HC 1258 Published on 3 November 2011

by authority of the House of Commons London: The Stationery Office Limited

£20.00

House of Commons

Culture, Media and Sport Committee

Spectrum

Eighth Report of Session 2010–12

Report, together with formal minutes, oral and written evidence

Ordered by the House of Commons to be printed 25 October 2011

The Culture, Media and Sport Committee

The Culture, Media and Sport Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the Department for Culture, Media and Sport and its associated public bodies.

Current membership

Mr John Whittingdale MP (Conservative, Maldon) (Chair) Dr Thérèse Coffey MP (Conservative, Suffolk Coastal) Damian Collins MP (Conservative, Folkestone and Hythe) Philip Davies MP (Conservative, Shipley) Paul Farrelly MP (Labour, Newcastle-under-Lyme) Alan Keen MP (Labour, Feltham and Heston) Louise Mensch MP (Conservative, Corby) Steve Rotheram MP (Labour, Liverpool, Walton) Mr Adrian Sanders MP (Liberal Democrat, Torbay) Jim Sheridan MP (Labour, Paisley and Renfrewshire North) Mr Tom Watson MP (Labour, West Bromwich East)

Powers

The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk.

Publication

The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/cmscom. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some of the written evidence are available in a printed volume. Additional written evidence is published on the internet only.

Committee staff

The current staff of the Committee are Emily Commander (Clerk), Andrew Griffiths (Second Clerk), Sarah Heath (Assistant Clerk), Elizabeth Bradshaw (Inquiry Manager), Jackie Recardo (Senior Committee Assistant), Keely Bishop/Alison Pratt (Committee Assistants), Steven Price, (Committee Support Assistant) and Jessica Bridges-Palmer (Media Officer).

Contacts

All correspondence should be addressed to the Clerk of the Culture, Media and Sport Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6188; the Committee’s email address is cmscom@parliament.uk

Spectrum 1

Contents

Report Page

Summary 3 

1  Introduction 5 What is spectrum? 5 How spectrum is allocated and regulated 6 

Our inquiry 8 

2  Mobile network operators and their spectrum use 9 Liberalisation of the 900 MHz licences 10 Spectrum trading 12 Spectrum licence fees 14 

3  The next spectrum auction 16 Ofcom’s auction proposals 16 

The number of mobile network operators 16 Spectrum caps and floors 17 

4  Spectrum and coverage 20 Rural broadband 20 

Coverage obligations 22 Broadband Delivery UK 24 Infrastructure 25 

5  Other spectrum users 30 Public sector spectrum 30 Programme-Making and Special Events and interference 31 

London 2012 Olympic Games 32 Interference 32 

Satellite spectrum use 34 

Conclusions and recommendations 37 

Formal Minutes 41 

Witnesses 42 

List of printed written evidence 42 

List of Reports from the Committee during the current Parliament 44 

Spectrum 3

Summary

Spectrum is an important and finite resource. Many industries such as tourism, entertainment, mobile telephony and mobile data services depend on having access to appropriate spectrum, and its value to the UK economy must not be underestimated. Spectrum is also vital for critical services such as defence, emergency services, maritime navigation and air traffic control where people’s lives depend on safe communications.

Ofcom, as spectrum regulator, has a very difficult role to play in striking a balance between the needs of consumers, spectrum users and service providers, and the public purse. On the whole, we have found that Ofcom is doing a good job in striking this balance and is often having to make very difficult and commercially sensitive judgements.

Ofcom’s consultation on the rules for the next spectrum auction, which will take place in 2012, has divided opinion among the four mobile network operators, who, we have discovered, rarely agree on matters concerning spectrum allocation.

We have examined the liberalisation of some existing spectrum licences in the 900 MHz bandwidth—originally allocated for second generation mobile use—which has allowed the network operators holding those licences to use them for third generation mobile use. We conclude that this liberalisation has not permanently distorted the market in favour of those licence holders.

We are concerned that the sale by Everything Everywhere of some of its spectrum will result in the company making a substantial profit from a public asset that was granted to it for free. We recommend that the Government and Ofcom look into mechanisms by which at least a significant proportion of the proceeds could be used to benefit consumers.

Ofcom proposes that one of the spectrum licences available at the auction will contain a coverage obligation requiring the successful bidder to offer mobile internet coverage to an area in which at least 95% of the population lives. We believe that this is achievable and, in fact, does not go far enough to hasten the roll-out of mobile broadband. We recommend that the coverage obligation for this licence should be set at 98% and that Ofcom consider applying this obligation to more than one licence.

We agree with Ofcom’s proposals to implement spectrum caps and floors at the auction, as we believe that this is the best viable option to ensure a competitive tension in the spectrum market place.

We welcome DCMS’s proposal to release public sector spectrum, but emphasise that it is essential that the Government works closely with Ofcom on this matter to ensure its international harmonisation.

We note the concerns of the Programme Making and Special Events sector regarding the relocation of their spectrum allocation and the problems it has faced with interference. While we welcome Ofcom’s work in managing interference, we urge it to continue to monitor this area closely and rapidly revoke the spectrum licences of service providers causing significant interference.

4 Spectrum

It is understandable that spectrum policy has been heavily focussed on mobile services recently because of the advent of 4G services and the forthcoming spectrum auction. However, it is vital that other spectrum users are not overlooked by policy makers and regulators.

We recommend that Ofcom’s remit is widened in order that the interests of British businesses, whose spectrum use plays an important part in the UK economy, are best served.

Spectrum 5

1 Introduction

What is spectrum?

1. The “spectrum” referred to in this Report is the part of the electromagnetic spectrum which is usable for radio wave transmissions, and is also referred to as “the radio spectrum”. It is made up of a range of radio frequencies, from extremely low (3 hertz (Hz)) to extremely high (300 gigahertz (GHz)). Television, radio, mobile phones, mobile internet services and other wireless devices such as radio microphones all rely on being able to use sections, or “channels”, of the spectrum in order to function. Spectrum is a finite resource and, if usage of it becomes too concentrated, users will experience interference and interruptions to the service.

2. Spectrum is measured in bands of megahertz (MHz). The term “bandwidth” refers to the range of frequencies in a particular band. Spectrum has different properties depending on its frequency. Low frequencies travel much further than high frequencies and so are useful for covering rural areas, although they cannot carry as much information. Higher frequencies do not travel as far, but are more suitable for areas of high usage such as cities.

3. The spectrum between the frequencies of 300 MHz and 3 GHz, which lies somewhere in the middle of the usable spectrum range identified above, is known as the “sweet-spot” because of its suitability for a variety of applications including mobile communications and broadband. It is also internationally harmonised for mobile service use, meaning mobile users on a network using this spectrum have uninterrupted coverage when crossing international borders. Spectrum use across the bandwidths is shown in the chart below:

Source: Ofcom

Electricwaves

Radiowaves Infrared Visible

light Ultraviolet X-rays Gammarays

Cosmicrays

Radio spectrum

“Sweetspot”

3 30 300 3 30 300 3 30 300kHz MHz GHz

Increasing rangeDecreasing bandwidth

Decreasing rangeIncreasing bandwidth

VLF LF MF HF VHF UHF SHF EHF

Medium-waveradio

Long-waveradio

TETRA

Fixed links

WiFi

3G

GSM

TVFM

radio

6 Spectrum

How spectrum is allocated and regulated

4. 50% of spectrum holdings is currently allocated for use by public sector bodies, for example for defence, aviation, shipping and the emergency services. In using this spectrum they are subject to inter-locking international regulatory frameworks set by, among others, the International Telecommunications Union and the Conference of Postal and Telecommunications Administrations.

5. Overall UK spectrum allocation is shown in the chart below:

6. Commercial spectrum holdings are allocated and managed under a separate regulatory regime, made necessary by the existence of so many competing uses and users. Policy responsibility for this specialism was transferred from the Department for Business, Innovation and Skills (BIS) to the Department for Culture, Media and Sport (DCMS) in January 2011, although DCMS does not manage commercial spectrum directly. Subject to a power of direction by the Secretary of State, the allocation and regulation of spectrum is the responsibility of Ofcom, the independent regulator and competition authority for the UK communications industry.

7. The allocation of spectrum is managed by means of licences. Prior to 1998, the then regulator issued licences for specific technologies and purposes on the basis of an assessment of their social and economic usefulness. This was very much a “command and control” model, whereby the regulator managed all spectrum usage. Licences issued under this regime were subject to fees to cover administrative costs only. The Wireless Telegraphy Act 1998 enabled the conduct of auctions as a means to grant licences. The first auction took place in 2000 and, since its formation under the Communications Act 2003, oversight of the auctions has passed to Ofcom. It acts as the competition authority and conducts assessments to ensure that the auctions themselves do not distort the market. Ofcom’s approach has been gradually to liberalise spectrum allocation, removing auction and licence constraints wherever possible and allowing the market greater freedom to determine spectrum usage rather than determining usage itself.

Defence 30%

Fixed/satellite 24%Aeronautical/maritime 14%

Broadcasting 13%

Business radio 5%

Celluar 4%

Emergencyservices 2%

Science 1% Other 7%

Spectrum 7

8. Ofcom’s principal duties as set out in the Communications Act 2003 are to “further the interests of citizens and consumers and to secure the optimal use of spectrum”.1 Ofcom does not have a statutory obligation to secure the greatest financial return from spectrum auctions but notes that “we believe that a well-designed competitive auction is very likely to achieve value for money for tax payers”.2

9. As well as allocating spectrum through auctions, Ofcom also regulates the use of spectrum by the commercial sector. It identifies cases of interference (two or more users of the same part of the spectrum disrupting one another); illegal broadcasting (such as pirate radio); poor use of transmission equipment (such as unfiltered taxi-cab radios); and unlicensed wireless devices, and it has powers to take action in such cases. Ofcom also co-ordinates international agreements for spectrum use with neighbouring countries.

1 Communications Act 2003, section 152

2 SP16 Ofcom written evidence

8 Spectrum

Our inquiry

10. On 10 May 2011, we decided to launch an inquiry that looked at the way in which commercial spectrum holdings were allocated and regulated. Our decision was prompted by the imminence of the next spectrum auction in 2012; Ofcom’s consultation on the rules of the auction, published in March 2011;3 and a Westminster Hall debate on rural broadband on 23 March 2011.4 We were also aware that there were conflicting opinions among UK spectrum users, notably the four main mobile network operators (MNOs), about how the next spectrum auction should be conducted.

11. We agreed terms of reference and invited evidence on the following issues:

• Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision of mobile broadband services;

• whether the forthcoming auction can provide value for money for tax payers and how that should be balanced with benefits for consumers;

• what is the potential for next generation mobile internet services offered by the forthcoming availability of spectrum;

• whether the forthcoming auction can deliver improved mobile broadband coverage in rural areas, as well as cities;

• whether licence fees for mobile operators have previously been set at appropriate levels, and how this should be assessed;

• how the position of the UK compares with other countries, with regards to the allocation and utilisation of mobile broadband spectrum;

• what is the possible impact of the auction on alternative uses for spectrum.

12. We received 22 written submissions and held three oral evidence sessions during which we heard from Three, Everything Everywhere, Telefonica O2, Vodafone, Arqiva, Inmarsat, Intellect UK, Ofcom and DCMS. In June 2011 we were given a technical briefing on spectrum by Ofcom. We would like to thank Greg Bensberg, Director of Spectrum Policy and Matthew Conway, Director, Regulatory Development and Nations at Ofcom, for their technical advice, given informally throughout the course of the inquiry.

3 Ofcom, Consultation on assessment of future mobile competition and proposals for the award of 800Mhz and

2.6GHz spectrum and related issues, March 2011

4 HC Deb 23 March 2011 c315WH

Spectrum 9

2 Mobile network operators and their spectrum use 13. At the time of this Report there are four UK mobile network operators (MNOs): Vodafone, Telefonica O2 (known as O2), Hutchison 3G (known as Three) and Everything Everywhere, which is comprised of the Orange and T-Mobile networks that merged in 2010. The four MNOs each have different spectrum holdings that were allocated to them at previous auctions. There are many more mobile service providers in the UK—including Virgin Mobile, Tesco Mobile and TalkTalk —which offer mobile service packages through the four networks, but do not have spectrum holdings.

14. Current mobile technology, combining voice and internet services, is generally referred to as third generation (3G), although second generation (2G) services (voice and text message) are still in use. Fourth generation (4G) services, the most widely used of which is Long Term Evolution (LTE), are faster and have better coverage capabilities than 3G. At the time of this Report, 4G services have not been launched in the UK. The spectrum auction in 2012 will facilitate the roll-out of 4G services by releasing the necessary spectrum in the “sweet-spot”. The roll-out of 4G services enabled by the release of this spectrum is expected to reach the UK in 2013.5

15. DCMS summarised spectrum allocations among the four MNOs in its written submission:

Initially, spectrum at 900 MHz was first allocated to the two (at the time) mobile operators. Later when 1800 MHz became available it was awarded to four operators (with the bulk going to the new operators that are now known as T-Mobile and Orange, recently combined to form Everything Everywhere). In 2000 the UK ran an auction for 3G spectrum at 2100 MHz and designed it in such a way as to result in five successful different bidders. The existing four operators were successful plus Three joined the market as a new entrant.

16. Spectrum for mobile communication and data transfer is organised, and sold, in bundles of two lots, known as “paired spectrum”. This is because mobile telephones allow two-way data transfer and communications, as opposed to walkie-talkies which only allow one user to communicate at a time. The communication channel from the base station to the mobile device is called the downlink, and the communication from the mobile device back to the base station is called the uplink. The uplink and downlink operate on separate spectrum frequencies, hence there being two different spectrum frequencies in each paired bundle. Paired spectrum is measured in quantities of MHz and often specified in a form like "2x15 MHz" meaning 15 MHz of bandwidth in a lower band and 15 MHz of bandwidth in an upper band. DCMS provided a table of spectrum allocations as at May 2010 in its submission, which shows the spectrum holdings of the four MNOS:

5 Ev 60

10 Spectrum

Paired spectrum holdings in MHz

Spectrum band Vodafone O2

EverythingEverywhere Three

900 MHz 2x17.4 2x17.4 0 0

1800 MHz 2x5.8 2x5.8 2x45 0

2100 MHz 2x14.8 2x10 2x20 2x14.6

Liberalisation of the 900 MHz licences

17. The MNOs’ spectrum holdings are subject to licences set by Ofcom that prescribe what the spectrum can, and cannot, be used for. Holders of licences must pay a licence fee, charged on an annual basis at a rate set by Ofcom.

18. Following European legislation, in January 2011 Ofcom lifted the restrictions specifying that the existing 900 MHz and 1800 MHz licences had to be used for lower and higher frequency 2G, and allowed them to be used for 3G as well.6 The 900 MHz spectrum licences that were “liberalised” in this way are especially effective in providing 3G connections over a wider geographic area, and also have better indoor coverage.

19. Not all of the MNOs had the original 900 MHz 2G licences, and therefore not all of them benefited from liberalisation. As shown in the table above, in May 2010 Vodafone and O2 both had 900 MHz and 1800 MHz spectrum licences; Everything Everywhere only had a 1800 MHz licence; and Three had neither. We wanted to discover whether or not the liberalisation of the 900 MHz licences had distorted the market in favour of the MNOs holding these licences.

20. Kevin Russell, the then Chief Executive of Three, explained to us why he thought the liberalisation of the 900 MHz licences put his company at a disadvantage:

There is a well documented and well understood significant competitive advantage to low frequency spectrum. It transmits about three times as far as high-frequency spectrum. That is an advantage that O2 and Vodafone have enjoyed in the marketplace for a long time. It has now been carried over directly into 3G with the liberalisation. It is a distortion that has been largely addressed in other European countries, so in every other European country that Three operates in, there has been an allocation or a re-auction of 900 MHz spectrum. There is no other country that we operate in other than the UK that has not addressed that distortion.7

Similarly, Richard Moat, Deputy Chief Executive Officer of Everything Everywhere thought that the market had been distorted in favour of the MNOs holding the liberalised licences and “that problem will perpetuate itself into the 4G environment in the future”.8

6 Directive 2009/114/EC; 16 September 2009

7 Q 34

8 Q 34

Spectrum 11

21. The two MNOs with the liberalised 900 MHz licences, Vodafone and O2, both argued to us that any advantage they might have from the liberalisation of their 900 MHz licences had been overstated. Vodafone wrote:

Vodafone’s existing holding of 900 MHz spectrum is already used in providing voice and data services; we carried around 42 billion voice minutes across our networks in the last financial year. To clear the 900 MHz band within the space of a year would require thousands more sites because we would need to cater for the calls and data services displaced from the cleared spectrum in other spectrum. This is clearly impractical and would result in a terrible experience for our customers.9

22. It is not surprising that the MNOs should seek to reinforce their own market positions in all negotiations about spectrum policy. We have not done a market analysis ourselves. It seems clear to us, however, that Ofcom—which has carried out extensive work in this area—is well-placed to analyse any threat to competition. Graham Louth, Director of Spectrum Markets at Ofcom told us:

I see no evidence today that consumers are suffering detriment as a result of a distortion of competition as a result of the fact that O2 can make use of that spectrum for 3G. We did a lot of analysis over a number of years to reach the final decision. It revealed that there is the potential for a competitive distortion, but it is not an immediate risk.10

With reference to O2 he told us that:

O2 has already started to make use of that flexibility. They are deploying 3G technology in the 900 MHz band in certain city centres. That is bringing consumer benefits today. O2's customers are getting a better 3G mobile service as a result of that than they would have done if we had not liberalised that spectrum.11

23. When Ofcom liberalised the 900 MHz licences for 3G use in January 2011, it did not alter the level of the licence fees paid by the licence holders but stated it would do so after the spectrum auction in 2012 when all spectrum licence fees for mobile use would be reviewed.12 The MNOs without 900 MHz licences argued that, as soon as these licences had been upgraded to 3G, their market value increased and consequently the licence fees paid by O2 and Vodafone were too low. Nicholas Ott, Vice President of Strategy, Planning and Regulatory Affairs at Everything Everywhere, suggested that Ofcom should have started charging higher licence fees on the 900 MHz licences as soon as they were liberalised.13

24. Ofcom believed that liberalising the licences was of sufficient importance to consumers to justify proceeding with it before considering the issue of the licence fee. Ed Richards told us that “the administrative and economic priority, or the public interest priority was very

9 Ev 90

10 Q 284

11 Q 284

12 Ev 101

13 Q 91

12 Spectrum

clearly to get on with the auction and then come back and deal with the pricing question”.14 This view was also shared by the Minister for Culture, Communications and the Creative Industries, who pointed out that the liberalised licence holders will be charged higher rates after the auction when “you can then have a proper evaluation of what a market licence should be for that spectrum”.15

25. Kevin Russell, then Chief Executive of Three, told us that, although he thought that licence fee levels were unfair, increasing the licence fees for liberalised spectrum would not be sufficient to cure the distortion in the market caused by liberalisation. He argued that the “distortion will be a fundamental, ongoing shortfall in coverage that will go to your brand and your ability to build your business”.16 Unsurprisingly, the two MNOs with 900 MHz spectrum holdings did not agree that they had a commercial advantage.17

26. The liberalisation of the 900 MHz licences held by Vodafone and O2 in January 2011 undoubtedly provided benefits for some of their customers and therefore helped to enhance those brands. Ofcom’s decision to recalculate 900 MHz licence fees after the auction rather than at the time of liberalisation has resulted in Vodafone and O2 effectively underpaying for 3G capable spectrum from January 2011 until the new licence fees are set after the auction in 2012. The competitive advantage that this has given to Vodafone and O2 is, however, limited because their 900 MHz spectrum is already being used for 2G services and therefore cannot all immediately be upgraded to 3G.

27. The current duopoly on sub-1 GHz spectrum will be short-lived. Graham Louth told us that Ofcom had “considered requiring Vodafone and O2 to give up some of the 900 MHz spectrum so that it could be made available to other operators”,18 but had decided against doing so as the release of 800 MHz spectrum in the next auction would give all operators the opportunity to access sub-1 GHz spectrum.19

28. The debate surrounding the liberalisation of the 900 MHz licences reflects the predictably polarised views that exist among mobile network operators. It also provides an example of the difficult judgements Ofcom has to make in order to balance the needs of consumers with those of fair competition. We are convinced that Ofcom made a considered decision based on thorough research, and that—overall—the liberalisation of the 900 MHz licences has not resulted in a significant or permanent distortion of competition.

