The Government has abandoned plans to auction radio spectrum.
Instead, it will directly allocate the 5G-friendly to telcos for a 20-year term - on the proviso that they make commitments to better address mobile calling and broadband gaps in rural and small-town NZ.
The move means Communications Minister David Clark has gone for public good over a windfall for Crown coffers that could have run to hundreds of millions, based on previous spectrum auctions.
Clark says the arrangement means more people will get better mobile coverage more quickly, and in more places.
Will it be a case of swings and slides for Spark, Vodafone and 2degrees as they save on bidding, but have to spend more on extending mobile coverage?
Details of spending or geographic coverage targets - or even if there will be any specific targets - is a work in progress.
"The details of this long-term allocation will continue to be worked through over the coming months as the Crown negotiates final contracts with the parties involved," Clark said.
In the meantime, Spark - which paid $149m for its 4G spectrum at the 2014 auction - said in an NZX filing that "in return" for it receiving an 80MHz allotment of 5G spectrum, it will commit an additional $24 million in funding to the Rural Connectivity Group between 2023 and 2025 (the RCG is a joint venture formed by Spark, Vodafone and 2degrees for the public-private Rural Broadband Initiative).
It was not immediately clear whether that will be the limit of Spark's contribution, or how much the other telcos will chip in, will depend on negotiations during the weeks ahead. Vodafone refused comment on that point, citing commercial sensitivity as final contracts had yet to be signed. So did 2degrees.
A spokesperson for Spark did confirm that there were no fees. It was an in-kind arrangement. As well as increasing its financial commitment to the Rural Connectivity Group, Spark has agreed to "deploy expanded 5G coverage to provincial New Zealand", with a focus on areas where there had been previously regarded as not commercially viable. The details of the provincial expansion are still being worked out.
An MBIE spokesperson said, "The $24 million reported by Spark would, if finally agreed in contracts, be a partial payment for the 3.5 GHz spectrum. The market value of the spectrum is proposed to be traded for a mix of cash and in-kind works."
While Spark had to report its 80MHz spectrum allocation and its (in MBIE's words) "partial payment" of $24m to meet its NZX continuous disclosure obligations, the Ministry regarded Vodafone, Spark and Dense Air's terms as commercially sensitive and would not comment on them.
MBIE did confirm that "100MHz of spectrum in this band has been allocated to the Interim Māori Spectrum Commission at no cost" (the iwi allocation was first flagged in February this year).
Temporary licences extended
Temporary 5G licences issued during the pandemic, which had been due to expire at the end of this month, have been extended until June next year to allow time to hammer out the final terms.
MBIE is aiming to finalise contracts by March 2023.
Better for consumers - potentially
Consumer advocate Craig Young, head of the Technology Users Association of NZ (Tuanz), welcomed the Government's shift to directly allocating spectrum.
"We see auctions as being simply a revenue-raising exercise by governments leading to unfair allocations to those with the deepest pockets - and it is the users who end up paying in higher monthly charges," Young told the Herald.
"However, the detail on the responsibilities of those providers is unclear and we expect there to be very specific requirements for roll-out in regional and rural NZ rather than just an 'expectation'."
Another detail missing today was what tack the Government will take on so-called "millimetre band" 5G spectrum, which the telcos will need in a couple of years as they fill out their 5G networks.
Nor did Clark directly address concerns raised in submissions by Spark, Vodafone and 2degrees about Elon Musk's Starlink satellite broadband service, which is paying just $750 per year for each of its dishes across its six ground stations in NZ as it signs on thousands of customers - though the NZ-based telcos paying nothing or just a token amount for their allocated 5G spectrum could take the heat out of this argument.
To further complicate matters, today's development also takes place against the backdrop of new Auckland Mayor Wayne Brown sending a letter to the CEOs of the mobile telcos complaining about mobile blackspots and call dropouts in our largest city.
"Confirmation that there will be an allocation of spectrum rights rather than an auction is consistent with what we had been expecting and finalisation of this is likely to be positive for operators with the quid pro quo being on build commitments. It will be interesting to see the extent of those build commitments when the agreements are finalised," Jarden head of research Arie Dekker told the Herald.
The impact on NZX-listed Spark could not be assessed until further details finally emerged.
"But the further delays - with the extension to temporary rights - is disappointing, given the amount of time that has passed since the short-term rights were first provided in 2020," Dekker said.
