The Digital Dividend
The UK telecoms market and attendant regulation has been a beacon for Europe and the developing world over the last two decades. With the significant delays to the UK auction of 4G Spectrum - has the UK lost its leadership position?
In the US, AT&T and Verizon are driving LTE rollout. In Europe, 2.6 GHz auctions have been completed in Austria, Belgium, Denmark, Estonia, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Spain and Sweden. In most of these European countries 800MHz spectrum the "Digital Dividend" was auctioned at the same time. In Asia Do CoMo's CTE smartphones are available now with coverage targets of 99% by 2012; Korea expects full coverage by 2012; and China Mobile will deploy 20,000 4G TP-TTE base stations this year as a trial, with the number expected to exceed 200,000 next year. The digital dividend was conceived in the UK in 2003 -however, the relevant spectrum has been cleared and the spectrum auctioned more quickly elsewhere. Smart phone penetration and demand for mobile broadband in Western Europe is expected to increase by more than 500% over the next five years. Convergence is happening and at a pace that was not foreseen. There has never been a more urgent appetite for the availability of 800MHz and 2.6 GHz spectrum.
There has been significant controversy between UK MNOs and Ofcom over the upcoming 4G Auction. The attendant delays risk economic loss to the UK and its consumers. The potential loss has been estimated at about Â£5 billion for the two year delay. Having said that, perhaps the economic argument is purely theoretical, for now. The spectrum released by the digital dividend will only become available for use nationwide in the UK from early 2014. Most operators have had successful trials of LTE. But are the infrastructures, market conditions and availability of 4G devices adequate to provide necessary economies of scale to encourage MNOs to invest?
Let's consider where economies of scale kicked in and competitive services really began to be efficiently delivered for the consumer. The 3G auctions took place in 2000. The move from 2G and take up of 3G services has only relatively recently been significant enough for such economies of scale to be realised by mobile operators in the very competitive UK market. It might be argued that 2G didn't take off until China adapted it. Is there a reasonable existing market in Europe today for 4G? Germany, for example, is ahead of the UK, but has relatively few connections. Consider how slowly 3G services were to roll out after the 2000 auction.
It is possible these precedents will not apply to 4G. Many commentators believe 4G/LTE rollout will not be as slow due to the earlier launches in the US, Asia and other parts of Europe and the earlier availability of end user devices than was the case for 3G.
The consultation process
Ofcom released its "Consultation on assessment of future mobile competition and proposals for the award of 800 MHz and 2.6GHz spectrum and related issues on 22 March 2011" (2011 Consultation).
The 2011 Consultation included Ofcom's proposals for the largest single award of spectrum in the UK and invited stakeholders to respond with their views to specific questions and the 2011 Consultation in general. The spectrum that is the subject of the upcoming auction is equivalent to three quarters of the mobile spectrum currently in use in the UK today. The proposed package includes 80% more spectrum than was auctioned in the 3G Auctions held in 2000.
Ofcom expects the spectrum to be used for next generation mobile broadband services. The growth of mobile data usage since 2007 has been dramatic.
Growth of mobile data usage
New mobile spectrum is essential
A few additional statistics from Cisco indicate:
- Global mobile data traffic grew 2.3 fold in 2011, more than doubling for the fourth year in a row.
- Last year's mobile data traffic was eight times the size of the entire global internet in 2000.
- Mobile video traffic exceeded 50 percent for the first time in 2011.
- In 2011, a 4G connection generated 28 times more traffic on average than a non- 4G connection.
- Smart phone usage nearly tripled in 2011.
Ofcom's critical overall objective is to secure the best use of the relevant spectrum for the benefit and in the best interest of UK citizens and consumers by encouraging investment, promoting competition and delivering wide coverage of next generation services.
Following significant operators' opposition, the responses and evidence Ofcom received in response to the March to May 2011 Consultation, Ofcom launched a second consultation in January 2012, with a deadline for responses of 22 March 2012.
The principal changes in Ofcom's approach were the removal of the reservation of a portion of the spectrum for Everything Everywhere; and changes to Ofcom's special condition for one of the 800MHz licences to coverage. Ofcom continues to support four national wholesalers of mobile spectrum. Ofcom is trying to preserve the current level of wholesale competition, while taking a more relaxed approach to the level of infrastructure competition - in the interest of both economic and environmental considerations.
Ofcom also plans to reserve a portion of the 2.6GHz spectrum to be shared and deliver innovative new mobile services. Some of these applications may include local mobile networks for students, hospitals or commercial offices which operate short range services in a small area. The Second Consultation has now closed and Ofcom is working hard drafting its statement and auction rules for publication this summer. Summer being in "the next month or so".
Ofcom has also proposed a variation of Everything Everywhere's ("EE") licence to allow it to offer LTE services on its 1800MHz licence. This would provide EE with an opportunity to roll out these services before any of its competitors. A prospect Vodafone and O2 have obviously objected to. The closing date for responses was 17 April 2012. This date was extended to 8 May 2012.
We are now in a quiet period while Ofcom analyses all the responses to both consultations, takes advice and considers the final shape and content of Ofcom's statement and auction rules and its decision on EE.
With the ever present threat of litigation from the MNOs, Ofcom is taking extraordinary care in its process and documentation as well as the reasoning behind its conclusions.
The current timetable
As indicated above, publication of a statement together with the auction design has been promised during the Summer of this year. The biggest problem and risk of delay is the EE Consultation. This is being handled by a separate team at Ofcom. Ed Richards would like to see the statement delivered before the Summer break. With the uncertain future political strength of Jeremy Hunt and the implicit requirement for Government to approve the final statement - speed as well as diligence is of the essence.
Though the EE licence variation consultation has a different Ofcom team, it would be advantageous for the two statements to come out at virtually the same time. We understand, however, that one is not dependent on the other and may not be released simultaneously.
Government, Ofcom and the mobile operators all blame each other for the delay. Ed Vaizey has recently blamed the operators rather than Ofcom for the slow progress. Threats of litigation in November led to Ed Richards to accuse unspecified operators of "gaming the system".
Are we late?
The answer is yes; compared with the countries indicated above. However, the delay so far will not have the effect of materially holding up the deployment of new services. Barring any further litigation or need for additional consultation, Ofcom expects Applications before December 2012 and the bidding process for spectrum to take place in the first quarter of 2013. If there is a delay beyond this point there will be serious risk of damage to the economy - both nationally and internationally. The prices are unlikely to move in the trajectory or amounts bid in the 2000 3G Auction. If, however, the MNOs are greedy about the amount and type of spectrum they want and if the bidding consequently becomes highly competitive, then prices may well go higher than the 2 to 4 billion anticipated at this time.
It is time now to concentrate on innovation, new value creation, economies of scale in infrastructure sharing and competition. How can we achieve the best economic results for consumers and stakeholders? Ofcom must create a clear road map to effective wholesale competition, establish further opportunities for efficiencies and encourage infrastructure sharing. This will provide operators with the clear commercial path to cut costs, drive revenue growth and trigger investment. The consequent rollout of new networks and creation of innovative services will spur the growth of the market overall, create jobs and spur the developments in smart cities, healthcare and education.
The 4G auctions and the opportunity for innovation in products and services will have far reaching implications for a wide range of stakeholders.
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