Proacti

vely

Releas

ed

2980 19-20 In Confidence 1

5G ‘early access’ spectrum allocation: Revised options

Date: 15 April 2020 Priority: High

Security classification:

In Confidence Tracking number:

2980 19-20

Purpose

This paper sets out options for the allocation of short-term (‘early access’) rights to 3.5 GHz spectrum, following postponement of the March 2020 auction.

Executive summary

An auction of 3.5 GHz spectrum rights for 5G services, planned to commence on 30 March, was postponed due to the Covid-19 lockdown. However, the case for additional investment in telecommunications infrastructure has only been reinforced by the lockdown. We ar therefore seeking your decisions on how and when to proceed with the 5G ‘early acces ’ spectrum allocation.

Several things have changed since the auction was originally designed. Notably, we now have a much better sense of Spark, Vodafone and Dense Air’s spectrum acqui ition strategies. However, we understand that the ability of the network operators to invest in 5G has significantly diminished due to the economic effects of the pandemic. We sugge t it is use ul to consider those factors before deciding how to proceed.

This paper considers three options regarding the 3.5 GHz early access auction:

A. Restarting the early access auction under he existing terms and conditions; or

B. Modifying the auction, then restarting; or

C. Using a direct allocation process

Restarting with existing terms (Option A) is the simplest option but may face objections from some parties that they do not have capacity to take part due to Covid-19 related issues (“too busy”)

. There is also a risk that general re-emergence of Covid-19 or local lockdowns could make it difficult to set a hard date for the restart.

Modifying the auction terms (Option B) might deal with some issues in Option A but if consultation on new terms is required i would still attract the “too busy” criticism and it would still be subject to commencemen date uncertainty. We suggest several modifications to the auction that would not require consulta ion and would assist parties that might otherwise struggle to participate (immediate r turn of deposits, reduction in reserve price, ability to delay settlement and more adv nce signall ng of auction steps).

We now have a good sense of an equitable outcome that would satisfy the reasonable wishes of all interested companies. This means that a direct allocation process (Option C) could closely replicate a “fair” auction result while allowing companies to move at their own speed in their engagement with government on this issue. The main disadvantages would be some loss of transparency and the need to seek a new mandate through Cabinet.

On balance, we recommend Option B – modifying and restarting the auction – as this preserves continuity with previous decisions and allows for pragmatic changes to the process without compromising transparency.

s s 9(2)(ba)(i)

Proacti

vely

Releas

ed

2980 19-20 In Confidence 2

This topic is likely to be high on the agenda at meetings you have scheduled with Spark and 2Degrees. We recommend you consider the issues described in this paper before your meetings with these companies.

Recommended action

The Ministry of Business, Innovation and Employment recommends that you:

a Note that the industry appetite for a 3.5 GHz short-term allocation for 5G has somewhat decreased as a result of the Covid-19 pandemic and its ripple effects on the telecommunications commercial environment.

Noted

b Agree to the revisions outlined in this briefing (return deposits, reduce reserve price mo e flexible settlement terms) to make the 3.5 GHz spectrum allocation more attractive to interested parties.

Agree / Disagree

c Note that both Spark and 2Degrees will want to discuss the 3.5 GH allocation when you meet with them in the coming days.

Noted

After your meetings with Spark and 2Degrees:

EITHER

d Agree to the 5G early access auction proceeding with the modifications outlined under ‘Option B’ in this briefing.

Agree / Disagree

OR

e Agree, subject to Cabinet approval, that MBIE make direct offers of 3.5 GHz spectrum to the registered bidders in the amounts of Spark 60 MHz; 2Degrees 60 MHz; Dense Air 40 MHz.

Agree / Disagree

Len Starling Manager, Radio Spectrum Policy and Planning Building, Resources and Markets, MBIE

15 April 2020

Hon Kris Faafoi Minister of Broadcasting, Communications and Digital Media

..... / ...... / ......

Proacti

vely

Releas

ed

Proacti

vely

Releas

ed

2980 19-20 In Confidence 4

spectrum allocation to encourage early investment and continuing technology competition in the sector.

Options

8. This paper considers three options to progress the 3.5 GHz ‘early access’ spectrum allocation:

A. Restarting the auction under the existing terms and conditions; or

B. Modifying the auction, then restarting; or

C. Using a direct allocation process.

Option A: Restart with existing terms

9. Restarting the auction with the existing terms is the simplest option. However, it is likely to face objections that the MNOs are too busy responding to Covid-19 issues

. There is also a risk that general re-emergence of Covid-19 or local lockdow s could make it difficult to set a hard date for the restart.

10. Given the changed environment, we consider that it would be advantageous to improve the terms of the auction for the bidders. Therefore, we do not recommend this option.

