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NZ Communications Ltd

Response to the Ministry of Economic Development: Discussion paper on Radio Frequency Auction 2.3GHz and 2.5GHz bands


Public VERSION

September 14th 2007

NZCL Public Policy Team



SUMMARY OF KEY CONCLUSIONS

INTRODUCTION

EXECUTIVE SUMMARY


Comments on the WiMAX 2.3GHz and 2.5GHz spectrum discussion paper

1. Process

2. Technical descriptions

3. Pro competition measures

4. Eligibility to Bid

5. Precondition to Bidding Process

6. Maori interests

7. Managed Spectrum Parks


Appendix


1. Co-location practices in NZ and relevant impact on WiMAX deployments in NZ

2. Review of the Commerce Commission Mobile Market report of October 2006 and the relevance to the WiMAX auction

3. Independent expert review of HSPA and Mobile WiMAX deployment issues

4. Reference comments from “Allocation and Acquisition of Radio Spectrum” (Moore Wright Associates)

5. Comments on Cabinet Economic Development Committee

6. References from Ovum Consulting Market Study for UMTS 900 (profile of NZ’s 900 3G market)

7. Profile of the NZCL relationship with Hautaki and support for the Hautaki Spectrum

8. Profile of “NZCL” NZ Communications Limited



SUMMARY OF KEY CONCLUSIONS

  • Effective competition in an entrenched wireless market comes from combining the natural resources of spectrum with competition policy. NZCL believes that the Commerce Commission should be involved in this auction process to maximise the benefit to the NZ consumer.
  • The NZ wireless market is distorted and uncompetitive from an international perspective. This is best illustrated by NZ being at the bottom of the OECD for share of telecommunications revenue in wireless relative to fixed line (see 2007 OECD report). This is a function of weak competition frameworks accompanied by spectrum distortions.
  • New technologies do not break monopolies. Government policy does.
  • Spectrum blocks are raw natural resources. Without a basket of development rules entrenched operators will continue to dominate, specifically without a workable co-location protocol. WIMAX markets will be dominated by Telecom and Vodafone.
  • The WIMAX auction gives an opportunity to fix some of the distortions of the NZ wireless market. The Government should seize this opportunity to use the spectrum sale as a mechanism to fix some of the imbalances that have prevented wireless competition in NZ.
  • Without the application of rules surrounding the competitive deployment, specifically co-location ,access and roaming, WIMAX will simply be monopolised by the two large incumbents
  • A lack of vibrant competition will slow the speed of new technology adoption and prevent low-cost solutions being available to consumers in the 2.3GHz and 2.5GHz bands.
  • NZCL believes that the outcome of the WIMAX spectrum auctions should be predicated on the following:

The Commerce Commission confirms that existing spectrum resources of 900MHz are re-allocated in an unconditional binding agreement which will produce the best outcome for the end user.

The MED confirm that before incumbents bid for WIMAX spectrum, there be a detailed undertaking confirming implementation of co-location with targets similar to the LLU undertaking for D-Slam co-location.

That new entrants ( under25% mkt share) be able to collaborate on new joint infrastructure developments.


INTRODUCTION

NZ Communications Limited (“NZCL”) thanks the Ministry for Economic Development for the opportunity to make submissions on questions outlined in its discussion paper on the radio frequency auctions of 2.3GHz and 2.5GHz.

Our primary focus with this MED activity is an explanation of rules that should be attached to the purchase of the WIMAX spectrum.

NZCL considers that spectrum policy must be considered simultaneously with competition law and industry interconnection protocols.

NZCL has reviewed the MED discussion document and chosen to comment on the sections of the report where it has a constructive input.

 

Executive Summary

The spectrum auction should not commence until the 900MHz and 800MHz hoarding of the incumbents is solved unconditionally


 


 






The challenges of the forthcoming WIMAX deployments are not spectrum lot design, but application of competition policy



New Zealand needs challenger networks with scale and nationwide capability.





Should the WIMAX auctions progress without due consideration of competition policy. WIMAX will not bring any benefits to NZ consumers.










Use it or lose it conditions will not alone create competition.


Downstream competition rules must also be attached.




New spectrum sales create the opportunity to reset the regulatory environment for wireless communications.





The October 2006 Mobile market review must be considered when selling further spectrum.


This report catalogues the barriers to market entry; most of the recommendations are applicable to WIMAX.










Spectrum caps alone will not create competition








































Legacy cell tower infrastructure must not be used to perpetuate market power into the WIMAX market.




