The merger of T-Mobile and Orange means combining their spectrum holdings, throwing Digital Britain into confusion and putting the Digital Dividend at risk.
Digital Britain's promise of broadband for all is based on permitting 3G services at lower frequencies, which means reallocating those frequencies between the existing operators. But the plans are all based on there being five UK operators. What's worse is that until the deal gets regulatory approval no-one can be certain it's going to happen, putting the UK spectrum auctions in a very difficult position.
At the very least, the announcement renders the work done by Kip Meek (the Independent Spectrum Broker) and Ofcom redundant. The spread of spectrum ownership changes completely with T-Orange being in possession of 170MHz of prime spectrum. It puts the new company well beyond the suggested cap of 120MHz, so the deal will certainly see T-Orange selling off some of it, but to whom isn't at all clear.
T-Mobile and Orange both have 20MHz of paired 3G spectrum at 2.1GHz: 10MHz for the uplink, 10MHz for the down. The blocks are adjacent and the new company will probably be able to fill 40MHz without difficulty. Vodafone, by comparison, has 30MHz of 2.1GHz spectrum (15MHz for each direction), so 40MHz is not an unreasonable holding.
T-Mobile and Orange also each hold another 5MHz of 2.1GHz spectrum, which is reserved for Time Division Duplex (TDD) services. O2 and 3 also hold such blocks, all of which remain unused as TDD never took off in the UK. Ofcom will very soon remove that restriction, and even though the blocks owned by T-Mobile and Orange aren't contiguous with their other holdings, they are contiguous with each other. This could provide a useful block of 10MHz which could supplement the 40MHz holding, or be sold off.
Running down the dial to 1800MHz, Orange and T-Mobile each have 60MHz of spectrum around here, which carries their 2G services. Combining those holdings gives 120MHz of spectrum, which is certainly more than the company will need. This excess of 1800MHz capacity will only increase as it expands its operations at 2.1GHz, by deploying more 3G base stations, so we can expect to see at least half of that holding being sold off.
But who would be interested in 60MHz of spectrum at 1800MHz? The UK's sixth mobile operator, UK01, would love to get its hands on it, but doesn't have the cash. O2 and Vodafone already have small chunks of spectrum at 1800MHz, and little interest in owning more. 3 certainly has no intention of expanding below 2GHz (at least not until someone hands it some 900MHz space to play with), so it's hard to see how the excess 1800MHz is going to stay in the mobile telephony space.
There are, of course, lots of other people who could make use of the frequencies, but they won't pay the kind of price that T-Orange will be hoping for.
The deal also throws plans for the division of 900MHz into chaos. Vodafone and O2 were allocated chunks at 900MHz back when GSM was launched, and the pair still have sole possession of the frequencies. The government's Digital Britain initiative requires the use of 3G at 900MHz, which is also mandated by the recent EU Directive which comes into force in October. Before that can happen, however, the other operators want a share of the spectrum.
Vodafone/O2 have been hanging onto their spectrum in the knowledge that a Conservative government next year will mean Ofcom getting knocked back and plans again thrown into chaos. By then, the EU mandate will require the government to allow the deployment of 3G into 900MHz (which must happen within six months of the Directive coming into force) and T-Orange and 3 will just have to suffer.
By that time the network operators are supposed to have their hands on the Digital Dividend, along with the 2.6GHz spectrum that Ofcom has been trying to get shot of for years. Neither T-Mobile nor Orange would be drawn on if either, or both, plan to bid for the spectrum around 800MHz which is supposed to be going up for auction early next year. If the schedule goes ahead as planned, then the auction could even happen before the EU regulator approves the formation of T-Orange, making it almost impossible for either company to bid on the newly available frequencies.
What's far more likely is that the auction gets delayed, again, while the government changes and T-Orange comes into existence, and then the Conservatives will screw about with Ofcom. Vodafone and O2 will get to hang on to their 900MHz spectrum against some wishy-washy promises about broadband provision that the government of the day can then claim meets the commitments of broadband for all. Then they can quietly knock out the 800MHz Digital Dividend to the existing operators as a reward for a job well done.
The only alternative would seem to be Labour going hell-for-leather to get an auction in this side of an election, perhaps to raise money for a tax sweetener. But with the 900MHz question no nearer resolution and two of the potential bidders in the middle of trying to merge into one, it might not be as big a sweetener as the government might hope. ®