4. Economic Outcomes

Economic Objectives

Pricing

Commercial Assignment

Allocation of Spectrum

Broadcasting Issues

This chapter describes and reviews spectrum policies and processes that contribute to the achievement of New Zealand's economic outcomes.

Economic Objectives

123. It was noted in the conclusion to Chapter 1 that the management of radio spectrum is governed directly or indirectly by a variety of Government policies and purposes, which are embodied in legislation and Cabinet decisions. It is convenient to divide these into economic and social and cultural objectives, although the distinction is not always clear-cut. This chapter examines the effectiveness of radio spectrum management in supporting economic objectives. Social and cultural objectives are discussed in Chapter 5.
124. Under current Government policies, economic objectives encompass:

• promoting competition;
• maximising the value of spectrum to society; and
• satisfying growing demand.

Pricing

125. Initial assignment of spectrum, under the RLR or the MRR, can be administrative or by the sale of spectrum rights. It is usual for spectrum managed under the RLR to be assigned at a price that covers the costs of administration but does not necessarily reflect the real value (whatever that may be) of the spectrum. If the regulator wishes to assign spectrum at a price that reflects its value to society, the main options are administrative pricing or commercial allocation.
126. Administrative pricing sets charges for spectrum that approximate the market value of the resource, thus providing users with incentives to release unused or underused spectrum, to consider alternative services or uncongested frequency bands, and to implement more efficient technologies. Recent experience suggests that calculating such charges can be difficult and that they are unlikely to be wholly accurate. Further, raising the price of spectrum through this mechanism would run counter to Government's policy of reducing business compliance costs.
127. In academic literature, a number of methods for estimating the monetary value of spectrum rights have been postulated, all subject to uncertainties and inaccuracies. It is widely accepted that opportunity cost provides the least uncertain estimate, but that rather begs the question, as the next best alternative use of spectrum must be identified and such information is seldom available. Calculating the marginal value to an incumbent user is equally problematic, because the data available (revenue, profit) lends itself more to the calculation of average than marginal values.
128. Were such calculations reliable, uncertainty remains as to whether the incumbent is currently allocating spectrum to its highest-value use (and whether this actually represents its maximum value to society, not merely to its user: a proposition much argued but incapable of proof). Opinions vary, therefore, as to the most practical method of valuing spectrum.16
129. Economic value analysis examines the total value generated in the economy of the country as a result of activities associated with radio spectrum (e.g. profits of cellular operators, salaries, equipment purchases) in order to determine which applications add the most value. More spectrum can then be allocated to those applications that generate high levels of value. The main problem with this technique is the inherent difficulty in performing the work to any degree of accuracy. A further problem is that there is a high resource cost in gathering the required data (if that data is indeed available), that measuring such proxies as salaries may not yield an economic value, and that the market may change more rapidly than analysis can follow.
130. Secondary trading of administrative licences could be used to develop a real market in spectrum, as opposed to the pseudo-market of administrative pricing. Theory posits that, as long as an efficient secondary market exists, it matters very little how the spectrum is assigned initially. Trading would allow prices to fluctuate according to supply and demand and the true market value would be realized at all times. The main disadvantage, in some critics' views, is that windfall gains would be enjoyed by those who happen to be holding spectrum at the time trading is introduced. Further, the government, although avoiding engaging in profit-taking, would not capture the market value of that spectrum in its revenue. The market itself might be difficult to regulate.
131. With commercial assignment, the regulator offers spectrum on the open market, relying on competition to determine the value of the spectrum to purchasers. This mechanism works most effectively when there are large numbers of willing and informed buyers and sellers, but is less effective where buyers are few and high entry costs prevail as, for example in the New Zealand telecommunications market.
132. Auctions can be effective determinants of value where there are large blocks of unused spectrum and many competing buyers. Advantages include transparency, a relatively low cost of operation, and significant revenue returns to government. Auctions also produce a market price that could be applied to spectrum assigned by other means: for example, administrative pricing. While well-resourced bidders tend to overshadow small or low value users, with diminished downstream competition resulting, auctions are a cost-effective rationing mechanism where no social and cultural objectives are at risk.

