Assessment of future mobile competition and proposals for the award of 800 MHz and 2.6 GHz spectrum and related issues
1.1 This consultation sets out our proposals for the largest ever single award in the UK, of internationally harmonised mobile spectrum - the 800MHz and 2.6GHz bands. We expect this spectrum to be used to deliver the next generation of mobile broadband services, using fourth generation (4G) mobile technologies such as LTE and WiMAX. These mobile broadband services might have speeds approaching today's fixed broadband services, with coverage significantly better than today's 3G coverage instead approaching today's 2G (voice) coverage.
1.2 The award of this spectrum is vital to the UK's economic and social growth. It will enable mobile operators to meet the significant growth in demand for mobile data. This is being fuelled by growth in the take up of smart phones and tablets, offering services such as video streaming, social networking and mobile gaming, as well as applications such as messaging and email.
1.3 Access to this spectrum is expected to be vital to the future commercial success of existing and prospective new entrant mobile network operators. The proposals set out in this consultation are likely to shape the future competitiveness of the mobile sector for at least the next decade. We set out in this consultation document our assessment of the impact of the distribution of spectrum on future competition in mobile markets, and our proposals for the rules that should apply, in the auction and more generally, to promote competition.
1.4 Part of this spectrum - the 800 MHz band - is also expected to be key to the economic delivery of next generation mobile broadband services in less densely populated areas. This award therefore represents an important opportunity to ensure that such services are made available in less urban areas, as well as in the more commercially attractive more densely populated areas. This consultation therefore also sets out proposals for how we might ensure that next generation mobile broadband services are available throughout the UK for the benefit of citizens and consumers.
1.5 The two bands of spectrum to be awarded at 800 MHz and 2.6 GHz comprise 250 MHz of mobile spectrum. This is equivalent to three-quarters of the mobile spectrum in use today and 80% more than was awarded through the 3G auction in 2000.
1.6 The lower frequency 800 MHz band is part of the digital dividend, which is being freed-up as the UK switches from analogue to digital TV. This spectrum is ideal for wide-spread and indoor mobile coverage. The 2.6 GHz band is at a higher frequency, and is ideal for delivering the capacity needed to deliver higher speeds and provide services simultaneously to many users. The combination of low and high frequency spectrum creates the potential for next generation mobile broadband services to be widely available across the UK, while at the same time having the capacity to cope with significant demand, even in urban centres.
1.7 This consultation is about how Ofcom should award this new spectrum in a way that secures the best use for the benefit of citizens and consumers.
1.8 The award of the 800 MHz and 2.6 GHz bands was referred to in the Government's Direction to Ofcom made in December 2010 (the Direction). The Direction requires us to:
- assess likely future competition in markets for the provision of mobile electronic communication services after the conclusion of the award of 800 MHz and 2.6 GHz bands;
- hold an auction of the 800 MHz and 2.6 GHz bands as soon as reasonably practicable after concluding the competition assessment;
- revise the annual licence fees paid for 900 MHz and 1800 MHz to reflect full market value having particular regard to the sums bid for licences in the 800 MHz and 2.6 GHz auction.
1.9 This consultation document is the first in a series. It sets out our competition assessment and proposals for how to award the available spectrum at 800 MHz and 2.6 GHz and for how to authorise the use of new technologies in mobile bands that are currently in use for 2G and 3G, at 900 MHz, 1800 MHz and 2.1 GHz. We have developed these proposals so as to fulfil the requirements of the Direction and maximise benefits to citizens and consumers from spectrum use, consistent with our statutory duties.
1.10 This consultation document contains proposals for the award in the following areas:
a) how to promote competition in mobile markets following the auction;
b) whether to include rollout or coverage obligations in the new licences;
c) what non-technical licence conditions are likely to promote optimal use of this spectrum;
d) which spectrum packaging and auction design are likely to support the most efficient assignment of spectrum; and
e) how to set annual licence fees for 900 MHz and 1800 MHz spectrum in accordance with the Direction.
