Leftover 4G spectrum not dead, just resting

In missing out on AU$1 billion in expected revenue from the 4G spectrum auction, the government has failed, according to Shadow Communications Minister Malcolm Turnbull, but would there have been any other bidders anyway?

A total of 30MHz of the 700MHz spectrum band was left over after the digital dividend auction, where Telstra picked up 2x 20MHz and Optus picked up 2x 10MHz in that band. Only four companies participated in the auction process: Telstra, Optus, Vodafone, and TPG, and Vodafone had already indicated that it was not going to buy any of the 700MHz spectrum.

Together, Telstra and Optus could have bought out the entire 700MHz spectrum band, because each company would have been allowed to buy a maximum of 2x 25MHz. However, the capacity that the companies have obtained today will no doubt be more than sufficient for 4G services for the next few years, given their spectrum holdings in other bands and how much 2.5GHz spectrum they also picked up at the auction.

TPG was a surprise entrant in the auction, but given that it isn't in the business of building mobile networks just yet, it chose to spend much less than the other two carriers, and therefore only invested in the 2.5GHz band, where the spectrum was significantly cheaper.

In a press release today, Turnbull said the auction was "another Labor bungle", because the expected AU$3 billion from the auction only reached just under AU$2 billion due to the leftover 700MHz spectrum. He said that the reserve price was "extremely costly by global standard", something that Optus had agreed with before begrudgingly picking up some of the spectrum.

The government has previously stated that the price was only determined after Vodafone indicated that it wouldn't participate in the 700MHz auction, meaning the government was seeking to get as much out of the other two telcos as possible, and hoping that in lifting the cap, Telstra and potentially Optus would buy much more spectrum than they ultimately did.

There wasn't any hint at that stage that another company would jump into the fray.

At the time of announcing the reserve price, the Australian government was pushing to deliver a surplus in this financial year, and the revenue from the auction was a key part of that push.

Now that the government has given up hopes of delivering a surplus in the next financial year, the pressure is off to get in the revenues as quickly as possible, and the government showed this by pushing back the payment for the spectrum until the second half of 2014. Leaving spectrum unsold will hurt the budget bottom line in the short term, but ultimately it is still an asset that can be sold.

Keep in mind that the 700MHz spectrum will not be made available to Optus and Telstra until the beginning of 2015, and Telstra has already indicated that there will need to be a few more networks jumping on to use the APT700 band (the 700MHz stack for the Asia-Pacific region) before there will be compatible devices.

This means that we still have several years before the spectrum is even useful, by which time millions of people will be using 4G devices in Australia. When the government of the day — whichever one it happens to be — then tries to sell off that spectrum, it's not too difficult to see that the spectrum would be snapped up very quickly by Optus or Telstra, which may find that demand is already exceeding what they were expecting.

A potentially revived Vodafone may also ultimately find that while its existing holding of 20MHz in the 1800MHz spectrum band works well in metropolitan areas for long-term evolution (LTE), the company might struggle at delivering 4G to regional Australia, which needs a lower band spectrum for LTE to reach across long distances. Picking up 700MHz would also help Vodafone to get better in-building coverage for 4G.

Or there might be another surprise guest. TPG again? Or iiNet?