Commercial Assignment

133. Commercial assignment of long-term spectrum rights can generate efficient outcomes, as the competition to obtain spectrum should mean that radio frequencies are used by the entities valuing them most. However, the relatively small number of operators in the New Zealand market creates a likelihood that management right-holdings will be concentrated, with the conditions by which markets operate competitively being compromised. Government maintains some ability to intervene in the market where necessary, with the options of encouraging competitive behaviour, discouraging anti-competitive behaviour, or both.
134. The Radiocommunications Act deems management rights and spectrum licences to be assets of a business for the purposes of s47 of the Commerce Act 1986, which prohibits the acquisition of assets (in this case management rights and spectrum licences) if the acquisition would be likely to have the effect of substantially lessening competition. Section 36 prohibits the taking advantage of substantial market power for exclusionary purposes. With respect to merger and acquisition control, the onus is on the acquiring company to comply with the Act. In order to provide certainty to companies whether a proposed merger does comply, the Act provides a potential purchaser with the ability to apply to the Commerce Commission for a clearance or authorisation.
135. A clearance is granted if the Commerce Commission concludes that a proposed merger will not substantially lessen competition in a market. An authorisation is granted if the Commerce Commission concludes that, although competition will be substantially lessened, the benefit to the public will outweigh the detriments of the proposed merger. If granted, a clearance or authorisation protects those acquiring the business from further scrutiny by the Commission and/or complaints from private individuals.
136. When the Radiocommunications Act was reviewed in 1995 the government determined that the provisions of the Commerce Act should, in general, continue to be used for competition issues and that no industry-specific legislative safeguards were required. This accorded with the prevailing view of industry and the Ministry. Since then, industry-specific regulation of downstream telecommunications markets has been implemented through the Telecommunications Act 2001.
137. The Commerce Act was amended in 2001. A key amendment was to change the s47 threshold from a test of dominance to a test as to whether an acquisition has the effect of substantially lessening competition in a market.17 No complaint made in respect of radio spectrum has yet been assessed by the Commerce Commission as breaching this provision. Consequently, major rightholders have been able to continue the expansion of their holdings. This in turn has precluded spectrum acquisitions by local and regional interests, as they lack the financial resources to compete at auction with the national networks.
138. There is provision in the Act for the Commerce Commission, at the request of a Minister, to set qualitative and quantitative thresholds relating to anti-competitive market behaviour: for example, percentage of total radio assets held or price charged for access to a network. This provision has never been invoked in respect of radio spectrum.
139. The Ministry has the power to impose such limitations on spectrum acquisition as spectrum caps (see Spectrum Caps and Eligibility Requirements) and eligibility requirements, and has done so in recent auctions, though only on a case-by-case basis.

Issue 4.1

The Act relies on the provisions of the Commerce Act to resolve competition issues. Given the perceived need to apply spectrum caps and eligibility requirements in past and future auctions, and the absence of determinations against dominant acquisitions, is there a case for re-examining the effectiveness of these provisions?

Secondary Markets

140. A secondary market is perceived to work efficiently when there is a large number of informed and willing buyers and sellers. Secondary market trading in spectrum, however, is constrained in New Zealand by a number of factors. These include:

• New Zealand's small consumer market;
• the high entry costs of new radiocommunications and telecommunications services;
• the limited number of buyers and sellers; and
• the ready availability of inexpensive alternative spectrum under the RLR, which limits incumbents' incentive to trade.

141. The low volume of spectrum trading does not necessarily imply hoarding for anti-competitive purposes. New Zealand companies state that they purchase spectrum with the intention of using it, rather than for on-selling, and that they bid in auctions largely to ensure that they are able to compete in any future downstream markets that may develop (e.g. 3G mobile spectrum). It does, however, place pressure on the stock of spectrum that remains available for auction. There is a view that, if there were a properly functioning secondary market for spectrum, companies would be able to use resources more efficiently by investing in spectrum closer to the time it is needed. Instead, they are forced to anticipate future use and stockpile unused spectrum.
142. A way of addressing the issue is to allow more players into the market, by limiting the percentage of spectrum that may be held by any single entity and/or creating a more favourable start-up environment. There are arguments against such measures, the most cogent being that small players are unlikely to benefit from economies of scale, thereby negating any advantages to the consumer that might accrue from competitive pricing. Nonetheless, monopolistic or duopolistic influence in the consumer market commonly promotes over-pricing and excess profit-taking, and can discourage innovation.
143. The way in which spectrum is packaged is also significant. Australia has recognised this in creating Standard Trading Units (STUs) for spectrum. These can be traded en bloc or subdivided, in contrast with NZ's regime of licences tailored to specific users on a case-by-case basis, which may not as easily be transferred to other users or uses. A recent decision here, to assign spectrum by means of area licences based on administrative boundaries for 3.5 GHz fixed wireless access use, may facilitate the adoption of more flexible uses and engineering solutions

Issue 4.2

Is there merit in re-packaging the MRR to provide for regional or local management rights? What would be the implications for legislation, engineering and administration?

144. Guatemala has recently instituted a system of usufruct18 titles (TUFs) to spectrum, by which individuals may apply for the right to use any unused spectrum and, if there are no interference issues or public objections, receive title within 15 days. Competing applications are settled by auction.
145. Since 1996, the Guatemalan regulatory authority has received more than 13,000 TUF applications and has issued more than 5000 usufruct titles. Of these, a quarter has been transferred in what appears to be a healthy secondary market, augmented by an unknown number of unrecorded leases. Guatemala has experienced a remarkable growth in telecommunications since the introduction of the new regime, exceeding all relevant statistical benchmarks for middle-income Latin America by a considerable margin.19
146. Australia, the United Kingdom and the USA (see the Appendix) are moving towards the establishment of trading desks, to facilitate sales and transfers of spectrum. Whatever measures are adopted, simplicity, transparency and low transaction costs will be advantageous.

