Today saw the surprise announcement of Ofcom’s spectrum auction winners, giving Vodafone, 3, O2 and BT the opportunity to catch up with EE and unleash 4G services across the UK and raising £2.34bn.
Although the regulator had planned for the auction to be completed in March, the industry had grown pessimistic about the timescale after delays hampered the process from the beginning.
So, when the news dropped this morning (Wednesday 20 February 2013) – a BT spokesperson told Computer Weekly the company only found out just before 7am – it was a pleasant surprise, albeit one that brought a whole new wave of questions and concerns for the future.
The major focus has been on the money. In December 2012, chancellor of the exchequer George Osborne took to the dispatch box in the House of Commons and gave his autumn statement, detailing how the economy was bearing up.
Osborne claimed government borrowing was down, raising eyebrows on each side of the house. On later inspection, the figures showed the Treasury had included £3.5bn from the upcoming sale of 4G spectrum in Ofcom’s auction – a predicted figure that had not been approved by Ofcom and without which the borrowing figure would have been a rise of £2bn.
As Ed Richards, CEO of Ofcom, told Computer Weekly the first time he heard the number was when Osborne announced it in his speech and his organisation had made no such predictions.
Osborne left the existing spectrum to be licensed at a ridiculously low rate, potentially costing the taxpayer tens of millions in lost revenue
Tom Watson, Labour MP
The auction may not have been about revenues for Ofcom, but it is clear the price tag of the spectrum came in significantly lower than the government expected – even smaller when you compare it with the £22bn raised during the 3G auction in 2000 – and a hole has to be filled.
“Not only did George Osborne screw up his figures on the auction, the delay has ensured that existing spectrum licences have not been uprated,” Labour MP Tom Watson told Computer Weekly. “In so doing he left the existing spectrum to be licensed at a ridiculously low rate, potentially costing the taxpayer tens of millions in lost revenue.
“It is incompetent and the only beneficiaries are the big phone companies, who aren't renowned for paying much tax.”
Low revenues for accelerated 4G roll-out
However, while the smaller amount spent on the spectrum may look bad news for Treasury figures, there is an argument that the lower price could boost the speed and quality of the 4G roll-out.
Bengt Nordström, CEO of analyst firm Northstream, said: “Treating the £2.34bn raised during this auction as a missed opportunity for the UK treasury is extremely short-sighted. The less UK operators are forced to pay for spectrum, the more they are able to invest in building 4G networks and developing new services.”
“The boost that 4G will contribute to UK GDP as a consequence will vastly outweigh the additional £1bn they might have raised during this auction.”
And as an Ofcom spokesman said to Computer Weekly: “The auction was about maximising competition, not maximising revenue,” and bringing these much improved services to UK customers.
Read more about the 4G spectrum auction
So, who won what? O2 appears to have the hardest task. Although it was awarded a relatively small amount of spectrum – 2 x 10MHz of 800MHz, costing it £550m – the lot came with the stipulation of a coverage obligation. This means that, by 2017, O2’s 4G network must be able to provide indoor coverage to 98% of the UK.
O2 said it would be proud to offer its services to that proportion of the country, however, even if it brought more pressure than that borne by the other operators.
Ofcom believes this obligation will spur rivals on to roll-out their networks further and wider, ensuring they can compete with one another and get more customers signed up to their 4G tariffs.
Vodafone, which won a significant chunk of spectrum and paid the most for it – over £790m – made a promise alongside O2 last year to also reach 98%, despite not going for the spectrum with the caveat.
The most interesting new addition to the 4G landscape though seems to be BT. For what seems like a miniscule amount – just £186m – the telecoms giant managed to secure 2 x 15MHz of 2.6GHz and 1 x 20MHz of 2.6GHz of spectrum, even though it doesn’t plan to use it for a mobile network.
BT CEO Ian Livingston said the spectrum would “complement our existing strategy of delivering a range of services using fixed and wireless broadband”. Computer Weekly asked BT for more information and, although it couldn’t give a definitive plan, the company said there were many avenues it could follow.
“With the fibre roll-out, you could say the fixed part is being sorted,” said a BT spokesman. “We want to make sure users don’t have to put up with low speeds when they are out and about and this 4G spectrum gives us options.”
As well as complementing BT’s ever-growing wireless presence with BT Wi-Fi hotspots, the technology could be used to bring connectivity to hard-to-reach rural places that may not be suitable for fibre roll-out.
The boost that 4G will contribute to UK GDP as a consequence will vastly outweigh the additional £1bn they might have raised during this auction
Bengt Nordström, CEO, Northstream
“It is one other option to explore,” said BT. “The LTE trial we had in Cornwall was a success and, although these may not be superfast speeds, if these areas are getting nothing or are in those 10% that get less than 2Mbps, owning this spectrum gives the option to have more.”
Return on 4G investment
None of this is going to come cheap for the operator and the question from the industry perspective is: will the 4G roll-out be worth it for their revenues?
EE, the only operator in the UK which currently offers 4G services, released its results this week to little fanfare. Revenues fell 2% year-on-year despite the introduction of the premium packages, with earnings before tax falling 7.3% to £1.08bn.
The operator confirmed it had signed up 201,000 contract customers in the last quarter of 2012 but would not break down how many of those were 4G tariffs, leaving questions as to whether there was the public will to sign up for the speedy mobile service or, after such a heavy investment, whether the profits made it worthwhile.
Victor Basta, managing director of merger and acquisition consultants, Magister Advisors, said: “The disappointing revenues from the 4G auction are a reflection of the challenges that mobile operators face in growing revenues from their users in the social media age.”
“Data-heavy social media services are causing huge growth in data traffic across mobile networks and mobile operators increasingly find themselves supporting users’ social networking habits, with little, if any, commercial benefit. Social networking has effectively turning mobile network operators into digital drug mules.”
Social networking has effectively turning mobile network operators into digital drug mules
Victor Basta, managing director, Magister Advisors
That outlook may be bleak for the operator, but there is no denying the performance improvements of 4G technology, enabling video-calling without the jumping, watching films without the picture juddering and the opportunity businesses big and small to create applications or boost productivity with their own workforces.
“Today's announcement will deliver a significant economic boost to the UK,” said culture secretary and Conservative MP Maria Miller. “Spectrum use is worth more than £50bn to the UK economy and 4G mobile broadband is a key part of our digital growth strategy, so I am delighted the auction has been completed.”
There is still an element of future gazing though. The assignment stage where operators will fight out where in the spectrum band their services will sit is yet to commence. When it does, the operators will have to pay up for their lots as well before they can move any further forward.
Some commentators suggest it will be summer before EE’s rivals come to market with their offerings. Having watched the first operator in the 4G game struggle with uptake, there is no guarantee they will all leap onto the networks from the first day.
But at least progress has finally been made in helping the UK catch up and become a 4G nation with stronger connectivity than ever before.