kind of thing that just doesn’t happen in the real world.

Telecom NZ and Vodafone have the opportunity to bid for the remaining 5 MHz paired block of the 700 MHz spectrum.

The carriers each won three 5MHz paired blocks during the first round of the 700 MHz spectrum auction last month. Underdog mobile carrier 2degrees only purchased two blocks leaving an unsold block of spectrum on the table.

Both Telecom NZ and Vodafone have applied for Commerce Commission clearance to boost their holding to 20 MHz paired.

Assuming they are both granted clearance – and there’s little indication that won’t happen – they will be able to bid.

2degrees is also eligible to bid. However, that looks less likely now as the price of the remaining spectrum is now likely to be higher than the $22 million reserve that would have secured it for the company last month.

Bidding in the new auction starts at that price. Picking up the extra spectrum will be more expensive again for Telecom NZ or Vodafone because the terms of the auction say carriers taking three blocks must build at least five new cell sites each year, for five years. Any carrier taking four lots will have to build ten new cell sites each year for five years.

No surprise

The government’s decision comes as no surprise. A second round was pencilled before the first round in case the entire spectrum failed to sell.

After the first round there was lobbying from 2degrees and others to leave the unsold spectrum on the table.

One argument against selling the final block is that it will tilt the market in favour of whoever wins the additional spectrum. Carriers are able to deliver fast data services or service more customers with larger spectrum blocks.

The winner may be in a position to do both. It will certainly be able offer considerably better speeds than 2degrees. On the flip side, there’s an argument that 700 MHz spectrum is too useful and valuable to leave unused.

Writing in the organisation’s blog, Tuanz CEO Paul Brislen says: “From a competition point of view this is the worst outcome on offer”.

As he points out Telecom NZ and Vodafone are likely to get into a bidding war because neither will wish to see the other buy the strategic advantage that extra spectrum will bring.

HD Voice vodafone NZ

Suddenly New Zealand’s mobile sector is competitive.

The two largest carriers, Vodafone and Telecom NZ now fight on products and services. Barely a week passes without something new added to the mix.

Today Vodafone launched HD voice. Earlier in the week it began selling Microsoft Office 365 and the new iPad Air. The company adds new sites to its established 4G network on an almost weekly basis.

Telecom NZ is just as busy. The company is days away from a 4G launch. Telecom NZ continues to build on its nationwide Wi-Fi hotspot network. I understand Vodafone has an innovative response waiting in the wings. All the carriers are playing with mobile payment technologies.

Perhaps the most interesting thing is that all this extra stuff comes at little extra cost. Telecom NZ isn’t charging customers more for Wi-Fi hotspots or 4G. Vodafone charged $10 for a while, but now wraps 4G into its plans.

This year you get a lot more for your mobile dollar than you did a year ago.

Let’s not forget 2degrees. New Zealand’s third mobile carrier possibly already has more customers than Telecom NZ. It is positioned as the low-cost alternative. If 2degrees does nothing else, it puts price pressure on Vodafone and Telecom NZ.

But it does do something else. Something important. While 2degrees is playing catch-up in areas like 4G, it has been innovative in finding new ways to sell wireless services. The company’s carryover plans and ability to share data between accounts have helped reshape the market.

So why is the mobile market flowering now? The arrival of a third carrier in the shape of 2degrees made much of the difference. Once it reached critical mass, Vodafone and Telecom NZ had to lift their games. All New Zealand mobile customers owe 2degrees founder Tex Edwards a debt for making that possible.

Regulatory changed helped too. The mobile termination rate decision was important. Among other things, it made mobile charges more transparent and flattened the playing field. And number portability also plays a role.  When it’s easier for customers to switch networks, carriers have to work harder to keep their business.

It’s late 2013 and we’re seeing something of a golden age in New Zealand mobile telephony. It doesn’t look like slowing down any time soon. The wider spread of 4G and the launch of 700 MHz services will keep the momentum going. And I understand there’s plenty more innovation in the pipeline.

  • Paying for Microsoft Office just got simpler for Vodafone customers. The carrier is now selling Microsoft Office 365 and charging customers on their phone bill. The deal includes added local support and set-up. Microsoft’s cloud-based Office software is a nice complement to Vodafone’s fibre broadband services, the company points out apps like Lync and Sharepoint work better with a fast connection. The move is part of Vodafone NZ’s alignment with the global company on computing and related services. Grant Hopkins Vodafone director of enterprise says Vodafone is the only Microsoft global partner offering this level of service in New Zealand.

2degrees mobile wallet

  • Another tap-to-pay mobile wallet trial kicks off. This time it’s 2degrees working with GE Capital. The trial allows users to load their existing GE Capital credit card directly only a 2degrees Galaxy S III phone. If you were to draw a Venn diagram of people with a GE Capital credit card, a 2degrees account and a Galaxy S III, there wouldn’t be many people in the central segment. 2degrees says the trial differs from others because there’s no need to load special funds on to the phone.
  • New small business mobile plans from Telecom NZ offer unlimited calling and text. They also let you share monthly data allowances between a pool of users. The basic plan is $119 a month with 3GB of data. A $219 plan comes with 8GB. Additional users cost $39 for unlimited calling and text, but they share the basic plan’s data.
  • Westpac says its Cash Tank app for the Sony SmartWatch is now live. The bank is whipping up interest by giving away smartwatches in a Facebook competition
  • There a total pool of $60,000 of funding from InternetNZ for individuals or organisations researching Internet topics. Each applicant will be eligible for up to $20,000. InternetNZ CEO Jordan Carter says: “We want to hear from those with a broad range of ideas for Internet research projects. Brief outlines of the proposed research are now sought and applications from any person or organisation will be considered so long as they meet the criteria”.

spectrum

New Zealand’s 700 MHz spectrum auction is due to start today. The auction is for nine parcels of 5 MHz paired spectrum. Each parcel has a reserve price of $22 million. That’s a total of $198 million. Few expect the auction to raise much more than that figure.

In the first round of bidding each bidder is limited to buying three parcels of the spectrum. With only Telecom NZ, Vodafone and 2degrees registered to bid, there are unlikely to be many surprises.

The only unknown is whether 2degrees is able to buy its full allocation of 15 Mhz paired for $66 million. Should it fail to do so, Telecom NZ and Vodafone will each be invited to bid for an additional 5 MHz block.

The 700 Mhz spectrum became available after New Zealand switched from analogue to digital television broadcasting. 700 MHz is especially well-suited to 4G mobile data networks, particularly in less densely populated rural areas because signals can travel further.  Or to put it another way, carriers can cover the same amount of ground with less physical infrastructure.

There are some interesting auction rules requiring successful bidders to increase their network coverage. For more details, see the Radio Spectrum Management website.