UK 5G Auction – Why wide radio channels send prices rocketing

UK 5G Auction – Why wide radio channels send prices rocketing

The media and general public will be hailing Ofcom’s spectrum auction as a huge success. It raised over £1.355 billion for the Treasury. This has now become the popular measure for the success of a spectrum auction. In 2003 spectrum in the 3.4 GHz band only fetched £175,000 per MHz, which would be £262,000 at today’s prices adjusted for inflation. At the 5G spectrum auction it fetched £7.83m per MHz. If Ofcom was no more than a branch of the Inland Revenue it was a very good outcome.

However, as Ofcom constantly reminds us, the purpose of a spectrum auction is not to raise money for the Treasure but to get the spectrum into the hands of those that will make the best use of it. Against this measure, how successful was the 5G spectrum auction?

The 5G auction outcome can mark-up two positives:

  • The auction was on time. There is now 5G pioneer band spectrum in the hands of the mobile operator and this opens-up a clear road to the launch of 5G high capacity networks in the UK before 2020.
  • The auction saw Telefonica/O2 buy their way back into a spectrum parity with the other mobile players. They paid £5.1m per MHz for 40 MHz of 2.3 GHz spectrum which is the almost identical price Vodafone and BT paid for their 2.6 GHz spectrum five years ago. They also bought 40 MHz of 3.4 GHz 5G spectrum for £7.9m per MHz. This has got Telefonica/O2 out of its uncomfortable corner of trying to support the highest number of customers per unit of bandwidth of anyone in the market. It is a success for Ofcom’s spectrum cap policy.

However, there are some very serious down-sides when it comes to the release of the 3.4 GHz spectrum:

  1. Excessive price for bandwidth. Mobile Operators paid huge sums of money but not one emerged with what they all wanted – a standard 5G 100 MHz wide radio channel
  2. Blow against more competition. The only potential new entrant was priced out of the auction. This was not only a blow to more competition but consumers having the benefits of innovations such as neutral hosting.
  3. Bandplan mess. The resulting band plan is an inefficient mess
  4. No 5G benefits for rural citizens.  No spectrum was provisioned  to ensure 5G benefits are delivered to rural areas, as Ireland successfully ensured in their 5G spectrum auction.

Let’s take each in turn:

  1. Excessive price for bandwidth

The reserve for price for each 5 MHz lot of 3.4 GHz spectrum was £1m and there were thirty lots. If the spectrum had sold for the reserve price, the industry collectively would have paid £30m. Instead they paid £1.16 billion.  What was going on?

Branding it “a 5G pioneer band” probably sprinkled a bit of star-dust on the spectrum but that was also true of the Irish 5G auction. Vodafone UK paid £7.56m per MHz for its 3.4 GHz spectrum whereas my calculations show that Vodafone Ireland paid £1.53 per MHz on a comparable basis. That is nearly one-fifth of the price. (Note: my calculation averaged the city and rural spectrum prices and adjusted for the two different population sizes).  We also see later that the new entrant had no effect on the price.

This only leaves the Ofcom auction design generating over-heating. Let’s look at some numbers:

If the four mobile operators had entered the auction to just to secure equal shares ie 37.5 MHz each, they would have only paid £0.2m per MHz instead of around £7.5m. This price inflation can only have come from mobile operators seeking more than “equal shares” in a zero sum game that precluded mobile operators having rational conversations with each other. What is particular in this auction design is that one operator seeking a substantial increase sent the price for the others rocketing just for them to almost standstill relative to the “fair share value”:

  • Vodafone secured 12.5 MHz over the “fair share value” of 37.5 MHz at a price of £29.7m per MHz.
  • BT and O2 secured 2.5 MHz of bandwidth over the “fair share” value of 37.5 MHz and had to pay an astronomic £118m and £125m per MHz respectively.