Spectrum trading

29. In 2010, the European Commission gave clearance for France Telecom and Deutsche Telekom to merge their UK mobile businesses (operating as Orange and T-Mobile respectively). However, the Commission said that the merged business, Everything

14 Q 294

15 Q 247

16 Q 91

17 Q 129

18 Q 285

19 Q 285

Spectrum 13

Everywhere, must dispose of some of its spectrum to comply with competition rules, and that Everything Everywhere could keep the proceeds of the sale of the spectrum as long as it was completed before the next spectrum auction in 2012.20

30. On 20 June 2011, Ofcom announced that it had changed the regulations on spectrum trading, allowing MNOs to trade the rights to the spectrum they held, in a measure aimed at increasing mobile network capacity.21 On 21 June 2011, the Financial Times speculated that one of the first transactions to take place under the new rules would probably be the sale by Everything Everywhere of the required 25% of its 1800 MHz spectrum.22

31. The 1800 MHz spectrum reportedly to be sold by Everything Everywhere had originally been allocated, at no initial cost, to its component companies T-Mobile and Orange in 1991.23 Since then, £33 million in licence fees has been paid on this spectrum per year.24 The Financial Times speculated that the sale of the 1800 MHz spectrum could net £450 million for Everything Everywhere.25 In evidence to the Committee, Richard Moat and Nicolas Ott of Everything Everywhere said that it was too commercially sensitive to comment on the price the spectrum being sold might reach.26

32. Since being allocated its 1800 MHz spectrum, Everything Everywhere has paid an estimated £160 million in licence fees for it.27 However, as the spectrum was given to Everything Everywhere at no initial cost, any amount made from the sale of the 1800 MHz spectrum will be pure profit. We asked Ed Richards and Graham Louth of Ofcom whether they thought it was appropriate that Everything Everywhere should make a substantial profit from the sale of a public asset that they were given for free. Ed Richards responded:

in resource markets of this kind these things sometimes happen. Crucially, we wanted to make trading possible and available in order to make sure the spectrum was in the hands of the people who valued it most highly. [...] The slight difficulty I have with this is that if one permits trading because of the general economic benefits, it is very difficult to then go back and say, “Well, you made too much money out of that so we have to somehow claw it back”. I think that would remove all incentive, in certain circumstances, to trade.28

33. Estimates of the likely profit from the sale of Everything Everywhere’s spectrum may have been excessive. Graham Louth told us:

we are about to revise the annual licence fees applying to the 1800 MHz spectrum. So any acquirer of the divested 1800 MHz will not pay what [Everything Everywhere] currently pays; they will have to pay the same full market value price that every other

20 “The Communications Market 2010”, Ofcom, August 2010

21 “Mobile spectrum trading given go-ahead”, Ofcom press release 20 June 2011

22 “Everything Everywhere sale cleared”, Financial Times, 21 June 2011, p20

23 Q52

24 Q47

25 ibid

26 Q37

27 Q54

28 Q 298

14 Spectrum

1800 MHz licensee will have to pay. So I struggle to see why anybody would be willing to pay Everything Everywhere a very large price to get hold of that spectrum if they are going to have to pay “the full market value” for that spectrum as soon as they acquire it.29

When the Financial Times figure of £450 million was put to him, he said “we just don’t know”.30

34. The sale by Everything Everywhere of some of its spectrum allows a private company to profit substantially from the sale of a public asset. We acknowledge that unless companies can profit from the sale of their spectrum, there is no incentive for them to divest any of their holdings. However, we recommend that the Government and Ofcom investigate mechanisms by which a proportion of the proceeds of any sale could be used to the benefit of consumers. For example, Ofcom should explore whether it could compel Everything Everywhere to ring-fence a proportion of this windfall for investment in its network .

Spectrum licence fees

35. Spectrum licence fees are set by Ofcom and paid annually by MNOs with the financial returns going to the Treasury. Ofcom last reviewed the level of annual licence fee payable for mobile spectrum in 2004: it found that fees for mobile spectrum should continue to be set at a level in excess of the costs of administration, with the objective of encouraging efficient use of the spectrum in line with its statutory duties.31 In its written submission, Ofcom states that, following the 2004 review, the mobile operators with licences to use the 900 MHz and 1800 MHz spectrum were paying licence fees of approximately £65 million per year.32 As set out earlier, Ofcom did not alter the licence fees following the liberalisation of the 900 MHz and 1800 MHz spectrum, but aims to review all of the licence fees again after the 2012 auction of 800 MHz and 2.6 GHz spectrum.33

36. Ofcom’s proposals, contained in its consultation on the auction rules, suggest linking the licence fees for the liberalised 900 MHz and 1800 MHz spectrum with the market values of the 800 MHz and 2.6 GHz spectrum that will be determined at the auction.34 Everything Everywhere argued that this solution was unsatisfactory because “the detail of these proposals undervalues 900 MHz and overvalues 1800 MHz and we would like to see this addressed. 900 MHz spectrum can and is being used for high speed mobile broadband now. There is no equipment for UMTS [Universal Mobile Telecommunications Systems, the most widely used 3G technology] 1800 MHz”.35 Graham Louth of Ofcom pointed out, however, that:

29 Q 298

30 Q 299

31 Ev 101

32 Ev 101

33 Ev 101

34 Ofcom, Consultation on assessment of future mobile competition and proposals for the award of 800Mhz and 2.6GHz spectrum and related issues, March 2011

35 Ev 107

Spectrum 15

It is possible to deploy 3G technology in the 1800 MHz band, but it is not widely adopted around the world so the equipment is quite expensive. However, the next generation 4G technology, LTE, is definitely going to be used in 1800 MHz band. In fact that is one of the leading contenders for the next use of the 1800 MHz band. I think in the longer term it is absolutely clear that the 1800 MHz will have other uses and potentially a different value, although whether it is much higher than the current price of the 900 MHz is yet to be seen.36

37. From the opposing perspective, Vodafone was also unhappy with Ofcom’s proposals because they “mean that the amounts paid in the auction for 800 MHz spectrum will translate directly into the annual fees for 900 MHz spectrum paid by Vodafone and O2. In effect, Vodafone is required to pay twice for any spectrum that it purchases: once in the auction and once via the new annual licence fee”.37

38. We acknowledge the concerns of some of the mobile network operators regarding spectrum licence fees. However in a commercial situation such as this, it is unlikely that all interested parties can be satisfied at the same time. We agree that Ofcom’s proposals to link licence fees to the market value of the spectrum determined by the auction is the most likely way to ensure that the fees charged to MNOs are fair and appropriate to the market value of their spectrum holdings.

36 Q 296

37 Ev 90

16 Spectrum

3 The next spectrum auction 39. The next auction of spectrum for mobile use is due to take place in the last quarter of 2012. Although it was originally scheduled for early 2012, Ofcom delayed the auction date in order to hold an extra round of consultation.38 The auction will allocate spectrum in the 800 MHz and 2.6 GHz bands. This will be the largest ever single award in the UK of internationally harmonised mobile spectrum in the “sweet-spot”.39 Internationally harmonised spectrum is crucial for mobile operators as it allows users to cross international borders and maintain mobile coverage. The combined auction of the 800 MHz and 2.6 GHz spectrum will deliver an additional 250 MHz of spectrum. The spectrum being auctioned in the 800 MHz band has been freed up as a result of the UK digital switchover of television broadcasting, and is suitable for delivering 4G mobile broadband services.

40. The 800 MHz spectrum being auctioned has characteristics that are particularly suitable for allowing 3G coverage over wide areas, and therefore could result in improved coverage in rural areas, a topic that is discussed in greater detail later in this Report. The 2.6 GHz spectrum being auctioned is particularly suitable for carrying high capacity and coping with demand in urban areas.

Ofcom’s auction proposals

41. On 22 March 2011, Ofcom published its Consultation on assessment of future mobile competition and proposals for the award of 800 MHz and 2.6 GHz spectrum and related issues, which contained a number of proposals about the rules under which the auction should be conducted.

42. Ofcom’s consultation proposes that the next spectrum auction should be conducted using the “combinatorial clock” method which has been used for previous spectrum auctions. Ofcom will set prices for the lots of spectrum to be sold and bidders will have to indicate if they are willing to accept the prices. Ofcom will then increase the prices in stages until only one bidder remains.

43. Ofcom has proposed mechanisms designed to create an outcome whereby four viable MNOs emerge from the auction, all able to compete effectively in future mobile markets. To achieve this, Ofcom has also proposed having caps and floors on the amount of spectrum each MNO can hold, as well as imposing a coverage obligation on one of the 800 MHz licences to provide services to 95% of the UK population.

The number of mobile network operators

44. Ofcom’s proposal that there should be at least four mobile operators after the auction is a measure designed to maintain competitive tension in the market, which benefits consumers. Ed Richards said in Ofcom’s annual evidence session with us on 3 May 2011

38 Ofcom, Update on plans for 800MHz and 2.6GHz spectrum, press release 07 October 2011

39 Ofcom, Consultation on assessment of future mobile competition and proposals for the award of 800Mhz and 2.6GHz spectrum and related issues, March 2011

Spectrum 17

that if there were not an MNO quota set for after the auction “you might as well just have a spectrum free-for-all” and that “both ordinary individuals and businesses would pay for that in the long term”.40

45. Arqiva, the media technology company that provides much of the infrastructure behind television, radio and mobile communications, said in its written submission that, while it agrees with Ofcom’s proposals to maintain four mobile operators, the whole premise of spectrum auctions may be becoming outdated because “competition is increasingly focussed at the service layer”.41 Julian McGougan, Head of Public Policy and Regulatory Affairs at Arqiva, said that the fact that MNOs shared infrastructure, and might share spectrum in the future, meant that “the likelihood is that, if Ofcom secures the outcome it is aiming for, it will have to come back and review that afterwards”.42

46. The spectrum market already allows for consolidation and network sharing, subject to competition regulations, as the merger between Orange and T-Mobile demonstrates. The Minister for Culture, Communications and Creative Industries, Ed Vaizey, said that he could “have a philosophical view that four mobile operators is a good thing, but that does not mean that there will not be consolidation in the industry”.43

47. From the evidence we have heard, we believe that Ofcom’s proposal to secure at least four mobile network operators after the next spectrum auction is an adequate measure to safeguard plurality of mobile network operation. We are reassured that four is a minimum rather than a limit, as imposing such an artificial constraint on the number of operators in the market would inhibit competition.

Spectrum caps and floors

Floors

48. In its consultation Ofcom proposes that, after the auction, there should be at least four holders of a minimum spectrum portfolio that are “credibly capable of offering high quality data services in the future”.44 It proposes:

to implement this through use of spectrum 'floors' in the auction. This involves disregarding any potential auction outcome in which a minimum number of licensees (currently proposed to be four) do not win at least the minimum amount of spectrum. We expect competition in the auction to determine how much spectrum each bidder in fact wins and anticipate that this may well exceed the minimum that we propose to set, but we nevertheless consider it important for competition that we put in place this back-stop provision.45

40 Ofcom, uncorrected oral evidence to the Committee 03 May 2011

41 Ev 96

42 Q 2

43 Q 254

44 Ofcom, Consultation on assessment of future mobile competition and proposals for the award of 800Mhz and 2.6GHz spectrum and related issues, March 2011

45 Ofcom, Consultation on assessment of future mobile competition and proposals for the award of 800Mhz and 2.6GHz spectrum and related issues, March 2011

18 Spectrum

49. Both O2 and Vodafone told us that they objected to the proposal for spectrum floors. They argue that, because O2 and Vodafone already have 4G capable sub-1 GHz spectrum (the liberalised 900 MHz licences), in order for Ofcom to achieve its proposed outcome of four MNOs that can provide 4G services, Everything Everywhere and Three will have an advantage bidding for the 800 MHz spectrum at the auction. O2’s submission states that “the spectrum floors are specifically designed to ensure that [O2] and Vodafone are not guaranteed to win any 4G spectrum on the erroneous presumption that their existing spectrum holdings will suffice”.46 Ronan Dunne, Chief Executive of O2, told us that he thought spectrum floors could inhibit competition because “the floors mean that certain existing operators are essentially guaranteed an allocation of spectrum” because they do not already have sub-1 GHz spectrum.47

Caps

50. Ofcom has stated that there is a possibility that “one or more players might seek to corner the market in this additional mobile spectrum in order to restrict competition”.48 To counteract this it proposes to “impose spectrum caps in the auction so that no one player can acquire so much spectrum through the auction, relative to others, that competition might be distorted in future”.49

51. The alternative to caps considered by Ofcom was to require O2 and Vodafone to give up some of their liberalised 900 MHz spectrum holdings before the auction. It decided instead to propose the imposition of a spectrum cap, which would “have the effect of limiting the amount of 800 MHz spectrum that Vodafone and O2 could acquire in the auction”.50

52. Unsurprisingly, Vodafone and O2 protest that caps will “distort competition”,51 and Everything Everywhere and Three suggest that they do not go far enough.52 Vodafone states that the caps would allow “Everything Everywhere to buy 2 x 25 MHz or over 80% of the sub-1 GHz spectrum for sale in the auction. This could have potentially serious consequences for competition in the future by creating a two-tier market”.53 Taking the opposite view, Three thinks Ofcom’s proposals for spectrum caps do not go far enough. In its written submission it proposed that “Ofcom should revise its proposed overall spectrum cap to 2 x 95 MHz at most rather than 2 x 105 MHz. This would limit the largest possible spectrum holding to 33% of total available spectrum”.54

46 Ev 62

47 Q 101

48 Ev 102

49 Ev 102

50 Q287

51 Ev 90

52 Ev 70

53 Ev 90

54 Ev 70

Spectrum 19

53. Ofcom is faced with the difficult task of finding a compromise between the two opposing views held by the MNOs. Its proposal to introduce floors and caps is supported by DCMS. Ed Vaizey told us that he was “very much a floor and ceiling man”.55

54. Those mobile network operators with sub-1 GHz spectrum play down any advantage it may offer, stating that they are not immediately able to use it for 3G because the spectrum is already in use by 2G customers, who cannot simply be cut off. Those operators without sub-1 GHz spectrum claim to be frozen out of the market. These irreconcilable claims highlight the difficulties faced by Ofcom in overseeing competition in the spectrum market place. Ofcom’s approach has been to liberalise spectrum allocation but there still remain some vestiges of a historical “command and control” approach to market regulation, which Ofcom itself has criticised. Not all operators start out on an equal footing, but by over-compensating for differences in their positions, Ofcom would risk reversion to the command and control principles from which it has been distancing itself since its inception in 2003.

55. We believe that the spectrum floors and caps proposed for the next auction are the best viable compromise to ensure a competitive tension in the market place in the context of the liberalised 900 MHz licences.

55 Q 253

20 Spectrum

4 Spectrum and coverage 56. Areas where mobile services cannot be accessed are referred to as “not-spots”. Ofcom has identified a number of different types of not-spots:

• complete not-spots—where there is no mobile coverage at all;

• 3G not-spots—where there is no mobile broadband;

• partial not-spots—which are operator specific;

• indoor-only not-spots;

• interrupted coverage on the move.56

57. Ofcom’s most recent research on mobile not-spots was published in November 2010 and stated that 2G covers approximately 97% of the UK population and 91% of the UK land mass; and 3G covers 87% of the population and 76% of the land mass. Ofcom also stated that “in the vast majority of case study areas, not-spots existed because it was not a commercial priority for mobile operators to extend their coverage, influenced by low levels of traffic, discouraging investment”.57

58. There are problems associated with measuring mobile network coverage, as Ed Vaizey explained to us:

You could have 95% coverage, which could in effect be 98% coverage, depending on how many people are using the system, or it could be 85% coverage if a lot of people are using the network. [...] coverage waxes and wanes depending on how many people are using the network. So it is very difficult to measure.58

A further complication is that the figures for population coverage frequently refer to outdoor coverage. Indoor coverage is not as high as population coverage, as higher frequency spectrum (over 1GHz) is not as effective at penetrating buildings as sub-1 GHz spectrum. Kevin Russell of Three stressed the importance of access to this sub-1 GHz spectrum, noting that “our outdoor coverage could be perceived to be 97% to 99% in that range. Our indoor coverage, however, is only 79%”.59

Rural broadband

59. Access to broadband is critical to rural economies and communities as well as tourism. Broadband can be delivered via BT’s network of copper phoneline cables; wireless connections; mobile internet devices (such as 3G phones and tablets); fibre optics (also known as “fibre”); and satellite delivery (which requires users to install a satellite dish). Fibre broadband offers the fastest speeds and greatest capacity for data handling. Ofcom

56 Ofcom,Mobile not-spots: an update on our research, November 2010

57 Ofcom,Mobile not-spots: an update on our research, para 2.15, November 2010

58 Q260

59 Q75

Spectrum 21

predicts that when 4G services are deployed in the UK, consumers should be able to get similar speed and capacity broadband on their 4G devices to the speed and capacity available on a home fibre connection.60 Ofcom also states that:

Coverage should, in time, be significantly better than today's 3G coverage, with 4G services available across more of the country and with better availability inside buildings—approaching if not exceeding today's 2G coverage. Capacity should also be significantly greater than that of today's 3G networks.61

60. In its research on mobile not-spots, Ofcom states that complete not-spots (where there is no coverage at all) exist mostly in rural areas,62 and that improvements to this problem have been slow.63 There has been considerable attention paid to the subject of rural broadband in the media, through campaign groups such as the Country Land and Business Agency, and in Parliament. After a debate on rural broadband coverage on 19 May 2011, the House passed a resolution urging Ofcom to increase the coverage obligation to 98% of the population. Ofcom’s written submission acknowledged this, stating that it was “currently considering such arguments carefully, and we will carefully consider any and all additional evidence supporting such a position, bearing in mind the costs as well as the benefits of increasing the coverage obligation”. 64

61. In its written submission, Arqiva outlined the impact of rural not-spots:

Increasingly consumers and citizens need access to broadband for education, work, interacting with public services and for their social life too. Access to broadband at home enables remote working and hobbies to be turned into cottage businesses, and future SMEs.

[...] recent studies have shown that a 10% increase in broadband penetration increases GDP by 1% and, in addition to the economic benefits, access to broadband can be an instrument of real social change.65

62. The Countryside Alliance also submitted evidence to us that stressed the importance of broadband access to rural communities. It wrote:

Reliable broadband is imperative for competitive and successful enterprises in a growing digital economy. The Coalition Government has made clear its desire to make more public services available online, which provides a more cost effective means of accessing public services. However online access to public services will only work if they are accessible to all and do not exclude those in remote areas, who already struggle to access public services.

60 Ev 102

61 Ev103

62 Ofcom,Mobile not-spots: an update on our research, para 1.6, November 2010

63 Ofcom,Mobile not-spots: an update on our research, para 2.21, November 2010

64 Ev 97

65 Ev 98

22 Spectrum

Farming businesses are increasingly required to meet certain obligations online, such as VAT returns, animal movements and applying for agriculture support. Farming businesses and other rural businesses can only meet these obligations if they have a decent and reliable broadband connection.66

Coverage obligations

63. In terms of coverage, the forthcoming auction is significant, for two reasons: the lower frequency (800 MHz) spectrum that is being auctioned is particularly effective for wide geographical coverage; and Ofcom is proposing to implement a 95% (population) coverage obligation for one of the 800 MHz licences allocated at the auction. Ofcom states in its consultation that a 95% coverage obligation should result in “coverage of future mobile broadband services that approaches today’s 2G coverage by the end of 2017”.67 Ofcom also states in its consultation that it considered whether the coverage obligation should apply to more than one of the spectrum licences being auctioned. Ofcom concluded that a coverage obligation on one licence would be sufficient and other MNOs “may in practice follow suit and also offer such coverage, but if they do not we will nevertheless have ensured that citizens and consumers in most areas will have access to such services, albeit their choice of supplier may be somewhat limited”.68

64. It is difficult to understand why it should take until 2017 for 3G services to reach current levels of 2G coverage. We asked Ofcom about this and Ed Richards told us that “you could do it faster and you could even have a higher number faster, but that simply requires engineers to deal with the masts, so there is a cost implication”.69 Graham Louth went on to say:

there is a limit to how much roll-out a network operator can do in any given period of time, and if you require them to roll out into rural areas, then they may well not be able to deploy as quickly and as extensively in urban areas and there will be a consumer impact there. It is a trade-off between urban consumers and rural consumers for who gets the service, possibly even who gets the service first.70

65. The infrastructure company Arqiva argued in its written submission that Ofcom should set the coverage obligation at 99% of each British nation’s population, and described Ofcom’s proposed 95% as “an obligation so unadventurous that an operator could theoretically comply without deploying its 800 MHz spectrum in the whole of Suffolk, Northern Ireland and Cumbria combined”.71 Arqiva also said that any short-term cost of imposing a 99% coverage obligation on one 800 MHz licence would, over the long-term, “be considerably less than the opportunity cost of not providing access to broadband,

66 Ev 68

67 Ofcom, Consultation on assessment of future mobile competition and proposals for the award of 800Mhz and 2.6GHz spectrum and related issues, March 2011

68 Ofcom, Consultation on assessment of future mobile competition and proposals for the award of 800Mhz and 2.6GHz spectrum and related issues, March 2011; para 6.32

69 Q290

70 Q290

71 Ev 99

Spectrum 23

or of providing it years later, to at least hundreds of thousands of homes, schools, farms and small businesses”.72

66. John Cresswell, Chief Executive of Arqiva, perceives the forthcoming auction as a “once in a generation opportunity” to “have a digital Britain”:

99% outdoor reach coverage will enable virtually every home in the country to be able to access at least 2 Mbps, which is enough to watch the BBC iPlayer, for instance. I don’t think the market would provide that, just as television reaching the last 5% would be uneconomic for commercial operators if they were left to choose. I guess that would be the same for a build out for fibre; it would be uneconomic to do that. Therefore, you have to set down the coverage obligation.73

He put a figure of £200-230 million on the predicted cost of a 99% coverage obligation.74 The MNOs who gave evidence to this inquiry broadly agreed with this figure,75 although Guy Laurence of Vodafone told us that this figure did not include operational costs which he estimated to be in the region of a further £140 million to achieve 99% coverage.76

67. Attaching a coverage obligation to one of the licences may result in that licence achieving a lower price at auction, because of the costs associated with increasing coverage. BT argued this point and said that imposing a coverage obligation on one of the 800 MHz licences would negatively affect the value of that spectrum, effectively creating a public subsidy to the holder of the licence with the coverage obligation to support rural broadband delivery.77 Attaching a coverage obligation to one of the 800 MHz licences may well result in that licence achieving a lower price at the auction; however, this will probably be off-set by the costs associated with increasing coverage. Increasing coverage will bring business benefits from attracting new consumers, which should encourage other network operators to follow suit. There is a risk that, by only applying a coverage obligation to one licence, consumers in the rural areas that would receive the extended coverage may still be limited in their choice of network provider. We recommend that Ofcom reconsider applying a coverage obligation to two or more licences.

