Convergence Conversation

Of the five UK 'winners', BT had to sell its mobile interests to Telephonica to reduce its debt mountain. T-Mobile (bid as One to One) has announced a merger with another 'winner' Orange (previously bought by FT) due to the lack of profitability. 3 (bid by TIW) and Vodaphone are still in one piece. All operators have now infrastructure sharing agreements. There remains a huge gap between users expectations of service and operators ability to deliver. In 2006, Vivianne Redding declared UK users were paying an auction related 2p extra a minute for mobile calls and costs for fixed to mobile calls and SMS calls with auction associated costs will continue until 2015.

On Oct 19^th 2009 the UK Department of Business Innovation and Skills, put out to consultation its intended direction to Ofcom on the release and auctioning of additional radio spectrum and the conditions under which existing spectrum can be re-farmed. The desire for a further quick buck is balanced with the need to increase coverage. Ofcom the regulator will carry formal responsibility for extracting as much money as possible from operators through the auction process while fulfilling its new duty in creating an environment suitable for investment! Intelligent people will be forced to sound and behave stupidly, in the full knowledge that the very objective they've set ( a meaningful Universal Broadband service) will be delayed by another 10 years if cash extraction process is anything like that of 2000.

Apart from this effort here has been no shouts of incredulity so far. Perhaps we are getting used to such banality! Give a radio engineer the job of building a universal broadband service, and he would suggest perhaps two fabrics of radio masts, accessible to all operators. Powering 5 separate networks in urban areas and having limited coverage in rural areas is wasteful. We do not need 5 sets of radio masts, as we do not need 5 separate electricity grids. Pure financial expediency means some 20,000 of the existing 53,000 mobile radio beacons are already shared to some degree. Planned as a single or even a dual fabric, you could at least ensure full coverage and the ability to switch off much of the capacity when not needed. The Green party calculated savings the equivalent of powering 70,000 homes annually. Better still we manage our fixed broadband and mobile broadband as a single data transport fabric, and use all the allotted frequency to achieve the outcomes we need.

The good news is that engineers from the 5 mobile companies are getting on with infrastructure sharing contracts. Vodaphone and 02 have a European wide sharing arrangement. 3 and T-Mobile formed a 50:50 Network sharing venture venture called Mobile Broadband Network limited. One assumes Orange will join the latter. The engineers I assume plan together at the UK Mobile Operators Forum. It is a shame BT Openreach or BT Wholesale have not found a way to play in this space. It is also a shame that network sharing has not evolved to spectrum sharing, but perhaps the £1bn costs in upgrading each network to 4g(LTE) will trigger this level of co-operation. This level and depth of sharing will also be driven by an expectation mobile broadband bandwidth will need to finds it way to £2 a GByte.

Unless industry are truly truly stupid this second Digital Britain auction heist should fail. The new game, and it was run like a game last time, should be just how badly can we collectively make it fail while ensuring the spectrum ends up being used to improve the nations connectivity and aiding the creation of UK data transport fabric encompassing fixed and mobile networks.

Last time out, Professor Binmore had 13 participants, some with deep pockets, chasing 5 licenses. The licenses to operate 3 G networks was like someone having the right to kidnap your family and offer them to the highest bidder. If offered the chance to save your family it is hard not to partake. Once the participants were signed up game theory took over and the rules of the game worked as forecast, each of the 5 licences bid up to a similar amount, the only surprise to some was the crippling amount bid.

There are now 5 network operators who can bid to extend or trade their family members, they cannot be taken from them. All 5 operators are now sharing infrastructure (some inter-marriage) to some degree. There are now more mobile phones than people and so any new services will be a re-farming (device -upgrades) of an existing base. All operators carry debt and are seeking to cut costs. But what of new operators?

Carphone Warehouse is already a major reseller of mobiles but is seeking to separate out its network and operations division, so there may be interest here as they can convert re-sale customers to their network. BT could do with a licence, but its debt, its pension fund deficit, and its investment in fibre upgrades points to partnership, rather than starting from scratch. All that FTTC would support an infrastructure player and perhaps a partnership on Femto cell deployment, but the latter assumes further sacrifice of PSTN revenue something BT has never been in any hurry to do.

This leaves Sky and Virgin Media. Virgins MVNO uses T-Mobiles network which is already outsourced as a 50:50 joint venture with 3 UK through Mobile Broadband Network Limited. You might change the point or depth of integration but not build another network. Sky have built an LLU network but would likely go the MVNO route to prove they could build a customer base before they get involved in infrastructure. Cable & Wireless have picked up spectrum to offer converged fixed and mobile services to business users, and may wish to do more.

