The mobile spectrum auction is just part of the job

News Analysis

The mobile spectrum auction is just part of the job

Ian Grant

The spectre of another expensive auction of radio frequencies, this time for so-called 4G or LTE mobile broadband licences, has raised old worries about the process.

The March 2000 auction for 3G licences in the UK raised £22.4bn for the government. At the time, the auction was hailed as a great success. Then came the dot.com crash and the economic slowdown, and the value of companies that had won licences in the auction plummeted by hundreds of billion of pounds.

Some critics charged that the auction was least partly to blame. The licence-holders were also not shy in attributing some of their cash-flow and borrowing problems to the auction, claiming it had left them short of capital to roll out their networks.

A whole new ball-game

Ten years on, the government finds itself with record deficit, slow and uncertain economic growth, and mobile network operators clamouring for more frequencies. The chancellor would have to be inhuman not to be tempted by the prospect of a high-priced sale of fresh air.

The Communications Management Association, which represents network owners who spend £13bn a year on network services, has been critical of the auction process. It has called on Ofcom to ensure that the auction is fair to telecommunications consumers and UK plc, rather than use its complicated system of caps and floors to ensure that the winners are viable and can afford a high price for their licences.

Ofcom has also reserved one licence in the 800MHz band for a network operator prepared to cover 95% of the population by 2017. Ofcom indicates that it would accept a lower price for this licence because of the relatively poor return on investment from building and operating access networks in sparsely-populated areas.

This ignores possible investments by local communities in local access networks, some of which look only for a cheap "fat pipe" to connect them to the internet.

A transparent auction?

But Ofcom's pressing concern is the auction. Graham Louth, director of spectrum markets at Ofcom, tells Computer Weekly, "Auctions are the most transparent, fair and efficient way of allocating scarce radio spectrum."

Louth has support for this view. In a research paper just published, three Korean researchers looked at the results of 3G auctions in 21 OECD markets to see if spectrum auctioning was harmful to consumers, but found it was not.

On the contrary, they were surprised that prices were as low as in the countries that used the "beauty contest" to allocate frequencies, and that market concentration was even lower.

"The results indirectly imply that auctions are a better method since they are simple and transparent and they can extract rents, which otherwise would have been given out to the licensees", the authors said.

Their findings vindicate the view of Peter Klemperer, the Oxford economist who helped design the UK 3G auction. Auctions simply match willing buyers and sellers, he noted in an op-ed piece in the Financial Times in November 2002.

He said that in the UK auction, the price of spectrum rose until the bidders dropped out. In practice this meant the price was set by bidders who had no 2G licences to protect. These bidders, which included Hutchinson, France Telecom, Telefonica and Sonera, were unlikely "naïve bidders", Klemperer wrote. Rather, "incumbents, with their established brands and infrastructure, could make much better use of 3G licences," he said.

Attracting investing

Matthew Howett, an analyst with Ovum, believes Ofcom is treading a fine line trying to balance competitiveness in the market with the need to attract fresh investment.

Ofcom notes that the 250MHz of spectrum on offer is 80% of the total mobile spectrum already allocated, so it represents almost a doubling of the available bandwidth. This gives it the room to use caps and floors as well as the reserved "rural licence" to mitigate gaming tactics by bidders and to assure a degree of competitiveness.

Even so, the CMA believes that the world is moving to a view that the internet is the "fourth utility" after water, energy and transport. Therefore network access should be tightly regulated, with prices driven as low as possible, but still allow operation and targeted expansion. This would avoid wasteful duplication of infrastructure and other resources, it says.

The CMA's view was supported by telcos who are struggling to enter national markets. They told the European Commission on Tuesday that it should push regulators to separate the provision of fibre networks from their operation, and to encourage competition for the available bandwidth.

Howett says "utility access" is not an issue for mobile network operators (MNOs). This is because they largely share physical transmission networks already, and 4G services will rely very much on fixed-line fibre or high speed microwave for backhaul.

However, if BT were to win the reserved rural licence, it could consolidate its position in so-called Market 1 areas, the two-thirds of the country that contains about 12% of the population who have access only to BT.

Ofcom believes this will not be a problem. It says the MNOs have been able to negotiate transport deals with the fixed line operators, and it has powers under the communications and competition legislation to force changes if needed.

But would-be fixed line competitors to BT in rural areas have found it hard to compete, for a variety of reasons. Ofcom and the government are looking at some of them, namely access to BT's poles and ducts, what services anyone renting BT's poles and ducts might offer, and the effects of the so-called fibre tax on rural fibre deployments.

The government needs to publish its conclusions to these consultations before the auction. This will allow a full range of participants and partnerships to develop ahead of the bidding. This will give the UK its best chance of catching up with the other 74 countries that have already promised 4G mobile networks, and hopefully overtaking them.

If culture minister Jeremy Hunt is to make good on his promise to get the UK the best network in Europe by 2015, he needs to make sure that happens sooner rather than later.


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