4G: What does the auction mean for the incumbents?
New generation, same four faces
Comment The UK's 4G auctions won't shake up the country's mobile industry, but there's enough there to annoy the incumbents equally - and perhaps make space for a local player or two.
Ofcom's consultation is clear that the ideal number of network operators, which it now calls "national wholesalers", is four. The regulator admits it designed the mega-auction specifically to maintain the existing competitive landscape; but that doesn't mean today's operators won't face changes, and there's even a proposal to reserve some frequencies for local operators too.
Those local operators will have, at best, a pair of 10MHz bands at 2.6GHz to themselves, perhaps with another pair to be shared with a national wholesaler (taking care not to interfere too much), so some sort of roaming agreement will be necessary. Ofcom reckons such an operation could cover a college or company campus, and even suggests automatically aggregating local bids so they can compete with the big four, though it's hard to see how that can work unless some spectrum is reserved for local use.
That's about it for new entrants. Ofcom says it's open to the possibility of someone coming along with a big bag of cash and plonking it on the table, but realistically the auction will end with the same four operators we have today, only with bigger spectrum portfolios.
Ofcom reckons that the four operators need at least 5MHz of spectrum below 1GHz (for big rural cells, and in-building penetration), and plans to cap that spectrum to ensure a four-way split. Higher up the dial things are a little less prescriptive, but Ofcom will still cap every company to a total 210MHz of spectrum to ensure there will always be four national wholesalers.
The low-end cap is particularly important to Three, which currently only has spectrum at 2.1GHz and is desperate to get something with greater range and in-building penetration. Three will have to bid for lots of 800MHz spectrum to fill that gap, probably the whole 40MHz it can get. It will then be able to chuck that spectrum into the network sharing deal it already has with Everything Everywhere to gain a very rapid roll-out.
Everything Everywhere will also want some low-end spectrum, as its current holdings are at 1800MHz and 2.1GHz. The problem is less acute for EE as it already has loads of base stations packed densely enough to provide pretty good coverage at 1800MHz (currently only offering a 2G services). EE will have to hand back some of that 1800MHz band in the next year or two, 30MHz of the 120MHz it currently holds, as a condition of the merger that formed it, but that's not going to have a big impact on coverage.
O2 and Vodafone have less interest in 800MHz, as they both have decent holdings (35MHz each) in 900MHz. Those were allocated to them back in the very beginning of GSM, to operate 2G services, and are subject to only a minimal rent. The decision to let the operators deploy 3G, and now 4G, in those bands has been hugely controversial and prompted loud complaints from Three who wanted a share of the freebie spectrum, though Three will be somewhat mollified by the section of the new proposal that explains how Ofcom is going to start charging market rates for that spectrum.
After the mega-auction Ofcom plans to judge how much the 900MHz spectrum would have made if it had been on the block, and then charge roughly a 20th of that every year, plus interest, indefinitely. Given that such payments will come under operational expenditure, the owners might decide to hand back the 900MHz and then try to buy it back again at auction, as capital expenditure. Ofcom even predicts such a thing, and explains how it would parcel up the 900MHz blocks if they were surrendered by O2 and Vodafone.
The same things applies to the thin slices of 1800MHz that O2 and Vodafone own, and the bigger chunk of 1800MHz owned by EE, who might also be tempted to surrender and buy back.
That sounds as though it might offer a disruptive bidder the chance to buy up previously-owned spectrum just to annoy the previous owner - but that's unlikely when the previous owner would value it so much more. It's more likely that the knowledge would prevent operators from bidding for each other's previous holdings, keeping the price down for all concerned.
This auction, if it stands as proposed, is a realignment of spectrum holdings, not a revolution in services or industry-changing initiative. Ofcom could have reserved spectrum for a new entrant, or tried to redress previous imbalances, but it has chosen a path which will provide more of what we already have.
The consultation, which wraps up at the end of May, will no doubt draw some robust retorts for Ofcom to address. Generally speaking, it's just what the industry wanted. ®