What can mobile operators do to boost their airwaves capacity between spectrum auctions? Buy another operator, which is just what 3, the smallest of the UK's four mobile network operators, has decided to do.
3 is forever grumbling about its shortage of spectrum: Of all the airwaves allocated to the main service providers, 3 controls about one eighth, while BT, which became its biggest mobile rival after acquiring EE last year, owns more than 45%. Vodafone, meanwhile, sits on nearly a third, according to Light Reading's calculations. That imbalance puts 3 at a colossal disadvantage when it comes to the provision of high-speed mobile Internet services, 3 insists. (See UK's 3 Huffs & Puffs That It's Short of Air.)
Owned by Hong Kong's CK Hutchison, Three UK has repeatedly complained to UK regulator Ofcom about the unfairness of the spectrum situation, but with disappointing results. Although Ofcom has agreed to impose some restrictions on BT Group plc (NYSE: BT; London: BTA) during an upcoming spectrum auction, it has not gone far enough for Dave Dyson, 3's CEO. That is no great surprise: Having waved through the deals that led to the current imbalance, Ofcom would be acknowledging its own historical failings if it attempted a major redistribution of spectrum now. But the regulator's resistance to change has driven 3 to look for alternative remedies.
Those were evident this week when 3 announced a £250 million ($309 million) takeover of a small company called UK Broadband, which trades under the Relish brand and whose current owner PCCW Ltd. (NYSE: PCW; Hong Kong: 0008) is also a Hong Kong firm. Having once hoped to disrupt the UK broadband market using LTE TDD technology to provide fixed wireless broadband services, UK Broadband Ltd. serves as few as 15,000 customers, a tiny fraction of the roughly 9.2 million "active" subscribers on 3's books. But it also holds licenses covering about 208MHz of spectrum, according to data from the European Communications Office, compared with 3's 74.9MHz. (See 3 UK Acquires UK Broadband – And Lots More Spectrum and 4G: Live in London.)
These airwaves look especially enticing because some of them occupy the 3.5GHz and 3.7GHz spectrum bands, which could play a critical role in current and, especially, future mobile broadband communications. Because the 28GHz spectrum attracting interest in the US, Japan and South Korea is reserved for satellite communications elsewhere, Europe's telecom industry is instead focused on bringing 3.5GHz and other "mid-band" spectrum into use with 5G, a next-generation mobile technology that operators could begin deploying in 2020.
Ofcom's upcoming spectrum auction will include 3.5GHz airwaves, but a UK Broadband takeover would secure valuable 5G airwaves for 3 in advance of that sale, and at relatively low cost. Besides the upfront fee, 3 says it will make a £50 million ($62 million) deferred payment as credit toward a wholesale deal for UK Broadband on 3's network. The overall fee of £300 million ($371 million) works out at roughly £0.02 ($0.02) per MHz per member of the UK population (a common means of assessing the value of spectrum payments). To put that in context, 3 paid as much as £0.35 ($0.43) per MHz per member of the population for its 800MHz 4G concessions in early 2013.
UK Broadband's airwaves look attractive in other ways, too. In the 3.7GHz band, the company owns 2x84MHz of contiguous spectrum, meaning there are no gaps in its holding. That will make it easier for 3 to run higher-speed services over the spectrum than if it were broken up into smaller chunks. (UK Broadband also holds the rights to capacity in the 3.9GHz, 28GHz and 40GHz bands.)
While the deal has not yet secured regulatory approval, it will probably not encounter the same opposition as 3's doomed £10.25 billion ($12.7 billion, at today's exchange rate) approach to O2, the UK's second biggest mobile operator, last year. A subsidiary of Telefónica , O2 would have been merged with 3 to create a mobile giant. It would also have helped 3 to address its spectrum shortcomings, giving the operator another 91.4MHz across a variety of 2G, 3G and 4G bands. But authorities rejected the deal, concerned it would diminish competition in the UK mobile market. Given UK Broadband's marginal role, they seem unlikely to have the same reservations this time round.
— Iain Morris, , News Editor, Light Reading