3. Fair market value and scarcity of spectrum

In our view, the PwC-NZIER report raises some interesting issues regarding the fundamental scarcity of spectrum. If the Ministry were to adhere to global (ITU) standards for allocating specific frequencies to cellular services, the supply of spectrum for the provision of cellular services would appear to be fixed. In the aggregate, this may result in excess supply in the sense that incumbents may not need or use all of the spectrum for which they are licensed. Indeed, supply may be greater than demand in each locality (or geographic market) covered by the licence. In this sense, spectrum may well not be scarce. However, the market value of a nationwide licence will not necessarily be zero in these circumstances, as is evidenced by the fact that the initial auctions for the bands in question resulted in revenues that were significantly different from zero. These auctions attracted bids based on the total value of the licensed spectrum to the bidders. In general, the winning bids for each lot were one bid increment above the total value of that licensed spectrum to the losing bidder with the highest valuation. Thus, even though spectrum may not be scarce in the economic sense, the fair market value of a spectrum licence (as currently defined) that is up for renewal is likely to be positive. We agree with the PwC-NZIER report that the renewal price should not be based on considerations of scarcity.