EE’s spectrum auction may prove more popular in the UK than Ofcom’s

(Jan 17 2012) 4G , LTE

1. By Caroline Gabriel, Research Director, Rethink Research

   The U.K. may be waiting longer than most for new LTE spectrum auctions, but a batch of 1.8 GHz frequencies should come to market in the next month, as a result of the formation of Everything Everywhere (EE) in 2010. Ironically, these licenses could attract fiercer bidding than the 2.6 GHz spectrum, due to be auctioned late this year, with some experts questioning the short-term gains for operators in that band.

   EE, the U.K. joint venture between France Telecom and Deutsche Telekom, is about to appoint Royal Bank of Scotland to oversee the rare auction process, which could raise as much as £400 million (U.S.$620 million), according to sources who spoke to the Financial Times (FT) newspaper. EE’s parents submitted their joint venture plan to the European Commission at the start of 2010, rather than the U.K. competition authority, perhaps because they expected faster and more lenient treatment given the huge presence of both firms across the EU. The European body green-lighted the merger in March 2010, subject to EE relinquishing a quarter of its 1.8 GHz spectrum (30 MHz).

   The resulting sale will bring some valuable spectrum to market at a time when the operators have been forced to wait until at least late 2012 for the sale of 2.6 GHz and 800 MHz LTE licenses. These allocations have been repeatedly delayed by legal challenges over how sub-1 GHz frequencies are distributed among the main cellcos. As Vodafone and O2 are the only operators already holding these low frequencies--with their 900 MHz GSM licenses--EE has argued they should be restricted in how much 800 MHz digital dividend spectrum they can acquire. The two cellcos retort that 800 MHz will be more valuable than 900 MHz because it is a more globally allocated band.

   In the meantime, 1.8 GHz is regarded by many operators around the world as prime spectrum for LTE because it fits between the long-range characteristics of sub-1 GHz, which is well-suited to rural rollout, and the high capacity of the 2.6 GHz band. That should generate significant interest from EE’s rivals--Vodafone and Telefonica O2, which have no 1.8 GHz spectrum, and 3 U.K.--as well as potential new bidders such as land-line carrier British Telecom, quad-play operators Sky and Virgin Media and even potentially Web giants like Google. As the FT comments: “The price in part depends on whether Everything Everywhere would be less likely to accept a higher bid from a direct rival such as Vodafone. It is also complicated by an annual charge on the spectrum.”

   EE insists it will invest the proceeds into its U.K. network, which is undergoing several parallel upgrade processes: a refresh of the 2G system, which is also likely to be made LTE-ready; the convergence of the former Orange and T-Mobile networks; plus future development of the 3G network operated by EE’s joint venture with 3 U.K., MBNL. Some observers have expressed concern that the sums raised might be taken offshore by EE’s parents, but the U.K. arm recently pledged to spend £1.5 billion on its networks over the next few years.

   The auction of the 1.8 GHz licenses will remove one obstacle standing in the way of the Ofcom auction, expected late this year. But while the four cellcos are fighting bitterly over their rights to the digital dividend spectrum, which will support affordable rollout in rural regions, the 2.6 GHz area may be less popular. As in some other parts of Europe, the U.K. has seen its mobile carriers talking the LTE talk, with early trials taking place despite the delayed auction. But in reality, most of their investment for the coming few years will center on expanding HSPA(+) capacity and speeds, and modernizing existing networks, in existing bands, to make them ready for future 4G. Outside urban hotzones, where 4G will be needed earlier and which will provide valuable showcases and testbeds, the majority of the effort will be on pushing the boundaries of 3G.

   That makes additional 1.8 GHz spectrum attractive, since Ofcom cleared the GSM band to be refarmed for 3G or 4G at the end of 2010. Unlike the other main 2G band, 900 MHz, a broad ecosystem of 1.8 GHz LTE devices is already starting to build because of international support for harnessing the availability and excellent propagation characteristics of this spectrum for 4G--thereby possibly diluting interest in investing in new allocations such as 2.6 GHz.

   The Global mobile Suppliers Association (GSA), which carries out a regular survey of LTE deployments around the world, believes 1.8 GHz will emerge as the prime band for LTE. A report commissioned last fall by a group of 4G operators including Deutsche Telekom, Elisa, StarHub and Telstra concluded that 1.8 GHz would become the most popular LTE spectrum worldwide and GSA President Alan Hadden commented at the time: "This report provides the clearest signals to investors, policymakers and all stakeholders about the expanding opportunities being driven by the global interest in LTE1800, backed by at least 23 firm deployment commitments. Operators should note that device availability is improving rapidly. However, device vendors need to accelerate the availability of their LTE products for all segments and include operation in 1800 MHz to avoid limiting the development of the market."

