Entry No.9e

IT Writers Awards

Secrecy surrounds the closely fought mobile spectrum auction, but there is already one big winner -- government coffers. Selina Mitchell reports

IN one small, grey, windowless government office, sparsely dotted with computers, the mobile phone industry's future is being decided. This is the headquarters for the Communications Minister Richard Alston's latest and most lucrative spectrum auction, which is raking in millions of dollars in bids daily. But the only indication of new bids is a quick beep and a small message on the auction computer. Most of the time no-one is even there to notice the online activity. But there are plenty of people interested in the action: progress is recorded after every round on the Australian Communications Authority Website.

Observers have been surprised by the dizzy heights bidding has reached, driven by potential new carriers. The traditional network carriers -- Optus, Telstra and Vodafone --are vying for the remaining lots of 1800MHz spectrum, with three new players each hoping to become the provider of the fourth GSM mobile national network: Hutchison, One. Tel and Primus. (Telco equipment vendor Siemens paid the $10,000 application fee, but dropped out before bidding even began.) It may be a public auction, but there is plenty of secrecy surrounding the bidding for mobile spectrum, with most refusing to comment on any aspect of the process. ``We are not saying how long we expect the auction will take because you can work out mathematically from that how much value we are placing on the auction, and that gives an indication of our movements,'' one says. 

Those that do comment are regarded as naive by the experienced, who say any comment can give away important hints on strategy. It seems there is good reason for their reticence. Radio frequency spectrum is the lifeblood of mobile telecommunications carriers, and it doesn't come cheap. The last ACA 800MHz and 1800MHz auction, involving 230 lots, netted about $350 million, and the competition was minimal that time. In the latest 1800MHz auction, minimum bids started where the 1998 auction left off. 

There appears to be no limit to the coffers of the some carriers -- one of the players says quietly that it has at least $100 million to invest in spectrum. Some say the most prized lots may reach values closer to $150 million. But with 38 per cent of Australians (seven million) being active mobile phone users, and many more expected to join the rush, the expense is well worth it, The Australian was told. Not surprisingly, the two strongest areas of bidding are Sydney and Melbourne, but spectrum is also on offer in Adelaide, Perth and Brisbane. The ACA, in charge of running the high-stakes process, spent around four months preparing for the event. 

The client and server software used to drive all the lucrative simultaneous ascending auctions was developed by the ACA for just $150,000. Most of the small spectrum marketing group are old hands at the auction process, but even their eyes bulged last week when one round's bids were raised almost $40 million in just 30 seconds, and the day's total bids reached $66 million. And apparently, none of the carriers blinked.

A little more than a week before, on the first day of the auction, senior ACA executives had waited anxiously for the first bids. Sooner or later the bidding must slow, even for the big spenders. After the dust settles, and it is likely users will pay for the big bids through higher tariffs. 

Any lucky carrier setting up a new network will need to spend a few hundred million more on the infrastructure. Telstra, for example, estimates the cost of its new CDMA network at $600 million. But telecommunications analyst Paul Budde doubts tariffs will increase. He says: ``These spectrum costs are only a small part of total costs, but it is a nice argument they can use, isn't it?'' ``Prices will come down because there will be sufficient players to create more dynamic in the market -- at the moment there is a cosy triopoly.'' Budde says even if only one more physical network is set up as a result of the auction, many more competing virtual network operators will emerge. ``This is an indication for the first time that the industry is moving from the traditional fixed network to the mobile network, and it opens up new markets and new marketing models,'' he says. In an effort to increase competition, limitations were placed on the amount of spectrum each carrier could purchase.

Due to government spectrum caps, no carrier is allowed to acquire more than two blocks of 20MHz of all 1800MHz frequency (including that sold in 1998). Therefore the three major players, who already have a large amount of spectrum, can only purchase about another two blocks of 5MHz in most of the cities. This could explain the early, and more eager, bidding from the newplayers, which are seeking up to two blocks of 20MHz in each area.Continued -- Page 54 From Page 53 The auction itself is relatively simple. Each bidder has a nominated eligibility based on what it hopes to win.

Initially there are two auction rounds daily, and bidders must bid on 70 per cent of that eligibility to continue in the auction. This is a way to keep the auction active. Then stage two starts, with four rounds daily. Once bidding starts to plateau, the ACA jumps in again and raises the eligibility to 95 per cent. The auction ends when the bidding stops, and no-one can predict when that will happen. Eligibility status is one indication carriers use to check up on each other. If the eligibility level goes down, it is an indication ofbidding being wound back. Guessing games, rumours and a bit of psychological warfare are all helpful in the auction process, one carrier representative says. 

Another, Primus chief executive Ravi Bhatia, says in the early days there were a lot of ``silly bugger games'', but as the process continued and the stakes increased, bidders would get down to business. It is interesting that the carrier most inexperienced in the auctionprocess is the most outspoken on the subject. Bhatia admits Primus was a late arrival: ``We decided to enter the race late -- two days before the licence deposit was required.'' He would be happier if the incumbents were not involved in the auction at all. They are attempting to stifle competition from new players and don't need more spectrum, he says. But what will the lucky winners do with their airspace haul? The incumbents are expected to use it to strengthen their position heading towards the introduction of third-generation technologies, but they are not dependent on it. It is the new players who are more desperate to win. One.Tel already owns a small package of spectrum. It announced plans for a network last April and signed a roaming agreement with Telstra in December. Primus also hopes to roll out its own network, and Bhatia says its pockets are deep, as this would be the telco's ``jewel in the crown''.

If it wins spectrum, Primus will begin building almost immediately, with a war chest believed to be about half a billion dollars. Hutchison is keeping its cards very close to its chest, saying it will announce plans if and when it wins spectrum. The company is busy building the Sydney-Melbourne CDMA network, expected to be launched commercially by mid-year. Many were surprised by Siemens' initial interest in the auction. InDecember, information and communications networks general manager Andrew Levido confirmed discussions with an unnamed telco were taking place.``We have identified this as a key growth area,'' he told The Australian at the time. The deal would have given Siemens its first local GSM hardware contract, but Siemens never started bidding. 

There will be other losers from the auction process, but they will not include government coffers. But some future auctions may not be so lucrative. The ACA has already developed possible allocation and licensing scenarios for datacasting spectrum. But there are industry concerns that there will be few bidders after the federal Government's decision to narrowly define datacasting possibilities.

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