Written evidence submitted by Hutchison
3G UK Ltd (Three)
INTRODUCTION
Hutchison 3G UK Limited ("Three") is the
UK's fourth mobile network operator (fifth before the merger of
Orange and T-Mobile in the UK), having won the 3G licence reserved
for the new entrant in the 2000 spectrum auction. Three has been
instrumental in both increasing competition in the UK mobile phone
market and in driving the migration to 3G technology which delivers
a range of mobile broadband services. Three is the UK's leading
provider of mobile broadband carrying 50% of all mobile data (according
to independent estimates) and has over 97% population coverage
for its mobile data services.
SUMMARY
(i) The internet is now mobile. Government and
regulatory policy must therefore preserve a competitive mobile
market that maximises benefits for consumers and citizens, including
rollout of mobile data across the UK and enables Government to
better target funding to those areas where the market will genuinely
not deliver mobile broadband, such as rural areas.
(ii) The combined auction for 8H00MHz and 2,600MHz
spectrum must be seen in the context of the competitive distortion
caused by the January 2011 liberalisation of 900MHz and 1800MHz
spectrum. O2, Vodafone and Everything Everywhere each received
significant benefits from liberalisation. Yet Ofcom's proposed
method of allocation does not mention this link. This distortion
must be remedied through minimum spectrum packages that provide
performance at least equivalent to that which O2 and Vodafone
can achieve through the low frequency spectrum gifted to them.
(iii) Three strongly supports Ofcom's view that
competition between a minimum of four wholesale mobile operators
is essential to future competition in mobile markets. Against
a background of consolidation in the UK and US this is a clear
and strong commitment that will stimulate investment and protect
consumers. To achieve this policy objective requires a minimum
spectrum portfolio that gives wholesale operators the ability
to compete credibly, or Ofcom risks the possibility of other operators
marginalising Three or forcing it out of the market completely.
(iv) Ofcom must also impose a linkage between
the licence fees for liberalised spectrum and the auction prices
payable in this auction. Without such a linkage, operators who
benefit from liberalised spectrum will gain a financial advantage
which could undermine the positive competition benefits which
would otherwise arise from a reasonable spread of spectrum holdings.
(v) Mobile internet services are the most cost
effective means of serving rural areas where there is typically
no fixed internet. Improved mobile broadband coverage will be
provided to rural areas in an auction that maintains a competitive
market and effectively remedies the market distortion caused by
liberalisation of 900MHz spectrum.
(vi) Three supports the proposed national coverage
obligation and proposes that this is further extended subject
to suitable minimum spectrum portfolio. Three would be prepared
to support an increased coverage obligation of 97% indoor population
coverage at 2Mbps. This would guarantee mobile data services to
an additional 1.2 million people compared with the 95% proposal.
With government funding allocated to broadband, it may be possible
to achieve over 98% national coverage.
1. Does the proposed method of spectrum allocation
promote, or hinder, competition in the provision of mobile broadband
services?
1.1 While Three agrees with much of the proposed
method of spectrum allocation there remains the concern that the
proposed allocation will fail to address the distortion of competition
in the mobile market caused by liberalisation of 900MHz and 1800MHz
spectrum in January 2011.
1.2 In seeking to ensure that Ofcom achieves
its stated policy objectives, Three considers that Ofcom should
apply three tests to ensure the preservation of competition:
— Will
the Combined Auction remedy the competitive distortion arising
from O2 and Vodafone's preferential access to low frequency spectrum?
— Will
the spectrum awarded under the Combined Auction ensure that at
least four national wholesale operators are credible and sustainable
competitors?
— Will
the Combined Auction avoid spectrum being a source of competitive
distortion in the future?
1.3 Will the Combined Auction remedy the competitive
distortion arising from O2 and Vodafone's preferential access
to low frequency spectrum?
1.4 Ofcom's method of allocation does not make
the link between the 2012 auction of 800MHz and 2.6GHz spectrum
and liberalisation. Prior to liberalisation, 3G capability (using
the 2.1GHz 3G spectrum exclusively) was relatively evenly distributed
between operators following allocation by competitive auction
in 2000. This created a level playing field which stimulated competition
between operators resulting in increased 3G rollout, lower prices
and innovation and investment in new mobile services.
1.5 In January, Ofcom lifted the restriction
on the use of lower frequency 2G (900 MHz) spectrum, along with
higher frequency 2G (1800MHz) spectrum. Lower frequency spectrum
is particularly effective in providing connections over a wider
geographic area compared to existing 3G 2.1GHz spectrum. Liberalisation
led to a 150% increase in the total 3G spectrum in the UK mobile
market. However, the benefits have not been distributed evenly
across the market and liberalisation has caused a fundamental
shift in the balance of 3G capabilities of the various operators,
without the benefit of a competitive process.
1.6 O2, Vodafone and Everything Everywhere (EE)
have each received significant benefits from liberalisation. Three
is the only wholesale mobile operator whose share of 3G capable
spectrum is much less now than before liberalisation. Indeed,
its share of 3G capable spectrum has dropped hugely, from 25%
to just 10%. Furthermore, without any holdings of 900MHz spectrum,
Three and EE are the only operators that do not have access to
valuable low frequency 3G capable spectrum.
