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Summary:

Eleven years ago Britain’s auction of 3G wireless spectrum broke records by raising more than $36.7 billion. So today, when the news broke that the even faster 4G spectrum will be auctioned off next year, why were analysts so underwhelmed?

htc-evo-4g-angled

Eleven years ago Britain was proudly trumpeting its bright new mobile data future, with an auction of 3G wireless spectrum that broke records by raising more than £22.5 billion ($36.7 billion). It was huge — valued at a higher per capita level than anywhere else on the planet — and welcomed by all sides. The bidders, despite having paid as much as £6 billion, were happy to have won, while the government was rubbing its hands with glee. “It will ensure the UK maintains its position as a world leader in mobile telephony,” said the trade minister at the time.

So today, when the news broke that the even faster 4G spectrum will be auctioned off next year, you might have expected fireworks and champagne. Instead, the response has been relatively muted: analysts expect the sale to raise around £3 billion ($5 billion).

Why?

It’s true that the British have conditioned themselves to be a race of eternally disappointed people, but in this case pessimism about the sale is not misplaced — because there are plenty of good reasons to remain skeptical about the upcoming 4G auction.

It’s not just that the process has already been beset by delays (the auction was originally scheduled for 2008, and last year officials said it would happen in 2011). Britons are hopeful it will definitely happen in 2012, but we’ve been burned before. It is definitely part of the ennui towards 4G.

And it’s not just that the rest of the world has leapfrogged Britain in terms of mobile development, although that’s important too. Rollout of 4G has been most extensive in Scandinavia and the Baltics, with Sweden, Norway, Estonia, Latvia and Lithuania all benefiting from super-speed mobile connectivity. Meanwhile the U.S., which is often seen as a backwater in terms of mobile networking, has seen 4G services launch across some cities, although there is still plenty of debate about what 4G actually is. Even Uzbekistan — Uzbekistan! — is getting in on the action.

Those two factors are important, but the more straightforward reason is that, for all the hype around the 3G auction, the results of that blockbuster sale have been a disappointment.

The rollout of 3G was painstakingly slow. It did not start until 2003, and only continued sporadically after that. By 2008, when the iPhone had ignited the smartphone market and demand for data and connectivity was increasing rapidly, it became apparent that the network provision just wasn’t good enough. In fact, it was so poor in cases that in 2008, regulators said they were prepared to take action against O2 — at the time the country’s largest network — for failing to deliver.

It brought the issue to the fore, but things didn’t improve much as a result: a year later — that’s nine years after the blockbuster auction took place— the map of 3G coverage across Britain looked patchier than a pirate’s face.

uk 3g coverage, 2009, courtesy of Ofcom

Looking back today, it’s clear that there were several factors that pumped up that original 3G auction to abnormal levels and raised expectations.

One of the most crucial decisions back in 2000 was to auction five licenses simultaneously. Given that Britain only had four mobile networks at the time, that made sure that there would be a new entrant in the market — and the rules also said that the incumbents would not be allowed to win the biggest license. This made competition intensify dramatically. The existing networks had to make sure they won a license, at almost any cost, while anyone hoping to enter knew they’d have to beat stiff competition (13 companies ended up bidding, with nine of them effectively competing for a single spot).

The auction also happened at the height of the first dotcom bubble, with the bidding beginning just four days before the Nasdaq reached its peak. Valuations were insanely high, and as a result there was a lot of money to splash around.

So perhaps what we see in the reaction to the 4G auction is not pessimism, but realism. Compared to 2000’s 3G bonanza, any auction of the next generation of wireless spectrum in Britain will be late. Evidence suggests it won’t raise anywhere near the same amount of money. And consumers may have to brace themselves for a slow rollout of services that don’t dramatically change their life.

But perhaps that’s not a bad thing. Back in 2001, Paul Klemperer, a professor economics at Oxford University, wrote a rather scathing paper about the 3G sale.

“Twenty-two and a half billion pounds is a great deal of money to raise for selling air,” he wrote.

When the 4G bidders start the auction, perhaps that’s something worth remembering.

  1. We may be looking forward to better speeds etc in the UK but, if the current state of 3G/HSDPA provision in the UK is anything to go by, we shouldn’t be holding our breaths.

    Whilst large areas technically have coverage, that coverage is so poor with regards to strength and often over-subscribed that it might as well not be there at all. 4G may help here but the carriers need to invest heavily in the infrastructure or it will fail.

    The auction for 4G may start in the first quarter of 2012 but even with an early uptake we still face a staggered roll-out as 4G will use the parts of the spectrum currently occupied by analog TV which is being switch off at different times in different areas.

    I have a feeling it’s going to be a painful journey and that we are going to be over charged for 4G devices.

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    1. Corrupted Mind Tuesday, March 22, 2011

      I think you’re being overly pessimistic here. The auction has been structured to ensure that all four operators get a slice of spectrum so this will result in more realistic bids – while not great for the exchequer it will ultimately good for consumers. When you also factor in a commitment to provide 95% coverage with one license (I like to call that the Vodafone license) it ensures that someone builds out the network. I expect this slice will go at a bargain basement price.

      As to whether its going to be a painful journey or not. I sense that it will be much smoother than our 4g journey mainly as a consequence of having seen and experienced other countries achieving the same feat. (It would be incorrect to imply that there are no benefits ti starting later).

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      1. All four operators are guaranteed their piece => everyone bids 1 pound…

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  2. Umm, could it be that services were so poor because they were rolled out in the frequency band that was available, rather than the one that was actually suitable? If anyone expects to be able to roll out a nationwide network using wavelengths that provide inherently poor building penetration and coverage-per-investment made, that I have a certain bridge I’d like to sell them. 2100 Mhz is a lot more suited for WiFi than for a mobile network, as the coverage maps shown here would seem to demonstrate.

    Physics matters a lot more than promises and hype.

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