Market Insight

High prices cool demand for spectrum in Australia

May 06, 2013

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Australian telecoms regulator ACMA announced that Telstra, Optus and new entrant to mobile network market TPG Internet have won spectrum licences in its recent auction. The auction raised AU$1964m (approximately €1583m) for the federal government. In the valuable 700MHz digital dividend block Optus won 2x10MHz while Telstra won 2x20MHz. In the 2.6GHz band, Optus won 2x20MHz, Telstra won 2x40MHz and TPG came away with 2x10MHz.

Notably absent from the auction was the country's third largest operator Vodafone Hutchison Australia (VHA) which declined to bid due to the high reserve prices set. As a result, 2x15MHz of 700MHz spectrum went unsold and the auction process only generated a 0.2 per cent premium of the total reserve price of the lots sold. The new 700MHz licences will become operational in January 2015 while the 2.6GHz licences come into force in October 2014.

Since being formed by the merger of Vodafone and Hutchison 3G Australia four years ago, VHA has struggled to break even, most recently reporting losing both subscribers and money in 2012. Subscriptions dropped 6.3 per cent to just under 6.6m, while the operator posted a net loss of over AU$800m on $4bn of revenues. In this precarious situation, VHA's decision to avoid this spectrum auction appears perfectly rational. However, with deep-pocketed parents it should have been possible for VHA to bid. Indeed, VHA was set to participate in the auction prior to the announcement of the reserve prices.

The Australian government set a reserve price of AU$311m on the 2x5MHz blocks in the 700MHz band. This put the price paid per MHz per head of population at AU$1.40 (approx €1.13). For comparison, most European 800MHz auctions were priced in the €0.40 to €0.80 per MHz Pop range. The fiercely competitive US 700MHz auction in 2008 reached just under €0.80per MHz Pop. As such, it is unsurprising that at least one operator baulked at the prices being asked for. While the government set out to maximise revenue with a high reserve price, the result is unused spectrum and poorer mobile broadband coverage and capacity for Australians, as well as the government missing its revenue target from the auction.

It is important to remember that this spectrum was never a necessity for Australian operators to launch 4G services. Both Optus and Telstra have refarmed 1800MHz spectrum for 4G services which are currently commercial. Since launching its 4G network in August 2011, Telstra has sold over 2.1m 4G devices which would represent approximately 14 per cent of its subscriber base. VHA has an abundance of 1800MHz spectrum in the key markets of Adelaide, Brisbane, Melbourne, Perth and Sydney (in excess of 2x20MHz in each); and it plans to launch 4G services on this band later in the year. This will enable VHA to compete in the most important markets without spending hundreds of millions of dollars on licences.

TPG Internet is mainly a fixed line player with 565 thousand subscriptions (9.5 per cent market share) and its own extensive fibre network in the south-east of Australia. It also functions as a mobile virtual operator with just over 300 thousand subscriptions reported in January 2013. IHS figures indicate that TPG has less than one per cent of the Australian mobile market at the moment. TPG has not indicated what its plans are with its newly acquired spectrum, but with so little spectrum, IHS anticipates that it will wholesale its 4G capacity to the other operators. Due to its comparatively smaller spectrum holdings and its existing backhaul deal with TPG's fibre network subsidiary Pipe, VHA are the obvious candidates to lease this capacity.


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