Context for the renewals process
Technology choice and spectrum rights
New Zealand’s cellular telecommunications market
Spectrum – scarcity or surplus?
Spectrum currently available for cellular services
3.1 The frequencies designated and available for cellular services are ultimately determined by the International Telecommunications Union (“ITU”), which designates specific bands for particular utilisation. The ITU aims to develop a coordinated and harmonised use of spectrum around the world. The ITU designations are implemented in practical terms by a combination of:
- Decisions by National governments and supra-national bodies (particularly the European Union) on spectrum allocations and permitted utilisation.
- Manufacturers’ design of network equipment and handsets to use some or all of the designated frequencies.
3.2 New Zealand’s spectrum licensing regime involves allocation of technology-neutral spectrum rights. There are no requirements to use particular frequencies for cellular or to use particular cellular technologies.
3.3 New Zealand has made available the majority of spectrum in the ITU-designated frequencies in the 800MHz, 900MHz, 1800MHz and 2GHz bands.
3.4 A negligible amount of spectrum (approximately 1MHz unpaired) of the 800 MHz Band has not been sold by the Government. Rights in the entire 1800MHz band designated for cellular use have been sold. 20MHz of unpaired spectrum in the IMT-2000 bands has not been sold, as its use is available under the General User Licence regime (it is currently used for DECT/PHS systems e.g. cordless phones).
3.5 In total, approximately 2x178MHz of spectrum is currently available for cellular use in New Zealand (i.e. management rights have been sold and cellular technology is readily available). A further 2x15MHz of paired spectrum in the IMT-2000 band is reserved for allocation to a pan-Maori trust, but the management right has not been paid for and assigned yet.
Future assignment of spectrum for cellular services
3.6 The most likely immediate additional spectrum for cellular services are as follows.
- IMT-2000 Extension Bands (190MHz in the 2.6GHz band). Some radio licences suitable for Television Outside Broadcasting currently occupy this spectrum. This band is also a candidate band for Wi-Max, so may not in fact be identified by the ITU for cellular.
- IMT-2000 in the 450MHz band. Spectrum in this area has been used by obsolete cellular technologies (e.g. NMT-450 analogue mobile phones). It is possible that it might be identified by the ITU as a further extension band for IMT-2000 to assist the delivery of wide-area coverage. Clearing these bands for cellular use in New Zealand would be problematic due to the large number of licences. Current applications include public services (police/fire/city councils) and private mobile radio (e.g. taxis).
Existing rights sold by government
3.7 The table below sets out all the current allocated spectrum rights, that are available for cellular telecommunications. Not all of these spectrum rights are used by the right holders at the moment.
Table 1 Spectrum suitable for cellular services: Rights sold by government
|Low Freq (MHz)||High Freq (MHz)||Bandwidth(MHz)||Right holder||Start Date||Expiry Date|