1.11 Further documents will follow as part of the preparations for the award. These will cover specific technical issues, in particular our proposals for technical conditions to manage the risk of interference into uses that are adjacent to the 800 MHz and 2.6 GHz bands including Digital Terrestrial Television (DTT). We also expect to provide further updates on our programme of spectrum clearance in the 800 MHz band and the radar modification programme at 2.7 GHz.
1.12 The purpose of this consultation is to seek input from stakeholders and any other interested parties. In particular, whilst this consultation document contains a number of specific questions, we are not seeking to limit the issues on which respondents may wish to comment and respondents are invited to include representations on any issues which they consider to be relevant.
Promoting future competition in mobile markets
1.13 We have carried out a competition assessment as required by the Direction and as a consequence considered carefully whether it would be appropriate for us to put in place measures in the auction of the 800 MHz and 2.6 GHz bands to promote competition. We consider that there are risks to future competition if bidders could bid for and acquire any amount of spectrum in an open auction and these are sufficient to justify putting in place measures designed to promote competition.
1.14 We believe that competition at the national wholesale level is essential to future competition in mobile markets and to maximising consumer and citizen benefits. To be a credible national wholesaler, a competitor is likely to need enough spectrum of the right kind to be able to run a national network of their own or to negotiate a network sharing deal with a national competitor. Our analysis suggests that future competition between credible national wholesalers could be at risk if we do not take action now to promote competition through measures in the award of 800 MHz and 2.6 GHz.
1.15 We are proposing to promote competition at the national wholesale level in two main ways.
1.16 First we propose to ensure that after the auction, subject to demand, there are at least four holders of a minimum spectrum portfolio that mean they are credibly capable of providing high quality data services in the future. We currently believe that to be a credible national wholesaler an operator is likely to need at least as much spectrum as one of the following minimum spectrum portfolios. This is however a matter on which we are particularly keen to receive views and evidence from stakeholders in response to this consultation.
a) 2x5 MHz of sub-1 GHz spectrum and 2x20 MHz of 2.6 GHz spectrum; or
b) 2x5 MHz of sub-1 GHz spectrum and 2x15 MHz of 1800 MHz spectrum; or
c) 2x10 MHz of sub-1 GHz spectrum and 2x15 MHz of 2.6 GHz spectrum; or
d) 2x10 MHz of sub-1 GHz spectrum and 2x10 MHz of 1800 MHz spectrum; or
e) 2x15 MHz of sub-1 GHz spectrum.
1.17 We propose to implement this through use of spectrum 'floors' in the auction. This involves disregarding any potential auction outcome in which a minimum number of licensees (currently proposed to be four) do not win at least the minimum amount of spectrum. We expect competition in the auction to determine how much spectrum each bidder in fact wins and anticipate that this may well exceed the minimum that we propose to set, but we nevertheless consider it important for competition that we put in place this back-stop provision.
1.18 Second we propose to set safeguard spectrum caps. These would place restrictions on the amount of spectrum each participant could win in the auction. The proposed caps are a maximum of 2x27.5 MHz of sub-1 GHz spectrum and 2x105 MHz of mobile spectrum in total. These proposals are intended to provide flexibility to bidders to express their preferences, while preventing highly asymmetric outcomes that might distort competition in the future.
1.19 We have also considered the potential for market entry. In proposing a minimum of four licensees capable of being credible national wholesalers it is important to realise that we are not ruling out the potential for some of those licensees to be new national wholesale entrants. We would not be surprised if one or more prospective new entrants were to bid for the minimum spectrum portfolios that we have identified; for example in the recent 800 MHz auction in Sweden two of the bidders were prospective new entrants. Our proposals are neutral as to the identity of the four licensees; they seek to provide all parties with equality of opportunity to bid for sufficient spectrum to be credible national wholesalers in the future.
1.20 We have also received suggestions that entry by sub-national vertically integrated operators might be possible and of interest to some companies, and that this could bring benefits to consumers through increased competition and innovation. It has been suggested that such operators would need access to sufficient spectrum to deliver competitive mobile services indoors and in localised outdoor environments such as campuses. The suggestion is that a number of such operators could share a block of 2.6 GHz spectrum. They may also need to secure wholesale access to services provided by a national wholesaler to complete their coverage.
