Spectrum - Culture, Media and Sport Committee Contents

3 The next spectrum auction

39.  The next auction of spectrum for mobile use is due to take place in the last quarter of 2012. Although it was originally scheduled for early 2012, Ofcom delayed the auction date in order to hold an extra round of consultation.[38] The auction will allocate spectrum in the 800 MHz and 2.6 GHz bands. This will be the largest ever single award in the UK of internationally harmonised mobile spectrum in the "sweet-spot".[39] Internationally harmonised spectrum is crucial for mobile operators as it allows users to cross international borders and maintain mobile coverage. The combined auction of the 800 MHz and 2.6 GHz spectrum will deliver an additional 250 MHz of spectrum. The spectrum being auctioned in the 800 MHz band has been freed up as a result of the UK digital switchover of television broadcasting, and is suitable for delivering 4G mobile broadband services.

40.  The 800 MHz spectrum being auctioned has characteristics that are particularly suitable for allowing 3G coverage over wide areas, and therefore could result in improved coverage in rural areas, a topic that is discussed in greater detail later in this Report. The 2.6 GHz spectrum being auctioned is particularly suitable for carrying high capacity and coping with demand in urban areas.

Ofcom's auction proposals

41.  On 22 March 2011, Ofcom published its Consultation on assessment of future mobile competition and proposals for the award of 800 MHz and 2.6 GHz spectrum and related issues, which contained a number of proposals about the rules under which the auction should be conducted.

42.  Ofcom's consultation proposes that the next spectrum auction should be conducted using the "combinatorial clock" method which has been used for previous spectrum auctions. Ofcom will set prices for the lots of spectrum to be sold and bidders will have to indicate if they are willing to accept the prices. Ofcom will then increase the prices in stages until only one bidder remains.

43.  Ofcom has proposed mechanisms designed to create an outcome whereby four viable MNOs emerge from the auction, all able to compete effectively in future mobile markets. To achieve this, Ofcom has also proposed having caps and floors on the amount of spectrum each MNO can hold, as well as imposing a coverage obligation on one of the 800 MHz licences to provide services to 95% of the UK population.


44.  Ofcom's proposal that there should be at least four mobile operators after the auction is a measure designed to maintain competitive tension in the market, which benefits consumers. Ed Richards said in Ofcom's annual evidence session with us on 3 May 2011 that if there were not an MNO quota set for after the auction "you might as well just have a spectrum free-for-all" and that "both ordinary individuals and businesses would pay for that in the long term".[40]

45.  Arqiva, the media technology company that provides much of the infrastructure behind television, radio and mobile communications, said in its written submission that, while it agrees with Ofcom's proposals to maintain four mobile operators, the whole premise of spectrum auctions may be becoming outdated because "competition is increasingly focussed at the service layer".[41] Julian McGougan, Head of Public Policy and Regulatory Affairs at Arqiva, said that the fact that MNOs shared infrastructure, and might share spectrum in the future, meant that "the likelihood is that, if Ofcom secures the outcome it is aiming for, it will have to come back and review that afterwards".[42]

46.  The spectrum market already allows for consolidation and network sharing, subject to competition regulations, as the merger between Orange and T-Mobile demonstrates. The Minister for Culture, Communications and Creative Industries, Ed Vaizey, said that he could "have a philosophical view that four mobile operators is a good thing, but that does not mean that there will not be consolidation in the industry".[43]

47.  From the evidence we have heard, we believe that Ofcom's proposal to secure at least four mobile network operators after the next spectrum auction is an adequate measure to safeguard plurality of mobile network operation. We are reassured that four is a minimum rather than a limit, as imposing such an artificial constraint on the number of operators in the market would inhibit competition.