Before the WIMAX Auction legacy spectrum imbalances must be fixed.




















Maori should have access to WIMAX on similar terms to their access to 3G spectrum.






Managed spectrum parks will entrench Geographic de averaging in the NZ wireless landscape.





NZ needs to be more ambitious for national competition. The Commerce Commission need to be consulted before a sale of 2.3GHz and 2.5GHz spectrum.

WIMAX Spectrum Issues


NZCL is supportive of the option A in terms of proposed lot design.


NZCL is supportive of there being six holders of WIMAX spectrum.


NZCL is supportive of the Hautaki Spectrum Trust being offered one block of WIMAX spectrum under the same terms and conditions of their 3G 2100MHz option.


NZCL does not believe that spectrum should be offered to Vodafone and Telecom until there is binding unconditional sale of 900MHz and 800MHz spectrum and binding unconditional co-location targets with implementation standards agreed.


WIMAX Competition Issues


NZCL believes spectrum lot design is only one component of effective spectrum management in promoting competition. NZCL believes that the OECD precedent of simultaneously delivering “license conditions” is useful in developing downstream competitive markets which benefit consumers.


NZCL believes that simultaneously to selling spectrum, additional terms are required to be delivered to bidders (not just incumbents) who may want to bid. Consider the case of the new entrant, who has a potential “lose it” condition on their spectrum if a deployment does not take place within a time period. The incumbent, who can control the access to the market through owning all or the majority of the cell sites and interconnection agreements, can have a significant impact on the “lose it” decision.


New Zealand has a problem in wireless competition. To solve these problems it needs to address:

  1. Secure a solid co-location protocol that works for wireless operators
  2. Ensure small operators (who have less than 25% market share)can collaborate to build nation wide networks


PROCESS

NZCL is concerned with lack of industry consultation over the best use of the 2.5GHz band, and is concerned that the Commerce Commission’s October 10th mobile market review is not mentioned in the discussion paper of the MED. This report is instructive on how to create competition in the networked wireless business and highlights spectrum and barriers to entry.


The allocation of yet more precious natural spectrum resource to incumbents who have all the market power and can control new entrants’ costs should be considered with caution. This is because the history in NZ is more spectrum sales have not created a competitive outcome for consumers but rather a concentration of spectrum.


NZCL believes an auction process is appropriate, and that an open outcry auction to pre-qualified participants should occur. NZCL notes that previous auctions for 1800 spectrum and 3G spectrum should be reviewed. In the enquiry and subsequent review of the 2000 and 2001 spectrum auctions it was noted that there was no analysis to review whether there had been collusion.


The auction that should have taken 9 days, took 9 months. NZ cannot rest on its laurels that it was the first country to auction spectrum. It must focus on its problem as the most uncompetitive wireless market in the OECD.


It is dangerous to assume that spectrum sales with “use it or lose it “conditions will create competition. What creates competition is the downstream access to bottleneck infrastructure and interconnection regimes which re-balance market power asymmetries.


Without a stronger application of competition rules 5 years after the issuance of WIMAX spectrum there will be the same dominance of the telecommunications market power in NZ.


The opportunity that new spectrum sales create


New spectrum sales create a once in a 20 year period to reset the regulatory framework as incumbents with significant infrastructure deployments need to review the technology landscape and plan for new applications. The Government regulatory agencies during this sale period can set the agenda as they have leverage over operators who need spectrum to conduct their businesses.


We believe that it is appropriate for the MED and the Commerce Commission to realign the industry rules in this spectrum auction to facilitate more wireless competition in NZ.


Overall policy settings


NZCL commends the policy statement of the MED. We agree with 20 year spectrum allocations and the setting of acquisition limits. NZCL also supports secondary market trading and the concept of use it or lose it rights in some circumstances.


NZCL’s experience however is that without clear policy being issued simultaneously to spectrum being auctioned, the MED’s objective of competition between service providers will not be met.


NZ wireless communications markets are evolving from a long period of inaction by regulators. The market is 100% penetrated and all the activity is concentrated between two operators. NZCL believes that without competition policy evolving simultaneously there will be no outcome.


We refer to our appendix 2 to highlight the main findings of the mobile market review which should be considered during the spectrum auction


TECHNICAL DESCRIPTIONS

Clear spectrum blocks are a basic raw material, we respect the rights of existing holders and advocate “option A” being used as the best way of using this spectrum.


