4G Wireless Spectrum Auction Will Determine Winners and Losers in the UK Mobile Market

El Segundo, Calif. (Jan. 25, 2012)—The auction of coveted 4G spectrum that is now underway in the United Kingdom represents a critical juncture for country's wireless market, with the winners set to gain access to data bandwidth essential for meet burgeoning demand for mobile data services.

Chiefly driven by smartphones, U.K. mobile data traffic will rise by more than 400 percent from 2012 to 2016, according to a new report from the IHS Screen Digest Mobile Technology Intelligence Service at information and analytics provider IHS (NYSE: IHS). IHS forecasts mobile data traffic in the country will rise to 1.4 billion gigabytes in 2016, up from 274 million gigabytes in 2012, as presented in the figure attached.

The auction features 2.6Ghz spectrum best suited for urban deployments and scarce spectrum at the 800MHz band, which is especially suitable for delivering wireless services in rural areas. This makes 800MHz desirable for any nationwide deployment of 4G.

"The importance of this spectrum auction in shaping the future of the U.K. wireless market cannot be understated," said Daniel Gleeson, mobile analyst at IHS. "Access to spectrum is the main barrier to entry for any company looking to build a new wireless network. The amount a company spends in the auction will affect their business performance for years to come. Seven companies are bidding for spectrum: the country's four existing mobile operators along with three new players. With only three companies likely to win spectrum, at least one of the United Kingdom's existing operators is likely to lose out."

Bidders play mobile musical chairs

The four existing players that have entered the auction are EE, O2, Vodafone and Three. The three new entrants are BT, PCCW and MLL Telecom.

Other European spectrum auctions have only seen a maximum of three operators win 800MHz spectrum. The United Kingdom could follow this pattern, yielding three winners and four losers.

"The winners will have the bandwidth required to keep pace with the boom in mobile data—while the losers will struggle to remain competitive in the mobile market," Gleeson noted.

Data explosion

Much like other developed markets, the United Kingdom has seen massive growth in smartphone users during the past five years. This, combined with a steady take-up of large screen mobile broadband services, is causing a substantial increase in data traffic carried by the mobile operators.

The 800MHz question

Different types of spectrum have varying propagation characteristics. Lacking spectrum in certain bands effectively limits an operator to urban areas. For an operator to succeed, it must have a spectrum portfolio with both breadth and depth.

The U.K. auction is offering spectrum in two bands; the 800MHz band and the 2.6GHz band. The longer wavelengths associated with transmissions at the 800MHz band mean signals travel further resulting in larger cells, fewer cell sites for operators and therefore lower deployment costs to serve rural areas. The 800MHz cells are approximately 10.5 times larger than 2.6GHz cells transmitting with the same power. This makes 800MHz much more valuable than the 2.6GHz band.

The stakes

Among the existing mobile operators, the companies with the most to lose are O2 and Vodafone, which presently do not have 4G spectrum.

Not securing 800MHz licenses would be a disaster for O2 or Vodafone as their current licenses do not allow for the deployment of 4G, and relying on 2.6GHz spectrum would severely limit their capability to cover most of the country.

The consequences beyond 4G

While the deployment of 4G services will be the primary outcome from the auction, spectrum auctions have a habit of rearranging all the deck-chairs in the mobile market in a particular country. The past few years has seen cooperation between the operators in site-sharing deals in order to reduce costs while simultaneously expanding potential coverage.

These relationships are based around having similar needs due to similar spectrum holdings, so it's clear that changing the spectrum holdings could lead to different joint ventures. Particularly in an era of economic uncertainty, operators will be on the lookout for ways to minimize the cost of rolling out services. Extra sites may be needed if an operator is aiming to use 2.6GHz exclusively in urban areas or if an operator with limited geographic coverage i.e. Three, is attempting to build out a more comprehensive network or of course there is a new entrant like BT.