Option B: Modify, then restart the auction (MBIE recommendation)

11. There are several modifications to the auction that could be contemplated. In considering which terms to modify our focus is on elements that would:

Make the auction (and subsequent inves ment) more attractive to the parties involved

Avoid changes that would require a further round of consultation

Stay within the Cabinet mandate.

12. While consultation would normally be the preferred course of action, it would create further work for the MNOs, potentially bringing further objection. However, consultation would not be necessary if the changes are limited to variances favourable to the MNOs. In light of Cabinet’s current workload, and the delays inherent in Cabinet processes, we would only seek modifications that are consistent with your existing mandate.

13. We suggest four modifications to the current auction terms. These are:

Return of deposits. Returning the $500,000 deposit will give immediate assistance to the three companies’ cash-flow. The purpose of the deposit was to eliminate ‘timewasters’ from the auction process and ensure registered bidders are genuine. This has been achieved and therefore the deposit has largely served its purpose. Although there is a small risk that a company fails to settle, we see this as a minor and acceptable risk.

Reduction in reserve price. As described above, the value of the management rights on offer is now lower. Reducing the reserve price by half (to $125,000 per 10 MHz) will reduce the barrier to investment in the spectrum. There is a risk that parties who did not register in the auction but expressed interest will object as they may have taken the reserve price to indicate the Government valuation of the spectrum on offer. We consider this risk is also acceptable as the spectrum value has decreased for everyone (i.e. no company is isolated from the impact of the

s 9(2)(ba)(i)s 9(2)(ba)(i)

s 9(2)(ba)(i)

Proacti

vely

Releas

ed

2980 19-20 In Confidence 5

pandemic). In these extraordinary times, this is not a particularly extraordinary measure.

Ability to delay settlement. Currently, the Auction Catalogue requires successful bidders to submit a statutory declaration confirming their associations with other bidders within five days of the auction concluding, after which MBIE will issue an invoice for payment that must be settled in full within 20 days. We propose changing this to allow successful bidders to nominate a settlement date (within a reasonable timeframe).

Clear signalling of auction process. The current Auction Catalogue retains flexibility for the Government to make decisions as the auction proceeds. This create uncertainty for MNOs as they have to plan for different scenarios or have senior decision-makers actively involved while the auction progresses. With only three bidders, many of these decisions can be made early without compromising the integrity of the process. For example, we can signal that we will have one clock round followed by a supplementary round with a cap of 60 MHz (reducing the time between rounds from four days to one, and explicitly stating how much the spectrum cap will increase in the supplementary round).

Option C: Direct allocation process

14. Direct allocation of spectrum is not our preferred method in normal’ times. However, it is fairly common in other jurisdictions and is worth considering in the current circumstances.

We are also in the process o making direct “renewal” offers for 1800 and 2100 MHz spectrum

15. A number of events have occurred sinc publishing the Auction Catalogue that provide us with information that could make a direct allocation successful. For example, we now know the companies that have registered for the auction

The companies involved have also been fairly open with us about their strategies. For example, we now have a better sense of how technical constraints and affect desirability of different parts of the band.

16. As a result we can see an outcome that could satisfy the reasonable wishes of all of the companies. This means that a direct allocation process could be used, producing a good outcome while allowing companies to move at their own speed in their engagement with government on this issue.

We know the objectives of all four interested companies and could accommodate these with a direct allocation1

17. Vodafone is currently the only company in New Zealand with enough suitable spectrum for 5G cellular mobile services. It has made a significant investment in spectrum holdings in the 3.5 GHz band through its earlier acquisition of Telstra NZ and recent purchases from Connecta . Vodafone’s holdings in the band now total MHz (refer Fig 1).

1 Note that views on a direct allocation process have been sought on a confidential basis and discussed in principle with these MNOs, these scenarios have not been discussed in detail.

s 9(2)(ba)(i)

s 9(2)(f)(iv), s 9(2)

s 9(2)(f)(iv),

s

s 9(2)(f)(iv), s 9(2)(ba)(i)

s 9(2)(f)(iv), s 9(2)(i)

s 9(2)(ba)(i)

Proacti

vely

Releas

ed

2980 19-20 In Confidence 6

18.

19. Spark

20.

21. 2Degrees

22. Dense Air

23. We suggest that encouraging Dense Air investment in New Zealand, , remains a wor hy objective if New Zealand aspires to

have world class 5G services. All three options prese ve the opportunity for Dense Air to participate in this allocation, should it wish to.

What would a direct allocation look like?

24. Taken together, the reasonable objectives of the four companies could be satisfied by the result as shown in Figure 2 below.