1.7 Ofcom's current proposals will not remedy
the distortion in relation to access to low frequency spectrum
because they may result in the fourth operator lacking sufficient
spectrum to match the performance of O2, Vodafone and Everything
Everywhere in terms of capacity, speed or coverage.
1.8 Almost all other Western European countries
took steps, when conducting the liberalisation, to re-allocate
or re-auction spectrum between operators in a more balanced way.
The UK has failed to do so and has thereby given certain operators
a substantial unearned competitive advantage.
1.9 Will the spectrum awarded under the Combined
Auction ensure that at least four national wholesale operators
are credible and sustainable competitors?
1.10 Three strongly supports Ofcom's view that
competition between a minimum of four national wholesale mobile
operators is essential to future competition in the mobile market—maximising
consumer and citizen benefits and the UK's economic and social
growth.
1.11 Given the increasing importance of being
able to provide high quality mobile data in the current market,
a credible national wholesaler will need access to sufficient
spectrum to provide high quality national coverage to consumers.
The other existing national wholesale operators have strong incentives
to support a reduction in competition and a realistic possibility
of achieving it by limiting Three's access to new spectrum. With
Three having driven 3G rollout out and lowered consumer prices
the other operators would benefit substantially if Three ceased
to be an effective competitive force.
1.12 It is for this reason that Ofcom must enact
measures to promote competition by ensuring that there are at
least four national wholesalers with a "minimum spectrum
portfolio" needed to compete credibly in a sustainable manner.
Three considers that the minimum packages required to provide
performance at least equivalent to that which O2 and Vodafone
will be able to achieve with their 900MHz spectrum are 2x15MHz
of 800MHz spectrum; or 2x10MHz of 800MHz spectrum plus either
2x15MHz of 1800MHz spectrum or 2x20MHz of 2.6GHz spectrum.
1.13 Will the Combined Auction avoid spectrum
being a source of competitive distortion in the future?
1.14 In addition to a minimum spectrum portfolio
that enables sustainable competition, Ofcom needs to do more to
avoid large disparities between holdings of different operators.
Large holdings will tend to encourage inefficient hoarding of
spectrum, to the detriment of competition. To address competition
in the future Ofcom is proposing the introduction of spectrum
caps on the amount of spectrum that operators can hold. Ofcom
should revise its proposed overall spectrum cap to 2x95MHz at
most rather than 2x105MHz. This would limit the largest possible
spectrum holding to 33% of total available spectrum.
2. What is the potential for next generation
mobile internet services offered by the forthcoming availability
of spectrum?
2.1 New technology and applications, as well
as growing consumer demand, will require ever greater amounts
of spectrum. Further spectrum liberalisation will provide faster
download speeds to mobile broadband customers across a wider area
of the UK and support the take up of mobile broadband.
2.2 Developments over the last three years, since
Three led the market to develop mobile broadband (MBB) as a mass-market
proposition, have shown how rapidly the market can develop. Three
anticipates that the pace of change will increase over the coming
decade with the launch of 4G/LTE networks.
2.3 Over the past two years internet traffic
on mobile networks has exploded, with Ofcom reporting a 2,200%
increase in data traffic on mobile networks in 2009 alone. This
is being fuelled by the rapid uptake of smartphones and tablets
by citizens and businesses alike. Efficient, equitable spectrum
allocation is necessary to sustain this growth and to provide
continued connectivity to the public at fair prices.
2.4 The competitiveness of the future market
will depend on operators having the right spectrum, and enough
of it, to be able to service the demand. Consumers and the economy
will suffer, possibly irretrievably, if the wrong decisions are
made now. In particular, UK consumers will no longer receive leading,
high quality mobile services at reasonable prices.
2.5 To realise the potential of next generation
mobile internet services, next year's UK spectrum auction must
ensure the competition that existed prior to the decision to allow
legacy 2G spectrum to be used for 3G is re-established. Before
liberalisation in January Three handled 50% of UK mobile data
traffic with 25% of 3G spectrum, secured in a competitive auction.
After January Three now handles 50% of UK mobile data traffics
with just 10% of available 3G spectrum. If the auction fails to
address the spectrum imbalance created in January 2011, then there
is a very real risk of higher prices, stalled rollout of new technology
and market stagnation.
- The chart below illustrates operators' spectrum
holdings following liberalisation in January.#
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3. Can the upcoming auction deliver improved
mobile broadband coverage in rural areas, as well as cities?
3.1 Mobile internet services are the most cost
effective means of serving rural areas where there is typically
no fixed internet. Lower frequency spectrum can be used to deliver
mobile broadband and address "not spots" in rural and
urban locations as well as increased in-building penetration.
Improved mobile broadband coverage will be provided to rural areas
in an auction that preserves and enhances competition by ensuring
access to lower frequency spectrum for all operators.
