Mergers scuttle strategy as Ofcom reneges on spectrum promise

It's all about the spectrum imbalance (maybe)

Ofcom wants to hold onto the 60MHz of the 190MHz of spectrum it had announced would be for sale, and is floating the idea of scaling things back, citing a change in market conditions for the sale, slated for the end of this year or the beginning of next.

In the revision to the proposals, Ofcom said:

“Since the publication of our earlier consultations, two announcements have been made which could change the nature of the mobile market: On 5 February 2015, BT announced its intention to acquire EE.

Then, on 24 March 2015, it was announced that Hutchison Whampoa (owner of the H3G network i.e. ‘Three’) had reached agreement to acquire O2 from its current owner Telefonica.

If the H3G/O2 transaction were to proceed, it would reduce the UK wholesale mobile market from four operators to three.”

As a response, the regulator is proposing to reduce the amount of spectrum it sells in the next round by 60MHz from 40MHz within the 2.3GHz band (2350-2390 MHz) and 150MHz within the 3.4GHz band (at 3410-3480MHz and 3500-3580MHz) to 130MHz in total.

Although how much of which chunk would be held back isn’t explained, it’s most likely to be at the higher frequency.

Since BT bought some 4G spectrum before it bought EE, the move could be described as a move from five potential wholesalers to three.

The merger will leave BTEE with a huge chunk of the available mobile spectrum, so much so that Vodafone has called for some of it to be re-allocated along the lines which saw EE give up some spectrum to Three when Orange and T-Mobile merged to become EE.

The merger of O2 and Three will see a second network which, while more spectrum is always A Good Thing, won’t be desperate for the stuff. There is the network UK Broadband which sells under the Relish brand and which is owned by Hong Kong company PCCW.

This has 124MHz of spectrum at 3GHz and 3.6GHz with 40MHz in non-contiguous bands adjacent to that being auctioned. The plan is for UK Broadband to move to the same amount of contiguous spectrum in the same space to make what else is being auctioned off neater.

So the prime candidates to buy would be Vodafone for the 2.3GHz and UK Broadband for the 3.4GHz. While there are some other companies which might be interested (TalkTalk wants to roll out a network based on the DECT guard band it has at 1800MHz, and a comprehensive response to the last consultation from Sky is a signal of interest) it pretty much looks as though there is only one real bidder.

Auctions with only one bidder don’t tend to make the sky-high numbers which makes the money the exchequer wants recognise the market value, to use the phrase Ofcom has applied to spectrum previously.

Ofcom is basing the expected pricing on the last round of 4G auctions when there were indeed five major bidders. Then spectrum was sold in 5MHz blocks for between £2.45m (Vodafone) and £8.25m (BT), and Ofcom proposes using the lower of these figures as the reserve price for the forthcoming auction.