3G promised but is only beginning to deliver high speed Internet services, and more is to come from HSPDA upgrades. It is assumed the new spectrum, especially at 800Mhz and re-farmed 900Mhz will be used to support 4G or LTE (long term evolution) a new go faster mobile service now emerging from the labs. It is not yet proven and upgrades to existing networks will be expensive, circa £1bn per network or shared network, so there is no great hurry to launch. Only 02 have announced trials. Meanwhile Ofcoms consultations on NGN investments this September, triggered by BT's decision not to mass migrate customers to an new emulated IP based PSTN service, showed no operator has any desire to accelerate NGN roll out. The focus is on cost recovery on existing assets.

Verizon and Vodaphone are affiliated. Would AT&T be interested in a small overcrowded market with rich pickings elsewhere? Probably not. Will Google want to purchase some spectrum for nation? They failed to do so in the US, but it is a nice thought.

The 2010 auction will consist of 6 lots of 2x5MHz in the 800MHz, 7 lots of 2x10Mhz at the 2.6Ghz. There is minimum of 2 lots and a maximum of 3 lots to be bid in the 800Mhz range. In the 2.6Ghz, you can bid for a maximum of 2 lots. There is also 1 lot of 50Mhz spectrum for TDD (Wimax). Existing holders of 900Mhz (Voda/02) and 3G space at 1.8 GHtz will need to hand back some spectrum in order to take part in the 800Mhz auction. Any returned spectrum will be re-auctioned at the same time and any cash given to the company surrendering the spectrum. To complete the variables for the game there are spectrum caps and temporary spectrum caps to encourage Voda/O2 to surrender some space in 900 Mhz, so increased coverage can be facilitated.

Surrendering spectrum creates more biddable spectrum thus it complicates the game a bit more, reducing the likely competition in the new 800 MHz space. One good reason to take part is to see whether you could get any of the original £22.4bn back, or keep the prices high enough to keep the LLU fixed operators including BT out. But the spectrum caps limit this possibility, and the way the game works is that it is the action of paying more for new spectrum which drives others to bid up spectrum in the other lots. It looks better to not enter the game, and trade and share spectrum after the event through the network sharing agreements.

Any future build out is likely to be physically managed by one or two of the network infrastructure partnerships already formed. So why would the spectrum need to be held by anyone else other than these two consortia? If these consortia each had commitments to wholesale services, then why bid for spectrum, when what you need is a brand and the beautiful devices to build and hold volume? If it is efficient to share networks, why not share the spectrum?

Once the initial divvy up of spectrum in 2000 was completed and the battle for initial customers complete, it could be argued the value of the spectrum and any future spectrum would drop to zero, unless you could create or induce a shortage. In truth there is no shortage or scarcity (just inconvenience) as every fixed broadband end point could be an access node to the mobile network. If BT Openreach was not part of a BT group defending legacy revenues, they would work a mobile network partnership pretty quick. Planning fixed and mobile networks separately must be odd, when both are or will in essence be but carrying data transport fabrics. These are not service businesses just bit transport businesses.

So how would Professor Binmore create a game plan to extract some billions in 2010? The number of real participants will be less and the possibility of some interesting left field events to upset his game is high. For the 5 existing licence holders, he cannot kidnap their families. There is an invite to surrender spectrum. The UK does not need 5 over lapping semi-built mobile networks, 1, ok, 2 mobile data transport fabrics and 2 fixed data transport fabrics are more than enough, better still if they were planned as converged data transport fabrics. Given the real power belongs to the brands rather than the owners of the plumbing, then zero participation in the auction by brands means prices drop or dis-appear, because nobody is brand building just providing simple connectivity, something they have largely failed to do adequately because of the legacy of the first heist. The only protection consumers need is that the data transporters (mobile, fixed or preferably both) have to wholesale on an equal basis to all parties.

The number of possible left field events are many. The efficiency of sharing networks and sharing spectrum has been mentioned. The saturation of mobile phone sales is another. One left field item will be Ofcoms new legal responsibility to encourage investment. When Ofcom acquire a legal responsibility to encourage investment then it will be illegal (perhaps unjust) for it to extract billions before any network investment occurs? The need to use good networking to re-charge and change the economy is becoming more important. The notion of taxing not just at source, not just pre-tax a possible outcome, but to act as a barrier to better networking must be a consideration.

Although many apologists describe UK networking as fit for purpose, the 2000 auction heist of £22.4bn or £350 for every man woman and child ensured it is nothing like it could be! In fact we have yet to re-cover from it.

It is difficult to believe how sensible people would conceive another auction would enhance Digital Britain. The 2000 auction was a one off trick not to be repeated.