Business Watch: New Year uncertainties as UK LTE auction looms

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Britain is gearing up for the first big auction of radio frequency spectrum for more than a decade. The sale, slated for 2012, will spark the industry’s biggest capital spending spree since operators splurged a combined £22.5 billion on 3G spectrum in 2000

UK communications watchdog Ofcom has set out a timetable to sell off valuable chunks of the airwaves for us by operators for next-generation LTE services. The move will see a bidding war among UK operator brands, as they splurge on the promise of new data services bringing them new data revenues.

3G licences were sold on the hope that explosive demand for data usage over high-speed 3G networks would more than offset slowing customer growth and declining average revenues per user for basic voice and text.

But overhyped technology, handset delays and intense competition put paid to that. And because the government of the day designed the auction to maximise value for Treasury coffers, the industry took a beating.

The auctions marked the high point of the dotcom boom, and over-inflated shares in Vodafone, O2’s then-parent BT, Orange and T-Mobile’s parent Deutsche Telekom took a kicking from which they have never recovered.

The good news is analysts believe the industry is likely to pay a lot less this time around, even though the spectrum will allow them to offer 4G services, with speeds of 100Mbps and more. Nevertheless, governments appreciate spectrum is the lifeblood of the industry and will do everything to maximise sale proceeds to help pay off their heavy debts.

So far Germany is the only European country to have auctioned off the spectrum that has been freed up by broadcasters switching from analogue to digital transmission.It raised €4.4 billion last year, which is a fair chunk of change but pales compared with the £30 billion it raised in 2000 for 3G.

That said, Ofcom is aiming to not only auction the UK’s digital dividend spectrum – in the 800MHz band – but also spectrum in the 2.6GHz band, which is currently used by television companies for outside broadcasts. Both spectrum is in the sweetspot for 4G services using industry-standard ‘LTE’, an industry euphemism for “let’s not overhype it this time around, guys”.

Egg-frying on 4G?

The combined chunks of spectrum will have great value to Vodafone, O2, Orange/T-Mobile and Three, who will angle to find out as soon as possible the rules Ofcom puts around the auction. Ofcom intends to auction off the spectrum by the end of its 2011/12 financial year, which runs until end-March 2012, or early in 2012/13, and to issue the licences in the first half of 2012/13.

It is under pressure from the European Union, which has said countries should release spectrum to operators by 2013 to spur consumer demand.

Demand for wireless bandwidth will continue to grow exponentially; it certainly has in the past three years, due to the rise of the smartphone, led by Apple.

But remember it took the industry seven years to get 3G right, so it might take longer than expected to turn 4G into a compelling consumer experience. (Anyone remember former Vodafone chief Arun Sarin suggesting in 2004 that he could fry an egg on some 3G handsets because the batteries were overloaded?)

Sufficient capacity now

Industry watchers Analysys Mason warned recently that mobile network operators can easily meet the demands on their networks at the current growth rates without huge investment in LTE.

“There is a lot of exaggerated talk about operators facing increasing pressure on their networks, and having to use every resource to make costs, revenue and traffic growth align. The problem with the view that there is a huge impending wave of mobile data is that it does not correlate to measured traffic on mobile networks,” wrote Rupert Wood, principal analyst at Analysys Mason.

Wood says that measured mobile data traffic growth in Europe is nothing like as fast as ‘doubling every year’, a frequently reiterated claim. His research indicates that while European mobile data traffic grew by 110 per cent in 2009, it will grow by about 35 per cent in 2010, and that there is no real prospect of a pick-up in growth rates in 2011.

Mobile broadband traffic generated by PCs is by far the largest part, accounting for over 90 per cent of traffic, but it is also the part with the slowest growth.

“In fact in some markets mobile broadband traffic growth has already come to a standstill”, says Wood. “Subscriber bases are still growing, but each subscriber uses on average less and less.”

Smartphone data that actually flows over networks is actually very low, he says, as little as 10–20 per cent in countries where most households have a fixed broadband connection and users connect to Wi-Fi with their smartphones in the home.

“Operators stand to benefit from these trends. So long as they derive more money per byte from handset data than from PC data, then they will get an improving mix of a low-value and high-value data without a damaging capacity pressure on their networks.”

But he warns: “The short-term danger is they will not be able to hold on to that price premium. The longer-term danger, though, is over-investment in LTE before the demand is there.”

Three sale likely

Finally, Three UK has received an unwelcome blow after Ofcom said it would allow airwaves currently used for 2G services – mainly voice calls and texting – to be used for 3G mobile broadband services too.

Three, which has a 3G-only network, argued that the move would give an advantage to 2G incumbents, Vodafone, O2 and Orange/T-Mobile.

It’s probably right, and it’s another reason Three UK is likely to merge or be sold by its Hong Kong parent Hutchison Whampoa sooner rather than later.

Maybe 2011 will be the year.

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