3.2 As a new entrant into the mobile market Three
has invested heavily in its network to extend 3G coverage. Three
currently provides outdoor 3G coverage to 97% of the UK population.
With just under 13,000 base stations Three possesses the infrastructure
required to support low frequency spectrum and extend coverage
to rural areas. If 800MHz was deployed over Three's network 96%
of the UK's population would enjoy indoor mobile broadband coverage
overnight.
3.3 Three supports the government's objective
of providing 95% indoor coverage at 2Mbps (based on a lightly
loaded cell). However, under Ofcom's proposal only speeds of around
1Mbps can be provided; speeds of 2Mbps could be provided using
2X10MHz 800MHz. Furthermore this allocation could deliver 97%
indoor population coverage without likely effect on auction prices,
and enable funding from BDUK to be more effectively targeted to
hard to reach areas.
3.4 Three would therefore be prepared to support
an increased coverage obligation of 97% indoor population coverage
at 2Mbps. This would guarantee mobile data services to an additional
1.2 million people compared with the 95% proposal. With government
funding allocated to broadband, or acceptance of slightly lower
auction prices, it may be possible to achieve over 98% national
coverage.
4. Have licence fees for mobile operators
previously been set at appropriate levels, and how should this
should be assessed?
4.1 900MHz 2G spectrum was gifted to Vodafone
and O2 in the 1980s. It is a valuable public asset for which Vodafone
and O2 each pay an annual fee of just over £12.4 million.
Everything Everywhere pay an annual fee of just over £33.2
million for the 1800MHz spectrum they hold. Ofcom recently told
this Committee that the fees should be a "multiple"
of this as the effect of liberalisation was to increase the value
of this spectrum.
4.2 Three re-iterates the importance of maintaining
the linkage proposed by Ofcom between the licence fees for liberalised
spectrum and the auction prices payable in this auction. Without
such a linkage, operators who benefit from liberalised spectrum
will gain a financial advantage which could undermine the competition
benefits which would otherwise arise from a reasonable spread
of spectrum holdings.
4.3 Three supports the linkage suggested by Ofcom
(800MHz prices for 900MHz and the average of 800MHz and 2.6GHz
prices for 1800MHz) but notes the need to address the considerable
first-mover advantages associated with early availability of this
spectrum.
4.4 900MHz spectrum is significantly more valuable
in the short and medium term due to:
(i) earlier availability;
(ii) lack of legacy problems; and
(iii) earlier availability of handsets.
We estimate that the potential incremental cash flows
for operators with 900MHz spectrum could be around GBP80-100 million
per annum over the next five years, with diminishing benefits
afterwards.
4.5 This translates into a net present value
(NPV) of around GBP500 million over the next ten years. This is
consistent with international benchmarks as higher prices were
paid in recent auctions for 900MHz spectrum (Hong Kong) than for
800MHz or equivalent (Germany and US).
5. How does the position of the UK compare
with other countries, with regards to the allocation and utilisation
of mobile broadband spectrum?
5.1 In 1999, the UK took the lead in transforming
its mobile communications market, announcing that competition
was the key to the future of next generation mobile phones and
seeking to encourage the entry into the market of new 3G entrants.
12 years later, the UK's belief in the power of increased competition
has been vindicated. In addition to the benefits brought by encouraging
3G market entry, Three strongly believes that a mobile market
with four or more competitors is of significant benefit to consumers.
The UK now benefits from materially lower prices and greater penetration
of new and innovative mobile communications services.
5.2 Where 3G market entry has been successful,
the revolution in 3G mobile communications has clearly demonstrated
the benefits of creating effective and sustainable competition.
In contrast, many other large Western European economies have
not tried or have failed to support 3G market entry and create
effective or sustainable competition in mobile communications
services—and this has resulted in much higher prices and
lower availability of new mobile services.
5.3 The UK is in the fortunate position in which
it currently has a mobile market with four active national wholesalers,
one of which is a 3G market entrant. From the evidence available,
this would appear to be the optimal competitive situation, to
the benefit of UK consumers. However, following 2G liberalisation,
the UK now has the most unequal holdings of mobile spectrum in
Western Europe. It may be argued that the UK is now at risk of
becoming an anti-competitive market. Ofcom must remedy this via
the combined auction.
5.4 The lack of speed with which the UK has sought
to allocate spectrum to facilitate the provision of 4G services
risks its status as a world leader. The US currently offers 4G
LTE services yet the UK is still some way off achieving this.
Further legal challenges by operators could delay spectrum allocation
even further. Parliament must support Ofcom, even if opposed by
other operators, in the timely allocation of spectrum to ensure
that the UK remains competitive.
6. What is the possible impact on alternative
uses for spectrum?
6.1 There exists a number of alternative, valuable
uses for spectrum with particular regards to PMSE use (800MHz)
and Olympic use (2.6GHz). Three respects the right to alternative
uses of spectrum and fully supports Ofcom's measures to make spectrum
available for such uses. However this must not further delay the
availability of 800MHz and 2.6GHz spectrum for mobile use, as
required by international harmonisation commitments.
June 2011
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