Saturday, December 08, 2007

Ofcom's 2.6 GHz auction

Come mid-2008, Ofcom plans to auction thirty eight lots of 5 MHz spectrum between 2500 and 2690 MHz. (There will also be an auction of 15 MHz of spectrum between 2010 and 2025 MHz, which will not be further discussed in this note).
In the CEPT band plan for the 2.6 GHz spectrum block, twenty eight blocks (14 x 2) are reserved for 3G operators using WCDMA in paired slots (FDD - frequency division duplex). The remaining ten slots are intended for TDD services (time division duplex), most likely for mobile WiMAX - see figure 1 (click on picture to enlarge it).

Figure 1: The CEPT band plan for 2.6 GHz

To launch a national WiMAX service would probably require a minimum of two adjoining 5 MHz slots - the ten TDD slots could support five WiMAX operators in this way. A WiMAX channel could use up to 20 MHz for higher bandwidth, and an operator could deploy multiple WiMAX frequency bands. For example, three WiMAX ‘channels’, each of 20 MHz, would require 60 MHz or twelve 5 MHz slots. Adding in competing WiMAX operators might require even more TDD slots. To accommodate this, the Ofcom plan is to auction generic lots, which can be assigned later to 3G/FDD or WiMAX/TDD usage depending upon the winning bidders’ desires.

Value for Money?

Ofcom are experts in the area of spectrum auctions and in the broader issues of the telecoms industry. They are unlikely to have made obvious errors in either the objectives of the auction or its design, particularly when their work is carried out in public and is under the scrutiny of the industry as a whole. So any assessment of the auction and its possible outcomes should focus on more subtle effects.

a. The ‘market’
Ofcom has made much of the inherent lack of knowledge of the regulator, and how the ‘market’ will know more about the utility of this spectrum. While this is certainly correct, we should look more closely at the market structure which obtains here. In textbook discussion of the superiority of markets over, say, centrally-planned economies, there is a presumption of competitive markets, maximally-responsive to customer needs.
However, in mobile wireless, for well-understood reasons, the market structure is oligopolistic. Perhaps the most likely outcome of the 2.6 GHz auction is the existing five 3G operators (O2 - Telefónica; Orange - France Telecom; T-Mobile - Deutsche Telekom; Vodafone; 3 - Hutchison Whampoa) owning some of the spectrum, who will then square up to one or more WiMAX operators (perhaps BT, Craig Wireless Systems, Inquam Broadband). The ‘knowledge of the market’ then reduces to the vector sum of the interests of these players, whatever that may be.

b. Post-auction market structure
How many providers can there be in a mobile wireless market? Consider a very simple model where the cost of rolling out and operating a significant (quasi-national) network is C and the total revenues available in the market are R. Then there can be no more than (R/C) distinct operators, as the revenues are not great enough to support any more.
Since mobile wireless voice networks already exist in the current GSM and 3G networks, we are talking about residual revenues in a distinctive wireless broadband data market. These are hard to predict and unlikely to be large, at least in the early years. The result is to raise some questions.

(i) If too many bidders acquire WiMAX spectrum, is this likely to inhibit all or most of them from investing, on the grounds that the cake will have to be split too many ways?

(ii) As Ofcom has proposed no requirements either as regards timescales to deploy or extent of geographical coverage, wouldn’t successful WiMAX bidders without deep pockets simple cherry-pick the centres of large cities and other high-valued locales? Doesn’t this then undermine the business case for more extensive deployment from operators with more capital resources?

There are probably good answers to these questions, but the issues seem under-discussed in the Ofcom discussion document (here).

c. Uncertainties in spectrum utilisation via new services
Ofcom seems unsure about the uses to which the 2.6 GHz spectrum could be put. Their report simply reiterates a list of services commonly used by consumers on their fixed broadband links, via PC.
In fact the business case for public wireless broadband services today looks fragile. Engaging with likely revenue possibilities requires a detailed review of location-based services, the specific needs of early adopters such as emergency services, councils and governments - as well as consumer requirements (which are heavily device-dependent).

High-bandwidth services such as mobile CCTV will surely be additional early drivers for these services. Ofcom could argue that it is not their concern to do such analysis - this is down to the bidders. However, taking an accurate, forensic view of likely services roadmaps, relevant vertical markets and early adopter requirements might help both in shaping the process and in estimating the likely benefits of various outcomes.