|Today Ofcom issued its long awaited statement on the competition issues and auction regulations for the award of the 2.3 and 3.4 GHz spectrum bands (the "Auction"). The statement is in response to the consultation issued by the regulator in November 2016.
The 2.3 GHz spectrum band is expected to be used immediately by UK mobile network operators ("MNOs") to support mainstream mobile devices and will provide additional 4G capacity. The 3.4 GHz spectrum band is likely to become available in 2-3 years' time and it is not currently supported by most mobile devices. It is expected to support the initial deployment of 5G mobile services.
In light of concerns that the Auction could give rise to a very asymmetric distribution of spectrum holdings between MNOs, Ofcom decided to impose two separate caps on the amount of spectrum a single MNO may hold:
Taken together, these two caps prevent BT/EE from bidding in the Auction for spectrum in the 2.3 GHz band. They will also restrict BT/EE from being awarded more than 85 MHz in the 3.4 GHz band and prevent Vodafone from being awarded more than 160 MHz across the 2.3 GHz and 3.4 GHz bands together.
The statement also sets out an approximate timeline going forward, with Ofcom currently anticipating a late October to November 2017 timeframe for the start of the Auction.
Demand for connectivity has increased significantly in recent years, driven by improved smartphone capability, high smartphone penetration, the availability of data rich services and applications, and the development of LTE/LTE-A standards for mobile communications. Whilst projections of future growth are uncertain, Ofcom's statement acknowledges the broad consensus that mobile data consumption will continue to increase sharply over the next decade, placing further pressure on MNOs to invest in increasing the capacity of their networks in order to meet growing consumer expectations.
There are several ways for MNOs to increase their network capacity, including by deploying additional radio spectrum. Given that radio spectrum is a scarce and finite resource, the way in which it is allocated has important implications for users of mobile communications services and the UK economy. The UK market is currently made up of four MNOs - BT/EE, Vodafone, Hutchison 3G (operating as Three UK) and O2 - and the operators hold asymmetric shares of mobile spectrum, with BT/EE holding the largest share. The MNOs are supplemented by a number of Mobile Virtual Network Operators ("MVNOs") which each have access to an MNOs network through a commercial agreement and offer their own mix of services to end customers.
As part of the Auction, Ofcom plans to award 190MHz of spectrum in total across the 2.3 GHz and 3.4 GHz bands, which represents an increase of 29% of the total mobile spectrum currently available in the UK. This is part of the Public Sector Spectrum Release ("PSSR") Programme which aims to make 500 MHz of spectrum below 5 GHz available for civil users by 2020.
Ofcom has statutory duties under the Communications Act 2003 to further the interests of citizens in respect of communications matters and to further the interests of consumers in relevant markets, where appropriate by promoting competition. In doing so, the Ofcom statement confirms that it has a duty to secure the "optimal use of spectrum". In assessing the likely effects on competition of awarding the 2.3 GHz and 3.4 GHz bands, Ofcom identified two potential concerns: (i) the risk that following the Auction, there would no longer be four credible MNOs in the UK market; and (ii) the risk that very asymmetric spectrum holdings might weaken competition between those operators – even if four credible MNOs do remain.
Ofcom first consulted on the Auction in November 2014 and originally proposed to hold the Auction by the end of the financial year 2015 / 2016. This was subsequently followed by further related statements and consultations in May 2015 and October 2015. In December 2015, Ofcom published a statement regarding its decision to delay commencing the Auction process pending the outcome of the European Commission's ruling on Hutchison 3G's proposed acquisition of Telefónica UK (operating as O2).
On 21 November 2016 Ofcom issued a further consultation on competition issues and auction regulations. The regulator was particularly concerned about the consequences of spectrum asymmetry in the 2.3 GHz band – given that such spectrum will be immediately useable after the Auction. The 3.4 GHz band is not currently useable, or supported, in the same way and, by the time it becomes available, Ofcom expected other spectrum would be available in the 700 MHz band and potentially in the 3.6 – 3.8 GHz bands to address any competition issues, if necessary.
