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UK's £1.4B '5G' Auction Looks Bad for Industry

Iain Morris

In 2000, when the UK government sold licenses for the spectrum that would support 3G services, it bagged a budget-boosting £22.5 billion ($31.6 billion) and went off on a public sector spending spree. It is a measure of just how much the telecom industry's outlook has darkened that today's "5G" auction, some 18 years later, has raised just less than £1.4 billion ($2 billion). The proceeds will barely extend to a few infrastructure repairs.

Indeed, they work out at just £0.11 ($0.15) per MHz per capita (a common industry measure), compared with the £2.75 ($3.85) that operators spent in 2000. Yet the companies that won spectrum in the auction forked out more than some analysts had expected. Fierce competition for the 3.4GHz band, which operators plan to use in future 5G networks, appears to have driven up the price. Those airwaves ended up raising about £1.15 billion ($1.6 billion). Bernstein, an analyst firm, had reportedly been expecting between one half and two thirds of that amount.

Table 1: Results of UK's 2.3GHz and 3.4GHz Auction

2.3GHz spectrum (MHz) 2.3GHz fee 3.4GHz spectrum (MHz) 3.4GHz fee
EE 0 0 40 £303 million
Telefónica UK 40 £206 million 40 £318 million
Three UK 0 0 20 £151 million
Vodafone UK 0 0 50 £378 million
Source: Ofcom.

That operators spent so heavily on these frequencies should perhaps not have come as a big surprise. Expectations were low because the experience of 3G and 4G suggests that 5G, which promises even faster mobile Internet connections, will not boost service revenues for telcos. Yet no operator wants to be at a 5G spectrum disadvantage to its rivals. (See Ericsson: 5G Unlikely to Kickstart Telco Spending and The Growing Pains of 5G.)

"The 3.4GHz spectrum band is hugely important for 5G, as it lets operators add extra capacity to their existing networks without having to add many new basestation sites," said Bengt Nordström, the CEO of the Northstream consulting business, in emailed comments. "This explains why the operators' bids for this band were so much higher than expected."

Unsurprisingly, all four existing network operators picked up licenses, while a prospective new entrant called Airspan came away empty-handed. The biggest spender by far turned out to be Telefónica UK, one of the country's weakest players. Splashing £318 million ($446 million) on 40GHz of 3.5GHz spectrum, it also coughed up £206 million ($289 million) for a 40MHz concession in the 2.3GHz band. That should help to improve its position in these mid-band spectrum ranges, where Telefónica UK Ltd. has looked badly off compared with its rivals.

Vodafone UK also spent heavily, investing £378 million ($531 million) in 50MHz of 3.4GHz spectrum, while BT Group plc (NYSE: BT; London: BTA)-owned EE secured 40MHz in that band for the fee of £303 million ($425 million). Three, a subsidiary of Hong Kong's Hutchison that operates the smallest of the country's four mobile networks, spent just £151 million ($212 million) on a 20MHz license in the 3.4GHz band. Added to its existing holdings, that leaves it with 60MHz of spectrum in the 3.4GHz band, on top of 84MHz between the 3.6GHz and 3.8GHz ranges, and means Three UK holds more 5G-suitable spectrum than any other player.

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The auction results will reinforce one concern about the UK market and leave another to fester. The first is that, along with some other European markets, the UK is in danger of lagging other parts of the world on the rollout of 5G services. As Nordström puts it: "That operators paid higher than expected prices is good for HM Treasury but not so good for consumers, as it leaves the operators with less money to invest in their 5G networks and services."

In Nordström's view, UK regulatory authority Ofcom was wrong to auction spectrum and should instead have agreed a license fee with each operator. China's regulator has previously followed that approach. By awarding spectrum to operators at minimal cost, it has ensured companies have more to spend on network deployment. In the UK, the unlikelihood a 5G auction would bring a new entrant into the market, and its failure to do so, makes "the idea of a competitive spectrum auction even more strange," according to Nordström.

