Three warns of phone contract ‘price rises’, blames BT and EE – exclusive

The price of your phone contract could skyrocket over the next five years, according to a senior Three executive.

Phil Sheppard, Director of Network Strategy at Three, has told TrustedReviews that Ofcom must intervene to stop BT from “dominating the market” and sending phone tariff prices through the roof. According to Sheppard, BT is trying to stockpile mobile network spectrum, which are the vital radio frequencies that allow operators to supply your phone with signal.

Three is asking Ofcom to impose a 30% cap on spectrum ownership for next year’s spectrum auction that will see newly freed-up frequencies sold off. Here’s how available spectrum ownership in the UK breaks down right now:

• BT/EE – 42%
• Vodafone – 29%
• Three – 15%
• O2 – 14%

If Ofcom followed Three’s advice and introduced a post-auction cap, it would block BT – as well as EE, its subsidiary – from purchasing any spectrum at all in the next auction. Vodafone’s opportunity to buy more spectrum would also be severely limited. Speaking to TrustedReviews about Three’s demands, a Vodafone spokesperson said:

“These are some pretty surprising comments from an operator which has been in the UK market for more than 15 years and has had ample opportunity, as well as the financial resources, to bid for spectrum when it’s become available.”

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What is spectrum?

Spectrum is a shorthand way of describing the radio frequencies that your phone uses to communicate on. They’re allocated to network providers (e.g. EE or Vodafone), so that you can send texts, make calls, and use data.

When new spectrum is released, it means that mobile providers can upgrade their networks. So with more spectrum, an operator is able to serve more people and offer faster speeds.

But not all spectrum is the same. Different frequency bands have different characteristics. For instance, low-frequency spectrum (like the 800Mhz band) carries less data, but works better over wider areas, penetrating through walls easily.

By comparison, high-frequency spectrum (like the 2.6GHz band) carries more data, but is better suited to small areas – like a football stadium, or a densely populated neighbourhood. So if you want to cover wider areas with high-frequency spectrum, you’ll need more masts.

The spectrum that is being sold off in the UK next year is high-frequency, which means it can carry more data. High-frequency spectrum is great for 4G networks, and will be very attractive to the networks bidding on it – but not as attractive as the low-frequency spectrum sold in 2013.

‘Strategic bidding’

Sheppard went on to accuse EE of “strategic bidding” in Ofcom’s previous 4G auction, which saw highly valuable 800Mz spectrum sold to five different bidders back in 2013: “What we saw was EE bid very high values in that auction, and they did purchase the maximum that they were allowed – there was a cap. Looking at their bid history, they would have purchased even more if that hadn’t been the case.”

According to the network head, EE was able to purchase significantly more spectrum in the last auction because it had a much larger customer base, which made it easy to justify the spend to shareholders. But Sheppard says the fact that Three had a lower number of customers made it very difficult to match EE’s bids. That auction, combined with BT’s takeover of EE earlier this year, has left the two networks with a staggering 42% share of the available UK spectrum – far higher than Three’s 15%. Sheppard hopes that a 30% share cap at next year’s election with help level the playing field.

“The ownership of spectrum needs to be roughly similar across operators. If you have four operators, an ideal uniform spread would be 25% ownership each – it would be the most competitive market,” explained Sheppard. “We’ve come up with a number that means BT cannot bid in that auction, so it stops them from doing strategic bidding.”

At the time of the previous auction, EE had the largest customer base by a long way, holding around 38% of the market – that’s in contrast to Three’s 7% share, according to Ofcom.

Stockpiling spectrum

At the last auction, Hutchinson 3G UK Ltd, the company that owns Three, spent £225 million on spectrum, while EE dropped a significantly higher sum of £588 million. But Sheppard claims that most of this spectrum has been wasted:

“BT has more than enough spectrum. They have lots of spectrum they haven’t touched, and have done nothing with it since the last auction. They haven’t used most of the spectrum for EE either. We’re not asking them to lose any of that; we’re just saying they have enough. The next auction would not equalise, but lessen the gap.”

“An auction is a good way to determine the market value, but we need competition measures to stop any one player having a disproportionate amount,” he added.

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EE: We pioneered 4G

In a statement given to TrustedReviews, EE said: “We have never stopped using our spectrum to deliver the very best network experience for customers. We pioneered 4G and we are a leader in network speeds, developing technologies to provide some of the highest mobile download speeds in the world. We are unique in our commitment to expand 4G coverage to 95% of the UK’s landmass by 2020, further than any other UK network has done, and will continue to ensure the UK stays at mobile technology’s leading edge.”

The spectrum wars are a doubly sore topic for Three, thanks to the European Commission’s recent block of an attempted merger with O2, which would’ve seen their spectrum share combined to total 29% – matching Vodafone. But BT’s EE buyout earlier this year was given the thumbs-up by Ofcom, which has allowed BT to hold a large share of UK spectrum.

