Spectrum - Culture, Media and Sport Committee Contents

Written evidence submitted by Everything Everywhere

1.  I am writing on behalf of Everything Everywhere in response to your Committee's Inquiry on Spectrum. Our response is structured as follows:

—  Brief Background on Everything Everywhere.

—  Our view on Ofcom's consultation on competition in mobile and proposals for the award of 800 MHz and 2.6 GHz spectrum.

—  The role of wireless in extending broadband coverage.

We provide brief answers to your specific questions at Annex A.


2.  With over 27 million customers and 16,000 people working on our behalf, Everything Everywhere is the UK's leading communications company offering services under the Orange and T-Mobile brands. Everything Everywhere is a key investor and contributor to the UK economy, with our shareholders having invested £52 billion in this business over the last 10 years—about 7% of total foreign investment into the UK.


3.  Ofcom recently published its consultation document on its assessment for future mobile competition and proposals for an auction of spectrum in the 800 MHz and 2.6 GHz bands ("the Consultation"). As you know, access to the right spectrum is a critical input to our business and the upcoming auction is an important event for our company. We welcome the timely nature of the Committee's inquiry into spectrum and related issues. We would like to take the opportunity to bring up some serious concerns we have over Ofcom's proposals for the auction.

4.  The increased media coverage of launches of new mobile devices and services highlights that we are in the midst of a fundamental extension of the role of mobile devices in society. Tablets and smartphones are bringing (first of all) the internet and (secondly) video in a variety of forms onto mobile devices. For the average consumer smartphones could replace PCs as the standard entry point on to the internet[44] in the next five years. In addition, we anticipate a significant extension in the functions of mobile devices with, for example, mobile devices becoming payment systems and an upsurge in machine-to-machine applications.

5.  This rapid evolution is not in question and Ofcom refers to it at length in the Consultation. The consequent explosion in data traffic on mobile networks has been visible for several years and there is little basis to question the forecasts of Cisco[45] that suggest compound annual growth rates in data traffic of 90% or more over the next five years.

6.  More data traffic on mobile networks means mobile network operators will need more spectrum to provide capacity to carry the increased traffic load. We expect that traffic growth will increase by at least a factor of 30 by 2020 and we find it difficult to identify how this demand can be met—given what we know now, greater efficiency of spectrum use and identifiable additional spectrum will be only partly able to satisfy this huge increase in traffic. We do however believe that a competitive market is of pivotal importance in ensuring that any gap between the underlying growth in demand and capacity is minimised or eliminated—it is competition that will produce the necessary investment and innovation.

7.  Ofcom recognises of course that competition is important and that because spectrum is a critical input to the provision of mobile communications services, access to spectrum is of fundamental importance to competition.

8.  As the Committee will be aware the current allocation of spectrum is the result of public policy decisions made between 10 and 30 years ago. The first UK licences for mobile services using 900 MHz spectrum were awarded to Vodafone and O2 (Cellnet) in 1983, and subsequently they were permitted to use this spectrum for so-called "2G" (or GSM) mobile telephone services. Both operators gained additional, high frequency spectrum at 1800 MHz in the early 1990s. T-Mobile (One2One) and Orange entered the market in 1993 and 1994, having been awarded 1800 MHz spectrum. The most recent spectrum allocation for mobile services took place in 2000, when the then Government auctioned the 2.1 GHz spectrum for "3G" mobile services. This auction resulted in Hutchison 3G ("Three") entering the UK market, and the existing four operators added to their spectrum holdings.

9.  In January this year, the original 2G licences were liberalised. This means that Vodafone and O2 can now offer 3G services using their 900 MHz licences. In contrast to the experience in most other European markets, Everything Everywhere and Hutchison 3G have no low frequency spectrum and, despite years of debate on the issue, the liberalisation process did not result in any redistribution of this spectrum.

10.  For mobile services, competition depends critically on spectrum. As the Committee will be aware, an operator's spectrum portfolio determines its ability to offer its customers capacity, coverage and performance in a cost competitive way. "Sub-1 GHz" spectrum, ie spectrum in the 800 MHz or 900 MHz bands, has particular characteristics compared to spectrum at 1800 MHz or 2.1 GHz. Locations deep inside buildings can only be reached with sub-1 GHz spectrum and sub-1 GHz spectrum also has greater geographical reach, which means that rural areas can be better covered with fewer masts. This means that customers will get a better experience from a mobile network operator that has access to sub-1 GHz, and operators with such low frequency spectrum will have lower costs. Hence access to sub-1 GHz spectrum is critical to a mobile network operator's ability to compete.