PRO COMPETITION MEASURES

NZCL notes the limit on spectrum acquisition in the discussion paper. We think the existing frameworks will themselves not generate the required outcome. Spectrum caps by themselves will not produce an adequate competition platform. Additional steps relating to:


  • Co-location
  • Abuse of Significant market power
  • Fixing current spectrum imbalance


Ministry for the Environment (National Standard for Telecommunications Facilities)


In support of the NZCL position that a spectrum sale should be postponed until further regulatory consideration, we bring to the attention of the MED the MFE consultative paper on telecommunications infrastructure.


There is currently a large workstream of analysis in the Ministry for the Environment creating a national policy for roadside cabinets and telecommunications antennas. The value and competitive impact of WIMAX licenses is materially affected by the outcome of this workstream. NZCL urge the MED to work with the MFE to ensure the best outcome for the country.


We refer to our appendix photos whereby there are three antenna towers on one hilltop. Should there be a successful outcome of WIMAX development, there would need to be an extra four towers on this hilltop.


ELIGIBILITY TO BID

NZCL believe there should be a test to be able to bid. “Beauty Parade” eligibility has been common in many GSM licenses internationally for many years. New Zealand needs stronger, larger new entrants. Few markets are as concentrated as New Zealand. 93% of all telecommunications revenue is with two players, and 98% of it is with three operators (Telecom, Vodafone and Telstra). New Zealand needs larger new entrants.


NZCL believes that infrastructure-building new entrants, who are prepared to ensure a minium build level , should have preference for eligibility.


Incumbents who have SMP should not be able to bid until they have met criterion set by the Commerce Commission, specifically:


  1. Timely unconditional binding sales of spectrum excesses
  2. Documented co-location offerings


This gives a positive incentive to incumbents not to abuse their legacy cell tower infrastructure, much of which was built in pre RMA days.


This cell tower infrastructure will entrench Telecom and Vodafone dominance in a WIMAX market unless a workable co-location standard is formulated.


PRECONDITION TO BIDDING PROCESS

NZCL believes that prior to conducting the auction the following should occur:


  1. Telecom should be required to submit a list of all towers that are available for co-location of WIMAX, complete with pricing and implementation plans.
  2. Vodafone should be required to submit a list of all towers that are available for co-location of WIMAX, complete with pricing and implementation plans.
  3. The Commerce Commission should set a series of rules pertaining to interconnection, termination and roaming. These should be standards similar to LLU network unbundling implementation standards.
  4. The Commerce Commission should review the barriers to entry as were noted in the 10th October mobile market review and address those that will impact the fledgling WIMAX market to the broadband market.


Risks in the WIMAX Industry Structure


NZCL’s position is that WIMAX spectrum owners should be able to join and build businesses together, and they should be encouraged to do so on the condition that they don’t already have more than a 25% market share in the telecommunications market in NZ, or more than 40% market share in the mobile market.

Without a workable co-location protocol, the NZ consumer won’t benefit from a competitive WIMAX market. The current wireless operators will merely transfer their market power to the WIMAX technology using their existing facilities to ensure their market position is maintained.


The NZ consumer needs a nationwide scalable network built to confront the market dominance of the incumbents. For this reason, all WIMAX spectrum owners without significant market power must be able to collaborate for a nationwide network.


MAORI INTERESTS

NZCL is 20% owned by pan Maori interests. Maori representatives have two Board seats. The inaugural Chairman of NZCL and its predecessor company is Maori representative, Mr Bill Osborne. NZCL is committed through its shareholder agreement and constitution to seeing Maori advance its economic interests in telecommunications. NZCL has displayed a long-standing commitment to Maori development through this participation.


NZCL believes that Maori should benefit from a WIMAX spectrum allocation on similar terms and conditions that Hautaki got with the 3G spectrum.


Essentially, WIMAX could become a migration path from 3G spectrum. The development of NZCL is testimony to the judicious management of spectrum by the Hautaki Trust. It is NZCL’s perspective that Maori should benefit as investors not just content providers or users. Maori need true economic empowerment coming from equity participation, and the ownership of the underlying natural resource.


MANAGED SPECTRUM PARKS

NZCL endorses the government’s motivation in considering managed parks. NZCL’s perspective is that New Zealand needs to be more ambitious with its network development aspirations. Sweden, Norway, Denmark and Finland all have 3G coverage to 95% of the population.


Managed spectrum parks create small unscaleable pocket networks, which create pyrrhic competition. Incumbents sell overpriced services to pocket networks. Consumers think they are benefiting, but the real outcome is that they are being quarantined in service position and in pricing. Incumbents are then relieved from regulatory pressure as there is the façade of competition.


