Optus braces for SingTel's spectrum strategy

How Optus plays the coming spectrum auction will reveal much about the telco’s future in Australia. But that strategy will be designed in Singapore.

Australia’s Optus executives may be coy as to whether or not the company will participate in the digital dividend auction, but in reality it isn’t even their decision to make.

The call as to whether Optus will bid will come from a board meeting in Singapore. Ultimately, Optus’ parent company, Singapore Telecommunications, will decide the telco’s fate and with it the landscape of Australia’s telco sector.

While Telstra is cashed up from separation of its retail and wholesale arms, Optus will require additional capital from its parent in order to fully compete in the looming auction.

Given the scale of the auction this was always going to be the case. But the government’s move to raise the reserve price from the highly sought-after 700MHz spectrum to $3 billion has possibly forced SingTel to reassess whether or not it will continue to invest in Australia’s telco industry.

Analysts tip that this is perhaps one explanation for the unusual behaviour that we’ve seen emerging from the telco over the past couple of months. For instance, last week Optus announced that it had paid $25,000 to the Australian Media and Communications Authority to take part in the auction. But in the same breath, the telco’s chief operating officer, Kevin Russell, told The Australian Financial Review that it’s examining “alternate strategies to spectrum”.

While the move could easily be dismissed as pre-auction jitters - where the telco is trying to talk down what it wants before the actual sale - it could also point towards what telecom analyst Paul Budde, calls “the real issue” leading into April’s auction: whether Optus can convince SingTel to invest in Australia.

Both Budde and independent telco analyst Chris Coughlan agree that Optus’ future in Australia relies on its access to the 700MHz spectrum being offered by the government.

“If Optus doesn't participate in the 700MHz auction they will not be able to match Telstra's regional and rural depth of capacity and coverage,” Coughlan says.

The spectrum Optus obtained from the Vividwireless acquisition will allow it to remain competitive in the cities. However, not buying into the 700MHz band will more than likely transform Optus from a national carrier into a more metro-focused telco.

Meanwhile, like all companies, SingTel’s interests lie in attaining some form of return for its investment. While Optus is profitable, it may not make good business sense for SingTel to invest on such a grand scale in a mature market. It may be more profitable to invest such funds in developing smartphone markets, like India.

And to further complicate matters, Budde says that “persistent rumours” have been circulating that SingTel may intend to sell off Optus, and this point could play into its decision.

Despite the bleakness of its spectrum situation, Optus does in fact have some options.

Budde proposes that if Optus does want to participate in the auction without SingTel’s blessing it could turn to Vodafone for support and sub-let some of the spectrum it wins during the auction to its rival. He adds that Optus may also be looking for capital from some of its virtual operators as they also have a stake in the telco’s longevity – though whether the telco could go toe to toe with Telstra with this kind of funding is uncertain. 

While buying spectrum is the easiest way for Optus to keep up with its competition, there is one other path forward. Rather than investing in pre-existing spectrum, it could always choose to use the funds it would spend at the auction to build more base station to support its network. Though this move goes against the advice of analysts, you can bet that Optus’ execs will be doing the math to figure out which option would best benefit the telco in the long term.

Whichever path it chooses, Optus urgently needs capital to keep up with its rivals. And it's this fact that will ultimately reveal the most telling point of the digital dividend auction: whether SingTel still sees the Australian telco space as a wise investment. 

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