Vodafone's spectrum equation

Vodafone won't pay much for 4G spectrum but the auction could yet reveal its future in Australia and Canberra should still get its billions.

Vodafone Australia boss Bill Morrow’s candid confession about how the country’s third biggest mobile carrier failed to prepare itself for our love affair with smart devices is a glaring example of how the pace of tech advancements and adoption can sneak up on organisations. Just how big a price the carrier will pay for its complacency remains to be seen but we might get a clearer picture once the 4G spectrum auction is done and dusted next year. 

Vodafone Australia is yet to recover from the horrors of network and Morrow, brought in to clean up the mess about seven months ago, to his credit has decided against sugar coating the enormity of the challenge.

Understandably, Morrow’s main objective is to revive the ailing brand at the expense of joining the 4G race that Telstra and Optus are running with great gusto. A key flashpoint in this struggle will be ‘Digital Dividend’ auction scheduled for April next year.

Morrow’s comments to ABC Inside Business are a clear indication of a stance flagged earlier this year – Vodafone’s 4G ambitions are not dependant on the outcome of the spectrum auction and it’s not willing to spend big for 700MHz.

The reasons for this are fairly well understood, Vodafone Australia has more than enough spectrum - 900MHz and 1800MHz- handy to enter the LTE space, once the existing network is finally brought to speed.  

The interesting thing now is to see how the lack of intensity from Vodafone Australia affects the auction. The Federal Government is hoping to garner up to $4 billion in revenues from the auction, but is the lack of competitive tension set to kybosh those plans?

Spectrum sabre-rattling

With Telstra and Optus left as the only bidders for 700MHz spectrum just how much the government makes will depend on the reserve price of the spectrum. This price is expected to be revealed by the Australian Communications and Media Authority (ACMA) in November along with the other auction rules.

According to Telsyte analyst Chris Coughlan the reserve price, which is the minimum price that an operator must pay to obtain the spectrum, needs to be high enough to ensure the government gets what it wants and will be closely watched by the telcos.

So will the two telcos opt to play a game of chicken with the government? Well, Coughlan suggests that while the telcos will undoubtedly indulge in a certain amount of brinkmanship over the reserve price, both are also acutely aware of the importance of making sure that they don’t miss out.

"Telstra’s absolutely needs the spectrum and Optus (despite the Vividwireless acquisition) will need it to expand its rural and regional presence,” Coughlan says.

Neither Telstra nor Optus will be allowed to hold more than two 20 MHz blocks in the 700 MHz band and two 40 MHz blocks in the less valuable 2.5 GHz band, and it’s quite likely that after a dose of sabre-rattling all parties will reach a mutually beneficial resolution

According to Coughlan, a reserve price within the range of $1.25 to $1.50 per MHz POP will ensure that the government hits ‘80 to 90 per cent of its estimated revenue target.’

Telstra and Optus have from time to time pushed for early access to the 700Mhz and while that issue will undoubtedly make another appearance between now and the April auction, it’s unlikely that the government will be keen to accommodate the requests.

Could a new player emerge?

So, what of the remaining two 5 Mhz blocks? Vodafone Australia could still pick them up otherwise there is the possibility of another party joining the spectrum race. It won’t be the likes of Google or Apple but it could potentially be a player like China Telecom or Japan’s Softbank.

If a third player does emerge it could also potentially resurrect the prospect of Vodafone Australia being on the block. The main driver of this speculation is of course the reputation of Bill Morrow as Vodafone’s troubleshooter. He was instrumental in fixing the group’s Japanese operations before its sale to Softbank and certainly has the requisite knowledge and skill to engineer a similar outcome here.

However, for now Morrow’s immediate task is to remedy the mistakes of the past, which includes the rather unfortunate and unforeseen consequence of the $6 billion marriage between Vodafone and Hutchinson’s ‘3’

The merger brought scale but also led to a loss of focus which ultimately led to the collapse of the network and the subsequent exodus of customers. Vodafone Australia, despite the progress made so far to rehabilitate the network, is still essentially playing catch up, its bold ambition of displacing Optus as the second player in the market left in ruins.

Unprepared for the smartphone wave

One feature of Vodafone Australia’s failed promise articulated by Morrow was the operator’s failure to prepare its network for the rapid adoption of smartphones by consumers.  

The carrier is by no means alone in getting blindsided by the rush to mobility. Intel, the world's leading chipmaker, and Microsoft are both notable examples of companies that failed to see the smartphone, tablet wave. The PC era was undoubtedly Intel’s playground but the world of touchscreen tablets and smartphones has proven to be less hospitable.

Intel failed to recognise how quickly smart mobile devices would start to make inroads into the PC market and is subsequently chasing the likes of Qualcomm, Samsung Holdings and ARM Holdings in the smartphone space, where it has a market space of less than one per cent.

That’s not to say that Intel can’t turn things around but it certainly misjudged the pace at which the mobility paradigm reached critical mass. Morrow’s statement about Vodafone Australia’s failure to prepare for the smartphone revolution is a pertinent example that how quickly an established operator, irrespective of the sector, can be pushed to the brink.

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