Issue 4.3

Are there proactive means by which the government could promote and enhance secondary spectrum markets?

Spectrum Auctions

147. The Ministry moved to simultaneous, multiple round (SMR) ascending auctions from 1996, initially by faxed bids. An Internet bidding system was implemented in 1998. Such auctions make all lots available for bidding at the same time. The auction takes place over a number of rounds of a specific duration (say thirty minutes), until no further bidding takes place on the lots being offered.
148. In theory, auctions should result in a similar clearing price to a second-price tender as the auction clearing price is one increment above the value placed on a lot by the second price bidder. The fact that the identity of bidders and the value of bids are disclosed during the auction encourages clearing prices which more fairly reflect the real market value of rights. SMR auctions allow bidders who wish to purchase specific combinations of lots to take part. Other advantages are that bidders obtain full market information and are able to determine their level of success on any combination of lots at any time during the auction.
149. An alternative to the SMR auction is a combinatorial auction, in which bidders make offers for specific combinations of lots on an all-or-nothing basis. This reduces the risk inherent in SMR auctions that a bidder may acquire an unmatched or incomplete block of licences. It does, however, introduce a number of technical problems related to auction design. In SMR auctions, each lot is bid for separately and is clearly distinguishable from other lots. In combinatorial auctions, no two bidders will necessarily be bidding for the same combination of lots, and comparing bids in each round requires the application of an algorithm to determine the optimum (highest value) bid. Combinatorial auction theory is still evolving and the methodology has yet to be proven on a significant scale.20
150. The FCC is considering variations of the clock auction as a potential method for future spectrum sales. Clock auctions are multi-round bidding events at which similar lots are offered by the auctioneer at a single price and, within a predetermined time period, bidders nominate the quantity required. If there is excess demand (i.e. more lots are required than are available) the price is progressively raised until demand matches supply. Conversely, if there is excess supply, the price is progressively lowered. Clock auctions have the merit, in most cases,21 of precluding the "winner's curse", by which the winning bidder pays well above the market clearing price, as the bid price is always the clearing price.
151. A Vickrey auction commences with bidding on a single lot, SMR-style. The successful bidder has the opportunity to acquire multiple lots at the winning price. Bidding recommences on the remaining lots, and continues in this fashion until all lots are sold. This method overcomes the problem of acquiring mismatched lots, as under the SMR method, and to some extent mitigates the effect of the winner's curse.
152. In an auction, the highest bidder has to convince its governing body and/or the money market to provide sufficient financial backing for the bid. Price-based assignments have the advantage of being more efficient and transparent, and less prone to challenge. Concerns that participants with significant market power may hoard rights or exclude competitors can be met by the application of general competition law, or (more controversially) by such specific safeguards as spectrum caps and implementation requirements. Auctions are being used increasingly overseas for the assignment of commercial spectrum (see the Appendix for Australian, North American and UK references).
153. Alternatives to auctions include first-come-first-served assignment and beauty contests. Where demand exceeds supply, first-come-first-served licensing is less likely to ensure that spectrum achieves the highest value use. Beauty contests are superficially attractive, as they ensure that a wider range of considerations than price determines the highest value use of the spectrum. All beauty contests rely, however, on a subjective judgement by the decision-maker, whether the Ministry, Ministers or an independent tribunal, and can be unreliable as a method of assignment. They may, however, be useful for qualifying bidders at auction, in terms of their eligibility under current spectrum policy.

Issue 4.4

What are the relative merits of different types of auction, and are some types more suitable than others for the various spectrum markets?

