The UK 4G auction

20 February 2012

Colin Long

Ofcom’s latest attempt to get the 4G auction off its starting blocks has now been revealed in a massive near-700 page (including annexes) Consultation Document published on 12 January with a closing date for responses of 22 March (See footnote 1).

This will be the most significant release ever of spectrum to the market, a total of 250MHz, since the 3G auction in 2000 and, in Ofcom’s words, “is likely to be the last significant opportunity to obtain prime mobile spectrum for many years”.

The essential legal driver behind Ofcom’s proposal is direct Government legal intervention: a never-before-used instrument envisaged by the Wireless Telegraphy Act 2006 – in the form of Directions issued by the Secretary of State to Ofcom on December 30, 2010. These Directions were expressed to be given for the purposes of –

“ensuring the release of additional electromagnetic spectrum for use by providers of next generation wireless mobile broadband; allowing early deployment and maximising the coverage of those services; creating greater investment certainty for operators; and implementing Directive 2009/114/EC and the [Commission Decision 2009/766/EC] on the liberalisation of frequencies in the 900MHz and 1800MHz bands. 

These Directions had first been conceived during the dying months of the prior Labour Government and were the result of Lord Carter’s Digital Britain report which had set up an independent spectrum broker (‘ISB’) to try to find a way to reconcile the various competing interests that were threatening a smooth path uninterrupted by legal challenge, towards the holding of the auction.

However, the ISB intervention was not wholly successful in compromising all interests and the Labour Government drafted its own form of Directions to Ofcom which, however, failed to become law before the general election in May 2010 and were dropped. The new Directions were considerably simplified and shortened compared to the earlier version and, as a consequence, may have suffered in not giving Ofcom as much legal body armour as their draft predecessor (as we shall see below).

The main requirements in the Directions as regards 4G mobile are that:

• Ofcom must make regulations for an auction of licences to utilise frequencies in the 800MHz and 2.6GHz bands, ‘as soon as reasonably practicable’ after carrying out a competition assessment.

• This competition assessment must be in respect of the future competitiveness of mobile electronic communication services markets after the conclusion of the Auction, taking into account possible effects of the Auction. It must also include consideration of ‘the potential for new entry into those markets’.

• In light of the competition assessment, Ofcom must, where they think fit, put in place ‘appropriate and proportionate’ measures which will promote competition in those markets after the conclusion of the Auction, including in the rules governing the Auction itself.

The current consultation is also Ofcom’s second attempt to implement the Directions. Ofcom’s first consultation, issued in March 2011, provoked a good deal of comment and strongly-voiced concern (including suggestions of legal challenge), not least about Ofcom’s proposed rules to address the competition aspects. This latest consultation is intended therefore to try to address those concerns, give stakeholders the benefit of Ofcom’s conclusions on its (revised) competition assessment and describe the measures which it proposes to take to promote competition and therefore include in the Auction rules.

The main conclusions and proposals which Ofcom put forward in their 2011 consultation and which proved to be quite controversial were:

• Ofcom’s view of the world that to protect national competition, there would need to be no fewer than four ‘credible’ (see below) national wholesalers (i.e. national network operators).

• There should be spectrum ‘floors’ in order to ensure that, after the auction had been held, there would be at least four holders of a minimum spectrum portfolio, which meant that they were ‘credibly capable of providing high-quality data services in the future’.

• There should be safeguard spectrum caps which would place restrictions on the amount of spectrum each participant could win in the auction: maximum of 2 x 27.5MHz of sub-1GHz spectrum and 2 x 105MHz of mobile spectrum in total.

• There should be a coverage obligation in one licence for the 800MHz spectrum, namely to deploy a network capable of providing mobile 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.

• As also required by the Directions, revision of the level of annual licence fees for 900MHz and 1800MHz spectrum licences in order to reflect full market value, having particular regard to the sums bid for licences in the Auction.

It was the rules and conditions flowing from Ofcom’s original competition assessment which probably attracted the most comments and the most risks of legal attack. So as a consequence, Ofcom has now revisited and slightly revised its competition assessment in light of the responses to the March 2011 consultation. By the way, that competition assessment (running to some 230 pages on its own) goes into painstaking detail and analysis on possible auction strategies and outcomes. This is necessary for transparency and to help Ofcom explain their provisional conclusions regarding the preferred number of national wholesalers, spectrum caps and spectrum reservation, but is also inadvertently a ‘guide for gamers’ as it provides quite useful but free intelligence regarding the risks of strategic bidding and how the regulator intends to deal with such risks in the Auction rules.

As a policy matter, Ofcom now point out that where they identify uncertainties and have a choice between different options to address competition concerns, it is their intention to go for the least interventionist option in order to minimise as far as possible the risk of regulatory failure. Subject to the representations and results of the consultation, Ofcom’s provisional conclusions are that:

• (Holding to their view in the first consultation) UK consumers would be likely to benefit from better services at lower prices in future if there were at least four ‘national wholesalers’ (i.e. operators with their own physical network infrastructure) of mobile services: in support of this Ofcom believe that with four national wholesalers, UK consumers “would be likely to benefit from better services at lower prices in future”. This assertion is essentially based on Ofcom’s provisional view that a consolidation or transition from four down to three national wholesalers would represent a large increase in concentration in what is already a ‘highly concentrated’ market. (See footnote 2)

• Reservation of spectrum for a fourth national wholesaler (whether H3G or a newcomer) is the ‘least onerous way’ of achieving the policy aim of promoting national wholesale competition. (See footnote 3)

• As before, safeguard caps of 2 x 105MHz overall and 2 x 27.5MHz at the sub-1GHz level.