68. Once again, the four MNOs do not agree with each other about Ofcom’s proposal for a 95% population coverage obligation. O2 opposes the imposition of any coverage obligation at all, and wrote in its submission that “whilst coverage obligations are superficially attractive, they can have the effect of deterring entry by new players and therefore potentially reduce the level of competition in the auction”.78 By contrast, Three not only supports the notion of a coverage obligation, but also suggests that 95% is not high enough, recommending instead an obligation of 97% indoor coverage at 2 Mbps: “this would

72 Ev 98

73 Q14

74 Q18

75 Q83, Q157

76 Q158, Q160

77 Ev 94

78 Ev 64

24 Spectrum

guarantee mobile data services to an additional 1.2 million people compared with the 95% proposal. With Government funding allocated to broadband, it may be possible to achieve over 98% national coverage”.79 Kevin Russell went on to say that meeting a 99% coverage obligation was “very doable”.80

69. Rural broadband coverage has not developed as quickly as it should have. Having access to broadband services is vital for rural communities and economies, and the UK economy as a whole. The evidence we have received suggests that Ofcom’s proposed 95% population coverage obligation on one of 800 MHz spectrum licences being auctioned is readily achievable. In fact, we consider the imposition of a 95% coverage obligation to be unambitious.

70. When deciding the level at which any coverage obligation is set, Ofcom must balance the cost to the network operator of meeting the obligation with the effect that it will have on competition. The objections we have heard to imposing a coverage obligation higher than 95% have cited the cost of improving the infrastructure, rather than the feasibility of increasing coverage. The evidence that we have heard suggests that a 99% coverage obligation, although achievable, would cost up to £230 million and we are concerned that that cost could be transferred to consumers. Therefore we support the unanimous decision made by the House in May 2011 and recommend that Ofcom imposes a coverage obligation of 98% on one or more of the 800 MHz licences being auctioned.

Broadband Delivery UK

71. Broadband Delivery UK (BDUK) is a team within DCMS that was set up to deliver the Government’s broadband strategy, bringing superfast broadband to all parts of the UK.81 BDUK’s main role is to allocate and distribute £530 million of funding to bring superfast broadband to the third of UK homes and businesses which would not be served by the broadband market alone and would otherwise miss out. County councils, unitary authorities and Local Enterprise Partnerships can apply for a share of the money by developing a local broadband plan setting out how everyone in the area will be provided with superfast broadband access.

72. Once again, the MNOs could not agree on the distribution of spectrum amongst themselves. Everything Everywhere argued that the duopoly on sub-1 GHz spectrum would also create a duopoly for rural broadband projects, which, if it continued, would “reduce the value for money achieved from the public funds set aside for rural broadband projects administered by BDUK”.82 Similarly, Three argued that increasing competitive access to sub-1 GHz spectrum would increase coverage, and therefore allow the public funds administered by BDUK to be targeted more effectively.83

79 Ev 69

80 Q87

81 http://www.culture.gov.uk/what_we_do/telecommunications_and_online/7781.aspx

82 Ev 107

83 Ev 71

Spectrum 25

Infrastructure

73. Extending broadband coverage, especially in rural areas, requires improved infrastructure and a mixed economy of broadband delivery through fibre, mobile and satellite services. Arqiva said in its written submission that:

Not everyone will be offered fibre; wireless will be the only cost-and-time-effective means of providing access to broadband for virtually all those who won’t be, with 800 MHz the optimal spectrum to use for that. Satellite broadband will also play a role, but its higher cost and lower speed [...] makes it sub-optimal for all but those who couldn’t be cost-effectively offered broadband by other means.84

Kevin Russell, then Chief Executive of Three, told us that he thought that O2 and Vodafone had “fundamentally under-invested” in their infrastructure and went on to say that they had “close to 8,000 sites [mobile masts]; Everything Everywhere and ourselves have 12,500-plus sites. Our indoor coverage would be 79%. I would expect their indoor coverage to be somewhere probably in the 60s—that would be my guess”.85

74. Coverage could be increased by infrastructure-sharing amongst MNOs. Ed Richards, Chief Executive of Ofcom told us:

The obstacles to site sharing and things of that kind were largely removed some time ago and quite substantial site sharing is now already taking place. There is site sharing between what was T-Mobile and Orange, now Everything Everywhere, and that also extends to Three. There is also site sharing now between O2 and Vodafone. [...] our general approach is to look at the economic benefits, but also at the risks to competition of those sorts of collaborations. There is no in-principle objection, and it clearly does offer benefits in terms of reach, and I think that is what has happened over the years.86

75. The MNOs all told us they remained committed to sharing infrastructure. Richard Moat, Deputy Chief Executive of Everything Everywhere, said that MNOs “should seek every possible means of collaborating to reduce the costs and the impact on the environment”;87 and Kevin Russell, of Three, said that introducing high coverage obligations would encourage MNOs to collaborate and look for efficiencies.88

76. We are encouraged to hear that mobile network operators are sharing their infrastructure in order to achieve a cost-effective solution to expanding their coverage. We believe that imposing a 98% coverage obligation will stimulate competition and the need for all operators to increase coverage. In turn, we think this will encourage more sharing and collaboration among the mobile network operators.

84 Ev96

85 Q76

86 Q292

87 Q94

88 Q94

26 Spectrum

77. If coverage obligations were implemented, the connection between the base station and the main network of the operator, known as the “backhaul infrastructure”, would need to be updated. O2 stated that:

If [...] coverage obligations are included in licences then, to be effective in delivering rural mobile broadband coverage, they must go hand-in-hand with the availability of cost effective backhaul solutions from BT, plus the ability to use BT’s “ducts and poles”. There is little value in forcing mobile operators to build masts when those masts cannot be connected back to the core network with a fit for purpose backhaul solution. 89

Guy Laurence, Chief Executive of Vodafone, agreed with a 98% coverage obligation in principle, but said that its successful implementation would depend on investment in the network infrastructure not just by MNOs, but also by BT who owned the backhaul network.90

78. Backhaul infrastructure that connects mobile base stations with the main network is a vital component of mobile service provision. Lack of backhaul must not become a reason—or an excuse—for mobile network operators not to extend coverage into rural areas. We recommend that Ofcom and BDUK work closely with each other to ensure that backhaul is taken into account in any policy decisions relating to mobile network provision or extending access to broadband.

79. Planning constraints can also be a factor in coverage obligations. O2 and Vodafone both told us that mobile network operators often faced obstacles in erecting new masts caused by the availability of sites, planning issues and opposition from local communities. Ronan Dunne, Chief Executive of O2, said that “my mailbox is mixed between people writing to me asking for increased coverage and those writing saying they don’t want a mast built in their area”.91

80. DCMS told us that it had an active dialogue with the Department for Communities and Local Government (DCLG) on all aspects of broadband roll-out, including the planning regulations for erecting masts.92 Simon Towler told us that DCMS was trying to ensure that any planning regulation did not hinder broadband deployment, including masts, but “as ever, there is a balance to be struck between the rights of individuals and economic development needs”.93

81. It is widely acknowledged that achieving 100% broadband coverage will be difficult. However, Arqiva argued in its written submission that universal coverage should still be a goal, stating that the proposed coverage obligation “stops short of actually ensuring that universality would be achieved. This is short-sighted. There is an ever-greater social and economic cost to each person who falls on the wrong side of this ‘digital divide’”.94 John

89 Ev64

90 Q153

91 Q130

92 Q265

93 Q265

94 Ev 99

Spectrum 27

Cresswell, Chief Executive of Arqiva, also explained how he thought this could be delivered: “I think you need a mixed economy. Principally it will be fibre with wireless broadband, and then the last 1% being able to be served by satellite”.95

82. Laying fibre networks into sparsely populated, rural areas is expensive. Guy Laurence of Vodafone told us that, in order for the MNOs to reach the most rural parts of the country, BT had to invest in its backhaul network:

if you have a small village in the middle of nowhere and BT can't run the fibre in there is not much that we can do about it. There are some technologies available but they are exceedingly expensive and therefore the faster we can encourage and work with BT to run the fibre in so we will get a solution for rural faster.96

83. Ronan Dunne, Chief Executive of O2 described backhaul as one of the main obstacles to O2 ever reaching rural areas.97 Similarly, Guy Laurence of Vodafone told us that:

we have to have BT run fibre into those areas as well because at the end of the day our base stations connect to a fibre link or should connect to a fibre link. If we don't have that it means we have to move to alternative technologies, which are very expensive to operate.

Therefore you have to see this as a package of us having spectrum and the ability to invest and, secondly, BT doing their part, which they do intend to do, I hasten to add, in order to run fibre into the rural areas as well. We can put up a base station but if it can't talk to anything then it doesn't work.98

84. In order to achieve universal coverage, broadband provision to the hardest-to-reach last 1% would have to be supplied by satellite, although that is a more costly and slower service than fibre.99 Rupert Pearce, Group General Counsel of Inmarsat, the satellite service provider acknowledged that satellite broadband is slower than fibre,100 and also explained some other aspects of satellite broadband provision to us:

Although we would immediately deliver truly ubiquitous coverage in the UK merely by having a satellite over the UK, which we do, we have several, there are small issues like being able to serve only a few hundred customers at a time in a beam with a mobile satellite network and the fact that we don't work in building. You actually have to have line of sight to a satellite to be able to have a service.101

95 Q25

96 Q148

97 Q147

98 Q107

99 Q25, John Cresswell, Arqiva

100 Q208

101 Q204

28 Spectrum

However, Mr Pearce went on to say that in the United States satellite broadband has had an unexpectedly high take-up, not just in rural areas but also in suburban areas, and satellite service providers there are offering a service for $50 a month.102

Innovation

85. Commercial advantage is the real incentive for mobile operators to improve coverage, and the evidence we received suggests that they are making advances of their own volition. Everything Everywhere described a rural broadband trial in Cornwall that it is conducting with BT:

This trial sets out to develop a hybrid fixed and mobile solution to deliver broadband to those homes which do not currently have access to basic broadband of at least 2 Mbps. BT will extend its fixed fibre network as widely as possible. Everything Everywhere has obtained non-operational licences for 2 x 10 MHz of 800 MHz spectrum and based on that, we will deliver wireless broadband to the last few households and businesses that are very costly to reach with BT’s fixed network.103

Everything Everywhere also said in its written submission that its findings from its rural broadband trial in Cornwall indicate that the suggested 2 x 5 MHz of 800 MHz spectrum (Ofcom is proposing that this should be the size of the spectrum floor) will not be capable of “providing sufficient performance or capacity to handle broadband traffic levels in rural not-spots”.104

86. Vodafone also described Sure Signal, an innovation that it has developed to improve indoor mobile coverage using “ femtocell technology (indoor equipment that looks like a wireless router and connects via a fixed line broadband connection) as a potential solution to improve indoor coverage and for which we have hundreds of thousands of registered users”.105

87. Ed Vaizey commended the innovation of femtocell technology and told us that “the only mobile company at the moment that is using femtocells for the consumer is Vodafone. The other ones are using them for business, but they are not rolling them out for consumers, which I find baffling”.106 He went on to say that the Government “would encourage other mobile operators to adopt this technology as soon as possible”.107

Digital village pumps

88. Digital Village Pumps (DVPs) are one route BDUK can take in order to increase access to broadband in rural areas. DVPs are where fibre is run into a village and, rather than it feeding into every home, it terminates in a central data-centre, or “cabinet”. The cabinet is

102 Q205

103 Ev 107

104 Ev 107

105 Ev 92

106 Q 268

107 Q 269

Spectrum 29

owned and run by the local community, which then decides how connectivity is distributed from the cabinet to the homes and businesses in the village, via fibre or wireless connections.

89. We asked Ed Vaizey how significant a part DVPs played in the Government’s broadband policy. He told us that:

the digital pump is a very important part of the process. Again, we are not mandating any particular technology or method to deliver the broadband target. What we are trying to do is get the money out to counties and devolved Administrations to come up with solutions that are suitable for their areas. The village pump is, I think, one of those solutions, [...] But, as I say, the backhaul network is going to be very important for the success of mobile in any event.108

We asked the MNOs whether it would be possible for them to “piggy-back” on the DVPs in order to extend their coverage in rural areas. Richard Moat, Deputy Chief Executive of Everything Everywhere, told us that there was no reason why they could not.109 Nicholas Ott, Vice President of Strategy at Everything Everywhere, however, pointed out that because DVPs were procured locally, there would effectively be a county-by-county build-up of this network, and each locality might have different approaches to their DVPs, which would make it difficult for MNOs to come up with a strategy to exploit them.110

90. Any solution to the problem of limited rural broadband access has to be collaborative. We have heard much about access being dependent on mobile, fibre and backhaul networks, and yet we are not convinced that the operators of these infrastructures are co-ordinating their approaches in order to benefit consumers.

91. Market competition has led to mobile network operators, and others, coming up with innovative solutions to problems such as mobile not-spots. We welcome the Government’s decision to invest £150 million to increase mobile coverage and we welcome projects such as Everything Everywhere and BT’s rural pilot in Cornwall, and Vodafone’s femtocell technology. We note that other mobile network operators have not been using femtocell technology and we are disappointed that they have chosen not to offer this service to their domestic customers.

108 Q262

109 Q95

110 Q95

30 Spectrum

5 Other spectrum users

Public sector spectrum

92. The public sector is a major holder of spectrum. Almost 50 per cent of all spectrum below 15 GHz is currently held by the public sector and primarily used for the defence, aeronautical and maritime sectors and emergency services. The composition of public-sector spectrum is shown in the table below:

% of public sectorspectrum held

MoD 75 %

Civil Aeronautical 12 %

Emergency Services 5 %

Science 4 %

Maritime 2 %

Satellite navigation/GPS 2 %

Source: DCMS

93. In March 2011, DCMS issued a consultation called Enabling UK growth – releasing public spectrum.111 In the consultation document DCMS acknowledged that increasing demand from commercial users meant that there was a strong case for releasing some of the public sector spectrum holdings. It observed that:

Given that spectrum bands are already heavily used, and that spectrum does not respect international borders, there are a number of issues that need to be addressed when deciding which bands to release, how and when.

[...]Many public sector bands are already shared among a number of public and private sector users which adds to the complexity in freeing them for other uses.

The international nature of spectrum both provides benefits and raises issues. Much of the value from spectrum use can be increased if a band is allocated for the same purpose internationally. For example increased equipment volumes reduce costs and equipment can be used abroad. However issues can arise if the international agreements that bind the way that spectrum can be used need to change, as securing changes can take many years.112

The MoD has already identified two bands from which it expects to release spectrum and DCMS has identified more bands which it is investigating as potential releases.

111 With: BIS, DCLG, MoD, Dept for Transport, Home Office, Dept of Health and HM Treasury

112 Enabling UK growth:releasing public spectrum, DCMS et al

Spectrum 31

94. Witnesses said that there was “a good case for releasing some of the under-utilised spectrum” held by the MoD and other public bodies.113 Stephen Hearnden, Director of Telecommunications and Technology at Intellect UK, the trade association for the UK technology industry, said that the biggest benefit in releasing the public-sector spectrum was that it could be internationally harmonised allowing users to “roam” across international boundaries, and therefore had more value to other spectrum users. He did, however, express some concerns about how the proposed release of public spectrum would be managed. He said that Ofcom was “quite a long way divorced” from the process of public sector spectrum release, even though it has a lot of experience in that field, whereas the Government does not.114

95. Another issue that was brought to our attention regarding public sector spectrum use, was that public sector bodies, such as the emergency services, are not in a position to bid for spectrum and compete with private sector organisations in the marketplace. Stephen Hearnden told us:

the emergency services are in need of additional spectrum for the future growth of the emergency services, the blue light network. They are not in an easy position to bid for spectrum on a pure auction basis. Similarly, other public sector needs are not adequately covered because under economic value they have to pay the full market rate and there needs, I think, to be a recognition. 115

96. Simon Towler of DCMS told us that the Department was aware of this issue, and that it formed part of the focus of the communications review.116

97. We welcome DCMS’s consultation on the release of public sector spectrum. We urge DCMS to work closely with Ofcom and with the relevant international bodies to ensure that the spectrum that is released is internationally harmonised.

98. We are concerned that, because the emergency services are not in a position to bid for spectrum at auction, they could be overlooked in spectrum policy. It is vital that Ofcom and DCMS take into full account the spectrum needs of the emergency services in their spectrum policies.

Programme-Making and Special Events and interference

99. The 800 MHz spectrum that is due to be auctioned has previously been primarily used for Digital Terrestrial Television (DTT) and the Programme Making and Special Events (PMSE) sector. PMSE spectrum use includes radio-microphones, wireless cameras and wireless communication headsets. These are used in concerts, theatre, television production, outside broadcasts and sporting events. PMSE use of spectrum has grown considerably in the last 20 years due to live shows and events becoming bigger and more technologically sophisticated. PMSE is the main sector using interleaved spectrum which comprises the “white spaces”, or “spare channels”. The term white space (or interleaved)

113 Q228

114 Q228

115 Q227

116 Q244

32 Spectrum

spectrum describes a range of frequencies that are not in use by the licensee all of the time at all locations. A white space device can make use of those frequencies provided that interference is not caused to the licensed users of the spectrum. White space devices include items such as car key fobs, baby monitors and Wi-Fi adaptors for laptop computers.

100. Ofcom states that the 800 MHz band will be cleared of PMSE services by the end of 2012, and of DTT (as part of the digital switchover) in 2013-14.117 PMSE users are therefore being moved from their current spectrum band, known as channel 69, to an alternative band, channel 38.

London 2012 Olympic Games

101. The London 2012 Olympic Games (the Games) are perhaps the largest special event ever to take place in the UK. The Games will place a heavy demand on spectrum which will be used for many devices including wireless communications, cameras and broadcast equipment. We understand that Ofcom has, effectively, borrowed some public sector spectrum in order to ensure that the Games organisers have access to enough spectrum that is free from interference. Ofcom’s ability to procure public sector spectrum is vital for the success of the London 2012 Olympic Games, and might also provide a model of spectrum lending that could be used for other special events. We recommend that DCMS and Ofcom look into whether this could be done for other special events.