Spectrum Caps and Eligibility Requirements

154. A spectrum cap is a restriction on the amount of spectrum that any one entity (including associates of that entity) may hold. A cap can be applied at original assignment: for example, through auction rules which prevent any person from purchasing more than, say, a third of the management rights on offer in the auction, or incrementally acquiring more than a third of the total management rights allocated to the industry. It could also be applied following an auction by an agreement with the winning bidder that prevents any trading of management rights that has a similar result.
155. Determining the optimal size of a cap involves balancing two key efficiency considerations. If the cap is set too "loose", relative to the amount of spectrum available, the successful bidders will be in a dominant position with little incentive to limit consumer charges. If the cap is too restrictive, restricting the size and scope of spectrum acquisitions by any single entity, reduced economies of scale will result in higher implementation costs and higher consumer prices.
156. A further difficulty in determining the configuration and duration of a spectrum cap lies in deciding what limits to association between bidders should be imposed. It would be possible, for example, for several bidders to acquire management rights at auction without breaching spectrum cap conditions, but for a single entity to consolidate all of the holdings in secondary trading. In such circumstances, extension of the cap to cover secondary trading could be justifiable.
157. From 1989 until 2000, the Ministry did not apply any spectrum caps. The main policy rationale was that the Commerce Act applies to acquisitions of spectrum rights under the Act, so no specific restrictions were required.
158. In 2000, the Crown imposed a spectrum cap on the acquisition of spectrum rights for 3G mobile services. Its purpose was to facilitate the development of competition in the provision of such services in New Zealand. It addressed concerns that one or two of the 3G spectrum bidders might purchase enough of the spectrum to significantly reduce competition in downstream telecommunications markets. The Commerce Act provisions were not considered adequate to mitigate this concern, given the potential for an enduring 3G duopoly to exist under the "dominance" threshold. There was also some uncertainty at the time as to the eventual characteristics of the 3G market.
159. In extending the 3G spectrum cap, the Crown recognised that some constraints would be placed on commercial partnership models that spectrum holders might consider: for example, in some circumstances the long-term interests of consumers of 3G mobile telephony services might be better achieved by a joint venture servicing low-density areas. In the event that such a proposal were of interest to two or more parties and complied with Commerce Act requirements in being in the public interest, the Crown will consider modifying the 3G cap.
160. A spectrum cap was applied to some lots in Auction 5 in 2002 to ensure there would be at least three successful bidders. The cap was lifted automatically after one year, to allow secondary market trading to occur. It was considered that, as the Commerce Act had been amended to provide a "substantial lessening of competition" test and markets were more clearly defined, general competition law was again assumed to provide the most effective means of ensuring effective competition.
161. No spectrum cap was applied in Auction 6, of licences for sound and television broadcasting. The radio and television markets were considered to be mature, so the Commerce Commission was expected to have little difficulty in applying the "substantial lessening of competition" test. Further, to be effective, any cap would have had to be applied as an eligibility requirement which excluded two of the major broadcasters. There did not, at the time, seem to be sufficient policy justification for this. The auction was followed by some complaints about acquisitions to the Commerce Commission, which concluded, however, that no action was warranted.
162. Eligibility requirements are a potentially useful mechanism for ensuring that government policy objectives are met while maintaining a commercial spectrum market. Typical examples include requirements that:

• telecommunications providers maintain a 111 service;
• 3.5 GHz spectrum is used to provide rural broadband services; or
• urban FM radio spectrum is used for educational broadcasting.
  

When acquiring such spectrum, bidders are able to take into account the cost of providing the specified services

163. An outstanding policy issue is whether the justification for the application of spectrum caps or eligibility requirements is founded in competition policy (i.e. enhancing competition) or public policy (encouraging diversity). For example, in Auction 6 the Commerce Commission found that increases in licence holdings by the two largest rightholders in the mature radio broadcasting market did not breach the "substantial lessening of competition" test. There is some concern, however, that lack of diversity of ownership in this market may not serve the best interests of consumers.

Issue 4.5

There is a tension in the design of auctions (including the application of spectrum caps and eligibility requirements) between the objectives of assigning spectrum to the bidder according it the highest value and promoting the competitiveness of downstream markets. How might this tension be managed? Should constraints continue in place after the spectrum has been assigned?

Implementation Requirements

164. The Ministry has not applied an implementation requirement when assigning spectrum under the MRR, although radio licences assigned under the RLR can be revoked for non-use under Regulation 15. With respect to the issue of the hoarding of spectrum for anti-competitive purposes, the Ministry has usually concluded that there is little evidence of any problem, and that implementation requirements are difficult to impose and enforce. It may be appropriate to impose an implementation requirement where spectrum is allocated for social and cultural purposes, but this issue has not been examined in detail.
165. The Ministry proposes to apply both eligibility and implementation requirements to the assignment of two blocks of FWA spectrum in the 3.5 GHz band, retained by the Crown from Auction 5. The requirements accord with Cabinet's intention that licences in these blocks be made available for specific geographic areas, typically for high speed internet connections in rural/provincial districts.22
166. If there is evidence of spectrum hoarding, or of barriers to re-assignment of spectrum to higher value uses, there is a question as to how the Government should and could prevent such hoarding, whether through an implementation requirement or some other mechanism. An inherent difficulty has been in defining "implementation", and in the latitude that should be given before new services are considered not to be implemented.
167. Practical "implement" or "lose" provisions would be extremely difficult to apply, and the compliance costs of policing such a requirement are likely to be high.

