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Opinion, Telecommunications - Written by Renai LeMay on Thursday, January 10, 2013 13:07 - 35 Comments
Crazy spectrum prices? No. Historically consistent.
opinion The flagrantly worded argument by Liberal MP Paul Fletcher and others that the Federal Government has badly mismanaged the process of auctioning off 4G wireless spectrum is overly simplistic and does not well-represent the complex dynamic involved in this commercial bidding process.
Spectrum, spectrum, spectrum. If we were to try discussing this incredibly valuable property with our fellow humans only a couple of hundred years ago, they would have likely thought us crazy. How can something which you can’t see or hold be worth a lot of money? Paying billions for such an ephemeral commodity would, up until only recently, have seemed like the biggest scam on earth.
Of course, if you follow the debate in Australia’s telecommunications sector at a cursory level, you might come to the conclusion that the imminent licence through competitive auction of a sizable chunk of Australia’s wireless spectrum by the Federal Government, which owns the rights to it, to the nation’s mobile telcos, was still this same kind of colossal scam.
Yesterday former Optus executive and current Liberal MP Paul Fletcher added his voice to the long list of those who have expressed surprise and anger at the $1.36 per megahertz per head of population figure which Communications Minister Stephen Conroy set in November as the reserve, fall-back price which Australia’s cadre of mobile telcos will pay to get access to the highly desirable 700Mhz spectrum block on offer in the process a figure which implies the Government is seeking a return of close to $2.8 billion from the process.
If you listen to Fletcher on this issue, you’d probably believe that Conroy’s move was merely designed to try and fleece Australia’s mobile telcos unfairly with the aim of trying to keep the Government’s aim of achieving a budget surplus intact (despite the fact that it’s already admitted this to be all but impossible).
And Fletcher’s not the only one raising this viewpoint. Well-regarded commentator Stephen Bartholomeusz, who’s normally on the money when commentating on telecommunications, has also raised it as a possibility, and of course News Ltd newspaper The Australian is running this line as a veritable certainty. Conroy’s opposite, Shadow Communications Minister Malcolm Turnbull, was all over the situation late last year, describing the decision as being driven by politics rather than with the aim of achieving good policy. And, if you can believe it, there are even nut jobs out there muttering that the Government is trying to sabotage the mobile industry in order to promote its own fixed-line NBN infrastructure. Riiight.
The nation’s number two telco Optus, which, along with Telstra, is likely to be one of the two major bidders in the auction last year described Conroy’s price as “unworkable”, and is considering its options with regard to the auction, as is Telstra itself. And every journalist and their dog have by now put together comparison charts showing how the reserve price set by Conroy was markedly higher than spectrum prices in most developed countries around the world.
Yet there is also reason to believe that the Government hasn’t completely thrown caution to the wind. Some of the calmer heads out there have been quietly suggesting recently that the reserve auction price might not be so remarkable after all.
Take the $2.8 billion which the Government expects to raise through the reserve price stipulation, for example. Fletcher yesterday highlighted earlier spectrum auctions in Australia as having featured much lower returns.
But the fact is that when the you take inflation and the amount of spectrum for sale into account, the $1.3 billion which the Government raised in 2000 through the sale of chunks of the 1800Mhz bands currently used for 4G services in Australia is directly comparable to the $2.8 billion figure the Government is aiming for — actually slightly cheaper — to the figure in 2000. Analysis has also shown that this year’s reserve price is only slightly more expensive on a per capita basis than the auction in 1998 involving the 850Mhz band, which raised $350 million.
Numerous publications have quoted a recent Goldman Sachs report stating that the average price paid for spectrum internationally in the past few years was 80c per MHz per head of population. But the fact remains that Australia’s mobile telephone networks are more developed than those of many other countries — with Telstra’s 4G network and 3G Next G network in particular being one of the most lucrative and well-developed in the world — meaning that it’s not unreasonable to assume that spectrum prices locally would vary to the high end of that scale.
