2. TelstraClear responses to submissions by other parties

2.1 Telecom NZ

Costs and benefits of auctioning management rights

4. Telecom makes the following comments regarding risks around an incumbent rightholder losing their management rights:

    

   We also note that there are potential economic downsides to the incumbent rightholder losing its management rights. Telecom believes the policy objectives of the spectrum renewal require the Ministry to consider those potential effects. In particular, the situation for an incumbent is different from a new entrant, because if an incumbent loses its management rights it may have to write-off sunk assets whereas an entrant does not. This means that the existing rightholder’s valuation for keeping the spectrum is likely to be greater than an entrant’s valuation of winning spectrum by the value of the write-off…. “

    

   Further, a cellular operator losing its spectrum would have significant impacts on the consumers of mobile services. These impacts are relevant, given Cabinet’s decision that the Ministry should consider the effect of renewal on society. In particular, if the existing rightholder lost its rights, consumers are likely to incur costs when switching to another service provider or existing provider operating at different spectrum bands. Such costs may include having to write-off current mobile phones as well as the time and effort to making the switch. The entrant or incumbent is not likely to bear these costs, therefore these costs are not likely to be factored into the auction bids. As a result, there is a risk that an auction will not result in an efficient allocation of spectrum.” ²
5. As with any policy decision, it is appropriate to consider the costs and benefits involved. There may indeed be costs to both the incumbent and to consumers using the incumbent’s services if an incumbent loses its rights. However, this does not mean that there is necessarily an overall cost to society from a decision to auction the rights, as Telecom seems to be seeking to imply. A decision to auction the rights should only be made if this would result in net benefits, which in TelstraClear’s view is the case because of the significant dynamic efficiency benefits that would result from increased competition.Top
6. This statement by Telecom also seems to attempt to imply that it is a foregone conclusion that the incumbents would lose their rights if they were put up for auction. However, as Telecom notes, the risk of having to write off sunk costs is likely to mean that an incumbent will place a greater value on the spectrum than an entrant. That being the case, the incumbent is likely to obtain the rights in an auction. However, as TelstraClear has submitted previously, the best approach for maximising the benefits of the spectrum would be to reconfigure the spectrum in a manner that promotes competition. If the Ministry follows TelstraClear’s suggestion of blocks of 2x10 MHz of spectrum in both the 800 and 900 MHz bands, then the risks and costs associated with incumbents losing the rights are further minimised.
7. TelstraClear takes issue with Telecom’s assertion that because an auction does not incorporate the costs to consumers that might result from an incumbent losing its rights in an auction it might result in an inefficient allocation of spectrum. For spectrum allocation to be efficient, it must be allocated to the highest value use. While an auction may not perfectly reflect all the costs and benefits to society, of the allocation methods available it best ensures that the rights to the spectrum are obtained by the party that values them most, consistent with allocative efficiency. Offering the spectrum back to the incumbent, uncontested, provides no such guarantee. Moreover, Telecom’s analysis is, again, one sided and fails to take into account the benefits that might accrue to consumers from competition for the spectrum.
8. Telecom seeks to link its assertion of a risk of an inefficient outcome through an auction to the renewal price. In particular, Telecom states that “the MED can reduce this risk [inefficient allocation of spectrum by auction] by taking into account the consumers switching costs when calculating the renewal price”. The Ministry should ignore this suggestion for the following reasons. First, as stated in the previous paragraph, an auction is more likely to result in an efficient allocation than offering the spectrum back to the incumbent uncontested. Second, if the spectrum were offered back to the incumbent consumers would incur no switching costs. Consequently, it would be inappropriate for such costs to be incorporated into the renewal price. Expectations about future performance of different technologies
9. Graph 1 of Telecom’s submission³ seeks to suggest that all technology options will ultimately and smoothly converge on 'equivalent performance' around 2015. TelstraClear considers that such smooth convergence of performance of different technologies is very unlikely. This is because any tendency towards convergence will inevitably prompt one or other of the technology proponents to develop further technical enhancements in an effort to maintain their respective market differentiation.Top
10. TelstraClear is curious as to the source of Graph 1 of Telecom’s submission. It is distinctly at odds with the step-increase in capacity/speed performance enhancements expected to be launched by the respective industry sectors in accordance with forecast milestone time-points over the next several years (see, for example, the expected performance milestones for UMTS/HSDPA set out in paragraph 11(c) (i)-(iii) below). In that context, the graph should more accurately be drawn as a set of 'staircase' plots, with the “steps” of varying sizes, and variously crossing over as competitive performance enhancements are released over time.
11. An important aspect of technology evolution, which may impact on future efficient use of critical national spectrum resources, is the likely timing of the launch of key technologies and their market penetration. This is because it is all too easy to promise some future new technology that apparently offers a step change in performance but which is never quite delivered. The key points are:
    1. TelstraClear’s assessment is that Wi-Bro is essentially now being absorbed by WiMAX. It should therefore no longer be separately identified. The implication of absorption of this is that there are limited alternatives to 3G technologies .
    2. TelstraClear’s assessment is that the delays in the launch of the global interoperability certification regime for mobile WiMAX (802.16e) technology may result in it being overshadowed by the current rapid growth in deployment of UMTS/HSDPA networks. This may occur to such an extent that WiMAX is not able to capture the necessary market scale to make it a ubiquitous platform. However, forward predictions remain somewhat conjectural at this stage so it is too early for firm conclusions to be drawn.
