Woosh Wireless Limited

WOOSH SUBMISSIONS

To the Ministry of Economic Development
RADIO FREQUENCY AUCTION 2.3 GHz AND 2.5 GHz BANDS

14 SEPTEMBER 2007

EXECUTIVE SUMMARY

1. Woosh supports the overall approach of the Ministry of Economic Development in the discussion paper, implementing the objective of fast-tracking the roll-out of advanced broadband services to New Zealanders
2. Woosh agrees with the provisions made in the Discussion Paper for:

3. However, Woosh considers that some changes need to be made to the provisions to better promote fast roll out, and ensure that the full potential of the 2.3 and 2.5 GHz bandwidth can be met, including:
   

3.1. The removal of the acquisition limits following the auction; and

3.2. Allowing spectrum sharing or licensing within any period where acquisition limits apply, provided it is not anti-competitive.

4. We also recommend that the Ministry build some additional flexibility into some of the rules it has proposed to reflect the future market uncertainty. In particular, we recommend discretion being given the Chief Executive of the Ministry of Economic Development to grant limited extensions to the timing of application of “use” tests.

LOT DESIGN

2.3GHz Band

5. We support Options A and C as the only logical formations of this band because:
   

5.1. This spectrum is to be used for TDD;

5.2. There is no value in an auction method which may potentially result in uneconomic blocks smaller than 35MHz;

5.3. It is appropriate to have the MSP abut the “public” spectrum at 2396 and beyond 2400MHz in order to better manage any interference from the users of the MSP.

2.5GHz Band

6. We support Option A for the following reasons:
   

6.1. TDD is the best method for deploying BWA. In particular, FDD is not part of the WiMAX standard.

6.2. Option A provides the best certainty for bidders, with lowest risk of gaming and purchase of uneconomic lots.

6.3. FDD is inefficient as it needs twice as many guardbands.

6.4. If FDD does develop then two holders of TDD spectrum can cooperate to “split and swap” their management rights to create two lots of FDD spectrum.

7. If the Ministry of Economic Development wishes to create an FDD MSP in the 2.5GHz band, then we recommend that the MSP be located at top and bottom of the band:
   

8. If Option A is rejected then we prefer Option B, subject to the following comments:
   

9. Option C is not desirable:
   

Acquisition Limits

10. Woosh supports the inclusion of acquisition limits which cap the amount of spectrum each bidder can acquire at auction. The acquisition limits will promote the objective of promoting competition by ensuring that bidders are not shut out of the auction entirely by competitors with ‘deep pockets’.
11. However, Woosh submits that the acquisition limitation period should be shorter than the discussion paper suggests, for the reasons set out below, under the heading “Duration of Acquisition Limits”.
12. In the alternative, if the acquisition limits remain as provided for in the discussion paper (i.e. until 1 year prior to the use it or lose it deadline), Woosh submits that the auction rules should expressly permit owners to acquire additional spectrum on licence from another owner immediately following the conclusion of the auction (the discussion paper is currently silent on this point).
13. Beyond the auction is it not possible to predict with any certainty what prescriptive regulation will best suit the market and technologies as they develop. For this reason, Woosh considers that predetermined prescriptive rules run a significant risk of not being “future proofed”. It is preferable, we believe, for the Commerce Commission to be relied on as the arbiter as to what acquisitions should be prohibited on the grounds of being anti-competitive.
14. As noted in the discussion paper, the effective deployment of technologies such as WIMAX may well require more than 35MHz of bandwidth (paras 32-33). Woosh agrees that the ability to access more than 35MHz of spectrum will be necessary to enable service providers to offer services in keeping with technology developments and with international trends.
15. Woosh submits that it is counterintuitive to require two operators to build networks before they can wholesale access to each other (as was suggested in the April 2007 2.3 Auction Discussion document). If, for example, Woosh were the only operator to build a network in the 2 .3 or 2.5GHz spectrum then the fact that no other network has been built should strengthen the case for allowing Woosh to acquire additional spectrum in order to improve services for customers.
16. Moreover, while there are 6 lots in the auction, it is unlikely that each of them will be utilised for a separate networks – New Zealand is too small to sustain 6 separate networks. Woosh submits that the most likely outcome (and the most efficient) is that there will be fewer networks with greater bandwidth. Therefore, imposing a lengthy acquisition limit period could result in inefficiencies by preventing or delaying desirable rationalisation.
17. For these reasons, it is crucial that the auction rules provide enough flexibility to enable Woosh and other service providers to roll out a fast and efficient service which is both:
    

17.1. Capable of competing with other forms of internet services within New Zealand (so that the investment is economic); and

17.2. Comparable to standards of services provided overseas, to ensure that users can compete on the world stage.

18. In this regard it is notable that SprintNextel in the USA (the party which is essentially driving international WiMAX developments) currently has up to 100MHz of 2.5GHz spectrum in some areas. They are pushing for technology to be developed to best use this spectrum – they know they need to offer the best services in the market in order to be competitive. In Australia (New Zealand’s primary competitor and trading & roaming partner) Unwired and Austar between them hold 200MHz of WiMAX spectrum.
19. It is not possible to predict now how WiMAX and other broadband wireless technologies using the 2.3 and 2.5 GHz bands are going to develop. However, we can predict with reasonable confidence that:
    

19.1. In order to be successful the retail services will need to be superior to services offered on existing technologies.

