Tuesday, 22 March 2011

UK LTE spectrum: how likely we'll see a new operator?

Looking through the Ofcom document on digital dividend and 2.6GHz awards, one question crossed my mind: "Why couldn't I have been a professional cricketer instead?". Then another more relevant thought was "what is the likelihood that we'll see a new mobile entrant in the UK market?".

Ofcom has not mandated a new entrant in the same way that it did with the 3G awards where 5 licences were offered to a market with 4 exisiting operators. It's nice to see that they're "ruling it out" though. Any potential new entrant must be stunned by the regulator's enthusiasm for increased competition :

"We have also considered the potential for market entry. In proposing a minimum of four licensees capable of being credible national wholesalers it is important to realise that we are not ruling out the potential for some of those licensees to be new national wholesale entrants. We would not be surprised if one or more prospective new entrants were to bid for the minimum spectrum portfolios that we have identified; for example in the recent 800 MHz auction in Sweden two of the bidders were prospective new entrants. Our proposals are neutral as to the identity of the four licensees; they seek to provide all parties with equality of opportunity to bid for sufficient spectrum to be credible national wholesalers in the future."

The fact that it's four operators does lead one to suspect that it'll be the existing four players who tie up the spectrum between them. The award does place some limits on the amount of spectrum that each operator can own, but it's unlikely to hinder them. H3G alone, if it decided to go on a spending spree, would be allowed to buy 72% of the spectrum available (2x30MHz at 800MHz and 2x70MHz/1x50MHz at 2.6GHz). O2 could buy 44% and Vodafone 40%. Everything Everywhere is the most limited due to its hulking great 2x45MHz (down from 2x60MHz due to merger requirements) at 1800MHz and the fact that it currently holds 48% (to be reduced to 40%) of UK allocated spectrum. It would be allowed to buy 32% of the newly awarded spectrum. Added together that gives 188%. So it's difficult to foresee a scenario in which all of the spectrum is not hoovered up by the existing 4 players.

But maybe there's hope for a new entrant. One of the blocks of 2x5MHz spectrum in the 800MHz band (lot A3) has a coverage requirement:

"We propose to include a coverage obligation in one licence for the 800 MHz spectrum to deploy an electronic communications network that is capable of providing mobile telecommunications services with a sustained downlink speed of not less than 2Mbps with a 90% probability of indoor reception to an area within which at least 95% of the UK population lives. We believe this should result in coverage of future mobile broadband services that approaches today’s 2G coverage by the end of 2017. We consider that such an obligation would be proportionate taking in to account the likely costs and benefits. A key question on which we are seeking views from stakeholders is the best way to specify such an obligation, in particular as regards coverage in more rural areas."

But will that encourage a new entrant? With the roll-out obligations, that licence will be cheaper. But it's a double-edged sword as the roll-out obligations would require a huge investment. Risky when demand is unproven and they'd be reliant solely on selling data plans which are much less profitable than voice. Also it rather depends how the existing incumbents see it. If they plan for 95% population coverage anyway (I rather doubt it, but just for argument's sake) then the discount on that piece of spectrum would be modest.

[Update] After some thought I'd not rule out BT (and at a push maybe Virgin) bidding on the basis that they'd be filling a gap in their portfolio, there is a good opportunity for synergies with their existing business and they already have the channels to market. Cell sites and infrastructure deployment costs is clearly a major issue but maybe they'll find an innovative way of deploying LTE, e.g. a focus on femto to give something like what FON should have been.

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