Stephen Conroy’s price expectations in forthcoming radiofrequency spectrum auction unrealistic, just completed UK auction shows

Last year Broadband and Communications Minister Stephen Conroy set an extremely high reserve price for the forthcoming auction of key radio frequency spectrum.

The UK has just completed an auction of similar spectrum – and the result there suggests that the auction in Australia will fall a long way short of Conroy’s expectations.

The spectrum to be auctioned in Australia – in the 700 megahertz (MHz) band – is expected to be used by mobile phone operators to deliver the next generation of wireless broadband services – so called 4G or LTE (‘long term evolution’). 

Already, millions of Australians have 3G data services on their mobile handsets, offering download speeds which are typically two to three megabits per second (Mbps).

4G services are much faster, with download speeds typically between 5 and 10 Mbps (and theoretically the ability to go a lot higher.)

With the Rudd Gillard Government scrambling for revenue as the budget deficit gets ever bigger, it seems that Conroy regards the forthcoming spectrum auction as an opportunity to hoover up a huge amount of cash.

He has set an unprecedentedly high reserve price for the auction - $1.36 per megahertz per head of population.  This is much higher than the price paid in recent auctions of similar spectrum in other countries.  According to research by Goldman Sachs, the average across eight countries was 80 cents per megahertz per head.

Now we have the results of the recent UK auction of very similar 800 MHz spectrum – similarly expected to be used for 4G mobile data services.

This sold at a price of 23 cents per megahertz per head of population – about one sixth of the price that Conroy is expecting to get.

The total amount raised – 2.3 billion pounds - was about one third less than the target the UK government had set.

This suggests Conroy is unlikely to achieve his unrealistic objectives for the 700 Mhz spectrum in Australia.

Worse still, in the Australian auction Conroy has not just set a target for revenue to be raised – he has set a reserve price.  This means that if the mobile phone companies are not willing to pay his price, the spectrum will not be allocated.

The most likely outcome is that dominant player Telstra will buy spectrum – but the two smaller players Optus and Vodafone will either buy none at all, or buy only a fraction of what Telstra does. 

Conroy has seriously mishandled the spectrum auction.  The UK result is yet more evidence of how badly he has got it wrong.