2 Mobile network operators and their
spectrum use |
13. At the time of this Report there are four
UK mobile network operators (MNOs): Vodafone, Telefonica O2 (known
as O2), Hutchison 3G (known as Three) and Everything Everywhere,
which is comprised of the Orange and T-Mobile networks that merged
in 2010. The four MNOs each have different spectrum holdings that
were allocated to them at previous auctions. There are many more
mobile service providers in the UKincluding Virgin Mobile,
Tesco Mobile and TalkTalk which offer mobile service packages
through the four networks, but do not have spectrum holdings.
14. Current mobile technology, combining voice
and internet services, is generally referred to as third generation
(3G), although second generation (2G) services (voice and text
message) are still in use. Fourth generation (4G) services, the
most widely used of which is Long Term Evolution (LTE), are faster
and have better coverage capabilities than 3G. At the time of
this Report, 4G services have not been launched in the UK. The
spectrum auction in 2012 will facilitate the roll-out of 4G services
by releasing the necessary spectrum in the "sweet-spot".
The roll-out of 4G services enabled by the release of this spectrum
is expected to reach the UK in 2013.
15. DCMS summarised spectrum allocations among
the four MNOs in its written submission:
Initially, spectrum at 900 MHz was first allocated
to the two (at the time) mobile operators. Later when 1800 MHz
became available it was awarded to four operators (with the bulk
going to the new operators that are now known as T-Mobile and
Orange, recently combined to form Everything Everywhere). In
2000 the UK ran an auction for 3G spectrum at 2100 MHz and designed
it in such a way as to result in five successful different bidders.
The existing four operators were successful plus Three joined
the market as a new entrant.
16. Spectrum for mobile communication and data
transfer is organised, and sold, in bundles of two lots, known
as "paired spectrum". This is because mobile telephones
allow two-way data transfer and communications, as opposed to
walkie-talkies which only allow one user to communicate at a time.
The communication channel from the base station to the mobile
device is called the downlink, and the communication from the
mobile device back to the base station is called the uplink. The
uplink and downlink operate on separate spectrum frequencies,
hence there being two different spectrum frequencies in each paired
bundle. Paired spectrum is measured in quantities of MHz and
often specified in a form like "2x15 MHz" meaning 15
MHz of bandwidth in a lower band and 15 MHz of bandwidth in an
upper band. DCMS provided a table of spectrum allocations as at
May 2010 in its submission, which shows the spectrum holdings
of the four MNOS:
|Paired spectrum holdings in MHz
Liberalisation of the 900 MHz licences
17. The MNOs' spectrum holdings are subject to licences set
by Ofcom that prescribe what the spectrum can, and cannot, be
used for. Holders of licences must pay a licence fee, charged
on an annual basis at a rate set by Ofcom.
18. Following European legislation, in January
2011 Ofcom lifted the restrictions specifying that the existing
900 MHz and 1800 MHz licences had to be used for lower and higher
frequency 2G, and allowed them to be used for 3G as well.
The 900 MHz spectrum licences that were "liberalised"
in this way are especially effective in providing 3G connections
over a wider geographic area, and also have better indoor coverage.
19. Not all of the MNOs had the original 900
MHz 2G licences, and therefore not all of them benefited from
liberalisation. As shown in the table above, in May 2010 Vodafone
and O2 both had 900 MHz and 1800 MHz spectrum licences; Everything
Everywhere only had a 1800 MHz licence; and Three had neither.
We wanted to discover whether or not the liberalisation of the
900 MHz licences had distorted the market in favour of the MNOs
holding these licences.
20. Kevin Russell, the then Chief Executive of
Three, explained to us why he thought the liberalisation of the
900 MHz licences put his company at a disadvantage:
There is a well documented and well understood significant
competitive advantage to low frequency spectrum. It transmits
about three times as far as high-frequency spectrum. That is an
advantage that O2 and Vodafone have enjoyed in the marketplace
for a long time. It has now been carried over directly into 3G
with the liberalisation. It is a distortion that has been largely
addressed in other European countries, so in every other European
country that Three operates in, there has been an allocation or
a re-auction of 900 MHz spectrum. There is no other country that
we operate in other than the UK that has not addressed that distortion.
