Will Ofcom have to stick up its hands on 4G auction?
Speed > fairness
Comment Ofcom will do anything to avoid seeing the 4G auctions scheduled for next year mired in legal battles - but deciding to whom it would surrender will be tough.
The regulator has told the FT it stands ready to fight for its proposed 4G mega-auction, in the face of operators who seem keen to resort to legal action, but not at the cost of the auction schedule:
"We would of course stand ready to defend robustly our final decisions. But we consider that it is in the best interests of citizens, consumers and the companies operating in the sector that we move on, without additional delays, so that the frequencies can be put to good use," the regulator said*.
O2 and BT have both made it clear they consider that Ofcom's proposed mega-auction, which is scheduled for next year, constitutes illegal state aid to their competitors, and O2's response only just stops short of threatening legal action if the action goes ahead as currently proposed.
The idea of BT (former state monopoly) and O2 (handed spectrum for nothing, over which it now runs 3G services) complaining about state aid might seem laughable, but Ofcom's problem is that if it concedes to one operator then it's only going to upset the others - probably enough to launch court action of their own.
The disputes over spectrum allocations go way back: O2 and Vodafone got lovely spectrum at 900MHz for nothing, while Orange and T-Mobile were gifted slightly unlovelier 1800MHz bands, which they've now combined into a holding so large they'll have to sell some of it off.
That sale presents the interesting spectacle of the German and French governments (who still hold shares in Orange and T-Mobile, and thus EE) selling off something that they were given by the UK government for nothing: but we digress.
Three, meanwhile, feels slighted as the only network operator not to have received 2G spectrum, especially as that spectrum can now carry 3G and 4G services. Three claims to be entirely in favour of rapid 4G auctions, but no one is prepared to rule out legal action if they feel their grievances aren't being addressed.
As we've said before, the operators have nothing to gain by an early 4G auction. They'll have to stump up for spectrum and build infrastructure, so a delaying action based on legal challenges is very attractive.
Ofcom might signal that it's ready to negotiate, but successful negotiation needs shared motivation, and that's far from proven in this case. ®
* Ofcom has been in touch to clarify that this quote refers to the final proposals, which won't be published until later this year - so we don't yet know whom they will offend, though we can guess.
COMMENTS
Re: Spectrum for Nothing?
While it's true that O2 and T-Mobile do pay an annual fee it's not very much, and there was no upfront payment made for either band.
3G licences were paid for by all the operators, at 2.1GHz, but O2 is running 3G at 900MHz these days (in London at least) which increases the value of the spectrum which has never been put up for auction.
Bill.
Spectrum for Nothing?
Where does the author of this article get the idea that the original GSM 900 and 1800 operators got their spectrum for nothing? They have always paid a commercial annual licence fee for each individual 256 kHz channel they operate on, resulting in several 100s of millions going into Government coffers over the past 20 years. The 3G auction in 2000 was at the peak of the dot com boom when the Radio Communications agency as it was called then was instructed by HMG to maximise the revenue for this spectrum.
When O2 (nee BTCellnet) was split from BT in 2001, the 3G licence was an asset of the company, just as all switch, base sites, offices, call centres, staff etc where so if O2 got their 3G licence free then so where all other assets from your statement.
O2 wrote off the cost of this licence in 2003 when 3G was still being rolled out and the company recorded a huge £2bn+ loss as a result.
Whose Mine Is It Anyway?
The operators object to paying taxpayers for something they'll use to make money - spectrum. Who doesn't like getting things for free, after all?
But the real problem is the idea of an auction. Established operators would, of course, always prefer a beauty parade, because they really have to mess up to lose out. An auction may bring in new players who don't have to justify anything but simply have to prove financial resources. And that poses a real threat.
As a consumer, it's easy. I want more choice. I want more innovation. And I don't want operators to sit on spectrum they've bought (sometimes by buying a company or merging operations), I want it to be used to my benefit.
But that doesn't make me a total fan of the auction mechanism. By nature, it moves money out of building an operation and into the pocket of the Government. It's a direct tax on innovation, not an enabler of it. It's better than the beauty parade, but it doesn't give me what I actually want, because it doesn't open up the market nearly enough. In fact, we've seen in the UK and elsewhere how new entrants tend to merge, because they get to share costs, and as competition reduces so does price pressure.
It seems to me that, faced with the legal threats, Ofcom might do well to consider a completely separate option.
My favoured direction would be to allocate some, if not all, of the available spectrum on the basis of a wholesale-only licence, with some additional light touch regulation to ensure, for instance, that the wholesaler was obliged to offer fair terms to any and every prospective customer.
This wouldn't remove the requirement for prospective network operators to gain licences any more than at present. And it would need to define service boundaries in ways that fit current 4G technologies. That feels slightly uncomfortable, but there's no real prospect of operators doing anything else in the short to medium term.
This would create the right conditions for competition, and accelerate progress to widespread use and innovative application of 4G. And for the established operators, it would guarantee that they can all have access to 4G as and when they want it - as can anyone else who obtains an appropriate licence and agrees terms with the wholesaler.
As a taxpayer, I like the idea of an auction, but it doesn't have to take the primary form of an up-front payment. Retailers in transport locations often pay a combination of a fixed fee and a percentage of actual turnover, and the licensor may be entitled to take back a location that fails to perform. Something of this sort could work in 4G too.
Erm no
'That sale presents the interesting spectacle of the German and French governments (who still hold shares in Orange and T-Mobile, and thus EE) selling off something that they were given by the UK government for nothing: but we digress.'
The French and German governments both paid cash for that spectrum, from C&W and Hutchinson Whampoa. Now it's true that they never paid a upfront fee for their spectrum, and certainly nobody ever paid anything like the economic value to the state for this spectrum.
