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Ofcom consults on the UK's largest ever single spectrum auction

31/03/2011

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United Kingdom

Ofcom consults on the UK's largest ever single spectrum auction

Last week, Ofcom released a long-awaited consultation on what will be the UK's largest ever single mobile spectrum auction. The consultation is a significant step towards the roll-out of superfast, mobile services in the UK. Ofcom's proposals will come under scrutiny from potential bidders, and the proposals are also of wider interest to content providers, to businesses that distribute data across mobile networks, as well as to mobile device manufacturers and businesses in the M2M (machine-to- machine) supply chain.

WiMAX, Long Term Evolution and the spectrum auction

Ofcom is to auction spectrum that will become available as a result of the switchover from analogue to digital terrestrial television (spectrum in the 800 MHz band, often referred to as the "digital dividend"), as well as spectrum in the 2.6 GHz band. Both types of spectrum are crucial to delivering superfast broadband across the UK, particularly to remote areas where fixed-line services are uneconomical. The available spectrum is equivalent to 80% more than was awarded in the 3G auction in 2000.

Although the auction is to be technology neutral, the spectrum is well-suited to delivering WiMAX and "Long Term Evolution" or "LTE" services. LTE is a highly efficient next generation mobile technology that allows delivery of data, internet applications, video streaming, mobile TV and music downloads, all to mobile devices at speeds that rival domestic broadband connections. Consumer demand for content-on-the-go together with the predicted growth in smartphones, tablets and other connected devices on the back of 4G mobile networks - the so-called "internet of things" -  can only further strain existing network capacity; all of which makes LTE (and the spectrum required to deliver it) attractive to network operators.

Setting the auction rules

The consultation fulfils a government direction that required Ofcom to assess the future competitiveness of the UK's mobile communications market, and to use the auction rules to address any competition concerns that might arise. The consultation sets out the results of that assessment together with Ofcom’s proposed auction rules, including measures intended to promote competition.

Allocation of sub-1GHz spectrum

The auction rules will be heavily scrutinised by stakeholders concerned to see that sub-1 GHz spectrum is not concentrated in the hands of a small number of operators. Sub-1 GHz spectrum is much sought after for its coverage. It can travel further than higher frequencies, requires fewer base stations and is cheaper to operate and maintain. It also has superior in-building coverage. For historic reasons, just two of the UK's four national mobile network operators currently hold sub-1 GHz spectrum. The auction therefore presents an opportunity for other operators or new entrants to acquire this valuable asset. However, if left unchecked, there is a risk of strategic bidding that closes the market.

Against this background, Ofcom has laid out the market model that it wants to see in place after the auction: at least four national spectrum wholesalers, each holding a minimum spectrum portfolio (a "spectrum floor") made up of a mix of 800 MHz (digital dividend) spectrum and either 2.6 GHz or 1800 MHz spectrum. In setting these parameters, Ofcom is allowing the potential for new entrants alongside existing operators.

The consultation document outlines a number of possible portfolios that Ofcom regards as sufficient to deliver high quality data services. Ofcom believes that a network operating on any of the proposed minimum spectrum portfolios would be capable of matching the speed and coverage of a network operating entirely on sub-1 GHz spectrum using the same number of sites. However, none of the proposed portfolios would be a match in terms of capacity. In addition to spectrum floors, Ofcom also proposes introducing overall spectrum caps both on the amount of sub-1 GHz spectrum and the total spectrum that an operator may hold. 

Finally, Ofcom intends to liberalise the use of the 900 MHz, 1800 MHz and 2.1 GHz bands for LTE and other technologies in order to promote competition. All spectrum under the individual licences would be tradable. Significantly, the proposals indicate that the licences would be of indefinite duration, with limited revocation rights for Ofcom.

Timing issues

Press statements suggest that some operators intend to demand more from Ofcom in the way of equalizing measures. Ofcom has already faced legal challenges over spectrum liberalisation - most recently over delays in "refarming" 900 MHz spectrum in the UK1. For the time being, the consultation process provides a channel for dialogue, but given the long-term strategic importance to operators of securing the "right" spectrum, future legal challenges cannot be ruled out. The stakes are high. Even on the current auction schedule, Ofcom predicts that LTE services in the UK will not be available before the end of 2013. Any future legal challenges would inevitably lead to more delays, and the UK already lags behind other countries in the roll out of LTE. For example, Verizon has launched an LTE network in the USA using 700 MHz spectrum; TeliaSonera is operating in the Nordics and Estonia using 2.6 GHz spectrum; and Telstra’s CSL in Hong Kong is using 1800 MHz and 2.6 GHz spectrum. 

Coverage obligations

Ofcom proposes to introduce an obligation into one of the 800 MHz licences that would require the licensed operator to serve an area in which 95% of the UK population lives. The operator would also have to ensure sustained download speeds of 2 Mbps, which is consistent with the government’s universal service commitment. Ofcom expects bidders to take into account the coverage obligation when pricing their bids. Thus, we can expect to see differing approaches from bidders according to their appetite for these roll-out obligations.

Shared spectrum for low-powered use

On the retail side, the consultation includes proposals to help operators who want to run low-power local networks. Such operators are likely to use shared spectrum for low powered cells that cover small areas, for example, in offices, on campuses or in the home. The operator might also have roaming arrangements with national operators so that their local customers can continue to have network access when away from the local hub. Ofcom's' view is that these types of operators often offer innovative and competitive services. Acting individually in the auction they would be disadvantaged. Ofcom therefore proposes to allow bids for non-exclusive (i.e. shared) concurrent use of certain spectrum in the 2.6 GHz band for low-power use only. Up to 10 licensees would be permitted to share use of the same spectrum. Bids placed for shared low-power use would be aggregated, thereby avoiding the need for disparate low-power operators to co-ordinate their bids2.       

Next steps

The current consultation closes on 31 May 2011 and is just the first step. Ofcom plans to issue a statement in the autumn setting out its conclusions and taking into account responses received. At the same time, Ofcom will issue draft auction regulations for consultation. Further consultations will also follow including on the potential for mobile use of the 800 MHz band to cause interference to adjacent users and Ofcom’s proposals for the technical conditions for use of the 800 MHz and 2.6 GHz bands. Ofcom plans to be ready for submission of applications by bidders in the first quarter of 2012.

If you would like to discuss Ofcom's proposals, or if you would like Fieldfisher to help your business formulate a response to the consultation, please contact John Worthy, Nick Pimlott, Simon Briskman or Nick Holland.


Footnotes:

  1. "Refarming" refers to the reallocation of spectrum that was formerly designated for use with 2G services to so that the spectrum may be used for 3G services. The amended European GSM Directive required Member States to refarm 900 MHz spectrum by no later than 9 May 2010. Only on 6 January 2011 did Ofcom implement this requirement.
  2. Similar shared, low-power licences were granted following the 2006 auction of the so-called "DECT guard band" - the narrow spectrum band that acts as a buffer between DECT spectrum - used for cordless phones - and GSM spectrum.

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