1.21 We believe that there is a good case for ensuring that bidders with an interest in such shared low-power use can compete in the auction with those bidders who have an interest in individual high-power use, for access to at least a part of the 2.6GHz spectrum. We include proposals for how this might be achieved in this consultation.
1.22 We furthermore believe that there may be benefits for consumers in taking measures in the auction to actually reserve spectrum some spectrum at 2.6 GHz for such shared low-power use, although the extent of such benefits is uncertain. Any reservation might however impose costs, such as reducing the opportunity for other bidders to win large contiguous blocks of 2.6 GHz spectrum, which may affect their ability to offer high speed services. At this stage, we believe it is unclear whether the benefits would outweigh such costs. As a result we have set out a number of options for consultation on this issue.
1.23 We are also proposing to liberalise the use of mobile frequencies at 900 MHz, 1800 MHz and 2.1 GHz for LTE and other technologies at the earliest opportunity, following the conclusion of discussions in European groups. We consider that this would be likely to be in the interests of consumers, and do not believe that it would raise competition issues not already addressed through the measures we propose to put in place to promote competition set out above.
Promoting the availability of future mobile services for citizens and consumers
1.24 We expect that over time new mobile services using LTE and possibly other advanced technologies will become available to a large proportion of the UK population as a result of the competitive market we are seeking to promote. However, the speed at which such services are provided across the UK is uncertain. Moreover, there will always be limits to the extent and depth of coverage that will be commercially viable for any mobile network; although it is difficult for us to anticipate in advance what that level might be.
1.25 It is possible for us to include coverage obligations in auctioned licences to require certain minimum levels of coverage to be achieved by certain dates. We believe that there is a case for doing so in this case in order to guarantee a minimum coverage level for consumers and citizens. But in specifying the obligation, it is necessary to ensure that it is proportionate and does not impose too great a cost relative to its benefits.
1.26 We propose to include a coverage obligation in one licence for the 800 MHz spectrum to deploy an electronic communications network that is capable of providing mobile telecommunications services with a sustained downlink speed of not less than 2Mbps with a 90% probability of indoor reception to an area within which at least 95% of the UK population lives. We believe this should result in coverage of future mobile broadband services that approaches today's 2G coverage by the end of 2017. We consider that such an obligation would be proportionate taking in to account the likely costs and benefits. A key question on which we are seeking views from stakeholders is the best way to specify such an obligation, in particular as regards coverage in more rural areas.
1.27 We have also considered whether the award of 800 MHz and 2.6 GHz should play a role in addressing existing mobile not-spots, particular for voice coverage. We consider that improving today's mobile coverage, in particular for voice, has the potential to benefit consumers and citizens in areas currently not covered, not least in terms of basic social communications, safety and security and dealing with emergency situations. We are already pursuing a number of initiatives in this area, namely facilitation of discussions to address railway co-ordination problems, research on the extent of specific short falls in road coverage, and improved consumer information. In addition we will shortly be taking forward a new strand of work to better understand the costs and benefits of more comprehensive solutions to existing voice not-spots, and to assess the different mechanisms available to us to bring these about. Options which we will consider as part of this work include, for example, variations to existing licences possibly combined with amendments to spectrum licence fees. We will bring forward proposals on this later this year. For these and other reasons we are therefore proposing not to use the award to address existing voice not-spot issues.
1.28 We are also consulting on the possibility of retaining the power to partially revoke the awarded licences in specific circumstances, even during the initial period of 20 years. The specific circumstances of concern are where the spectrum is needed to meet a specific public policy goal (such as the provision of broadband in rural areas), the spectrum is unused, and the licensee is unable to unwilling to provide the required service even when offered appropriate funding.
Non-technical licence conditions to promote optimal spectrum use
1.29 Our proposals for non-technical conditions are consistent with our previous approach to licences granted through auction. We consider that the licences in this award should be UK-wide and technology and service neutral. We propose that all types of spectrum trading should be permitted for individual high-power licences, subject to a review of the impact of the proposed trade on competition; in the case of concurrent low-power licences at 2.6 GHz (if any), only those types of trades that do not increase the number of licensees in the band would be permitted.
