Spectrum spat could still delay UK 4G auction

Most European countries have already awarded operators the spectrum they need to provide 4G services, but in the UK an auction has been repeatedly held up by disputes between the various stakeholders. In its auction plan published this week, Ofcom, the UK’s communications regulator, says it expects the process to begin by the end of the year, with bidding to start in early 2013. But a legal challenge that delays it would surprise no one.

Most European countries have already awarded operators the spectrum they need to provide 4G services, but in the UK an auction has been repeatedly held up by disputes between the various stakeholders. In its auction plan published this week, Ofcom, the UK’s communications regulator, says it expects the process to begin by the end of the year, with bidding to start in early 2013. But a legal challenge that delays it would surprise no one.

Ofcom has taken the controversial decision to reserve a slice of spectrum in the 800MHz band for a so-called “fourth operator”. By this, it means a company outside the big three of Vodafone, O2 (owned by Spain’s Telefónica) and Everything Everywhere (a joint venture between France Telecom and Deutsche Telekom of Germany).

In all likelihood, this will be 3, the country’s smallest network operator, owned by Hong Kong’s Hutchison Whampoa, which has lobbied hard for this condition. Although 3 received a generous allocation of spectrum during the 3G auction of 2000, when it was a new entrant to the market, it lacks any of the 900MHz spectrum the UK’s older operators were first given to support their basic, 2G services. Should it miss out on 800MHz spectrum during the 4G auction, 3 would have no so-called “sub-1GHz” spectrum whatsoever.

That would put 3 at a considerable disadvantage. Wireless signals travel much further in lower-frequency bands, which means operators using them do not have to deploy as many base stations to cover wide areas as rivals stuck with the higher-frequency stuff. Sub-1GHz spectrum also provides much better in-building coverage. This matters because Ofcom has decided to let the holders of 900MHz spectrum “refarm” those assets for use with 4G technology, guaranteeing the companies a sub-1GHz means of rolling out higher-speed services, regardless of what happens during the 4G auction.

Ofcom could have ignored 3’s pleading, and the demands of other prospective new entrants (such as BT, the fixed-line incumbent, and Virgin Media, a cable company), and kept all the 800MHz spectrum in the open market. The potential consequence, however, would be the emergence of a three-player sub-1GHz sector, with Vodafone, O2 and Everything Everywhere squeezing others out of the bidding. That would have been unacceptable from a regulatory perspective: Ofcom believes the mobile-broadband market needs to have at least four network operators to remain fully competitive.

Predictably enough, other operators have bitterly opposed 3’s spectrum stance. Industry executives have even suggested that reserving spectrum for a fourth operator could amount to providing illegal state aid. Clearly, it may drive up the price that operators have to pay for the 800MHz spectrum available on the open market. The reserve price means the UK government will make at least £1.4 billion ($2.2 billion) from the auction, but PricewaterhouseCoopers, a consulting company, expects demand to push up the final take to between £3 billion and £4 billion.

The other question, which has received scant attention, is whether it is fair to lump 900MHz and 800MHz spectrum into the same bracket. “Refarming” may not be all that straightforward. The 900MHz frequencies are not, after all, sitting idle but supporting millions of 2G connections. What’s more, the 900MHz band has attracted relatively little interest from operators and equipment makers as a platform for 4G services. That could mean it is costlier to construct a 4G network using 900MHz spectrum than it is with 800MHz, or that 900MHz customers have only a limited range of devices from which to choose.

Telecoms customers must hope none of this delays the launch of 4G services beyond the second half of 2013—the earliest they can be introduced if there are no further disruptions. In Germany and Scandinavia, not to mention the US and parts of Asia, consumers can already enjoy high-speed mobile-broadband connections, and national economies are benefitting, too. The UK’s could certainly do with a boost, but its operators may decide not to play along.