You wouldn’t begrudge the mobile industry for taking their time scrutinising the latest Ofcom proposals for the perennially delayed 4G auction. The proposals run to some 295,000 words across almost 750 pages of text. As one operator put it: ‘It could have been a bit less opaque.’ But while the latest Ofcom report was criticised, mainly by Everything Everywhere, it seems to have achieved a rare feat in not displeasing the wider mobile sector.
The headlines are something the trade is by now familiar with. Ofcom is proposing to hold some of the lucrative sub-1GHz spectrum for a fourth wholesaler, more than likely Three but perhaps another player entirely, but with conditions attached. Everything Everywhere appears to have lost the most, with the removal of the formerly promised sub-1GHz chunk of spectrum. And rural areas will benefit from a new stipulation for one of the 800MHz winners to extend 4G mobile coverage to 98% of the population, making it comparable to 2G coverage. The latter received the most coverage in the mainstream press.
Alastair Davidson, director of mobile at communications infrastructure company Arqiva, said he wants this obligation to be extended to all operators who win sub-1GHz spectrum. He said: ‘If Ofcom decided to place the coverage obligation on only one operator, many consumers in rural areas will receive a second-tier broadband service, denied the benefits of competition available to those who live elsewhere.’
So far, the heads of the four operators – O2’s Ronan Dunne, Everything Everywhere’s Olaf Swantee, Three’s Dave Dyson and Vodafone’s Guy Laurence – have stayed silent on the proposals, with press requests for interviews rebuffed. Each company has cited a desire to spend more time scrutinising the documents ahead of the 22 March deadline when they have to submit their responses to Ofcom. However, close scrutiny of the tens of thousands of words in the latest edition of this long-running saga throw up some fascinating insights into Ofcom’s thinking and what this means for the industry.
The sweet spot
The surprise removal of safeguards ensuring Everything Everywhere gets a chunk of sub-1GHz spectrum is seen as the most significant change since the last consultation. Those safeguards particularly irked Vodafone and O2, both of whom appear more content with the proposals since their removal.
Ovum analyst Matthew Howett said Ofcom believes Everything Everywhere has a distinct advantage in that it can launch LTE fairly quickly by using its existing 1800MHz spectrum. The operator has a 2x45MHz chunk of that spectrum, although it has to divest 2x15MHz as part of the conditions of the Orange/T-Mobile merger. Howett said: ‘The thing about spectrum is you need to strike a balance between coverage and capacity. 800MHz is very good at providing coverage but lacks the capacity you have at the higher frequency bands. If you look at how consumers have increasingly used mobile broadband, capacity is very important.’
However, Everything Everywhere disagrees. It reacted most strongly to Ofcom’s report, saying it was ‘very disappointed’ by the proposals and feels a ‘fair distribution’ of sub-1GHz spectrum is crucial for a competitive market. It claimed it is more expensive to provide LTE using the 1800MHz spectrum and argued the ‘imbalance’ in the sub-1GHz spectrum ‘has damaged consumer interests for the last 20 years’. A spokesperson said: ‘The importance of sub-1GHz spectrum, which delivers service and cost benefits, has been recognised by other regulators across Europe and supported by economic analysis. All of the regulators bar Ofcom have made vigorous efforts to support healthy and sustainable competition by ensuring that the imbalance of sub-1GHz holdings is redressed.’
Nevertheless, Howett said that as things stand Everything Everywhere appears to be in a good position, having asked Ofcom about potentially refarming its 1800MHz spectrum for existing use. Rival operators expect this to be subject to the same scrutiny as when O2, Vodafone and Everything Everywhere asked to refarm parts of their spectrum in 2010.
Ofcom’s report suggests that while O2 and Vodafone both have chunks of the lucrative sub-1GHz frequency band, neither operator is in as healthy a long-term position as one might imagine. Both companies currently have a comparatively low portion of the spectrum – Vodafone has 14% to O2’s 12% – which Ofcom argues is an insufficient amount for it to be credible in the long-term if neither wins any spectrum at auction. It said the parts of the 900MHz spectrum they own are not suitable for a short-term route to provide 4G speeds or for transmitting peak data rates. In order to use it for 4G services, both companies would have to spend time in refarming it from its current use. Howett said: ‘The problem for them both is that part of the spectrum is full of existing users and LTE will not be possible for a long time to come. They really need to acquire more spectrum in that lower band. If they owned a sizeable chunk of the 1800MHz band, it would be much easier for them to provide 4G.’
The fourth operator
Observers have noted that the somewhat measured reactions to Ofcom’s proposals are a sign that while no one is overjoyed with the hand dealt, they are hardly spitting feathers either. Thus far, last year’s squabbles between the operators, where Vodafone’s CEO Guy Laurence accused Three of seeking a government handout to support competition, have not been repeated.
Ovum’s Howett said the threat of legal action hung over last week’s proposals. ‘If Ofcom had offered Three and Everything Everywhere the same degree of protection as it had last year, you probably would have seen legal challenges from the other players. It was maybe necessary to make everyone unhappy to some extent.’ So gone are the caps and the floors that so angered some of Three’s competitors. One rival dryly noted that the new proposals ‘move much further towards an open auction’.
Throughout the report, Ofcom stresses the importance of having four operators competing for customers with an ample chunk of 4G. The regulator argues that consumers will lose out if they are not provided with four strong wholesalers. So Ofcom proposes to safeguard a fourth operator without being accused of protectionism by reserving a range of different possible spectrum portfolios for it across the 800MHz, 1800MHz and 2.6GHz bands that are up for grabs. While Three is not guaranteed to be the fourth operator, rivals said they would be shocked if it did not make a bid for spectrum or a new player entered the market.
However, this reservation could change if Everything Everywhere sells its 2x15MHz of 1800MHz spectrum, which it must divest because of the Orange/T-Mobile merger, ahead of the auction. If the fourth wholesaler was to buy it, then it appears it would have no guarantee of having spectrum reserved when the auction takes place.
Howett said: ‘Reserving spectrum is controversial because you are putting something in the way of a market mechanism. But if you are to consider the duties of a regulator, it’s not to maximise the revenue to the exchequer, it’s to ensure a competitive landscape.’
When this story hits the mainstream press, much is made of how the UK is behind the rest of Europe in getting 4G fully implemented. The Confederation of British Industry (CBI) said it was ‘crucial’ that the auction goes ahead during the second half of this year. However, given how a chunk of the spectrum that will be auctioned is how Britain will watch the Olympics this summer, one operator joked that the UK is probably more prepared to wait than we think, so they can watch Team GB strike gold at the Games. More seriously, he noted how the change in Prime Minister and shelving of the previous government’s Digital Britain proposals had impacted on the process.
Ovum’s Howett said: ‘The timing of this means different things to different people. Three is very constrained at the minute and really wants this auction to have happened yesterday. But for the more established players, they have enough spectrum to cope. I don’t think the delays are causing as many issues as suggested but it is important the pressure is there… we are in no danger of being the sick man of Europe because of the delay.’
However, the issue of pricing the licence fee still needs to be ironed out. Ofcom is planning to look at it after the auction, using a mechanism that includes referring to all bids made during the process and the outcomes in other countries to determine pricing. Ofcom is still cagey on the final auction date. The consultation process ends on 22 March and the regulator promises an update, including details on how the auction will work, during the summer. Of course, Ofcom merely states that the auction ‘could’ start in Q4 2012. So the wait could continue.