4G auction raises less than expected

20 February 2013
By Sofia Mitra-Thakur
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The auction of superfast 4G airwaves raised a smaller-than-expected £2.3 billion

The auction of superfast 4G airwaves raised a smaller-than-expected £2.3 billion

Chancellor George Osborne was dealt a blow after the auction of superfast 4G airwaves raised a smaller-than-expected £2.3 billion.

All the major mobile phone companies - EE, Hutchison 3G, O2 parent Telefonica and Vodafone - were successful in the bidding process, while a subsidiary of BT also picked up a licence from Ofcom.

The regulator had placed a reserve price of £1.3 billion on the 4G sale, but the total is still much less than the £3.5 billion estimated by the government's tax and spending watchdog in the Autumn statement.

The previous 3G auction raised £22.5 billion for the Treasury in 2000.

The bidders in the 4G version competed to buy airwaves in two separate bands - the higher frequency 2.6 GHz and lower frequency 800 MHz - with 28 lots up for grabs.

After more than 50 rounds of the auction, Vodafone was the highest bidder paying £790.8 million for a mixture of the lower and higher bands.

EE, formed from the merger of Orange and T-Mobile, already has access to 4G and was the first to offer a 4G network in the UK. It was the second highest bidder paying £588.9 million for its airwaves.

Vodafone UK chief executive Guy Laurence said: "We've secured the low frequency mobile phone spectrum that will support the launch of our ultra-fast 4G service later this year. 

"It will enable us to deliver services where people really want it, especially indoors. This is great news for our customers."

Under the deal O2's Telefonica has won a spectrum which must provide mobile broadband services for indoor reception to a least 98 per cent of the UK population, and at least 95 per cent of the population in each of the UK nations - England, Northern Ireland, Scotland and Wales - by the end of 2017 at the latest.

Ed Richards, Ofcom chief executive, said: "This is a positive outcome for competition in the UK, which will lead to faster and more widespread mobile broadband, and substantial benefits for consumers and businesses across the country. 

"We are confident that the UK will be among the most competitive markets in the world for 4G services.

"4G coverage will extend far beyond that of existing 3G services, covering 98 per cent of the UK population indoors - and even more when outdoors - which is good news for parts of the country currently under-served by mobile broadband."

The two losing bidders were Hong Kong Telecom owner PCCW and private-equity backed Buckinghamshire-based firm MLL, which supports fixed and wireless services in the UK.

BT, which paid £186.5 million for its licence, said it did not intend to build a national mobile network.

Chief executive Ian Livingston said: "Instead, this spectrum will complement our existing strategy of delivering a range of services using fixed and wireless broadband. 

"We want our customers to enjoy the best possible connections wherever they are and this spectrum, together with our investment in fibre broadband, will help us achieve that."

Ofcom said that by 2030 demand for the mobile data could be 80 times higher than today and it was planning for a further spectrum for possible future 5G mobile services.

It had said it wanted at least four mobile wholesalers in the UK to drive competition in the market and the auction was designed to achieve this.

The watchdog said 4G services should make it much quicker to surf the web on mobiles, giving speeds close to home broadband services and allowing consumers to stream high-quality video, watching live TV and downloading large files.

For the typical user, download speeds of initial 4G networks will be at least five to seven times faster than those for existing 3G networks.

This means a music album that takes 20 minutes to download on a 3G phone will take just over three minutes on 4G.

Richards told BBC Radio 4's Today programme that Ofcom had not attempted to estimate how much money would be raised from the auction.

"Others did that. That is a matter for them," he added.

Senior Tory backbencher John Redwood insisted the Office for Budget Responsibility was to blame rather than Chancellor George Osborne.

"I think it was entirely predictable all the revenue figures would be high," he said. "I have been saying that for two and a half years.

"This is a rather small shortfall compared with the shortfall in income tax and other incomes. But it is the OBR doing this, you cannot blame the Chancellor for it.

"He has made an independent budget office who are meant to know about these things, and I am afraid they have been consistently wrong.

"They have consistently overestimated the growth in the economy and they have consistently overestimated the revenues."

Redwood said the fundamental problem was a "stand-off" between the costs of the public sector and what funding the private sector was willing to provide.

There needed to be "realistic tax rates that the private sector can and will pay".

Asked whether Osborne should be relying on revenues from selling off the 4G spectrum, Mr Redwood said: "I think he needs whatever money he can get his hands on."

Deputy Prime Minister Nick Clegg insisted that ministers were not to blame for the over-estimate in the amount the auction would raise.

"The figure that George Osborne talked about wasn't plucked out of thin air. This was actually verified by the independent Office for Budget Responsibility (OBR)," he said on his weekly radio phone-in on London's LBC 97.3.

"Of course it was a prediction, by definition, about an auction that hadn't yet been completed, but it wasn't one cooked up by politicians in Whitehall. The OBR said that was a reasonable estimate."

For Labour, shadow chief secretary Rachel Reeves said the shortfall was another blow for Mr Osborne's economic strategy.

"It shows how foolish and short-termist the Chancellor was to bank this cash in the autumn statement to make his borrowing figures look less bad," she said.

