Mallinson: Technological partiality and political gains with broadband stimulus and spectrum auctions

Keith Mallinson wise harborAs stated in one of my previous FierceWireless:Europe columns, LTE will bridge the digital divide in most of the world because it will never be economic to pull fibre to around half the world's population who are difficult to reach or very low-spending. Similarly, LTE is the most economic solution for broadband to a small but significant proportion of households in developed nations including the UK and Germany.

I couldn't tolerate living anywhere that didn't have broadband Internet access. I need it for work, it's vital for my children's education, for family information gathering and increasingly for entertainment. It's socially and politically essential to make such connections available to virtually all developed nation householders regardless of where they live. Other than in city states such as Hong Kong, Singapore and in small and very densely populated nations such as in Europe's Benelux region, most developed nations have 10 per cent or more of their population remaining the wrong side of the digital divide with at best sluggish access speeds through DSL and in many cases just dial-up or legacy 3G wireless.

Horses for courses

Providing very high proportions of geographic or household coverage is a formidable task with communications networks--particularly with broadband speeds and monthly data usage in double digit megabits and gigabytes respectively. For example, in the U.S., 92 per cent population coverage by a wireless network is only equivalent to around 8 per cent geographic coverage. A small but significant minority live in remote regions such as deserts, forests, up mountains away from ski resorts or in rural areas, but those that do can cost hundreds of times more to serve than the average.  Choice of network technology is a delicate technical and economic trade-off that is also changing abruptly with disruptive technologies such as LTE and LTE Advanced that are increasing speeds and capacities by orders of magnitude while dramatically lowering costs.

In June 2009 the former British Government, under Labour party leadership, set out its Digital Britain "strategic vision for ensuring that the UK is at the leading edge of the global digital economy". In its report summary it had the following to say about mobile broadband:

"Long Term Evolution (LTE) technology is capable of delivering a range of speeds up to 50Mbps in a competitive, multi-operator market. We will take the necessary steps to ensure spectrum is available for use and the market remains competitive. But here too, the costs of deployment rise in the final third of the country, meaning the investment required to install the density of base stations needed to support very high bandwidths becomes uneconomic. While we believe, therefore, that the market will deliver new higher mobile data rates to the final third of the country, this may not be at genuinely ‘next generation' bandwidths."

Whereas the above was at least questionable, such policy document "findings" can become entrenched, impede broadband market development and tilt the playing field in favour of particular technologies and service providers. That snapshot view put the dampers on prospects for seeking to connect households with anything other than fibre. It makes LTE and wireless in general seem inferior. Who would accept second best?  However, connecting anywhere close to 100 per cent of homes with fibre is totally uneconomic and infeasible. While waiting for broadband utopia one might remain stuck firmly in the slow lane for many years.

Governments and authorities have the laudable desire to provide ultra-fast connections to the nation's households, but it should be a competitive marketplace not policy-makers who decide which technology is most suitable and where. With near infinite capacity, fibre-optic connections are highly attractive because these can maintain high levels of throughput even when they are heavily loaded with many concurrent users in areas of high population density such as apartment blocks in cities. Wide-area wireless access cannot match that, but at the other extreme where population densities are very low and spectrum bandwidth per capita per square kilometre is abundant it is also possible to provide much increased access speeds and network capacity over what is currently available through copper connections such as DSL. Sub-gigabit frequency bands provide excellent coverage with the low cell site densities that are all that's required in sparsely-populated regions.

Policy positions can easily become ingrained, even following changes in leadership at agencies and in government. In a free market, however, it only takes one competitor with a new technology or business model to upset the status quo, as illustrated by Microsoft in PCs, Google in browsers or Apple in music publishing and players or smartphones.

Self-servingly, BT Group's CEO Ian Lvingston also disregards any role for terrestrial wireless in delivering residential broadband. In public Q&A at the FT World Telecoms conference in London this month I asked him if BT might re-enter wireless (following the 2001 sale of its shareholding in Cellnet, now called O2) with the upcoming UK spectrum "auctions".  In response, he maintained that only fibre can provide the fast speeds (i.e., of 100 Mbps or more, I presume) required for residential connections. However, his advocacy for supplementing this only with satellite for remote locations reveals his pretence or ignorance. Whereas LTE will not be as fast as fibre, satellite would be much slower and have far less capacity than any terrestrial solution--including LTE.

However, Livingston's preference to receive financial support over shelling-out for spectrum is understandable. The new UK coalition government, under Conservative party leadership, has earmarked £830m ($1.3 billion) of public money to subsidise the rollout of new "super-fast" broadband services into areas where private sector investment alone will supposedly not go. Livingston is posturing to secure as much of this money as possible to satisfy BT's ambitions in fibre. BT is already ready set to deploy fibre to 2/3 of the nation's population and he would like to take this further with government hand-outs. For example, the broadband penetration level is already being raised to 90 per cent with EU funding in the western peninsular county of Cornwall.

