Communications minister Ed Vaizey has set the end of 2011 as the closing date for the auction of so-called 4G spectrum. The question is whether the government will make the same mistakes as it did in 2000, when it extracted £26.4bn from investors for 3G, starving the network operators of cash to build their networks quickly, thus slowing delivery of fast cheap access to customers.
A spokesman for communications regulator Ofcom, which will design and run the auction, said the government was keen to see competition based on "features".
"This is not all about cash (generation)," he said.
Nominally the UK has five mobile network operators: they are Vodafone, O2, Orange, T-Mobile and 3UK. But this is misleading in two ways. Orange and T-Mobile are being merged by their parent companies, France Telecom and Deutsche Telekom respectively. Together they will form the largest single UK operator, with about 29.5 million customers.
Spokesmen for the firms say they will keep both brands, for the time being, as they provide different market propositions.
There are also a number of mobile virtual network operators, led by Virgin Mobile, Tesco and BT, which resell capacity on the operators' physical networks. According to Ofcom, these operators hold about 13% of the market.
More important is the fact that the mobile network operators have been allowed to share infrastructure. Vodafone and O2 have palled up, as have Orange and T-Mobile, dragging in 3UK through its prior roaming arrangement with Orange.
"The net effect, for practical purposes, is that the UK has only two physical mobile networks," says Vodafone UK CTO Jeni Mundy.
Having only two bidders in an auction is unlikely to maximise the money the government would like to be able to take from the deal, so it has specifically instructed Ofcom to assess likely future competition in mobile markets, before and after the auction. "The competition assessment shall include consideration of the potential for new entry into those markets," it said.
What Ofcom won't say is whether it will consider the idea of a regulated infrastructure supplier, similar to BT's Openreach, for the mobile industry. A spokesman deferred such questions until after Ofcom completes its assessment.
Stefan Zehle, chief executive of Coleago Consulting, a specialist telecoms consultancy, said the recent 4G spectrum in Germany provides a benchmark for the UK.
"After the merger of Orange and T-Mobile the UK will also have four mobile operators, the same as Germany. However, in the UK we may have a new entrant, BT, bidding for spectrum. This may increase prices," he said.
BT declined to comment on whether it would bid, or even whether it would consider bidding. However, it has a track record of interfering with spectrum negotiations, has trialled wireless broadband in rural areas, and recently tied up with radio signal distributor Arqiva to offer "long range radio" specifically for the national smart meter project.
So, would BT pitch to run the nation's fixed and mobile communications infrastructure?
It has already earmarked £2.5bn to provide fibre connections to exchanges that serve some two-thirds of the population. Fibre for backhaul to their core networks is precisely what the mobile network operators need, especially as smartphone usage grows, along with the traffic they generate.
The smartphone effect
In Ofcom's 2009 market survey, sales of smartphones were picking up, both in units terms and as a percentage of total sales: unit sales had reached 1. 23 million, almost 16% of sales.
Recent figures from Nokia, the world's biggest mobile phone maker, suggest that smartphones are now 25% of sales.
Ofcom also found that 80% of iPhone users accessed browser services, and more than half used downloaded apps to access information. As the other smartphone operators build up their online stores and stocks of apps and content, their customers will start to copy iPhone users.
Mundy says the rise in content traffic is one thing, but smartphones also deliver a huge boost to the amount of signalling traffic on the network as they poll for e-mail updates and other alerts. According to Cisco, global mobile data traffic will double every year through 2014 to reach 3.6 exabytes per month by 2014.
As a result, network operators are desperate for more frequencies to cope with the rise in traffic volumes. They also need the extra capacity to deliver new, data-rich services such as streamed video, which they need to shore up margins that regulators are eroding.
But if they could offload that traffic to a nearby fibre network, their need for more bandwidth would fall, cutting how much they would pay for spectrum.
So, how much are they prepared to pay?
The German government received €4.38bn (£3.73bn) for its 800MHz frequencies, or an average of €0.73 per MHz per head of population. This was less than a quarter of the €3.41 ($4.17) per MHz per head that the US government managed to get for its auction in the comparable 700MHz band, and less than half what some expected the auction to deliver. Coleago says the average price for 4G frequencies was even lower, €0.15 or $0.19 (see table). In total, this was one-twelfth of the £24.6bn UK mobile network operators paid for 3G spectrum.
Zehle accepts that the 4G auctions will go ahead, but he argues that mobile network operators should resist future government invitations to bid for more spectrum. Scarce bandwidth would allow operators to raise prices for guaranteed traffic, shore up margins, give investors a better return, and possibly attract new entrants, he says.
The next 18 months promises to see all these issues explored thoroughly. The process is likely to test, severely if not to destruction, the coalition government's commitment to free markets.