Fourth AU MNO arises from spectrum auction

Nicole McCromick/Ovum
Ovum
The auction of the 700MHz (the so-called “digital dividend” band) and 2.5-GHz spectrum bands in Australia concluded on May 7, raising A$1.96 billion ($1.96 billion).
 
The major talking points to come out of the auction were Vodafone’s decision not to bid for spectrum and Australia’s largest MVNO, TPG Internet, potentially emerging as a fourth MNO in the country.
 
In the auction, Telstra, Australia’s largest operator, set itself up to preserve its LTE network lead in both metropolitan and regional/rural Australia. The second-placed operator, Optus, secured enough spectrum to enable it to launch targeted LTE services in regional/rural areas in competition with Telstra.
 
However, Vodafone – which is the smallest of the existing MNOs – did not bid for spectrum in the auction, despite initially applying to participate.
 
Instead, Australia’s fourth-largest ISP, TPG Internet, secured a nationwide license to use spectrum in the 2.5GHz band and announced plans to build a network. Should Vodafone’s current turnaround strategy fail to please its shareholders, TPG could emerge as a buyer.
 
Telstra scoops up largest spectrum pool at auction
 
Telstra secured 2×20MHz of spectrum in the 700-MHz band in the auction, which was just shy of the maximum allowable bid of 2×25MHz for a single bidder. It sees network supremacy as a significant differentiator, not only in terms of the network’s extensive breadth and depth, but also in terms of spectrum.
 
Telstra believes that a key success factor is ensuring that it has sufficient spectrum to serve regional/rural Australia with high-speed broadband services, and acquiring 2×20MHz of spectrum in the 700-MHz band will help it to guarantee that.
 
Telstra also secured the maximum allowable spectrum allocation of 2×40MHz in the 2.5-GHz band. Its total bid amount was A$1.3 billion.
 
Optus will pay A$649.1 million for 2×10MHz in the 700-MHz band and 2×20MHz in the 2.5-GHz band. The fact that it acquired spectrum in the 700-MHz band is encouraging because it cannot afford to give Telstra too much of a LTE head-start in regional/rural areas. Optus also has enough spectrum in the 1800-MHz band and high-bandwidth spectrum in the 2.3-GHz, 3.5-GHz, and now 2.5-GHz bands to support a metropolitan LTE strategy.
 
Now that it has also acquired spectrum in the 700-MHz band, it can target key regional/rural areas with LTE. The onus is now on Optus to successfully bring its TD-LTE service to market, which is due to launch in early 2H13 alongside its existing LTE1800 service. However, if it is to close the gap on Telstra, Optus will need to ensure that its entire business proposition – including customer service, pricing innovation, retail strategy, and marketing – matches its improved network speed, performance, and reach.
 
Spectrum sold marginally higher than the reserve price in the auction. While all spectrum in the 2.5-GHz band was sold, a 2×15MHz block of 700-MHz spectrum failed to sell. This is not surprising given that the government’s reserve price of A$1.06 per MHz per population for 700-MHz spectrum was estimated to be approximately 30% higher than similar spectrum prices in other countries. The leftover 700-MHz spectrum will likely be auctioned in one to two years’ time.
 
However, there is no guarantee that the government will get the same price that it got at this auction; pricing will depend on several factors, including the demand for 700MHz spectrum at the time. In Europe, for example, recent auctions of LTE-suitable spectrum have raised significantly less than earlier auctions of spectrum in the same band.
 
Uncertainty hangs over Vodafone’s future in Australia
 
Vodafone failed to bid for any spectrum at the auction. The operator already has abundant spectrum holdings in the 1800-MHz band (including at least 15MHz of contiguous 1800-MHz spectrum in all capital cities), which it plans to use to launch LTE services in metropolitan areas from June 2013. It could also refarm its spectrum in the 850-MHz band (which is currently used for 3G services) for LTE.
 
However, Ovum believes that VHA – which is a joint venture between the Vodafone Group and Hutchison – took a considerable risk by not bidding for spectrum in the 2.5-GHz band as it originally planned. Compared to the 700-MHz band, the spectrum in the 2.5-GHz band was very affordable and would have been useful for long-term capacity expansion.
 
On the other hand, TPG Internet, which is Australia’s largest MVNO with approximately 300,000 mobile customers, paid just $13.5 million for 2×10MHz of spectrum in the 2.5GHz band. Currently, TPG sells mobile services as an add-on to its existing fixed broadband customers, with the revenues going straight to its bottom line.
 
TPG plans to incrementally build out an LTE network in heavy usage areas. Customers will be able to use this network while they are in the area that it covers. When outside of these specific areas, customers will continue to use Optus’ network on a wholesale basis.
 
A more aggressive option for TPG could involve it targeting new and existing value-seeking customers as it seeks to recover its network costs. This could force some MVNOs out of business and would put more pressure on Vodafone, which has a considerable price-sensitive subscriber base.
 
In the long term, Ovum believes that something has to give in the Australian mobile market. We expect Optus and Vodafone to engage in closer network co-operation in an effort to bridge the gap between themselves and Telstra.
 
Alternatively, if Vodafone does not achieve its desired turnaround strategy and its shareholders decide on an exit strategy, Optus and TPG may look to collaborate more closely. Should the Vodafone Group or Hutchison look to sell out of the joint venture, TPG is relatively well placed to make a bid for Vodafone.
 
Nicole McCromick is a senior analyst for industry, communications and broadband at Ovum. For more information, visit www.ovum.com/

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