In its November consultation, Ofcom therefore proposed:
Whilst an overall mobile spectrum cap was also considered as part of some of the options under the consultation, the above proposal was thought to be more appropriate at the time. Ofcom also considered it inappropriate to impose a coverage obligation on the spectrum awarded; this was based on its view that the spectrum which would be made available in the Auction is "best suited for delivering greater network capacity, not achieving wide geographic coverage".
Ofcom's assessment has evolved in some areas since the November 2016 consultation. Ofcom identified changes affecting the UK market since that date, giving rise to changes in the "immediately useable" and "future useable" spectrum holdings of each of the MNOs quoted in the November consultation.
These market changes include: (i) Hutchison 3G's acquisition of UK Broadband (increasing its share of overall mobile spectrum which will be useable in future); (ii) the 1400 MHz band being available for mobile use earlier than originally anticipated and potentially as early as 2018 (of which Hutchison 3G (Three UK) and Vodafone each hold 20 MHz); (iii) the 3.6 – 3.8 GHz band not being fully useable in an equivalent timeframe to the 3.4 GHz band (this affects the extent to which Ofcom can rely on this spectrum band to address any future competition concerns that might arise); and (iv) the fact that Ofcom has seen credible evidence that MNOs may be less able to adapt networks to increase capacity without additional spectrum.
In its revised assessment of competition issues, Ofcom considers that the risk of any of the four MNOs ceasing to be a credible competitor in the market because of their spectrum holdings is low. However, the regulator went on to state that a very asymmetric distribution of immediately useable spectrum represents a significant risk to competition and those with smaller spectrum holdings may not be able to "compete so strongly" in the future as those with much larger spectrum holdings.
Of the four mobile network operators currently in the UK, BT/EE holds 42% of the total amount of immediately useable mobile spectrum, compared with 29% for Vodafone, 15% for Three UK and 14% for O2. These figures also include spectrum in the 1400 MHz band.
The 255 MHz cap set by Ofcom on the amount of mobile spectrum that is immediately useable after the Auction seeks to address spectrum asymmetry in the "first transitional period" (i.e. the period immediately after the Auction until the time when the 3.4 GHz spectrum becomes useable, which it expects to be 2019 – 2020). This cap will reduce BT/EE's spectrum holding to 39% after the Auction.
The secondary cap of 340 MHz on the overall amount of mobile spectrum a single operator may hold represents 37% of the mobile spectrum that Ofcom expects to be useable within the same timescales as the 3.4 GHz band (including the 190 MHz available in this Auction plus the 80 MHz in the 700 MHz band that Ofcom plans to award in 2019). It is also consistent with the overall cap set for Ofcom's 800 MHz and 2.6 GHz spectrum auction in 2013, which was also set at 37% of the relevant mobile spectrum at that time. Ofcom considers this secondary cap to be capable of effectively addressing the concern of spectrum asymmetry in the "second transitional period" (i.e. starting when the 3.4 GHz spectrum is useable (2019 – 2020) and ending when the 3.6 – 3.8 GHz becomes useable (potentially 2022)). Ofcom expects the 700 MHz band to be useable in this period as well.
The two caps will prevent BT/EE from bidding for spectrum in the 2.3 GHz band. They will also prevent BT/EE from being awarded more than 85 MHz in the 3.4 GHz band and prevent Vodafone from being awarded more than 160 MHz across the 2.3 GHz and 3.4 GHz bands together. There will be no restriction on the amount of spectrum Hutchison 3G, O2 or other bidders could be awarded in the Auction.
In addition to the competition issues, today's statement also sets out some further decisions regarding the Auction Regulations and recaps the decisions that Ofcom has already taken and published regarding other aspects of the award. Ofcom also published a consultation document on the proposed Auction Regulations that have been amended to take account of the changes set out in the statement.
Given that a significant part of the spectrum which is the subject of the Auction is immediately useable for the provision of mobile services, Ofcom considers it is important to proceed to hold the Auction as soon as possible. The statement sets out an approximate timetable for next steps as follows:
Ofcom has recognised the potential for challenge of its decision and stated its view that any claim for judicial review should be brought promptly within six weeks of the date of this statement, with a request that the court expedites any such challenge. The time frame for judicial review is usually "promptly" and in any event within three months of the relevant statement.