Between the lines: Canny bidding puts auction into reverse

Just when you thought it was safe to take an eye off the Government's three-month-old radio spectrum auction, up pops a day of confusing bidding that unveils another flaw in the process.

This particular flaw also gives birth to the prospect that the auction could still be running this time next year.

The problem centres on a series of bizarre rules that allow bidders to withdraw any or all of their bids at any time, without penalty.

Because withdrawing a bid is seen by the auction's guardians as an "activity," the auction could keep rolling on.

While that prospect might be a nightmare for many parties, for some of the larger players it is a case of the longer the spectrum auction continues, the better.

Telecom, for instance, is in the process of setting up a digital CDMA mobile network.

Many in the industry claim it will be of better quality than Vodafone's existing GSM digital mobile network.

By keeping the auction going, Telecom can prevent smaller players from buying some of the spectrum and launching a competing network.

If the auction was to drag on until Telecom's CDMA network was complete, it would enjoy the advantage of having thousands of customers already signed up before smaller start-ups were able to get underway.

By counting a bid withdrawal as activity, the Ministry of Economic Development is leaving itself open to the prospect of an auction that degenerates in value as it lumbers on.

But that may not be the worst of it.

Telecom's surprise move yesterday to withdraw $21 million worth of bids for third-generation (3G) spectrum exposed another potential loophole in the rules.

The company withdrew a bid, sat out a round and then made a lower bid to reclaim the same 3G lot.

Effectively, Telecom pushed down the price in place for a chunk of 3G spectrum, and saved itself some cash in the process.

That was possible because the lot lost value after the bid was withdrawn. Instead of being passed down to the previous highest bidder, the lot was left with no holding bidder and retreated to a reserve price.

That reserve price, while higher than the auction's opening reserve, continued to drop until someone made a bid.

The fact that Telecom was able to so easily control the price, and do so without penalty, must be a worry for the officials charged with watching over the auction.

Late last week, Telstra Saturn pulled a similar manoeuvre, also saving itself some money.

All of which leads to the question of when the rules will be tidied up.

Given the discontent surrounding the lack of a spectrum cap on second-generation frequency, another review may be necessary.

The ministry got it right last time, when it changed the rules to lift the auction's pace.

It now seems likely the officials will have to move again.