UK 4G auction unlikely to meet government expectations

Ofcom will not reveal the approved bidders until later this year or early next, but the registration process for the UK regulatory authority’s ‘4G’ auction is officially closed after prospective applicants were given just a six-hour window to submit their details earlier this week. In his recent statement on the economy, George Osborne, the Chancellor of the Exchequer, said he expected the sale of airwaves to raise as much as £3.5 billion ($5.6 billion) for the public-sector purse. But this could be another case of wishful thinking by UK authorities.

Ofcom will not reveal the approved bidders until later this year or early next, but the registration process for the UK regulatory authority’s ‘4G’ auction is officially closed after prospective applicants were given just a six-hour window to submit their details earlier this week. In his recent statement on the economy, George Osborne, the Chancellor of the Exchequer, said he expected the sale of airwaves to raise as much as £3.5 billion ($5.6 billion) for the public-sector purse. But this could be another case of wishful thinking by UK authorities.

Just about everybody involved agrees the auction of spectrum in the 800MHz and 2.6GHz bands – suitable for use with the LTE technology now widely regarded as a ‘4G’ standard – will be a relatively sober affair in comparison with the 3G frequency sale that happened 12 years ago. The fanciful belief that consumers would double their mobile-phone spending to feast on 3G services drove the final bids for 2.1GHz spectrum up to a stratospheric £22.5 billion. Operators now know better. Thanks to the UK’s lag, they have also been able to observe the outcomes of 4G auctions in many other countries.

Those experiences seem to indicate that £3.5 billion is very much towards the upper limit of what the UK auction could raise. PricewaterhouseCoopers (PwC), a consultancy, thinks demand for 800MHz spectrum – which provides better indoor and wide-area coverage than higher bands – could push government takings up to between £2 billion and £4 billion. Yet rival KPMG plumps more specifically for a figure of £3 billion, bang in the middle of the PwC range, if valuations resemble those in Germany.

Conducted in 2010, that process raised approximately £50 per person, with the 800MHz airwaves priced at €0.72 ($0.94) per MHz per capita (so-called MHz POP). But most 800MHz auctions since then have attracted lower valuations. France’s, in December 2011, brought in €0.68 per MHz POP, while Spain’s, which took place four months earlier, raised just €0.47. In June this year, bidders in Denmark paid as little as €0.30 per MHz POP for 800MHz spectrum.

Of course, conditions vary dramatically from one country to another, and the UK is a notoriously competitive market (although less so than before T-Mobile and Orange merged to form EE (London, UK)). Ministers will also take heart from Ireland’s sale of 800MHz, 900MHz and 1800MHz spectrum last month, which netted a whopping €855 million for government coffers, equating to €190 per person.

Dampening bidding enthusiasm may be the early 4G experiences of EE, which was given the green light by Ofcom to use existing spectrum for LTE services in advance of the 800MHz and 2.6GHz auction. EE launched the technology under the 4GEE brand at the end of October, but has been suspiciously quiet about take-up so far. After attracting criticism for pricing 4G at a premium to 3G, and imposing usage restrictions on customers, EE was reported by The Telegraph newspaper at the end of November to have stopped supplying details of weekly subscriber additions to statistics body GFK. The operator has also been cagey about its 4G performance, while attacking rival Vodafone (Newbury, UK) for advertising a 4G service before it is in a position to offer one. Vodafone has retaliated by saying EE is trying to shift attention from its own 4G shortcomings.

In the meantime, any lingering hopes that BT (London, UK) might jack up the prices eventually paid for 800MHz spectrum appear to have been dashed. According to a report in the UK’s Financial Times newspaper, the fixed-line incumbent has registered its interest in bidding, but only for the less valuable 2.6GHz airwaves.

None of that, however, is likely to discourage interest among the country’s existing operators, which cannot afford to get left behind in the march towards faster and more efficient technologies. Even if 4G availability leads to zero improvement in revenues, any operator would risk losing its footing if it were perceived to be somehow weaker than its rivals. Auction proceeds will undoubtedly give a boost to public-sector finances, if not quite the lift that Osborne anticipates.