• "Implementation" is difficult to define. Many frequencies can be used for more than one purpose. For example, a broadcasting frequency may be used for a low-power service, or to provide a sub-carrier communications service, as well as for a high-power broadcasting service. Utilisation for even a modest purpose could frustrate the intentions of the implementation requirement.
• People denied the use of a frequency under an implementation requirement may have passed the cut-off date purely because market conditions had changed, or equipment had not arrived on time. There would need to be a great deal of administrative flexibility, which in practice would make the requirement difficult to enforce.
• Rightholders have paid for their spectrum. If they were to forfeit their spectrum for non-implementation, the question of compensation for the lost spectrum would arise unless the conditions of forfeiture were clearly stated in the licence agreement. Otherwise, there would be significant prospects of court action to avert the loss. This would not be solved by a provision for a cash refund: this might simply encourage rightholders to return their frequencies to the Crown for a refund in the event that market prices for spectrum fell.
• It would be difficult to define the date at which an implementation requirement would apply. It would have to be determined whether the requirement applied from the date of sale, after a fixed period from the date of sale, or some other date. Further, it would need to be stipulated whether the requirement continued to apply if the licence were traded before the implementation requirement came into force.
• There would be an incentive for right-holders to defer investment until there was certainty that the rights would be retained. Hence, services may be developed to the bare minimum required for compliance with the implementation requirements.

Issue 4.6

Use-it-or-lose-it requirements are common in overseas jurisdictions on both anti-hoarding principles and the proposition that unused spectrum is not realising its highest value to society. Notwithstanding the administrative difficulties, would it be in New Zealand's interest to impose such conditions more generally on management rights and spectrum licences? Under what circumstances should they be applied?

Allocation of Spectrum

168. The use of spectrum is steadily increasing, particularly for cellular, WLAN, broadband access and radio identification services. Project PROBE23 is driving significant network building activity for the delivery of broadband services to rural communities. Compared to countries with higher population densities, however, New Zealand's spectrum still has a modest level of congestion.
169. The demand for spectrum is driven by demand for the goods and services to which it is an economic input. These are extremely varied, ranging from entertainment, leisure and consumer products to education, health and public security. Recent years have seen a spectacular increase in cellular telephony and short range devices. Demand is difficult to predict in an era of rapid technological development. There is no doubt, however, that the demand for spectrum will increase, and that its management will become increasingly complex.
170. The ready availability of spectrum has prevented any excess demand issues arising, but greater consideration may have to be given to competition as the growth of consumer markets and new technologies place pressure on the remaining spectrum available. In addition to the Commerce Act provisions, it may be necessary to consider implementation requirements and spectrum cap provisions to ensure that there is equitable access to the spectrum within the RLR.
171. Any judgement as to the efficacy of the allocation system and the efficiency of spectrum use needs to be underpinned by accurate data: any such relevant information as currently exists is patchy and, to a degree, anecdotal. It may be timely, therefore, for the regulator to commission a comprehensive independent audit of spectrum allocation and use, similar to that recently proposed by Ofcom in the United Kingdom.

Effectiveness of the Radio Licence Regime

172. The RLR does not provide a competitive market environment, but there is little incentive to transfer spectrum to the MRR where the supply of spectrum exceeds demand. Nearly every application under the RLR is satisfied with a licence for the applicant's preferred operating band, or with a reasonable alternative. Even where demand does not exceed supply, there appear to be few incentives for licensees to hoard spectrum in most bands, as new assignments can be applied for with relative confidence.
173. Low cost and ease of access, however, may also encourage licensees to be profligate in its use in order to save costs elsewhere: for example, by operating 25 kHz channel equipment rather than replacing it with more spectrum-efficient 12.5 kHz channel equipment. While this is a good business decision, it can also contribute to band congestion.
174. In bands that are becoming congested (i.e. demand exceeds supply), technical innovation may absorb demand in the short term. In the longer term, however, fully saturated bands managed under the RLR may not be achieving their highest market value. At this point or before, consideration could be given to transferring spectrum to the MRR, or applying such incentives for efficient use as resource rentals or opportunity cost pricing. Too early a transfer of spectrum, however, should be avoided: in the absence of excess demand, the purchaser may pay low prices at auction and consequent enjoy later windfall benefits.

Effectiveness of the Management Rights Regime

175. The fundamental mechanism, by which the spectrum management regime could contribute to economic growth, is through ensuring that users face continuing incentives towards more productive use of this resource….these incentives should be financial and be based on the opportunity cost of spectrum use. In this way, spectrum would be costed as any other input into the productive process. Price signals about the cost of spectrum would be distributed throughout the economy. This information should enable dispersed economic units to make their own judgements about the use of spectrum and the alternatives open to them to meet their organisational goals.24
176. The advantages of a market system are tempered … by the notion that a spectrum market could involve numerous bilateral transactions. If the cost of individual transactions is high and there are numerous spectrum "neighbours" with whom negotiations are necessary, then efforts to achieve economically efficient interference patterns will be inhibited. The difficulties involved in designing market mechanisms which enable the efficiency gains to be realised while minimising transaction costs have, in part, inhibited the move towards market systems of spectrum management elsewhere in the world.25
177. Since 1989 the approach of successive governments has been to create an efficient market mechanism for radio spectrum so that decisions involving the use of new technology are devolved to its users. To this end the Crown has created and sold defined management rights in many of the frequency bands used by commercial operators, particularly in those sectors experiencing the greatest technological change.
178. In theory, the economic value to the holder of rights assigned under the MRR, whether as an input to production or as an asset to be traded or mortgaged, is reflected in the auction fee paid or, when rights expire, by the market-value price paid for renewal. These relatively high costs motivate rightholders to use the spectrum efficiently in the generation of income. RLR licences, on the other hand, are subject only to administrative fees, whose impact may provide insufficient cost incentive for efficient use.
179. Before management rights can be assigned by auction, decisions must be made on the configuration of lots, including the size of each management right, its boundary conditions and whether the lot consists of an individual right or a pair of rights. In general, the Ministry balances competing objectives of:

• technical neutrality, which suggests that no judgements should be made as to the likely end use of the management rights;
• technical efficiency, which suggests that the lots should be defined in a way that facilitates their likely end use; and
• competition issues, which suggest that the number of lots should facilitate competition in the downstream market.
  

When considering these issues, the Ministry seeks the best available market and technical information, through industry consultation, expert technical analysis and consideration of overseas trends.

180. Despite this, the end use of management rights is not always predicted accurately, as is demonstrated by the examples that follow. This is not surprising, given the rapid rate of technological change in the communications sector, and is anticipated when allowing market flexibility to determine the highest value use of the management rights.

• A management right configured for a 1G cellular telephony technology known as TACS A was purchased by BellSouth in 1990, and subsequently used for GSM, a 2G technology.
• Management rights sold in 1989 in the 2.3 GHz band were configured for multipoint distribution services (MDS), a form of television broadcasting. These rights have had very little use over their lifetime, as the relevant technology has not been implemented on a significant scale either locally or internationally. The most likely future use now appears to be for FWA, although the boundaries of these rights may not be optimal for such use.
• Adjacent spectrum configured for fixed links (i.e. point-to-point) in the 2 GHz band was purchased by Woosh Wireless and BCL, who separately decided to use incompatible technologies for FWA (i.e. point-to-multipoint) delivery. This created potential interference issues between the two services, which eventually were resolved by an agreement to coordinate further deployment.
• Spectrum at 3.5 GHz configured for FWA was sold in lots consisting of pairs of management rights of 7 MHz each, with a spectrum cap which prevented bidders at the auction from acquiring more than three pairs each. This has been criticised by one potential new entrant as having had a harmful effect on competition in the downstream market for the provision of broadband, as a large bandwidth would be needed if a single provider were to compete successfully with wire-based technologies.

181. If, despite the Ministry's best efforts, lot design does hamper competition, the Act allows the market to remedy the problem through secondary trading, amalgamation and division of management rights, and arbitration provisions. In addition, the case-by-case review undertaken when management rights are renewed provides the opportunity for the Ministry and industry to consider whether the configuration of the rights promotes highest value use, or whether adjustments are warranted.

Issue 4.7

When "packaging" management rights, what weighting should be given respectively to technical neutrality vs. technical efficiency, and competition issues?

Issue 4.8

To what extent should MED be involved in resolving coordination issues between management rightholders?

Expiry of Rights

182. Spectrum rights created under the MRR have a maximum term of 20 years under the Act. The first rights created, for UHF television, expire in 2010. Rights for AM and FM audio broadcasting expire in 2011 and VHF television rights (TV1, TV2, TV3 and C4) in 2015. Expiry dates for mobile telephone services vary, with the first rights expiring in 2011.
183. The original Act provides that rights revert to the Crown on expiry, but is silent as to how they should be allocated or reallocated. Amendments to the Act in 2000 allow the Crown to create a "succeeding" management right ahead of expiry, to ensure a seamless transition from one term to another.
184. In mid 2003, following consultation with industry, Cabinet agreed the following policy for the reassignment of commercial spectrum rights:

• that commercial spectrum rights be reassigned five years before expiry for a further 20 years, subject to review on a case-by-case basis to ensure consistency with New Zealand's international radio obligations and with the general objective of maximising the value of the spectrum to society as a whole;
• that the Crown should receive a fair financial return for the use of spectrum in the future period; and
• that spectrum rights be reassigned to existing rightholders based on price-setting formulae that reflect the market value of the rights, and that, if existing rightholders do not wish to pay this price, the respective rights be reassigned by auction.

185. Econometric consultants were employed to develop and peer-review a price setting formula, which has been approved by Cabinet as a general framework for implementing its policy. The price-setting formula calculates the renewal price for a spectrum right (V2) by taking the acquisition price (V1) and applying a compound growth factor ("z"). The growth factor represents an estimate of how much the net cashflows from the use of rights in the renewal period compare to the net cashflows from the current period. At the time of writing, a process was being developed for the implementation of government's overall policy on expiry of rights, and for the application of the price-setting formula to specific rights, particularly those rights due to expire before April 2011.
186. It has been argued26 that spectrum rights should be issued in perpetuity, because incentives to trade in secondary markets and to invest in spectrum-dependent activities could diminish as the payback period of a fixed-term licence shortens. Since the report was written, a right of renewal has been established in Government policy, which reduces the weight of the argument. A prudent band manager might consider lobbying for perpetual management rights but would be unlikely to assign spectrum licences in perpetuity.