Interference

102. The British Entertainment Industry Radio Group (BEIRG) wrote in its submission that, following the allocation of the 800 MHz spectrum to mobile operators at the auction, the users of neighbouring spectrum may be affected:

BEIRG believes any future users of the 800 MHz spectrum must be prevented from interfering with existing licensed users in the adjacent bands. Ofcom must make every effort to ensure that new use of the 800 MHz band is as clean as possible, as soon as possible. Given the disruption already faced by the PMSE sector, any further disruption would be unacceptable and unsustainable.118

Similarly, DTT broadcasters sent us a joint submission arguing that, after the 800 MHz auction, 4G services will be rolled out which is “likely to create significant interference for DTT viewers”.119

103. The Musicians’ Union, in its written submission, told us that if the move from channel 69 to 38 was looked at in isolation from the wider context, “it would be reasonable to conclude that channel 38 is an adequate replacement”.120 However, it goes on to state that, in the context of digital switchover, it is “impossible to determine whether PMSE

117 Ofcom Digital dividend: clearing the 800MHz band, June 2009

118 Ev 85

119 Ev 110

120 Ev 54

Spectrum 33

spectrum allocation is demonstrably interference-free and sufficient in terms of quality, bandwidth and continuity”.121

104. In June 2011, Ofcom launched a consultation entitled Co-existence of new services in the 800 MHz band with digital terrestrial television, which closed in August 2011. The consultation contains a number of proposals which Ofcom has designed to try and mitigate interference after digital switchover and the roll-out of 4G mobile services. Ofcom has also committed to publishing the results of further research into potential interference in the autumn of 2011.122

105. Ed Richards told us that concerns about interference on DTT were the reason why Ofcom was putting its proposals to consultation. He said:

We think that a significant number of households could be affected— possibly as high as 750,000—but the vast bulk of those should be able to have the issue addressed through a simple filter. Once one has taken account of the effects and the benefits of that filter, we think the number is very much lower—more like 0.1%—and for those households we may have to look at specific measures.123

106. The Ofcom consultation and technical research demonstrates that, as Stephen Hearnden of Intellect UK put it, Ofcom was “on top of” the issue of cross-spectrum interference, and that the industry “is working with the regulator to try and resolve it”.124 He also said that “the methods that have been suggested and adopted by Ofcom for moving them from channel 69, as we call it, down to channel 38 I think has been a fair and reasonable compromise”.125

107. There is evidence that the proliferation of unlicensed white space devices using WiFi and Bluetooth technologies pose a potential threat of interference for PMSE users. BEIRG wrote in its submission:

The PMSE sector is extremely concerned that there are moves to introduce these [white space] devices into the spectrum currently used by licensed PMSE users, before any “real life” testing has taken place and before Ofcom is in a position to guarantee that existing licensed users will not be negatively affected.

White space devices are an unproven technology. If they are permitted into the UK market in line with current proposals they will, in all likelihood, cause interference to licensed PMSE applications and consequently undermine the UK's ability to produce quality content because they will render radio microphones, in-ear monitor systems and talkback effectively unusable. This will devastate the live music, theatre and film and TV production industries, amongst others.126

121 Ev 54

122 Ofcom Co-existence of new services in the 800MHz band with digital terrestrial television, June 2011

123 Q301

124 Q223

125 Q226

126 Ev 84

34 Spectrum

108. We put these concerns to Ed Vaizey, who told us about the measures the Government was taking on this issue, including a compensation regime and a trial in Cambridge looking at white space devices and interference. He told us that he “would like to think that we reflect on their concerns and we act on their concerns”.127 Ed Vaizey went on to say that the issue of white space device interference is not specific to channel 38, and that in that respect “channel 38 would be no different from channel 69”.128

109. We welcome the Government’s compensation regime for the relocation of PMSE spectrum use from channel 69 to channel 38, and the trial in Cambridge looking at interference by white space devices. However, these measures do not address the real problem of new spectrum users in the 800 MHz band causing disruptive interference to the PMSE sector. We recommend that Ofcom includes in the new 800 MHz licence conditions a provision that any significant interference to adjacent users be considered grounds for that licence to be revoked.

Satellite spectrum use

110. Inmarsat provides satellite services for military and Government, as well as maritime users and disaster relief missions and, in its written submission, stressed that the alternative uses for spectrum, ie. other than by the MNOs, should not be overlooked when it comes to the spectrum auction:

The focus of this inquiry on mobile broadband should not obscure that many other services rely on spectrum in the same portion of the radio frequency spectrum that mobile terrestrial operators seek. Among the recommendations of the UK Space Innovation and Growth strategy (IGS) [...] is that the Government should take full account of the wider value of Space-enabled services when engaged in activities relating to radio frequency spectrum allocation. The spectrum most in demand below 3 GHz has been a prime focus for mobile terrestrial operators, but it also is used by many other users and regulated safety services. A sophisticated approach to “co-habitation” amongst the different services is required to maximise welfare for all users.129

Rupert Pearce of Inmarsat explained to us that satellites were very expensive and sophisticated objects, weighing six tonnes and requiring a $120 million rocket to launch them into space. He went on to say that, once in orbit, “you can’t send a man up with a screwdriver” to recalibrate a satellite, and that therefore any changes to international spectrum allocations or policy must take account of this.130

111. We asked both Inmarsat and Intellect UK whether they were satisfied that European spectrum regulators were sufficiently taking into account the needs of niche services such as satellites, and both said that no, they were not.131 Stephen Hearnden said that Ofcom

127 Q278

128 Q279

129 Ev 67

130 Q208

131 Q217

Spectrum 35

seemed “to be reducing their commitment to the European programmes [...] It is a source of concern that certain bands seem to be ceded to the broadband community and there are activities like, for example, [satellite] services [...] that could suffer as a result of some of the changes in legislation that come out of the EU”.132 This is a point that Chris McLaughlin, Vice President of External Affairs at Inmarsat, took further when giving evidence to us: Ofcom had “always seen themselves as the guardians of the consumer in the UK and nowhere else. They have struggled, shall we say, to think about how they could also be the guardians of leading British industry that operates with spectrum”.133 Rupert Pearce went on to say that:

We do feel that Ofcom is split between wanting to be the regulators' regulator, proselytising new ways of regulating outside the UK to its comrades there, as against wrapping itself in the Union Jack and supporting British business out there in the rest of the world. Domestically, we feel uncomfortable with the economics-driven approach to spectrum policy, which I think if that is the only approach and it is not leavened by public policy objectives as well and recognising there are other businesses that can't compete for spectrum on the same basis as, say, a Vodafone or an O2, then over time businesses like ours will struggle to compete in the UK.134

112. Ofcom’s remit is set out in the 2003 Communications Act which states that “Ofcom’s principal duty when exercising its functions is to further the interests of citizens in relation to communications matters and to further the interests of consumers in relevant markets, where appropriate by promoting competition”. 135 We considered whether there was a case for widening Ofcom’s remit to take full account of the interests of British businesses. Ed Vaizey said that he thought there was.136 Ed Richards also said that “there is bound to be a case” for widening Ofcom’s remit, but said that Ofcom did not currently ignore business interests, asserting that “it certainly is not the case that we do not take account of business needs. Whether our duties need to be adjusted to guide us to take more account of business as a voice or of particular businesses, will ultimately be a matter for Parliament”.137

113. Given the growth, and consumer benefits, of mobile broadband provision, it is understandable that this has been the focus of recent spectrum policy. However, spectrum use by other sectors is also crucial to many industries and services including the emergency services, maritime services, and special events including the London 2012 Olympics. Some spectrum users are not in a position to bid competitively for spectrum and therefore it is even more important that their needs are not overlooked.

114. We are sympathetic to the concerns we have heard from the Programme-Making and Special Events sector. However, we think that Ofcom and DCMS are taking their concerns seriously and we welcome the trial in Cambridge that is looking at white space devices.

132 Q217

133 Q227

134 Q227

135 Communications Act 2003, section 3(1)

136 Q277

137 Q304

36 Spectrum

115. Given that spectrum is a finite resource, it is inevitable that some interference and inconvenience may occur for users as certain sectors expand faster than others. We are concerned about potential interference on digital terrestrial television caused by 4G mobile services, but we are satisfied that Ofcom is taking appropriate measures to mitigate this.

116. Spectrum is a valuable resource that many industries depend on. Ofcom has a very difficult role to play in balancing the interests of consumers, businesses and the public purse. On the whole, we believe that Ofcom is striking the right balance with regards to spectrum policy and management. However, we recommend that the Government widens Ofcom’s remit to ensure that it will safeguard the interests of British business abroad as well as the interests of consumers and citizens, a measure that would not require legislation.

Spectrum 37

Conclusions and recommendations

Liberalisation of the 900 MHz licences

1. The debate surrounding the liberalisation of the 900 MHz licences reflects the predictably polarised views that exist among mobile network operators. It also provides an example of the difficult judgements Ofcom has to make in order to balance the needs of consumers with those of fair competition. We are convinced that Ofcom made a considered decision based on thorough research, and that—overall—the liberalisation of the 900 MHz licences has not resulted in a significant or permanent distortion of competition. (Paragraph 28)

Spectrum trading

2. The sale by Everything Everywhere of some of its spectrum allows a private company to profit substantially from the sale of a public asset. We acknowledge that unless companies can profit from the sale of their spectrum, there is no incentive for them to divest any of their holdings. However, we recommend that the Government and Ofcom investigate mechanisms by which a proportion of the proceeds of any sale could be used to the benefit of consumers. For example, Ofcom should explore whether it could compel Everything Everywhere to ring-fence a proportion of this windfall for investment in its network . (Paragraph 34)

Spectrum licence fees

3. We acknowledge the concerns of some of the mobile network operators regarding spectrum licence fees. However in a commercial situation such as this, it is unlikely that all interested parties can be satisfied at the same time. We agree that Ofcom’s proposals to link licence fees to the market value of the spectrum determined by the auction is the most likely way to ensure that the fees charged to MNOs are fair and appropriate to the market value of their spectrum holdings. (Paragraph 38)

The number of mobile network operators

4. From the evidence we have heard, we believe that Ofcom’s proposal to secure at least four mobile network operators after the next spectrum auction is an adequate measure to safeguard plurality of mobile network operation. We are reassured that four is a minimum rather than a limit, as imposing such an artificial constraint on the number of operators in the market would inhibit competition. (Paragraph 47)

Spectrum caps and floors

5. Those mobile network operators with sub-1 GHz spectrum play down any advantage it may offer, stating that they are not immediately able to use it for 3G because the spectrum is already in use by 2G customers, who cannot simply be cut off. Those operators without sub-1 GHz spectrum claim to be frozen out of the market. These irreconcilable claims highlight the difficulties faced by Ofcom in overseeing

38 Spectrum

competition in the spectrum market place. Ofcom’s approach has been to liberalise spectrum allocation but there still remain some vestiges of a historical “command and control” approach to market regulation, which Ofcom itself has criticised. Not all operators start out on an equal footing, but by over-compensating for differences in their positions, Ofcom would risk reversion to the command and control principles from which it has been distancing itself since its inception in 2003. (Paragraph 54)

6. We believe that the spectrum floors and caps proposed for the next auction are the best viable compromise to ensure a competitive tension in the market place in the context of the liberalised 900 MHz licences. (Paragraph 55)

Rural broadband: coverage obligations

7. Attaching a coverage obligation to one of the 800 MHz licences may well result in that licence achieving a lower price at the auction; however, this will probably be off-set by the costs associated with increasing coverage. Increasing coverage will bring business benefits from attracting new consumers, which should encourage other network operators to follow suit. There is a risk that, by only applying a coverage obligation to one licence, consumers in the rural areas that would receive the extended coverage may still be limited in their choice of network provider. We recommend that Ofcom reconsider applying a coverage obligation to two or more licences. (Paragraph 67)

8. The evidence we have received suggests that Ofcom’s proposed 95% population coverage obligation on one of 800 MHz spectrum licences being auctioned is readily achievable. In fact, we consider the imposition of a 95% coverage obligation to be unambitious. (Paragraph 69)

9. When deciding the level at which any coverage obligation is set, Ofcom must balance the cost to the network operator of meeting the obligation with the effect that it will have on competition. The objections we have heard to imposing a coverage obligation higher than 95% have cited the cost of improving the infrastructure, rather than the feasibility of increasing coverage. The evidence that we have heard suggests that a 99% coverage obligation, although achievable, would cost up to £230 million and we are concerned that that cost could be transferred to consumers. Therefore we support the unanimous decision made by the House in May 2011 and recommend that Ofcom imposes a coverage obligation of 98% on one or more of the 800 MHz licences being auctioned. (Paragraph 70)

Rural broadband: infrastructure

10. We are encouraged to hear that mobile network operators are sharing their infrastructure in order to achieve a cost-effective solution to expanding their coverage. We believe that imposing a 98% coverage obligation will stimulate competition and the need for all operators to increase coverage. In turn, we think this will encourage more sharing and collaboration among the mobile network operators. (Paragraph 76)

Spectrum 39

11. Backhaul infrastructure that connects mobile base stations with the main network is a vital component of mobile service provision. Lack of backhaul must not become a reason—or an excuse—for mobile network operators not to extend coverage into rural areas. We recommend that Ofcom and BDUK work closely with each other to ensure that backhaul is taken into account in any policy decisions relating to mobile network provision or extending access to broadband. (Paragraph 78)

12. Market competition has led to mobile network operators, and others, coming up with innovative solutions to problems such as mobile not-spots. We welcome the Government’s decision to invest £150 million to increase mobile coverage and we welcome projects such as Everything Everywhere and BT’s rural pilot in Cornwall, and Vodafone’s femtocell technology. We note that other mobile network operators have not been using femtocell technology and we are disappointed that they have chosen not to offer this service to their domestic customers. (Paragraph 91)

Public sector spectrum

13. We welcome DCMS’s consultation on the release of public sector spectrum. We urge DCMS to work closely with Ofcom and with the relevant international bodies to ensure that the spectrum that is released is internationally harmonised. (Paragraph 97)

14. We are concerned that, because the emergency services are not in a position to bid for spectrum at auction, they could be overlooked in spectrum policy. It is vital that Ofcom and DCMS take into full account the spectrum needs of the emergency services in their spectrum policies. (Paragraph 98)

Programme-Making and Special Events and interference

15. Ofcom’s ability to procure public sector spectrum is vital for the success of the London 2012 Olympic Games, and might also provide a model of spectrum lending that could be used for other special events. We recommend that DCMS and Ofcom look into whether this could be done for other special events. (Paragraph 101)

16. We welcome the Government’s compensation regime for the relocation of PMSE spectrum use from channel 69 to channel 38, and the trial in Cambridge looking at interference by white space devices. However, these measures do not address the real problem of new spectrum users in the 800 MHz band causing disruptive interference to the PMSE sector. We recommend that Ofcom includes in the new 800 MHz licence conditions a provision that any significant interference to adjacent users be considered grounds for that licence to be revoked. (Paragraph 109)

Satellite spectrum use

17. Given the growth, and consumer benefits, of mobile broadband provision, it is understandable that this has been the focus of recent spectrum policy. However, spectrum use by other sectors is also crucial to many industries and services including the emergency services, maritime services, and special events including the London 2012 Olympics. Some spectrum users are not in a position to bid

40 Spectrum

competitively for spectrum and therefore it is even more important that their needs are not overlooked. (Paragraph 113)

18. We are sympathetic to the concerns we have heard from the Programme-Making and Special Events sector. However, we think that Ofcom and DCMS are taking their concerns seriously and we welcome the trial in Cambridge that is looking at white space devices. (Paragraph 114)

19. Given that spectrum is a finite resource, it is inevitable that some interference and inconvenience may occur for users as certain sectors expand faster than others. We are concerned about potential interference on digital terrestrial television caused by 4G mobile services, but we are satisfied that Ofcom is taking appropriate measures to mitigate this. (Paragraph 115)

20. Spectrum is a valuable resource that many industries depend on. Ofcom has a very difficult role to play in balancing the interests of consumers, businesses and the public purse. On the whole, we believe that Ofcom is striking the right balance with regards to spectrum policy and management. However, we recommend that the Government widens Ofcom’s remit to ensure that it will safeguard the interests of British business abroad as well as the interests of consumers and citizens, a measure that would not require legislation. (Paragraph 116)

Spectrum 41

Formal Minutes

Tuesday 25 October 2011

Members present:

John Whittingdale, in the Chair

Dr Thérèse Coffey Damian Collins

Mr Philip DaviesMr Adrian Sanders

Draft Report (Spectrum), proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 116 read and agreed to.

Summary agreed to.

Resolved, That the Report be the Eighth Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Written evidence was ordered to be reported to the House for printing with the Report in addition to that ordered to be reported for publishing on 21 June, 12 July, 6 and 13 September.

[Adjourned till Thursday 27 October at 10.00 am

42 Spectrum

Witnesses

Tuesday 21 June 2011 Page

John Cresswell, Chief Executive Officer, Arqiva and Julian McGougan, Head of Public Policy and Regulatory Affairs, Arqiva Ev 1

Richard Moat, Deputy Chief Executive Officer, Everything Everywhere, Nicolas Ott, Vice President of Strategy, Planning and Regulatory, Everything Everywhere, Kevin Russell, Chief Executive Officer, Three, and Phil Sheppard, Director of Network Strategy, Three Ev 6

Tuesday 28 June 2011

Ronan Dunne, Chief Executive Officer, Telefónica O2, Nicholas Blades, Head of Regulatory Affairs, Telefónica O2, Guy Laurence, Chief Executive Officer, Vodafone, and David Rodman, Head of Regulatory Affairs, Vodafone Ev 15

Rupert Pearce, Group General Counsel, Inmarsat, Chris McLaughlin, Vice President of External Affairs, Inmarsat, Stephen Hearnden, Director of Telecommunications and Technology, Intellect UK, and Raj Sivalingam, Associate Director of Telecommunications and Spectrum, Intellect UK Ev 29

Tuesday 5 July 2011

Ed Vaizey MP, Minister for Culture, Communications and the Creative Industries, DCMS and Simon Towler, Head of Broadband Policy, DCMS Ev 37

Ed Richards, Chief Executive, Ofcom, and Graham Louth, Director of Spectrum Markets, Ofcom Ev 45

List of written evidence

1 Written evidence submitted by the Musicians’ Union Ev 54

2 Written evidence submitted by Barry McKeown, Datod Ltd Ev 55

3 Written evidence submitted by the Department for Culture, Media and Sport Ev 59

4 Written evidence submitted by Telefónica UK Limited Ev 61

5 Written evidence submitted by Inmarsat Group Limited Ev 65

6 Written evidence submitted by the Countryside Alliance Ev 68

7 Written evidence submitted by Hutchison 3G UK Ltd (Three) Ev 68; 116

8 Written evidence submitted by the Federation of Communication Services Ev 72

9 Written evidence submitted by the Northumberland National Park Authority (NNPA) Ev 77

10 Written evidence submitted by the British Entertainment Industry Radio Group Ev 83

11 Written evidence submitted by the Incorporated Society of Musicians Ev 87

Spectrum 43

12 Written evidence submitted by Vodafone Ev 88

13 Written evidence submitted by British Telecommunications plc (BT) Ev 92

14 Written evidence submitted by Arqiva Ev 95; 114

15 Written evidence submitted by Network Rail Ev 100

16 Written evidence submitted by Ofcom Ev 101

17 Written evidence submitted by Everything Everywhere Ev 105; 115

18 Written evidence submitted by Intellect Ev 108

19 Written evidence jointly submitted by BBC, ITV, Channel 4, Channel 5, S4C, Arqiva and SDN Ev 110

20 Written evidence submitted by BSkyB Ev 113

44 Spectrum

List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2010–12

First Special Report Press standards, privacy and libel: Responses to the Committee's Second Report of Session 2009-10

HC 351

Second Special Report BBC Annual Report 2008-09: BBC Trust's response to the Committee's Fifth Report of Session 2009-10

HC 352

Third Special Report Channel 4 Annual Report: Responses to the Committee’s First Report of Session 2010-11

HC 891

First Report Channel 4 Annual Report HC 423

Second Report Pre-appointment hearing with the Government’s preferred candidate for Chairman of the BBC Trust

HC 864-I & -II

Third Report Funding of the arts and heritage HC 464-I, -II & -III

Fourth Report BBC Licence Fee Settlement and Annual Report HC 454

Fifth Report Pre–appointment hearing with the Government's preferred candidate for Chairman of the S4C Authority. First joint Report with the Welsh Affairs Committee

HC 1061-I

Sixth Report 2018 World Cup Bid HC 1031

Seventh Report Football Governance HC 792-I, -II & -III

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Culture, Media and Sport Committee: Evidence Ev 1

Oral evidenceTaken before the Culture, Media and Sport Committee

on Tuesday 21 June 2011

Members present:

Mr John Whittingdale (Chair)

Dr Thérèse CoffeyDamian CollinsPhilip DaviesPaul Farrelly

________________

Examination of Witnesses

Witnesses: John Cresswell, Chief Executive Officer, Arqiva, and Julian McGougan, Head of Public Policyand Regulatory Affairs, Arqiva, gave evidence.

Q1 Chair: Good morning, everybody. This is the firstsession of the Committee’s inquiry into spectrumallocation. As our first panel, I welcome JohnCresswell, now CEO of Arqiva, and JulianMcGougan, who is head of public policy andregulatory affairs. It was suggested to me by acolleague that we should start by asking everybody toturn off their mobile phone. Can I begin by askingyou whether you think that the market is still the bestmechanism for determining the allocation of spectrumand whether the auction process is the best way ofdoing that?John Cresswell: I think there is always a trade-offbetween the auction and what it is designed toachieve, which I guess is deriving the most value forthe taxpayer and balancing that against public policyobjectives through the auction. Obviously an auctionis a good mechanism in terms of providingcompetition and openness and transparency, but thekey issue, as I say, is what is the objective of theauction? Is it to raise the most money or is it tobalance the most money against the public policyobjectives? In our submission we made the point thatthe current auction as it stands does not necessarilyachieve that public policy objective of achievinguniversal coverage to allow the 800MHz spectrum tobe utilised for delivering broadband into rural areas.