Ofcom rejected the idea of auctioning large blocks of spectrum in favour of auctioning small increments of bandwidth and the result was to make “incremental bandwidth” almost penal for those trying just to stay in the 5G market. The penalty for a single party behaving entirely rationally was to have to leave the auction with no spectrum whatsoever. This is what happened to Airspan.

The outcome of the auction is to leave H3G with 60 MHz, Vodafone with 50 MHz, BT with 40 MHz and O2 with 40 MHz. Common sense would suggest that the mobile operator with the largest customer base could afford to secure the most spectrum and the mobile operator with the smallest customer base would finish with the least spectrum. The market shares in 2018 are in the ranking order: BT, O2, Vodafone and H3G.  In other words the outcome of this auction is the complete inverse of a rational economic outcome.

  1. Blow against more competition

A credible new entrant, Airspan, came financed to acquire spectrum based on what they had paid for spectrum in other countries. They were knocked out of the 3.4 GHz auction after only a few rounds. This is a blow to competition and also a blow to consumers, as Airspan’s business plan was to be a neutral host, a model that thrives in parts of the country where competition fails to deliver early coverage.

  1. Band Plan mess

The auction was in two stages. The first settles how much spectrum each bidder gets and the second determines exactly where in the band their spectrum will be assigned. This was made more complicated by an incumbent service, called UK broadband, that Ofcom allowed to stay in place. Subsequently, the company was bought by H3G, so even before auction began H3G had 40 MHz of spectrum in the band. The following band plan emerged from the auction assignment stage:

3.4-3.6 GHz bandplan

The decision of H3G to leave UK Broadband 40 MHz of spectrum where it was has resulted in their 60 MHz being fragmented. But it also left no choice where Vodafone, O2 and BT/EE could put their assignments as only lower part had 50 MHz space to accommodate Vodafone’s 50 MHz of spectrum. However, it is not the only fragmentation issue – the spectrum of the two site sharing groups has been split up.  The band plan is a mess. Worse than that expensive filters are now needed by the bidders to protect the incumbant services.

  1. No 5G benefits for rural citizens

The first three generations of cellular mobile released spectrum on an exclusive national basis but this was under pinned by a national coverage obligation. The  2.6 GHz spectrum (4G) auction was the first time cellular mobile spectrum was released on a national basis with no coverage obligation. Five years after the 4G auction the 2.6 GHz spectrum is only fully deployed over 2% of the UK. In other words over 98% of the country valuable 4G spectrum is wasting away every single day.  Now my expectation is for 3.6 GHz 5G networks to be rolled out much further than 4G networks at 2.6 GHz have been since there are more mobile operators with 5G spectrum. However, coverage that is driven solely by capacity peaks is unlikely to extend much beyond 20% of the UK.  To have prime 5G spectrum being wasted across 80% of the UK would be a shocking statistic for a regulatory authoritiy charged with making efficient use of the spectrum and bad news for all the rural citizens that could have had coverage benefits from 5G small cells connected to the ends of the growing reach of fibre optic cables being promoted by the Government and Ofcom.

Conclusion

The sale of the 2.3 GHz spectrum to O2 is a reasonably successful outcome for the country. However, the outcome of the sale of the 5G pioneer band spectrum at 3.4 GHz is likely to prove more controversial. The international side of Ofcom did an outstanding job of securing European agreement for the 5G pioneer bands only to see the domestic side of Ofcom making a hash of the spectrum release. All is not entirely lost as there is another 120 MHz of spectrum between 3.6-3.8 GHz still to be auctioned. The good news is that  the DCMS “ Future Telecommunications Infrastructure Report” contains some ground-breaking ideas on spectrum sharing that Ofcom could exploit at least to secure wins in terms of new entrants, more competition, a far more exciting 5G story for rural Britain and improved geograpic spectrum efficiency. It is the most critical of all the 5G related regulatory decisions and likely to be the difference between the UK being a leader in the exploitation of 5G or finishing in the slow lane.

 

 

 

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