|890||897.5||7.5||VODAFONE MOBILE NZ LIMITED||07-Nov-02||29-Jun-12|
|897.5||907.4||9.9||VODAFONE MOBILE NZ LIMITED||03-Apr-03||28-Nov-11|
|907.4||915||7.6||VODAFONE MOBILE NZ LIMITED||21-Oct-94||29-Jun-12|
|939||942.5||3.5||VODAFONE MOBILE NZ LIMITED||22-Nov-02||29-Jun-12|
|942.5||952.4||9.9||VODAFONE MOBILE NZ LIMITED||31-Mar-03||28-Nov-11|
|952.4||960||7.6||VODAFONE MOBILE NZ LIMITED||21-Oct-94||29-Jun-12|
|1710||1725||15.0||VODAFONE MOBILE NZ LIMITED||27-Sep-01||31-Mar-21|
|1805||1820||15.0||VODAFONE MOBILE NZ LIMITED||27-Sep-01||31-Mar-21|
|1920||1935||15.0||VODAFONE MOBILE NZ LIMITED||13-Feb-04||31-Mar-21|
|2015||2020||5.0||VODAFONE MOBILE NZ LIMITED||11-May-01||31-Mar-21|
|2110||2125||15.0||VODAFONE MOBILE NZ LIMITED||13-Feb-04||31-Mar-21|
|825.015||835.005||10.0||TELECOM MOBILE LIMITED||09-Sep-92||08-Sep-12|
|835.005||845||10.0||TELECOM MOBILE LIMITED||30-Oct-92||29-Oct-12|
|870.015||880.005||10.0||TELECOM MOBILE LIMITED||09-Sep-92||08-Sep-12|
|880.005||890||10.0||TELECOM MOBILE LIMITED||30-Oct-92||29-Oct-12|
|1735||1760||25.0||TELECOM NEW ZEALAND LTD||20-Dec-01||31-Mar-21|
|1830||1855||25.0||TELECOM NEW ZEALAND LTD||20-Dec-01||31-Mar-21|
|1950||1965||15.0||TELECOM NEW ZEALAND LTD||20-Dec-01||31-Mar-21|
|2140||8155||15.0||TELECOM NEW ZEALAND LTD||20-Dec-01||31-Mar-21|
|Total allocated spectrum rights||316|
Source: Ministry of Economic Development
3.8 In total, the spectrum allocations for the operators are set out below.
Table 2 Spectrum suitable for cellular services: Allocation by right holder
|Right holder||Band||Total MHz|
|Vodafone||900MHz||2 x 23 MHz|
|1800MHz||2 x 15 MHz|
|2GHz||2 x 15 MHz + 5 MHz|
|Telecom||800MHz||2 x 19.985 MHz|
|1800MHz||2 x 25 MHz|
|2GHz||2 x 15 MHz|
|1800MHz||2 x 25 MHz|
|2GHz||2 x 15 MHz + 5 MHz|
Source: Ministry of Economic Development
3.9 Actual current spectrum utilisation for cellular services is shown in the table below.
Table 3 Current use of spectrum for cellular services, by cellular band
|Telecom||800 MHz||D-AMPS, CDMA CDMA-2000, EV-DO|
|1800 MHz||Not used for cellular|
Source: Ministry of Economic Development, Telecom, Vodafone
3.10 Although there have been relatively few auctions from which to draw data, there has been a downward trend in the price of new cellular spectrum (the marginal price of spectrum). The graph below illustrates.
Figure 1 cellular spectrum rights prices at auction or tender (NZ$/MHz)
3.11 Telecom and Vodafone use different families of cellular technology. Telecom uses technology developed in and for the US market, in the CDMA “family.” Vodafone uses the European GSM family.
3.12 Telecom’s networks (D-AMPS, CDMA, EVDO) all operate within the same frequency band, the 800MHz band. New iterations of EVDO technology are being developed for other bands (other than the 2GHz band) by equipment manufacturers.
3.13 Vodafone currently operates voice and texting services using the 900MHz band, GPRS in the 1800MHz band, and WCDMA in the 2GHz band.
3.14 On a timescale of five to fifteen years, assuming that cellular technologies have not been superseded, for example by Wi-Max, the optimal spectrum holding is likely to be in two core bands:3
- A lower frequency band (e.g. 800MHz or 900MHz) to achieve wide-area coverage; and
- A higher frequency band (e.g. 2GHz) for shorter-range, high data rate traffic.
3.15 These core bands could be supplemented, as required, by use of other bands allocated for cellular (e.g. 1800MHz or the IMT-2000 extension bands at 2.6GHz at the upper end, or conceivably the 450MHz band at the lower end).
3.16 Notwithstanding the above, the actual spectrum requirements for a given operator will be driven by actual demand for the operator’s services and the economic choices around minimising the cost of delivering a target quality of service.
3.17 Key facts on New Zealand’s cellular market are summarised in the table below.
Table 4 New Zealand’s Cellular Market: Key Facts
|Total call minutes||(million)||1,248||2.114|
|Average revenue per usage (Post-paid)||($/month)||$73.10||$143.83|
|Average revinue per user (prepaid)||($/month)||
Source: Telecom Annual Report 2005; Vodafone quarterly KPIs September 2005 (www.vodafone.com)
3.18 The graph below illustrates growth in subscriber numbers and penetration rates over the last three years.
Figure 2: New Zealand cellular market: Subscribers and penetration rates
3.19 New Zealand is somewhat unique in the developed world in only having two operators. Most developed markets will have more. With only two operators, competition can be expected to be at a different level than in markets with four or five operators. In particular, it is hard to see the cellular market in New Zealand (and hence the market for spectrum) being as intensely competitive as in some other markets. There is not a multitude of participants and the level of competitive intensity can be expected to be lower. Moreover, practical barriers to entry exist, through the existing positions of the two incumbent operators and the overall size and saturation of the cellular market.
3.20 It would not be unreasonable to assume that market participants would earn economic rents in a market with less competitive intensity. These rents would be threatened by entry of new participants to the market. Logically, the incumbent operators would place a price on being able to exclude new entrants from the market. That price would be a proportion – depending on the likelihood of new entry if surplus spectrum was available – of the economic rent being earned.
3.21 The probability of effective new entry appears to be low4, but cannot be fully discounted. Spectrum does not appear to be the constraining factor (as it can be in many markets), but rather the overall business case and, in particular, the size of the market and the strong positions of the two existing operators. Having said that, during the course of this assignment, Econet announced that it will roll out a limited 3G network in Auckland (although we are yet not aware of this actually proceeding).
3.22 This would suggest that, irrespective of the demand for or supply of spectrum, and the implications of this for price-setting, protecting predicted economic rents might place a premium on ownership of those spectrum rights that the operators might be prepared to pay to the sole vendor of the spectrum (the Ministry). This is partly a function of the duration of the renewal – the policy benchmark is 20 years – and the uncertainty as to future market developments over such a long period.