Similarly, Richard Moat, Deputy Chief Executive Officer
of Everything Everywhere thought that the market had been distorted
in favour of the MNOs holding the liberalised licences and "that
problem will perpetuate itself into the 4G environment in the
21. The two MNOs with the liberalised 900 MHz
licences, Vodafone and O2, both argued to us that any advantage
they might have from the liberalisation of their 900 MHz licences
had been overstated. Vodafone wrote:
Vodafone's existing holding of 900 MHz spectrum is
already used in providing voice and data services; we carried
around 42 billion voice minutes across our networks in the last
financial year. To clear the 900 MHz band within the space of
a year would require thousands more sites because we would need
to cater for the calls and data services displaced from the cleared
spectrum in other spectrum. This is clearly impractical and would
result in a terrible experience for our customers.
22. It is not surprising that the MNOs should
seek to reinforce their own market positions in all negotiations
about spectrum policy. We have not done a market analysis ourselves.
It seems clear to us, however, that Ofcomwhich has carried
out extensive work in this areais well-placed to analyse
any threat to competition. Graham Louth, Director of Spectrum
Markets at Ofcom told us:
I see no evidence today that consumers are suffering
detriment as a result of a distortion of competition as a result
of the fact that O2 can make use of that spectrum for 3G. We did
a lot of analysis over a number of years to reach the final decision.
It revealed that there is the potential for a competitive distortion,
but it is not an immediate risk.
With reference to O2 he told us that:
O2 has already started to make use of that flexibility.
They are deploying 3G technology in the 900 MHz band in certain
city centres. That is bringing consumer benefits today. O2's customers
are getting a better 3G mobile service as a result of that than
they would have done if we had not liberalised that spectrum.
23. When Ofcom liberalised the 900 MHz licences
for 3G use in January 2011, it did not alter the level of the
licence fees paid by the licence holders but stated it would do
so after the spectrum auction in 2012 when all spectrum licence
fees for mobile use would be reviewed.
The MNOs without 900 MHz licences argued that, as soon as these
licences had been upgraded to 3G, their market value increased
and consequently the licence fees paid by O2 and Vodafone were
too low. Nicholas Ott, Vice President of Strategy, Planning and
Regulatory Affairs at Everything Everywhere, suggested that Ofcom
should have started charging higher licence fees on the 900 MHz
licences as soon as they were liberalised.
24. Ofcom believed that liberalising the licences
was of sufficient importance to consumers to justify proceeding
with it before considering the issue of the licence fee. Ed Richards
told us that "the administrative and economic priority, or
the public interest priority was very clearly to get on with the
auction and then come back and deal with the pricing question".
This view was also shared by the Minister for Culture, Communications
and the Creative Industries, who pointed out that the liberalised
licence holders will be charged higher rates after the auction
when "you can then have a proper evaluation of what a market
licence should be for that spectrum".
25. Kevin Russell, then Chief Executive of Three,
told us that, although he thought that licence fee levels were
unfair, increasing the licence fees for liberalised spectrum would
not be sufficient to cure the distortion in the market caused
by liberalisation. He argued that the "distortion will be
a fundamental, ongoing shortfall in coverage that will go to your
brand and your ability to build your business".
Unsurprisingly, the two MNOs with 900 MHz spectrum holdings did
not agree that they had a commercial advantage.
26. The liberalisation of the
900 MHz licences held by Vodafone and O2 in January 2011 undoubtedly
provided benefits for some of their customers and therefore helped
to enhance those brands. Ofcom's decision to recalculate 900 MHz
licence fees after the auction rather than at the time of liberalisation
has resulted in Vodafone and O2 effectively underpaying for 3G
capable spectrum from January 2011 until the new licence fees
are set after the auction in 2012. The competitive advantage that
this has given to Vodafone and O2 is, however, limited because
their 900 MHz spectrum is already being used for 2G services and
therefore cannot all immediately be upgraded to 3G.