Some publications have suggested that Vodafone, which has abandoned this year’s spectrum auctions, would return and help ramp up the competitive tension. But the fact is that Vodafone indicated as early as July last year that it was unlikely to participate in the auction, choosing instead to rely on the spectrum it already owns in the 1800Mhz band.
And with Vodafone’s ongoing financial problems — the company continues to lose hundreds of thousands of customers and hundreds of millions of dollars each year — who can blame it? It has been easy to predict for more than a year or so that the 2012 spectrum auction would be held between Telstra and Optus.
Fletcher implied that Vodafone’s decision to pull out of the auction was based on its high prices. But he didn’t explore the company’s existing spectrum assets and its financial woes, which would have been likely to keep it out of the auction regardless of whether the price was drastically reduced or not.
In this context, what the Government has really been left with is a competitive auction between just two players, Telstra and Optus parent SingTel, both of which are essentially incumbent former monopolists with extremely deep pockets when it comes to network investment. And both of these companies, in order to fuel their mobile network investments in Australia in the next few years, need access to spectrum.
University of Queensland Professor of Economics Flavio Menezes pointed out in a recent article published at The Conversation that the auction process is actually more complex than most people think (I recommend you read the analysis of the bidding process). It’s not a matter of putting in a single price like bidding for a smartphone on eBay.
And Menezes also warns that if the Government hadn’t set a reserve price, Australia could end up with a situation such as happened recently with 3G auctions in Switzerland, where strong competition in the bidding process was expected but didn’t eventuate, resulting in winning bids which were set at only two percent of the predicted revenue.
Perhaps Conroy could have set a lower reserve price for the 700Mhz spectrum auction … but when you consider the fact that the Government is dealing with two massive incumbent telco companies who each spend hundreds of millions of dollars (in Telstra’s case, in some years it’s been more than a billion) on wireless infrastructure in Australia, and achieve strong profits as a result, then you have to question how low that price should be. To give you some idea of the sums involved, in its most recent financial reporting quarter last year, Optus pulled in $1.4 billion in revenue from its mobile business (that’s just one quarter), while Telstra made some $8.7 billion in revenue from its mobiles business in its last financial year. Not exactly pocket change.
In addition, there seems very little doubt that Telstra, especially, would seek to participate in the bidding process at the price which has been set. Optus’ very public complaint about Conroy’s price is clearly an effort to drive that price down, but then Optus has made a habit over the past decade of publicly complaining about government regulation of the telecommunications sector. If Telstra participates in the auction process as it currently stands, there seems little doubt that Optus will be forced to participate as well. In fact, apart from its HFC cable rollout, historically, investment by Telstra or other telcos in both the fixed and mobile arenas (think 3G, 4G, ADSL, etc) has been the only way to guarantee that Optus will follow suit in an effort to remain competitive.
Now, obviously I am not privy to the inner workings of the no doubt very complex calculations made by the Australian Communications and Media Authority and Conroy’s own department regarding the upcoming spectrum auction. I am sure much has been written about this process internally within the Government — and that detail is not available publicly. Likewise, I am sure there is a great deal of internal thinking at Telstra and Optus that would help clarify this situation — but again, we are not privy to that thinking.
However, what I have attempted to demonstrate with this article is the fact that the Government’s position on the wireless spectrum auction is not as unreasonable as is being suggested.
There is no doubt, with the limited number of bidders, that a reserve price must be set on the 700Mhz band in this auction. Secondly, the current price is historically consistent with previous auctions in Australia and at a price that both major bidders have deep enough pockets to consider. It is at the upper band of international prices, but given the advanced development of Australia’s mobile networks and the profit being made from them, that is perhaps to be expected.
Communications Minister Stephen Conroy may still direct the ACMA to reduce that reserve price, if Optus goes far enough in its threats to pull out of the bidding process or if Telstra itself expresses enough strongly worded private concern to the Minister. I wouldn’t personally be surprised if this does happen, and I’m sure the Government is currently examining the case for such a move. But I would not expect the price to be lowered by a very large percentage — and I would certainly not expect the reserve price to go away entirely. Like most politicians, Conroy can be loud and arrogant at times. But one thing he’s not is stupid.
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