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Three isn't going to back away from a fight over spectrum
Ready to take on Ofcom after O2 merger block
Analysis Three’s £250m acquisition of loss-making UK Broadband shows the operator has a large appetite for spectrum, but it will be the forthcoming spectrum auction where the land-grab for frequencies will really take place.
Hong Kong owner of Three, CK Hutchison, purchased UK Broadband this week (which also runs the Relish brand in London), and at first this looked surprising. The company has just 15,000 customers and made a loss of £25.07m on revenue of £3.2m for the full-year 2015.
However, UK Broadband claims to be the single largest holder of commercial spectrum in the UK, with 300MHz of its 2.3GHz of spectrum holdings being identified for both 4G and 5G, including in the 3.6-4.0GHz range.
That will be a welcome boost to Three's spectrum portfolio, which it has been keen to beef up for some time. In 2015, it acquired a chunk of Qualcomm's spectrum.
But while the latest deal will help alleviate Three’s concerns over a capacity crunch in the lower band, it will only plug the gap so far. Matthew Howett, analyst at Ovum, notes most of the acquired frequencies won't come into play until 2020.
Last year European regulators squashed Three’s proposed £10.25bn takeover of O2, with advice from Ofcom that fewer operators would disadvantage consumers.
Since then Three has been waging a PR battle to persuade Ofcom to impose spectrum caps at forthcoming auctions in order to level the playing field, most notably at the 2.3GHz and 3.4GHz auctions, which will expand UK spectrum for mobile services by about a third, notes Philip Carse, analyst at Megabyte.
"UKB’s spectrum eases its short term issues, but Three will still need to secure more spectrum in the forthcoming auctions," he said.
Ofcom has already proposed that BT/EE will not be able to bid for more 4G spectrum in the forthcoming auction.
However, Three wants the regulator to go further and impose a 30 per cent cap on spectrum ownership, having waged a bizarre campaign featuring Ofcom head Sharon White as a cartoon superhero and calling on her to "make the air fair".
As BT/EE currently holds 45 per cent of immediately usable UK mobile spectrum, that would mean the largest operator would have to trade some of its existing spectrum to even the playing field. In contrast Vodafone holds 28 per cent, O2 15 per cent and Three 12 per cent.
Howett says the auction is significant as operators need to get their hands on immediate frequencies to satisfy consumers’ growing desire for more data.
“Chip makers are putting a lot of effort into making handsets more efficient, but ultimately operators need more spectrum. We’re yet to get a final set of rules as to how the auction will go ahead. But I expect there will be some more tug from Three.”
"Initially Ofcom did not think a cap was needed at all, but it has been convinced otherwise. There has been surprise at how bold Three has been in its demands, but Ofcom has also recognised there should be some protection. However, I’d be surprised if Ofcom moved fully to where Three is campaigning.”
O2 has also called for a spectrum cap, but at a slightly higher proportion of 35 per cent. Howett notes that while the provider clearly wants to see more evenly allocated spectrum for immediate use, it is more pressing for Three, which has warned of a spectrum crunch. Instead O2 may be concentrating on its rumoured IPO, says Howett.
Ofcom is expected to come up with its final spectrum rules early this year. However, most do not expect the auction to occur in 2017.
Howett says the legal wranglings between operators probably won’t be as bitter as those around the 4G auction in 2013 - which held the sale up by several years.
“We’re not in the same position at this stage, but clearly there are some strongly held views from Three. Since the regulators blocked its acquisition of O2, Three has been testing the regulators' patience. And I suspect they are going to remain firm." ®