Friday, January 25, 2013

Wireless spectrum scare-story: $400 per year per user?

If Ord Minnet’s data are to be believed, the federal government’s spectrum reserve price is going to add $400 per year to “broadband consumers”.

If, of course, the Daily Telegraph got its understanding of the Ord Minnet numbers right.

Let’s take the number as read, and since I can’t see why a mobile investment would be recovered from fixed broadband users, let’s confine the calculation to the country’s 5.8 million wireless subscribers. Finally, let’s take one other number Ord Minnet’s Brad Dunn gave to the Tele:

“The bill to purchase enough spectrum to cover the 22.6 million population will be approximately $1.5 billion.”

With 5.8 million subscribers, $400 per subscriber would yield $2.3 billion in the first year alone. Or to put it another way: to recover $1.5 billion in a year, the additional cost to users would only need to be $258, not $400.

So that didn’t work.

Not only that, but spectrum is a multi-year investment. Telstra doesn’t have to recover $1.5 billion in the first year; $150 million over ten years would pay it back (yes, I am ignoring the cost of capital).

If you ignore any kind of ramp-up, then Telstra’s current 4G customers – around 375,000 last August according to ComputerWorld – would have to repay $150 million in the first year.

Would you be surprised to find out that $150 million divided by 375,000 is $400?

But that’s only the first year (and from the laziest calculation possible). If you presume that Telstra wants to have 10 million 4G customers after ten years, and use a simple linear ramp-up, the per-year spectrum cost recovery by the tenth year falls to $15 per user.

A more complex calculation is to assume that Telstra would spread the $1.5 billion over ten years so that each user pays the same amount towards spectrum costs. Then, ignoring the cost of capital, the extra burden on subscribers is a paltry $29 per year (or less than $2.50 per month).

Even with a 10% cost of capital – if my spreadsheet is correct, which I don’t guarantee, but it's good enough for this case – the annual per-user recovery with a ten-year ramp up is $132 – or a little over $10 per user per month.

There’s plenty of room in a 4G premium alone to cover that.

If any of my numbers are close to reality - closer, say, than $400 per user per year - then perhaps the government's spectrum floor price isn't as stupid as people are saying.

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