“When BT purchased EE, the Competition Market Authority or Ofcom could’ve done something about that, but they failed to do that. We think that was a mistake,” said Sheppard. “The only other chance [to equalise spectrum ownership] is a competition review at the spectrum auction, which is the only significant opportunity in the next five years.”

Did Ofcom do enough? Ofcom responds

But Ofcom denies that it hasn’t done enough to prevent BT from stockpiling spectrum. Responding to Sheppard’s claims, Joe Smithies, Head of Media and Corporate Relations at the regulator, told TrustedReviews: “We don’t think that’s fair. We put the spectrum to market, and we put in place specific rules to ensure that all the players got a good slice of spectrum.”

He continued: “Now, of course, BT have since merged with EE, so the spectrum holdings that Three talks about are the result of the merger. But they were separate entities at the time of the auction. Now that won’t be the case this time; they’ll be bidding as one company.”

“It’s a bit premature of them to suggest that we haven’t done enough. Last time, we designed the auction to ensure that they got a good slice of spectrum,” Smithies added.

Update (September 23 2016) – An Ofcom spokesperson said: “We plan to publish a consultation in the autumn, which will set out our plans for the next spectrum award.”

The 2013 auction raised £2.4 billion for the government, with Ofcom estimating that it would provide benefits worth £20 billion for UK consumers. An Ofcom assessment suggested that all four operators that won spectrum – EE, Three, O2, and Vodafone – held sufficient spectrum to keep their businesses viable in the medium-term. But Ofcom also found that without intervention (i.e. reserving spectrum), the smallest operator (Three, at the time), might not have been able to acquire the spectrum it needed to compete effectively in the market.

It’s worth noting that the National Audit Office assessed Three’s bidding strategy at the 2013 auction, and concluded that Three got a great deal:

“Our evaluation of Three’s bidding strategy suggests that it was designed to ensure that Three never paid more than the reserve price for spectrum packages that had been reserved for it or new entrants to the market. Three knew early on in the auction that it was the only bidder for the reserved spectrum. In our opinion, it is very unlikely that the reserve price was equal to its true value to Three’s business.“

Following the auction, EE held the largest amount of spectrum, followed by Vodafone, then O2, then Three, and finally BT. Both EE and Three then held the same amount of valuable 800Mz spectrum, but EE’s hoard was bolstered by higher frequency 1,800Mz and 2.6GHz spectrum, of which Three has very little and none, respectively.

No spectrum left

Sheppard argues that Three is now facing a serious shortage of spectrum: “We’ve got two main chunks of spectrum for capacity in the network; we have some 3G spectrum and some 4G spectrum. The 4G spectrum, we’ve deployed all we have.”

To solve this problem, Three plans to start aggregating spectrum over the next two years. That means Three will soon begin converting its 3G spectrum to 4G spectrum, and will then combine the two separate bands. Thanks to the advanced modem technology in modern smartphones, you’ll be able to use this “aggregated” spectrum just like a normal band, which should bolster Three’s capacity.

Unfortunately, Sheppard says that it still won’t have enough spectrum to reach the speeds that new modems are capable of. For example, earlier this year, Qualcomm announced its new ‘Snapdragon X16’ modem, which is expected to debut in handsets next year.

The Snapdragon X16 is capable of 1Gbps download speeds; that means a 4K movie – estimated at 100GB average file size – could be downloaded in just over 13 minutes. And a Blu-ray movie, which averages at around 20GB, would arrive in a quarter of this time. But Sheppard revealed that Three “can’t reach the headline speeds”, and would only be able to manage peak speeds of 200Mbps with its current spectrum resources.

Sheppard also believes that prices will rise for the customers if Three can’t get its hands on more spectrum: “We’ll see prices rise over the next five years as competition reduces. Prices on mobile have significantly reduced over the last four or five years, which Ofcom has recognised as being partly due to having Three as a challenging operator to drive down prices. Last year was the first year where prices started to rise for contracts, and that’s an early indicator that this spectrum holding is having an effect.”

He cited Three’s price hike on All-You-Can-Eat data plans last year as a direct consequence of the company’s limited spectrum supply: “One of the main reasons that prices went up was that we had to pull back from offering such generous data offers, and that was to effectively ensure that we had a good service for everybody, due to limited capacity.”

“It’s a risk over the next five years that you get less competition, and price reductions will reverse and start going up, and choice will go down,” he added.

Ofcom has not released the details of its next spectrum auction, but tells TrustedReviews that we’ll find out more “later this year”. First, there’ll be a consultation, after which the networks can respond. This will be followed by a statement from Ofcom that finalises the terms of the auction. The auction is expected to go ahead at some point in 2017.

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