End of the road

Rather than build a six lane motorway as far as it goes until the money runs out, perhaps a four lane dual carriageway that extends much further might be a better overall solution for the nation. Whereas commercial LTE-based services may not be as fast as those based on fibre, they are already of comparable speeds to legacy copper-based networks. And in outlying areas LTE can provide higher speeds at lower cost. Additional spectrum availability and technological developments with LTE Advanced will enable upgrades this decade that further improve technical performance and economics.

Whereas fibre access is excellent in dense urban locations, wireless technology such as LTE is ideal in rural and remote locations where user densities per square kilometre are by definition very low. In Germany, for example, Deutsche Telekom is installing LTE to rural and remote locations in place of DSL-based broadband connections and in so called "white spots" where DSL is not available. The wireless technology will provide faster connections speeds than at present and lower operating costs. Branded "Call & Surf Comfort via Funk", the service will be launched in 1,000 rural locations by yearend 2010. The first terminal available is a WiFi/LTE router from Huawei. Vodafone's "Zu Hause" (at home) fixed wireless service is being upgraded from HSPA to LTE with speed increases of up to 50Mbps on a 30GByte service for Euro 69.99 per month. The speed is throttled to a maximum of 384 kbps once the monthly maximum data usage has been reached.

Also presenting at the FT conference, CEO Rajiv Mehrotra claims to be able to deliver mobile broadband along with GSM to villages in India at very low cost. The company claims a track record of success with its solar-powered zero OPEX GSM system providing sustainable and profitable services to rural areas where ARPUs are less than $2 per month. This clearly illustrates what disruptive innovation might do elsewhere in developed nations, despite the fact that sunshine is not always so abundant in Western Europe!

Taking a pound with one hand and give back 20p with the other

In austere deficit-ridden times such as these, politicians can earn popular credit with fund-raising schemes such as auctioning spectrum to the highest bidder. And, they can also curry favour from the electorate--particularly in rural communities--by giving some of the money back (possibly to precisely the same players) with grants and subsidies for the worthy cause of building near-universal broadband access. They can even claim credit for making work for public employees to administer the scheme.

I suggest it would be better to let the operating companies keep more of their money in return for exacting network rollout and service obligations with the new spectrum. Auction prices would be lower if such obligations were imposed on spectrum owners. Tax reductions can always be spent more rapidly than grant funding and a whole layer of bureaucracy in allocating funds could be eliminated. The 800MHz and 2.6GHz blocks are next up for sale around Europe with allocations already made in Germany as reflected in the new services described above. The combination of these frequencies is ideal for very high speed access and backhaul to remote areas that could never be connected by fibre, even with the budgeted subsidies.

Whereas auctions are a transparent and effective mechanism for allocation and maximising proceeds, these also have the effect of extracting enormous amounts of money from the mobile sector. That is not necessarily a good thing. While raising Euro 100 billion or so to be transferred to programs in other sectors, European 3G auctions around the millennium put operators under severe financial strain and close to the point of bankruptcy in some cases. This cash crunch severely hampered investment in development of the 3G networks and businesses for several years.  It would be a shame to repeat this mistake just when large amounts of investment capital are also needed to build-out widespread and high-capacity networks.

Either way, the UK is failing in its aim to be on the leading edge of the global digital economy with respect to wireless broadband access. Ofcom, the UK telecommunications regulator, will publish a consultation and proposals for an "auction" for these frequencies at the end of February 2011, according remarks by Chief Executive Officer Ed Richards at the FT conference. Bidding will take place in the first quarter of 2012 and the frequencies will not be available be available for use until 2013.

Get out of the way

Governments shouldn't express preferences for one technology over another. Instead, they should set policy objectives in the broader terms of service performance levels required, how widespread availability should be and possibly also with regard to affordable pricing for "uneconomic" subscribers. Technology and economics are changing very rapidly, as are business models for network operators and service providers. Government policies cannot adapt to let alone predict changes that highly innovative and potentially most effective competitors might seek to pursue.

Governments should minimise their intervention in the "value" chain and resist the temptation to maximize the amount of money extracted from the telecoms sector. Auctions might well be most objective and easily-administered way of allocating spectrum, but that does not justify forcing a damaging economic shock on an entire industry. It has already been shown that bidders can make very harmful decisions for themselves in their attempts to secure their futures with new spectrum for next generation services. Classic "beauty contests" had their shortcomings including subjectivity in selection and windfall gains to winners' shareholders rather than consumers or tax payers. However, such issues are not unique to spectrum allocation. For example, public procurements require bidders quote to supply on and apples-for-apples basis and bear the costs of loss-making obligations as well as taking profits elsewhere. Same goes with post, rail, utility and telecom privatisations. Why not introduce competitive bidding for spectrum also on the basis of significant licensee obligations rather simply sell to the highest bidder?  That way, affordable universal broadband could be provided with some special reporting and monitoring of licensees, but without requiring elaborate schemes to allocate and administer capital grants and operating subsidies.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor has recently published its Extended Mobile Broadband Device Forecast to 2020. Further details are available at: http://www.wiseharbor.com/forecast.html

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