FIGURE 2 SUGGESTED BAND PLAN FOR A DIRECT ALLOCATION

25. The result of this allocation is that Vodafone, Spark and 2Degrees would each end up with MHz of useable spectrum2. We note that in this scenario, given equal 5G spectrum

holdings, the companies are unlikely to feel the need to seek clearance from the Commerce Commission. This would remove a significant cost and delay from the process.

Terms for a direct allocation

26. We suggest that if a direct allocation is the preferred option then the terms should, as far as possible, replicate those of the auction as modified in Option B above. Rather than an

s 9(2)(f)(iv), s 9(2)(ba)(i)

s 9(2)(f)(iv), s 9(2)(ba)(i)

s 9(2)(f)(iv), s 9(2)(ba)(i)

s 9(2)(f)(iv), s 9(2)(ba)(i)

s 9(2)(f)(iv), s 9(2)(ba)(i)

s 9(2)(f)(iv), s 9(2)(ba)(i)

s 9(2)(g)(i)s 9(2)(g)(i)

s

s 9(2)(f)(iv), s 9(2)(b)(ii)

s 9(2)(f)(iv), s 9(2)(i)

Proacti

vely

Releas

ed

2980 19-20 In Confidence 7

auction process we would simply offer each company Management Rights as shown in Figure 23. The price would be as per the new reserve price recommended above (paragraph 13) and settlement date could be set by the buyer. A discount would be applied to thepurchase price for spectrum returned, up to the value of the spectrum purchased.

27. Technical terms, restrictions on sale, and other requirements would remain as currentlypublished.

Comparison of Options B and C

28. In assessing the two live options (B and C) we have considered the criteria of effectiveness,timeliness and transparency. On balance, we recommend Option B: Modify and restart theauction as this preserves continuity with previous decisions and allows for pragmat cchanges to process without compromising transparency. However, you may wish to considerOption C pending the outcome of your meetings with Spark and 2Degrees as his option willfurther limit possible objections to the allocation process.

Effectiveness

29. Although there is a reasonable possibility that the two processes will p oduce the sameoutcome, running an auction introduces an element of randomness as each party makes itsdecisions in the absence of complete information.

30. We therefore suggest that in terms of effectiven ss, the direct allocation (Option C) has aslight edge.

Transparency

31. The main disadvantages of direct alloca ion (Option C) are the loss of transparency and theneed to go to Cabinet for a new mandate. One-to-one discussions would be less transparentthan the auction process, which has followed a consultative process to date. This loss oftransparency would only be minor if the new allocation process is fully disclosed at an earlystage. However, in terms f transparency, Option B has a slight edge.

Timeliness

32. The need to go to C bine for Option C could slow down the direct allocation process,although it would be possible to advance discussions with the companies on an ‘in principle’basis before Cabine makes decisions.

33. In practic , we cannot say with certainty whether Options B or C would be faster, given ‘wildcards n the auction process and the possible need for a Commerce Commission clearanceafter an uction. However, on balance we consider that Option B has less room forunexpected surprises/variance, as much of the process has already been prepared andn eds only minor modification.

Impact on value of Māori Spectrum

34.

35. Key objectives of the MSWG are to establish Māori as key players in the management ofspectrum in New Zealand and capability-building to make effective use of spectrum over the

s 9(2)(ba)(i)

s 9(2)(g)(i)

s 9(2)(i)

Proacti

vely

Releas

ed

2980 19-20 In Confidence 8

medium to long term. The first objective has been achieved to the extent possible with the 3.5 GHz early access allocation.

36.

37. In addition, development of a thriving 3.5 GHz 5G market will have positive implications for the value of any long term rights granted to the MSWG.

38. Given these factors, we suggest that your decision on the government’s spectrum lloca ion process can be independent of concerns about the short-term value of the MSWG’s spectrum.

Next steps

39. You are scheduled to meet with Spark and 2Degrees in the next few days. We expect both companies to use the pandemic as a reason to support their previous positions.

40. After your meetings with the two companies, we ask that you agree to either Option B or Option C for the allocation process. Once you have decided on your preferred option, the government will need to issue a public notification of the decision ahead of further discussions with MNOs.

41. If you choose Option B, MBIE will issue r vised terms and conditions to the registered bidders and set a date for the auction. If you choose Option C, MBIE will prepare a Cabinet paper seeking a revised mandate for the allocation and prepare offer documents for the three registered bidders.

s 9(2)(g)(i), s 9(2)(b)(ii)

s 9(2)(g)(i), s 9(2)(b)(ii)

s 9(2) s 9(2)(b)(ii), s 9(2)(ba)(i)

Proacti

vely

Releas

ed

2980 19-20 In Confidence 9

Proacti

vely

Releas

ed