Adams has pre-determined that the 700MHz band go to the mobile telcos and decided that mobile broadband for urban users is more important than fast broadband for rural users.
The bidders are now at their blocks and waiting for the get-go.  The auction process too, is ready for a press of the ‘go’ button.  The back-room influencers have done their bit and now await the outcome.  They are not holding their breaths.  Perhaps because the outcome of the 700MHz ‘Digital Dividend’ auction is pre-determined.

The bidders are Telecom, Vodafone and 2Degrees.  Tex Edwards, the sacked co-founder of 2Degrees is adding some colour to an otherwise lack-lustre process with his registration as a bidder.  His barrier to re-entering the realm of mobile phone operators is the required $5 million deposit – he plans to pay it in the form of “used SIM cards and stale bread”.

The auction itself is an interesting though necessarily complicated process because hundreds of millions of dollars are at risk.

Even the name of the process is complicated: the “simplified combinatorial clock auction” comprises clock rounds, supplementary rounds, and an assignment round.

A combinatorial clock auction is a combination of a Clock Auction and a single round sealed bid auction.

At the beginning of each clock round, the reserve price is set and ‘ticks’ up from that, for the duration of that round.  Bidders will drop out of the bidding when their maximum price is reached.

At the end of a clock round, the demand by bidders will be either less than, equal to or greater than the available supply.

If demand exceeds supply, then the auction goes to the next clock round with a higher starting price.

If demand is less than supply, then the auction moves to the supplementary round where bids are allowed on more than was permitted in the initial clock round.

When the demand by bidders equals the available supply, then the auction goes to the assignment round which is where the sealed bid aspect is revealed.

The first clock round starts at the Minister’s reserve of $22 million for each lot.  There are nine lots up for grabs and each bidder is restricted to bidding on no more than three lots.

This is the means by which the government can control the level of competition in the mobile market.

used-sim-cards-and-stale-brThree mobile operators, each winning three lots of spectrum would maximise competition within the sector.  Except that the cash rich Telecom/Vodafone duopoly could force 2Degrees out of the auction by bidding for say six lots each through multiple clock rounds.  Or they could force the price so high that 2Degrees has too little cash available to build their network.

As a priority, such an outcome must not be allowed.  It would be a serious setback to competition in the mobile sector which has benefitted hugely from 2Degrees’ entry in to the mobile market nearly five years ago.

So why does the government not simply set a price for the three mobile operators to each receive three lots of frequencies?  That approach would be effective in ensuring competition and in the absence of more than three bidders, may yet be the outcome.

But it would not be efficient in the utilisation of the spectrum.  The smaller the allocation of frequencies to each operator, the lower the maximize speeds that can be offered by each.

More importantly, it would not be efficient in obtaining the maximum price for the government.

To me, this shows that the prime objective of the auction is to maximize revenue.  Which is at odds with what the back-room influencer Amy Adams said in February 2012.

“It’s not about who can bid the most. I’m not interested in a high bid that’s not going to deliver much for New Zealanders,” she told Computerworld.

However, there is no obvious mechansim in the auction process, to enable Adams’ stated intention.

There are some conditions that will be placed on the spectrum winners.  Things like targets for regional deployment of the spectrum, time frames and the number of cell sites that must be upgraded and newly constructed.  These conditions are there ostensibly to improve broadband availability to rural areas.  Given the burgeoning growth in mobile broadband demand and the telcos focus on maximising revenue, I doubt that these targets will add more than lip service to rural broadband speeds.

Adams has pre-determined that the 700MHz band go to the mobile telcos and decided that mobile broadband for urban users is more important than fast broadband for rural users.