The below formed much of the text of my newsletter on Friday 23 March. Clearly I am a soothsayer, given what came out in today’s news from Three UK. Well, either that, or I had a bit of a backgrounder from Three as to what it was planning to say today, as did may others in the media I would wager.
Anyway, I’m posting this up on the site now as a bit of a backgrounder to today’s news. By the way, you can read nuggets of information like this every Friday by signing up for our newsletters here.
Four, not Three, is the magic number
Yesterday (Thursday 22 March) was the deadline for submissions to Ofcom’s second consultation on the LTE/4G auction. There is also another deadline arriving, 13 April*, for interested parties to respond to Ofcom’s consultation on its proposal to allow Everything Everywhere to use part of its 1800MHz spectrum for LTE.
However, the two issues are of course related, and Vodafone and O2’s submissions on the former consultation seem to have made mention of the situation relating to the EE refarming deal. This is because in their view, one of the guiding principles of the original LTE auction rules was to foster a competitive, four operator strong, market. They can’t see how giving EE up to a year’s head start conforms with this desire.
But despite this bellyaching from the 900MHz operators (Voda and O2), there’s a chance that the real loser in the auction is set to be the fourth player, aka Three UK.
Three already sits on by far the least spectrum. It has 2×14.6 paired spectrum at 2100MHz, and no spectrum at all at 900 and 1800MHz. EE has no 900MHz spectrum (hence it’s pretty keen to get hold of 800MHz spectrum on favourable terms) but it has 2x45MHz at 1800MHz and 2×20 MHz at 2100MHz. Vodafone has 2×17.4 at 900MHz, 2×5.8 at 1800 and 2×14.8M at 2100MHz. O2 has 2×17.4 at 900MHz, and 2×10 at 2100MHz.
That wasn’t so bad for Three when all the operators had to run 3G at 2100MHz, where Three was just about their spectrum equal. But when, in late 2010, Ofcom said it would allow 2G spectrum to be refarmed for 3G, Three wasn’t so pleased. 2G spectrum was, to all intents and purposes, free, so O2 and Vodafone had potentially a lot more 3G spectrum than Three, and they didn’t have to pay extra for it. What is more, with its better in-building penetration, it was pretty good spectrum to have. Indeed, O2 was not shy about proclaiming the benefits of its 900MHz 3G, and Ofcom itself hailed the increased in-building coverage as a “significant consumer benefit”.
So Ofcom said that to make up for this, the operators would, at the time of the 4G licence auction, be asked to pay market rates for their existing 2G spectrum licences (rather than the peppercorn rents they currently pay). That market rate would be determined by the price of spectrum arrived at through the 800MHz auction.
In short, although the big operators were being aided by being able to use cheap/free spectrum for 3G, Ofcom said it would level the playing field come the 4G auction. Yet there are worries that that determination to make the operators pay market prices for existing spectrum has wavered.
Never mind that, Ofcom has potentially seen another of its levelling tool blunted – this being the mechanism that would ensure that the fourth entrant, effectively Three, and probably EE as well, would both be guaranteed spectrum blocks that included 800MHz spectrum. 800MHz spectrum is important for Three because it offers much better in-building penetration than its current spectrum block up at 2100MHz, as well as much wider coverage, of course. The same goes for EE, to a slightly lesser extent.
Now, Three is clearly worried that it is going to be cut out both ways, as Ofcom’s determination to impose market rates and reserve 800MHz spectrum has weakened in the face of fierce opposition from Vodafone and O2, who felt that determining the value of their 900MHz licenses by the amount paid for 800MHz spectrum is illogical, and potentially punishing. Every bid they made for 800MHz spectrum would, in effect, push up the price of their 900Mhz licenses. If a block of 800MHz is cordoned off, then that makes the remaining 800MHz spectrum likely to fetch a higher price. That, in turn, raises the price of the 900MHz licenses. You can see the reason for their objection, even if you do think they’ve had a “free ride” on 2G spectrum to date.
So…there’s now a suspicion in some corners that Ofcom just wants this “out the door”, as it is becoming politically embarrassing to the UK to be dropping behind the LTE rollout schedules of other countries. There’s a danger, though, that the major operators will use this deadline to game the process to their maximum long term advantage, baking in structural weakness to the UK mobile market, to the detriment of competition and consumers.
One source told us that the current rules look like an auction drawn up by O2 and Vodafone lawyers, with the added extra that it also allows Everything Everywhere to determine the outcome. It is not, currently, a happy scene.
* Now delayed.
Less Esser, more Freedom to roam
This week, SFR’s long-standing CEO, Frank Esser took the walk to the door marked “thanks for your contributions over the past 12 years, but it’s time to go now”. SFR owner Vivendi announced that Esser would be leaving immediately. This is being portrayed as an “SFR can’t hack the competition from Free Mobile” move, but it’s much more likely to be a “let’s get a Vivendi man in there quick” move.