3.23 A number of points have been made in the discussion in this chapter about radio spectrum available for cellular use and the characteristics of the New Zealand cellular market. An important issue for the pricing of spectrum rights is whether the demand for cellular services is at a level that means that the amount of available spectrum exceeds the amount of spectrum needed to meet the demand for cellular services.
3.24 This is not a purely technical question. There are two reasons for this. First the amount of demand for cellular use is not fixed; it depends significantly on the pricing structures adopted by the firms and the availability and pricing of substitute products or services. And second, there are different ways of constructing networks to meet demand, with different capital costs, and these will require different levels of spectrum availability.
3.25 For the discussion here we can work around these difficulties. We assume that the pricing structure that has emerged locally is a feature of the market as it exists, and that the need for spectrum therefore can be seen primarily as an engineering question once the basic commercial approach to the network construction is determined. This allows us to define “scarce” in terms of the engineering structure selected.
Medium to long term
3.26 In the long run, it appears that, in general, spectrum for cellular use in New Zealand is not truly “scarce,” and is unlikely to become so. That is to say, despite the physical limits on the available quantum of spectrum, there is little likelihood of actual shortage. If there was a shortage or expected shortage then signs of physical problems meeting demand or significant price increase to ration available supply would begin to emerge.
3.27 Conforming with the ITU designations of spectrum for cellular use, the New Zealand Government has made available to the market at least as much spectrum as most European countries. However, New Zealand’s population and population densities are significantly lower than most of these other countries. By way of illustration, the table below provides a very simple comparison to the UK.
Table 5: Comparison of UK and NZ
|Land area (km2)||241,600||268,021|
|Total population||59.8 million1||4.1 million2|
|Cellular subscribers||57.3 million3||3.5 million4|
|Total cellular spectrum allocation (MHz) (900MHz, 1800MHz, 2GHz bands)||~375MHz||~345MHz|
- UK Office for National Statistics (Mid-2004)
- Stats NZ 18 December 2005
- As at 30 June 2005. Source: OFCOM, Telecommunications Market Data Tables Q2 2005
- As at 30 June 2005. Source: Telecom, Vodafone
3.28 Even without additional spectrum, it appears highly unlikely that there will be a physical scarcity of spectrum for cellular use in New Zealand for the foreseeable future. However, as discussed, this is subject to operators’ choice of technology and its deployment, as well as pricing patterns.
3.29 Government could conceivably create an artificial scarcity. However, this would be a complete reversal of current policy, which has been to make spectrum generally available with the objective of maximising economic and social well-being. Short to Medium Term
3.30 The discussion above ignores operator choices about the technology that it has deployed or will deploy. While spectrum for cellular services as a whole is not scarce in New Zealand, and is unlikely to be so in the foreseeable future, it may be more scarce in particular instances in the short to medium term, due to historical technology decisions taken by operators.
3.31 All of Telecom’s 2G and 3G cellular services are concentrated in the 800MHz band. Standards and equipment is being developed for the CDMA-2000 family for use in other bands. However, in the short to medium term, utilisation of bands outside of the 800MHz band by Telecom would be likely to require levels of investment that might be difficult to justify on financial grounds because:
- Construction of entirely new core and radio networks using a different family of cellular technologies and migration of customers onto the new technology (with replacement of handsets being a significant burden, potentially much greater than the cost of the new network); or
- Commissioning of newly designed equipment to operate in that band (still with the attendant costs of migrating customers).
3.32 By contrast, Vodafone New Zealand has an allocation of 900MHz spectrum approximately double that of Vodafone UK, but serves only 12% of the subscribers as the UK operation. Further, using the GSM family, Vodafone can use its allocation in the 1800MHz band for 2G services5 and in the 2GHz band for 3G services. Migration into the 1800 band, for example, would be unlikely to incur costs of handset migration (the vast majority of GSM handsets operate in both 900 and 1800 bands), but would still incur costs of addition to the radio network in the form of additional base stations (given that cell size decreases and frequency increases) and upgrades to the core network.
3.33 If we assume that spectrum is not scarce – in fact, that it is in substantial surplus to demand - the implication is that the value of a marginal piece of spectrum to an operator will be very low, all other things being equal.
3.34 While this appears to be a possible scenario, it cannot be determined with certainty. In the last five years, there has been sufficient competition at auction for operators to pay more than zero. Equally, market conditions may also have changed since then.
3We understand that equipment is being developed for the CDMA family for use in other frequency bands than the 800 MHz band.
4Potential entrants have in theory had access to other spectrum (e.g. that currently held by TelstraClear) for a number of years, but have not entered the market, even when it was less mature.
5We assume that most if not all GSM handsets currently sold in New Zealand are multi-band and can use 900MHz and 1800MHz