Q2 Chair: Can you expand on what you said in yoursubmission: that you felt the whole premise may bebecoming outdated as a result of sharing ofinfrastructure and carrier aggregation? To what extentdo you suggest that that means we ought to be lookingat a different way of determining this?Julian McGougan: What we have said in oursubmission is that we thought Ofcom was broadlyright in their conclusion that what they wanted to seepost-auction is four operators, each with roughlysimilar spectrum bags, and that would maintain thecompetitive tension. We thought that was the rightthing to do. However, given that the market is movingtowards ever-increasing infrastructure sharing andthere is a strong likelihood of spectrum sharing lateron—in fact, the next development, of the 4Gtechnology, almost encourages spectrum sharing—thelikelihood is that, if Ofcom secures the outcome it is

Mr Adrian SandersJim SheridanMr Tom Watson

aiming for, it will have to come back and review thatafterwards. What we would not wish to see, surely, isthe idea there is a line in the sand drawn under fouroperators, each with their own exclusive pots ofspectrum, that holds forever and a day, which mighthave a detrimental impact on consumers and citizens.

Q3 Chair: You think that the whole process mayneed to be revisited once technology has moved on?Julian McGougan: For now, I think Ofcom’s premiseof four more or less equal spectrum portfolios is theright thing to aim for. If they achieve it, it may be thatthey will have to review it several years down the lineto make sure that still holds true.

Q4 Mr Watson: Isn’t that a rather obviousstatement—that you have to review things that changein the future? Are you effectively saying that fouroperators is one too many?Julian McGougan: No, not in the slightest. In fact,four operators are fighting each other tooth and nailin this country. This is one of the most competitiveenvironments for cellular networks and I am sure theoperators following will tell you that they are makingless money here than they make in other countries inwhich they operate. No, I think four operators isexactly the right thing to try and preserve. What I amsaying is that what we are seeing in the market is anincreasing move to competition at the service layerrather than infrastructure layer. The days are movingaway from when operators had their own exclusiveinfrastructure and their own exclusive pots ofspectrum and, in fact, the market is much more aboutthe service layer: who has the most attractive tariffs,who has exclusive dibs for six months on the nextnew iPhone and that sort of thing.

Q5 Mr Watson: You would say that at the momentOfcom have struck the right balance betweenregulatory intervention and market mechanisms?Julian McGougan: Yes. It is very difficult to get thisright. There is no one-size-fits-all solution forauctions, and when Ofcom decides it is going toaward some spectrum there is a whole bunch ofdecisions they have to take between deciding that andawarding it, one of which revolves around

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Ev 2 Culture, Media and Sport Committee: Evidence

21 June 2011 John Cresswell and Julian McGougan

competition—that is, to what extent do they try toaddress in the auction design any competitionconcerns they have, as opposed to leave it forcompetition law after the auction? We think theyprobably have it about right.

Q6 Mr Watson: Yes. I think we are realising as aCommittee that it is staggeringly complex. What Ifound interesting about your proposal is that it doesseem to capture the future a little bit. You might seethese as obvious questions, but I think for ourdeliberations in the future it might be helpful. Howmany 3G masts would your shared infrastructureneed?Julian McGougan: That would depend what it is youwere trying to do with it, I suppose.

Q7 Mr Watson: The proposal that you have given usto get 99% coverage, how many masts would thatneed?Julian McGougan: Well, we are aware that one ofthe operators, which is Three, has said publicly thatjust using their existing site portfolio, if they added800MHz to that without any new sites at all, theycould achieve that coverage objective of 99% outdoorreception or about 97% indoor reception. So if oneoperator does not need any new sites, though theymay need some more antennas, it suggests to us it isperfectly achievable.John Cresswell: Can I say a couple of words? Thechallenge is that if you are looking to have broadbandinto those rural areas, you have the balance betweenwhat the cost might be in building out the mobilenetwork in those areas as opposed to getting fibre tothe last 5%, 3%, 2%, 1% of homes. The analysisshows that wireless broadband, while not giving thebroadband speeds that fibre can give, is a far morecost-effective solution for reaching those homes.While it is a good question—how much is the cost ofit in terms of masts and rollout—you need to comparethat to the cost of getting fibre to the home in thoseother areas to have a true comparison.

Q8 Mr Watson: That is good advice. Can I just keepyou on masts for the moment, though? Can you tellme how many 3G masts the four providers currentlyhave?John Cresswell: No, because we don’t service themall, so we would not necessarily have access to thenumber of masts that they have to an accurate level.

Q9 Mr Watson: It is quite hard for me to understand.If you don’t know how many 3G masts they have,how do you know that your proposal can give 99%coverage?Julian McGougan: As we said, Three have saidpublicly that if they put 800MHz spectrum in all thesites they have access to, which I think is about 16,000from memory but I am sure the Three witnessescoming afterwards will confirm the exact figure foryou—they have said that that would provide about99%.

Q10 Mr Watson: But, essentially, you are sayingyour proposal is based on Three’s figures.

Julian McGougan: What we are saying is two things.We are saying, firstly, that achieving 99% coverage isabsolutely essential if you want to make sure that thatlast 10% gets served, because fibre will find itincreasingly challenging to reach them. 4G is the onlyway to do it; 800MHz is the only spectrum that isefficient to do it in and no other spectrum like that isgoing to be awarded for another decade or so. We arealso saying that, because at least one of the existingoperators could achieve that without adding any moresites, this is not an onerous thing to ask for. It isachievable now.

Q11 Mr Watson: Perhaps we could follow this up inwriting. What I am trying to establish, though, is howmany 3G masts are now provided by the fouroperators and how many more would be required toachieve what you say. Three say they can do it withno more masts. I am just trying to work it out because,remember, we are novices; we are politicians, notregulators and lobbyists who live and breathe this. Weare trying to understand this on a deeper level.John Cresswell: We can help with that, with the helpof our customers.

Q12 Mr Watson: I think I know the answer to this,but just for our evidence gathering could you explainto me why low-frequency spectrum—it is a simplequestion, I know—is much better at getting coverage?Julian McGougan: Well, quite simply, the lower thefrequency, the longer the wavelength. Those of youwho listen to Radio 4 long wave will be familiar withthat scenario. You can pick it up on the continent veryeasily, but if you tried to listen to FM Radio 4 youprobably can’t. The lower the frequency used, thelonger the wave length. The characteristics of longwavelength is that they not only tend to travel veryfar but they also tend to bend round obstacles and gothrough walls, which means this spectrum we aretalking about, the 800MHz, was specifically chosenfor television because it provided the optimal balancebetween enough bandwidth that you can offer higher-quality TV pictures than we have seen with the oldblack and white and in colour, but it also carriedthrough walls and hit set-top aerials.

Q13 Mr Watson: Would it be too simple a proposalto say that, therefore, based on that technicalassessment, four operators having access to the800MHz spectrum is better for the consumer?Julian McGougan: Well, it depends what outcomeyou are trying to achieve. If the key public policyobjective is to ensure everybody gains access tobroadband, you don’t need four operators to offer that.As long as at least one is doing that, that has tickedthat box. From the point of view of competitivetension, one of the things Ofcom is trying to achievein terms of these minimum spectrum portfolios, asthey describe it, is that they have four operators, eachof which have some spectrum that is low frequency,below 1GHz. Two operators already do; two don’t.

Q14 Damian Collins: Do you think the Governmentshould set coverage targets or do you think thereshould be a purely market-based approach? If there

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was a market-based approach, what would it looklike?John Cresswell: I am very clear: I think theGovernment should set a target. The 800MHzspectrum is released through DSO and clearance. Itwas used to deliver universal coverage for TV. If youwant to have a digital Britain or a network nation andbroadband for all, this is a once-in-a-generationopportunity to impose coverage obligations on thisspectrum to deliver that. Therefore, as we said, 99%outdoor reach coverage will enable virtually everyhome in the country to be able to access at least2Mbps, which is enough to watch the BBC iPlayer,for instance. I don’t think the market would providethat, just as television reaching the last 5% would beuneconomic for commercial operators if they were leftto choose. I guess that would be the same for abuild-out for fibre; it would be uneconomic to do that.Therefore, you have to set down the coverageobligation.

Q15 Damian Collins: What sort of coverage do youthink market forces alone would allow for? If therewere no targets at all, what do you think we would belooking at?John Cresswell: Difficult to tell. In 3G, the coverageobligation is about 80%. You can ask the industrycolleagues behind me whether they have exceededthat. I do not think the market would necessarily dothat because it is uneconomic for them at that level.Damian Collins: Julian, did you want to come in?Julian McGougan: I was just going to say thecoverage obligation of 3G is an interestingcomparator. It was set at 80%, whereas the precedinglicences were essentially universal. The Ofcom figuresin the latest consultation that has just closed on thisvery auction, the 800MHz auction, suggest that the3G reaches 87%—that is, 87% of the populationshould be able to get at least one 3G signal, althoughthe latest press coverage you may have read suggeststhat the coverage may not be as perfect as you wouldlike to believe.The important thing to deduce from that is not onlythat, left to the market, they will not achieve anythinglike universality—the commercial imperative runs outlong before you hit even 90%—it is also worthdrawing the conclusion, if you look at Ofcom’sfigures, that those who are not served at all are veryunevenly distributed, much like the last 10% who donot have broadband of 2MB; because although 87%is the 3G coverage for the UK, for Northern Ireland itis only 40%. This is one of the reasons why we weresuggesting both to Ofcom and in our response to thisCommittee that, whatever the coverage obligation, itshould be set by nation rather than by the UK so thebenefits are more widely distributed. The French, intheir proposals for 800MHz, have not only set a verychallenging coverage target of 99.6%, but they havesuggested that it needs to be measured by department.

Q16 Damian Collins: Do you think that setting ahigh coverage target, be it 95% or 98%, which anumber of MPs in Parliament spoke in favour of, or99% as you said, is a market deterrent? Do you thinkthe companies can deliver that? They may choose, left

to their own devices not to, but would their businessmodels allow them to hit that target?John Cresswell: I suggest that is a question that theycan better answer. However, I think it is what I saidearlier: there is a balance if you want to maximise thetax take, because the cost of reaching and operatingto an extended level is bound to be more expensivethan if you didn’t have to do that. In terms of the pricethat anyone is willing to pay in the auction, there is aslight trade-off for the additional coverage, but I thinkif you just stand back and look at what BDUK istrying to do and the amount of money it has availableto ensure broadband for all, if you don’t have a mixedeconomy between wireless broadband and fibre, Idon’t believe there is enough money in that pot to getfibre to every home. Therefore, the two need to bealigned in some way.

Q17 Damian Collins: Where would you strike thebalance? Because it is all money, however you cut it.The Government can set high coverage targets andaccept lower bids for it, or it could get as much moneyas it can and seek to top up the coverage with pocketsof money to fund projects, or even maybe localgovernment may decide to support the rollout ofbroadband to support business development in itsareas. From what you have said, it sounds like thebest thing to do is set the target and then let the marketfind a way to hit it.John Cresswell: I think that is exactly right. Unlessyou set the coverage target, then the procurementwithin BDUK, which doesn’t have any coverageobligations in its targets yet either, you would neverget there. That is why I say this is the once-in-a-generation opportunity. If you set the target, then youhave the opportunity to find funding from wherever.Also, in terms of having the whole thing aligned—all the Government policies aligned—you need to setcoverage obligations for the procurement in BDUK;otherwise they could spend the money withoutreaching the coverage obligations as well.

Q18 Damian Collins: Have you calculated what theadditional cost associated with the 99% coverageobligation would be for the industry? Asupplementary to that: do you think the Governmentshould ask for bids based on maybe one or twodifferent coverage targets, to assess what the likelycost might be?John Cresswell: I could not quite hear the first partof the question.Damian Collins: Sorry. Have you calculated whatyou think the additional cost associated with the 99%coverage would be for the industry?John Cresswell: I think it is in the region of £200million to £230 million to extend the networks in thatway. What was the second question?

Q19 Damian Collins: The second was, in terms ofthe auctioning process, do you think the Governmentshould consider setting, say, two coverage targets andasking people to submit their bids based on, say, a95% and a 99% coverage?John Cresswell: I wouldn’t, because I think then youhave a level of complexity in the auction and it

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depends how you are going to decide between them,because then you have a very clear trade-off betweencoverage and money. I believe the coverage obligationshould be there.Julian McGougan: If I could just make two points onthat one, the first is that we shouldn’t look at the costswithout also looking at the benefits. There was asubstantial OECD-World Bank study in 2009 lookingat the benefits to the economy of driving up broadbandpenetration, which said that for every 10% increase inbroadband penetration you get more than onepercentage point extra GDP growth. I am sure thatfigure will dwarf whatever the costs are.The second point I would make is that it may not beobvious even when the auction is over what the costsof that coverage obligation have been because the sixdifferent pots of 800MHz spectrum that the biddersare going to be bidding for are not homogeneous.There are various factors in play affecting how muchthey will bid for different ones. If you bid for thespectrum at the bottom against prevailing Freeviewuse, there will be interference from that use intoFreeview, which will have to be mitigated. There willbe a cost to that.The release—when all the spectrum is available forUK-wide release—varies depending on which bit ofspectrum you buy. At the top end you have the risk ofcontinuing unlicensed radio microphone use and thepotential interference into the low-power devicesimmediately at the top, which include personal healthcare alarms for frail people—the alarm gets triggeredif they fall over—which Ofcom is looking at at themoment. All these factors mean that this is nothomogeneous spectrum, so even when the auction isover, you may not know what the cost of asking for a99% coverage obligation was, but you do know whatthe benefits of plugging that last 10% are going to be.

Q20 Mr Sanders: Given that yours is a companyproviding media infrastructure, is that one of thereasons why you would be so keen to want 99%coverage?John Cresswell: If it was only that simple that all thebusiness would come our way, then yes, but we workin a competitive environment. As we explained earlierin terms of the number of 3G masts, we are a providerin the marketplace. There are other providers as well.I think having broadband for all will provide greaterbusiness opportunities for us and other businesses aswell, but the thing that we have learnt from DSO—digital switchover—which Arqiva is doing and thenwe are doing the clearance for clearing these channels,is that if you do not plan ahead, then there are, aswe know, thousands of sites out there with masts andantennae on them, and the turnaround time is not veryquick. The vision and ambition that the Governmentset out for the longer term, this is an opportunity toseize that.

Q21 Mr Sanders: I had never come across thephrase “backhaul infrastructure” until this inquiry. Welearn something all the time. Do mobile operatorshave effective enough backhaul infrastructure to copewith a 99% coverage obligation?

Julian McGougan: It is a legitimate concern and wehave heard it before. There is no doubt that if you arerolling out into rural areas, the backhaul is an issuethat has to be addressed. Now, in some of those areasfibre will reach either because fibre can get there nowor because BDUK is looking at how, as part of itsprocurement, fibre can be driven out as far as possibleto the communities. Where fibre does not reach themast, there is microwave as an alternative, which is alongstanding use of that. You use microwave wireless,which can offer very high bandwidth backhaul up to100Mbps, which is ample for a small rural site, and ittakes that backhaul, takes that traffic, to the nearestfibre point. For example, when we operated the800MHz 4G trial in Pembrokeshire at the end of lastyear, we ran it from one of our broadcast sites, whichalso has virtually all the mobile operators on alreadyfor the non-4G. It did not have fibre into it at the time,but we could run fibre into it if we wanted it to. It isa mix of fibre and microwave that will deliver this.John Cresswell: That is part of the issue in some ofthe rural sites. They already do have power forbackhaul to them because they are used forbroadcasting and other benefits. You are right; it is anissue that will need to be addressed with someinvestment, but it is solvable.

Q22 Dr Coffey: I notice in your submission youmention just 95% could exclude Suffolk, NorthernIreland and Cumbria, so obviously I’m referring tothat. I am sure many rural MPs are pushing hard fora higher coverage obligation. I am just trying tounderstand a little bit more about what you said there.I visited Orford Ness the other day. There is an ideathat if they could get fibre out there, they could do alot of relay on this. If BDUK’s effective role is tocreate a digital pump in a village, which is whatJeremy Hunt says, what is stopping the mobileoperators basically piggybacking on that and creatingmore masts in a cheap way? Why is it they only everwant to use their own infrastructure, it seems? We arejust trying to understand.John Cresswell: Before we answer the second part ofthat question, let’s start with the digital pump. I thinkthe digital pump works very effectively with wirelessbroadband because you still have the pump in themiddle; you do not have connectivity to every homeand the ranges for wireless broadband would be a verycomplementary technology to sit alongside that.In terms of what you were saying earlier in terms ofthe procurement, I think one of the interesting thingsabout how the procurement is structured is in somecounties, Cumbria being an obvious one, it is not thefinal 5%. It is probably the final 50% that are affectedin rural areas, which is why, if you do not havecoverage obligations within their procurement, youmay find that some areas have very low penetrationlevels. The second part of the question about the mastsI will allow you to have a go at, Julian.Julian McGougan: I wish I knew the answer. If youwant to know why the mobile phone companies prefertheir own infrastructure, which they are decreasinglydoing, then perhaps it is a question to ask the twooperators following us. One point I would make aboutthe digital pump is that, although that was one of the

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centre points of the Coalition’s broadband strategythat was unveiled at the end of last year, becauseBDUK is running a whole series of localprocurements bubbling upwards, there are going to be30 to 40 different procuring authorities—some thesize of Wales, some the size of perhaps counties—who will decide for themselves what they wantbroadband to look like for their consumers.

Q23 Dr Coffey: But BDUK is changing that strategy,isn’t it? Or have they not communicated that publicly?Julian McGougan: It is a slightly fluid situation.Every time we have spoken to BDUK they have madeit quite clear to us that they cannot insist onuniversality. They cannot insist that each procurementdelivers 100%. It is for the local procuring authorityto decide exactly what it is that they want to buy.Some areas may get digital pumps, which may thenhave a very large rural dispersed population to serve.Some may not get digital pumps at all.

Q24 Dr Coffey: From what you have just suggested,BDUK may be setting themselves up to fail indelivering the Government’s policy?Julian McGougan: It is more difficult delivering aGovernment policy if you are relying on localcounties and devolved assemblies to decide what theywant to do in their areas. It is one of those localismdebates we are familiar with from the NHS and muchelse, I’m afraid.John Cresswell: Yes, I think you need to have the twothings aligned and certainly as part of procurement.Whether we start at the coverage obligations, certainlystandards in the procurement are going to beabsolutely essential to ensure that the operators andthe network are interoperable.

Q25 Dr Coffey: Stepping back, I appreciate youcan’t talk on behalf of mobile operators, but whatwould be the most cost-effective way to get 99%coverage? Your masts?John Cresswell: No, not our masts necessarily. I thinkyou need a mixed economy. Principally it will be fibrewith wireless broadband, and then the last 1% beingable to be served by satellite. That is what happens inmost other European countries that are going alongthe same path. I think you need that mixed economy.

Q26 Dr Coffey: In terms of existing fibre network,is there any reason why that couldn’t be used to,again, be piggybacked on? In your view, are theretechnical limitations?John Cresswell: Obviously, fibre has significantadvantages in terms of speed. As the Minister said ata dinner I was at, he was aiming for 90% at 10Mbpsand 10% at 2Mbps as a starting base. Well, wirelessbroadband can get you to that. I think essentially it isgoing to be fibre, but the cost of rolling out fibre tothe last 3% or 5% is extremely expensive. Dependingon whether you want to deliver high-speed broadbandas we would all understand it to everyone, or for thelast 5%, 3%, 2%, 1% prepare to, with today’stechnology, give them 2Mbps in terms of band speed,then that is just about price—how much you wouldlike to pay for the cost of getting fibre to the home,

because it is very expensive in those areas just to digup the roads to people’s houses.Dr Coffey: Of course. Thanks.

Q27 Chair: Can I turn to the PMSE sector, withwhich you have some involvement as a companysupplying technical equipment? We have heardconsiderable concerns have been expressed that theproposals by Ofcom don’t go far enough to safeguardthe future of the sector. Do you share those concerns?Julian McGougan: I think it is unfortunate that theyhave to suffer this disruption, although we have tobear in mind that television is also being ejected fromthe same space—there was disruption to Freeviewviewers in some places as well—but the PMSE lobbyis quite vociferous and they quite rightly say, “Whyshould we be moved?” I think they lost that argumentbecause of the high-value nature of mobile broadband,but Ofcom, working with Arqiva and the industry,have done their best to put in place something thatmitigates that. There is a scheme that pays, I believe,about 55% of the cost of new equipment.There is a transition process in place where newspectrum was found—channel 38 to be technical—which will provide more spectrum more flexibly thanthe old channel 69 they are being moved from. Boththe old and the new spectrum are availablesimultaneously and they are available under the samelicence you currently have. You don’t need to get anew licence when you buy new equipment.Everything is being done to make that transition assmooth as possible, but yes, it is a bit disruptive andI’m afraid there is not much that we can do about it.There are thousands of radio microphone users to becommunicated with and some of them would probablyrather just stay where they were. Unfortunately, thatis not an option.