Spectrum Holdings in UK (MHz)
Source: Ofcom, Light Reading.
Source: Ofcom, Light Reading.

The other concern is the broader spectrum imbalance in the UK market. Even though Telefónica closed some of the gap with its rivals, and Three has looked better off since a takeover of spectrum-rich UK Broadband last year, each holds less spectrum than market leader EE, and far less in some of the most useful bands. Based on Ofcom data from last summer, and Light Reading's own calculations, EE controls about a third of the available airwaves following today's auction, while Telefónica has less than a fifth.

Although it now has just less than a quarter of the available spectrum, Three has long complained about this imbalance. A dispute with BT previously threatened to hold up the 2.3GHz and 3.4GHz auction for much longer. That led some to worry the UK risked falling even further behind parts of Asia and North America on 5G development. Expect to hear similar spectrum grumbling before the next auction is due. (See Hot Air: UK 5G Spectrum Dispute.)

— Iain Morris, News Editor, Light Reading

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Gabriel Brown
Gabriel Brown,
User Rank: Light Sabre
4/9/2018 | 5:31:23 AM
Re: Compare UK with Sweden and Italy
Agree that spectrum fragmentation in the 3.4 to 3.8 band will be an issue in the UK.
Gabriel Brown
Gabriel Brown,
User Rank: Light Sabre
4/9/2018 | 5:29:41 AM
Re: Updates
I agree on the new entrant issue. Maybe the classic auction format has had its day and some new thinking is needed. 

Coverage targets seems like a good thing, and would in theory, moderate the price the auction achieves. One problem is that MNOs have proven adept at gaming these targets.

Beauty contests also have problems and there's certainly no guarantee that investment saved in spectrum will be invested in the network -- multinational operators are as likely to bank the gains and allocate capital elsewhere.
User Rank: Moderator
4/6/2018 | 8:51:04 AM
Compare UK with Sweden and Italy
Both Sweden and Italy are taking different approaches and in Sweden there will be a combination of block allocation and a geographical split with 100MHz almost reserved on a first come basis.

Of more concern in the UK auction and the subsequent 3.6-3.8GHz auction in 2H '19 is spectrum fragmentation - not one operator is going to be able to achieve a 100MHz 5G channel - the optimum as far as the vendors of 5G are concerned.
User Rank: Light Beer
4/6/2018 | 6:30:17 AM
Re: Updates
The orgin of spectrum auctions is that it became to cumbersome for regulators to manage beauty contests since they many time became court cases with delays etc.. I would speculate that it would still be the case if we fully went back to beauty contest again. I believe though that a hybrid model could work based on coverage/service requirements and caped fees.

My main argument against spectrum auctions is that mobile has become a mature industry where the the barrier to entry for new players is so high that it's a given that incumbents are buyers of the spectrum.It will more be a matter of how the spectrum will be allocated between the incumbents.

Taxes should be predicatable and fair and I have a hard time seeing that spectrum auctions meet any of those criteria. Since they are set up in sophisticated auction systems it appears the outcome is always a surprise for the analysts and experts. One could argue that auctions fees dwarfs in total revenue for operators but it's an outlay of cash when you have won the license so it's definately impacting investments around the time period for auction. It is also punishing mobile since fixed does not having corresponding fees or auctions. 
Gabriel Brown
Gabriel Brown,
User Rank: Light Sabre
4/5/2018 | 11:19:13 AM
Re: Updates
You could equally look at this the other way around: operators in the UK are confident enough in future demand to invest £1.4 blillion in spectrum. 

Given UK mobile retail revenues are ~£15 billion annualy, it's not a vast sum.

Auctions are intended to allocate spectrum to the party that can gain most economic advantage. It's not neccesarily the case that beauty contests are better for consumers overall. You pay tax one way or another!
User Rank: Blogger
4/5/2018 | 9:09:54 AM
This story has been updated to include a table and graphic, as well as details of spending per MHz per capita, since it was first published.
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