The results of the UK 4G auction are bad news for the Treasury, but good news for operators, shareholders and consumers, according to most commentators.
Five companies were successful in winning spectrum in both or either of the 800MHz and 2.6GHz bands on offer: EE, O2, Vodafone, Three and BT (via Niche Ventures) all won spectrum.
Disappointment for the Treasury
Kester Mann, senior analyst operators at CCS, observed: ‘At £2.3 billion, the total amount raised from the auction fell some way below government expectations of £3.5 billion. While this is bad news for the Treasury, it is good news for operators, shareholders and consumers.
‘It should free up the carriers to more rapidly deploy networks and develop new services. Initially however, the shortfall in proceeds will be the big story from the auction and the benefits of 4G may get lost at first.’
Matthew Howett, telecoms regulation analyst, at Ovum agreed: ‘For the mobile operators there must be widespread relief that the amount paid is a mere fraction of the £22.5bn they were asked to cough up during the 3G licencing process. For them, the fact they didn’t have to pay billions more is without doubt a positive thing.
Low bids reflect cost of rolling out new networks
‘The costs of rolling out a network are significant. It could be argued that the relatively poor 3G coverage we have seen in the UK up until now is at least partially a result of operator’s being left out of pocket after the last auction that they had very little to actually spend on building the network. Things this time should be different, especially given the ability for the 800MHz airwaves to cover large distances and penetrate buildings well.’
Mann noted that all mobile operators secured spectrum in the valuable 800MHz band (it propagates further and is better at penetrating buildings than 2.6GHz) – which will result in better in-building coverage in the UK.
He pointed out that Vodafone and O2, which already own frequencies at 900MHz, now extend their lead over EE in the sub-1GHz band by securing 2 x 10MHz frequencies. However, EE still has by far the largest overall spectrum holding.
Vodafone bids for increased share
‘At £791m Vodafone spent the most which is a statement of intent to re-gain standing in its home market where it is now third-ranked player,’ said Mann. ‘The likelihood that operators will be allowed to re-farm existing frequencies for 4G may have lowered the value of the spectrum. During the process, Ofcom announced a consultation around plans to make all mobile licences technology neutral.’
Daniel Gleeson, mobile media analyst at IHS, viewed Vodafone’s spectrum grab as an aggressive bid to reclaim its status as a contender for leadership in the UK wireless market. It also indicates that it plans to remain a player in the market for older 2G services, with hopes to expand its market share.
‘By spending big in both bands available in the U.K. auction, Vodafone is showing it doesn’t plan to shift its 2G frequencies at either 900MHz or 1800MHz to 4G services at any time in the short to medium term,’ Gleeson said. ‘Vodafone is clearly targeting all types of services from low- to high-end in a bid to garner the largest possible market share in the UK.’
O2 buys in moderation
O2 won relatively modest amounts of 4G spectrum in the auction. Because of this, the company probably will need to refarm some of its 2G spectrum at some point after coming away with only 800MHz spectrum, Gleeson believes.
O2 also has a coverage obligation spectrum, which means it will be an important operator for rural areas and will need to invest quickly to hit the rollout target by the end of 2017.
Without high-capacity 2600MHz spectrum, coupled with the need to focus on a countrywide rollout, it is possible that O2 will lose the battle for network quality in major population centers. This will be a major concern because O2 has the largest number of valuable iPhone subscriptions in the country, according to Gleeson.
Everything Everywhere keeps it steady
Gleeson observed that as EE is able to refarm its 1800MHz spectrum and launch 4G for relatively little cost, it seems to have decided not to invest heavily in this auction. Common wisdom among operators is that a 2 x 5MHz block will not be enough to offer a good wireless broadband experience.
But EE—along with another player, Three—will be aiming to use only its 800MHz 4G network to cover remote areas and for some in-building reach in cities, leaving the bulk of urban needs to be served by its 1800MHz 4G network. This will lighten the load on the 800MHz network, and mean that customers in rural areas should still get decent broadband speeds.
Over the long term, 2x5MHz may not be enough to remain competitive in speed and capacity with rivals possessing larger spectrum blocks. This is true even though initially the situation will be different because when 4G networks have relatively few customers, those operators with 2x5MHz will have the headroom to be competitive in Gleeson’s view.
Three does enough
No. 4-ranked Three played a conservative role in this auction after forking out for Everything Everywhere’s divested 1800MHz spectrum, which will now presumably be the central plank of its 4G rollout strategy. By limiting its spend in that auction, Three will be hoping to make viable its recently announced plan to not charge a premium for 4G, Gleeson said.
However, he points out that it is not publicly known how much Three paid Everything Everywhere for its spectrum. The 800MHz winning by Three will open up rural markets that the company up to now was not able to effectively cover.
Ovum’s Howett added: ‘Three’s ability to win valuable 800MHz spectrum coupled with the spectrum at 1800MHz it acquired from EE before the auction puts it in a strong position to roll out its 4G network. Many customers on Three will have had problems at one point with reception inherent of the propagation characteristics of the 2.1GHz spectrum it currently uses.
British Telecom re-enters mobile market
British Telecom spent £186m to re-enter the mobile market after selling O2 to Telefónica in 2005. However, with just short-range 2600MHz spectrum at its disposal, it is unlikely that BT will launch a consumer-facing mobile service of its own HIS’s Gleeson speculated.
The two more likely options are it could wholesale extra capacity to the four mobile operators and the many virtual operators; or it could use the spectrum to provide high-speed broadband in areas where ADSL and even VDSL are limited by the copper access network. These options are not mutually exclusive as the wholesale option would be mainly needed in urban areas, whereas the fixed-line replacement option would be needed in rural areas, Gleeson said.
Howett added: ‘Other key highlights include the commitment BT has made to rolling out its own 4G services, and O2’s lack of higher value spectrum, which is needed to meet growing data demands.
‘The hard part for operators now comes in convincing us to upgrade and take out 4G mobile subscriptions once services are launched by EE’s competitors in late spring/early summer of this year. A lack of detail from EE on how many customers they have tempted over to 4G has led some to believe that consumers just aren’t willing to pay more for faster speeds,’ noted Howett.
Hard work yet to start
Today really is just the beginning,’ concluded Mann. ‘Now the real hard work starts for operators – they need to rapidly deploy networks, carefully consider pricing and deploy marketing campaigns to convince consumers of the benefits of the technology. EE’s lack of disclosure (in its Q4 2012 results published on19 February 2013) of its 4G customers could signify that operators have plenty to do.’
IHS’s Gleeson summed up: ‘One of the most significant results from the recent auction is that all four incumbent operators won spectrum in the valuable 800MHz band. This marks the first time that four operators have come away with spectrum in the band, with previous European auctions yielding only three winners.
‘The most likely reason for this was Ofcom’s prescribed minimum portfolio for a fourth national operator beyond EE, O2 and Vodafone. After receiving 1800MHz spectrum from Everything Everywhere, Three essentially secured the position, giving it cheap access to a small amount of 800MHz spectrum. Indeed, the price paid by Three for its block is exactly the reserve price set by Ofcom before the auction.’
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