According to Coleago, potentially several billion dollars of benefit to the economy has been lost as a result of setting reserve prices too high

According to Coleago, potentially several billion dollars of benefit to the economy has been lost as a result of setting reserve prices too high

A consultancy firm specialising in the planning of national radio spectrum auctions has criticised Australia’s recent digital dividend spectrum for setting reserve prices too high.

Three Australian firms secured spectrum in auction, with 700MHz and 2.5GHz blocks up for grabs – generating revenues of nearly A$2bn ($2.06bn) for the Australian government.

Telstra paid over A$1.3bn for its 2x20MHz blocks of 700MHz spectrum and 2x40MHz of 2.5GHZ spectrum, while Optus Mobile won 2x10MHz blocks of 700MHz spectrum as well as 2x20MHz blocks in the 2.5GHz band, paying almost A$650m for its spectrum. Fixed line operator TPG Internet also secured 2x10MHz of 2.5GHz spectrum, for a total of A$13.5m.

However, 2x15MHz of 700MHz spectrum remained unsold and according to Stefan Zehle, CEO at Coleago Consulting, this is because Vodafone Hutchison Australia (VHA) decided not to bid due to the extremely high reserve prices set by the Australian Communications and Media Authority (ACMA).

Zehle explained that the switchover from analogue television services to digital frees up spectrum to be reallocated for mobile broadband. It was estimated to deliver a net benefit to the Australian economy of between A$7bn and A$10bn, he said.

“Of course this estimate assumed that all of the spectrum will be allocated to mobile,” he said. “In the event, one third of the APT band plan 700MHz spectrum remains unsold whereas 100 per cent of the cost of freeing up the spectrum has been incurred. Therefore potentially several billion dollars of benefit to the economy has been lost as a result of setting reserve prices above the level where weaker operators can earn a normal return of capital employed.”

He added that the damage the ACMA has inflicted on the Australian economy does not end there.

“Since VHA ended up without spectrum it will further weaken their relevance in the market. Since competition is likely to have been weakened this will reduce the “consumer surplus” from the digital dividend, in other words, the benefit consumers would gain in form of lower prices.”

The most direct impact of the high reserve prices is the lower auction revenue that the government receives, said Zehle. The government had budgeted to generate revenue at least equal to the total reserve; A$2.9bn, whereas the auction only raised A$1.96bn; 32 per cent below its target.

“The ACMA’s failure could hardly be more complete,” he concluded. “Yet, it was widely predicted that with these high reserve prices spectrum would remain unsold, in fact Vodafone said it would not bid unless the reserve prices are lowered.  The outcome says a lot about politicians’ lack of understanding of how investment decisions are made and also demonstrates an unwillingness to listen to the industry.”

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  • Central to this article is an assertion that the ACMA, by setting a too-high reserve for the 700MHz spectrum, deterred one of the three Australian mobile telephony players, Vodafone, from bidding.

    The facts are that in October 2012, Vodafone announced it did not need to buy the spectrum that was being offered in the digital dividend auction because it has sufficient spectrum to provide LTE services in the future.
    Vodafone’s CEO, Bill Morrow, made this announcement two months before the Minister directed the ACMA to set the reserve price for the 700 MHz band at $1.36/MHz/pop.

    Vodafone also refrained from bidding for licences in the 2.5GHz band, even though it is hard to characterise the reserve price for this band ($0.03 per MHz/pop) as extremely high, and indeed all 2.5GHz lots were sold.

    The ACMA does not know the source of the figures attributed to Stefan Zehle, CEO at Coleago Consulting. The figures on the net benefit are well beyond figures quoted for expected auction revenue in the media and seem to be based on speculations about the overall economic benefits resulting from subsequent network rollout and operation. Such benefits would, of course, be hard to calculate from the auction results alone.

    The ACMA expects that consumers will benefit from the substantial increase in spectrum holdings for Telstra and Optus resulting from this auction. Telstra and Optus would not have bought this spectrum if they didn’t believe it would improve their position in offering competitive services to consumers. Vodafone says it also intends to compete vigorously in the mobile broadband market using its existing spectrum assets. In addition, the auction has brought a new entrant to the market with its own spectrum holding.

    The ACMA is optimistic that all these companies will invest in the community when they commence 4G services, which will further transform the way Australians communicate and do business.

    Meanwhile, 3 continuous lots, or 15MHz paired, of the valuable 700MHz spectrum remains vacant and available for allocation to Australian industry at some future date.’

    Reply to Chris Chapman on Australian spectrum auction “damaging to economy”
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