UK 4G auction perspectives

A joint paper by RPC and Trova Consulting on the business issues and legal framework for the upcoming UK 2.6GHz and 800MHz auctions
June 2011

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UK 4G auctions Business Context and Legal Framework - June 2011 1

About the authors

Stephen Smith Partner

stephen.smith@rpc.co.uk D +44 (0) 20 3060 6527

Faisal Ahmed Partner, Trova Consulting

faisal.ahmed@trovaconsulting.com D +44 (0) 20 7993 4035

Stephen is a Partner specialising in anti-trust and competition law. He has extensive experience advising across a broad range of EU and UK competition law matters, including representing clients on complex merger investigations, cartel and other anti-trust investigations before the European Commission and regulators in the UK, including the Office of Fair Trading and the Competition Commission as well as industry-specific regulators. Stephen also has valuable experience working within a competition regulator, having spent time as a senior legal adviser at Ofcom. Whilst at Ofcom, Stephen advised on a variety of matters, encompassing Communications Act disputes, Competition Act investigations and spectrum auctions, including in respect of the DECT Guard band award in 2006.

Faisals speciality areas are spectrum, technology, corporate finance, business modelling and product marketing. Faisal has worked in the technology and telecoms sector since 1990 with companies including Madge Networks, Nortel, Wind River (a subsidiary of Intel) and PCCW. He has a BSc in Electrical and Electronic Engineering from Manchester University, a Masters in Computer Science from Cambridge University and has completed the Corporate Finance programme at London Business School. Faisal is particularly interested in technology start-ups and is a mentor on the Cambridge University Judge Business School MBA programme.

2 UK 4G auctions Business Context and Legal Framework - June 2011

Contents
1 Executive summary 1.1 Promoting future competition in mobile markets 1.2 Annual licence fees 3 3 4 5 5 6 7 7 8 8 9 9 10 11 12 13 13 13 14 14 14 15 15 17 18

2 Market context 2.1 Background 2.2 Mobile data growth 2.3 The impact of mobile data competition 2.4 Mobile data supply and demand 2.5 Mobile data penetrations 2.6 Summary 3 The UK 4G auction 3.1 The 4G bands and auction timing 3.2 Auction structure, spectrum caps and likely bidders 3.3 Spectrum valuation and combinatorial clock auctions 3.4 Summary

4 The legal framework for 4G auctions 4.1 European law 4.1.1 European regulatory framework 4.1.2 European commission decisions 4.2 UK law 4.2.1 Communications Act 2003 4.2.2 Wireless Telegraphy Act 2006 4.2.3 Regulatory background to the auction process 4.3 Summary Glossary

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UK 4G auctions Business Context and Legal Framework - June 2011 3

1 Executive summary
Ofcoms March consultation sparks the end of the beginning in the race to deliver nextgeneration mobile services in the UK. Despite a number of false starts previously, momentum appears to be gathering to enable Ofcom to hold the auction sometime in the first half of 2012. In this paper we look at the background to the upcoming auction in its market and legal context and consider some of the issues facing potential bidders in light of the chosen auction format of a combinatorial clock auction and in view both of valuation benchmarks from recent similar auctions and the regulatory framework. In a combinatorial clock auction it is difficult for bidders to game the outcome and therefore it is important before entering the auction to have a clear idea of which spectrum blocks are of interest and what bidders are prepared to pay for them. Moreover, the second price rule which Ofcom has incorporated into the combinatorial clock auction format can mean that a winning bidder can end up paying significantly less than its highest final bid (a side effect which can be difficult to explain to senior management teams).

1.1 Promoting future competition in mobile markets

Consistent with its obligations under both the overarching European regulatory framework and Governments Direction to Ofcom made in December 2010, Ofcom is consulting on the imposition of two key restrictions in the auction in order to remove any potential risks to future competition:~ A requirement that after the auction there should be at least four credible holders of a minimum spectrum portfolio; and The imposition of set spectrum caps, both for sub-1GHz spectrum and for total spectrum. Whilst the latter restriction should not be overly contentious (the overall cap is set sufficiently high at 2x105MHz that it is unlikely to have any bearing on auction strategy and the sub-1GHz cap does not exclude either of O2 or Vodafone from the 800MHz spectrum band), the former raises some interesting points. The consultation focuses on five alternative portfolios that would each meet the minimum spectrum portfolio Ofcom considers necessary to be a credible national wholesaler, all of which require access to a minimum of 2x5MHz of sub-1GHz spectrum. In other words, of the existing mobile network operators, only O2 and Vodafone currently meet the minimum spectrum portfolio and Everything Everywhere, despite its large contiguous block of 2x45MHz of 1800MHz spectrum does not. The competitive assessment focuses on the potential unmatchable competitive advantages of sub-1GHz spectrum. This is based on: Ability to provide higher quality data services in general and more specifically on long-term evolution (LTE) services in particular; and Access to at least 2x20MHz of contiguous spectrum (whether at sub-1GHz or higher frequencies).

4 UK 4G auctions Business Context and Legal Framework - June 2011

On the one hand, the case for including a minimum 2x5MHz of sub-1GHz spectrum in any minimum spectrum portfolio is reasonably compelling, given its better propagation characteristics (as regards both greater geographic and in-building coverage). Yet that position may change, particularly once Ofcom has fully liberalised the 1800MHz and 900MHz bands especially within the context of market momentum for such higher bands. For example, Telstra in partnership with Ericsson is already rolling out LTE at 1800MHz with an aim to cover all major Australian conurbations by the end of 2011. Other operators including CSL HK, Deutsche Telekom and France Telecom have also announced plans to use LTE at 1800MHz. Full liberalisation of the 1800MHz band could potentially give Everything Everywhere a head-start on its competitors when delivering next generation mobile and mobile data services, particularly given expectations that 800MHz LTE services are not expected to be available until early 2013 at the latest. This may of itself be sufficient to off-set the conclusion that access to sub-1GHz is essential and may render questionable Ofcoms preliminary conclusion that Everything Everywhere is not already a credible national wholesaler.