11.  On the basis of its competition assessment, Ofcom has now recognised that sub-1GHz spectrum provides an "unmatchable advantage" and accordingly proposed measures for the upcoming spectrum auction, which it believes should help to ensure future competition. The core concept underpinning these measures is that there should be at least four operators after the auction, which have access to a sufficient amount of sub-1 GHz spectrum. However, whilst we fully support the critical link between spectrum and competition that Ofcom has made, we believe Ofcom has got the pro-competitive measures to achieve this wrong.

12.  Ofcom has focused on understanding the minimum amount of sub-1 GHz spectrum that an operator needs, and come to the conclusion that this is 2x5 MHz (of the total 2 x 65 MHz available[46]). Ofcom's technical work aims to demonstrate the equivalence of spectrum portfolios including such small amounts of sub-1 GHz spectrum with portfolios including much larger amounts of sub-1 GHz spectrum in terms of the coverage and capacity that a mobile network operator can deliver for its customers. However, competitiveness is not about minimum holdings. What will matter for healthy and robust competition is the relative holdings of sub-1 GHz that mobile network operators will have after the auction.

13.  The view, as set out in Ofcoms' Consultation, that to be viable a mobile network operator requires only a certain minimum amount of low frequency spectrum misrepresents the nature of the market today, and ignores the differing holdings of sub-1 GHz spectrum. Everything Everywhere is extremely concerned that the auction rules as proposed could facilitate an outcome where Vodafone and O2 each hold more than five times the amount of critical sub-1 GHz spectrum than Everything Everywhere and Hutchison 3G. This would amount to the continuation of an effective duopoly of sub-1 GHz spectrum and it must be avoided through a change in the auction rules. We think that Ofcom's intervention must ensure that mobile operators other than Vodafone and O2 hold at least 2 x 10 MHz of business critical sub-1 GHz spectrum.

14.  Extending the current duopoly of operators with sub-1 GHz spectrum will perpetuate Vodafone and O2's current unmatchable competitive advantage. This would harm investment incentives in next generation, "4G" mobile services, dull incentives to ensure data network coverage, reduce the competition to provide access to rural areas and ultimately mean less effective competition (with higher prices, lower quality and less innovation) for mobile broadband customers generally.

15.  We expect that Vodafone and O2 may suggest to the Committee that Everything Everywhere has more spectrum overall than any of its competitors. Whilst we desperately lack access to sub-1GHz spectrum, it is true that Everything Everywhere currently has more spectrum above 1 GHz than Vodafone, O2 or Hutchison 3G. We note that we serve more customers with our spectrum holding than Vodafone and O2 do, and hence we need more spectrum for capacity. However, it is important to stress that the forthcoming auction will make available at least 2 x 90 MHz to 2 x 105 MHz of additional spectrum above 1 GHz.[47] Vodafone and O2 will almost certainly win significant quantities of this spectrum in the auction. Hence after the auction Everything Everywhere will not have more spectrum above 1 GHz than our competitors, when taking into account the number of customers we serve. The critical issue for competition is access to sub-1 GHz, which is extremely scarce. Ofcom themselves recognise that mobile network operators offering services over 900 MHz spectrum enjoy efficiencies of two thirds over those operators who do not possess sub 1 GHz spectrum as they require fewer masts to provide services.

16.  Whilst Ofcom's intention to ensure healthy competition through adequate spectrum portfolios is one we support, we do not think the current proposals, as they stand, will deliver the desired outcome. We are extremely concerned that Ofcom's proposals could result in two healthy mobile operators, and undermine the long term viability of the two other holders of spectrum.


17.  The 800 MHz spectrum to be awarded in the upcoming auction offers a great opportunity to improve rural broadband coverage. Ofcom has set a coverage obligation on one of the licences to be awarded that it must provide mobile broadband with a downlink speed of 2Mbps to 95% of the population. We are not opposed to this—provided that Ofcom gets the details right—but we do not believe that it is the most effective way of delivering rural broadband.

18.  We would like to draw the Committee's attention to a rural broadband trial in Cornwall that Everything Everywhere has recently launched jointly with BT. This trial sets out to develop a hybrid fixed and mobile solution to deliver broadband to those homes which do not currently have access to basic broadband of at least 2Mbps. BT will extend its fixed fibre network as widely as possible. Everything Everywhere has obtained non-operational licences for 2 x 10 MHz of 800 MHz spectrum and based on that, we will deliver wireless broadband to the last few households and businesses that are very costly to reach with BT's fixed network.

