Australia’s 700MHz auction unlikely to be a sell-out: analysts

A portion of the waterfront 700MHz spectrum in Tuesday’s Digital Dividend auction could go unsold despite aggressive bidding expected from Telstra, according to mobile industry analysts.

The Australian government will auction 2x45MHz of the radio frequencies in the 700MHz band but at a high price that may discourage Optus from bidding for as much it’s allowed, the analysts said. Vodafone Hutchison Australia has already indicated that it won’t bid for 700MHz spectrum. The Digital Dividend also includes an auction of spectrum in the 2.5GHz band.

The spectrum auction – one of the largest ever held in Australia – will commence at 9am on 23 April 2013. The ACMA anticipates that the auction will run over several weeks, with auction results known in mid to late May 2013.

Background: What is the Digital Dividend?

What actually happens won’t be known until the end of the auction when the Australian Communications and Media Authority lifts its confidentiality rules preventing participants from speaking publicly about the auction.

What is known is that each telco will be allowed to bid for as much of 2x25MHz of the 700MHz spectrum. The spectrum carries a reserve price — the minimum amount accepted for bids — of $1.36 per MHz POP (a telecom term measuring the amount of spectrum owned in a region multiplied by the number of people reached).

That means that a telco seeking all 25MHz would end up paying $1.56 billion if it was sold at the reserve price. It would cost $1.25 billion to secure the remaining 2x20MHz at the reserve price. Paying that much is likely to dent Telstra and Optus’s credit ratings, according to a recent Moody’s report.

Analysts who spoke to Computerworld Australia said they only expect one round of bidding on the 700MHz spectrum, meaning it will sell for the reserve price. Telstra, which currently dominates the Australian mobile market, will likely take the majority of the 700MHz spectrum available, they said.

Telstra will go for as much spectrum as it can get "given their aggressive wireless strategy," said Gartner analyst Geoff Johnson said. "Money's not an issue ... You can be rather sure they're going to get the position that they want."

Telstra will seek at least 2x20MHz of the spectrum and may go for the maximum 25MHz, Ovum analyst David Kennedy said earlier this month at the CommsDay conference. Telstra has a stated strategy of seeking network and spectrum "supremacy," but the high price of the spectrum could keep Telstra from buying the full 2x25MHz, he said.

"Supremacy means more than superiority," Kennedy said. "It means being so powerful you can act virtually without regard to what your enemies are doing."

In contrast, Gartner’s Johnson predicted that Optus will be "sufficiently" aggressive to maintain its position following Telstra.

Kennedy said Optus may only bid for 2x10MHz of spectrum and 2x15 MHz at most. Adding the lesser amount would put Optus "on par" with Vodafone in terms of the telcos’ supply of low-frequency spectrum, he said.

"Right now, Optus is actually behind both Vodafone and Telstra ... and this is a heaven-sent opportunity to get some good quality low-frequency spectrum."

Independent telecom analyst Chris Coughlan predicted Optus could take up to 2x20MHz of the spectrum, but may be content with less. The exact amount “will depend on the depth of [Optus and parent company SingTel’s] pockets, he said.

“I haven't been privy to internal discussions in Optus but my estimate is that there is a 70 per cent chance that at least 5 of the 45MHz will be unsold,” he said.

“If Optus don't buy, or only buy say 10MHz then there could be a $625 million to $1.25 billion shortfall in expected government revenue next year.”

Ovum’s Kennedy said he believes at least 2x5MHz of the spectrum won’t be sold and the actual amount could be up to 2x15MHz. Any unsold spectrum "would be put out for auction again at some later date," likely to be at least three years from now, he said. Coughlan agreed: “The ACMA may auction the spectrum again at a later date, but probably not before it becomes available to those that purchased spectrum” in 2015, he said.

If there is a re-auction, this year’s holdout Vodafone could decide to bid for 700MHz after all, said Kennedy. But Coughlan said he doubts it: “I don't think they will contend for this spectrum in the next few years as they continue to chase profitability."

Page Break

Building capacity with 2.5 MHz

While perhaps not as “beachfront” as the 700MHz spectrum, analysts predicted a competitive – and much longer – auction for the 2.5 GHz spectrum to be sold in the Digital Dividend auction.

The higher frequency of 2.5GHz spectrum makes it less effective for reaching rural areas or improving in-building coverage, but the mobile industry believes the band is critical to bolstering data capacity for 4G service in urban areas where coverage is already strong but high data demand is straining mobile networks.

While the 700MHz auction will likely end in one round of bidding, Ovum’s Kennedy predicted the 2.5GHz auction could go much longer because of its relatively low reserve price. The government is selling the 2.5GHz spectrum at just 3 cents per MHz POP, compared to $1.36 for the 700MHz spectrum.

As with 700MHz, Kennedy predicted Telstra will be a "strong bidder" for the 2.5GHz spectrum. Of Australia’s top three telcos, Telstra has the least amount of spectrum at that frequency and is only number two for 1800MHz, he said. "I think they're going to try and make up for it by bidding hard at 2.5[MHz].”

Background: 4G in Australia: The state of the nation

While Vodafone isn’t expected to bid for 700MHz, the company has said it would consider a move for some of the 2.5GHz spectrum.

Gartner's Johnson said Vodafone will focus on 2.5GHz spectrum because the frequency is suited to metro areas where Vodafone is focusing its investment.

However, Kennedy noted that Vodafone has a great amount of 1800MHz spectrum and it probably would not be a "disaster" if the telco chose not to bid, he said. "They can afford to be fairly choosy."

Meanwhile, Optus already has significant spectrum in the nearby 2.3GHz band, so it may have less need for 2.5GHz, said Coughlan.

Kennedy agreed but said not to count out Optus. "It will be interesting to see whether they do go hard on 2.5 [GHz] or not because I think that might tell us something about what they expect to see happen over the medium term on 2.3 [GHz]."

Follow Adam Bender on Twitter: @WatchAdam

Follow Computerworld Australia on Twitter: @ComputerworldAU, or take part in the Computerworld conversation on LinkedIn: Computerworld Australia