The hammer comes down on the UK’s 4G auction

OVUM VIEW

Summary

On February 20, 2013, after five years of planning, tens of thousands of pages of consultations, but an auction process of just five-weeks, Ofcom announced which operators had won the right to deploy 4G mobile services in the UK. Of the seven bidders taking part, five won licenses to operate in the 800MHz and 2.6GHz bands, raising a total of £2.34bn. This was £1.00bn more than the reserve price, but £1.20bn less than the government had predicted. Overall it looks like a good outcome, and should deliver a competitive mobile market for at least the next decade. While much has been made of the UK’s relatively late start in the 4G race, attention now must turn to how the winning bidders will launch their mobile services and the type of services they will be able to offer. At this point there are more questions than answers, which will make the next few months very interesting indeed.

Trying to put a figure on how much the auction would raise was always problematic

Despite all the noise around the UK’s 4G auction, it failed to raise the £3.50bn forecast by the UK Office of Budget Responsibility. Had it based its prediction on Ofcom’s reserve price of £1.34bn it would have been celebrating an additional £1.00bn in revenue and congratulating Ofcom on delivering a result that was broadly in line with that we have seen elsewhere in Europe. Trying to predict how much an auction might raise is always problematic, because the outcome can be heavily influenced by bidding behavior in the auction. The mobile operators must be relieved that the final figure is a mere fraction of the £22.50bn they were asked to pay during the 3G licensing process.

The costs of rolling out a network are significant. It could be argued that the relatively poor 3G coverage we have seen in the UK until now is at least partially a result of operators being short of money after the last auction, meaning that they had very little left to actually spend on building the network. Things this time should be different, especially because all the operators were successful in winning 800MHz licenses, and these airwaves in particular are able to cover large distances and penetrate buildings well.

Good decisions and a well-designed auction have delivered a sensible result

Less than 12 months ago few people would have thought an auction of 4G mobile spectrum would take place in the UK in 2013. Endless delays looked set to condemn the country to the slow lane for years to come. Ovum believes that everyone – the regulator, the government, and even the operators – deserved at least some of the blame for this. However, a year later one operator (EE) has already staged an ambitious 4G rollout, the auction has come and gone, and we are now set to see all operators launch some sort of commercial service around May/June of this year.

Ultimately, the progress seems to have hinged on Ofcom allowing EE to launch 4G services in October 2012 using its existing spectrum holding at 1800MHz. While it was not an elegant solution to the disagreements between operators, and in spite of the criticism at the time, it now seems the decision was the right one. By giving the other players a strong incentive to make the auction happen (at that point it was the only path for them to 4G), it effectively removed the roadblocks that had been put in place. There are certainly many lessons to learn from the UK auction experience, but in the end Ofcom looks to have created a competitive market for 4G services at an affordable price for the operators.

All the license holders can be considered winners, but some perhaps more so than others

At first glance, O2’s lack of higher frequency spectrum at 2.6GHz, which it needed to meet growing data demands, is intriguing. Was it outbid on the higher frequency spectrum, throwing its money behind 800MHz? Or was this a strategic decision? The relatively low values bid suggest that a player of O2’s scale could have found more cash if it wanted to, which suggests that this was a strategic decision. O2 has said that its strategy is to leverage its existing spectrum holdings combined with Wi-Fi in the short term. In the longer term it will use cell splitting to “work the 800[MHz band] harder” and refarm its existing spectrum for LTE. (For more information on this see Ovum’s recent comment “Ofcom looks set to liberalize more spectrum in the UK for 4G.”) Both of these policies require some further development and represent something of a strategic gamble. The possibility of trading spectrum with those with larger holdings also remains an option.

If O2 did lose out it may have been to BT, which won both paired and un-paired 2.6GHz spectrum. This would also be inappropriate for nationwide services, given the propagation characteristics of this spectrum and the lack of existing infrastructure. A hypothetical marriage of convenience between O2 and BT would make an intriguing prospect, although it is unlikely for now. BT’s stated strategy has been to use LTE as a “hotspot” technology to complement Wi-Fi, hence its desire for higher frequencies.

Of the remaining operators, Vodafone and EE look the biggest winners, spending the most and obtaining the greatest amounts of spectrum to supplement their already significant holdings. Meanwhile 3’s ability to win 800MHz spectrum, coupled with the 1800MHz spectrum it acquired from EE before the auction, puts it in a strong position to roll out its 4G network. This will be a relief to the many 3 customers who have experienced reception problems at some point due to the propagation characteristics of its 2.1GHz spectrum.

The reality for each of the UK players is now clear: they must implement commercial strategies to earn returns on these investments. The talking is over and the competition must begin.

APPENDIX

Author

Matthew Howett, Practice Leader, Regulation and Policy

matthew.howett@ovum.com

Steven Hartley, Practice Leader, Strategy

steven.hartley@ovum.com

Further reading

iPhone 5: Refined Features and Regulatory Fallout (September 2012)

“Ofcom looks set to liberalize more spectrum in the UK for 4G” (February 2012)

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