Could auction languor bring NBN Co into mobile 4G?

In the wake of his recent moves to shore up the reserve price of the upcoming "digital dividend" auctions, I recently asked Communications Minister Stephen Conroy what he would do if there were no bids on the 700MHz spectrum — from which the government is planning to extract at least AU$3 billion.

He wouldn't comment on such speculation, but with the formal withdrawal of Vodafone Hutchison Australia (VHA), and the risk of a filibuster from Optus and Telstra, Conroy — fresh from celebrating his 50th birthday and, I might also assume, the announcement that NBN Co is ahead of its own rollout forecasts, for what they're worth — will most certainly be weighing the government's options should such an outcome come to pass.

While VHA has already folded, and Telstra will surely bid on the spectrum it needs to extend the footprint and capacity of its 4G network — and early users of its existing services know how badly this is necessary — the participation of Optus is the big wildcard here.

Optus initially indicated that the per-capita figures behind the government's $3 billion reserve price made participation in the auction difficult to justify, although its revelation this week that it will at least put its hand up for a ticket suggests that it is being realistic. It is a risky proposition, however: without 4G to counter Telstra, Optus will become… well, it will become VHA, really. And nobody wants that.

But what if Optus and Telstra's combined bidding still falls far short of the government's reserve? Conroy could lower his expectations and let the Budget eat the difference; negotiate favourable terms with unknown third parties to step into the market; beg VHA to reconsider its abstinence; or any other strategy you care to think of to ensure full takeup of the digital-dividend spectrum.

With so much up in the air, it's worth considering another option: if the government can't get what it needs from the private sector, why couldn't Conroy just as well give Telstra and Optus what they're bidding for, and use the remaining spectrum to start a government-owned mobile carrier?

It wouldn't need to be a retail telco; that is of course a grossly inappropriate role for the government, especially in a market where competition has for many years been anecdotally working well.

But what would prevent Conroy from allocating a portion of the digital-dividend spectrum to a new company — putatively a division of NBN Co — which would provide wholesale 4G wireless services to private-sector telcos that would then operate as mobile virtual network operators (MVNOs) on an ongoing basis?

NBN Co already has, or is building, an extensive network of backhaul that would support the rollout of appropriate mobile towers. The company could then contract the likes of Crown Castle Australia — which already owns and manages 1600 mobile towers around the country on behalf of 2G, 3G, and 4G operators — to maintain the physical infrastructure and transceivers to deliver 4G services.

Leasing unsold spectrum would allow the government to extract value from that spectrum, which would otherwise lie fallow and help paint the Budget bottom line that queasy shade of red that politicians and economists hate.

Because the digital-dividend spectrum lies at distance-friendly 700MHz, instead of the jerry-rigged and shorter-range 1800MHz solutions currently on the market, NBN Co wouldn't even need to roll out that many 4G towers.

The result would be a widespread, wholesale-only 4G network that would be instantly available to even smaller telcos and NBN retail service providers (RSPs) looking for additional value-added services. Such companies are currently limited to MVNO solutions from Vodafone and Optus — notwithstanding the blip from Telstra's late-in-the-game decision to resell 3G services.

In the current mobile market, it is Optus' dominance of the MVNO market that can be said to be a limiting factor. Optus customers, including Amaysim, Virgin Mobile, Dodo, Primus, iiNet, TPG, and Woolworths Mobile, are locked into whatever pricing plans Optus cares to offer them; I imagine all would relish a bit more competition in the MVNO space, since the only other real option is VHA.

It's worth noting that Optus itself has presaged a shakeup in the MVNO market after the company recently outlined its strategy to bolster revenues by pushing its MVNO customers away from price-competitive strategies.

"We've started to reassess some of the value that we're seeing from some of the wholesale deals," Optus Wholesale and Satellite Managing Director Rob Parcell told industry journal CommsDay last month. "We are starting to see a situation where we're just trading customers between wholesalers … we really find that approach has hit its last stage."

If Optus is concerned that it's not recovering enough value from its extant spectrum, and that its MVNO business has become a haven for discounter mobile operators that are affecting its own margins, it's unlikely that the company is going to be too happy about buying up premium-priced 4G spectrum from the government and then releasing it to cut-rate MVNOs so that the same thing can happen all over again.

Here, then, may be the opportunity for Conroy to make a bold intervention in the 4G mobile market — providing a wireless carrier of last resort that will leverage the NBN to provide a wholesale mobile platform on which cut-price operators can build their own MVNO businesses without fear of being cut off by a profit-minded supplier.

Leasing the spectrum that remained unsold after the auction would allow the government to extract value from that spectrum, which would otherwise lie fallow and help paint the Budget bottom line that queasy shade of red that politicians and economists hate.

Taking a proactive approach to ensure full usage of digital dividend spectrum might be one way for Conroy to reverse the consequences of [allowing Telstra too much time to establish its rival 4G service] — and to lay the new groundwork for a fully competitive 4G mobile market.

It would also allow the government to improve mobile service, particularly in the outlying and regional areas in which profit-minded Optus, Telstra, and VHA are loathe to invest. This would address the concerns of folks like Victorian ICT Minister Gordon Rich-Phillips, who has invented a special kind of awkward — ignoring the NBN and calling for a federal strategy to improve mobile coverage — that addresses his conflicting needs to both ensure NBN delivery to Victorians, and to mercilessly bag Labor because it's Labor.

Opponents of this suggestion will argue that NBN Co is already spending enough money on its fibre network, that we already have enough competition in the mobile market, and that we can't afford or don't need another mobile network. Yet the cost wouldn't be ridiculous. If you recall, Telstra built its Next-G network for around $1 billion back in 2006; double it to allow for inflation, and you'd be talking about a brand-spanking new 4G wholesale network, with particular coverage to fix blackspots in rural and regional areas for, at a guess, $2 billion to $3 billion.

I recently opined that by delaying the digital TV switch-off, Conroy had created a problem by allowing Telstra too much time to establish its rival 4G service. Sure, Telstra wants 700MHz spectrum, but it has learned to live without it; Optus has done the same and may end up partnering with VHA to perpetuate this strategy, instead of paying for what it perceives to be premium 4G.

Taking a proactive approach to ensure full usage of digital dividend spectrum might be one way for Conroy to reverse the consequences of his earlier decision — and to lay the new groundwork for a fully competitive 4G mobile market in every part of the country.

What do you think? Would it ever work? What should Conroy do if 4G auction bidding fails to reach the government's reserve price?