Market Insight

Vodafone and O2 are the biggest spenders in UK spectrum auction

April 06, 2018

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UK telecoms regulator Ofcom has announced the results of the principal stage of its recent spectrum auction in the 2.3 GHz and 3.4 GHz spectrum bands. The auction was for 40 MHz of 2.3 GHz spectrum and 130 MHz of 3.4 GHz spectrum. The 2.3 GHz spectrum band will boost operator’s 4G capacity and is immediately usable by current devices, whereas the 3.4 GHz spectrum band is earmarked for 5G services and is incompatible with current devices.

In total, UK telcos Vodafone, EE, O2 and Three spent £1.35 billion in the spectrum auction, with all money raised from the auction to be paid to HM Treasury. This figure is below the £2.3 billion spent in the UK 4G auction in 2013, which was for 30 MHz of 800 MHz spectrum and 105 MHZ of 2.6 GHz spectrum, but remains a considerable outlay at a time when operators are struggling to increase revenues. 

The end of the UK spectrum auction marks the start of a busy period for European telcos, with mid-band (3.4-3.8GHz) spectrum auctions expected in several countries - including France, Germany, Italy and Spain - by the end of 2018.

Our analysis

Vodafone spends £378 million on 50 MHz of 3.4 GHz spectrum

Vodafone acquired more spectrum in the 3.4 GHz band than O2 (40 MHz), EE (40 MHz) and Three (20 MHz). Vodafone’s spend reflects the importance of network leadership to its overall strategy as the operator aims to have the best, or co-best network, in each of its territories. Moreover, Vodafone’s heavy investment in 5G spectrum also highlights its commitment to the UK, following several years of underperformance in the country, and continued speculation around Vodafone’s ownership of its UK business after talks at a group-level with Liberty Global.

In the 2013 auction, Vodafone acquired a total of 2x20 MHz of paired spectrum and 25 MHz of unpaired spectrum in the 2.6 GHz spectrum band, which underpinned its 4G rollout. Given its existing 4G spectrum holding, it is unsurprising that Vodafone did not acquire any spectrum in the 2.3 GHz band in the 2018 auction.

O2 wins 40 MHz of 2.3 GHz spectrum for £206 million, in addition to 40 MHz of 3.4 GHz spectrum for £318 million

While Telefónica-owned O2 won 40 MHz of 3.4 GHz spectrum, the more crucial result for the operator was the acquisition of all 40 MHz of the 2.3 GHz spectrum sold by Ofcom in this auction. The acquired spectrum will provide a much-needed boost to the rather modest amount of 4G spectrum currently owned by the operator, easing capacity concerns. O2 owns 2x10 MHz slices of spectrum in the 800 MHz band, but failed to acquire any spectrum in the 2.6 GHz band during the 2013 auction. As a result, the 2.3 GHz spectrum will be important for O2 in improving 4G coverage in urban areas. Thanks to its network sharing agreement with O2, Vodafone stands to benefit from O2’s deployment of 2.3 GHz spectrum in the eastern half of the UK.

Following the end of the UK spectrum auction, it is likely that the issue of Telefónica’s ownership of O2 will be revisited, with Telefónica seeking to reduce its level of debt. During the operator’s Q4 2017 earnings call, management stated that work to prepare O2 for an IPO is ongoing. IHS Markit believes that the results of the spectrum auction are positive for Telefónica, and this is likely to fuel interest in the UK asset ahead of the proposed IPO.

BT’s EE pays £402 million for 40 MHz of 3.4 GHz spectrum

The H217 IHS Markit RootMetrics mobile network performance report showed that EE led the UK market for mobile network performance with a score of 93.7, followed by Three (91) and Vodafone (90.8). The auction outcome – whereby Vodafone outspent EE on 3.4 GHz spectrum – indicates that EE faces an increased level of competition for mobile network leadership in the UK. It also reflects BT’s need to be financially disciplined at a time when it faces a number of headwinds, including a significant outlay on FTTP infrastructure and continued problems within its global services division. BT demonstrated a similarly disciplined approach to the recent Premier League rights auction, where it reduced its total expenditure.

Prior to the auction, EE had agreed not to bid for any of the 3.4GHz spectrum as it already owns 4G spectrum in an array of frequencies (800 MHz, 1800 MHz, 2.6Hz).  

Three acquires 20 MHz of 3.4 GHz spectrum at a cost of £151 million

As in 2013, Three’s approach to the UK spectrum auction was rather conservative. Three acquired only 20 MHz of 3.4 GHz spectrum in the auction, although the operator’s 5G spectrum position is bolstered by the acquisition of fixed-wireless provider UK Broadband, which it completed in May 2017. As part of the £250 million deal, Three acquired 40 MHz of 3.4 GHz spectrum.  

However, Three’s 4G spectrum holdings look less positive as the operator failed to acquire any spectrum in the 2.3 GHz range. It was a similar situation in the 2013 auction, when Three did not acquire any spectrum in the 2.6 GHz band.  As a result, Three’s 4G deployment strategy will continue to focus on using the 1800 MHz spectrum it acquired from EE in August 2012, as part of the conditions of the Orange/ T-Mobile merger, as well as the 2x5 MHz block it has in the 800 MHz band.

Looking forward, the next 700 MHz auction in the UK is expected by the end of the decade. IHS Markit believes that this auction is particularly important for Three. Three’s mobile network carries more data than any other network in the UK, and faces the threat of capacity constraints in the future unless it acquires more spectrum.

UK MNOs continue to dominate spectrum auctions

Prior to the UK auction, Ofcom’s list of approved applicants included fixed-wireless provider Connexion, as well as small cell and wireless backhaul vendor Airspan. Connexion dropped out of the auction shortly before it started, while Airspan did not acquire any spectrum at the auction, as UK MNOs maintained their control on UK spectrum.

Geography
UK Western Europe
Research by Market
Mobile & Telecom
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