NZCL supports managed parks but only for community groups and for “Not for Profit” enterprises.


The MED & Commerce Commission must ensure a policy framework for countrywide networks is in place. Without competition rules in place, no new entrant will be able to obtain funding to roll nationwide networks. Consumers will then be constrained to pocket networks and subject to the indignity of geographic prices.

APPENDIX


  1. Co-location practices in NZ and relevant impact on WiMAX deployments in NZ
  2. Review of the Commerce Commission Mobile Market report of October 2006 and the relevance to the WiMAX auction
  3. Independent expert review of HSPA and Mobile WiMAX deployment issues
  4. Reference comments from “Allocation and Acquisition of Radio Spectrum” (Moore Wright Associates)
  5. Comments on Cabinet Economic Development Committee
  6. References from Ovum Consulting Market Study for UMTS 900 (profile of NZ’s 900 3G market)
  7. Profile of the NZCL relationship with Hautaki and support for the Hautaki Spectrum
  8. Profile of “NZCL” NZ Communications Limited 2



1. Co-location practices in NZ and relevant impact on WIMAX deployments in NZ

 

[image] NZ Communications 1.

There is no multi access co-location regime in NZ, with out a pre determined co-location policy WIMAX will not create competition


Above is a picture of 3 cell sites in Cole Rd, Pokeno. It is a strategic countryside hill top on a main arterial route between the cities of Auckland and Hamilton. Current policy framework would require another four towers.

 


[image] NZ Communications 1.2.


This site illustrates an unnecessary urban site outside a Telecom telephone exchange. In any other country the new entrant would build a cell site on the incumbent’s tower. This assists in supporting the NZCL position that the differential between D-SLAM co-location and cell site co-location is in fact hurting the consumer and the community.


The history of co-location in New Zealand

Site acquisition is a long and arduous task. Every cell site has an interdependence on other sites (so if you want to move site number 45, all the sites from number 43 to 53 possibly need to be moved and all the transmission links also need to be moved). Co-location doesn’t reduce the investment on network equipment, it makes a smaller visual impact and creates a sense of Like for Like competition.

Because there are only so many hill tops and roof tops which are the best vantage points to transmit radio signals to consumers, if there is no co-location a new entrant’s network will always be subordinated to inferior sites. This usually means more sites are needed and as such, a new entrant’s operating costs will be more expensive than an incumbent’s, and consumers won’t benefit from “like for like” competition. Co-location gives a better opportunity for customers to get identical coverage configurations, which means that networks then compete on price and innovation rather than the incumbent continually demonising a new entrant’s coverage in advertising campaigns.


The environmental impact of co-location in New Zealand

New Zealand prides itself on its environmental history. Evidence presented to the regulated services conference in September 2006 confirms that there is no significant co-location between Telecom and Vodafone and as a consequence, many rural areas have more masts than necessary.


NZC requests that the Commission consult with the Ministry for the Environment with regard to the forthcoming Environmental standard for telecommunications facilities in roadside reserves. Policy impacts consumers, and also councils, and the Ministry for the Environment.


The Impact of WIMAX on Co-location policy


  1. There will be more cell sites required in NZ
  2. Entrenched mobile operators will continue to control the wireless market in WIMAX unless co-location is regulated.
  3. Communities with Community based towers will have the best access.
  4. Local councils will be looking for guidance on tower co-location as they get more antenna RMA applications.


2. Review of the Commerce Commission Mobile Market report of October 2006 and the relevance to the WIMAX auction

The Commerce Commission produced a 40-page summary highlighting the problems in wireless network construction in 2006 many of these observations are useful in the context of the MED discussion paper on WIMAX.


“The fact that entry has not occurred suggests that there many be barriers preventing or constraining entry into the market.” page 5 Review of Cellular Mobile Market Entry Issues 10 October 2006


“The unavailability of spectrum in the 850.900MHz range for new entrants is a barrier to entry as it raises the cost of entry. The Commission notes that incumbents appear to hold in excess of the requirements for providing actual current and future services given New Zealand’s characteristics.” page 39 Review of Cellular Mobile Market Entry Issues 10 October 2006


“The Commission has decided to commence a Schedule 3 investigation into whether or not to amend the co-location service. The investigation will examine whether the service should change to become a designated service which will allow the Commission to set price terms. Should the

Commission’s review of the co-location code reveal unresolved issues with non-price terms the Commission may decide to expand the scope of its investigation.” page 36 Review of Cellular Mobile Market Entry Issues 10 October 2006


