Radio Spectrum Auctions – Have Ofcom finally found the solution?

Radio Spectrum Auctions – Have Ofcom finally found the solution?

The heart of this long running saga has been the radio spectrum held by  H3G (or 3)  in the UK mobile phone market. They were the late comers and entered the market on the back of the mobile 3G revolution and the 2.1 GHz spectrum auctioned  in 1999. The 2.1 GHz spectrum was ideal for covering cities but expensive for providing national coverage and definitely not very good for getting inside buildings.

Compounding these limitations was a market that was far from a level playing field. Orange and T-Mobile had entered the market on the back of the GSM (2G) revolution a decade earlier with spectrum at 1.8GHz. This was much better for national coverage and penetrating buildings. They in their turn had entered a market a decade earlier that was also not a level playing field. The original incumbents were Vodafone and O2. They had been given all of the most ideal radio spectrum at 900 MHz for national coverage and getting inside buildings.

The regulator at the time (Oftel) recognised this original imbalance. Orange and T-Mobile were not only given much more spectrum at 1.8GHz than Vodafone and O2 had at 900 MHz but also enjoyed better mobile phone termination rates as a financial compensation to pay for the additional base stations needed to provide comparable national coverage. The denser base station network also significantly improved indoor coverage although not entirely closing the gap with the 900 MHz networks. The result was that the networks were broadly comparable and led to a very competitive (and successful) UK mobile phone market.

Ofcom’s aim has been to provide a comparable “assist” to H3G but it has been compromised by Ofcom’s own conflicting policy objectives. On the one hand Ofcom set the UK spectrum policy on a road to a fully hands-off approach that left the market to sort out who had which spectrum and what it was used for. At the same time Ofcom went in the opposite direction of micro-managing the spectrum to assist H3G. The plan was to force Vodafone and O2 to give 10MHz of spectrum at 900 MHz to H3G in exchange for Vodafone and O2 being allowed to do what they wanted with their 900 MHz spectrum (rather than just limited to providing GSM services). Vodafone and O2 refused this less than tempting offer and dug-in.

At this point Lord Carter arrived on the scene as the responsible Minister. He saw the potential for a political fix to help everyone dig themselves out of the impasse. He almost pulled it off. It involved Vodafone and O2 giving up 5 MHz of spectrum (rather than 10) and this would be given to H3G. All the affected parties signaled their willingness to compromise and Ofcom accepted stepping back to allow Lord Carter to broker a deal. Lord Carter brought in a consultant Kip Meek as a spectrum broker to sort out the details.

At this juncture H3G did something that turned out to be less than helpful. They came to a side understanding with T-Mobile to swap the 900MHz spectrum they would acquire in exchange for T-Mobile giving them 5 MHz of their spectrum at 1800 MHz. This was fully in line with Ofcom’s vision of spectrum trading…so why not? The “why not” was the understandable reaction of Orange. Where was their 5MHz of 900 MHz spectrum to keep competitive parity with T-Mobile?

The numbers no longer added up. The deal fell apart. So instead Kip explored an alternative approach to partially re-level the spectrum playing field over a long period. It involved a very elaborate idea of spectrum floors and caps applying to any new spectrum. Then the merger announcement between Orange and T-Mobile completely scuppered this initiative…the uncertainty made it impossible to find agreement. This left a complex situation considerably more complex but did not solve the basic issue for H3G.

The Government quietly buried most of the superfluous complexity and managed to un-couple liberalising the use of spectrum from the competition policy elements. The latter was pushed back to Ofcom. They were asked to carry out a competition assessment and deal with any competition issues within the rules for the next spectrum auction.  The can had just been kicked down the road.

Ofcom produced their competition assessment and policy proposals in March 2011. H3G were to be given an inside track to 5 MHz of the new 800 MHz digital dividend spectrum and there would be some limitations placed on the two 900MHz mobile network operators on what they could bid for at 800 MHz.  H3G were upset that the redress was only 5MHz at 800 MHz since it is widely known in technical circles that the most likely technology to use in this band (the new LTE technology) needed at least 10MHz to deliver any decent data rates. This issue was compounded by Ofcom’s also trying to assist Everything Everywhere (as well as H3G). This severely tilted the balance of probability so that at least one player would emerge from the auction with only 5 MHz of spectrum at 800 MHz…which would have been a very poor technical use of such valuable spectrum.