• Possibly, 2 x 10MHz of 2.6GHz spectrum should be reserved to facilitate the provision of services by sub-national operators e.g. “inside out” networks.

• Only one 800MHz licence should contain a coverage obligation and this should now be expressed in terms of a straightforward 98% (indoor) UK population coverage, perhaps linked to the Government’s mobile infrastructure programme or ‘MIP’. In a bid to head off legal challenge, Ofcom assert that this is a “proportionate measure that balances appropriately the risk of inefficient use of the spectrum against the benefits for consumers of wider coverage”. However, it is surprising Ofcom do not dispose of some of the alternative arguments, for example the impact that such an obligation will have on the perceived value of such a licence vis-à-vis the value of other licensed blocks of 800MHz and the risk of discrimination as a consequence.  This proposal also seems to raise questions for the design of the MIP programme and ensuring that it works in a fair, non-discriminatory way and does not negatively impact the obtaining of EU State Aids approval.

• To fulfil the requirement in the Directions, once the Auction has been held the level of annual licence feesfor 900MHz and 1800MHz spectrum licences should be revised to reflect full market value, having regard to the sums bid for licences.

In November last year the Chief Executive of Ofcom, Ed Richards, said in his speech to the European Competitive Telecommunications Association –

“Our current plan is that the auction will take place in the second half of next year, with spectrum available for LTE services to be launched in parts of the UK as early as January 2013. 

The work underway here provides a vivid illustration of one area in which we need to change the way we approach these questions, particularly but not exclusively in the UK.

It has been very disappointing to witness the extent to which the incumbent mobile operators have chosen to entangle this process in litigation or threats of litigation.

We recognise, of course, the need for companies to defend their commercial interests and to have recourse to the law in order to do so.

If a regulator or any other public authority makes a decision that is either procedurally or substantively flawed, the right of appeal is there to ensure good decisions replace bad ones. 

But then litigation becomes essentially strategic rather than based on objective grounds, and when it has the effect of holding back innovation and hampering growth, it is legitimate to ask whether the overall legislative framework fully supports the public interest in this increasingly vital area.

As the UK Parliament’s Culture, Media and Sport committee recognised only a few weeks ago, the stance of the operators makes it increasingly hard for important decisions to be made and implemented.

This may well be a consideration as British lawmakers consider their approach to a promised new communications bill for the UK.

I think some major companies will have to reflect upon whether they have inadvertently jeopardised the benefits of objective, independent regulation in this area by virtue of their willingness to game the system.

I am sure legislators would be all too willing to accept an argument which returns power in such matters to politicians, in light of the apparent inability of the current model to make timely decisions where the national interest is at stake.”

Emanating from the head of the UK regulatory authority, this was an unusually pointed and bitter attack on some members of the mobile network community. The question therefore arises, have the Government through the Directions and Ofcom, through the Consultation Document, set up a platform sufficient to satisfy and placate all competing interests and forestall legal challenge? In my view, possibly not.

Any such challenges would have to be centred on Ofcom’s statutory duties and EU regulatory principles. Those duties, helpfully summarised in section 4 of the Consultation Document, include the obligation to ensure that the assignment of radio frequencies is based on objective, transparent, non-discriminatory and proportionate criteria, and that spectrum rights are also granted through non-discriminatory procedures. EU State Aids rules have also been held to be relevant to the arguments.

Noticeably Ofcom have now removed one of the main bones of contention in the first consultation last year, the reservation of spectrum for Everything Everywhere, on the grounds that although it has no sub-1GHz spectrum, it is considered likely to be able to deliver sufficient quality of coverage to be a credible national wholesaler even if it were not to win additional spectrum in the Auction. On the other hand the reservation for H3G/ a 4th national wholesaler remains in the set of proposals, and that was also being questioned last year. (It is understood that some representations to Ofcom alleged that reservation of spectrum was tantamount to a State Aid.)

However, Ofcom remain firmly of the view that, with only 2x15 MHz of 2.1 GHz spectrum, H3G/a 4th national wholesaler is unlikely to be credible without additional spectrum in the Auction and that there is a material risk in the Auction it would not acquire the spectrum it needs to become so. This does seem quite robust, until you consider that if there is little or no competition for the reserved spectrum H3G could end up acquiring it at the reserve price or relatively cheaply. Not only could this resurrect the State Aids argument, it might also be unfairly discriminatory vis-à-vis bidders for the non-reserved spectrum.

There also remains the possibility of challenge to the plan to impose a coverage obligation in one only of the 800 MHz licenses, as discussed above (section 5).

All in all, in this latest consultation Ofcom have made a serious attempt to produce an ‘objective, transparent, non-discriminatory and proportionate’ set of principles for the Auction. However they continue to be at risk of legal challenge: whether there is within sections of the mobile operator community the will and appetite to incur further the wrath of Government and the regulator, not to mention frustrate those both within and outside the broader telecom sector who are anxious to see next generation mobile broadband spectrum released without further delay, can only remain to be seen.

Footnote 1: Second consultation on assessment of future mobile competition and proposals for award of 800 MHz and 2.6GHz spectrum and related issues –
http://stakeholders.ofcom.org.uk/consultations/award-800mhz-2.6ghz/

Footnote 2: Whilst at least 40% of EU Member States have less than four operators, generally the countries which are nearest to the UK in terms of size, population and economy have four operators or more.

Footnote 3: Reservation to be a combination of either 2 x 15MHz at 800MHz, 2 x 10 at both 800MHz and 2.6GHz, 2 x 10 and 2 x 15MHz at 800 and 1800 respectively, or 2 x 15MHz and 2 x 10MHz at 1800MHz and 2.6GHz respectively.

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