Analysis: Are the UK’s LTE spectrum proposals such a disaster after all?

Analysis: Are the UK’s LTE spectrum proposals such a disaster after all?

The UK’s latest LTE spectrum proposals mean the country won’t see live 4G action until the second half of 2013 at the earliest, with many seeing this as just the latest disappointment in a litany of disasters for the UK’s mobile market. Yet will the UK really be four years behind the curve by the time LTE is a reality, and is there a long-term price to be paid for such a lag?

The story of LTE in the UK is a complicated one. But it is important for the country’s mobile operators, and their wholesale partners, to realise that the latest delay represents not so much a disaster from which there is no recovery, as an opportunity from which to profit.

On the face of it, the UK is well behind the pace setters. By late 2013, Europe’s LTE leaders will have been providing services for a little short of three years.

In South Korea, the global leader in LTE just as it is in FTTH, 4G adoption has already reached 17% of mobile users. By the time the UK boasts its very first LTE consumer, South Korea will quite likely have breasted 50% adoption, at current rates of growth.

There’s evidence, however, that some early adopting countries have not really profited from their LTE lead. Consumer take up has been slow in a lot of instances, and it is already clear that many existing 4G networks simply aren’t up to managing the data traffic demands that are coming their way.

LTE has not yet proved a mobile broadband panacea, as hoped. This gives latecomers to the LTE scene time to develop appropriate strategies.

UK MNOs, and the carrier partners that supply them with backhaul capacity, will hopefully have been taking notes as other operators around the world struggle to make their investments in LTE networks profitable.

When it comes to infrastructure investment, there will be tension, as ever, between achieving profitability and meeting regulatory requirements, and UK operators must plan to get this balance right too. Around Europe the business model of many operators has been to build specific LTE coverage where there is strongest demand for high-speed access and high capacity.

Adopting this strategy in the UK would be bad news for rural communities and against the ethos of licensees being obliged to roll out 4G in smaller towns and villages, as has been the case in Germany where the regulator has used 4G as a means of closing the broadband access gap.

UK operators must take the opportunity the Ofcom-imposed time lag gives them to plan for data volumes in other ways. They will have noted that operators in other parts of the world are already beginning the wide-scale roll-out of small cells to boost capacity and meet a possible 50-fold increase in data volumes by 2017.

More time is also needed before we even know who will play in the UK’s 4G market (see box out). Ofcom is insistent on four major licensees, which would presumably see Vodafone, O2 and Everything Everywhere joined by Hutchison Whampoa’s 3 network.

But the regulator appears to have left the door open to a possible new player, not currently licensed, to operate a mobile network of any sort. Names being bandied about include BT, BSkyB, TalkTalk, Virgin Media and even Google.

There are many variables to be worked out, investments to be made and decisions to be reached before the UK sees live 4G. Luckily there is now time for this to happen. 

The runners and riders for the fourth UK operator spot:

Ofcom’s decision to reserve spectrum for a fourth national network operator is aimed at bringing fiercer competition to the UK market, but it has also prompted mass speculation about potential new entrants.

Industry experts are predicting a more sophisticated strategy from operators than during the 3G licensing in 2000, which raised £22.5 billion. This time round, however, the auction is expected to generate a fraction of that amount due to the introduction of spectrum caps, which limit how much spectrum an operator can bid for, and a realisation from the industry that revenues are no longer available to support such an outlay.

Joint ventures or partnerships could prove a popular strategy, but Ofcom has taken steps within its auction rules to make such a shared approach the harder option. There is nothing, however, stopping joint venture or partnerships emerging post-election, and any bids could be made with this strategy in mind.

  1. Hutchison 3G (Three) is by some considerable distance the favourite to secure the reserve UK spectrum. The operator has long been campaigning for the availability of reserve spectrum and it already has infrastructure in place to support its bid. If it was unable to secure spectrum, Three’s position in the market would look tenuous and it could pull out altogether.
  2. BT is one of Europe’s only incumbents not to possess a mobile arm – although it does have a little publicised MVNO deal with Vodafone which it utilises for corporate deals. Its strategy of late has been concentrated on Wifi, but that appears to have only short to mid-term demand. The incumbent could therefore be tempted to re-enter the mobile market, but it would prove a significant financial burden during a time when the company is suffering losses. Its Q1 2012 results indicated its biggest share fall in nearly a year, and bidding for 4G spectrum therefore seems a gamble it is unlikely to take.
  3. Virgin Media or BSkyB are also potential outsiders which may have an interest in bidding for spectrum. Virgin Media has already reportedly said it would consider participating for spectrum if the price seemed right. Hardly an aggressive stance, but it is still more than BSkyB has said. The company could, however, be remaining quiet until it investigates the full ramifications of entering the auction. Both parties’ interests lie on the content side and so a post-auction wholesale agreement appears the most likely option.
  4. The dark horse would be a Google, Skype or Apple. Would one of these internet brands want to own a network? With Google already building its own test network in the US, could it be about to make the move into infrastructure? All these companies certainly have the cash to burn, but it would present a huge gamble, particularly in the troubled UK market.

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