The other major point of debate coming out of the March Consultation document was the coverage obligation. The 800 MHz spectrum was likely to be the last big opportunity for a decade to push out broadband mobile services to rural areas but this would not be delivered by the market alone – a coverage obligation was essential. Ofcom did not rise sufficiently to the challenge of this unique opportunity and it led to a House of Commons motion and Select Committee calling on Ofcom to impose a much more ambitious coverage target.

A third less well reported issue was the potential liberalisation of one of the 2.6GHz channels for low powered in building mobile broadband coverage providing super-fast mobile data speeds. Here Ofcom were criticised by the IET amongst others for being too cautious.

Against this background do the new Ofcom proposals resolve all these issues?

My assessment of the revised proposals is that Ofcom has cracked the problem. The proposals look extremely robust from the direction of judicial review…fair and proportionate…with even this extra round of consultation thrown-in for good measure. Furthermore the policy looks and feels right within the numerous constraints. They deserve our praise for creating a basis that is as good as it is going to get for delivering the next generation of advanced UK mobile broadband networks

The “break-out” of the conundrum Ofcom found was to uncouple the way they treated H3G from Everything Everywhere- even though they both lacked of spectrum below 1GHz. Ofcom reasoned that the combination of more spectrum Everything Everywhere hold at 1800MHz and their bigger number of base stations was actually providing much of the benefit that spectrum under 1 GHz would deliver. In addition only Everything Everywhere is positioned to launch LTE services within the spectrum it has already got. All the other operators need to acquire spectrum at the auction.

What Ofcom could have added is that this endowment of spectrum and base stations was a result of a regulatory favour given to Orange and T Mobile by Oftel a decade earlier. One of the reasons Orange got caught into this second round of regulatory favours was to maintain parity with T-Mobile. But the merger by the two companies themselves as well as H3G dropping their swap intentions has removed this justification. On top of this Everything Everywhere are now the largest mobile network operator in the UK, have therefore the best scale economies, great brands and a better developed infrastructure. Under these changed circumstances it would have been quite unfair to have given Everything Everywhere a further regulatory favour at the expense of their two smaller rivals Vodafone and O2.

The rural coverage issue now appears to be heading in the right direction…the direction being 98% coverage. Ofcom envisage linking the 800MHz  coverage obligation with the Government’s £150m mobile infrastructure programme for covering mobile Not Spots. This makes perfect sense.

Ofcom have also come a long way towards supporting innovation through being minded to allow one 2.4 GHz channel for a revolutionary inside-out approach to high density networks able to deliver mobile data speeds in excess of 100 Mb/s. Ofcom are signalling some vestiges of hesitation and would no doubt be encouraged by a wave of support in response to this consultation document. That is unlikely to come. It is in the nature of these sorts of innovations that the vested interests are on hand to oppose it but the beneficiaries will only emerge as the market evolves towards Femto cells. It is a time for Ofcom to follow their instincts…that is the nature of innovation.

Finally, there is a refreshing change of tone in this new consultation document. Five years ago Ofcom embraced a free market ideology in spectrum management that took them almost onto a different planet from the rest of the UK mobile industry. Some of the friction over the past few years between Ofcom and the industry can be put down to the resulting dialogue of the deaf. It is abundantly clear from the significant movement since March that Ofcom is under a spectrum management leadership that is both thoughtful and much better tuned into the real world and is also prepared to listen to the industry.  This bodes well for the future relations with the industry.

There will no doubt be worries by the Government of yet another judicial review delaying the spectrum auction. If this happens Ofcom’ careful work since March have now put them clearly on the right side of the arguments… so any further recourse to the Courts will only be an irritation and not a show-stopper. One might also question the judgement of any company who chose to upset the government now…just when a new Communications Act is coming fast down the track. It is time for the industry to draw a line under this long running saga and move onto a new far more positive and exciting agenda…rolling out the next generation of mobile broadband networks…the UK has a lot of catching up to do.

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