3G spectrum sale stalls as the competition dries up

By Francis Till

Friday 14th July 2000

With bidding stalled just over the reserve limits, the government's auction of 3G wireless spectrum could fail to generate even the $50 million once thought to be its lowest possible outcome. Such a final tally would reflect poorly on the government's handling of the controversy-plagued auction, from which it had widely been expected to make hundreds of millions.

Management rights to bandwidth is under the gavel in 43 lots but only a handful of those are suitable for the high-speed data, voice and multimedia transmissions that are at the heart of third generation (3G) wireless communications. In all, sufficient bandwidth is on auction to allow three operators of 3G services to establish networks. A fourth operator could be added to the mix through a bandwidth lot allocated for post-auction direct sale to a pan-Maori spectrum trust.

For months, investment bankers and analysts have consistently projected potential returns for the 3G share of the auction at $500-650 million, although figures have ranged even higher. A similar auction in the UK earlier this year earned taxpayers there £34 billion ($NZ112 billion). Converting that to what is on offer here would value the combined 3G rights at up to $1.6 billion, according to Telecom chief executive Theresa Gattung.

But as early as the second day, only three of the 12 bidding entities appeared interested in the 3G portion of the spectrum sale and each is currently standing on uncontested bids only marginally above the reserve limits. This means Telstra, Telecom, and Vodafone might finish the auction without having to increase their current bids of just over $10 million apiece for full rights.

The fourth license will be sold non-competitively to a pan-Maori trust for development in co-operation with an as yet unselected business partner, and will yield taxpayers only an amount equal to the lowest bid for the other three less 5%.

Ultimately, the 3G spectrum blocks could bring as little as their $40 million reserve price once the discounted Maori trust package is sold, and even less if the trust cannot find a qualified backer. Successful bidders for 3G lots in the main auction will not be eligible to partner with the trust under present competition rules.

The only active bidding in the auction so far has been among several entities interested in portions of the 2G spectrum, notably Walker Wireless, Ihug and TVNZ. Parts of that spectrum were recently approved by the International Telecommunications Union for possible use in a 3G context but are unlikely to be developed that way here without additional regulatory input from the government. While some of the 2G bidding might heat up, it has not so far substantially exceeded the threshold reserve of $10,000 for any of the contested blocks.

In addition to bandwidth reserved for the Maori trust, a total of 41 blocks of second- and third-generation spectrum are being auctioned, most in 5MHz and 10MHz segments listed in the auction catalogue as management rights (MR) schedules.

To construct a 3G operation, a bidder must secure four separate MRs, each of which must be purchased on its own. That is: a primary 10MHz block and its designated adjacent 5MHz in the 1920-1980MHz band and a specific "natural pair" configuration higher up on the spectrum, or 30MHz altogether. One half of a "natural pair" is used to transmit, the other to receive.

The "spectrum cap" imposed by the government on the auction of 3G frequencies means no single bidder may obtain control of more than one 15 MHz portion of the 3G spectrum, augmented by its "natural pair" in the higher frequency range. Bidders who obtain control of a "natural pair" may also buy one block of 5MHz spectrum in the 2110-2125MHz band, designated for use by time-division-duplexing broadband operations.

Early on, the government acknowledged the spectrum cap would depress the returns from the auction, but through acting Communications Minister Trevor Mallard and others contended limits on acquisition of the spectrum were necessary to ensure rapid deployment of technology and competitive pricing by licensees.

Other factors in the auction design may also be working to subdue interest, however, particularly the requirement that any successful bid be paid in full immediately following the auction's close and that GST costs will be added on. There has been no word from the government about why the expected entry into the bidding of offshore interests did not materialise, but the absence of offshore money has apparently limited major bidders to those with already established infrastructures in the country.

But there is still time for a new operator to enter the auction. According to the government's website <auction. med.govt.nz/>, any new applications will be processed "as quickly as practicable, typically within a day" provided they are complete. The auction will continue until two successive rounds (there are two each working day) have passed with no new bids, a process that could take weeks or even months, given the developing competition in the 2G bandwidth blocks.

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