Have UK Operators Reached Consensus on Refarming or Must Ofcom Intervene?

May 1, 2009

Ever since the decision to allow the broadcast of 3G service over 900MHz and 1800MHz bands, the UK’s five operators have squabbled over how to best enact such changes.  The matter is complicated by the original distribution of 900MHz frequencies, which remain exclusive to Vodafone and Telefónica O2 on indefinite license terms. The two operators control equal portions of a 2x34.8MHz band in the 900MHz range and are highly opposed to any government intervention.

Meanwhile, the 1800MHz spectrum is distributed between Vodafone, Telefónica O2, Orange and T-Mobile, also on indefinite licenses. Three UK, the UK’s latest entrant, with 7% of all subscribers at the end of 2008, does not have access to either spectrum, although it has access to T-Mobile’s 1800MHz network. As part of the refarming strategy, Ofcom will remove technological restrictions on the 900/1800/2100MHz spectrums. The move would help free up much needed spectrum for mobile broadband services, helping the UK reach its Universal Broadband Initiative by 2012 and ensuring greater competition between UK’s five operators while providing welfare gains in the range of £5bn to consumers.

Vodafone and Telefónica O2 are vehemently opposed to any changes in the existing spectrum allocation. The operators feel that any intervention by Ofcom would hurt their competitive position and endanger service quality. Likewise, some MVNOs that use Vodafone’s network have voiced concern over the effects of 900MHz redistribution on existing network capacity and quality.    Moreover, with the majority of the 1800MHz spectrum in the hands of Orange and T-Mobile, the 900MHz operators would be at an obvious disadvantage. Neither Vodafone nor Telefónica O2 has offered any feasible solutions to redistributing the 900MHz spectrum. Recently, Telefónica O2 and Orange suggested that the government divide up the digital dividend, the 800MHz spectrum, to which none of the operators have access, in exchange for a promise to roll out mobile broadband networks, particularly LTE, to 30% of the UK’s population who cannot receive fixed broadband services. Despite the merits of freeing the 800MHz spectrum proposed by Orange and O2, such a solution remains complicated by the 2012 deadline set for the digital television switchover.

Orange, T-Mobile and Three advocate Ofcam’s intervention to redistribute spectrum as the only solution, as attempts to reach consensus among the operators have proved futile. Orange and T-Mobile do not oppose Ofcom’s condition of redistributing the 1800MHz spectrum as a condition to access to the coveted 900MHz bands. Earlier this year, the operators tried to delay a 2600MHz auction prior to a resolution on the 900MHz spectrum, citing a lack of direction in the market. Meanwhile, Three, which does not have any holdings in the 900/1800MHz range, may stand to gain the most from Ofcom’s decision to redistribute the spectrum.

Given the failure of the UK’s five operators to reach an agreement over the 900MHz spectrum, Ofcom will likely intervene to redistribute spectrum among the operators. Pyramid Research believes that Orange and T-Mobile will gain access to 5MHz each of the 900MHz spectrum in exchange for a decrease in their 1800MHz holdings. Meanwhile, operators will continue pushing the government to help open up the digital dividend, which will streamline the deployment of fourth generation networks and bring broadband Internet connectivity to all of the UK.

— Andrei Tchadliev, Analyst, EMEA

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