Q28 Chair: I think, in terms of their approach to us,to some extent they accept that they are not able tostay where they are now and they are going to haveto move. One of their concerns is that where they arebeing moved to may not be a permanent home andthat, in due course, they may come under pressurethere as well.Julian McGougan: Well, I am not sure howpermanent any home is, to be honest, in terms ofspectrum. After all, the Crown retains the freehold ofall spectrum, so to speak, so anybody who has aspectrum licence does not know it is going to berenewed. However, they have been found this newhome with the expectation that it will last aconsiderable amount of time and probably as long asthe equipment that they are buying. All the tests havebeen done to show that there is no interference in thatthat would affect PMSE use. It should provide morespectrum and more flexible use of PMSE, but, yes,there is a bit of disruption for them, I am afraid.

Q29 Chair: They have also expressed considerableconcern about the possible use of white space devicesand the fact that this may interfere with PMSE events.Is that a legitimate concern?Julian McGougan: It is a concern shared by Arqiva,although we are more concerned that it will interfere

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with Freeview reception than PMSE because that is awider use than radio microphones. But yes, it is aconcern we share and Ofcom share the same concernas well. There is a trial due to start in Cambridge atthe end of this month on white space devices to provethe very point that those who are in favour of whitespace devices have been saying for some time: theycan operate safely around Freeview use and aroundPMSE use. For PMSE, where you don’t know exactlywhere it is—unlike television, which tends not tomove very much in its broadcast—that will requireaccessing a database, which is to say that every timea white space device wants to power up it will accessa database and say, “Tell me what I can use withinthis location”, and it will only then use what thedatabase has told it is free. Thus licensed PMSE useshould be protected.

Examination of Witnesses

Witnesses: Richard Moat, Deputy Chief Executive Officer, Everything Everywhere, Nicolas Ott, VicePresident of Strategy, Planning and Regulatory, Everything Everywhere, Kevin Russell, Chief ExecutiveOfficer, Three, and Phil Sheppard, Director of Network Strategy, Three, gave evidence.

Q32 Chair: Good morning, gentlemen. I welcomefor the second part of this morning’s session RichardMoat, the Deputy CEO of Everything Everywhere,and Nicolas Ott, the Vice President of Strategy,Planning and Regulatory Affairs, and from Three,Kevin Russell, the CEO, and Phil Sheppard, Directorof Network Strategy.

Q33 Mr Watson: First, I thank the executives forcoming, taking time out of your busy schedule.Richard, could I just ask you why couldn’t your ChiefExecutive make it this morning?Richard Moat: This meeting was arranged atrelatively short notice and I was available but hewasn’t. I am the person within the organisation whois most directly responsible for this area.Mr Watson: What does he have on this morning?Richard Moat: I don’t know exactly but—

Q34 Mr Watson: Okay. He is a busy guy. My firstquestion, perhaps for Kevin and Richard, is: is it fairto say that complaints about the effects of liberalisingthe 900MHz licences are special pleading?Richard Moat: I think there is an imbalance in the UKwith respect to the allocation of sub-1GHz spectrum,which started when that was awarded entirely toVodafone and O2 back in the early 1980s. It has beenperpetuated by the fact that that spectrum wasliberalised without charge at the beginning of thisyear, which means that it can now be used for 3G, andif provisions are not put in place to allow Three andEverything Everywhere to get a reasonable portion ofthe 800 spectrum, that problem will perpetuate itselfinto the 4G environment in the future.Kevin Russell: There is a well documented and wellunderstood significant competitive advantage to low-frequency spectrum. It transmits about three times asfar as high-frequency spectrum. That is an advantagethat O2 and Vodafone have enjoyed in the marketplacefor a long time. It has now been carried over directly

Q30 Chair: Ofcom have suggested if there isinterference then they will turn it off within an hour.If you are Bon Jovi about to play the Milton KeynesBowl, an hour is rather a long time while you wait forOfcom to get round to clearing your frequencies.Julian McGougan: Well, this is one of the things thatare being debated hotly within the industry andOfcom. It is a live issue.

Q31 Chair: Does Arqiva have a view on it?Julian McGougan: Well, we would not want BonJovi to be switched off either.Chair: Good, nor would I. I think that is all we have.Thank you.John Cresswell: Thanks very much.

into 3G with the liberalisation. It is a distortion thathas been largely addressed in other Europeancountries, so in every other European country thatThree operates in, there has been an allocation or are-auction of 900MHz spectrum. There is no othercountry that we operate in other than the UK that hasnot addressed that distortion.

Q35 Mr Watson: I am sure I speak for mostCommittee members when I say we are still gettingused to the technical terms about types of spectrum,but it does strike me that there are certain portions ofthe market where you are advantaged anddisadvantaged depending on your position. Forexample, I read in the Financial Times this morningthat for the first time Everything Everywhere will betaking advantage of Ofcom’s new spectrum tradinglaws and that you will be selling 25% of your1800MHz spectrum. Is that right?Richard Moat: Yes, that is right. We had to relinquish25% of our 1800 MHz holding as part of the remediesagreed with the EU and with the UK competitionauthorities, which allowed the merger to go forwardsin the first quarter of last year. Now that the spectrumtrading regulations have been put in place, we caneffect that.

Q36 Mr Watson: That is valued at £450 million?Richard Moat: I don’t know what the value of it is atthe moment. I think that can only be determined whenthe rules for the spectrum auction are finalised,because that will have a massive impact on the valueof any block of spectrum, 1800 MHz included.

Q37 Mr Watson: Would you say that the FT reportis more or less accurate—that £450 million isprobably the figure that you could realise for that?Richard Moat: I would not want to speculate on thatpublicly. It is highly commercially sensitive.

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Q38 Mr Watson: But surely in your own forecastingyou have a figure in your own head. You might notwant to share it with a parliamentary Committee, butyour shareholders presumably—Richard Moat: I don’t have a figure in my head at all.As I have said, there is such a wide range ofoutcomes, depending upon what rules are put in placespecifically with respect to the large amount ofspectrum that is for sale in the spectrum auction,which would determine the value of a single block of15MHz that could be sold separately from thatauction.

Q39 Mr Watson: Let me just get this straight. Youare telling me that nowhere in your company there isa single person who has estimated what the value ofthis spectrum might be?Richard Moat: Do you want to comment on that,Nicolas?Nicolas Ott: Yes, I can comment on that. One keydriver of being in a difficult situation for assessing thevalue of that block of 1800 is that Ofcom has notyet formally stated the spectrum fee they will want tocharge, whoever is going to buy the spectrum once wehave sold it. The current proposal of Ofcom seems toattach to that block of 1800 MHz a very high spectrumfee; therefore whoever buys it will have to pay,endlessly, a very high fee yearly back to Ofcom. Thatis one of the fundamental points of discussion withOfcom, which is to tell them, “Until the time youfinalise your decision about that yearly spectrum fee,no one is capable of assessing the value of thatspectrum.”

Q40 Mr Watson: To repeat my question, is thereanybody in your company that has estimated thevalue, or are you saying that, as Deputy ChiefExecutive, all you get is reports saying, “We have thisvery valuable piece of spectrum but we don’t knowwhat it is worth.”?Richard Moat: I am saying there is a very wide rangeof possible outcomes and I wouldn’t want to speculateon what that is.

Q41 Mr Watson: Well, could you just let me knowwhat you think the range might be?Richard Moat: Let’s look at the prices that are beingquoted for 800 and 2.6 in the context of the currentspectrum auction rules. If you are looking at 800reserved spectrum, then it is £200 million per 5MHz.

Q42 Mr Watson: So the FT might not be far off,then?Richard Moat: But 1,800 has much worsepropagation characteristics and, therefore, can provideless coverage than 800, so it is not going to be worththe same amount. It is going to be less than that.Nicolas Ott: If you take the 2.6 reserve price—

Q43 Mr Watson: I have the answer on that. Could Ijust move it on then? You received this in 1993, isthat right? Can I ask what you paid for it?Richard Moat: It was in 1991, I think.Mr Watson: 1991, was it?Richard Moat: Yes.

Mr Watson: Can I ask what you paid for it?Nicolas Ott: We are paying yearly the spectrum feeto Ofcom.

Q44 Mr Watson: No, when it was allocated to you,what did you pay for it?Nicolas Ott: It was paid against a yearly fee. The900MHz and 1800MHz have been allocated to theoperators against a yearly fee that is paid by theoperators to Ofcom.

Q45 Mr Watson: My understanding is you werebasically given this chunk of spectrum. Do I havethat wrong?Richard Moat: Yes. The original companies that werein existence at that time were given that chunk ofspectrum.

Q46 Mr Watson: Yes, so the component parts ofEverything Everywhere were given a chunk ofspectrum by the Government and did not pay anythingfor it. That would not be a misrepresentation?Richard Moat: Yes, the same is true of Vodafoneand O2—Mr Watson: I understand that. They are with usnext week.Nicolas Ott: But we pay £33 million per year.

Q47 Mr Watson: Let me just say I am going to gooff the £450 million figure that the FT have speculatedon this morning. Can I ask what you pay in licencefees for that chunk of spectrum?Nicolas Ott: For the 1800MHz?Mr Watson: Yes.Nicolas Ott: We paid £33 million per year.

Q48 Mr Watson: £33 million. If I go off £450million—I did do the maths before I came in—thatmeans that, if I go from 1993, you have paid £104million since 1993 in licence fees. Is that right?Nicolas Ott: Well—Mr Watson: Thirteen times eight.Nicolas Ott: Thirteen times eight would be probablythere.

Q49 Mr Watson: Yes, okay. If the FT are right, youare about to get a third of a billion pounds dividendout of this. Is that right? With the FT figure of £450million, you are going to get £350 million surplus fora piece of spectrum that you were given for free?Nicolas Ott: We also have invested on that spectrum.We have invested in network; we have invested incapex.

Q50 Mr Watson: Sure. Would I just be accurate inthat? I do not want you to defend that position just yet.Richard Moat: No, it is £33 million per annum for20 years.

Q51 Mr Watson: You are paying £33 million perannum, yes, but you are only giving a quarter of thisspectrum away.Richard Moat: Are you talking about only the quarterthat is being given away?

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Q52 Mr Watson: 25% of 33 times 13, 25% of 33,broadly £8 million times 13—when I did it on thecalculator this morning it made £104 million, butthat was—Richard Moat: Times 20. It was given in 1991.

Q53 Mr Watson: 1991? So it is even more than that?What would that be? That would be £8 million times20, that would be—Richard Moat: £160 million.

Q54 Mr Watson: £160 million. You have paid £160million and you will be making £290 million surplus?Nicolas Ott: But if you look at the NPV of thatspectrum you have to consider that we have beeninvesting on our network and that investment was—

Q55 Mr Watson: Can you just answer the question?It is broadly a third of £1 billion, yes?Richard Moat: On that hypothesis, yes, but there is70MHz of 2.6 spectrum and 30MHz of 800 for sale.

Q56 Mr Watson: Let me just ask you, do you thinkit is right that the Government should give away apublic asset to a private company on which they thenrealise a third of £1 billion pounds surplus?Richard Moat: These licences were awarded between20 and 30 years ago, so it is difficult to comment onwhat public policy was then and what this decisionmeans now.

Q57 Mr Watson: No, I do understand that, but doyou think that your customers, who for the next threeyears will be facing reducing living standards, wouldthink it was fair for the Government to allow you asurplus of a third of a billion pounds to be made onspectrum that is owned by them?Richard Moat: Well, it is currently owned byEverything Everywhere.

Q58 Mr Watson: That is because the Governmentgave it you.Richard Moat: Yes.

Q59 Mr Watson: Do you not think they should geta share of some of that surplus? Do you understandthe point I am making?Nicolas Ott: We understand the point you are making.That decision has been taken by the public authoritieswhen they accepted the merger. So it is not—

Q60 Mr Watson: Is it the right decision?Richard Moat: It is not our decision to sell it in thefirst place.

Q61 Mr Watson: But do you think it is right thatyou should get a benefit from that spectrum that wasgiven you for free? Just say yes or no.Richard Moat: The spectrum has a value and the factthat it was awarded for free 20 years ago I don’t thinkis relevant to today’s circumstances when we haveinvested £58 billion in this country since the start ofthe business. That represents 7% of FDI over the last10 years.

Q62 Mr Watson: Some of your shareholders are theGerman and French Governments, is that right?Richard Moat: Yes.Nicolas Ott: Well, nominal.

Q63 Mr Watson: They will be getting a share?Nicolas Ott: It is not the French and the GermanGovernment. The French and German Governmentshave a shareholding of Deutsche Telekom and FranceTelecom, but they are not the prime shareholder.

Q64 Mr Watson: I see. The German and FrenchGovernments have a share in Deutsche Telecom andFrance Telecom that own you?Nicolas Ott: Yes.

Q65 Mr Watson: So essentially they have a share?Nicolas Ott: But they do not control the companies.

Q66 Mr Watson: They are going to get a share of apublic asset that was given freely to your companyand the British taxpayer is not going to see any ofthat?Nicolas Ott: The key issue for the company, I think,is not to take that disposal and just to cash it. Thepoint is that we are here in the sense that we need toinvest in a new series of network. We need to investin 4G, we need to invest in rural coverage and weneed to invest in the licences that Ofcom will beorganising very soon now, hopefully. The priority forEverything Everywhere is to be in a position ofinvesting in the UK more than anything else, and thatis what matters. These proceeds, should we indeedkeep them, will be indeed reinvested into the UKmarket by acquiring more spectrum, by rolling out 4Gnetwork and by trying to do as well as we can in therural areas. That is what Everything Everywhere isabout and that is the vision and the mission of thecompany. That is why we have named the companyEverything Everywhere. We want to offer the bestcoverage possible in all the country. That is, if youwant, the industry or project of the company and Ithink that is what matters quite significantly for thecountry, hopefully. The country will benefit from oneof the four players being in a position that allowssustainable competition, in a position that allows themto invest, and in a position that will allow them to doas we are doing in Cornwall now, offering very deeprural coverage, in other regions of the country. It isdefinitely where we are focusing more time and effortthan on anything else, which is how can we play afair role in that new world of mobile internet.

Q67 Damian Collins: The profit you might make onthe sale that we have just been discussing, are yousaying that will be ring-fenced for investment back inthe UK network?Richard Moat: I think that it is not necessarily ring-fenced but, practically speaking, we need morespectrum. We are being forced to sell 25% of our1,800 spectrum holding as part of the remedies toallow the joint venture to move forwards. That beingso, we need to acquire more spectrum to replace itand more on top of that because we have 27 millioncustomers in the UK, 30 million if you include the

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mobile virtual network operators that we host, whichis by far the largest number of customers, the largestcustomer base, of any of the four operators in the UK.If you look at our spectrum holdings on a percustomer basis, we have one of the lowest spectrumholdings because of the large number of customersthat we have and we have to maintain that spectrumper customer. We have to reinvest not only inreplacement spectrum but in more spectrum on top ofthat to cater for the huge growth in data that is goingto occur over the next 10 years.

Q68 Damian Collins: Okay, so that was no, butgiven the figures we heard at the previous session,what might strike some people from what Mr Watsonhas been asking about and the numbers he was talkingabout is that the profit you are making on the spectrumsale would potentially pay for the infrastructure costsof extending coverage to 98% or 99% of the country.People might question whether the money would bebetter spent doing that than being returned to yourshareholders.Nicolas Ott: If you go back to effectively the valuesthat were quoted and if you look at the reserve pricethat Ofcom is currently proposing for the 800MHzand for the 2.6GHz, quite clearly you can see that,with these proceeds, we can pay for only a fraction ofthe spectrum that we need, as Richard said, forreplacing what we sell and for acquiring the spectrumwe need to cope with the mobile data increase. It doesmean that, only on the pure spectrum scope, it is quiteclear that the net outcome will be a cash outflow fromthe company. That is obvious. We would almost liketo be in the opposite situation where we would thinkthe spectrum will not be very expensive, so it wouldbe easier.Now, when you look at the reserve price proposed byOfcom and the auction outcome in the other westernEuropean countries and you try to compare thingslike-for-like, quite clearly the net-net for EverythingEverywhere will be a very significant cash outflow forthe spectrum itself. Then comes, effectively, therollout of the 800 network that we do not have, so weneed to build it from scratch because we do not evenhave a 900 network. We need to create somethingfrom scratch. Same thing for the 2.6. If, hopefully, wecan acquire also some 2.6GHz—as we say, it is afurther capex investment—at the end of the day thenet-net is going to be in the years to come definitelya very significant cash outflow from the companyeither to the Treasury for the spectrum, or to thecompanies we are using in the UK for rolling out andmaintaining our networks.

Q69 Damian Collins: I accept that, but you have amodel where you know you are making cashinvestment in the networks and you know you aregoing to recover that from your customers over a longperiod of time and that is protected for you. Wherewe have these sorts of pots of extra cash that maybeyou had not budgeted for, to me it suggests there isenough money in the system here to fund some ofthese extra things we might want in terms of certainlyexpanding coverage.

Richard Moat: We have not said that we are opposedto high coverage obligations. If you look at thecoverage that we have on our existing 2G network, itis 99%. On our 3G network, despite the fact that theoriginal coverage obligation was only 80%, recentlygoing to be increased to 90%, our coverage once againis 99% of the population. Despite what was saidpreviously, market forces push you in that direction.It is very difficult to get to 100%, particularly with thespectrum we have and its propagation characteristics,how much coverage it can provide, but we firmlybelieve that we have a role to play in terms ofreaching the maximum possible amount of populationin the UK. The trial that Nicolas referred to in LTE at800, which we are running in Cornwall in associationwith BT, is a big push pilot to make sure that that willwork in the future.

Q70 Dr Coffey: Can I just clarify in terms of the saleof the 25% spectrum that was forced upon you—thatwas income you may have expected in the past butthe European Commission said otherwise—will it bebased on market forces, what other people areprepared to pay, or is there an element of Ofcomintroducing almost a kind of a set price for you?Richard Moat: I think it will be heavily influenced bythe spectrum rules that are eventually agreed, but itwill be an open market transaction.

Q71 Dr Coffey: Then any profits you gain from thatwill, I assume, be included in your accounts and yourcorporate tax base for paying corporates?Richard Moat: Yes, but to reiterate what Nicolas said,there is almost bound to be a net cash outflow in termsof replacing and adding to that spectrum, before weeven start talking about the cost of investment in theinfrastructure equipment.

Q72 Dr Coffey: But there is no reason why, giventhe structure of how the spectrum is currently held, themoney would not be included as part of your financialaccounts within the UK?Richard Moat: No.Dr Coffey: I have finished my questioning on that.

Q73 Chair: Can I just clarify? Both of you haveessentially suggested that you are disadvantaged bythe fact that the original two operators have 800MHzand you don’t and the lower the bandwidth the betterthe coverage, yet in the case of EverythingEverywhere you are now the biggest operator in theUK and you have more base stations than everybodyelse. Given that you have all those existing basestations, surely the spectrum you already have accessto is perfectly as advantageous as the lowerbandwidth?Richard Moat: We want to reduce the overall numberof base stations that we have, because that makeseconomic sense. We had two completely separatenetworks and we only need one moving forwards intothe future. Also, obviously, if we reduce the numberof base stations, then that is good for the environmentas well. There would be a positive environmentalimpact from doing that.Chair: It is altruistic reasons that cause you to—

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Richard Moat: Well, partly. Partly it is soundcommercial reasons and partly, yes, it isenvironmental reasons, but it is a combination of thetwo.