27. The current duopoly on sub-1 GHz spectrum
will be short-lived. Graham Louth told us that Ofcom had "considered
requiring Vodafone and O2 to give up some of the 900 MHz spectrum
so that it could be made available to other operators",
but had decided against doing so as the release of 800 MHz spectrum
in the next auction would give all operators the opportunity to
access sub-1 GHz spectrum.
28. The debate surrounding the
liberalisation of the 900 MHz licences reflects the predictably
polarised views that exist among mobile network operators. It
also provides an example of the difficult judgements Ofcom has
to make in order to balance the needs of consumers with those
of fair competition. We are convinced that Ofcom made a considered
decision based on thorough research, and thatoverallthe
liberalisation of the 900 MHz licences has not resulted in a significant
or permanent distortion of competition.
29. In 2010, the European Commission gave clearance
for France Telecom and Deutsche Telekom to merge their UK mobile
businesses (operating as Orange and T-Mobile respectively). However,
the Commission said that the merged business, Everything Everywhere,
must dispose of some of its spectrum to comply with competition
rules, and that Everything Everywhere could keep the proceeds
of the sale of the spectrum as long as it was completed before
the next spectrum auction in 2012.
30. On 20 June 2011, Ofcom announced that it
had changed the regulations on spectrum trading, allowing MNOs
to trade the rights to the spectrum they held, in a measure aimed
at increasing mobile network capacity.
On 21 June 2011, the Financial Times speculated
that one of the first transactions to take place under the new
rules would probably be the sale by Everything Everywhere of the
required 25% of its 1800 MHz spectrum.
31. The 1800 MHz spectrum reportedly to be sold
by Everything Everywhere had originally been allocated, at no
initial cost, to its component companies T-Mobile and Orange in
1991. Since then,
£33 million in licence fees has been paid on this spectrum
per year. The Financial
Times speculated that the sale of the 1800 MHz spectrum could
net £450 million for Everything Everywhere.
In evidence to the Committee, Richard Moat and Nicolas
Ott of Everything Everywhere said that it was too commercially
sensitive to comment on the price the spectrum being sold might
32. Since being allocated its 1800 MHz spectrum,
Everything Everywhere has paid an estimated £160 million
in licence fees for it.
However, as the spectrum was given to Everything Everywhere at
no initial cost, any amount made from the sale of the 1800 MHz
spectrum will be pure profit. We asked Ed Richards and Graham
Louth of Ofcom whether they thought it was appropriate that Everything
Everywhere should make a substantial profit from the sale of a
public asset that they were given for free. Ed Richards responded:
in resource markets of this kind these things sometimes
happen. Crucially, we wanted to make trading possible and available
in order to make sure the spectrum was in the hands of the people
who valued it most highly. [...] The slight difficulty I have
with this is that if one permits trading because of the general
economic benefits, it is very difficult to then go back and say,
"Well, you made too much money out of that so we have to
somehow claw it back". I think that would remove all incentive,
in certain circumstances, to trade.
33. Estimates of the likely profit from the sale
of Everything Everywhere's spectrum may have been excessive. Graham
Louth told us:
we are about to revise the annual licence fees applying
to the 1800 MHz spectrum. So any acquirer of the divested 1800
MHz will not pay what [Everything Everywhere] currently pays;
they will have to pay the same full market value price that every
other 1800 MHz licensee will have to pay. So I struggle to see
why anybody would be willing to pay Everything Everywhere a very
large price to get hold of that spectrum if they are going to
have to pay "the full market value" for that spectrum
as soon as they acquire it.
When the Financial Times figure of £450
million was put to him, he said "we just don't know".
