Millions in airwaves sale

By RICHARD BRADDELL

A couple of months ago, British telecommunications companies bet $72 billion in an auction of third generation mobile telecommunications radio spectrum.

On Monday, New Zealand telcos will begin placing their own bets in a similar auction that begins here.

How much the spectrum will sell for is a difficult question. Estimates have ranged up to an improbably high $650 million. If the British experience is translated into local terms, the New Zealand spectrum would be likely to go for around $1.5 billion, or the possible cost of building a couple of networks. It will not, for any number of reasons.

The first is that the New Zealand auction has attracted surprisingly few bidders; a dozen including five SOEs seemingly intent on preserving existing user rights and none from overseas.

With Telecom, Vodafone and Telstra Saturn being the only bidders with obviously strong financial support, a dose of reality has settled in and expectations are that the New Zealand spectrum could now go for between $50 million and $200 million.

That aside, the amounts paid in Britain have so shaken the investment community that they have been a factor driving the recent slump in telecommunications share prices globally.

If impending auctions in other countries draw bids at similar levels, the balance sheets of some of the multinational operators could be seriously weakened.

In fact, bidders paid so much in the British auction that the Government has had to stagger payments over several months so that they do not upset monetary policy.

But why bid for the spectrum in the first place? The answer lies in a new third generation of mobile cellular services it will support. These will most likely be based on a broadband version of CDMA, an enhanced digital cellular technology.

Telecom is rolling out a narrowband version of this technology.

CDMA has become the technology of choice in third generation (known as 3G) because it overcomes limitations of prevailing cellular technologies which tend to be better at either voice or data but not both. CDMA is great for voice and data and it is the 3G version's much higher bandwidth or delivery capacity that has telcos and business salivating over its m(for mobile)-commerce and multimedia capabilities.

The services that 3G will bring are only, we are told, limited by the imagination. For instance, if you were to get lost in an unfamiliar city you would just pull out your mobile videophone, dial a number and a map of the locality would appear indicating where you were and even the way to a restaurant or bar, if that was what you were looking for.

Canny retail chains might also use the ability inherent in mobile networks to identify your location and send you messages when you are close to one of its stores.

But some services typically associated with 3G are already coming online on existing 2G networks.

New Zealanders with WAP enabled GSM phones are starting to get stock quotes, sports scores and scaled down internet.

3G will distinguish itself by being able to deliver full stream video on the hoof. That could be very useful in a rescue situation where images could be videoed back from the scene so engineers could advise searchers on the best way of going about finding trapped people.

But whether there would be sufficient demand for full-stream mobile video to justify building a new network is a big question.

Another problem is that demand for many services will be limited, if only because their complexity may challenge consumers who already have trouble programming their home videos.

A more mundane reason for the hot demand for 3G spectrum in Britain is that existing 2G spectrum is already crowded, and demand for present generation cellular is burgeoning, providing room for new entrants as well as existing players to build new networks.

Demand is growing in New Zealand, but with a population less than a tenth the size, mobile operators have all the spectrum they need.

Even Australia's much larger market, executives at Telstra's Melbourne research facility are on record as saying, will struggle to support a 3G network.

Meanwhile, 2.5G services such as WAP, a trimmed-down internet protocol suitable for smaller cellular screens, and GPRS, a packet data system, are being introduced to New Zealand.

There are other problems with 3G. As one Telstra executive said, when a vendor shows you a 3G video-enabled phone, they show you just one, because that is all they have.

It will be three years before equipment is widely available.

And even then, 3G will only perform to full specification in urban areas because of the prohibitive cost of cellsites in the country.

There is also the question of who might use 3G services, and who will be able to afford them.

These issues have not gone unnoticed by parties interested in New Zealand's spectrum auction.

This week Maori interests and Ihug, the country's second largest internet service provider, were in court in Wellington in an effort to block the auction.

While the Maori interests were seeking to protect rights to a taonga, or treasure, Ihug's action was concerned with a portion of second generation spectrum that is also on the block.

Indeed, given the uncertainties about 3G, the 2G spectrum is regarded by Ihug, and seemingly the Maori claimants, as being every bit as important, if not more so.

The reasons are twofold: the first being that 3G is still some time off while 2G technology is available today. The second is an International Telecommunications Union ruling in May that 2G spectrum in the 2Ghz band that is being sold from Monday can also be used for 3G purposes.

As Telstra Saturn chief executive Jack Matthews said, the concern is that if a network operator does not get to 2G, then it will not make it to 2.5G, and 3G may come too late.

Ihug's view is that market incumbents Vodafone and Telecom are growing so fast that by the time a new 3G network is operational, there will be only the dregs of a potential customer base remaining. The window of opportunity, Ihug argues, is less than a year.

Its proposal, as outlined in the High Court, would be to buy a 10 MHz block of 2G spectrum and use 2.5 MHz of that to get a mobile network built.

Ihug is understood to be seeking $40 million in additional funding.

The auction has already been delayed several times by Maori claims at the Waitangi Tribunal, and carrier disquiet that Telecom or another carrier could foreclose the market by buying all the spectrum.

The new Government, responding to carrier discontent, delayed the auction yet again in February and then divided the 3G spectrum into four lots, to be sold to separate owners, with one lot reserved for Maori interests at 95 per cent of the average purchase price.

This week's unsuccessful Maori action, which will now go to the Court of Appeal, argued that the Crown had consulted insufficiently before rejecting a Waitangi Tribunal recommendation that part of the spectrum simply be given to Maori.

The Ihug action, which was rejected out of hand by the High Court, was aimed at getting similar restrictions on the 2G portion up for sale.

Restrictions were opposed by Vodaone, Telecom and Transpower when Ihug raised the matter with the Ministry of Economic Development in March.

But with the International Telecommunications Union ruling changing the landscape, the case for another rule change becomes all the more compelling.