    3. 3G/UMTS/HSDPA has already been launched in the 850MHz band in Australia and the United States. 3G/UMTS/HSDPA has also been deployed in the 2100 MHz band in many countries and in the 1900 MHz band in the United States. With the consequent availability of network equipment and handsets, decisions in a growing number of other countries are imminent. As such, the key performance milestones for this technology eco-system are now reasonably clear, being:
       1. now - 3.6Mbps/384kbps (peak uplink/downlink);
       2. early 2007 - 14.4Mbps/1.5Mbps; and
       3. by 2010 - 40Mbps/1.5Mbps.
    4. Network trials of 3G/LTE are scheduled for late 2007. Equipment vendors are therefore working toward a launch target, which further cements the performance milestones of the UMTS eco-system over the next several years.
    5. Global media reports indicate a growing number of network operators are shifting away from CDMA2000 technology platforms and instead deploying UMTS/HSDPA networks. As such, while EVDO initially offered 1.5Mbps (peak downlink) and Rev.A offers around 3.5Mbps, the timely delivery of future upgrades such as Rev.B and Rev.C may come under question as global demand evaporates. As such, the future performance milestones of CDMA2000 networks are much less assured in both time and absolute availability, and network operators reliant on this technology (such as Telecom) may experience reduced market share over time as other more competitive platforms/services overtake them.Top
12. For these reasons, TelstraClear recommends that the Government’s approach to renewal of the 800 and 900 MHz bands should focus on promoting competition in each of these bands rather than relying on a single operator and single technology platform. Accordingly, at least some of the spectrum in these bands should be reallocated by auction for use by new entrants. Future use of 800-900 MHz spectrum and capacity for use by new entrants
13. TelstraClear does not agree with Telecom’s assertion that the 800-900 MHz bands is "best suited for rural areas".⁴ This ignores the advantages these bands offer for meeting customer expectations for maximum building penetration in urban areas. In particular, higher frequencies, such as 1800 MHz and 2100 MHz bands, experience much greater building penetration losses than 800 or 900 MHz bands. While it is true that 800-900 MHz offers longer propagation ranges in open and flat rural areas than higher frequencies - and therefore means fewer rural base stations may be required (although, given New Zealand’s hilly terrain, such an advantage is highly debatable) – TelstraClear does not agree that this implies that these frequencies should in some way be “prioritised” for rural use. Taking such an approach would imply significantly undervaluing the substantial benefits that the 800-900MHz bands offer for serving urban customers.
14. TelstraClear notes that Telecom states it is currently using just over 50% of its 10 MHz AMPS-A band in the vast majority of its CDMA cell sites.⁵ Telecom indicates that the remainder is unused, except in infrequent cases of itinerant peak load (e.g. Christmas holiday sites and National Field Day events). Moreover, Telecom indicates that it is already planning to migrate the remaining 300,000 AMPS/TDMA customers (a relatively small number in comparison to typical overseas networks) from its AMPS-B band onto its CDMA network by April 2007.⁶ As such, Telecom openly admits that it can readily accommodate all of its current customer base within its AMPS-A band spectrum holding, and with several CDMA carriers to spare.
15. Like other network operators in NZ, Telecom also already enjoys access to other bands including the 1800 MHz and 2100 MHz bands. By their inherent nature (shorter range and thus higher spectrum re-use ratio), these bands are ideal for handling the peak load demand anticipated to arise from emerging high-capacity wireless applications. Thus, as Telecom specifically notes in its submission,⁷ the limited capacity of the 800-900 MHz bands can be readily offset by an overlay network based on use of 1800/2100 MHz cell sites - as is common practice in most other countries. There seems no basis to exclusively reserve access to 800 and 900 MHz bands to just two operators, and deny the unique benefits of this band to other competitive operators.
16. TelstraClear’s assessment is that the proposed future use of the AMPS-B band offered by Telecom is vague. Moreover, Telecom's proposal for allowing seven additional CDMA carriers x 1.25 MHz belies the fact of the conventional 1:1 frequency reuse principle of CDMA networks. Given New Zealand’s demographic characteristics, TelstraClear considers it is very difficult to envisage any traffic situation arising that would ever require an additional seven CDMA carriers, especially in light of the fact that Telecom already has nearly 50% vacant CDMA carriers remaining in its AMPS-A band.
17. TelstraClear considers that Telecom’s suggestions that the AMPS B band will be available to support EVDO Rev.B and Rev.C⁸ are speculative. In any case, the spectrum requirements of these services could be readily and efficiently met by use of other bands such as 1800 MHz.Top
18. TelstraClear does not agree with Telecom’s suggestion that its AMPS B band is the only band available for Telecom to migrate from CDMA to other technologies.⁹ Telecom has rights to spectrum in other frequencies and these would be perfectly appropriate for deploying other technologies. For example, the 2100 MHz band is suitable for deploying a 3G-LTE network. Such a network deployment would logically commence in urban areas, where long propagation characteristics are not required.
19. In paragraph 25 of its submission Telecom compares the spectral efficiency of CDMA with GSM. As far as TelstraClear is aware, there is no suggestion that GSM technology would ever be contemplated by any network operator in the 850MHz band at any time in the future. If TelstraClear were able to use this band, TelstraClear’s intention would be to deploy HSDPA technology in this band. HSDPA has a similar spectral efficiency to 1xEV-DO.¹⁰
20. Telecom asserts in paragraph 27 of its submission that it will require all of its 850 MHz spectrum rights “to meet existing data forecasts in the short to near term”. TelstraClear considers that this assertion is unsustainable in light of the information and deployment scenarios outlined in Telecom's own submission. There is therefore no basis for exclusively reserving the entire 850 MHz band for sole ongoing use by Telecom. The band should therefore be re-allocated upon expiry via a competitive auction process to:
    1. ensure that Telecom pays a "market-derived" valuation for the management rights for its current AMPS-A block; and
    2. allow a second competitive operator to exploit the inherent value in the AMPS-B block to the broader economic benefit of the NZ community.