The 4G windfall
The last major mobile spectrum auction, in 2014, saw the Government raise a total $259 million as Spark (which spent $149m), Vodafone ($66m) and 2degrees ($44m) bid against each other for chunks of 4G spectrum.
The 5G auction was originally expected in 2020, but was postponed as the pandemic hit.
Instead, then Communications Minister Kris Faafoi announced that, as a temporary measure, 5G spectrum would be directly allocated to the telcos for a token $250,000 per 10MHz lot over 16 lots (for a total $4m). The stopgap was designed to allow Spark, Vodafone and 2degrees to get on with their respective network upgrades.
Some 60MHz of spectrum was directly allocated to Spark, 60MHz to 2degrees, and 40MHz to Dense Air (the UK-based company that leased spectrum to Spark for its fixed-wireless 5G launched in the South Island. Dense Air entered the NZ market in 2018 when it paid $25.75m for spectrum owned by CallPlus cofounder Malcolm Dick).
Additionally, a 100MHz block was allocated to iwi interests, as per the original auction plan. Iwi will be free to lease or onsell the spectrum to Spark, Vodafone, 2degrees or Dense Air.
None went to Vodafone, which had not registered to bid. The telco already has 58MHz of 5G-friendly spectrum (the only sizeable chunk in telco hands), meaning an auction requirement to return existing spectrum would not have been attractive.
Spark said in an NZX filing that it had agreed in principle to an 80MHz of 3.5GHz spectrum under the permanent (or at least 20-year) direct allocation scheme, while the other telcos would not comment on their allocations. Nor would Clark or MBIE as the final horse-trading continued.
The shift from a competitive auction had been widely expected by the industry.
It follows the announcement in February this year that a "Māori Spectrum Entity" would receive an ongoing allocation of 20 per cent of future national commercial spectrum allocations, at no cost, plus $75m in funding. The iwi allocation ended talks that had been a barrier to the 5G auction, but did not constitute a Treaty settlement.
Win for 2degrees
Today's announcement was a win for 2degrees, which - at least under its leaner former owner - had argued for a mechanism that would boost competition rather than a straight auction as it sought to gain spectrum ground on its larger rivals.
The telco owes its very existence to a decision by the then Labour government in 2000 to allocate spectrum to a pan-iwi trust during the 3G auction process.
The trust's commercial arm, Hautaki, then traded that spectrum for a stake in the startup that would become 2degrees.
"Today's spectrum announcement is great news for Kiwis," chief executive Mark Callander told the Herald. "2degrees is investing significantly in 5G, and today's announcement supports us to continue deployment at pace, as well as enabling us to take 5G to smaller towns earlier in the rollout."
For Vodafone, corporate affairs lead Matthew Flood said, "We support the Government's proposal to allocate long-term 3.5GHz spectrum management rights via direct allocation and look forward to continuing to work with the Government on the details and final agreement.
"This deal has the potential to deliver great outcomes for Aotearoa, including through rollout of 5G into regional towns and additional investment into rural connectivity. In particular, the Government's proposal supports the case for our investment in areas that would not otherwise see benefits of 5G in the near term and enhances connectivity in the most remote parts of New Zealand."
The lay of the land has shifted since May 2020, when the then temporary allocations were made.
Earlier this year, 2degrees sized up via its merger with Orcon Group.
And mid-year, Vodafone NZ sold its 1484-site cell tower network to London-based InfraRed Capital Partners, Toronto's Northleaf Capital Partners and one of its corporate parents, Infratil, in a deal worth a total $1.7 billion.
That followed Spark's $900m sale of 70 per cent of its cell towers (or 1263 sites) to the Ontario Teachers' Pension Plan Board.
Both Spark and Vodafone sold their passive network assets only - the towers themselves, plus land or leases - retaining control of the electronics and spectrum.
Neither Spark nor Vodafone sold rural cell towers built under the public-private Rural Broadband Initiative - which has seen the Rural Connectivity Group, a joint venture owned by Spark, Vodafone and 2degrees, build hundreds of collectively run cell towers.
Tuanz head Young likes the direct allocation of spectrum to Dense Air, which he thinks has potential to extend this shared infrastructure approach.
But, like much announced today, he'll have to wait until the details are settled.