Vodafone

VODAFONE NEW ZEALAND LIMITED SUBMISSION TO THE MINISTRY OF ECONOMIC DEVELOPMENT

Radio Frequency Auction: 2.3GHz and 2.5GHz Bands

I Summary

1. This document presents Vodafone’s views on the Ministry of Economic Development’s (MED) discussion paper on “Radio Frequency Auction : 2.3GHz and 2.5GHz Bands”.
2. Vodafone proposes that up to six operators could be facilitated through both nationwide management rights and Managed Spectrum Parks (MSPs) and not through nationwide management rights alone. Current MED policy of up to six nationwide operators only through management rights is likely to result in significant spectrum wastage and deny New Zealand future technology options.
3. Vodafone proposes the following band plan to achieve this outcome

• For 2.3GHz band we propose that

1. 2300MHz to 2370MHz is divided into 14x5MHz lots
2. 2370MHz to 2395MHz is reserved for MSP.
   

• For 2.5GHz band we propose that

1. 2500MHz to 2570MHz is divided into 14x5MHz lots
2. 2570MHz to 2605MHz is reserved for MSP
3. 2605MHz to 2690MHz is divided into 17x5MHz lots
   

4. MED has set up rules to facilitate up to six nationwide service providers :

• Acquisition limit of 35/40MHz based on type of use
• Band plans designed for six users
  

5. MED has also stated that it does not believe that the New Zealand market can support six nationwide service providers. If this is the case then allocating spectrum to six nationwide service providers is likely to result in outcomes that are not in the best interest of New Zealand. For example:

• It would prevent the roll out the of highest speeds available from IMT 2000 and IMT Advanced or 4G (referred to as IMT from here on in) networks due to unavailability of 20MHz of contiguous spectrum; and
• a significant amount of high value spectrum could not be used in the future due to limiting band plans.
  

6. The 2.5GHz spectrum was identified for IMT at the World Radio Conference in 2000 (WRC2000). However, the rules MED has set for the auction are primarily based on WiMax use.

• The band plans proposed primarily prefers WiMax
• Time frames for the application of “use it or lose it’ favour WiMax and could potentially disadvantage IMT
• The acquisition limit is set to 2x20MHz when MED acknowledges that once guard bands are allowed, 2x20MHz of usable spectrum will not be available to provide the highest data rates from IMT.

7. This amounts to MED choosing technology winners. The industry should choose technology winners not MED. Such actions by MED could disadvantage New Zealand in the long term by limiting what IMT can provide.
8. The amount of spectrum allocated to MSPs is larger than demand can justify. Current spectrum allocation to MSPs in conjunction with nationwide management rights can result in up to nine service providers competing in a given area. This is likely to lead to significant spectrum wastage and this is happening at the expense of New Zealand foregoing technology options e.g. outside broadcasting at present and IMT in the future.
9. Vodafone’s preference is to use the multiple round ascending bid internet auction for both 2.3GHz and 2.5GHz bands.

II Introduction

10. This document presents Vodafone’s views on the MED’s discussion paper on “Radio Frequency Auction : 2.3GHz and 2.5GHz Bands”. Vodafone is pleased to have the opportunity to comment on the proposals.
11. This document is organised as follows :

• Section III - considerations relating to lot design.
• Section IV - proposed lot design.
• Section V - Maori interests.
• Section VI - terms of sale of management rights.
• Section VII - managed parks
• Section VIII - transition plans existing licensees.

Considerations Relating to Lot Design

Expected technical developments and likely demand

12. Vodafone is not able to add to the technical developments MED has already noted in the areas of WiMax and IMT.
13. Vodafone’s experience with predicting long term demand is that it is unreliable, even in an area where Vodafone has considerable experience. Thus Vodafone prefers not to forecast long term demand.

Acquisition Limits

14. Vodafone has two concerns with the acquisition limits;

• The acquisition limit is set to facilitate six nationwide service providers
• The acquisition limit is primarily based on WiMax and little consideration has been given to IMT.

