Three Proposes Protection in UK Spectrum Auction

Yet Another Row Develops as Rivals Are Likely to Clash

Following a heated debate over the future of BT Openreach and the proposed merger between Three and O2, another contentious problem is brewing in the UK.

Only weeks after the deal to buy O2 was rebuffed, Three CEO Dave Dyson called on Ofcom to impose restrictions on rivals at an upcoming spectrum auction of 2.3 GHz and 3.4 GHz frequencies.

It’s not difficult to see why Mr Dyson started lobbying so soon. Having failed to buy O2, Three is in a precarious position without the assets or scale needed to challenge its larger rivals. The operator claims to carry over 40 percent of UK data traffic, but holds only about a 15 percent share of the airwaves — an unsustainable position that has already forced Three to raise prices on some tariffs.

Without adding extra capacity, it will be extremely difficult for Three to deploy the kind of challenger strategy with which it has become synonymous. This is particularly relevant given its preference for pure-play mobile in a market rapidly evolving to multiplay services. In many ways, the network’s very future depends on acquiring more spectrum. Until this happens, Three will be treading water, unable to formulate a long-term strategy as rivals bolster services and Sky prepares to enter the market.

Mr Dyson has called for a 30 percent spectrum cap on any operator following the auction. This seems wishful thinking given that the combined BT and EE — which owns over 40 percent of the spectrum— would have to give up significant airwaves to take part. When the two companies came together, the merger was surprisingly smoothly dealt with by competition authorities, without any requirement to divest spectrum.

Some form of protection for Three seems plausible. Indeed, in 2014 Ofcom initially proposed a 37 percent spectrum limit post-auction in an effort to maintain competition, although it later backtracked. Still, the regulator has steadfastly campaigned for a four-player mobile market and would be likely prepared to consider various options to safeguard long-term competition. A consultation on a number of proposals seems inevitable.

This could spark the latest war of words between the networks. Undoubtedly, Three will be most vocal given that its need for airwaves appears the greatest. But any effort from Ofcom to rebalance spectrum holdings could trigger the threat of legal action from Vodafone and BT, which would be certain to campaign for an unrestricted sale. They will likely argue that Three missed the opportunity to bid more aggressively at the 4G auction in 2013 and that in any case, it has the funds and backing to spend heavily.

We should brace ourselves for yet another feisty and potentially acrimonious debate.