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Does 2degrees have a point about spectrum and mobile competition?
Posted on 3-Dec-2013 17:58 by Bill Bennett | Tags Filed under: Articles

Third-place mobile carrier 2degrees wants the Commerce Commission to step in to the 700 MHz spectrum auction.

Brandishing a recently commissioned Covec report, the company says auctioning the remaining unsold pair of 5 Mhz spectrum to Vodafone or Telecom NZ will undermine market competition.

Actually the report has that argument the other way round. It says competition between carriers would be ďsubstantially enhancedĒ if the watchdog vetoed Vodafone and Telecom NZís applications to buy the extra spectrum.

That sounds plausible.

More spectrum means better 4G

Whoever holds the most 4G spectrum gets to offer the fastest data speeds. All other things being equal – theyíre not but stick with me here – this means the auction winner will own the best and most commercially attractive 4G service.

In other words a relatively small additional investment could buy a commanding market position.

Thatís too good an opportunity for a carrier to miss.

Vodafone in the box seat

The most likely winner will be Vodafone. It has the deepest pockets which means it can bid more. It also has the largest, most lucrative customer base. That means Vodafone will recover any investment faster than a rival. Buying the additional spectrum will lock the company in a market leader for the foreseeable future.

Telecom also has the option to bid for the spectrum.

Regardless of who wins the battle for the last block, itís clear 2degrees will be left with the smallest amount of spectrum. And that means it will be weakest 4G player.

The Covec report says letting the dominant players buy the spectrum will leave 2degrees with higher long-term capital costs and less ability to win high value customers.

The state of mobile market competition

In the Commerce Commission’s 2012 Telecommunications Market Annual Report Vodafone’s mobile market share is at 42 percent, Telecom NZ has 37 percent while 2degrees is on 20 percent.† The remaining 1 percent is MVNOs, which was mainly TelstraClear which has since become part of Vodafone.

These numbers are simply the share of mobile connections. Not all connections are equal. One industry insider told me, off the record, that when it comes to revenue share, Vodafone has more than half the market. Thatís because the companyís customers spend more on their phones.

Telecom NZís customers are also more lucrative than 2degrees. Itís possible 2degrees accounts for less than 10 percent of mobile revenues.

While Vodafone has a more extensive network than 2degrees, the costs of running a nationwide mobile network are fixed. The business model means companies need to get their customer numbers and average revenue per customer sitting nicely above the cost of building and running a network.

Vodafone is clearly on the right side of that equation. Telecom NZ is somewhere on the right side of the balancing act. 2degrees almost certainly is not. Despite quickly building market share, the company is struggling to turn a profit.

What is the right competition policy here?

Governments and regulators want to encourage competition, but not necessarily at the cost of discouraging investment. 2degrees has done much to bring about a competitive mobile market in New Zealand, but the cost of doing so has been huge.

Thereís a risk all that work will be undone, that 2degrees is not a viable alternative and we return to a cosy duopoly. Oddly, thatís not what Vodafone or Telecom NZ really wants. From their point of view its important that there is a least the perception of market competition – that way thereís little political pressure to intervene in the market.

On the other hand, not auctioning the unsold spectrum also carries risks. And intervention in order to protect the weakest player in a three-way market starts to look like punishing winners, rewarding losers – hardly the way to get the best out of the overall market.

You could also argue that auctioning the remaining spectrum to the highest bidder will maximise the economic value of the spectrum and deliver the greatest benefit to the largest number of New Zealanders.

In truth itís unlikely 2degrees will get its way. Thereís little political support for its position and no mobs of interest groups lighting torches and gathering pitchforks to march in the companyís defence.

That wonít happen until someone – perhaps the Prime Minster – blurts out in public thereís a possibility the company will go bankrupt. Which is the kind of thing that just doesnít happen in the real world.

[digitl 2013]

digitl on Google+

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