   The study claims that providing a first phase of wide coverage can be 60 percent cheaper in 1.8 GHz than in bands between 2.3 GHz and 2.6 GHz (although many carriers will want to use them to supplement capacity in a subsequent, high-usage stage). The operators also believe that, since most LTE deployments will be in two, three or even more bands over time, 1.8 GHz can be added to existing high-frequency rollouts to boost coverage and indoor penetration affordably--or to add capacity in sub-1 GHz systems. The near-global availability of 1.8 GHz should accelerate international roaming.

   By contrast, U.K. operators may be going cold on 2.6 GHz, according to a recent study by law firm Freshfields Bruckhaus Deringer. The U.K. was once going to be the first nation to auction licenses in this band, at a time when WiMAX was the main available technology, but after years of delays and politicking, enthusiasm may have dampened amid the economic slowdown, as players weigh the costs of spectrum and rollout capex against potential revenue and the chance to implement LTE or 3G+ in existing 2G holdings. 

   Natasha Good, partner in Freshfields' telecoms, media and technology division, commented: "The exorbitant fees paid during the heady days of 3G led to a reduction in their share prices and debt ratings and they now have a better feel for what consumers will pay for data services.” She added: "The U.K.'s draft auction rules explicitly aim to preserve competition but as we've seen with 3G and Germany's auction of LTE, it's debatable whether the U.K. mobile market will realistically continue long term in its current form post-LTE. Mobile termination rates are being squeezed, voice is declining and there's a huge amount of data coming across the networks. Where will the revenue come from?"

   Meanwhile, Ofcom has announced its latest round of proposals for the 2.6 GHz auction and the accompanying--and more sought-after—800 MHz sale. It has removed rules to reserve sub-1 GHz frequencies for EE but insists it will preserve four competitive cellcos and extend broadband coverage targets. The agency now says it will remove guarantees that EE and possibly 3 U.K. would be reserved a certain amount of spectrum in the 800 MHz band. Vodafone welcomed the move, saying in a statement that it brings the U.K. “closer to a fair and open auction that will benefit the wider economy, increase competition and ultimately lead to the creation of innovative and exciting new services for consumers."

   However, operators will still face a system of spectrum caps and floors as Ofcom seeks to keep all four viable (and potentially enable a new entrant bid). The regulator said consumers will receive better choice and pricing of services if there are “at least four national wholesalers of mobile services,” which means operators need the “right quality and mix of spectrum” to keep all four viable. 3 U.K. has argued that, unless its larger rivals are capped, it may be squeezed out of the LTE game and become uncompetitive. Ofcom retains options for reserving “varying amounts of spectrum” to support four carriers, including caps on total holdings as well as, specifically, on sub-1 GHz frequencies. Ofcom also plans to earmark some spectrum in the 2.6 GHz band “to be shared by a group of companies to deliver innovative new mobile services for consumers,” which might include local resources for schools, hospitals or innovation centers.

   The regulator has also proposed measures to extend rural broadband availability. This may be done by increasing the coverage mandate attached to one 800 MHz national license from 95 percent to 98 percent of the population; or mandating coverage of identified “not spot” areas, supported by a previously announced government fund of £150 million to enhance signal quality in underserved regions. Many believe the latter approach would be more effective, ensuring that the operator’s 2 percent leeway did not fall in the most broadband-deprived communities.

   Some want rural coverage rules toughened up further. Alastair Davidson, director of mobile for infrastructure player Arqiva, said in a statement: "We're very encouraged by what Ofcom has said this morning and welcome its intention to make sure that at least 98 percent of the U.K. population has access to a 4G network. We'd encourage Ofcom to make sure the 98 percent coverage obligation is applied to all the operators that win 800 MHz spectrum. If Ofcom decides to place the coverage obligation on only one operator, many consumers in rural areas will receive a second-tier broadband service and will be denied the benefits of competition available to those who live elsewhere.”

   Interested parties now have 10 weeks to comment on the proposals, before a final decision on the auction rules is made in the summer, prior to kicking off the process in the fourth quarter.

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