4. Perspectives on value

4.1 This section considers potential perspectives on the value of the rights to be renewed, from the perspective of a holder of the rights. We consider this generically – it is not necessarily the specific way that Telecom and Vodafone view the issue, with their particular spectrum packages and technologies.

4.2 As noted in previous chapters, the renewal process follows two stages:

• The rights are offered to the current holder at a price determined by the Crown.
• If not accepted by the current holder, the rights are to be subject to open sale.

4.3 The right holder would have the option of renewing some or all of its current holdings of spectrum, in the lots being offered. We assume that the Ministry would not sub-divide rights at this stage.

4.4 The sale methodology, to be used if rights are not to be renewed, has not been determined. We assume that it would follow current practice, in that:

• The basic auction methodology would be an open, simultaneous multiple round auction. As a general rule, in such auctions, the final price is determined by the point at which the highest losing bidder withdraws from the auction. The Ministry’s auction methodology sets the price at the winning bid, in practice, normally the highest loser’s highest bid plus one bid increment;
• The reserve price would be set to recover the Ministry’s costs of running the auction, typically tens of thousands of dollars. In the context of the revenues of the cellular operators, this is a de minimis amount.

4.5 The number of lots into which the auctioned spectrum is divided has not been determined.

4.6 Although expressed as a single offer, it is a multi-stage process. If the current right holders judge the option of going to auction to offer a better (i.e. lower cost, taking into account the uncertainty of an auction) outcome, they can be expected to reject the renewal offer and go to auction.

4.7 Auction prices will be driven by the strength of competition in the auction, which will be a function of:

• Competition, if any, for specific spectrum packages between the existing right holders;
• The bidding behaviour of new entrants, if any, which will be determined by their business plans and concomitant financial resources.

4.8 In deciding whether or not to accept the Ministry’s offer price or defer to an auction, an existing right holder will need to:

• Determine the maximum price that it is prepared to pay.
• Judge the likely outcomes of an auction, in terms of the potential price that it might
  have to pay.
• Assess its attitude to the risks associated with the subsequent sale.

4.9 The maximum that a network operator would pay for a package of spectrum is the greater of the costs that it would avoid by having that additional package, or the net gain it would make by having the package. Similarly, the minimum at which it would sell the package of spectrum is the costs that it would incur, or gain it would lose from forgoing that unit.

4.10 In attempting to predict the potential outcomes of the auction, right holders might undertake some form of expected value calculation. This would involve developing plausible potential auction scenarios, likely resulting prices and the probability that these scenarios would occur. Potential scenarios might include: 

• New entry:
  • A potential new entrant to the cellular market;
  • A potential purchaser of spectrum for other radio uses;
  • A potential entrant seeking to become a spectrum bank;
• “Malicious” new entry to the market seeking, for other purposes, to bid up the cost of ownership of spectrum for either or both of the existing right holders;
• Competition between the existing right holders for particular spectrum packages;
• No new entrants to the auction and no effective competition between the existing right holders.

4.11 Any scenarios involving new entry also need to consider whether a new entrant, even if it had a viable business case, would bother to enter the auction if it judged that it had no chance of winning against the incumbents, particularly taking account of alternative means of access to the market (e.g. use of unused rights held by other parties).

4.12 The probability of a new entrant to the market seems reasonably low given the incumbent operators’ market position and the state of the New Zealand cellular market. It should also be noted that potential entrants have other routes to market than participating in the auction (e.g. negotiating to use TelstraClear’s or the pan-Maori trust’s cellular spectrum rights), although these are in different bands that potentially create significant cost implications for roll out and management of a cellular network.

4.13 It is notable that TelstraClear has not sought to enter the cellular market to date and that Econet has only recently confirmed plans to roll out a limited 3G network in the Auckland area.

4.14 Consequently, there is a real possibility that any auction would result in low prices or indeed allocation of all of the rights at the reserve price. However, this cannot be predicted with certainty, and hinges on the factors discussed above.

4.15 The Ministry can offer a price, but the existing right holders have other options if they consider the offer price to be higher than what they might expect to achieve in an auction. If the offer price is accepted, all that the Ministry will know is that the offer price was less than (or conceivably equal to) the risk-adjusted expected price the incumbents would have expected to pay in going into the renewal auction.

4.16 In the process of developing an offer price, the Ministry suffers significant informational asymmetries, in terms of its knowledge and understanding of the New Zealand cellular market and the details of the businesses of the existing right holders.

4.17 Nevertheless, the critical issue is that the incumbent right holders cannot predict with certainty the outcome of the auction, if they refuse an offered renewal price. This means an important factor in their approach to the decision is going to be their attitude to the risks this entails.