Between the lines: Innovation will be biggest loser

There is no place for smug smiles on the faces of those controlling the Government's radio spectrum auction, despite an apparent resurgence this week.

After two months of painfully slow progress, the Ministry of Economic Development's recent rule changes have undoubtedly lifted the auction's pace.

But many argue that the process still has fatal flaws that will not be revealed until it is too late. These flaws are likely to play a significant part in shaping the future of New Zealand's wireless communications industry.

The auction of second-generation (2G) and third-generation (3G) spectrum has been under way for 11 weeks, and its total sits at $60 million, far below expectations.

But the biggest concern lies not in how much the auction will raise, but how it will affect the way each New Zealander uses a cellphone or gets highspeed wireless internet access for the next 10 years, and how much we pay to do so.

Now dominated by a small number of big players, the race to equip every Kiwi with a cellphone is heatting up.

Securing spectrum, a major telco could cover significant growth, and even provide exciting new services like video on to handsets. Their competitors are smaller players who are looking to start up networks, or expand the products they offer. Clearly the size of competing wallets is vastly different, and therein lies the auction's problem.

While there is a cap applied to how much 3G spectrum one bidder can snap up, there is nothing to stop such a player buying up a huge amount of 2G and hoarding it to keep others out of the mobile market. Because of its lower cost, 2G gives start-up capability to a new entrant. The higher cost of 3G means only incumbents and rich newbies will be able to offer whiz-bang features in addition to existing services.

Fear of such anti-competitive play prompted ihug to take a case to court several months ago, seeking a change. It was thrown out.

Now, 11 weeks down the track, some bidders are starting to make noises about the games others are playing.

Walker Wireless and Telstra Saturn have been battling for big chunks of spectrum, which give the chance to send internet and data at high speed.

Every time Walker bid, Telstra outbid. It caused Walker to this week bid for Telstra's 3G, which many doubt Walker really wants. Telstra, in turn, called Walker's bluff and went over the top of Telecom, leaving Walker with a slice of 3G. Telecom came back and stamped out Walker's bid. Late yesterday, Walker returned to the spectrum it appears more interested in, only to have Telstra again step over them. This battle will be watched with interest.

And at the other end, Telecom, Vodafone and Telstra are showing remarkable interest in 2G spectrum.

It is ironic that the Labour-led Government - no longer unquestionably wedded to market solutions - has pursued such a market-driven formula that could see larger companies squash smaller ones out of the market.

The consequences may be a few more million for the Government's coffers later this year. Longer term, New Zealand will be poorer for the lack of active competition and innovative services.