1.2 Annual Licence Fees

Another potentially contentious issue in the Consultation surrounds proposals to amend existing annual licence fees for the newly liberalised 900MHz and 1800MHz spectrum. Section 10 and Annex 11 of the Consultation set out Ofcoms proposed framework for achieving this, taking into account requirements contained in Governments December 2010 Direction to Ofcom. Clearly mindful that negotiating this particular minefield is likely to be tricky, Ofcom has sought to put off any final confrontation by promising to consult again on a final approach to annual licence fees after the auction has concluded. However, that may not be sufficient for the existing mobile network operators, given that Ofcom also sets out a detailed and largely mechanistic interpretation of its obligations under the Direction. Article 6 of the Direction requires Ofcom, after completing the 4G auction, to revise the licence fees for the 900MHz and 1800MHz licences so that they reflect the full market value of the frequencies in those bands and having particular regard to the sums bid in the auction. Setting a mechanistic link between sums bid in the auction for frequencies in the 800MHz band and the annual licence fees in the manner suggested by Ofcom, could be argued to be incompatible with key provisions of the European regulatory framework. This would be the case if it could be shown that such an approach will have a distorting effect on the outcome of the auction. This might occur if, for example, it increases incentives on new entrants and H3G (who currently hold no 900MHz or 1800MHz spectrum) to overbid. It could be argued that such a strategy not only increases the likelihood of winning valuable sub-1GHz spectrum (or at the very least significantly increasing the cost to any winning bidder), but also adds to the regulatory cost of existing national wholesalers by increasing licence fees for their existing spectrum. Given the greater value expected to be ascribed to sub-1GHz spectrum, this may be of most concern to O2 and Vodafone.

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UK 4G auctions Business Context and Legal Framework - June 2011 5

Yet such an argument only holds water to the extent there is a risk, inherent in the auction rules, of gaming the outcome. Combinatorial clock auctions are notoriously difficult to game and gaming can lead to unintended consequences. It is interesting that Ofcom appears not to have considered the possibility of setting licence fees according to the opportunity cost of using the spectrum. In the short-term, that is likely to mean 3G use at 900MHz and LTE at 1800MHz. Licence fees for the 900MHz band would need to be kept under review until there is a credible case for rolling out LTE services at 900MHz. Such an approach would be consistent both with Ofcoms obligations under the Directions and under the European framework, given that it still enables Ofcom to have regard to sums bid in the auction (i.e. to review licence fees as appropriate once the opportunity cost within a given band should reflect use for LTE services).

2 Market context
In this section we set out how the mobile broadband market has developed and the implications for providers within the context of the upcoming UK 4G auction.

2.1 Background
In recent years mobile telephony service providers (both MNOs and MVNOs ) have seen voice services mature and ARPUs2 decline3. SMS4 was the first incremental service to gain mass consumer acceptance and its introduction greatly increased customer demand for mobile telephony services that bundled voice minutes with SMS allowances. In the business world, the emergence of the RIM BlackBerry handset for mobile email access over GPRS5 allowed corporate email users global access through international roaming agreements.
1

45% 40% 35% 30% 25% 20% 15% 10% 5%

Encouraged by the success of SMS and of the BlackBerry, service providers have introduced a whole host of new data services aimed at the consumer markets such as mobile web access, sharing of photographs, music downloads, video calls, social networking, mobile TV and online games. The emergence of compelling data applications has occurred hand-in-hand with the appearance of smartphones such as the Apple iPhone as well as the RIM BlackBerry and phones using Googles Android operating system. In addition there has been a proliferation of netbooks with USB mobile broadband dongles and tablet PCs with built-in 3G adding further to the volume of data traffic across the mobile networks.

0%

Q2/09 Q3/09 Q4/09 Q1/10 Web Browsing Video Streaming

Q2/10

Q3/10 Q4/10

File Sharing VoIP & IM

Figure 2-1 Allot Communications report on mobile data bandwidth usage application (Q4 2010)

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2.2 Mobile data growth

Driven by the take-up of new mobile data devices coupled with increasing mobile penetration, mobile network data traffic has risen dramatically. A number of market forecasts for mobile data have been produced by various analysts. Although these forecasts vary widely, they tend to all agree that mobile data growth will grow exponentially. The often quoted Cisco Visual Networking Index predicts a 26 fold increase in mobile data traffic (CAGR of 92%)6. Not everyone will subscribe to such a dramatic forecasted growth rate but what is clear is the evidence: Vodafones European mobile data increased by 115% from 1Q2009 to 2Q2009 and 88% from 1Q2009 to 2Q2010 Telecom Italias mobile data traffic in 2010 was 15 times the level in 2007 Frances SFR mobile data traffic has tripled since 2008 H3Gs UK mobile data traffic has grown from 3% of total network traffic in 2007 to 97% in 20117 Googles YouTube videos delivered to mobile devices has tripled in 2010 reaching 200M video views per day Allot Communications8 reported recently that mobile broadband data bandwidth usage grew by 190% in 2010 alone. Figure 2-1 shows how the mix of this bandwidth usage varied through the year with a significant growth in video streaming. Figure 2-2 shows how leading service providers are currently meeting this surging demand for mobile data using HSPA, LTE and WiMAX networks. For example, on TeliaSoneras LTE network, the average monthly consumption is 14GB per month. This is many times higher than the current typical MNO data plan (Vodafone UK offers plans based on 1, 3 or 4GB per month). By the end of 2010, 147 operators had confirmed their intention to adopt LTE, with eleven LTE networks already in commercial operation to meet the surging demand for mobile data.

