CCS Insight: Everything Everywhere bets on 1800 MHz LTE, but for how long?

Kester Mann

Following the controversy and delays that have beset the auction process, we applaud Ofcom's efforts to help the UK make up for lost ground on the many other markets that have already deployed LTE technology or awarded licences. The regulator clearly concluded that the benefits of an earlier launch outweighed the potential risk of unfair competition.

However, we believe Ofcom has indeed handed a significant advantage to EE, formerly Everything Everywhere, the UK's largest mobile operator in terms of subscribers and revenue, and that the absence of coverage requirements casts doubt over the true benefits to UK consumers.

In our view, Ofcom's decision is anticompetitive. With bidding for spectrum not due to start until 2013, it is unlikely that Vodafone or Telefónica's O2 UK will be in a position to offer commercial LTE services before the third quarter of next year. This would be almost a full year after EE, placing them at a significant competitive disadvantage. It allows their rival to promote its network as the nation's fastest and highest quality--a significant opportunity in a competitive market like the UK.

We question the benefits that a limited LTE rollout will bring to UK consumers. Although there will be no shortage of compatible handsets by the end of 2012, initial coverage is likely to be very restricted. EE is under no obligation to launch in rural areas, reducing the incentive for it to focus away from major cities, where usage will be higher. This risks widening the divide between parts of the UK that can receive high-speed broadband and those that cannot.

EE should be careful not to set initial expectations for its EE-branded services too high. Vodafone and 3 UK were first to market with 3G services in 2003, but failed to gain a significant advantage due to teething problems.

Of course, the environment today is markedly different. But the challenges of building a nationwide network and supplying reliable, attractive devices in sufficient quantity are no different to when 3G was first rolled out. Should EE services fail to meet consumers' high expectations, the negative publicity could undo any benefit gained from an early launch. In fact, as LTE will be a more mature technology by mid-2013, the larger range of devices and lower cost of equipment may arguably facilitate a smoother and less risky launch for its competitors.

EE has not given many details of devices for its LTE network, other than to confirm that smartphones, as well as dongles, will be available at launch. Despite advances in 1800 MHz LTE deployments--there were 23 commercial networks in mid-July 2012 according to the GSA--they remain outnumbered by networks using other frequencies. This will curtail roaming opportunities for EE customers with single-band LTE devices.

Unsurprisingly, EE's rivals vehemently opposed the regulator's move. O2 complained that the decision "undermines the competitive environment for 4G in the UK" and Vodafone said that it was "frankly shocked" by Ofcom's decision. However, we believe that any legal challenge would delay, rather than overturn, the ruling. EE's rivals should focus on a "plan B" to respond to the pending launch. With reduced options to differentiate based on network capability, they could focus on areas such as tariff innovation, distribution, marketing or device procurement.

In response to its rivals' comments, EE points out that Vodafone and O2 already possess an advantage by owning spectrum in the more-desirable 900 MHz band. Technically, Vodafone and O2 could use their 900 MHz spectrum to deploy LTE services should Ofcom allow it. In countering the argument that handset availability has prevented them from doing so, EE points to its own research, which found that Samsung could have a Galaxy S III 900 MHz LTE device "within four weeks" that HTC's latest LTE devices could, if requested, be available at 900 MHz "by January" and that Huawei could provide phones and dongles for 900 MHz networks "within weeks."

EE also questions the willingness of Vodafone and O2 to invest in 900 MHz LTE and their desire to bring 4G to the UK as soon as possible. It points to Verizon's aggressive deployment of LTE in the US, which it says forced AT&T and other carriers to bring forward their roll-out plans, ultimately to the benefit of consumers. However, unlike EE, which has an abundance of 1800 MHz spectrum, we do not believe Vodafone and O2 have spare capacity on their 900 MHz networks. This may preclude them from taking this approach.

Once the 4G auction has been completed, EE may find its 1800 MHz spectrum of less value for LTE. Acquiring 800 MHz and 2.6 GHz frequencies would allow it to achieve the coverage benefits associated with the lower band, as well as compatibility with a wider range of devices. Assuming EE is successful in the auction, we expect it to scale back investment in 1800 MHz LTE and focus on the other bands. This reinforces our view that EE's primary motivation to launch LTE early is for first-mover advantages.

Kester is a senior analyst at CCS Insight, where he specialises in operator strategy. He was previously a senior research analyst with Informa Telecoms and Media, where he established a reputation as an informed commentator on European mobile markets. A longer version of this article was published as part of CCS Insight's Hotline service. For more information please see www.ccsinsight.com.

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