"He couldn't bring himself to admit that borrowing was up so far this year but his trickery has now badly backfired.

"Instead of more accounting trickery, what we really need from this Chancellor is action to kick-start our flatlining economy."

Culture Secretary Maria Miller insisted that the auction would deliver a "significant economic boost" to the UK.

"Spectrum use is worth more than £50 billion to the UK economy and 4G mobile broadband is a key part of our digital growth strategy so I am delighted the auction has been completed," she said.

"We worked hard through the autumn to make sure that the operators would be able to use this spectrum six months earlier than expected.

"The benefits will be seen in the UK from the summer onwards as mobile operators deliver competitive high speed mobile broadband services."

Work and Pensions Secretary Iain Duncan Smith said the government never banked on raising the full £3.5 billion to fund its spending plans.

"The government never set out its stall on the basis that every penny that was predicted would come in. On that basis we are planning to fund all the programmes that we have got at the moment and so is the Treasury," he told BBC News.

"Let's be honest, it was a prediction by independent experts, but the reality is until the receipts come in you don't count that money."

The Institution of Engineering and Technology (IET) said it was confident that investment in 4G will now begin.

Prof Will Stewart, Chair of the IET Communications Policy Panel, said: “We very much welcome the completion of the 4G auction and are glad to see the wide interest amongst operators.

“In the UK we are still behind some countries in terms of 4G network technology but remain advanced in digital services and smartphone penetration.  However, this is a very valuable step forward.

“In the current economic climate, the auction has raised a lot of money for government, but the costs of networks and infrastructure-related investment now need to be found to enable deployment to proceed as soon as possible.

“This will be a valuable contribution to the UK's fast broadband network development, which is vital for future economic well-being.”

Victor Basta, managing director of Magister Advisors said: “The disappointing revenues from the 4G auction, well below government forecasts, are a reflection of the challenges that mobile operators face in growing revenues from their users in the social media age. 

"Data-heavy social media services are causing huge growth in data traffic across mobile networks.

Mobile operators increasingly find themselves in a role that is about supporting end users’ social networking habits, with little, if any, commercial benefit. 

"Social networking has effectively turning mobile network operators into digital drug mules.”

The last big auction of the airwaves saw the government rake in £22.5 billion during a bidding frenzy by mobile phone operators at the height of the dotcom boom.

The 3G licence sale in 2000 generated a huge boost for the Treasury's coffers but the outcome for consumers was much less positive as operators then struggled to also meet the significant cost of building their faster 3G networks.

Matthew Howett, telecoms regulation analyst at Ovum, believes the relatively poor 3G coverage seen in the UK up until now was at least partially the result of operators being left out of pocket after the last auction.

He said today: "For the mobile operators there must be widespread relief that the amount paid is a mere fraction of the £22.5 billion they were asked to cough up during the 3G licensing process.

"For them, the fact they didn't have to pay billions more is without doubt a positive thing."

He is hopeful that things should be different this time, especially given the ability for the 800MHz airwaves to cover large distances and penetrate buildings well.

The 4G airwaves will allow uninterrupted access to the web on the go, high definition movies to be downloaded in minutes and TV to be streamed without buffering.

But whether customers have the appetite and deep enough pockets to pay for the higher speeds remains to be seen.

EE already has access to 4G and was the first to offer a superfast network in the UK.

The company did not give figures for how many customers had signed up to its new 4G in its results yesterday, but it saw revenues drop and new contract customer numbers slow in the final quarter of last year.

Howett added: "The hard part for operators now comes in convincing us to upgrade and take out 4G mobile subscriptions once services are launched by EE's competitors in late spring/early summer of this year.

"A lack of detail from EE on how many customers they have tempted over to 4G has led some to believe that consumers just aren't willing to pay more for faster speeds."

Michael Jaeger, patent attorney at Withers & Rogers specialising in the telecommunications and consumer electronics sectors, said: "For the successful bidders, there will be more tense times ahead as they begin to roll out the required hardware and prepare to launch 4G services, which could potentially lead to disputes over the use of patented technologies, causing costly disruption.

"For example, following the 3G auction, the maker of Blackberry handsets, Research in Motion (RIM), settled a worldwide patent dispute with Visto, paying $267 million as a one-off payment. This allowed RIM to continue using their preferred push email technology and ensured their systems remained attractive to the business user.  

"One would anticipate that the mobile network operators have learnt lessons from the RIM/Visto debacle, and that they have undertaken patent infringement clearance checks so that they will not be on the wrong end of a patent lawsuit.  

"This should make such disputes less likely, but they are still possible. 

"Operators will be hoping that all the checks they carried out in the run up to the auction to ensure that they are free to use the relevant standard essential and non-essential patented technologies are accurate.

"They will also be hoping that licence agreements have been obtained by their suppliers where appropriate.

"When it comes to 4G take-up, the main issues for consumers, other than price, will be network coverage, reliability of service and download speeds.  

"EE launched their 4G service at the end of last year, but that service has attracted criticism and fallen short of expectations.

"The winning bidders will be hoping that their 4G services are now ready to deliver to a high standard."

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