19.2. Equipment will be developed to utilise all spectrum held by operators.

20. One of the primary uses of WiMAX technology may be for backhaul. If an operator is using all of their 35MHz for providing services to customers then it should be legitimate for them to acquire other spectrum for WiMAX backhaul. Access to cost effective backhaul is one of the key prerequisites to effective infrastructure competition in New Zealand.
21. It follows that Woosh considers that the auction rules should:
    

21.1. Be flexible; to reflect market and technology uncertainty.

21.2. Enable competitive networks to be built in line with international standards.

21.3. Authorise the use of additional spectrum under licence in advance of the formal removal of acquisition limits.

21.4. Be consistent with the purpose of the Telecommunications Act, being the promotion of competition for the long term benefit of end users.

Auction method

22. Auctions for the 2.3 and 2.5 GHz bands should be run at the same time using the same method, as the bands are substitutes for each other.
23. Simultaneous ascending auction is the only method that can appropriately deal with the complexity of auctioning the 2.3 and 2.5GHz bands.
24. Because of the acknowledged complexity of SAA (and the fact that such auctions have not been common New Zealand) we would welcome an initiative from the Ministry of Economic Development to hold mock auctions in advance in order to understand the workings and rules of the auction.

Regulation of Guardbands

25. The overriding principle for the implementation of guardbands should be to achieve an efficient use of spectrum. Coordination should be the primary method to address potential interference. Management right neighbours should not be able to force unnecessarily large guardbands for anticompetitive reasons.
26. Existing rules in the Radiocommunications Act regarding interference currently appear to be working. There are now a number of industry agreements that demonstrate that competing operators can work together to coordinate spectrum use to their mutual benefits. We do not believe that any further regulation is required.
27. Having said this, the proposal to auction 35MHz blocks, allowing for a 5MHz band seems acceptable. It may be that, in time, operators are able to use the full amount of spectrum they own and do not have to “waste” 5MHz for guardbands. Such an approach should be encouraged.
28. The issues are different in respect of boundaries between management rights and the MSPs. MSPs are not utilised by a single party with whom the neighbouring management rightholder is able to coordinate. In these instances, there is an onus on Ministry of Economic Development to ensure guardbands are respected by MSP users.

TERMS OF SALE OF MANAGEMENT RIGHTS

Duration of Acquisition Limits

29. The Discussion Paper proposes that the acquisition limits should last until one year prior to the use it or lose it deadline. On this basis the acquisition limit will apply until 2011 at the earliest.
30. Woosh is concerned that this constraint could undermine the overriding objective of the auction rules which is to "fast track the roll-out of advanced broadband services to New Zealanders".
31. As noted above, Woosh and other service providers must be able to access sufficient spectrum if they are to provide a fast enough WiMAX service to compete with other broadband services.
32. While Woosh recognises the importance of avoiding consolidation which reduces competition, and speculative buying, it considers that the Cabinet’s decision to auction additional spectrum, the limits on the amount of spectrum that may be acquired at auction and the use it or lose it provisions, together with ongoing oversight from the Commerce Commission are sufficient to deal with those concerns.
33. Accordingly, Woosh submits that the auction rules should not restrict trading in spectrum, or at least leasing or licensing, immediately after the conclusion of the auction.
34. Ongoing acquisition limits seek to balance the lesser of two evils:
    

34.1. The certainty that NZ operators will have less spectrum than US/UK/Aus counterparts and therefore services will be more limited here.

34.2. The possibility of “squatting” by speculators or spectrum hoarders.

35. The rules should seek to address the certainty, rather than the possibility. Acquisition limits should fall away quickly after auction, subject to any later acquisitions not being anti-competitive.
36. The benefits of a relatively short limit of acquisition include:
    

36.1. Enabling operators to provide the best services that the technology can support, as quickly as practicable, for the benefit of consumers.

36.2. The Ministry of Economic Development seems to acknowledge that six networks are unlikely to be built. Given, this it should seek to get spectrum into hands of those who are using it. It may be appropriate to limit management rightholders from acquiring additional rights in spectrum only once they have shown a willingness and ability to use existing rights.

36.3. Ofcom has set an acquisition limit of 90MHz for 2.5-2.7 band and so NZ should not stay so far behind with a limit at 35MHz for many years.

36.4. The Discussion Paper says “there is a case however for allowing early trading of spectrum to allow for re-allocation and/or consolidation of spectrum if that makes sense for commercial viability reasons.” (Para 38). We agree with this.

36.5. Acquisition limits of longer than 12 months are a very blunt instrument – no-one can predict with any certainty how the market will develop. The Commerce Commission has the ability to ensure that any new acquisitions are not anti-competitive.

37. We are not concerned that a short period of acquisition limits would overly encourage speculators as speculators still want to sell at a profit and, in the Cabinet’s own words, there is plenty of spectrum which should keep prices down – not just at the auction but beyond.