16 14 12 10

GB/month

8 6 4 2 0
TeliaSonera Yota P1 Malaysia Clearwire SK Telecom CSL HK (HSPA) (LTE) (WiMAX) (WiMAX) (WiMAX) (HSPA)

Figure 2-2 Monthly average data consumption for leading HSPA and WiMAX operators (Source: Operator data)

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2.3 The impact of mobile data competition

Most USB dongle based mobile broadband packages in the UK offer less than 5GB download capacity per month. H3G UK9 is the exception and continues to bring innovative products and pricing to the market. As the relative new entrant (launched in 2003), H3G is compelled to challenge the status quo in order to compete against the larger MNOs offering a 15GB per month download limit product which far exceeds its competitors mobile broadband offerings (see Figure 2-3) and indicates how 4G LTE services based on new spectrum such as 2.6GHz and 800MHz will evolve in the future and compete against fixed broadband offerings. The surge in demand for mobile data is not confined to USB dongle based mobile broadband but applies equally to smartphones. H3G has seized the opportunity to capture further market share by introducing its One Plan for smartphone users offering for 25 per month10, the following key components: All you can eat data 2000 voice minutes 5000 texts
Monthly download limit (GB)

16 14 12 10 8 6 4 2 0 1 Orange O2 T-Mobile Vodafone 4 3 3

15

H3G

Figure 2-3 UK monthly download limits for USB dongle based mobile broadband products

2.4 Mobile data supply and demand

TBytes/month

9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2008 2009 2010 2011 2012

The surge in demand has put strains on the capability of 3G mobile networks to deliver a satisfactory customer experience. Our analysis of mobile data supply and demand concludes that for certain metropolitan areas (e.g. London, UK) demand has already outstripped supply (see Figure 2-4).

Bandwidth consumption in Central London (TBytes/month) Bandwidth supply in Central London (TBytes/month)

Figure 2-4 Mobile data supply and demand in central London (Source: Trova Consulting)

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2.5 Mobile data penetrations

Since the launch of mobile broadband in the UK in April 2007, the penetration of households with mobile broadband has grown rapidly to 15% (Q1 2010)11 but the recent rate of growth is steadily slowing as customer satisfaction with mobile broadband services has declined12 because of network capacity issues. However, if operators are able to resolve these network capacity issues by harnessing larger blocks of spectrum using new technologies such as LTE, then high capacity mobile broadband may have the capability to compete head to head versus fixed broadband services. In fact already in the UK, despite the poor customer satisfaction rates discussed above, a growing number of households (6% in Q1 2010 up from 3% in Q12009) use mobile broadband as their only broadband connection. This is a clear market opportunity for mobile broadband operators to make inroads into the large installed base of fixed broadband customers (circa 73% of households in Q12010) and also to provide high speed broadband services in rural areas where deployment of fixed infrastructure especially fibre is not cost effective. Layered on top of the increasing usage of mobile broadband via USB dongles, is the rising use of the Internet on mobile phones. In Figure 2-5 data from The Nielsen Company13 illustrates how this has increased to 13.5M users by Q12010. What is interesting is that this figure equates to a penetration of circa 22% of all mobile phones users pointing to the fact that there is still further growth to come.
16 13.5 14

Endnotes
1 3 Mobile Virtual Network Operator http://stakeholders.Ofcom.org.uk/ market-data-research/market-data/ communications-market-reports/ cmr10/ General Packet Radio System an enhancement of GSM (2G) networks 2 Average Revenue Per User

4 Short Messaging Service 5

6 http://www.cisco.com/en/US/ solutions/collateral/ns341/ns525/ ns537/ns705/ns827/white_paper_c11520862.html 7 Kevin Russell, CEO Three UK - 15th March at Westminster eForum conference entitled,Sorting spectrum auctions, allocations and availability

8 http://www.allot.com/ MobileTrends_Report_H2_2010. html 9 www.three.co.uk 10 Correct at time of writing (June 2011) 11 Ofcom communications market report 2010

Number of mobile internet users (M)

12.5 11.4

12 YouGov Dongle Tracker report Wave 6 13 Nielsen study Q12010 the figure illustrates the number of consumers who have accessed the Internet on their mobiles in the past 30 days

12 10 10 7.5 8 5.7 6 4 2 0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 6 9 9

Q3 2009

Q4 2009

Q1 2010

Figure 2-5 Number of people using the Mobile Internet on their phones in the UK (Source: Nielsen Data)

2.6 Summary
In this section we have seen how demand for mobile broadband services is growing rapidly and MNOs are facing network capacity constraints which can only be alleviated via 4G LTE network upgrades using spectrum bands such as 2.6GHz and 800MHz.

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UK 4G auctions Business Context and Legal Framework - June 2011 9

3 The UK 4G auction
In this section we look at the UK auction timing, likely bidders and the important issues of auction structure and spectrum valuation.