15. The acquisition limits set by MED seem to be driven by a Cabinet decision (para 36 & 52). We note that MED appears to have questioned the wisdom of this decision (para 37).
16. If MED believes that the New Zealand market cannot support six nationwide service providers (para 88, point one) then MED should not force such an outcome on the market. It seems a flawed approach to exclude some technologies in order to accommodate an unrealistic potential number of WiMax players.
17. Vodafone considers forcing the wrong outcome on the market is likely to cause more harm than good. ‘Use it or lose it’ and financial consequences of non-use are likely to ensure that service providers roll out service.
18. The nationwide management rights and MSP spectrum could result in up to nine service providers in an area. This is likely to result in wastage of valuable resources- capital, human capital and spectrum.
19. The second concern Vodafone has is that the acquisition limit is primarily based on WiMax. Acquisition limit of 35MHz may be adequate for WiMax, however, it is not adequate for IMT. In para 41 MED notes that the building block of IMT services is 20MHz. However, in para 40 MED states that IMT needs a bandwidth of 2x15MHz and has concluded that only 2x20MHz (including guard bands) is required.
20. It should also be noted that after the renewal of 850/900MHz spectrum no party will have 2x20MHz of usable spectrum in bands where IMT equipment is available (currently IMT equipment is available only in 850, 900 & 2100MHz). This means the most likely spectrum where the 20MHz services will be provided is the 2.5GHz band. MED is removing this option for IMT service providers by setting the acquisition limit low.
21. While MED claims that it is not in the business of pre-judging commercial outcomes (para 37) in effect that is what MED has done by selecting a technology winner. Such decisions are not helpful in ensuring that New Zealand is in a position to deploy the most advanced technologies in the future.
    
22. Vodafone is of the view that MED should facilitate up to six operators between nationwide Management rights and MSPs. This will allow those who want to roll out IMT in the future to acquire 2x20MHz of “usable” spectrum while allowing adequate number of wireless broadband service providers using WiMax.

Size and location of the managed spectrum park(s)

23.   Vodafone is comfortable with allocating spectrum to MSPs. However, Vodafone is concerned that large amounts of spectrum are being allocated to MSPs without any justification of the need.
24. Vodafone is also not comfortable with the large amount of spectrum allocated to MSPs in the 2.5GHz spectrum band. There is considerable uncertainty over how this band will be used between WiMax and IMT due to the immaturity of the two technologies. Guard band requirements could significantly reduce the usability of this band for WiMax and IMT. For this reason Vodafone’s preference is to allocate only one block of MSP in the 2.5GHz band.
25. It should also be noted that allocating spectrum in the 2.5GHz band is causing disruption to existing services. In this context MED should not allocate large amounts of spectrum when it already knows that some of this spectrum will not be used.
26. The main purpose of MSPs is to encourage the roll out of wireless broadband by regional players. Allowing other uses, particularly those that are not compatible, is only going to result in significant disruption to bringing services to the market and unnecessary spectrum wastage. Vodafone proposes that broadband technologies are given preference in the MSPs.

Technical issues

27. Accommodating TDD and FDD in the same band is a particularly difficult issue. In general, guard bands, sometimes large guard bands, are required. Currently the guard band requirements are not well understood.
28. This has not deterred MED from making decisions on the acquisition limits based on the minimum spectrum required for WiMax. Such decisions have long lasting impacts and due consideration should be given to technical issues.
29. Vodafone has not done any estimation of guard band requirements, thus it is not in a position to comment on the exact guard band requirements.

Preferred auction type

30. Vodafone’s preference is for a multiple round ascending bid internet auction rather than an outcry auction. Vodafone’s concerns are that an outcry auction has:

• Limited suitability to a single lot or multiple unrelated single lots; and
• When there are multiple lots, an outcry auction is likely to distort the outcome due to uncertainty at the beginning of the auction and spectrum scarcity at the end of the auction.
  

31. Vodafone prefers the multiple round ascending bid internet auction for both bands. Vodafone believes that multiple related lots are being auctioned and this method is the most suited for such an auction.
32. MED proposed that the outcry auction could still be used for the 2.3GHz band. Vodafone disagrees with this view. In Vodafone’s view MED is being inconsistent in its views. On one hand it says that either 2.3GHz or 2.5GHz band can be used for WiMax. On the other hand it says these bands have to be treated differently when auctioning them.

Licensing issues

33. Vodafone agrees with MED that it should be up to the operators to decide how the licence is issued and how much guard band is required. Managing interference should be an issue for the operators and not something MED should decide.
34. Vodafone anticipates spectrum boundary disputes when issuing licenses if both TDD and FDD technologies are used in the 2.5GHz band. When everything else is equal the first in time licence holder has a significant advantage over the neighbour. This could potentially introduce delays in bringing services to the market, because every licence issued after the first licence has to comply with the first licence. This compliance process could betime consuming as it may involve technical calculations and protracted negotiations.
35. Vodafone urges that MED introduces rules to ensure that first in time licensees do not get an advantage over other parties. One option is for MED to coordinate between management right holders and issue some form of licence which will ensure that neighbours will have equal rights when it comes to issuing future licences.

