Analysis: 3G spectrum holdings cloud Voda-Hutch merger

That's the question that needs to be answered by the ACCC, which is currently reviewing the proposed marriage.

The merged entity, to be called VHA, will hold 25 per cent in terms of mobile market share, but also own a potent share of the nation's 3G radio spectrum.

Unless either of the merging parties sell spectrum assets before the operations merge, VHA will hold 41 per cent of the 2GHz band used for 3G mobile services in Sydney and Melbourne and 33 percent in other capitals.

If the competition regulator decrees that this represents a threat to competition, analysts suggest it may force VHA to offload some of its 3G spectrum licences in some metropolitan areas.

There are precedents for a mobile operator's share of spectrum to be viewed as a competition issue.

During the 3G spectrum auction in 2001, for example, the Federal Government decreed that no party could own more than a quarter of available spectrum in a metropolitan area. Vodafone successfully bid for 10MHz of the 60MHz of paired spectrum made available in capital cities and 5MHz in regional Australia. Hutchison won 10MHz of the 60MHz in all capital cities except for Melbourne and Sydney, where it took up 15MHz of spectrum.

At that time, regulation of spectrum ownership was the domain of the communications regulator, the Australian Communications Authority (now the Australian Communications and Media Authority, or ACMA).

Mark Loney, executive manager of ACMA's pricing and policy branch says these regulations only applied to the spectrum auction not for the 15-year term of the licenses.

"Competition limits of this nature... do not apply once the allocation process is completed and the licences have been issued to the successful bidders," Loney said.

Post the auction process, he said, competition limits are the domain of Australia's competition regulator, the ACCC.

"The acquisition of a spectrum licence is treated as the acquisition of an asset for the purposes of the Trade Practices Act 1974," he said. "This means that the ACCC is responsible for [retroactive] competition issues involving spectrum licences." 

He said the need for ACCC clearance was identified as a completion condition of the VHA merger.

An ACCC spokesperson declined to comment on specifics but said that for any merger, its analysis reverts to Section 50 of the Act, which deals with the essentials of competition law.

Section 50 prohibits acquisitions that would result in "a substantial lessening of competition".

"I couldn't specifically comment on rules about spectrum," the spokesperson said.

Is share of spectrum a competition issue?

Nick Ingelbrecht, research director for consumer mobile services at Gartner, told iTnews that spectrum ownership is a "very interesting issue" with regards to the future shape of the Australian mobile industry.

 "If VHA is found to be over the line, it may be required to return some spectrum or sell some spectrum to another party," he said.

The question that needs to be asked is whether VHA can compete with Telstra in terms of having enough spectrum to take the path to 4G, he said.

Spectrum will be a 'hygiene factor' that may determine who wins the 4G race, he said.

"There is an important commercial issue for VHA. Telstra is putting pressure on in terms of network speed with Next G. While it is fine for VHA to own the value space, operating at lower network and operational costs and passing that on to customers, I expect market forces will dictate that they need a reasonable amount of coverage."

"Long Term Evolution [of 4G] is where this new company will need to set their sights. Technologies based on the LTE standard will be available in various spectrum flavours, but at the end of the day, vacant spectrum is required. The important thing is having sufficient spectrum to set up a new network."

But telecommunications analyst Paul Budde doubts spectrum ownership will be a stumbling block.

"While it is the ACCC's decision at the end of the day, the proposed merger is not anti-competitive - if anything it is pro-competitive," he said. "Also, the whole spectrum issue needs to be reviewed anyway. Long Term Evolution (4G) requires a totally new approach to spectrum."

A spokesperson for Optus said the competitor immediately welcomed the merger but "wouldn't want any outcome that saw one company have too much control of spectrum."

Telstra chief technology officer Hugh Bradlow told iTnews that he is confident spectrum issues will "cross the regulator's mind". But wary of over-regulation, Bradlow warned that any analysis of mobile spectrum with relation to competition should be handled "in a mature way, and not a simplistic, ham-fisted way".

Regardless of regulation, VHA may volunteer to sell off spectrum assets.

A spokesperson for Vodafone said it is "far too early for Vodafone or Hutchison to comment on what the future holds for our spectrum assets. Post reviews by the Foreign Investment Review Board and ACCC, we will have a much clearer idea of where we stand on the issue."