The UK’s approach to spectrum auctions has, in common with those of many other countries, attracted criticism for various reasons, including government greed for maximum revenues (especially in the case of early 3G auction). But the decision by regulator Ofcom not to enforce defragmentation in the mid-band seems to have worked, as Telefónica’s O2 and Vodafone, the country’s second and third largest MNOs by subscriptions, traded allocated spectrum to create more efficient blocks.
This follows the conclusion of the UK’s auction of low- and mid-band spectrum in March 2017, raising £1.356bn ($1.892bn) in a process that again draw criticism for leading to the fragmentation. Ofcom had divided the sale of spectrum in the 3.4 GHz to 3.8 GHz band into two auctions, the first of which concluded three years ago in March 2018, when 40 MHz of spectrum within the 2.3 GHz band was made available, initially to improve existing 4G services, alongside 150 MHz in the 3.4-3.6 GHz band for future 5G roll-outs.
Before then, at least some of the four operators had been lobbying for a single auction covering the whole coveted mid-band space from 3.4 GHz to 3.8 GHz, precisely to avoid subsequent fragmentation. But Ofcom insisted that, because some spectrum in that band was available in 2018, but not all would be cleared until around now, 5G roll-out would be hastened if operators could at least get their hands on some as soon as possible.
Ofcom suggested instead that spectrum be exchanged to create more efficient contiguous bands, while resisting further pressure to enforce such actions through regulatory steps such as revoking and reissuing licenses. The situation was further complicated by Three UK’s ownership of a substantial amount of the mid-band spectrum, via its 2017 purchase of UK Broadband, a subsidiary of Hong Kong’s PCCW. PCCW had amassed 40 MHz across the 3.4 GHz, 3.6 GHz and 3.9 GHz bands, in a 2008 auction focused on fixed wireless plus the acquisition of assets from ISP Freedom4 in 2010.
These allocations were renewed indefinitely in 2014, and mobile hand-off was permitted, with hopes this would enable a new nationwide mobile broadband service. In the event, for various reasons including financial constraints, UK Broadband’s service only extended as far as Swindon, Reading and central London, and only supported fixed wireless. With operating losses about eight times revenues the writing was on the wall and PCCW ran out of patience, selling UK Broadband to Three’s for £250m in May 2017. The price reflected the future value of the spectrum held even though it was still dormant at that time.
This contributed to Three’s handsome spectrum holding in that 3.4 GHz zone, reversing the smallest MNO’s significant spectral disadvantage in 4G. The 3.5 GHz situation turned out to be a thorn in the side for other operators. The problem was that Three had little incentive to trade because it possessed all the mid-band spectrum it needed and if anything stood to lose competitive ground by conceding some to others so that they could defragment their holdings.
In those circumstances O2 and Vodafone did the best they could, and their trading just completed has resulted in a contiguous block of 80 MHz for the former. Vodafone, in turn, has at least brought the pieces that make up its 90 MHz of spectrum far closer together. The operator seemed satisfied. “The result of this auction and our agreement with O2 will help us continue our mission of connecting our customers for a better future,” said Ahmed Essam, CEO of Vodafone UK. “It means we have the best possible spectrum to continue giving our customers a fast and reliable 5G service.”
However, it is likely that Three may also be incentivized to reband its spectrum, so that Vodafone can unite its holding entirely.