1.30 We propose that the licences be of indefinite duration, continuing in force until relinquished or revoked. During the initial period of 20 years our powers to revoke a licence would be limited to specific circumstances, and would not include the power to revoke for spectrum management reasons. Thereafter we would be able to revoke a licence for spectrum management reasons on five years' notice.
1.31 We also plan to include conditions in the licences requiring licensees to provide us with information regarding their use of the licensed frequencies. We may publish this information in order to promote opportunities for more efficient use of spectrum and to facilitate potential spectrum trades.
A combinatorial clock auction with generic lots for bidders to aggregate
1.32 The competitive process through which we propose to assign the rights to use the 800 MHz and 2.6 GHz bands is a combinatorial clock auction. This follows the broad structure that we have previously used for two auctions (L-band and 10 to 40 GHz, both in 2008) and that we had put forward in 2008 for a stand-alone award of the 2.6 GHz band.
1.33 We have further developed this structure with some specific rules for the circumstances of this award, particularly to implement our proposals to promote competition through at least a minimum number of holders of spectrum portfolios that we consider necessary to be a credible national wholesale service provider.
1.34 We propose to make the spectrum available in the auction in as generic a way as possible, subject to technical conditions, in lot sizes that are consistent with the sizes of likely usage requirements. This means having several categories of 2x5 MHz lots at 800 MHz, a single category of 2x10 MHz lots for individual high power use at 2.6 GHz, and a potential category for low-power use by up to 10 concurrent licensees at 2.6 GHz.
1.35 We are still investigating the precise nature and extent of technical restrictions that are likely to apply to the available spectrum, so we have put forward an illustrative packaging arrangement for the purpose of this consultation.
1.36 We are not proposing to allow relinquishment of 900 MHz or 1800 MHz spectrum through the auction, but we have included proposals for how this would work if there were a case for doing so.
1.37 The circumstances of this auction may also justify a particular approach to reserve prices to guard against certain inefficiency risks. Such an approach would lead to reserve prices that would be higher than under our previous approach of using a value that is just sufficient to deter frivolous bidding. They may be based on a principle of recovering the costs of activities to clear the spectrum and/or some estimate of the likely value of the spectrum.
1.38 We are planning to hold the auction as soon as practicable, which we currently anticipate to be the first half of 2012.
Annual licence fees for 900 MHz and 1800 MHz spectrum that reflect full market value
1.39 The Direction requires us to revise the level of annual licence fees for 900 MHz and 1800 MHz spectrum to reflect full market value, having particular regard to the sums bid for licences in the auction for the 800 MHz and 2.6 GHz bands.
1.40 We envisage that the bids in the auction will provide the relevant basis for setting these fees as they are likely to provide the most reliable source of information on the value of similar spectrum.
1.41 We have developed detailed proposals for determining the revised fees, which are set out in this consultation. They comprise two principal steps. The first step is to identify lump sum amounts from the auction that provide an estimate of the full market value of various spectrum bands, from which we can derive annual fees. The second step is to convert this lump sum information into annual licence fees in constant real terms (i.e. annual fees indexed on a measure of inflation).
1.42 We are including a discussion of these issues in this consultation as we believe stakeholders are likely to wish to understand the likely approach ahead of the auction. However, we believe that we cannot reasonably decide on the final approach until after the auction and plan to consult again accordingly at that time.
1.43 We are inviting responses to this consultation by 31 May 2011. We plan to hold a number of events during this period, to present our proposals and receive early feedback from stakeholders.
1.44 We are also planning to publish one or more consultation documents relevant to this award in the next few months covering:
- our detailed proposals for the steps to be taken to protect adjacent DTT use; and
- our proposals for the technical conditions more generally for use of the 800 MHz and 2.6 GHz bands, including a review of adjacency conditions.
1.45 Following these consultations, and subject to stakeholders' comments, we plan to set out our decision for the award in a statement in the autumn. Alongside that statement, we plan to publish draft auction regulations for statutory consultation.
1.46 We will then make the auction regulations as soon as practicable thereafter. We will aim to start the award process at the earliest opportunity, having given sufficient time for potential participants to prepare. We expect that the process would start in the first quarter of 2012 with the submission of applications by prospective bidders.