Telecommunications Issues

187. In the telecommunications sector, current policy is to promote maximum market flexibility, allowing service providers to choose the timing and type of service established. Where demand exceeds supply, the timely assignment of management rights by auction is seen to be the most effective means to achieve this objective.
188. It is government policy to transfer commercial telecommunications spectrum from the RLR to the MRR progressively. The government has usually chosen not to retain the relevant management rights, which are assigned to the private sector by auction. Where the government has retained management rights, spectrum licences are assigned by auction.
189. Government has a number of mechanisms through which it can directly influence the market's investment decisions, including by regulation (e.g. specification of co-location and national roaming in the Telecommunications Act 2001), by purchasing services which promote infrastructure investment (e.g. Project PROBE), by making spectrum available for a particular use (e.g. assignment of Crown-retained spectrum at 3.5 GHz for use to provide FWA to specific geographic areas) and reserving spectrum for a particular purpose (e.g. reserving spectrum to increase Māori participation in the knowledge economy).
190. Where the Crown controls the assignment of licences, options for the relief of congested spectrum in the telecommunications bands include:

• implementation requirements on licences not currently implemented;
• the encouragement of narrowband technologies (e.g. in land mobile communications);
• encouraging migration to less congested bands; and
• re-planning all or part of the congested spectrum.

Where there is a private band-manager, assignment of the right at or near its market value may be sufficient encouragement for the rightholder to implement such measures.

191. The secondary market in management rights spectrum for telecommunications services is limited. There has been some rationalisation of the MDS spectrum, with most management rights now owned by Telecom, and of the LMDS spectrum, now predominantly owned by TelstraClear. The MDS and LMDS spectrum is largely "idle". The 3G spectrum is also largely unused, although Telecom has rolled out its new 3G network and two other companies have expressed an intention to establish 3G services in other bands.
192. Although spectrum is a critical business asset, its costs are negligible compared with the cost of establishing infrastructure and the potential return from the sale of services. The price and availability of spectrum is not, therefore, a major item in the balance sheets of cellular service providers.

Fixed Services

193. There is a complication in converting fixed services to the MRR as many of the bands are shared with satellite services and require coordination to minimise interference to New Zealand domestic satellite services and those of other countries. The New Zealand Government, as an ITU member, is responsible for the relevant co-ordination process. Meeting this responsibility could be impeded if the spectrum were assigned as a management right under private control.

Fixed Wireless Services

194. There is congestion in that part of the VHF and lower UHF spectrum27 used for fixed wireless services. As a general principle, it would be beneficial to encourage FW services to migrate from analogue systems in these bands to digital systems in higher bands, where there is greater bandwidth and less congestion. Current re-planning of the lower 400 MHz band is designed to make spectrum available for digital solutions.

Land Mobile

195. Consideration could be given to creating for assignment management rights and spectrum licences in the land mobile bands. However the heavy use of the bands and the extensive transitional rights provided to land mobile licensees under the Act might limit the benefits of such a transition. Use of narrower channelling in these bands and their transition to digital use could provide substantial relief, but there is a trade-off between the substantial cost of this type of change and the benefits of making it.

