Australian spectrum going for a song

Canberra was banking on the auction to generate the bulk of a budget-balancing $2.6 billion windfall. But a similar 3G spectrum sale now underway in New Zealand may be sending shock waves through Treasurer Peter Costello's office. The New Zealand auction has been dragging on since June and, if its prices are any guide, Australia will be "lucky to get $1 billion from its own auction", says telecommunications consultant Paul Budde.

"I don't think they have much chance of getting numbers like $2.6 billion. The way we see it now, $1 billion would be a nice price."

Telstra is expected to be a prominent bidder for 3G spectrum so it can snare the bandwidth it needs for its mobile business in the second half of this decade. The lower prices go, the bigger the bargain Telstra will be getting.

Expectations of a government bonanza were fuelled by the sale of UK mobile spectrum about six months ago for 60 billion pounds. But the spectrum demand/supply equation is different in Australia, which has more spectrum and fewer subscribers than the European community, says Budde. A telco like BT has to operate in the UK on 40 per cent of the spectrum available in Australia but has three times as many subscribers to serve.

That combined with competition from 50 to 60 other European carriers make European auctions much pricier affairs than the Australian sale is likely to be.

Nor are many telcos likely to keep producing the type of overheated bids seen at previous spectrum sales, says Gartner Group telecommunications market research director Geoff Johnson. "Auction prices are a real killer for a telco's business plan," he says.

It takes about two years before customer revenue streams flow from spectrum purchases. But the enormous burden imposed by auction prices is leaving telcos strapped for the resources needed to develop and market new services.

The huge debts being shouldered by telcos to meet their auction obligations are also causing the finance community to de-rate the sector, says Johnson. "Some telco paper is seen as having junk-bond status these days."

Meanwhile, the government agency responsible for running the pending 3G auction of 800MHz and 2.1GHz bandwidth dismisses speculation the exercise may be postponed. "I can dismiss any reports of delays -- the auction will be held in the next few months," says Australian Communications Authority marketing manager John Grant. ACA staff are working "feverishly" on preparations and waiting only for communications minister Richard Alston to decide on some ground rules governing how much spectrum any individual organisation can bid on.

Once that happens, the ACA will call for organisations to throw their hats in the bidding ring. Only then will it get a real indication of the depth of interest, Grant said. The most recent ACA auction was for space in the 3.4GHz band, an area of lesser commercial interest because it is not suitable for mobile applications.

Even so, it brought in $112 million, a sum at the high end of expectations by industry observers.

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