3.1 The 4G bands and auction timing

The two 4G bands planned to be auctioned by Ofcom next year are: 2.6GHz: This band which spans 2500-2690MHz was identified for 3G expansion when the original 3G spectrum was allocated at 1.9GHz and 2.1GHz at the ITUs World Radio Conference in 1992. Moreover, it was subsequently confirmed as a mobile data band in 2000 at the later ITU World Radio Conference in 2000. 800MHz: The band which spans 790-862MHz in Europe1 is being released as a consequence of the switch from analogue to digital TV, the so called digital dividend spectrum. 4G LTE2 is widely accepted as the evolutionary next step for 3G based networks (including HSPA and HSPA+) although LTE requires new bands such as the 2.6GHz and the 800MHz. Technology manufacturers are focusing their resources on developing equipment at these bands. Ofcom first started to consider the release of the 2.6GHz bands as a standalone auction as early as 2007. However, this process became mired in legal challenges, including in respect of issues arising out of the need to liberalise existing 2G spectrum for 3G and subsequent services. Only in January 2011, Ofcom announced3 that 3G services will now be allowed over MNOs 2G4 spectrum holdings (these bands will eventually be made fully technology neutral allowing 4G services using LTE) paving the way for a revised timeline for the release of the 2.6GHz and combining it with the 800MHz spectrum freed up by the digital dividend. As we see in Figure 3.1, the UK 4G spectrum auction has lagged similar auctions in other EU countries.
Date
Nov 2007 May 2008 Nov 2009 Apr 2010 May 2010 May 2010 Sept 2010 Mar 2011 1H 2012 1H 2012

Country
Norway Sweden Finland Netherlands Germany Denmark Austria Sweden UK5 France
6

Bands
2.6GHz 2.6GHz 2.6GHz 2.6GHz 800MHz/2.1GHz/2.6GHz 2.6GHz 2.6GHz 800MHz 800MHz/2.6GHz 800MHz/2.6GHz

Figure 3-1 Timeline of recent and upcoming 4G LTE auctions in Europe

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3.2 Auction structure, spectrum caps and likely bidders

Ofcom has put forward a suggested auction design in its consultation document (March 2011) which will lead to at least 4 national spectrum owners each with at least the following blocks of spectrum:
MHz

100 90 80 70 60 50 40 30 20

900 MHz 1800 MHz 2.1GHz FDD 2.1GHz TDD

2x5MHz of sub 1GHz spectrum and 2x20MHz of 2.6GHz; or 2x5MHz of sub 1GHz spectrum and 2x15MHz of 1800MHz; or 2x10MHz of sub 1GHz spectrum and 2x15MHz of 2.6GHz; or 2x10MHz of sub 1GHz spectrum and 2x10MHz of 1800MHz; or 2x15MHz of sub 1GHz Given the current spectrum holdings of the existing MNOs (as detailed in Figure 3-2), Ofcom is also suggesting that spectrum caps are put in place to deter spectrum hoarding. These spectrum caps are: A maximum holding of 2x27.5MHz of sub 1GHz; and A total maximum holding of 2x105MHz However, the sub 1GHz spectrum cap will only likely limit O2 and Vodafone as only they already own qualifying sub 1GHz spectrum. The overall spectrum cap is not material i.e. it is significantly large at 2x105MHz compared to existing and potential holdings and is therefore unlikely to affect the auction bidding process. In Figure 3-3 we present a view on the likely bidders in the auction. Some of the key takeaways from an initial assessment of the auction design and the likely bidders are as follows: MNOs are incentivised to underbid because spectrum fees payable on their existing 900/1800MHz will be based on the prices paid at the 4G auction. Network rollout requires substantial infrastructure hence likely to prevent new entrant apart from BT. H3G may not enter 800MHz but choose to focus on capacity play using existing 3G investments and augment this with 2.6GHz. H3G may also be open to JV or acquisition. Competitive intensity at 800MHz is likely to be higher (economics attractive and supply of spectrum is low i.e. 60MHz) compared to 2.6GHz (where there is 190MHz). German auction is likely to be a good indicator of pricing (800MHz raised 3.5Bn Euros whilst 2.6GHz raised 344M Euros).

10 0
O2 Vodafone Everything Everywhere H3G

Figure 3-2 MNO existing spectrum holdings7

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MNOs are highly unlikely to bid via a consortium e.g. MBNL (a network sharing JV between T-Mobile and H3G). MNOs see spectrum as core long lived (20 year) strategic asset (unlike sites and equipment).
Operator Likely interest in 4G auction Financial strength Brand Access to sites/core network Likelihood to be wholesale provider Notes

Vodafone O2 Everything Everywhere H3G Virgin Media BT

Holds 2 x 17.4 sub 1GHz Holds 2 x 17.4 sub 1GHz Must divest 1800MHz. Holds no sub 1GHz Holds no sub 1GHz Currently an ISP and MVNO Likely to target auction as way to re-enter mobile voice and data Currently an ISP and content provider Currently an ISP and MVNO Potential wholesale service provider Most likely to JV e.g. Etisalat, Qtel, China Mobile etc

Sky

TalkTalk Arqiva Overseas new entrant

Figure 3-3 Likely bidders in UK 4G auction

3.3 Spectrum valuation and combinatorial clock auctions

To ensure an adequate return on capital, 4G auction bidders will value spectrum assets, like any asset, using two techniques: Relative valuation using benchmarks from similar transactions Intrinsic valuation typically using a discounted cash flow model In order to use relative valuation techniques, it is vital to have a significant number of data points. Spectrum valuation benchmarks use a metric based on the price paid for the spectrum divided by the unit of spectrum and the population covered. Typically this is expressed as $/MHz/Pop (or /MHz/Pop). In Figure 3-4 we see how recent similar auctions provide a set of benchmarks some of which will be relevant to the UK situation. As for a valuation based on a discounted cash flow (DCF) model, each bidders business and use case for the spectrum will be different. The ability of existing MNOs to leverage existing assets (e.g. networks, sites, brands etc.) puts these players in a position such that they are likely to be willing to pay more for the spectrum. To ensure an adequate return on capital, when constructing a DCF model, key issues to consider are:

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Ensuring that the discount factor reflects the project risk Ensuring that the value from the spectrum is captured within a realistic time horizon (i.e. to avoid over reliance on the terminal value) Lastly, on the issue of valuation, one point of note for potential bidders in the UK 4G auction is the auction design. Ofcom has chosen a Combinatorial Clock Auction (CCA) design which it previously used in both the 10-40GHz8 and the L-Band9 auctions. A CCA is very difficult to game and if a bidder does try to game the outcome, it can lead to unintended consequences e.g. acquiring spectrum blocks that are not the ones that the bidder wanted. Hence, when entering a CCA, it is very important to have a clear valuation in mind for the spectrum blocks that a bidder wishes to acquire and when taking part in the auction to be mindful of the second price rule that Ofcom has incorporated in to the auction. This means that during the auction process a bidder may have placed bids according to its valuation of the block of interest and concluded the auction with final bids to its maximum budget and indeed won the blocks of choice. The CCA algorithm which includes a second price rule will determine the price the bidder actually pays for the blocks that it won which will not necessarily be the final price it bid. The actual price will be determined by competing bids for those blocks. The net result is that the winning bid will be one bid increment above the second highest bid. This can be quite difficult to explain to the senior management team within the bidding company especially as it may have bid up to its maximum budget but end up winning at a much lower price.
80 72 70 60 57

Endnotes
1 In North America this spans 698806MHz whilst in Asia it is consistent with the European bands http://stakeholders.ofcom.org. uk/consultations/900-1800mhzwireless-telegraphy/statement http://stakeholders.ofcom.org.uk/ consultations/combined-award/

2 LTE stands for Long Term Evolution 3

4 900MHz and 1800MHz 5

6 http://www.arcep.fr/uploads/tx_ gspublication/consult-800-2600thd-270710.pdf 7 Reflects Everything Everywheres divestment of 2x15MHz of its 1800MHz

8 http://stakeholders.ofcom.org.uk/ spectrum/spectrum-awards/completed-awards/1040award/notices/ 9 http://stakeholders.ofcom.org. uk/spectrum/spectrum-awards/ completed-awards/award_1452/

Eurocents/MHz/Pop

50 40 30 20 10 0 26 22 13 3 700 MHz US 2008 800 MHz Germany 2010 2.1 GHz Germany 2010 2.1GHz India 2010 2.6GHz HK 2009 2.6GHz Sweden 2008 2.6GHz Norway 2008 2.6GHz Denmark 2010 13 3 2.6GHz Germany 2010 4 2.6GHz Austria 2010 2 3.5GHz Italy 2008 34

Figure 3-4 Prices paid at spectrum auctions for 700MHz to 3.5GHz since 2008

3.4 Summary
In this section we have discussed the two spectrum bands which will be part of the 4G auction, the spectrum caps put in place by Ofcom, the likely bidders and how they may value the spectrum.

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4 The legal framework for 4G auctions

In this section we present the legal framework for the 4G auctions, within both the domestic and European context and specifically in the context of the Wireless Telegraphy Act 2006 (Directions to OFCOM) Order 2010 (the Direction) which sets the framework under which Ofcom is to proceed with the award.

4.1 European Law

4.1.1 European Regulatory Framework
The current regulatory regime governing telecommunications in general in the UK derives from the implementation of a series of European directives, including Directive 2002/21 EC (the Framework Directive) and Directive 2002/20 EC (the Authorisation Directive). Article 8 of the Framework Directive sets out the policy and regulatory principles which national regulatory authorities must follow when implementing the European regulatory framework. These include: A commitment to technology neutrality; The promotion of competition, including by ensuring there is no distortion or restriction on competition, encouraging efficient investment in infrastructure, promoting innovation and encouraging the efficient use and effective management of radio spectrum; and A commitment to contribute to the development of the internal market within the European Union, including by removing obstacles to the provision of Europe-wide services, encouraging interoperability of pan-European services and ensuring there is no discrimination in the treatment of communications network and service providers. Article 9 of the Framework Directive requires Member States to take steps to ensure that the management of radio spectrum is consistent with the policy and obligations contained at Article 8. This includes promoting harmonisation of frequencies across the European Union and ensuring that the allocation and assignment of spectrum is based on objective, transparent, nondiscriminatory and proportionate criteria. The Authorisation Directive harmonises and simplifies the regulatory regime applicable to communications services and network providers, setting out minimum obligations that operators must meet under a general authorisation (rather than a specific licence) regime. Article 5 reinforces the obligation set out at Article 9 of the Framework Directive by requiring Member States to apply open, transparent and non-discriminatory procedures to any grant of rights of use of the radio spectrum.

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This is further supported by Article 7 of the Authorisation Directive, which requires Member States to apply objective, transparent, non-discriminatory and proportionate selection criteria when deciding to limit the number of rights of use to be granted for particular radio frequencies. This includes giving due weight to the need to maximise benefits for users and to facilitate the development of competition. In 2009, the European Commission adopted Directive 2009/140/EC (the Better Regulation Directive) which amended certain aspects of the Framework and the Authorisation Directives. The amendments do not materially alter the substance of the European regulatory regime, although they further enshrine a commitment to technology (and service) neutrality (including the use of appropriate, proportionate and non-discriminatory restrictions where necessary, for example to avoid harmful interference). The European regulatory framework has been transposed into UK law by the Communications Act 2003 and the Wireless Telegraphy Act 2006 (see below). The Better Regulation Directive has most recently been transposed into UK law by the Electronic Communications and Wireless Telegraph Regulations 2011 (SI2011/2010). The key overarching principle of the European regulatory framework (as amended) can be summarised as a desire to promote technology and service neutrality, encompassing full liberalisation of spectrum usage rights, whilst ensuring open, objective, transparent, nondiscriminatory and proportionate criteria are attached to any grants of use.