34. The sale by Everything Everywhere
of some of its spectrum allows a private company to profit substantially
from the sale of a public asset. We acknowledge that unless companies
can profit from the sale of their spectrum, there is no incentive
for them to divest any of their holdings. However, we recommend
that the Government and Ofcom investigate mechanisms by which
a proportion of the proceeds of any sale could be used to the
benefit of consumers. For example, Ofcom should explore whether
it could compel Everything Everywhere to ring-fence a proportion
of this windfall for investment in its network .
Spectrum licence fees
35. Spectrum licence fees are set by Ofcom and
paid annually by MNOs with the financial returns going to the
Treasury. Ofcom last reviewed the level of annual licence fee
payable for mobile spectrum in 2004: it found that fees for mobile
spectrum should continue to be set at a level in excess of the
costs of administration, with the objective of encouraging efficient
use of the spectrum in line with its statutory duties.
In its written submission, Ofcom states that, following the 2004
review, the mobile operators with licences to use the 900 MHz
and 1800 MHz spectrum were paying licence fees of approximately
£65 million per year.
As set out earlier, Ofcom did not alter the licence fees following
the liberalisation of the 900 MHz and 1800 MHz spectrum, but aims
to review all of the licence fees again after the 2012 auction
of 800 MHz and 2.6 GHz spectrum.
36. Ofcom's proposals, contained in its consultation
on the auction rules, suggest linking the licence fees for the
liberalised 900 MHz and 1800 MHz spectrum with the market values
of the 800 MHz and 2.6 GHz spectrum that will be determined at
the auction. Everything
Everywhere argued that this solution was unsatisfactory because
"the detail of these proposals undervalues 900 MHz and overvalues
1800 MHz and we would like to see this addressed. 900 MHz spectrum
can and is being used for high speed mobile broadband now. There
is no equipment for UMTS [Universal Mobile Telecommunications
Systems, the most widely used 3G technology] 1800 MHz".
Graham Louth of Ofcom pointed out, however, that:
It is possible to deploy 3G technology in the 1800
MHz band, but it is not widely adopted around the world so the
equipment is quite expensive. However, the next generation 4G
technology, LTE, is definitely going to be used in 1800 MHz band.
In fact that is one of the leading contenders for the next use
of the 1800 MHz band. I think in the longer term it is absolutely
clear that the 1800 MHz will have other uses and potentially a
different value, although whether it is much higher than the current
price of the 900 MHz is yet to be seen.
37. From the opposing perspective, Vodafone was
also unhappy with Ofcom's proposals because they "mean that
the amounts paid in the auction for 800 MHz spectrum will translate
directly into the annual fees for 900 MHz spectrum paid by Vodafone
and O2. In effect, Vodafone is required to pay twice for any spectrum
that it purchases: once in the auction and once via the new annual
38. We acknowledge the concerns
of some of the mobile network operators regarding spectrum licence
fees. However in a commercial situation such as this, it is unlikely
that all interested parties can be satisfied at the same time.
We agree that Ofcom's proposals to link licence fees to the market
value of the spectrum determined by the auction is the most likely
way to ensure that the fees charged to MNOs are fair and appropriate
to the market value of their spectrum holdings.
5 Ev 60 Back
Directive 2009/114/EC; 16 September 2009 Back
Q 34 Back
Q 34 Back
Ev 90 Back
Q 284 Back
Q 284 Back
Ev 101 Back
Q 91 Back
Q 294 Back
Q 247 Back
Q 91 Back
Q 129 Back
Q 285 Back
Q 285 Back
"The Communications Market 2010", Ofcom, August 2010 Back
"Mobile spectrum trading given go-ahead", Ofcom press
release 20 June 2011 Back
"Everything Everywhere sale cleared", Financial Times,
21 June 2011, p20 Back
Q 298 Back
Q 298 Back
Q 299 Back
Ev 101 Back
Ev 101 Back
Ev 101 Back
Ofcom, Consultation on assessment of future mobile competition
and proposals for the award of 800Mhz and 2.6GHz spectrum and
related issues, March 2011 Back
Ev 107 Back
Q 296 Back
Ev 90 Back