The 4G Auction Fizzled – Hurrah!

George Osborne has got a problem with the 4G auction result. He’s already spent the £3.5 billion he expected from it – or at least he wrote it into his Autumn Statement in December, so he could pay down some of the UK’s deficit – and now he has only two-thirds of that: £2.3bn.

It is hard to resist the urge to cheer at a setback for Osborne. As Chancellor of the Exchequer, he is so unpopular that his ritual humiliation when 60,000 Paralympic spectators booed him was a real highlight of Britian’s 2012 Summer of Sport. But there is more to be said about this fiscal fumble.

Bursting the 4G auction bubble?

Firstly, why were the expectations so out of line with the result? As it closed there were reports that it might go beyond the £3.5 billion expectation, perhaps even raising more than £4 billion. What were people thinking?

Obviously many people remembered the £22 billion raised by the 3G auction in 2000. Alongside this, £3.5 billion seemed a suitably modest expectation.

But this auction was dealing with a much smaller amount of spectrum. And a vastly different market.

In 2000, that 3G spectrum was the only way to get into mobile data services, which were expected to grow rapidly to eclipse voice. It was a life-or-death choice for operators, since they were unable to offer mobile data on their existing spectrum.

The structure of the auction deliberately pushed operators’ bids up, and the Treasury happily trousered £22 billion. But the industry suffered.

The telecom-and-tech bubble burst immediately after. It’s not clear whether the huge auction prices caused the telecoms part of the crash, but they certainly didn’t help. Operators were saddled with huge debts. BT had to spin off O2, and mobile data services took a long while to arrive.

Won’t get fooled again

This time around 4G isn’t the only game in town. Operators already have offerings on 3.5G, 4G is just an incremental upgrade, not an entry to a new world.

It’s also a world they can get into by other routes. In 2000, the Ofcom spectrum regime meant that licence holders could only offer the services which the regulator allowed them on any given spectrum. Now Ofcom has an enlightened technology-neutral regime where operators can do what makes commercial sense, subject to energy restrictions and international agreements.

This means that EE has been allowed to offer it on spectrum previously earmarked for 3G services. The result has been useful but, as EE’s results showed, has hardly set the world on fire. As part of the deal that let EE offer that 4G service, the operator had to sell some spectrum to 3, so that’s another 4G service the UK can have independently of the 4G auction results.

There have also been other alternatives offered to the so-called 4G spectrum, for use by 4G services, and the 5G offerings which will follow. Air traffic control radar could be shut off, analogue broadcasting is being turned off and digital signals can be shuffled away almost at will.

This was not an all-or-nothing auction.

Besides that, the market for data services is now well-established, and the four mobile operators are a cosy club which only argues to entertain an audience, and keep the regulator from treading on their toes.

Given all that, the fact that the operators got the spectrum cheaply may be  inconvenient for the Treasury, but it should be good for operators and their customers. Lower spectrum costs will mean that services can be offered more easily and cheaply. Lower spectrum costs could benefit us all.

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