4.1.2 European Commission Decisions

The European Commission has adopted two decisions: the 2.6GHz Decision (2008/477/EC) and the 800 MHz Decision (2010/267/EU). In short, these two Commission Decisions harmonize use of the two bands across the EU, requiring Member States to make the bands available, subject to certain parameters relating to harmful interference. The 4G auction award will fulfil the UKs obligations to make the bands available under each of the 2.6GHz and 800MHz Decisions.

4.2 UK Law
4.2.1 Communications Act 2003
The general duties of Ofcom are set out at section 3 of the Communications Act 2003. Section 3(1) provides that Ofcoms principal duty in carrying out its functions is: to further the interests of citizens in relation to communications matters, and to further the interests of consumers in relevant markets, where appropriate by promoting competition.

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UK 4G auctions Business Context and Legal Framework - June 2011 15

In addition, section 3 requires Ofcom to secure the optimal use of radio spectrum and availability throughout the UK of a wide range of services (section 3(2)). In carrying out its functions, Ofcom must have regard to principles of transparency, accountability, proportionality and consistency (section 3(3)) and to the desirability of promoting competition and encouraging investment and innovation (section 3(4)). The core principles set out in Article 8 of the Framework Directive are implemented by section 4 of the Act.

4.2.2 Wireless Telegraphy Act 2006

Section 3 of the Wireless Telegraphy Act 2006 provides for additional duties on Ofcom when carrying out its radio spectrum functions, for example the need to have regard to efficient management of the radio spectrum, to the development of innovative services and competition in the provision of those services and to both current and future use of spectrum. Section 14 of the Wireless Telegraphy Act 2006 empowers Ofcom to grant spectrum usage rights through an auction process. The 4G auction award will proceed according to rules set out in Regulations to be made by Ofcom under section 14. Finally, section 5 of the Wireless Telegraphy Act 2006 empowers the Secretary of State to give general or specific directions to Ofcom concerning Ofcoms radio spectrum functions (see below).

4.2.3 Regulatory background to the auction process

Ofcom originally intended to award the 2.6GHz band via auction in 2008. At that time, use of the 900MHz and 1800MHz bands were restricted to 2G GSM services by the GSM Directive 87/372/EEC (the GSM Directive 1). This resulted in legal challenges brought both by O2 and T-Mobile, disputing Ofcoms ability to proceed with the award until decisions had been taken about liberalisation of existing spectrum rights. Crucially, given the propagation characteristics of the 900MHz band and its historic allocation to O2 and Vodafone, there was concern that allowing the 900MHz band to be liberalised without any reallocation would lead to significant competitive distortions2. As a result of these challenges, the timeframe for the freeing up of the 800MHz band (which shares many of the characteristics (and hence advantages) of the 900MHz band) following switchover of terrestrial television services in the UK to digital, became more aligned with the award of the 2.6GHz band. In an attempt to broker an industry-led solution to the impasse between the legacy 900MHz operators (i.e. Vodafone and O2) and the other MNOs (i.e. T-Mobile, Orange and Three), the Government commissioned a report by Kip Meek (the Independent Spectrum Broker) which proposed a framework and timetable for the clearing of the 800MHz band, liberalisation of existing 2G spectrum holdings and the combined award of the 800MHz and 2.6GHz bands at auction with certain caps to be imposed on overall and sub-1GHz spectrum. Ofcom would be directed to implement the proposals by the Secretary of State using his powers under section 5 of the Wireless Telegraphy Act 2006.

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The Government consulted on proposals based on the Independent Spectrum Brokers report in October 2009. This followed the announcement in September 2009 that Orange and T-Mobile would be merging their UK operations (combining as a joint venture known as Everything Everywhere), subject to approval under the EU Merger Regulation. The consultation was therefore conducted at a time of considerable uncertainty concerning the nature of competition in the UK at the network level. Whilst the existence of at least five mobile network operators had been a clear policy objective in 2000 at the time of the 3G auctions, the announced merger would (at least initially) reduce that number to four. Given the need to obtain prior approval under the EU merger regime (including the potential for the transaction to be referred back to the UK authorities for an in-depth review, prohibited, or cleared subject to undertakings), the proposals sought to provide alternatives under both a four and five network operator outcome. On 1 March 2010, the European Commission announced that the merger had been cleared subject to undertakings (which had been negotiated with the input of both Ofcom and the OFT). These undertakings related to the on-going provision of network access and network sharing arrangements by the merged entity to Three to ensure the continuation of a minimum of 4 viable network operators and required the divestment of a block of 1800MHz spectrum. Before the details of this decision were made public however, the Government published draft Directions to Ofcom in March 2010 which were the subject of significant criticism by both the Joint Committee on Statutory Instruments and the House of Lords Select Committee on the Merits of Statutory Instruments and by O2 and Vodafone. Central to these criticisms was the failure to take into account the outcome of the European Commissions merger review and remedy to be imposed on the newly created Everything Everywhere. The May 2010 General Election subsequently ensured that the Draft Directions were never made and the new Coalition Government announced that it would be looking again at the proposals, including the detail of the proposed auction rules and the issue of liberalisation of existing 2G spectrum. A revised draft was published for consultation in July 2010. Despite the threat of legal action (this time by Everything Everywhere in the autumn of 2010), Ofcom published a report in October 2010 concluding that liberalisation of 2G spectrum in the hands of the incumbents would not result in material distortions of competition and would rather lead to significant consumer benefits. This cleared the way for Government to make the Directions and in December 2010, the Wireless Telegraph (Directions to Ofcom) Order 2010 (the Directions) was finally made. This included directions to Ofcom to:

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UK 4G auctions Business Context and Legal Framework - June 2011 17

Permit use of the 900MHz and 1800MHz bands for both GSM and UMTS services3; Conduct a competition assessment as soon as reasonably practicable on likely future competition, including future competitiveness of the markets following award of the 800MHz and 2.6GHz spectrum; Hold an auction of the 800MHz, 2.6GHz and any other frequency band that Ofcom sees fit as soon as reasonably practicable after completion of the competition assessment; and Put in place appropriate and proportionate measures to promote competition, including rules governing the auction as appropriate. In addition, the Directions made certain other changes, including making the 3G licence terms indefinite and requiring Ofcom to revise the annual licence fees payable for use of the 900MHz and 1800MHz bands to reflect the full market value of the frequencies in those bands (regulation 6(1) and having particular regard to the sums bid for licences in the Auction (regulation 6(2)). Following the making of the Order, Ofcom issued a Statement on 6 January 2011 confirming the variation of the 900MHz and 1800MHz and in March 2011, O2 announced that it was rolling out the first UMTS900 services in the London area. It is expected that the bands will be fully liberalised (i.e. available for LTE, 4G WiMAX and any other use) in the course of 2011.

Endnotes
1 Amended by Directive 2009/114/ EC (the Revised GSM Directive) requiring Member States to free up the band for other uses and brought into effect in the UK by Ofcom in January 2011

2 Article 1(2) of the Revised GSM Directive requires Member States to consider the potential for distortions of competition to arise as a result of liberalisation of use of the 900MHz band and to take such steps as are justified and proportionate to address them if necessary 3 Bringing the UK in line with GSM Directive 2009/114/EC which amended GSM 87/372/EEC

4.3 Summary
In this section we have summarised the European and UK legal framework that will overpin the auction process in the UK. The primary tension remains the interpretation of Ofcoms obligations to deliver a technology neutral outcome based on open, objective, transparent, non-discriminatory and proportionate criteria. This raises particular concerns in the UK as a result of legacy issues arising from how original 2G spectrum was allocated and as a result of the policy decisions taken at the time of the 3G auction.

18 UK 4G auctions Business Context and Legal Framework - June 2011

Glossary
3G
3G is the third generation of standards for mobile phones and services specified by the International Telecommunication Union. Application services include wide area wireless voice telephone, mobile internet access, video calls and mobile TV.

BTS
BTS stands for Base Transceiver Station. It contains the equipment that facilitates wireless communication between user equipment and a network.

CDMA
CDMA stands for Code division Multiple Access and is a methodology for sharing radio spectrum amongst multiple users. Each user is assigned a code which is used to convert the digital data to a transmittable stream of chips. The transmitter and receiver each know the assigned code and can therefore de-code the received signal even in the presences of other CDMA signals and noise.

4G
4G stands for the fourth generation of cellular wireless standards and is the successor to 3G standards. Speed requirements for 4G service set the peak download speed at 100 Mbps for high mobility communication and 1 Gbps for low mobility communication. 4G systems provide all-IP based mobile broadband solutions to mobile devices.

Channel ADSL2+
ADSL2+ stands for Asymmetric Digital Subscriber Line. It extends the capability of basic ADSL by doubling the number of downstream bits. Channel refers to one of a number of discrete frequency ranges utilised by a base station to transmit and receive information from mobile devices.

Digital Dividend ATM

ATM stands for Asynchronous Transfer Mode. It is a switching technique for telecommunication networks that uses asynchronous time-division multiplexing and it encodes data into small, fixed-sized cells. This refers to the spectrum yielded by the Digital Switchover process whereby the analogue TV signal is switched off replaced by a digital signal.

DSL
DSL stands for Digital Subscriber Line. DSL is a family of technologies that provide digital data transmission over the wires of a local telephone network. DSL service is delivered simultaneously with regular telephone on the same telephone line.

BSC
BSC stands for Base Station Controller. It provides the intelligence behind the BTS (Base transceiver Station). Typically a BSC has tens or even hundreds of BTSs under its control. The BSC handles allocation of radio channels, receives measurements from the mobile phones, and controls handovers from BTS to BTS.

DSO
This refers to the Digital Switchover process whereby the analogue TV signal is switched off replaced by a digital signal.

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UK 4G auctions Business Context and Legal Framework - June 2011 19

DVB-S2
DVB-S2 or Digital Video Broadcasting Satellite Second Generation is the successor to the DVB-S digital television broadcast standard.

HSPA
HSPA stands for High Speed Packet Access. It is an amalgamation of two mobile telephony protocols, High Speed Downlink Packet Access (HSDPA) and High Speed Uplink Packet Access (HSUPA). A further standard, HSPA+, supports significantly higher data rates.

Ethernet
Ethernet is a family of frame-based computer networking technologies for local area networks (LAN).

IP FDD
FDD stands for Frequency Division Duplex. In fixed wireless PMP systems that use FDD, one frequency channel is transmitted downstream from a base station to a fixed subscriber terminal (downlink) and a second frequency is used in the upstream direction (uplink). IP stands for Internet Protocol. It is responsible for addressing hosts and routing packets from a source host to the destination host across one or more IP networks.