Broadcasting Issues

196. Government's overall objectives for the broadcasting sector are met by a mixture of commercial and non-commercial services. Commercial broadcasters are expected to purchase the necessary licences and to fund the requisite investment through normal commercial processes. There is, however, a growing emphasis in Government broadcasting policy on community, regional and iwi broadcasting, which may not be met by market mechanisms and may need to be encouraged through some form of Government intervention. Such intervention may be direct (e.g. the reservation and allocation of spectrum for specific purposes) or indirect (e.g. the imposition of eligibility requirements for bidders at spectrum auctions).
197. Crown management, by imposing conditions on spectrum licences, may on the one hand stifle innovation and compromise the potential for the spectrum to be applied to its highest (financial) value use, and on the other hand promote social and cultural objectives. The Crown seeks to limit unwanted effects by operating flexible management policies.
198. To assist in the promotion of public broadcasting objectives and in order to exercise greater control over the end-use of the spectrum, the Crown has retained management rights in some terrestrial broadcasting bands. Spectrum licences assigned by the Crown, acting as band manager, are property rights similar to management rights, in that they have value, security of tenure and tradability. Spectrum licences give greater security to the rightholder than a RLR assignment.
199. The two major commercial broadcasting companies, TRN and CanWest, each hold approximately one third of the available radio broadcasting spectrum licences, with most of the remainder held by government supported broadcasters. A number of aspiring broadcasters have been unable to acquire licences at auction because of the strong bidding from the two large operators. These acquisitions were challenged by complaints to the Commerce Commission in 2004, following Auction 6: none was upheld. Under the provisions of the Commerce Act, therefore, the main commercial broadcasters will probably be able to acquire further licences at will, at least until an acquisition is seen to significantly lessen competition. For the immediate future, it is unlikely that the current ownership concentrations in the market will change significantly, therefore.
200. There is little secondary trading of individual licences, but there have been a number in conjunction with the sale of a broadcasting business or as a result of a rationalisation of licences between parties. Some leasing of licences has occurred. The government auction has been the primary mechanism by which most commercial broadcasters have acquired licences.
201. In past allocations there have been views expressed, often by intending broadcasters, that some degree of priority should be given to locally owned services, locally programmed services, services not affiliated with major networks, and/or particular types of programming. No obvious and transparent mechanism currently exists for assessing whether any such priority should be granted, and to what degree this priority should override the value-based auction assignment process, although one could probably be developed. There is a risk of creating a windfall financial gain by issuing such a licence, which may be seen as inequitable by competing broadcasters. The costs of monitoring compliance with the licence conditions could also be substantial.
202. There are, nonetheless, government policy objectives related to meeting the needs of diverse and/or minority audiences, which are quite separate from competition issues. Dominance of the market by one or two broadcasters not only potentiates inefficient use of the spectrum: it also, by encouraging programming for the mass market, stifles variety of content. Government has a choice of indirect and direct interventions to correct this.
203. As the seller, the Government can place acquisition limits on a particular set of auction lots: i.e. a spectrum cap or conditions of entry. This could be used to exclude the larger commercial interests and encourage participation by minority and/or community groups wishing to broadcast commercially, although there is no guarantee that it would do so. To date, however, no exclusions have been directed at any specific licence holder, as only anti-competitive behaviour has been considered and none has been declared by the Commerce Commission.
204. A more direct alternative is to declare a particular spectrum lot for a specific use (e.g. commercial broadcasting in a language other than English or Māori). Any interested party could bid, but the use would be quite specific and defined by contract. Careful market research and regular review would be necessary to support such prescriptive conditions, and compliance costs would need to be considered. The most obvious way to ensure allocation of spectrum to social and cultural purposes is to reserve it, as is done for public broadcasting, or to impose such conditions of use as an implementation requirement.

Narrow Spacing Channelling

205. New Zealand follows international criteria in the planning of its FM broadcast bands, which in accordance with ITU guidelines are normally separated by 800 kHz. Narrower channelling (i.e. separating channels by, say, 400 kHz or 600 kHz) would increase the carrying capacity of the VHF-FM bands, and some overseas jurisdictions have carried out experiments in this area.
206. In early 2003, Canwest approached the Ministry with a proposal to move an unused licence based on Waiheke Island to the greater Auckland area from Auckland Skytower. This frequency is between two other Canwest stations operating from Skytower and on the same frequency as a Canwest station providing service to the Hamilton area. Canwest proposed a frequency separation of 400 kHz. A temporary licence was assigned on a pilot basis and no interference effects have since been reported.
207. MED has carried out testing of 400 kHz channelled services in Auckland. These tests concentrated on interference issues and the ability of domestic receivers to operate when stations are separated with 400 kHz channelling. Results indicated that while some experienced tuning difficulty, most domestic radio receivers can operate satisfactorily in the 400 kHz channelled environment. Some FM broadcasting services in the Waikato district could be disrupted if all Auckland FM services were channelled at 400 kHz separation.
208. Where technical issues can be resolved to allow narrow channelling, it will need to be implemented on a case-by-case basis. For any large-scale planning a review of current management policies for the FM broadcast band will also be necessary, which will include reconsideration of the re-planning options and possible effects on current licensees and rightholders.

16 Abridged from The Role of Economic Techniques in Spectrum Management, IEEE Communications Magazine (March 1998) pp 102-107.

17 Commerce Amendment Act 2001, Section 11(2). The new test is similar to that applied under parallel Australian legislation.

18 The right of using and enjoying the benefits of something belonging to another. The Market Dynamics report noted that NZ's spectrum rights are "usage" rights much more than they are management rights.

19 From Spectrum Management for a Converging World, ITU 2004

20 The world's first combinatorial and clock spectrum auctions have recently been held in Nigeria (reported by the Australian Communications Authority).

21 An exception is where the winner requires a large proportion of the spectrum on offer, and is forced to bid high to shut out other bidders.

22 See Draft Allocation Proposals.

23 Project PROBE (Provincial Broadband Extension) has been developed jointly by the Ministry of Education and the Ministry of Economic Development to roll out high speed internet access, or broadband, to all schools and provincial communities.

24 Cave report, op cit.

25 NERA report, op cit.

26 The Market Dynamics Report (pp 35-36) - see footnote, page 27.

27 …also occupied by public safety and security land mobile services.