19.  Everything Everywhere can demonstrate that 2 x 5 MHz of sub-1 GHz spectrum will not be capable of providing sufficient performance or capacity to handle broadband traffic levels in such rural broadband not-spot areas. A key finding from the Cornwall trial is that 2x10 MHz is the minimum quantity of sub-1 GHz spectrum necessary for the commercial viability of wireless access as a solution for rural broadband. Otherwise, the percentage of not-spots covered to the right performance level is so limited that it no longer justifies the significant investment involved.

20.  In addition to providing coverage at a given speed, the mobile site must have sufficient capacity to deliver broadband service to all the not-spots covered by that site. If not, customers in not-spots will face congestion and severely reduced performance. The step up from 2x5 MHz to 2x10 MHz also brings benefits here, reducing the number of not-spots with insufficient capacity by 24 percentage points.

21.  Prior to this auction, only O2 and Vodafone have the necessary sub-1 GHz spectrum, creating a duopoly for such rural broadband projects. If this continues, it will reduce the value for money achieved from the public funds set aside for rural broadband projects (administered by BDUK) as well as initiatives taken by the devolved administrations. We believe that it is crucial that after the forthcoming spectrum auction, other operators are able to compete for rural broadband projects with public funding.

Annex A

Q1.  Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision of mobile broadband services:

A1.  This has been covered. We like the proposed auction design but not the detail.

Q2.  Whether the upcoming auction can provide value for money for tax payers and how that should be balanced with benefits for consumers:

A2.  We believe that by undermining the ability of two players to compete the current proposals for the upcoming auction run the risk of depriving consumers of operator investment and innovation, and in the long term risking consumer surplus. In addition the overall spectrum cap unnecessarily constrains our ability to bid without compensating benefits. This will reduce benefits to the tax payer.

Q3.  The potential for next generation mobile internet services offered by the forthcoming availability of spectrum:

A3.  We believe that the auction of 800 MHz and 2.6 GHz spectrum offer great potential for next generation mobile internet services. The spectrum auctioned will reduce, but not eliminate, the spectrum shortage which will materialise over the next few years. Government and Ofcom are therefore right to focus on finding additional spectrum to compensate for the inevitable gap between demand and supply.

Q4.  Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well as cities:

A4.  We believe that new mobile technologies can play a pivotal role in reducing the unavailability of high speed broadband in the UK. We are particularly enthusiastic about developing hybrid fixed and mobile solutions for areas where broadband is not currently available as demonstrated by our Cornwall trial with BT. The auction is a vital step in permitting such solutions being developed.

Q5.  Whether licence fees for mobile operators have previously been set at appropriate levels, and how this should be assessed:

A5.  Vodafone and O2 have essentially paid insignificant amounts for their 900 MHz spectrum since 1983. The proposal to charge them realistically is welcome, although we believe that 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 UMTS1800 MHz.

Q6.  How the position of the UK compares with other countries, with regards to the allocation and utilisation of mobile broadband spectrum:

A6.  The position that Everything Everywhere and Hutchison 3G find ourselves in is unique in Europe. Nowhere else has 900 MHz spectrum been liberalised in the hands of the existing licensees where such spectrum is concentrated between just two of the operators.

Because of long standing disputes about the allocation of spectrum, the UK has been relatively slow to award spectrum in the new bands, with damaging consequences for the development of mobile broadband. New 4G services have already been launched in Scandinavia who were first to award the new bands from 2007. The German spectrum was auctioned in 2010, and many other European countries are ahead of us. We firmly believe that any subsequent delays to the auction should be avoided in the national interest.

Q.7  The possible impact on alternative uses for spectrum:

A7.  Our view is a straight forward one. We believe spectrum that is suitable for mobile broadband is most valuably deployed for mobile broadband. Consequently whilst other considerations might need to be taken into account, government policy should be designed to secure relevant frequencies quickly so that they can be exploited for wireless use.

June 2011

44   The Guardian 5 June 2011 - 'How the smartphone is killing the PC':

www.guardian.co.uk/technology/2011/jun/05/smartphones-killing-pc Back

45   www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html Back

46   2 x 30 MHz in 800 MHz to be awarded in the forthcoming auction and 2 x 35 MHz in the 900 MHz band which is shared between Vodafone and O2 including guard bands. Back

47   This is 2x70 MHz of paired spectrum at 2.6GHz plus 50 MHz of unpaired spectrum at 2.6GHz, which is equivalent to at least 2x20 MHz of paired spectrum plus 2x15 MHz of 1800 MHz that Everything Everywhere undertook to divest as part of the merger of Orange UK and T-Mobile UK, which we may sell privately or add to the auction. Back

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Prepared 3 November 2011