2.2 Telecom

21. TelstraClear notes that Vodafone does not appear to offer any particular justification for why Vodafone should retain the majority of the management rights over the 900 MHz band. TelstraClear’s comments in response to Telecom’s submission on use of the 850 MHz also apply in a general sense to the 900 MHz band.
22. TelstraClear also notes that GSM radio re-use techniques, notably fractional re-use, micro/macro cell combinations have dramatically increased spectral efficiency. Consequently, this would allow some of the 900 MHz spectrum used by Vodafone to be allocated for use by other providers.
23. TelstraClear’s assessment is that European countries will allow deployment of 3G technologies in the 900 MHz band in the near future (in fact, Finland has already made a decision to allow UMTS deployment and France has made clear indications it will take a similar step), including in some cases as early as the end of 2007. TelstraClear understands that the major vendors are already gearing up to supply network equipment and dual-band terminals in increasing numbers in order to meet the predicted demand.
24. TelstraClear notes that 3G-LTE (and emerging 4G) technology can be accommodated within channel sizes that are integer multiples of 1.25 MHz or 5 MHz. As such, dividing up the available 900MHz spectrum block (2 x 21 MHz) between multiple operators needs to be done with care.Top

2.3 Econet

25. TelstraClear does not agree with Econet’s suggestion that the 850 MHz upper limit should be reduced to 886 MHz "to allow use of the full 25+25 MHz spectrum available for standard GSM use".¹¹ While there is certainly a guard-band issue to be accommodated, Australia has accommodated a much closer usage than the 4MHz guard-band suggested by Econet. Moreover, GSM is a technology that is likely to be nearing its end-of-life around 2010. It would therefore be inappropriate to be designing a band-plan to apply from 2011-2031 based on technology that will, by and large, be superseded by that time.
26. TelstraClear’s assessment is that Econet’s proposal to divide up the 900 MHz band into four equal portions¹² may fail to take into account the actual technical requirements of future technologies. In particular, it appears to overlook the minimum 1.25 MHz granularity needed for future 3G-LTE (and 4G) systems. In addition, it overlooks the possibility of also including the upper portion of the E-GSM band (925-935 MHz) to provide an asymmetric allocation opportunity supportive of future broadband downlink arrangements. For example, the expanded band (ie the current band plus the upper portion of the E-GSM band) could support 4 operators each with 6.25+8.75 MHz allocation - or 3 operators each with 5+10 MHz plus 1 operator with 5+5 MHz and a single TDD 5MHz slot, etc.¹³

³ibid, page 7.

⁴ibid, paragraph 17.

⁵ibid, paragraph 19.

⁶ibid, paragraph 19.

⁷ibid, paragraph 17-18.

⁸ibid, paragraph 20.

⁹ibid, fourth sub-bullet, paragraph 20.

¹⁰Rysavy Research, Data Capabilities: GPRS to HSDPA and Beyond, White paper developed for 3G Americas, September 2005, page 42.

¹¹Econet Wireless New Zealand Ltd, Response to Ministry of Economic Development: Renewal of Management Rights for Cellular Services Discussion Paper, September 2006, page 5.

¹²ibid, page 5.

¹³TelstraClear understands that Vodafone currently has rights to 2x21 MHz, while the Crown holds rights to 4MHz in this band. TelstraClear is not aware of the purpose of the 4MHz held by the Crown. If this holding is set aside as a guard band, TelstraClear considers that this quantity is more than is necessary for the purposes of providing a guard band.