The Commerce Commission has cleared Telecom to acquire the final amount of 4G mobile spectrum the government is auctioning. The decision allows the government to complete the auction, and Telecom, Vodafone and 2degrees to use the spectrum for new 4G services, but raises some interesting Commerce Act issues.

The auction

Telecom will acquire two 20MHz blocks of spectrum, Vodafone two 15MHz blocks, and 2degrees two 10MHz blocks, half as much as Telecom. Telecom says that its larger holding will enable it to offer greater coverage, greater peak speeds and better service than its rivals.

The Commission's decision comes after at least four extensions of dates and over five months' deliberation. While some of this delay no doubt arose from the need to await the results of early rounds of the auction, it could also signal that the Commission was concerned that Telecom's acquisition breached the Commerce Act.

In previous spectrum auctions, the Commission gave its clearance relatively easily, usually finding that sufficient spectrum exists elsewhere to allow competition. In its latest decision, the Commission has taken a more detailed look at what would happen if it did not grant clearance.

Total revenue from the auction to date is $259 million, but more might be obtained in the final allocation round. The Government has spent $147 million clearing the 700MHz band to allow the spectrum to be used for 4G mobile networks.

The clearance decision

In giving its clearance, the Commission relied on government decisions on where the government would place the different spectrum blocks, if Telecom's clearance application were to be refused. The placement of the spectrum blocks is important, because they are far more useful to mobile phone operators if they are contiguous. If the blocks owned by an operator are spread around the 4G band, the operator's is not able to offer the best data speeds and quality of service.

If the application had been refused, Telecom would still have been able to buy two 15MHz blocks, but a final 5MHz block would have been unsold. The government said that in this scenario it would not make the unsold 5MHz block available to 2degrees, but might consider other uses such as for emergency services, wireless broadband or by electricity network operators.

The government also said that it would place the 5MHz block away from the two 10MHz blocks acquired by 2degrees.This would mean that, even if 2degrees wished to acquire the unsold 5MHz block, 2degrees would not be able to acquire contiguous blocks. As a result, the Commission thought it unlikely that 2degrees would want to acquire the unsold 5MHz block.

On that basis, the Commission considered that Vodafone and 2degrees would each hold the same amount of spectrum, whether Telecom acquired the spectrum or not. The Commission considered that Vodafone and 2degrees would effectively provide the same level of competitive constraint in both cases. The Commission was therefore satisfied that Telecom's acquisition would not breach the Commerce Act.

Questions on the Commission's approach

Two aspects of the decision might be questioned.

First, the Commission's view that Vodafone and 2degrees would effectively provide the same level of competitive constraint, regardless of whether Telecom acquired the final 5MHZ block, seems to ignore the benefits to Telecom of this additional block. Telecom bid to pay $83 million plus GST for this 5MHZ block alone. As noted above, Telecom's clearance application pointed to significant benefits from the additional spectrum, which the Commission acknowledged. The Commission's decision, however, does not explain why it still considered that competition would be unaffected.

Second, the clearance decision is interesting for its heavy reliance on government policy decisions. Those policy decisions, however, could be changed – at least up to the time that the telco's begin building their networks and possibly after that. The government's policy decisions are also themselves entirely hypothetical. The policy decisions paved the way for the Commission's clearance decision and as a result would never have been tested. Finally, the policy decisions flew in the face of the government's own advice, on which earlier spectrum decisions have been based, that the best use of the spectrum would be for 4G mobile telephony. The Commission's decision does not appear to explore any of these issues. A query might well be raised over whether the tests in the Commerce Act for clearance were satisfied.

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