The MED should postpone the WIMAX auction until this investigation is complete


3. Independent expert review of HSPA and Mobile WIMAX deployment issues

(HSPA and mobile WIMAX for Mobile Broadband Wireless Access - page 85 Conclusions)


“A further refinement would need to consider the respective merits and viability of national, regional, or zonal/hot spot coverage. 2G experience shows that consumers place a premium on a service if ubiquitous coverage is offered nationally as well as abroad through international roaming partners. So for example, the decision to offer zonal coverage might reduce some or all of the above revenue streams, compared to what a national operator could charge. Also zonal/hotspots operators would experience fewer economies of scale in terms of core networks, billing, brand presence etc. These fixed costs could not be shared over as many customers as a national operator. A decision to focus on WIMAX on zonal coverage would also mean that an operator would most likely be competing in the same markets as WiFi hotspot networks.”


4. Reference comments from “Allocation and Acquisition of Radio Spectrum” (Moore Wright Associates)

“We believe this is a significant weakness in the New Zealand model where decisions about a significant competition policy issue are able to be taken without expert input from the NZ government’s lead statutory authority on competition policy or without sufficient input from the MED’s own experts. These weaknesses may result in a lack of consistency in applying competition principles.”


NZCL believes it is appropriate for the Commerce Commission to review the policy applied to WIMAX network deployment in NZ.


5. Comments on Cabinet Economic Development Committee

“the concerns of CallPlus and others that incumbents should not be allowed to “strategically block” entrants from gaining access to scarce spectrum.”


NZCL believes it is other “bottleneck” access methods the incumbents would use to block market entry, co-location and roaming being the most significant issues.


6. References from Ovum Consulting Market Study for UMTS 900 (profile of NZ’s 900 3G market)

“Cellular coverage in the remote/rural areas. Access to spectrum in the 850MHz and 900MHz range is important to minimise site costs. The entire spectrum in this range is held either by TNZ or Vodafone; hence the unavailability of spectrum in the 850MHz/900MHz range is a barrier to entry as it raises the cost of entry.” (Page 63 – The situation in New Zealand)


NZCL believes that the same bottleneck will impact the WIMAX market in marginal rural coverage, as there will be a lack of roaming competition to provide national service.


7. Profile of the NZCL relationship with Hautaki and support for the Hautaki Spectrum

Hautaki is a founder shareholder of NZCL, it owns 20% of the equity of NZCL and is represented by two Board members Brian Leighs and Bill Osborne, who is the inaugural Chairman.

Hautaki has the right to put more capital into NZCL as the project expands. NZCL is committed to having Hautaki participate in the development of the Company. The Company’s shareholders agreement gives Hautaki benefits contextual to the original objective in forming Hautaki and having greater Maori involvement in telecommunications. The Board supports the Hautaki request to participate in WIMAX spectrum in a similar manner to the 3G participation


8. Profile of “NZCL” NZ Communications Limited

NZ Communications is a mobile telecommunications company. The company owns several blocks of spectrum which it is developing into a mobile phone network to compete on a like for like basis with Vodafone NZ and Telecom NZ. NZCL was formed as a response to the New Zealand Government passing the 2006 Telecommunications Amendment Act, to stimulate more competition. The company’s objective is to build a new NZ institution to own and operate a nationwide mobile phone network.


NZCL is owned and controlled by two private equity companies who specialise in investing and building mobile phone networks. General Enterprise Management (GEMS) and Communication Venture Partners (CVP) have built and invested in over 20 networks over the last ten years. They have injected cash and a management team into the company. The Maori-controlled Hautaki Trust owns 20% of the company. The Chairman of NZCL is Bill Osborne, CEO of Quotable NZ, ex All Black, Board member of SPARC, Positively Wellington Business and the NZ Maori Rugby Union Board.


NZCL has announced plans to commence business in NZ using Huawei Technologies as its technology partner. Huawei Technologies have supplied equipment on 32 GSM/WCDMA networks worldwide and are the fastest growing network equipment supplier in the world. They are on track to supply 20% of all new mobile phone networks by 2010.


NZCL is headquartered in Auckland with offices in Wellington and Christchurch. The company is in the process of deploying an initial 840 cell sites to cover 60% of the NZ population. The company currently employs 58 people and 20 consultants. It is in negotiations for multiple co-location sites with Telecom and has filed XX RMA applications for cell site tower erection in Auckland, Wellington and Christchurch.


Tex Edwards
NZ Communications

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Last updated 8 October 2007