Red ink, but no undies at Conroy's auction

"If I say to you, everyone in this room, if you want to bid in our spectrum auction you’d better wear red underpants on your head… I’ve got some news for you. You’ll be wearing them on your head."

That was Stephen Conroy last year, arrogantly telling a US audience that the chief executives of the three big wireless carriers – Telstra, Optus and Vodafone – would do whatever he told them and pay the government whatever he demanded. Or else.

The ‘or else’ was that they would miss out on the spectrum released via the ‘digital dividend’ auction; spectrum essential if they wanted to continue to roll out their 4G services.

So certain was Conroy that the chief executives would meekly comply with his bombastic demands that he set reserve prices for the spectrum at levels which were, by international standards, stratospheric and insisted they pay upfront for spectrum they wouldn’t actually receive until next year.

Vodafone’s Bill Morrow declined the invitation to wear Conroy’s red undies and opted not to participate in the auction at all. Optus’ Kevin Russell, and perhaps more surprisingly Telstra’s David Thodey, participated but bought significantly less spectrum than the maximum they were permitted.

The carriers were allowed to acquire a maximum of 50 MHz in the 700 MHz band and 80 MHz in the 2.5 GHz band. Telstra bought 40 MHz in the 700 MHz band and its full limit of 80 MHz in the 2.5 GHz band, while Optus acquired 20 MHz in the 700 MHz band and 40 MHz in the 2.5 GHz band.

In total (with a minor contribution from TPG) the carriers paid $1.96 billion for the spectrum – Telstra $1.3 billion, Optus $649 million and TPG $13.5 million – which was at least $1 billion less than Conroy and the government anticipated, if not more.

Telstra had been expected to pay more than $1.8 billion to acquire its maximum entitlement of the spectrum in both bands and Optus was expected to pay about $800 million for the spectrum it required. Thodey and Russell in their own way refused to do as Conroy had directed, aided by the impact of Vodafone’s withdrawal on the level of competitive tension within the auction.

Conroy had already been forced by the threat that Optus might also withdraw completely from the auction to shift the payment date from the completion of the auction to next year. The auction outcome ought to leave him red-faced, at the very least.

In the context of the financial chaos enveloping this government another $1 billion disappearing from the revenue line could be regarded as of little consequence given the scale of the deficits looming. Alternatively, it could be seen as another indictment of the Gillard government’s inability to link its spending to the revenue it actually receives, as opposed to the revenue it hopes it might receive if its most optimistic assessment of the future were realised.

While Telstra didn’t acquire as much spectrum as it could there was never much doubt that it would participate strongly in the auction of spectrum that has been used for analogue transmission by the free-to-air television networks.

Telstra is committed to maintaining the quality and reach advantage of its wireless network, which has been stressed by the massive growth in its customer base in recent years as Vodafone’s network degradation (now being remediated) caused its customer base to implode.

The new spectrum will enable Telstra to cope with the explosion in demand for wireless data services from its still-expanding customer base. Telstra is already looking to trial the next generation of wireless broadband technologies, or Long-term Evolution-Advanced upgrades.

Optus, which already had spectrum suitable for 4G services in metropolitan areas because of the $230 million acquisition of Vividwireless from Seven Group last year, could have stayed out of the auction for the more expensive 700 MHz spectrum.

That might, however, have threatened its network quality outside the metropolitan areas unless it was prepared to invest heavily in more infrastructure. It now has sufficient spectrum across a range of bands to have some optionality in delivering its own 4G services.

Vodafone, under some financial pressures albeit backed by parents with ultra-deep pockets, has a very strong existing position in the 1800Mhz band that will support its ambitions in metropolitan areas for the next few years and also has an infrastructure-sharing arrangement with Optus. It is hoping that recent heavy investment in its network will enable it to rebuild its customer base and put it in a position to participate in spectrum purchases in a few years’ time.

ACMA has said it shouldn’t be assumed that the $1 billion or so of unsold 700 MHz spectrum would be re-represented to the market in the near term, or that it would be offered at a price below the reserve price Conroy set for the auction that has just been completed.

Conroy said today that he intended to return that unsold spectrum to the market ‘’in the next two or three years.’’

One suspects that when that next auction is held, regardless of who the communications minister might be, there won’t be any references to chief executives wearing red underpants on their heads and the government at that time won’t be quite so optimistic when it writes the expected proceeds into its budget forecasts.