The auction for 4G spectrum may still be nine months away, but the pushing and jostling for a better starting position is already intense.
This was clear from recent comments from David Dyson, the new CEO at Three, the smallest of the five UK mobile brands, who said delays to the auction, originally reported by Mo, were unacceptable and gave an unfair advantage to its competitors.
Earlier, O2 and Vodafone had complained about Ofcom’s proposals for floors and caps to the amount of spectrum any mobile network operator (MNO) could hold after the auction. O2 even suggested the proposals amounted to illegal state aid to Everything Everywhere and Three as the regulator wanted to ensure there were at least four MNOs.
At stake is the extra capacity that will allow MNOs to provide faster access to mobile services, particularly data, ease congestion in the existing networks and serve new rural customers. So how much truth is there to Dyson’s claim that delays will disadvantage Three?
Ofcom, the UK’s communications regulator, believes that auctioning frequencies is the best way to allocate this scarce resource. Mobile telephony currently occupies only 4% of the spectrum suitable for radio transmissions, so it is very cramped for space.
The proposed auction of frequencies in the 800MHz and 2.6GHz bands, now expected to start in Q2 2012, will open an extra 250MHz to mobile telephony. This will add almost 75% more capacity to the networks, which is 80% more space than was available in the 3G auction in 2000 that netted the Government £22.5bn.
Sources close to the negotiatons say the Government will get less than it did for the 3G auction. Ofcom CEO Ed Richards told MPs recently that the Treasury had not given him a revenue target for the 4G auction. He said the auction was about the efficient allocation of spectrum, not raising money
for the Government.
The Government admits it is unlikely to repeat the capital windfall of 2000; there isn’t enough money around. But it is likely to get more rental income as a result of this auction. This is partly because everyone except Three is going to have to pay more for their existing spectrum.
The Government presently gets £63.4m per year in licence fees from all four operators for their respective holdings of 900MHz and 1800MHz or 2G spectrum. This is split into £33.3m a year for both Everything Everywhere’s licences, and £15m each from O2 and Vodafone. None of the operators paid upfront for their initial 2G licences.
However, Everything Everywhere must sell 2x15MHz of its 1800MHz holding to comply with a European Commission ruling that governs the merger of the UK operations of T-Mobile and Orange. This could give it a windfall of £450m, according to some estimates. The Government has so far rejected proposals that it should take and use this money to fill in broadband and mobile not-spots.
Sources close to the company say Everything Everywhere is reluctant to sell that holding ahead of the 4G auction. This is because prospective buyers don’t yet know the terms and conditions of the auction, which will guide Ofcom’s thinking on pricing, and hence the likely cost of the licence and annual rental.
Moreover, communications minister Ed Vaizey told MPs he would charge O2 and Vodafone for providing data services over its 900MHz 2G network, once the auction revealed the going price of 800MHz spectrum.
It is thus easy to see why everyone except Three has a financial incentive to delay or cancel the auction. It would preserve their cashflows and ensure they do not incur the capital cost of new licences.
Against this is the fact that they are all desperate for more capacity. Vodafone told MPs its 19 million customers fully utilised its capacity. O2 is building public Wi-Fi networks to offload its mobile traffic onto fixed-line networks as quickly as possible.
Everything Everywhere would like sub-GHz spectrum because it wouldn’t need all the 5,100-odd masts it presently shares with Three and would give potential coverage to some existing not-spots.
Three, for its part, has half the bandwidth of any of its rivals. It has paid top dollar for all of its spectrum, and is the only operator with the space to offer unlimited data deals. With data traffic expected to sky-rocket in the next few years, any spare capacity it has is likely to be quickly used up.
Ofcom is also exploring how to give a low power option in the 2.6GHz band in the same way it did for 1800MHz. This would potentially attract more bidders for short-range, high-speed applications like Wi-Fi access. Consultants Real Wireless have proposed using a 2x20MHz dedicated channel or 2x20MHz hybrid channel.
Ofcom’s auction proposals include a cap on how much sub-1GHz spectrum an operator can hold. This would limit how much 800MHz spectrum Vodafone and O2 could acquire. As Ofcom’s spectrum director Graham Louth told MPs: ‘Vodafone and O2 are not entirely happy with that cap and Everything Everywhere and Hutchison [Three] do not think it goes far enough.’
All the operators are keen to get as much 800MHz spectrum as possible because radio signals in this band carry further for the same energy input, and this means they need fewer base stations and masts.
Moreover, Ofcom proposed saving some 800MHz spectrum for an operator that promised to provide national roaming coverage in quick order.Analysts are divided on whether this measure, unpopular with all the MNOs, will be in the auction.
If it is, it could open the way for new entrants such as Global Crossing or Cable & Wireless, both of which have extensive fibre networks, to partner with a mobile operator, in the same way that Everything Everywhere and Three have joined forces with Virgin Media Business.
Or it could open the door for BT, which would like to roll out fibre to the street cabinet to 90% of the population in order to add a wireless component to its offering and so preserve its virtual monopoly in the countryside.
If the 2000 auction captured the public interest because of the eye-watering sums, the 2012 auction could be just as fascinating as we watch corporate elephants learning to boogie.