Radio Spectrum – the UK’s “4G” auction

By Domhnall Dods, Senior Associate at Towerhouse Consulting

The UK recently announced plans to auction spectrum for so-called “4G” services (suitable for LTE and WiMAX, but actually allocating the spectrum on a technology neutral basis). It’s a reasonably complex area, with abstruse economic questions about untested auction theory over-lapping with a controversial legal framework. This note outlines the plans without seeking to be judgmental.

The Plans in Outline

Spectrum allocations are complicated at the best of times and never more so than recently in the UK. The blandishments of massive auction revenues will challenge the instincts of even the most ardent of free-marketeers. It’s a complex area of regulatory principle which goes to the heart of the market structure – spectrum being an absolute barrier to entry – and which in the UK has been complicated by the merger of two of the formerly five mobile network operators in 2010.

Faced with litigation in a crucial area of industrial policy, the last government went so far as to appoint a neutral mediator to try to get agreement between the various stakeholders. 

The current Minister, Ed Vaizey MP, issued a direction to Ofcom in December 2010 which covered a variety of spectrum issues (“the Vaizey Direction”) – including on 4G allocation. Vaizey set the course directionally; Ofcom’s consultation of 22 March deals with the detail [1]. In summary, this is what the consultation covers:

  • An assessment of future competition in mobile markets (including the potential for new entry).  It was a requirement of the Vaizey Direction that Ofcom undertake such an assessment.  Sound in principle but may be risky in practice (see below).
  • Detailed proposals for the design of the 4G auction – covering a total of 250MHz of spectrum 800MHz and 2.6GHz
  • A number of ancillary questions:  should there be coverage / roll-out obligations, low power local licences and so on
  • Variation of existing 2G and 3G licences to permit the use of LTE  and WiMAX; and
  • How licence fees will be set for existing allocations at 900 MHz and 1800 MHz after the auction.

The rest of this part of the note contains a little more detail on Ofcom’s plans.

The objective

Ofcom believes this new spectrum allocation is desperately needed to meet the UK's rapidly growing appetite for mobile data services, and much of the consultation seeks to determine how best to promote competition. It is hoped that the new spectrum will allow the launch and rollout of 4G mobile technology which will provide mobile broadband speeds close to those that are offered by ADSL fixed line services today [2]. Such technologies should not only offer greater speeds, but much better coverage than has been achieved by 3G services. It is thought that the coverage offered will be comparable to today's 2G, or voice, coverage by 2017.

Ofcom is particularly keen to ensure that the benefits of these new mobile broadband services are also enjoyed in more rural parts of the country and in this respect the 800 MHz band is seen as being particularly important given that lower frequency signals travel farther, and are therefore ideal for serving rural areas.

The higher frequency 2.6 GHz band is seen as being useful for delivering higher speed broadband services simultaneously to many users. Ofcom says it’s therefore likely to be used in urban centres, since systems using higher frequencies require a greater number of cell sites due to their propagation characteristics.

Promoting Competition

Ofcom has decided that a completely open auction would threaten future competition. Spectrum holdings might become inefficiently fragmented across multiple players – some of whom may end up with insufficient spectrum to support a national service. Ofcom has therefore proposed a system of auction floors (to ensure that at least four bidders get enough spectrum to operate a credible UK wide wholesale service). At the same time, they want to ensure that spectrum holdings are not concentrated in the hands of a few players (to ensure no one bidder can secure enough spectrum to allow them to distort competition in the future). In doing this Ofcom creates a new regulatory concept – the “credible national wholesaler”. 

Ofcom clearly hopes that the auction may allow new entrants to come to the market; and appears to have gone to some trouble to ensure that companies are permitted to bid for sufficient spectrum to enable them to become credible national wholesalers in the future. 

While the consultation makes it clear that Ofcom is keen to encourage investment, they are also mindful of the need to ensure that the benefits do not just flow to urban centres and therefore they propose to insert coverage obligations in one of the 800 Mhz licences which will oblige the licensee to deploy a mobile network capable of providing a sustained downlink speed or not less than 2Mb/s, with a 90% probability of indoor reception to an area within which at least 95% of the UK’s population lives.

Sub-national competition

Interestingly Ofcom also considers that sub-national operators may wish to enter the market. For example, some companies may wish to deliver mobile services indoors or in particular localised environments such as university campuses. It may be possible for such operators to share one block of 2.6 GHz spectrum and use lower power equipment in order to facilitate such sharing. Directionally this looks a bit like Ofcom’s GSM guardband auction (in which we acted for one of the winning bidders.)

Licence Conditions

At this stage only non technical licence conditions are being consulted on. And these are very much in line with previous Ofcom practice in that licences will be:

  • UK wide
  • technology and service neutral
  • spectrum trading will be permitted
  • of indefinite duration (subject to very limited revocation powers for Ofcom during an initial period of 20 years)

Auction Design

The proposed auction is a combinatorial clock auction, similar to those which were used for the two spectrum auctions in 2008. This will utilise generic spectrum blocks which bidders will then be able to aggregate. The design itself – while in principle simple for auction theorists – will look quite complicated to many participants.  For example, the price paid by winning bidders will not be their own bid, but the next highest. This all sounds odd and is very different from – say – the UK 3G auction, in which we were intimately involved. And it can lead to some odd-looking results (in a previous UK auction on the same methodology, a winning bidder ended up paying only around 40% of their actual bid price). 

Revised fees for 900 Mhz and 1800 Mhz

Ofcom has also been directed by the government to revise the annual license fees for existing 900 and 1800 MHz spectrum to reflect full market value in light of bids received in this auction.

Next Steps

The consultation runs until the 31st May 2011, after which Ofcom will reach a decision sometime in the autumn. The auction is currently anticipated to take place in the first half of 2012.

It’s worth noting that there is the possibility of litigation about this auction.  There are some genuinely controversial aspects – none more so than the availability of the critical sub-1GHz spectrum, with its superior propagation characteristics.  So it may not all be plain sailing.

www.towerhouseconsulting.com




[1] With responses due at the end of May

[2] In field trials of 4G services in the USA (using LTE rather than WiMAX) Verizon achieved up to 60 Mb/s download speeds:  http://www.zdnet.com/blog/btl/verizon-wireless-4g-lte-trials-showing-50-to-60-mbps-download-rates/13058