USE OR LOSE PROVISIONS

“USE IT”

38. We support Option A requiring “significant use” as a pragmatic and progressive approach. This allows the Chief Executive of the Ministry of Economic Development to reflect operators’ efforts and achievements. Hard and fast rules around coverage requirements may not reflect market conditions, technology developments or other factors key to any deployment.
39. In exercising his discretion, the Chief Executive may be able to take into account a number of factors including the manner in which the spectrum is used. It may be that, over time, the 2.3 or 2.5GHz bands become well used for point-to-point backhaul, remote surveillance or other uses which are not necessarily the primary focus at the time of the auction.
40. Being overly prescriptive (such as is proposed in Option B) could lead to irrational/uneconomic/skewed investment decisions solely to met “use” requirements.

“LOSE IT”

41. The consequence of not using spectrum should be that the operator forfeits its rights. This is a very material incentive and we do not believe that additional penalties (such as financial payments) are necessary or appropriate.
42. It may be appropriate for the Ministry of Economic Development to retain discretion to permit extensions (subject to terms).
43. One amendment which we would support is recognition that an operator who fails to meet the “significant use” test may forfeit their management rights but retain licences operating under at that point. An operator might, for example, build a network in a couple of towns (say Oamaru and Timaru) but not satisfy the “significant use” criteria. It would not be desirable to force the operator to cease providing all services that are being provided to customers at that point and they should be permitted to keep any necessary licences. This does require an element of discretion but we believe it is appropriate in the circumstances.

TIMING

44. The primary objective in allocating management rights in the 2.3 and 2.5GHz spectrum is the building of competing infrastructure. To achieve this we believe that the timing of the “Use” requirements should be as soon as practically possible.
45. We propose a “Use” date no later than 2 years after the management rightholder getting access to use spectrum under new management rights. In the 2.3GHz band, management rights may commence in November 2010, or sooner if current management rightholders forfeit existing rights.
46. While this will result in different dates for different spectrum, we believe this is appropriate. The auction should seek to give whatever incentives it can for operators to deploy services quickly for the benefit of end users.
47. There is no value in allowing those who are not going to rollout to hold spectrum for long periods. In technology terms the dates of 2012 to 2016 are very distant.
48. If technologies are late developing then even if the spectrum is “lost” by one holder, the spectrum does not “disappear” but can be reallocated to the most efficient operator in the future.

ELIGIBLITY TO ACQUIRE LOTS

49. The Cabinet have stated a desire to deter spectrum speculators from participating in the auction. We support this and believe that eligibility criteria to participate in the auction, such as the following, would be appropriate:
    

49.1. Require the bidder to be an operator or spectrum holder in NZ or other markets.

49.2. Require the bidder to have a “clean” record with respect to spectrum.

50. Such criteria are common in other markets. The Ministry of Economic Development may wish to look further into appropriate criteria to prevent speculators from participating in the auction.

SETTLEMENT

51. It is very unusual for participants in any market to pay the full price for an asset many years before they are able to use that asset. While deposits are common with property developments, the full purchase price is not usually payable until completion of the subdivision and settlement.
52. We believe that, consistent with normal commercial practice, operators should not be required to pay the full amount for spectrum until the commencement of the management right acquired in the auction. It may be appropriate to reflect the time value of money in the auction rules, however provided the rules are clear, parties are likely to allow for the value of the timing of payments when considering their bids.
53. A deposit payable at the time of the auction (say NZ$250,000 as it is difficult to predict a likely purchase price and therefore the deposit could be different for every bidder) is a normal commercial term and would be appropriate in these circumstances.

TRANSITION PLAN

54. As we understand the transition plan, all of the spectrum to be auctioned will be free of spectrum licenses at the time the management right commences. In particular:
    

54.1. Telecom will not be issued CMAR licences in spectrum to be auctioned.

54.2. The 2.5GHz spectrum allocated as management rights will be clear of users by 1 January 2009, with the exception of some mobile cameras which are of a sufficiently low power that they are unlikely to interfere with other users.

55.  We would appreciate if the auction rules would clarify these points.

ADDITIONAL CONDITIONS TO BE INCLUDED IN LICENCES

56. Woosh notes that spectrum management rights are only one of several factors which influence the roll-out WiMAX and other advanced wireless broadband technology in New Zealand. An equally important factor is the ability of new entrants to acquire suitable sites for cellular equipment. In the past, this has been managed by way of a service specification under the First Schedule of the Telecommunications Act 2001 for collocation on cellular mobile sites. However, Woosh has found this process to be slow and unsatisfactory. It is vulnerable to gaming by incumbent operators, who can raise a wide range of technical arguments against co-location on any given site. The result has been to create an unnecessary barrier for new market entrants.
57. Woosh submits that the Ministry should consider using the spectrum auction rules to address this issue. Specifically, Woosh considers that barriers to entry into the market would be significantly lower if incumbents (with greater than a specified number of existing cell sites) were required, as a condition of their spectrum management rights, to grant access for collocation to new entrants on request. Woosh considers this could be achieved relatively simply, and that the outcome would be a significant improvement in terms of facilitating the roll-out of new technology.