Global analysis of 3G spectrum auctions reveals the UK may struggle to roll-out 4G services and preserve competition in the long term
15 December 2011 – The high costs paid by mobile operators in their bids to acquire spectrum for last-generation 3G services affected the competitive landscape in many mobile markets and hindered the roll-out of 3G network infrastructure, according to a global analysis* conducted by international law firm Freshfields Bruckhaus Deringer. The findings suggest the UK could face obstacles in its bid to preserve competition in the mobile market and roll-out 4G services from 2013.
Mobile operators paid more than $150bn for 3G mobile licenses worldwide during the preceding decade but a third (28%) of the auctions examined involved license winners which failed to deliver 3G services. Where deadlines for roll-out were imposed, more than half (55%) were not met by one or more of the license winners.
Natasha Good, partner in Freshfields’ telecommunications, media and technology sector group says, “Spectrum auctions for 3G mobile technologies have been significant revenue generators for treasuries worldwide. Auctioning spectrum to the highest bidder can be an effective way of plugging holes in domestic budgets.”
“Competition and expectations of charging consumers for data services encouraged operators to pay high prices for 3G licenses. But they also paid the price of finding it difficult to fund 3G infrastructure. In extreme cases, the combined cost meant some mobile operators failed to roll-out 3G services at all, to the detriment of consumers and the industry’s competitive landscape.”
The most successful countries by total revenue raised – Germany ($46bn) and the UK ($34bn) – were among those to encounter difficulties. The high cost of rolling out 3G services affected two of the six license winners in Germany. One operator returned its license and another froze development of its planned 3G network. The spectrum usage rights have meanwhile been revoked – without any refund of the $10bn paid for the spectrum.
While the five UK license winners achieved the coverage levels prescribed, one mobile operator missed the deadline to achieve this level of coverage. The UK’s competitive landscape has also reduced post-3G following the merger of Orange and T-Mobile.
Meeting the costs of 3G
The difficulties encountered post-auction led some regulators to adopt a more flexible approach to ensure post-sale obligations were met. While the Australian regulator initially prohibited spectrum license winners from collaborating to deliver 3G network infrastructure requirements, it later reversed its decision. Telstra and H3G and Optus and Vodafone subsequently forged two joint ventures.
Natasha adds, “The high cost of rolling out 3G network infrastructure has triggered market consolidation in many places. Mobile operators opted to forge joint ventures or network sharing arrangements to retain their 3G licenses and save money. This gave operators greater pricing power, boosting revenue and earnings while maintaining competition.”
Should the state pay?
While reaping the financial benefits has been a motivation for governments in the majority of 3G auctions, not all countries have followed suit. In Japan – the first country in the world to adopt commercial 3G services – fees were not charged for 3G licenses.
The Chinese government allocated spectrum to three state-owned mobile operators provided they invest $58.5bn in 3G networks over a three-year period. The telecoms regulator also dictated that operators work collaboratively to build infrastructure. While the actual investment ($40bn) fell short, operators rolled out 3G services within 12 months of the license award.
Natasha comments, “Mobile operators have already proven reluctant to pay more than the underlying value of the spectrum designated for 4G. The exorbitant fees paid during the heady days of 3G led to a reduction in their share prices and debt ratings and they now have a better feel for what consumers will pay for data services.”
“Given the importance of next-generation mobile infrastructure to economic growth and competitiveness, it’s interesting that some governments such as France boldly structure 4G auctions so mobile operators pay the highest price. A more co-operative approach between governments, regulators and mobile operators may better serve business and consumers.”
4G spectrum auctions
Recent 4G spectrum auctions have encountered similar challenges. Germany’s auction rules were structured to encourage competition and create a level playing field by limiting the number of blocks bidders with frequency in the 900MHz bandwidth could acquire. Newcomers were allowed to bid for more.
Natasha comments, “The three dominant players emerged as the key winners in the 4G spectrum race in Germany. A fourth operator had to pull out of bidding for spectrum in the 800 MHz bandwidth – the frequency likely to be used for new 4G networks – which has fuelled rumours about consolidation in the Germany mobile market.”
“The UK’s draft auction rules explicitly aim to preserve competition but as we’ve seen with 3G and Germany’s auction of 4G, it’s debatable whether the UK mobile market will realistically continue long term in its current form post-4G. Mobile termination rates are being squeezed, voice is declining and there’s a huge amount of data coming across the networks. Where will the revenue come from?”
“In structuring the auction in this way, the UK government may have another motive. Four operators, as opposed to two or three, will enhance competitive tension around the roll-out. Perhaps the government would be content to let networks be shared later in the day to satisfy the appetite to be well-connected sooner rather than later.”
Natasha concludes, “Mobile virtual network operators are also a real driving force behind the 4G spectrum sale process. Data services are squeezing the networks. It will be interesting to observe whether mobile virtual network operators enter the fray and bid for 4G or mobile operators seek to join forces with them to meet the costs of rolling out next-generation infrastructure.”
*Freshfields Bruckhaus Deringer examined 3G and 4G spectrum auction sales between 2000 and 2010 in the world’s leading mobile markets including France, Germany, Italy, Spain, the UK, Australia, the US, China and Japan. The analysis also included 3G auctions in Mexico, Poland, Switzerland and Turkey.