Radio spectrum auction's dreary progress punctures expectations

By PAULA OLIVER

The Government's radio spectrum auction is limping to the seemingly inevitable conclusion of realising a sum below even the most pessimistic forecasts.

Despite the Ministry of Economic Development moving to speed the exercise by changing the rules, it seems increasingly unlikely that the auction's flagging fortunes can be rescued.

Just months after an extraordinary auction in Germany earned $101 billion, New Zealanders look to be missing out on a windfall as the third-generation (3G) spectrum goes for a song. Total bids now sit at $42 million.

But why is local spectrum sitting at bargain basement prices, and is it really realistic to expect more from the auction?

Germany and Britain have much larger populations and already crowded networks. But they do hold some clues as to why our auction is not firing.

Up for grabs in New Zealand is a combination of so-called second-generation (2G) and 3G spectrum. The potential of 3G to provide video on mobile phones and internet at the touch of a button makes it more glamorous than 2G.

There are 1600 lots of licences and spectrum blocks for sale, making ours a large and relatively cumbersome auction process. In comparison, Germany's auction offered just six 3G licences, and Britain's five.

Telecommunications consultant Paul Budde says it is unrealistic to expect more from our auction, because the European experience was based on demand for more spectrum in an already-crowded market.

"Countries such as the UK, Germany and most of Europe have limited spectrum availability, and companies have to run a very tight and efficient show," he said.

"Incumbents need more capacity to cope with growing demand, and new entrants need a ticket to enter the market."

Following telecommunications deregulation in Europe, many companies are attempting to cross their borders into neighbouring markets, where there are only tiny amounts of spectrum available. Bidding wars are the result, with new entrants and incumbents driven by predictions that the majority of phone calls will soon be made on mobiles.

Comparatively, New Zealand has huge amounts of spectrum available, meaning there is no need for desperate bidding.

The lack of a bidding war can also be blamed on NZ's geography. The long, thin nature of our country demands a high investment in infrastructure to roll out a network.

As Paul Ryan pf Walker Wireless says, one mobile tower in NZ captures far fewer people than a tower in a more heavily populated place such as London.

"It's hard to say if the auction is a dismal failure, because from a new entrant's point of view the low prices are good," he said.

"To encourage competition in the market you wouldn't want costs too high."

The large investment needed in NZ is countered by the small population and subsequently the small market potential.

As one industry observer put it, unless we can get our sheep to start using mobiles, the size of the market is almost not worth the investment.

The Government's decision to offer three blocks of 3G spectrum and to hold one for Maori interests may also be impacting on the auction.

Jump Capital, for instance, says it is keen to get hold of 3G, but has yet to bid.

Companies such as Jump have the option of negotiating with Maori after the auction. From the Maori perspective, the lower the auction prices, the smaller the return they can expect from their spectrum.

With large amounts of spectrum available, some observers are also questioning the Government's timing in selling 3G spectrum.

"It's unfortunate that very few people understand all of this, and it's foreign to many politicians in New Zealand and Australia," Mr Budde said. "They can get dollar signs in their eyes and go for it."

He said the sale of 3G now was good for players like Walker Wireless, who would see great opportunities in the low prices.

Mr Ryan agreed, arguing that it was the right time to sell 3G because it took so long to prepare a network. Other countries had separate auctions for 3G, shortening the auction time.

After the auction, the advantage will remain with incumbent operators, who will have immediate access to an established client base by the time the features of 3G can be rolled out.

Mr Budde predicts it could be as long as five years before we see the most exciting features available, and by then a much larger portion of the population will already be tied to an existing mobile provider.

The auction's slow progress has also attracted political interest, with National commerce spokesman Lockwood Smith labelling it a "complete disaster."

"The Government has undermined the value of the spectrum by having the auction when a major telecommunications review is going on, and by splitting it into so many blocks that there is no competition," he said.

"Add to that their poisoning of overseas attitudes towards business in this country, and the whole thing is exquisitely bad."

The light at the end of the tunnel could be the strong bidding for 2G spectrum, although it will not lift the final total to anything spectacular.

What it could do is allow a new mobile operator to launch a network covering just one city, such as Auckland. Ihug may be interested in such a deal.

But New Zealanders can take heart in the fact that Mr Budde predicts that an upcoming Australian 3G auction will also be a flop.

"Some of the predictions are totally ridiculous, and because of the fact that Australia too has a lot of available spectrum, they are unlikely to come true."

An upcoming auction in the United States is also expected to net minimal amounts.