IV Proposed Lot Design

36. Vodafone has the same two concerns it has in the acquisition limits section, namely;

• The acquisition limit is set to facilitate six nationwide service providers
• The acquisition limit is primarily based on WiMax and little consideration has been given to IMT.

37.  On this basis Vodafone does not support Option A. Under this option MED decides the lot sizes and location. It only allows WiMax to be rolled out in the 2.5GHz band and precludes the roll out of IMT which is not in the interest of New Zealand.
38. Option B is the most flexible which allows both WiMax and IMT operators to choose which lots they want to use based on their plans. However, this option is also limiting on the IMT operators. Thus Vodafone does not support Option B either.
39. Vodafone does not support Option C. On the surface Option C looks reasonable, however, there is only one pair that can be used for FDD. It is possible to use 2x15MHz of spectrum, however, once the guard band has been allowed the remainder will not be adequate for providing the high bandwidth services.
40. As mentioned earlier the acquisition limit should facilitate up to six operators in both nationwide management rights and MSPs. On that basis Vodafone proposes the following band plan.

• For 2.3GHz band we propose the band plan in Option B i.e. 14x5MHz for auction and 25MHz for MSP.
• For 2.5GHz band we propose that

1. 2500MHz to 2570MHz is divided into 14x5MHz lots
2. 2570MHz to 2605MHz is reserved for MSP
3. 2605MHz to 2690MHz is divided into 17x5MHz lots

41. This option allocates

• 60MHz for MSP
• 2 lots for WiMax in the 2.3GHz band
• Considerable flexibility in the 2.5GHz band to choose between WiMax and IMT.

V Maori Interests

41.  In Vodafone’s opinion spectrum allocation to Maori interests is a matter of Government policy. Thus Vodafone leaves it to the Government to decide on this issue.

VI Terms of Sale of Management Rights

Eligibility to bid

41. Vodafone supports MED’s view that the larger operators should be allowed to bid in this auction. Vodafone does not see any danger of spectrum hoarding. The penalties associated with ‘use it or lose it’ will deter any spectrum hoarding.
42. Vodafone also agrees with MED’s view that it is large firms like Telecom and Vodafone that have the financial backing to make large investments required to deliver services using these spectrum bands.
43. Restricting participants in some auctions and not in others only distorts the price paid for different lots of spectrum (e.g. cellular vs. WiMax) which could be used to deliver similar services. Thus such a restriction will place the likes of Vodafone at a disadvantage.

Duration of Acquisition Limits

46.   Vodafone has expressed its views on this topic in its 2.3GHz submission. Vodafone considers that the acquisition limits and application of the ‘use it or lose it’ clause should have the same expiry date. Otherwise it will encourage speculative buying.
47. The earlier expiry of acquisition limits seems contrary to the Government objective of encouraging wireless broadband providers. An earlier expiry of the acquisition limit gives an escape clause for those who bought it speculatively.

Use it or lose it

48. The key input MED expects is the date when the ‘use it or lose it’ clause should be applied which will dictate the rest of the process. Vodafone is of the view that a single date will not satisfy the differing use of the 2.5GHz band. There should be two different ‘use or lose it’ dates for WiMax use and IMT use.
49. Vodafone proposes that an operator should be given three years to meet the service roll out obligations after the general availability of technology. The general availability of technology should be on credible technology paths and international trends.
50. Having the same date for different uses will penalise the service providers who will use the technology that has a later availability date. Currently the latest date MED has proposed is December 2016. However, MED notes IMT will not available till 2015 or later. If this is the case then MED is setting up IMT to fail.
51. This amounts to MED choosing technology winners instead of letting the market to decide.
52. Otherwise Vodafone is happy with the process proposed by MED. The solution proposed by MED is an elegant solution for a complicated problem and commends MED’s effort.
53. Vodafone’s preference is Option B as this is a precise definition. Option A is not defined precisely. The term “substantial use” is not defined and leaves uncertainty for those who buy the spectrum.
54. Neither option addresses Vodafone’s concern that there are no review processes in place if IMT technology is not available by the time the ‘use it or lose it’ is applied. In Vodafone’s opinion this is a serious flaw in MED’s approach.