IPTV
IPTV is Internet Protocol Television. It is a system through which television services are delivered using the architecture and networking methods of the Internet Protocol Suite over a packet-switched network infrastructure.

FTTH
FTTH stands for Fibre to the Home. FTTH reaches the boundary of the living space, such as the box on the outside wall.

FTTC
FTTC stands for Fibre to the Cabinet. FTTC reaches an aggregation point e.g. a neighbourhood roadside unit from which the households are then served via the existing copper telephone lines.

ISDN
ISDN stands for Integrated Service Digital Network. It is a set of communications standards for simultaneous digital transmission of voice, video and data over the public switched telephone network.

FTP
FTP stands for File Transfer Protocol. It is a standard network protocol used to copy a file from one host to another over a TCP (Transmission Control Protocol) based network, such as the Internet.

LTE
LTE is 3GPP (3rd Generation Partnership Project) Long Term Evolution. It is the next generation network standard beyond 3G. In addition to enabling fixed to mobile migrations of internet applications such as VoIP, video streaming and music downloading, LTE networks will also provide the capacity to support consumer devices tailored to new mobile applications. The LTE specification provides downlink peak rates of at least 100 Mbps and an uplink of at least 50 Mbps.

HDTV
HDTV stands for High Definition Television. It refers to video resolution substantially higher than traditional television.

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MNO
A Mobile Network Operator is a company that owns and operates a network for the provision of mobile network services including voice and data using licensed radio spectrum.

PoP
PoP stands for Point of Presence. On the Internet, a PoP is an access point from one place to the rest of the Internet.

Pop MVNO
A Mobile Virtual Network Operator is a company that provides mobile network services but does not have its own licensed frequency allocation of radio spectrum, nor does it necessarily have the entire infrastructure required to provide mobile services. Instead it procures at least some elements of the service provision from another party, usually a MNO. Pop refers to the population within a mobile operators licensed area.

PSTN
PSTN stands for Public Switched Telephone Network. It delivers fixed telephone service.

PTP
PTP stands for Point to Point. It provides a single communication path such as a microwave link.

NodeB
NodeB is the hardware that is connected to the 3G mobile phone network that communicates directly with mobile handsets. The Node B is the equivalent to the BTS (Base Transceiver Station) used in GSM networks.

QoS
QoS stands for Quality of Service. It is the ability to provide different priority to different applications, users, or data flows, or to guarantee a certain level of performance to a data flow.

P2P
P2P stands for Peer to Peer. Compared to Web browsing or e-mail, where data is only transferred in short intervals and relative small quantities, P2P file-sharing often consists of relatively heavy bandwidth usage due to ongoing file transfers.

RAN
RAN stands for Radio Access Network. It is the part of the mobile telecommunications system that sits between the mobile phone and the core network.

RNC PMP
PMP stands for Point to Multipoint. It provides multiple communication paths from a single location to multiple locations. RNC stands for Radio Network Controller. It is the governing element in the 3G radio access network and is responsible for controlling the Node Bs that are connected to it.

PMSE
PMSE stands for Programme Making and Special Events and refers to applications such as outdoor broadcast and wireless microphones.

SaaS
SaaS stands for Software as a Service and is sometimes referred to as software on demand. SaaS is software that is deployed over the internet.

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UK 4G auctions Business Context and Legal Framework - June 2011 21

SDH
SDH stands for Synchronous Digital Hierarchy. These are standardised multiplexing protocols that transfer multiple digital bitstreams over optical fibre. SDH is well suited for transporting Asynchronous Transfer Mode (ATM) frames.

TDM
TDM stands for Time Division Multiplexing. It is a type of (usually digital) multiplexing in which two or more signals are transferred apparently simultaneously as sub-channels in one communication channel, but are physically taking turns on the channel which is divided into time slots.

SDSL
SDSL stands for Symmetric Digital Subscriber Line. This is a variation of DSL technology where the downstream and upstream data rates are equal.

UMTS
UMTS stands for Universal Mobile Telephony System and is the family name for 3G technologies, as opposed to GSM which is the family name for 2G mobile technologies. UMTS is based on Wideband CDMA and is defined by the 3GPP.

SMS
SMS stands for Short Messaging Service. It is available on digital networks, typically enabling messages with up to 160 characters to be sent or received via the message centre of a network operator to a subscribers mobile.

VoIP
VoIP stands for Voice over Internet Protocol. It is any of a family of methodologies, communication protocols, and transmission technologies for delivery of voice communications and multimedia sessions over Internet Protocol (IP) networks, such as the Internet.

SNMP
SNMP stands for Simple Network Management Protocol. It is an Internet standard protocol for managing devices on IP network such as routers, switches, servers, workstations, printers and modem racks. It is commonly used in network management systems.

WSD
WSD stands for cognitive devices which use shared spectrum yielded by the Digital Dividend process.

TCPIP
TCPIP stands for Transmission Control Protocol/Internet Protocol. It is the basic communication protocol of the Internet and can also be used as a protocol in a private network.

WAN
WAN stands for Wide Area Network. A WANs is a computer network that covers a broad area and connects other networks together.

TDD
TDD stands for Time Division Duplex. In fixed wireless PMP systems that use TDD, a single frequency channel is used to transmit for the both the uplink and the downlink.

WiMAX
WiMAX is a global wireless metropolitan area network standard. It operates at both licensed and license-exempt frequencies (2.5GHz, 3.5GHz and 5.8GHz) and in PTP as well as PMP configurations

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