Conroy's 4G spectrum rip-off?

Stephen Conroy's directive on 4G spectrum pricing has sparked a fierce response from Optus, with the nation's second largest mobile operator threatening to walk out of the auction scheduled for April 2013.

The communications minister's decision to set a reserve price of $3 billion for the 700 MHz spectrum, with the $1.36 per MHz per population price (POP), may have surprised Optus but the entire scenario is actually playing to a script.

The dramatic tension underlying this script is the tug of war between a government keen to maximise its revenue for an indisputably lucrative asset and telcos trying their best to get a good deal. Both are certainly justified in their motivations but what implication does the resultant bout of brinkmanship have for Australia's 4G future?

The revenue from the spectrum auction is a key plank of the Gillard government's surplus promise and there are some who reckon that Conroy may have overshot here with a high reserve price.

Vodafone Hutchinson Australia's (VHA) decision to opt out of the 700 MHz auction, made absolutely certain by the reserve price, sets up a couple of possible scenarios where either all of the spectrum is bought at the reserve price or some of the spectrum goes unsold, with the telcos hoping to get a second bite at the cherry later.

Conroy's office has since told Technology Spectator that VHA had informed the government in September that it would not partcipate in the auction for 700 MHz spectrum.

“This advice informed the directions given by the Minister in relation to the digital dividend auction,”a spokesman for the minister said.

According to Ovum analyst David Kennedy, neither bodes well for the Australian consumer.

“It is more likely that lack of competitive pressure would more arise from the telcos bidding for less than the maximum limit, with some spectrum going unsold, there's little danger of a fourth force emerging with such a high reserve,” Kennedy says.

“Alternatively, all of spectrum might be bought at this price, but network investment will slow down and Australia will lag in LTE rollout.”

The cost to the consumer is an issue that Optus' vice president, corporate & regulatory affairs, David Epstein has been quick to point out. Labelling the price “unworkable and out of line with international outcomes” Epstein has warned that it will significantly restrict investment in 4G LTE and force carriers to pass the cost on to users.

The reserve price stipulated by Conroy is certainly high when compared to other jurisdictions and previous auctions but just how hard the operators decide to hit back will be calibrated by how badly they want to get their hands on the spectrum.

According to Telsyte analyst Chris Coughlan, both Telstra and Optus need the spectrum almost as badly as the Gillard government wants its surplus.

“Telstra is the most spectrum poor of the operators now, it desperately needs spectrum in high demand areas and deploying more spectrum at existing sites costs five to ten times less than the cost of building new sites for capacity,” Coughlan says.

“Meanwhile, Optus needs a regional coverage solution as quickly as possible.”

The regional equation could be behind Optus's immediate retort to Conroy and the 4G message is not going to resonate across regional Australia unless the operator gets its hands on the 700MHz spectrum. The telcos will be reluctant to upgrade regional networks with 1800 MHz spectrum and as Optus points out Conroy's insistence on making the bidders pay a near-world-record reserve price for spectrum stifles 4G innovation in the country.

Presumably, Conroy had a good idea of how Optus and Telstra were going to react to the pricing. While the communications minister can never be accused of shying away from letting the telcos know who the boss is, simply expecting their compliance on a high reserve price would be an act of supreme hubris. Given what's at stake for both the Gillard government and the telcos, Conroy and ACMA will now gird themselves for a potentially frantic bout of negotiations in the New Year.

The possibility of a boycott by Optus sounds intriguing but is unlikely to eventuate. The focus instead will be on stalling the talks and Epstein has already indicated that his immediate plan is to lobby for a rethink on the reserve.  For the time being, both Optus and Telstra have enough spectrum to keep their 4G plans in motion in the metro areas.  With the elections looming and the 700 MHz not coming into play until 2015 both operators could decide to bide their time. While unlikely, intimations of such intentions could be used to exert pressure on the Gillard government. However, this scenario assumes that a Coalition government will be more conducive to giving the telcos what they want. There is every chance that an Abbott government will choose to follow the Labor blueprint and look to squeeze every last cent of revenue from the valuable spectrum.

With the ball now firmly in the court of the operators, all parties involved will have to consider their options carefully. The telcos will be ill advised to push the envelope too far while Conroy can't afford to see the auction just become a one horse race. All in all, the stage is set for an exciting finish to a process that will dictate our 4G future.