A full spectrum of 4G prices

Stephen Conroy's reserve price for 4G mobile spectrum is too high, but unfortunately for Australia's telcos it looks low in comparison to a deal between AT&T and Verizon.

Now that the government has given up on making a surplus this year it could come up with a more sensible reserve price for the forthcoming auction of mobile spectrum and stop trying to use it as a tax, but it probably won’t.

Especially after AT&T paid Verizon $1.9 billion for some of the same spectrum on Friday, much more than the Australian reserve price.

Last week Telstra, Optus and Vodafone all coughed up $25,000 to register for the Australian auction, which is part of what the government calls the "digital dividend” because it involves selling spectrum freed up by the switch of TV broadcasting from analogue to digital.

All three are complaining bitterly about the reserve price of $1.36 per megahertz per head of population, saying that the average reserve for similar auctions elsewhere in the world over the past three years was 38 cents and the average price paid was 52 cents.

Interestingly, according to a list of recent auctions put about by one of the bidders, the highest price paid over the past three years was in Germany in 2010, where the reserve price was zero but the price actually paid was 87 cents per MHz per head.

The Australian reserve price of $1.36 was set by a ministerial direction to the Australian Communications and Media Authority, which is the real estate agent conducting the auction, and the minister, Stephen Conroy, has justified it by describing the spectrum as "waterfront property".

It is, indeed, highly desirable "land” – 4G mobile spectrum that goes through walls – and the phone companies definitely need it for the future. Mind you, in pre-auction positioning they harrumph they can get by without this lot, and Vodafone has said publicly it’s not bidding. But they all registered last week just in case.

Senator Conroy is no doubt trying to offset the possibility that in a small country far away there might be collusion between the bidders, God forbid, but he and Treasurer Wayne Swan are also clearly trying to use mobile phones as a taxing device.

Ord Minnett analyst Brad Dunn calculates the cost (tax) to consumers of the high Australian reserve price at $400 per year.

The beautiful thing about a spectrum sale is that it’s a one-off item that can be included as current revenue under the government’s dodgy accounting rules. When it was scrambling around trying to meet the commitment to run a surplus this year the estimated $4 billion from the "digital dividend” was crucial; now that surplus scramble has been abandoned it could theoretically lower the reserve.

The analogy with waterfront property only goes so far: the higher the price paid for the spectrum, the less able the phone companies are to invest in new technology to use it more effectively.

Then again the list of recent auctions doesn’t include secondary market sales of spectrum, and the most recent of those would seem to put the minister on somewhat stronger ground.

The acquisition last week by AT&T of two blocks in the 700MHz band – the same as the Australian government is selling – seems to set a pretty high benchmark.

The blocks were 12MHz each, covering 42 million people in 18 states, including California, New York, Florida and Virginia. I’m no expert on these matters, but dividing the AT&T price by the 42 million population and the 24MHz total of spectrum comes to $US1.88, or $A1.80, which is 30 per cent more than the Australian reserve price.

Now THAT’S waterfront property.

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