Financial Consequences of Non-use

55. On one hand MED believes that not all those who win spectrum rights in the 2.3/2.5GHz band will be successful. On the other hand MED wants to impose penalties on those who do not meet the roll out obligations.
56. Vodafone understands that the purpose of the penalties is to encourage investment. However, it seems that MED is following a strange policy approach where MED will enforce penalties on those MED expects to fail. 
57. There are considerable uncertainties around the state of technology and the market conditions. The New Zealand telecommunication market, particularly the broadband market, is undergoing enormous changes due to the introduction of unbundled local loop and naked DSL services. 
58. Under this scenario the best option for MED is to have a number of evaluation points and decide whether the service provider has met the obligations. These evaluations points could start as early as one year after the auction. If a service provider has not met the requirement then they lose the spectrum right. Such evaluation points will ensure the spectrum does not sit idle for a long period.
59. The penalty of stranded investment itself should be an incentive for the spectrum right holders.
    

Settlement

60. Vodafone is comfortable with the 30 day settlement period. However, Vodafone notes that in previous auctions MED has used 15 days from the invoice date for settlement.
61. Vodafone also notes that it takes more than 30 days to get Commerce Commission clearance for purchase of spectrum. This is particularly important as spectrum purchasers are increasingly required to get Commerce Commission clearance. This could create a scenario where spectrum purchasers are forced to buy spectrum while the uncertainty around Commerce Commission clearance remains.
62. Vodafone proposes that MED modifies the process so that the Commerce Commission clearance can be obtained before the actual purchase is made. For example the purchasers are required to provide a further 25% deposit in order to secure the purchase. The remainder is paid when the Commerce Commission clearance has been obtained.

VII Managed Spectrum Park

63. Vodafone would like to make the point that allocating 50MHz of spectrum at the expense of IMT use in the 2.5GHz band is not going to help the cellular industry. Vodafone proposes that spectrum allocated to MSP in the 2.5GHz band is reduced.

Eligibility Criteria

64. Vodafone is comfortable with eligibility criteria where holders of nationwide management rights are not allowed to use the MSP.
    

Core technical and usage requirements 

65. Vodafone is not convinced that users will be able to coordinate between each other in a timely manner for the following reasons:

• there are only a limited personnel in New Zealand who have the experience to coordinate technical issues such as avoiding or minimising radio interference.
• competing commercial interests will result in parties not willing to compromise.

66. Vodafone proposes that deployment rules similar to those exist in the fixed broadband environment are setup to avoid interference between users.

• MED has about an year between completing the auctions and the systems being able to use the spectrum rights. 

• During this period MED should coordinate a technical working group between the interested parties to develop the deployment limits for the MSPs.

Fees and/or Resource Charges

67. MED needs to ensure that parties who access MSP make payment equivalent to that paid by those who have nationwide access management rights. 
68. Vodafone is in general agreement with the principles MED has proposed. Options for Implementation 
69. Vodafone prefers Option Three. While Option One is simple and flexible it has serious disadvantages such as not being able to offer quality of service and it has potential for delays due to uncooperative users.
70. Option Two is an improvement on Option One, but still has a number of disadvantages.
71. While Vodafone prefers Option Three, the current Option has left all aspects open which is likely to require a lot of work to define when licences are being issued. Vodafone proposes that MED defines some of the aspects of the proposal e.g. area of licences : should align to TLAs

VIII Transition Plan for Existing Licensees

72. Vodafone does not have any specific comments on the transitional plans as Vodafone does not have detailed knowledge of the operation of ENG/OB services. However, Vodafone makes the following observations.
73. If this process can be compared to the 2GHz auction process where there was about a six year lead up period and existing users were given at least three year  incumbency licence and had the option to buy further incumbency licence.
74. In contrast the users of 2.5GHz band had virtually no lead up time and have to move out within 18 months with no option to buy any future licences. 
75. In Vodafone’s opinion both scenarios are not that different from an investment point of view. Both had similar period to recuperate the investment. However, both were treated quite differently.
76. As a holder of large number of radio licences such actions do not give any confidence of security of tenure. While MED is carrying out a review of security of tenure its actions do not reflect its policy directions.
77. Vodafone requests that radio licences are not treated the same way in the future.