The Federal Government's projections of reaping up to $3 billion from the sale of a new wireless spectrum has hit a major snag with Australia's second largest telecommunications company, Optus, considering whether it will pull out of the auction.
The auction, which is crucial to the next generation of tablets and smart phones, is facing the risk of collapse after .
Senior Optus management held talks with its parent company SingTel at the weekend.
"We were a bit surprised about the pricing, because it doesn't fit in with our understanding of international benchmarks," said David Epstein, who is responsible for government affairs at Optus.
According to Optus, the international benchmark is 38 cents per megahertz per head of population.
The Government has set its reserve price at $1.36.
Mr Epstein, who was once chief of staff to former prime minister Kevin Rudd, says it is difficult to make the business case to invest in spectrum at that starting price.
"The fact is we live in a connected world, and Australians expect to pay the same prices for their telecommunication as people do overseas," he said.
The auction is set down for April, just before the May budget, a budget the Government is struggling to keep in the black.
The Government had been banking on the three major players - Telstra, Optus and Vodafone - taking part in the spectrum sale and delivering it a big revenue windfall.
However, Vodafone has already decided not to participate.
"The response to that shouldn't be a simple, 'well if three people aren't going to participate we'll just divide the market in two and lift the price accordingly'.
Things just don't work that way," he said.
"Ultimately these costs have to be passed onto consumers and people just won't buy our services if they're too expensive.
They'll just adjust their use accordingly, and that affects the business case." The Opposition has suggested that the Government is setting the price at this high level to help resolve its budget issues.
Optus says its main consideration is what price customers are willing to pay.
"Obviously the Government has to be mindful of revenue but in this sort of equation we have to be mindful of what customers want," he added.
Optus is threatening to join Vodafone and walk away from the auction.
However, before it carries through with that threat, David Epstein will be lobbying for the reserve price to be cut.
"We would hope that some realism is brought to the process.
I mean I think that would make for a more competitive Australian telecommunications market," he said.
"It would make for more services and products to be brought to the Australian consumer at internationally competitive prices faster." Mr Epstein says telcos have alternatives to buying more spectrum.
"These are not the only options before us, and we can look at other ways of doing things other than acquiring spectrum," he observed.
"So we just have to assess what we're going to do now.
One company has already done that and they've said they're not going to participate.
At this stage our minds are open." The Communications Minister Stephen Conroy argues the price reflects the high quality of the spectrum and the investment the Government has made to free it up through the analogue to digital TV switchover.
AM asked the Minister for an interview but he was not available.