48.  In its consultation Ofcom proposes that, after the auction, there should be at least four holders of a minimum spectrum portfolio that are "credibly capable of offering high quality data services in the future".[44] It proposes:

to implement this through use of spectrum 'floors' in the auction. This involves disregarding any potential auction outcome in which a minimum number of licensees (currently proposed to be four) do not win at least the minimum amount of spectrum. We expect competition in the auction to determine how much spectrum each bidder in fact wins and anticipate that this may well exceed the minimum that we propose to set, but we nevertheless consider it important for competition that we put in place this back-stop provision.[45]

49.  Both O2 and Vodafone told us that they objected to the proposal for spectrum floors. They argue that, because O2 and Vodafone already have 4G capable sub-1 GHz spectrum (the liberalised 900 MHz licences), in order for Ofcom to achieve its proposed outcome of four MNOs that can provide 4G services, Everything Everywhere and Three will have an advantage bidding for the 800 MHz spectrum at the auction. O2's submission states that "the spectrum floors are specifically designed to ensure that [O2] and Vodafone are not guaranteed to win any 4G spectrum on the erroneous presumption that their existing spectrum holdings will suffice".[46] Ronan Dunne, Chief Executive of O2, told us that he thought spectrum floors could inhibit competition because "the floors mean that certain existing operators are essentially guaranteed an allocation of spectrum" because they do not already have sub-1 GHz spectrum.[47]


50.  Ofcom has stated that there is a possibility that "one or more players might seek to corner the market in this additional mobile spectrum in order to restrict competition".[48] To counteract this it proposes to "impose spectrum caps in the auction so that no one player can acquire so much spectrum through the auction, relative to others, that competition might be distorted in future".[49]

51.  The alternative to caps considered by Ofcom was to require O2 and Vodafone to give up some of their liberalised 900 MHz spectrum holdings before the auction. It decided instead to propose the imposition of a spectrum cap, which would "have the effect of limiting the amount of 800 MHz spectrum that Vodafone and O2 could acquire in the auction".[50]

52.  Unsurprisingly, Vodafone and O2 protest that caps will "distort competition",[51] and Everything Everywhere and Three suggest that they do not go far enough.[52] Vodafone states that the caps would allow "Everything Everywhere to buy 2 x 25 MHz or over 80% of the sub-1 GHz spectrum for sale in the auction. This could have potentially serious consequences for competition in the future by creating a two-tier market".[53] Taking the opposite view, Three thinks Ofcom's proposals for spectrum caps do not go far enough. In its written submission it proposed that "Ofcom should revise its proposed overall spectrum cap to 2 x 95 MHz at most rather than 2 x 105 MHz. This would limit the largest possible spectrum holding to 33% of total available spectrum".[54]

53.  Ofcom is faced with the difficult task of finding a compromise between the two opposing views held by the MNOs. Its proposal to introduce floors and caps is supported by DCMS. Ed Vaizey told us that he was "very much a floor and ceiling man".[55]

54.  Those mobile network operators with sub-1 GHz spectrum play down any advantage it may offer, stating that they are not immediately able to use it for 3G because the spectrum is already in use by 2G customers, who cannot simply be cut off. Those operators without sub-1 GHz spectrum claim to be frozen out of the market. These irreconcilable claims highlight the difficulties faced by Ofcom in overseeing competition in the spectrum market place. Ofcom's approach has been to liberalise spectrum allocation but there still remain some vestiges of a historical "command and control" approach to market regulation, which Ofcom itself has criticised. Not all operators start out on an equal footing, but by over-compensating for differences in their positions, Ofcom would risk reversion to the command and control principles from which it has been distancing itself since its inception in 2003.

55.  We believe that the spectrum floors and caps proposed for the next auction are the best viable compromise to ensure a competitive tension in the market place in the context of the liberalised 900 MHz licences.

38   Ofcom, Update on plans for 800MHz and 2.6GHz spectrum, press release 07 October 2011 Back

39   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

40   Ofcom, uncorrected oral evidence to the Committee 03 May 2011 Back

41   Ev 96 Back

42   Q 2 Back

43   Q 254 Back

44   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

45   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

46   Ev 62 Back

47   Q 101 Back

48   Ev 102 Back

49   Ev 102 Back

50   Q287 Back

51   Ev 90 Back

52   Ev 70 Back

53   Ev 90 Back

54   Ev 70 Back

55   Q 253 Back

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© Parliamentary copyright 2011
Prepared 3 November 2011