You see, Vivendi’s entire market value is now less than the valuation it put on SFR a year ago, when it bought out Vodafone’s 44% stake in the company. Esser was never Vivendi’s man, as such, and the company will feel safer having one of its own in direct command at this difficult time in the market. Vodafone’s sale is looking, well, well-timed.
SFR made up for this slight mishap by releasing a blizzard of announcements on Twitter. It started its campaign with a teaser Tweet, saying followers should monitor the hashtag ReseauXXL. This was met with a small wave of negative Tweets from French customers of the operator, many suggesting that what is XXL about SFR is the size of its bills. But they were soon muffle by an avalanche of Bofs and Pows from SFR, as it made announcements about HPSA+, LTE, WiFi, femtocells and fibre. It was interesting that SFR was positioning itself as the joined-up provider. WiFi services is to be integrated with cellular though the rollout of “Auto Connect” – SIM based authentication onto WiFi sites (and SFR is working with FON to expand its WiFi footprint. Femtocells are free on SFR, but they are part of a strategy to increase mobile broadband overall – with an aggressive 68% coverage predicted for HSPA+ (42Mbps) by the end of the year.
Clearly, this is a campaign that would have been in the pipeline before Esser was asked to go. So what will be interesting is if SFR follows this publicity up with a premium offer to consumers. It has already lost a net 208,000 customers since Free started making eyes at all French mobile customers, but there is evidence that Free users are beginning to realise that their network experience is not what it should be. Indeed, Orange took the step this week of publicly stating that “certain incidents” on Free’s network are nothing to do with Orange (Orange is the national roaming partner of Free). Indeed, the operator went further and hinted that Free’s issues had the potential to affect Orange’s own customers. If this happened, Orange said it would turn off support for Free.
As the French market decides if it will head down to compete with Free, in the UK T-Mobile became the latest operator to announce a price rise. Although a 3.7% rise may not seem a great deal, when Orange announced a 4.3% rise it triggered a 100% increase in complaints to Ofcom, which in turn triggered a bunch of headlines this week about Orange being the “most complained about” network in the UK.
Of course, from an industry perspective, T-Mobile is only being honest. At some point the industry knew it was going to have address the big issue facing it – that either handset subsidies, or what we might term data subsidies, are going to have to go. Consumers will have to pay something that is more akin to the actual cost of doing business for operators. In France, this has been skewed by the arrival of a company that is prepared to treat mobile almost as a loss leader. In the UK, that fourth operator role is taken by Three, which while being data-centric is nothing like as aggressive as Free. But it is a whole lot angrier – as a speech from its CEO David Dyson made clear this week. Dyson blasted Ofcom for backtracking on its obligation to regulate for the whole market, and said there was now a serious “distortion” in the UK mobile market. He wants Three to have assured access to 800Mhz spectrum in the LTE auction, but he had little detail to hand when Mobile Europe asked him how he would structure an auction to enable that to happen.
Either way, I think this auction is headed to court, as there’s no way all parties can be satisfied. Ofcom has a “choice”. It can face down Vodafone and Telefonica, or it can take on Three UK. Who would you choose?
Not headed to a court, yet, is the roaming market restructure that the EC is looking to achieve. Now, it may be that the operators and GSMA are relatively sanguine about the roaming restructure – which will see the market opened up to allow operators to compete for roaming contracts independent of a user’s home provider. After all, what one operator stands to lose, another stands to gain. But they are a lot more exercised about the roaming price caps that will be imposed in the mean time.
I’m torn on this. On the one hand, roaming rates seem too high, intuitively. It can’t be a good thing that many people simply turn off their data as soon as they leave the airport gate. But also, roaming prices seem like a tax on the (relatively) wealthy, to me. If regulators want to see MTRs cut, and are willing to shepherd through fourth or fifth players in the market to introduce competition for the benefit of consumers, then why not be willing to see business users, and those well off enough to travel, taxed for it in terms of higher roaming revenues.
I realise this is a pretty unpopular view, but it’s worth thinking about. The EC Digital Agenda states that home and roaming tariffs must be aligned by 2015. If home tariffs are only going to get lower and lower, as a long term trend, then where are operators going to see the profits they need to invest in the broadband networks that Governments demand as vital to the economy? I know, your heart is bleeding for the operators who have not been their own best advocates to date. They have a case, though.
Finally, the chair of the session that Three’s Dyson was speaking at was Lord St John of Betso. St John is chair of the House of Lords Communications Committee that is examining proposals for superfast broadband. This most technical of subjects is being scrutinised by members who, in the words of committee chair Lord St John, regard technical terms as “double Dutch”. Non-UK readers might be interested to know that we allow non-elected officials the chance to scrutinise complex material that they know nothing about, and make recommendations to Parliament as a result. But we don’t complain. It’s just how things are done here.