Q74 Chair: With the spectrum you have at themoment, while you nevertheless do have to maintainall the base stations, you can offer a perfectly viableservice?Richard Moat: Ofcom have previously saidthemselves that if you are using 1800MHz spectrum,which we are, you need, roughly speaking, three timesthe number of base stations than you do if you areusing 900 or 800 as we are now contemplating in thecontext of this auction. That being so, your cost baseis going to be much higher, so you are at a significantcommercial disadvantage if you have 1800 spectrumrather than 900.Nicolas Ott: If I may, just a quick point. Ofcom intheir consultation state very clearly that they considerthat roughly 10% of the calls—whether it is voice, orit is mobile internet—can be served only by 900 or800 because these calls are being made by people orreceived by people who are what they call “deepindoor”. Here, because of the laws of physics that therepresentative of Arqiva was explaining before, the900 and the 800, because they go further deeper intoa building, are the only spectrum capable of makingthat call or receiving that call. That is why, effectively,the ownership or the access to 900 or 800 is absolutelycritical for servicing that part of the deep indoorcoverage. Then, going back to the rural coverage andgoing back to BDUK’s ambition of delivering 2Mbpsin mobile data, the work we are currently doing withBT in Cornwall evidences very clearly, on a scan ofthe industry standard, that if you don’t access 2x10minimum of sub-1GHz there is no way you canprovide that coverage in deeper rural areas. That isalso why if we don’t have it, despite the number ofsites if you want, we couldn’t do it at all.The last point: on the surface we seem to have morespectrum but when you divide that spectrum by thenumber of customers we have, including VMOs suchas Virgin Mobile, then you have roughly the samelevel of megahertz per customer. So, yes, we have abit more spectrum but, yes, we also have a few morecustomers. All in all there is a balance without over-engineering.

Q75 Chair: Can I put a similar question to Three?You don’t even have 1800MHz, you have even higher,and yet, despite the fact that you are deprived of thelower bandwidth, which we are told is the mosteffective, you have 50% of all mobile data traffic, soit doesn’t seem to have disadvantaged you too mucheither.Kevin Russell: No, and I think that is fair for the lasteight years. All four operators in the marketplace haveoperated in the same frequency, the same spectrum,which is 2100. So for the last eight years we have allcompeted based on exactly the same spectrum. The900 being liberalised only happened in January. Theimpact of that in the marketplace, in terms of howindoor coverage will fundamentally improve for O2

and Vodafone, will take effect over the next 18 to 24months; that is the impact going forward.The other point I think it is important to clarify is thatwhen we talk coverage, it is important for us to bevery articulate and very clear around indoor coverageand outdoor coverage. In the last session, that talkof 80% for the previous licences, that is populationcoverage, outdoor coverage. That could represent only50% indoor coverage. If I look at where we, Three,are today, our population coverage, our outdoorcoverage, could be perceived to be 97% to 99% inthat range. Our indoor coverage, however, is only 79%and the challenge with the high-frequency spectrumis, while you might cover the population, you struggleto penetrate the buildings as well as the low-frequencyspectrum can. For ourselves and EverythingEverywhere, it is critical we acquire more frequencyspectrum to be able to take indoor coverage up tolevels in the high 90s to be able to compete on asustainable basis going forward. That is the key pointaround low-frequency spectrum.

Q76 Chair: What is the indoor coverage of yourcompetitors?Kevin Russell: Based on pre-900, Vodafone and O2,in my strong view, have fundamentally under-investedin the network and they have, I think, probably closeto 8,000 sites; Everything Everywhere and ourselveshave 12,500-plus sites. Our indoor coverage would be79%. I would expect their indoor coverage to besomewhere probably in the 60s—that would be myguess, but that is an estimate. I don’t know whetheryou have a different view?Richard Moat: You are talking about 3G there.Kevin Russell: Talking 3G. This is mobile broadband.

Q77 Chair: Yes, I understand. So you see thecompetitive disadvantage of not having access to thebandwidth as emerging over the next couple of years,not current today?Kevin Russell: It is emerging today but it will taketraction over the next 24 months. O2 very rapidlyredeployed their low-frequency spectrum in Londonand they are rolling out very rapidly across thecountry. Vodafone has not redeployed yet. It willemerge over the next, I would say, 18 months.

Q78 Dr Coffey: If your fears about O2 and Vodafonecornering the market at the next auction are realised,what could it mean for each of your operations?Perhaps Three could go first.Kevin Russell: For us it is simple. We haveapproximately 10% of the marketplace today. We haveinvested in a nationwide infrastructure and we haveambitions and necessities to double the size of ourbusiness to get ourselves up towards a 20% marketshare. We must do that with leadership in mobilebroadband and data. The fundamental requirement ofcustomers is to have a strong network. You are notgoing to move from your existing operator tosomewhere like Three, even though you might get abetter value proposition, unless the network is as goodor better than your competitor, so our ability to takecustomers from O2 and Vodafone and EverythingEverywhere to build market share has a fundamental

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premise that we are able to have at least a comparablenetwork in terms of in-building coverage and overallcapacity and speed to support customers. In terms, wewill not be able to grow as rapidly as we need tounless we can match our competitors on spectrum.

Q79 Dr Coffey: Would it have any impact forEverything Everywhere?Richard Moat: Yes, I agree. I think exactly the same.There would be an impact on revenues becausecustomers would naturally migrate to what theyconsider to be the best network and, in this context,if two players have a significant advantage over, inparticular, as Kevin was saying, in-building coverageover the long term then that is going to have a massiveimpact, particularly for the use of mobile broadband.We want to remedy that by getting part of thisspectrum ourselves to be able to use it and to have amore balanced playing field. As I said earlier, inaddition to that kind of top-line impact there is also amassive impact on costs, because if you are trying toachieve the same end results using higher frequencyspectrums—2.6 or whatever it might be—then that isgoing to be significantly more expensive. It is a kindof double whammy: it is a hit on revenues and apotential hit on costs as well.

Q80 Dr Coffey: Technically, in the rollout of 4Gbroadband, is there anything significantly differentbetween 800MHz versus 900MHz, those twoneighbouring parts of the spectrum?Phil Sheppard: In essence, not one that counts a greatdeal. They both have near identical characteristics interms of in-building coverage and coverage. There aredifferences in standardisation and timing. The 900spectrum is usable now for what is called HSPA andHSPA-plus, which is basically a 3.9G service, if youlike. That is usable now and that is what O2 are doing.The speeds that that technology provides are going tobe quite similar, with small differences, to the othertechnology, which is LTE, which is a technologylikely to be rolled out in 800. There are subtledifferences in what can be deployed technically andwhat devices but, to all intents and purposes, they arevery, very similar.

Q81 Dr Coffey: If we were to recommend—I am notsaying we are—that O2 and Vodafone should not evenbe allowed to have any 800MHz, would that undulyaffect their customers?Phil Sheppard: There are two issues here, basically.One is that the coverage will be the same with the800s; there would be no difference there. Thetechnology deployed would be slightly different,certainly in the next few years, so they would havemaybe more benefits initially because they have theHSPA technology. Over the longer term, they have toclear 2G customers from that band and we believe thatis fully possible to do. The number of 2G devices israpidly diminishing in the market, so that will bepossible. We don’t believe that will have a negativeimpact if that were to happen. We think it is feasiblefor them to provide very competitive services on that,but that is not what we are asking to happen in a

sense. We are asking for a minimum requirement suchthat there can be competitors in the market.

Q82 Dr Coffey: Could I cover the pricing and value?I live in a part of Suffolk where I have to go to onecorner of the bedroom to get an indoor phone signal.Mr Sanders: Too much detail.Dr Coffey: I am just trying to give an indication; ifanybody tries to call me on the mobile phone, gettingthrough happens by chance because I have to be in aparticular place. What I am trying to get at, frankly,is: who are your more valuable customers? Is it notgoing to be the people at the 2.1GHz, the 2.6GHzanyway, as opposed to the wider ranging 800MHz?What is more valuable to you in terms of data servicesand usage and applications and similar? I would havethought it would be the higher end of the spectrum.Kevin Russell: I will have first kick because I startwith a degree of frustration. In the previous session Iwanted to jump in on population coverage. We wantand need, in my view, as a company to roll out 97%,98%, up to 99% indoor coverage—not populationcoverage, indoor coverage—because UK consumersand businesses increasingly expect comprehensivecoverage wherever they go. It is not just aboutcovering Suffolk because people live in Suffolk; it iscovering people who travel to Suffolk. Ifundamentally believe that the level of coverage thatis there in 2G today, which is up at 99%, should infuture be matched or surpassed in 3G in terms ofindoor coverage, not just outdoor coverage. It is not acase of someone in London being more valuable thansomeone in Suffolk. You have to, as a basic, cover thewhole of the country up to a level where it becomesuneconomic and I believe that level is more in thelast 1% or 2%, not a number higher than that, if thatmakes sense.Dr Coffey: Yes, it does. Thank you.

Q83 Paul Farrelly: I want very briefly to try and putthis in some international context. Could you tell ushow competitive the UK market is at the momentcompared with France or Germany, or evenpotentially Hong Kong, and how good the UK hasbeen at maintaining a competitive market as againstother countries?Richard Moat: If I can go first, I think that the UK isone of the most competitive markets in the EU. If youlook at call prices, they are among some of the lowestof anywhere in the EU. Finland was often regarded asbeing the cheapest place to make a mobile phone callat one time, but I think now the UK has overtaken it.That is obviously very positive for consumers.At the same time, I think that regulation has beenquite strong here and that the latest proposals fromOfcom with respect to termination rates will result invery low rates, half of one penny at the end of theglide path, if that is implemented. The competitionassociated with the regulation means that the marginsthat are achievable in the UK are among the lowest,if not the lowest, in the EU 27. So there has beenquite a significant impact from all of those factors interms of the way the UK market looks and obviouslythat was one of the driving forces behind the

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consolidation from five operators to four, which tookplace when Everything Everywhere was created.I think that, looking forwards, Ofcom has taken theright approach to try to create four viable operatorswho can compete effectively in the future and that theplatform is being laid for that. We believe that, withsome of these tweaks that we are hoping can be made,we can lay the right scenario for coping with this hugedata growth that is coming over the next 10 years. Theadoption of mobile data and of data generally in theUK is among the highest in the world, so we have amajor role to play in coping with that.

Q84 Paul Farrelly: The supplementary I wanted toask is this. If Ofcom doesn’t get this right and doesn’tgive you what you want in terms of your level playingfield, there a risk of there being a big blot on the UK’ssuccessful record, but is the consensus that the UKhas a pretty successful record?Kevin Russell: I think you have to go down a levelon the number of competitors in the marketplace. Youtalk about four competitors in the marketplace. Thecompetitive tension, in my view, comes from the factthat you have three established players but one newplayer who is subscale and having to grow, so thepressure on Three to acquire customers from otheroperators drives us to expand our network, drives usto put aggressive pricing into the marketplace, drivesus to innovate. When you look across Europe and themarkets that have led on mobile broadbandpenetration and led on mobile broadband pricing, theytend to be the markets where there is a greenfield 3Goperator—a smaller, newer entrant who has to forcethe pace in the marketplaces. It is too simplistic justto say it is a matter of having four operators or five orthree. Someone has to have the need to grow. That isone point.The second point is that I think the competitive impactof the merger of T-Mobile and Orange has yet to befelt in this marketplace. There is a fundamentalconsolidation going on where five retail brands will goto four. That has not happened yet. When it happens Ido believe there will be a degree of competitivetension that comes out in the marketplace. I believethere is a fragility to the competitive dynamic of theUK marketplace that we almost shouldn’t take forgranted. This decision on spectrum fundamentally setsup the competitive structure for the UK mobile marketfor the next 10 years, and I think that competitivenessis going to ease already because of the merger. Thedanger here is that five goes to four goes to three in avery short period of time.Today, I think we are okay, but I don’t think we areincredibly aggressive. I push back on the benchmarkthat says it is the most aggressive marketplace in theworld—go to India, go to Hong Kong; there are manymarkets that are far more aggressive than the UKcompetitively—and I think there is a fragility to it.

Q85 Mr Watson: I think this might have beencovered in your earlier answer, Kevin, but we heardfrom Arqiva that they are proposing that 99%coverage should be based on one of the auctionlicences. Do you both think this is technically feasibleand financially feasible?

Kevin Russell: Working through coverage forecasts isnot a difficult thing to do. We know exactly where wehave 12,600 sites today, we understand thepropagation of the transmission capabilities of 800and other frequencies, and we know where peoplelive, so I know that with the site infrastructure that wehave today, which is shared with EverythingEverywhere, as well from our calculations, which areaccurate, that if we had 2x10MHz at 800 we wouldbe able to provide, as soon as that frequency wasdeployed, coverage with speeds of over 2Mb to 97%of the UK population. That 97% is indoor populationcoverage. Outdoor would be comfortably over 99%.To go beyond that, to go from 97% to 98%, weestimate probably would incrementally cost about£100 million in terms of sites. To go to 99%, we thinkit would incrementally cost about £270 million. Thatis our internal calculations.

Q86 Mr Watson: Presumably that is because youhave to get to the Outer Hebrides or something likethat?Kevin Russell: You are not going to the OuterHebrides at that point. You are going to a furtherpoint. But there is an incremental cost on sites. So that97% number is based on the site footprint that is theretoday. It is not about going out to acquire additionalsites.

Q87 Mr Watson: Richard, would you concur withthat?Richard Moat: Yes, I concur with that. Obviously thecalculations are pretty identical because we share thesame network, and that would be the backbone of thenetwork that would be created using this extraspectrum. I do think, especially from what we havelearnt from the broadband trial that we have beenrunning with BT in Cornwall, that when you get upto the marginal coverage beyond 99% there has to bea combination of fibre, satellite and mobile to makesure that those people get that coverage.Mr Watson: That is from 99% to 100%, or that isfrom 95% to—Richard Moat: Yes, 99%. Well, 1% or 2%, it dependswhere you are, at the top end.Kevin Russell: This is very, very doable. This is nota drama, the coverage obligation, in my view.

Q88 Mr Watson: Can I ask why you think this rathercommonsense proposal has not been enacted beforenow, or is that a stupid question to ask you guys?Kevin Russell: Because you have differences in sitefootprints. Everything Everywhere and we have veryclear views that, as data takes off, you are going tohave to have a lot of sites to support it. You are goingto have to have a lot of sites for capacity and speed.We have proactively over the last three years built orexpanded our site footprints from 7,000 or so sites allthe way up to 13,000. We have done that from 2008through to the present day. We have preparedourselves for it. I strongly believe that O2 andVodafone have not done so. Their site footprints aresignificantly less and, therefore, the coverage numberslook more daunting for them and would take longer.

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Q89 Mr Watson: Just for the benefit of us novices,when I use the word “3G masts” does that mean“sites” to you?Kevin Russell: It does.Mr Watson: Just so that I don’t end up gettingconfused.Richard Moat: One thing I wanted to point out aswell is it is not just a question of providing coverageto 99%-plus of the population. It is also thethroughput that you provide. One thing to emphasisein terms of the minimum amount of 800 spectrumholding we would like to have, which is 10MHz, isthat if you only have 5MHz the technology basicallysays that you can only deliver 1.3Mb. If you have10MHz then you can do more than double thatbecause it becomes more and more efficient the morespectrum you have. It is a question of the throughputthat you want to deliver to as many people as possible,as well as simply the coverage itself.

Q90 Mr Watson: Would that be the reason whyevery iPhone user in SW1 can never get any phonecalls or signals, just anecdotally?Richard Moat: No, I think that is a more generalcapacity-related issue.

Q91 Mr Watson: Okay. On a more technical point,do you think Ofcom’s proposals to limit future licencefees on the outcome of the next auction will helpremedy the distortion in the market of the operatorswho don’t have 900MHz licences?Kevin Russell: I apologise, Mr Watson. Could youstate the question again?Mr Watson: Yes. Will Ofcom’s proposals to link thefuture licence fees on the outcome of the next auctionhelp remedy the distortion in the market for operatorswho do not have the 900MHz licences?Nicolas Ott: Our view is that the 900 has beenliberalised since January, and since January the peoplebenefiting from the 900, or at least one of them, arecommunicating on the benefits they are getting fromit. The question back to Ofcom is, as they alreadyhave the benefit, why don’t they pay the spectrum feealready of leveraging that benefit? Why should wewait one or two years before Ofcom adjusts thespectrum fee on the 900 band?Mr Watson: Sorry, we are having troubleunderstanding. Could you repeat those last fewsentences again?Nicolas Ott: I understand your question being, “IsOfcom’s proposal for the spectrum fee going tocontribute in rebalancing the imbalance versus the900?”Mr Watson: Yes.Nicolas Ott: My answer to that was the 900 has beenliberalised early this year and there has been alreadya refarm into 3G for O2; for Vodafone we do notknow. Our point is what we have said in our answer:that from the day an operator can refarm his spectruminto 3G they should immediately pay the increasedspectrum fee because they get the benefit of it. Ourquestion to Ofcom was, “Why don’t you do it faster?”Kevin Russell: I am taking two parts to that question.One is if someone has low-frequency spectrum andothers do not, recalculating the licence fee to charge

that 900 holder more would not cure the distortion.That distortion will be a fundamental, ongoingshortfall in coverage that will go to your brand andyour ability to build your business. All operators needto access low-frequency spectrum.There is a second point in there, which is that a fairprice should be paid for both those allocations ofspectrum—the 900 spectrum and I believe the 1,800spectrum. There are three trunks to spectrum: one isauction spectrum in 2000, another one is refundspectrum in January of this year, and then there isanother auction coming up. This bit in the middle wasallocated administratively and we have to be verycareful, as you alluded to in your first question, that afair price is paid for it. Currently, and this is whatNicolas was alluding to, the 900 has been used andthe 1,800 is available to be used for 3G and mobilebroadband without an incremental change on thelicence fees. That, to Three, does not seem fair andappropriate.

Q92 Mr Watson: How do you feel about that?Richard Moat: I feel exactly the same. I think thatthere have been some well publicised statements bysome of our competitors about the fact that if some1GHz spectrum were to be reserved for either Threeor for Everything Everywhere, this would be classifiedas “state aid”, but our view would be that the abilityto use for 3G services at 900 that is available now—bear in mind whatever spectrum we purchase in thisauction will not be available until 2013 or beyond, sowe are talking about a significant advantage over anumber of years—is not a fair approach either.

Q93 Chair: What do you say to the argument thatyour competitors have used, that although they arenow able to use the 900MHz for 3G services, it isalready being used for all their voice telephony, butthey can’t just clear out thousands of customers inorder to vacate it for that purpose?Nicolas Ott: It is difficult to comment on the waythey are managing their spectrum and their customerrelationships but, from what was available in thepress, I think they were explicit, at least one of themwas, that they perceived a significant advantage inbeing in a position to offer their customers 900 3Gcoverage. Back to what was explained before by therepresentative of Arqiva, it is a well known fact thatyou have immediately a better indoor coverage and abetter rural coverage, so yes, they are benefiting fromit. That is why it also matters that the auctionproposed by Ofcom takes place reasonably fast,because if it is further delayed then the availability ofthe 900 is postponed even more and that will put usin a very difficult situation. It matters to progress fastnow. Going back to what we were saying before, thatis also why we do believe it is critical to be in aposition of benefiting from 2x10 minimum of 800because then, hopefully, when it becomes available,

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Ev 14 Culture, Media and Sport Committee: Evidence

21 June 2011 Richard Moat, Nicolas Ott, Kevin Russell and Phil Sheppard

we will be back on track to be in a position tocompete.1

Kevin Russell: My view on the concerns of O2 andVodafone, which they have strongly raised, isinfluenced by hearing large volumes of commentsover the last five to seven years to the same effect,that once 900 is liberalised it would be a long timebefore you could redeploy it; it could be years; thereis an incredible level of difficulty. To wake up acouple of months after it was liberalised and find thatit is now operational in London leaves me slightlysceptical that it is as difficult as previously claimed.

Q94 Dr Coffey: I think I heard you say earlier,Kevin, that you have estimated it would cost £270million, and you didn’t demur from that, Richard; so itmight be similar. What is to stop the operators sharinginfrastructure for that last extra bit of coverage andsplit the £270 million between you?Kevin Russell: Nothing, practically. When we look atthat final piece of coverage, it is eminently sensiblefor there to be a level of collaboration across theindustry. I think the UK market has matureddramatically over the last three years and I think wewill take some credit for that, EE and ourselves, ininfrastructure sharing. There were groundbreakingdeals done in 2007, followed through by O2 andVodafone in 2008–2009, and there are now twonetworks that share a lot of infrastructure. The abilityto have, for example in Northern Ireland, one networkwould be more economic and I don’t think it wouldbe giving much away competitively. There is scopefor discussions to collaborate on the more marginalareas, which is why I still think that strong coverageobligations should always be put on these licences,because the industry will then work through solutionsto do it economically.Dr Coffey: Do you have a view, Richard?Richard Moat: I agree with that absolutely. I thinkthat we should seek every possible means ofcollaborating to reduce the costs and the impact onthe environment, as I said earlier.

Q95 Dr Coffey: Forgive me, I wasn’t due to ask thisquestion but it is the one I put to Arqiva about JeremyHunt’s idea of a digital pump. We are hearing differentthings about whether the BDUK money will deliverthat. Is there anything stopping you basicallypiggybacking on the new rural network that thismoney is supposed to provide for?1 Note by witness: The 900 has been liberalised early this year

and there has been already a refarming into 3G for O2; forVodafone we do not know. Our point is what we have saidin our answer: that from the day an operator can refarm hisspectrum into 3G they should immediately pay the increasedspectrum fee because they get the benefit of it. Our questionto Ofcom was, “Why don’t you do it faster?”.

