A digital dividend is delivered

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James Riley

The sale to TPG and Vodafone of the remaining lots of 700 MHz spectrum provides a useful opportunity for reflection on a public policy process that extends over two decades.

The process of conversion to digital television was premised on the concept of the ‘digital dividend,’ the payout to taxpayers of the proceeds from the freeing up of 700 MHz spectrum to ‘higher value uses.’

The 700 MHz band (both VHF and UHF) was divided into 7 MHz frequency slots that corresponded to broadcast channels.

Discussion of conversion to digital television extends back to at least the mid-1990s. At that time, the author was the Telstra National Business Manager for the media portfolio and we were converting the terrestrial video transmission system from analogue to digital (from effectively 140 Mbps to 34 Mbps).

I was assured by the engineers in the television networks that the Sydney Olympics would be broadcast in high definition.

Government policy under the Howard Government for conversion to digital was premised on the link between digital transmission and high definition. The networks were all assigned an additional channel for the purposes of broadcasting in high definition.

This policy was somewhat farcical. The easiest programs to provide in high definition turned out to be studio based shows, notably game shows. The content was abysmal.

The situation was best summed up by Warren Lee, formerly from Channel Ten but at the time with Foxtel, addressing a meeting of the Australian chapter of the International Institute of Communications.

Having noted that the highest rating television program the previous week was Australia’s Funniest Home Videos, he observed that ‘seeing Dad hit in the nuts with a rake’ was no funnier in high definition.

InnovationAus.com has previously reported on the fact that the Labor Government through Stephen Conroy got the conversion process back on track and at the same time delivered television equalisation.

In 2010 the Government issued a Digital Dividend Green Paper seeking input on how the ‘restack’ of the digital channels should be performed when analogue television was shut down. That process identified 126 MHz of digital dividend spectrum available.

Students of Commonwealth budgets will know that expected proceeds of asset sales are included by Treasury in the calculation of the budget position (surplus/deficit) but are not reported separately, including in forward estimates.

Heading to an auction in 2013 this arcane Government process became a major political problem in late 2012.

Finance had locked an expected proceed from the sale into the budget forecasts of $4 billion (for 700 MHz and 25 GHz). The December 2012 MYEFO forecast surplus of $1.1 billion included the realisation of this valuation.

The Government abandoned the surplus commitment shortly after MYEFO on the back of collapsing revenue forecasts.

In 2013, realising the valuation came under pressure. Vodafone let the Government know that it had no intention of participating in the auction, and Optus was making presentations to Government of its expectations of a fairly low price based on overseas auction results.

In this environment, the Minister had to determine competition limits and a reserve price for the spectrum. Knowing there were likely to be only two well-resourced bidders, the Minister still set competition limits that meant the whole band couldn’t be sold without three bidders.

In addition, the Minister set a fairly high reserve price (by global standards) that was based on the prices the Government had charged for recent spectrum renewals.

The auction resulted in the sale of 10 MHZ of paired spectrum to Optus and 20 MHz of paired spectrum to Telstra. Together with the sale of 2.5 GHz spectrum the auction delivered $1.96 billion in proceeds.

The outcome was attacked by the Opposition with Communications Shadow Malcolm Turnbull saying “Senator Conroy set a reserve price for the 700 MHz spectrum that was extremely costly by global standards – sacrificing the long-term economic benefits of a more competitive and robust mobile telecommunications market in favour of near-term revenue to prop up Labor’s pursuit of a Budget surplus.”

“Senator Conroy’s intervention in the auction process means Digital Dividend spectrum worth $1 billion that belongs to taxpayers is left on the shelf,” he claimed.

The ACMA has just completed the auction of the remaining lots. As they report “After almost a week featuring strong bidding between three companies, the auction concluded on Monday 10 April, realising revenues of more than $1.5 billion, significantly exceeding the reserve price of around $857 million.”

The notable feature is that these lots sold above the reserve price (set by Mitch Fifield just as Stephen Conroy had set the earlier reserve price) which, as the Minister stated “is the equivalent of the 2013 ‘digital dividend’ auction reserve price, adjusted for a shorter licence term.”

In the end the proceeds from the Digital Dividend are a shade under $3.4 billion (in 2013 dollars).

Overall the two auctions have realised the objective of allocating spectrum to those who value it most. Senator Fifield should be thanking Senator Conroy for the wisdom he displayed in the original auction of not just giving away the spectrum at whatever price would have cleared the market.

There are, however, three important public policy questions remaining.

The $3.4 billion realised from the sale have not been costless. A myriad of programs helped finance the spectrum clearing process. A total accounting for the costs and revenues from the ‘digital dividend’ is an exercise the Auditor-General would be wise to undertake.

Additionally, the use of broadcast spectrum is still not efficient. Multi-channelling has been a boon for sports broadcasting and other services targeted at specific audiences (e.g. news and children’s programming), but the ongoing utility of multiple ‘infomercial channels’ and channels featuring the same reruns available on streaming services may not be the best use.

If we do get to repeal the 75 per cent reach rule, single owner national networks might also be better broadcast as single frequency networks. Together these present the prospect of a further digital dividend.

Finally, there is the politics. Malcolm Turnbull’s inaccurate claims about the auction process are no more egregious than his inaccurate claim that we didn’t need the NBN satellites or that Labor’s NBN would cost more than the $44 billion in the business plan.

They are standard for the way politics is conducted these days.

Paul Kelly in The Australian has (again) shared his despondency at the malaise of the current political system, writing “The problems facing the Turnbull government are of its own making yet part of a far bigger story — the failure of a political generation — where the demise of quality public policy is tied to the decline of trust in the political system.”

Bemoaning the twin evils of short-termism and populism is all the vogue these days!

Kelly continued “What is terrifying is the number of politicians and journalists who accept this system as the given terrain on which politics is conducted, thereby implicitly accepting the national decline this involves.”

One can only hope that as Editor-at-Large his work function extends to instructing his colleagues at The Australian on their failings.

In the same paper, Simon Benson gave us his analysis of Bill Shorten’s repositioning on the Adani coal mine. His conclusion is that “It can only be assumed that Shorten has now determined that Labor is cactus in federal seats north of the Townsville-based seat of Herbert, thanks to One Nation, but still vulnerable to the Greens in the metropolitan enclaves where jobs in the regions are of little concern.”

There is in Benson’s world view no possibility that the Opposition Leader is making his assessment on sound policy grounds, the presumption has to be that he is only motivated by a short-term, populist vote counting exercise.

Benson is prepared to discount any of the sound policy considerations such as the excessive demands the mine would place on artesian basin water and that it is apparently not commercially viable without concessional loans.

Apparently, the immediacy of construction jobs should simply trump concern that the mine is a proposal to add significant excess capacity into what is already a declining global market; that its single biggest economic contribution is likely to be further suppressing the price of thermal coal from already established mines.

Ultimately the behaviour of both politicians and journalists is as predictable as that of small children and dogs; behaviour that is rewarded will be repeated.

The public at large can make the behaviour change we need; stop rewarding those who don’t properly engage with policy substance.

Additional Notes: The ACMA does maintain a very useful spectrum auction archive, it is just not easy to find. When the final budget outcome was revealed for 2012-13 Crikey reported “The net result: a predicted $343 billion in tax revenue turned out to be $326.4 billion. Just to help, non-tax revenue fell by a billion on forecasts as well.”

David Havyatt worked as a Special Adviser to Senator Conroy from Dec 2011 to June 2013. He is no longer employed in a political office and no longer works in telecommunications.

Do you know more? Contact James Riley via Email.

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