Richard Moat: No, I don’t think so, is the basicanswer to that question.Nicolas Ott: The digital pump in the village has thestrong advantage of being in a village where there isprobably a BT cabinet already, so there is probablyalso already some BT fibre. I would suspect, fromthat point in time, that mobile sites become reasonablyeasy; provided we find the right landlord, thatbecomes reasonably easy. I suspect that you alreadyhave, in fact, most of the mobile sites, so it issomething that can be leveraged. I suspect it is defacto already leveraged because the BT cabinet isalready there, because in this area we buy all thebackhaul, if you want, mostly from BT, if you wantto simplify a little bit.I guess the key issue in the coverage when you go for95% or 96% or 97%—more than a village and,therefore, the pump of the village—is you are dealingwith much more remote places, such as the roadbetween the two villages and so on. It becomes moreof a trick to have the right site where there is no BTcabinet, because we are too far away in thecountryside. That is where, as I was explaining,microwave can play a role. In a nutshell, the digitalpump might help, but I suspect it might help onlywhere we are already present in one shape or another.The issue is where there is no BT cabinet at all; thatis where the challenge is.

Q96 Dr Coffey: Funnily enough, I thought the wholepoint of the extra money was to go where BT wasn’talready. I thought that was the whole idea.Nicolas Ott: The point is even with the subsidies ofBDUK, BT will not be in a position to go everywhere,because it is just too far away from their mainnetwork. It is back to the laws of physics. Someregions are better off than others—for example, inCornwall where we tried with them, it is reasonablyokay because the population is reasonably dense; thereis always a piece of network somewhere. If you go inCumbria, though, BT has a far lower density ofnetworks, so it is much more difficult, even withBDUK, to pull their lines much further. In Cumbria,quite clearly, if you want to cover all of the region,the cellular aspect of digital Britain would be far moreimportant. For example, I know where BT can go butI suspect what the micro-cellular network will do willbe quite a fair chunk of coverage. It is back to whatwas said before by the Arqiva representative—that allthe regions are not equal between themselves—but theissue is also what BT has or does not have in theseregions. That is why it needs to be tailored on a by-region basis.Chair: I think that is all we have. Thank you verymuch.

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Culture, Media and Sport Committee: Evidence Ev 15

Tuesday 28 June 2011

Members present:

Mr John Whittingdale (Chair)

Dr Thérèse CoffeyDamian CollinsPhilip DaviesLouise Mensch

________________

Examination of Witnesses

Witnesses: Ronan Dunne, CEO, Telefonica O2, Nicholas Blades, Head of Regulatory Affairs, Telefonica O2,Guy Laurence, CEO, Vodafone, and David Rodman, Head of Regulatory Affairs, Vodafone, gave evidence.

Q97 Chair: Good morning, everybody. This is thesecond session of the Committee’s inquiry intospectrum allocation and I would like to welcome forthe first part of session, Ronan Dunne, the ChiefExecutive of Telefonica O2 and Nicholas Blades, theHead of Regulatory Affairs, together with GuyLaurence, the Chief Executive of Vodafone and DavidRodman, who is also Head of Regulatory Affairs.Adrian Sanders is going to start.

Q98 Mr Sanders: Can I ask you, what is theoptimum number of mobile operators needed toensure that UK consumers get the best deals onmobile phones?Guy Laurence: First of all, I think you need to clarifythe term. We have mobile network operators likemyself and Telefonica, You also have virtual mobilenetwork operators, people like Tesco or Asda orLebara or companies like that that offer mobileservices to consumers as well, and the way that theydo that is by buying wholesale capacity from any oneof the mobile network operators. So currently there isabout 20 people selling mobile services in asubstantive way and together they have about a 7%market share. To answer your question, we have 20retailers of mobile services today and that creates ahealthy market. You could have less but we have 20.Ronan Dunne: Certainly I would agree. All of theevidence is that the UK is a highly competitive marketand the fact that there is active competition in retailservices for mobile supports that. So it is not just aquestion of the number of mobile network operatorsbut the number of people who are providing telecomservices.

Q99 Mr Sanders: When it comes to auctioning thespectrum would an unrestricted auction result infewer operators?Ronan Dunne: If I start, we support the approach thatOfcom is taking in the spectrum auction consultationin that we don’t believe that there should be anunrestricted or free for all market, so the evidence thatEd Richards gave to this Committee we would agreewith. Whether the auction should be used to determinethe number of operators, I think the role of the auctionis to ensure that those who have a viable businesscase and those who have an investment case to deliverdigital services have an opportunity to acquire thespectrum they need in order to deliver to their

Mr Adrian SandersJim SheridanMr Tom Watson

customers the exciting new services that will beavailable from fast mobile broadband.

Q100 Mr Sanders: Can I just get this right? You aresaying that you are not in favour of an unrestrictedauction?Ronan Dunne: Correct. We support Ofcom’sproposals about having caps within the overall auctionstructure and we also—

Q101 Mr Sanders: That is slightly different fromyour written submission, where your preference wasfor the spectrum auction to be run without anyrestrictions.Ronan Dunne: We wanted a simplification of theauction design and we specifically said that we didn’tbelieve that there was a need for the floors that werebeing proposed in the current consultation. What wesaid was we did support the fact that there should beoverall caps and we did put that in our response toOfcom, and we did also support the combinatorialclock structure of the auction, which also ensured thatthere were restrictions on strategic bidding. So weabsolutely support both of those proposals fromOfcom.Guy Laurence: I think the key thing is that thenumber of people who end up with spectrum is notthe number of people who end up retailing mobileservices. So, as in my previous answer, you have 20people retailing mobile services, even if you had lesspeople with physical spectrum it would not affect thenumber of people that then retail mobile. That numbercould go up or down, depending on the commercialenvironment.

Q102 Mr Sanders: But the companies that have thespectrum control the price to the smaller operators orthe smaller people selling the services at the frontend?Guy Laurence: The market at the moment has 16people buying substantive amounts of mobileservices. I don’t believe that that would change in anenvironment—

Q103 Mr Sanders: But how many control theactual structure?Guy Laurence: Well, Ofcom has powers to controlthe market if any of the operators started abusing that,but there is no evidence that that happens, and it hasnot happened in other countries either.

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Ev 16 Culture, Media and Sport Committee: Evidence

28 June 2011 Ronan Dunne, Nicholas Blades, Guy Laurence and David Rodman

Q104 Jim Sheridan: I don’t profess to be an experton these issues and if you excuse me I have to referto the research notes that I have been given. Back inthe year 2000 both of you lobbied for an auction tocreate fewer players than the Government wasproposing at that time, and I think that is perhaps theposition we are still in today. Isn’t your position lessabout the usefulness of the 900 frequency and moreabout preventing other operators from getting theirhands on the low frequency spectrum and the nicecosy relationship that you have at present?Guy Laurence: I would welcome an open auctionwith relatively few rules with as many people biddingas possible. I have no problem with 100 companiesentering that auction, so if people want to bid theyshould bid. I don’t have an objection. I don’t believethat the current auction rules create a level playingfield and I think that is an issue, because of the waythat they have been designed currently during theconsultation process, but I would welcome as manypeople who want to bid for spectrum to bid for it.

Q105 Jim Sheridan: What do you mean it is not alevel playing field?Guy Laurence: Well, because the way that the auctionis designed at the moment is it gives an advantage toEverything Everywhere, who I think appeared herelast week, and to Hutchison, who own Three. If webid for the higher end of the 800 spectrum then weend up with a higher fee as a consequence. It is justthe way it is designed at the moment.Ronan Dunne: Specifically the position on spectrumfloors, de facto by setting floors it means that there isless spectrum potentially available for new entrantsinto the market because the floors mean that certainof the existing operators are essentially guaranteed anallocation of spectrum. We certainly supportcompetition and the UK market has thrived becauseof the effect of competition and that is an accelerantto innovation. I think all of us are keen that we arein a position to deliver great digital services for ourcustomers by deploying the spectrum that is availablein a way that enhances the services available in theUK.

Q106 Jim Sheridan: I am sure my colleagues willexplore that further but can I raise a question aboutbroadband, in particular the broadband coverage inScotland? Can you tell me how extensive your 3Gcoverage currently is in Scotland? How many sites doyou have in Scotland?Guy Laurence: I don’t know the answer to that. Iknow my total base station sites but I don’t know thenumber for Scotland.Jim Sheridan: You don’t have a breakdown?Guy Laurence: We are very happy to provide that inwriting to you afterwards, absolutely no trouble at all.Ronan Dunne: Certainly we would be happy to dothe same.

Q107 Jim Sheridan: If you were to win the spectrumyou say you require, what percentage of the Scottishpopulation would you be able to provide indoormobile broadband coverage to?

Guy Laurence: I think one of the issues that Ofcomneeds to address in the structure of the auction is thecoverage obligations. We don’t have an in principleobjection to coverage obligations and it needs to beseen as a total package as to what was required interms of us providing coverage to the more rural areasversus what we have to pay for the spectrum. We havehad two sets of coverage obligations placed on us inthe 26 years we have been operating and we have metboth of those. So I think it is part of the package thatOfcom needs to decide.Ronan Dunne: Currently the 2G services in the UKare providing indoor coverage to north of 90% of thepopulation, and I think that should certainly be anaspiration. The challenge is as you go into the last 4%or 5% the returns become disproportionately lowerand the cost becomes significantly higher. I think asall of us have an investment case, the challenge for usis to balance the need for coverage and the need forcapacity. Certainly, as we have seen an explosion ofdemand for data, particularly in dense urban areas, wealso have to make sure that we invest in a balancedway between coverage and overall capacity.Guy Laurence: One other point I think is worthadding here is that it is not just about buying spectrumwith a coverage obligation. There is another part tothis equation, which is we have to have BT run fibreinto those areas as well because at the end of the dayour base stations connect to a fibre link or shouldconnect to a fibre link. If we don’t have that it meanswe have to move to alternative technologies, whichare very expensive to operate. Therefore you have tosee this as a package of us having spectrum and theability to invest and, secondly, BT doing their part,which they do intend to do, I hasten to add, in orderto run fibre into the rural areas as well. We can put upa base station but if it can’t talk to anything then itdoesn’t work.

Q108 Jim Sheridan: Just finally, the consumers willbe glued to their television sets trying to find out whenthe new iPhone 5 will become available. Anycomment?Guy Laurence: No comment.Jim Sheridan: No? Not even just a hint?Ronan Dunne: No.

Q109 Mr Watson: I have a number of technicalquestions later but just to build on what my colleagueMr Sheridan said, and just to let you know what I amtrying to get out of you, I want you to justify to methat you are not abusing your market dominance withsome of the lines of questions I am going to give youlater today. Mr Laurence, you gave a very clearanswer to my colleague there; you said there shouldbe 100 mobile network operators in the market. MrDunne, can you tell me how many you think shouldbe in the market?Ronan Dunne: As I mentioned earlier, I think wehave the most competitive market in Europe formobile services and by most people’s recognition oneof the most competitive markets in—

Q110 Mr Watson: Should it be five, four, three ortwo?

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Culture, Media and Sport Committee: Evidence Ev 17

28 June 2011 Ronan Dunne, Nicholas Blades, Guy Laurence and David Rodman

Ronan Dunne: It is not a function of the number ofmobile networks; it is a function of the effectivenessof competition in the market, which is defined byinnovation, the number of people providing retailservices, as well as the availability of capacity withinthe overall networks to be able to sell that capacity tocustomers. So it is not simply a question of thenumber of mobile network operators.

Q111 Mr Watson: Do you not think you have aresponsibility to make sure there is an appropriatenumber in the market then?Ronan Dunne: We have a responsibility to ensure thatwe give great services to our customers andeffectively compete, and we have a track record inevidence of doing that. That is why the UK is at theforefront of innovation in the mobile space.

Q112 Mr Watson: You announced a ratherinnovative and, if I can say, quite brilliantcollaboration with two of your partners a couple ofweeks ago to create mobile payments. Can I ask whyyou didn’t ask the fourth operator in? Isn’t that goingto squeeze them out of the market?Ronan Dunne: No, on the contrary. In fact theestablishment of that vehicle in the UK will acceleratethe deployment of mobile payment and mobileadvertising services.

Q113 Mr Watson: It will for you two and EverythingEverywhere but if that becomes the model, thestandard way that people make payments, are you notgoing to squeeze out the smaller guys?Ronan Dunne: On the contrary, the proposal that wehave made, and subject to the approvals for it, willmean that every operator, whether they are a mobilenetwork operator or a virtual network operator, willbe able to contract with that business on exactly thesame terms as I will and so it will be an accelerant tothe marketplace for mobile payments.

Q114 Mr Watson: So you would expect that otheroperators can licence your IP?Ronan Dunne: What they can be is they can becustomers on exactly the same terms as I can be. Alsoretailers can be customers or banks can be customersof that.

Q115 Mr Watson: Would it not be better to let themjoin the consortium?Ronan Dunne: What we did was we took thosepeople who had established businesses in that area andwe decided to come together and try to create somecommonality and what we did was we looked at thosepeople who were already operating in this space andwe worked together to create some commonality ofstandards.

Q116 Mr Watson: So if Three wrote to you and said,“Can we join?” you would let them in?Ronan Dunne: At the moment what we have is wehave people who have existing businesses in thisarea—

Q117 Mr Watson: No, I understand your point, butif someone else wanted to join the consortium so thatyou could get an industry-wide standard, would youlet them join?Ronan Dunne: They can all operate on that standardbased on being customers, everybody.

Q118 Mr Watson: But would you let them join?Could you just answer my question, would you allowthem to join your consortium?Ronan Dunne: At this time it is our proposal to goforward with—Mr Watson: Just say yes or no.Ronan Dunne:—the three operators; whether Threeor, for example, one of the banks who have alsoexpressed interest in being members would join atsome time in the future. The key at the moment isspeed, though, and that is the reason why I want tofocus on that, because there are other operatorsoutside of our marketplace, people like Google,people like Facebook, people like Apple, who want todeliver these services, and I think it is important forthe UK that we create a platform that means that UKbusinesses can compete with other internationalbusinesses in serving those new innovative services toUK customers.

Q119 Mr Watson: Just on that specific point, Googleand Apple are creating mobile payment systems?Ronan Dunne: Correct, yes. They already involvedin the US and they expect to launch their services atthe back end of this year in the US, and they anticipatelaunching into the UK in the spring of next year. Sospeed is of the essence to make sure that UK PLC hasits fair chance.

Q120 Chair: Will they be using mobile devices?Ronan Dunne: They will, and they will be using theirown proprietary services on top of the mobile devices,whereas we will have a more open standard. That isthe aspiration of the proposal that we announced twoweeks ago.

Q121 Louise Mensch: Just briefly, I am interested inthe apparent difference, if I have this right, in theapproach to this auction of Telefonica O2 andVodafone. If I am correct, Telefonica O2 is saying thatyou do not object to most of the restrictions thatOfcom wishes to impose on the auction except therestriction for the floor. So, as a matter of fact, yourcompany would wish more people to be able to buyspectrum as distinct from being retail, secondarypurchase as a spectrum from an operator. You wantmore people to be able to come in and buy spectrumbut you are otherwise happy with the restrictions.On the contrary, Vodafone, however, wishes to pushfor an unrestricted auction. Despite what you haverepeatedly said about retail providers who wouldpresumably buy spectrum from the big operators, youare unconcerned that an unrestricted auction wouldprovide fewer owners of spectrum in the UnitedKingdom, which is diametrically opposed toVodafone’s position. Is that correct? It is a prettyfundamental question, and it is a pretty fundamentalapproach to the auction that Telefonica O2 accepts

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Ev 18 Culture, Media and Sport Committee: Evidence

28 June 2011 Ronan Dunne, Nicholas Blades, Guy Laurence and David Rodman

the restrictions, objecting only to the floor restriction,which will therefore enable more people to go in andpurchase spectrum itself, is that correct?Ronan Dunne: That is correct. We are happy with—

Q122 Louise Mensch: But your position at Vodafoneis to the contrary, you wish for an unrestricted auctionand, although you have made much play of the factthat retail people can buy spectrum off you and enterthe market in a retail way, you are unconcerned by therestrictions on ownership of spectrum itself that wouldpresumably inevitably follow from an unrestrictedspectrum auction?Guy Laurence: I think the key thing is if 100companies want to enter the auction, I believe theyshould be able to do it. If they do not enter the auctionand they still want to provide mobile services they canbuy them through wholesalers.

Q123 Louise Mensch: Forgive me, but the point ofthe restrictions is to enable smaller players, becausethere are artificial restrictions on the spectrumpurchase to be able to compete with the big boys. Ifyou take away those restrictions, it is immaterial howmany people enter the market. If they don’t have theresources, they won’t be able to compete to buy thespectrum. Is it not factually the case that removingrestrictions on the auction would involve fewerowners of spectrum at the end of it?Guy Laurence: First of all, I am not sure that is thecase. I don’t think anyone knows until you have anauction and you have invited people to bid. But I thinkif people like Google or Facebook wanted to bid forspectrum they have more than the wherewithal to doit, as do a number of other corporations. The key pointthough is if they choose not to or they can’t dobecause they do not have the economic resources todo it, they can still buy wholesale capacity from usafterwards.

Q124 Louise Mensch: Yes, you have made that veryclear, but smaller players will not be able to enter themarket without the restrictions that Ofcom proposes.That is a fact, is it not? They may be able to besecondary purchases of spectrum and provide retailservices but they will not be able to own spectrum. Iam fascinated by—you have the two big boys in theroom here—the differing approaches that yourcompanies are taking. It is the case, is it not, thatfewer small companies will be able to, in practicalterms, own any spectrum if you take away theauction restrictions?Guy Laurence: Smaller players, by virtue of the factthey may have less financial resources, may not beable to buy spectrum but it does not stop themcompeting in the mobile market. So we havewholesale players now with 30,000 customers who arecompeting in the marketplace for a particular segmentand do not need to own spectrum.

Q125 Louise Mensch: It does not concern you asVodafone to hear Telefonica O2 saying that their onlyobjection is to the floor? They are encouraging smallercompanies to come in and buy by objecting only tothe floor and yet your company wants a free for all.

David Rodman: I think we have a very similarposition; we object to the floors but not the total capon spectrum. But keep in mind that we can only buya third of the spectrum each, so even together if webought the full third there would still be spectrum leftover for other operators.Louise Mensch: Thank you.

Q126 Dr Coffey: Just going through yourevidence—I am thinking particularly of Mr Dunne butMr Laurence can comment as well—you talk a lotabout how you feel the rules amount to state aid ofthis potential new bidding spectrum, whereas someother people have suggested that the decision toliberalise your 900 MHz licences are effectively stateaid. Do you have a comment on that?Ronan Dunne: If I take the question of theliberalisation of the 900 spectrum first. CurrentlyTelefonica has some 25 million customers in the UKand per customer we have the smallest amount ofspectrum of any operator. So in absolute terms wehave approximately half the spectrum that, say,Everything Everywhere, who are the largest operatorin the market, have and half the spectrum—

Q127 Dr Coffey: Is that before or after thedivestment?Ronan Dunne: That is before, but even after adivestment we would still have less spectrum, and wehave half the amount of spectrum in 3G. So Ofcomundertook a market review and satisfied itself thatthere was no problem with the liberalisation of the900 spectrum as it would not give rise to a distortionof competition in the market. In practice, what wefound is that because we have the smallest amountof spectrum per customer we are, in some respects,competitively constrained and what we have beendoing since the beginning of the year is in those denseurban areas where we have suffered some networkcongestion, we have been managing that congestionto give a better customer experience by using, inlimited areas, the 900 spectrum. The other thing toremember is we didn’t get additional spectrum; wehave 25 million customers who use the 2G networkand we have moved a small proportion of our 900spectrum from 2G to 3G because we have to continueto serve all of our existing customers with 2Gservices.

Q128 Dr Coffey: So I can see here that you haveabout 33 bits.Ronan Dunne: Correct, in total 33.Dr Coffey: You have got 17, 5.8 and 10 and Vodafonehas a bit more in the 2100. The reason I am going onabout state aid is there are suggestions in the marketthat both your companies are prepared to take this tojudicial review and effectively frustrate the auction.Can you give an undertaking that you won’t?Ronan Dunne: The first thing to say on that is thevery nature of this process is it is a consultationprocess and we are actively engaged in theconsultation with Ofcom. As I mentioned earlier, asthe operator with the least spectrum per customer it isin my interests for the auction to happen sooner ratherthan later because I am physically constrained in

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Culture, Media and Sport Committee: Evidence Ev 19

28 June 2011 Ronan Dunne, Nicholas Blades, Guy Laurence and David Rodman

competing in the market because of that limitation.We have taken extensive efforts to enhancetechnology and innovate in the way we build ournetworks to try to be more efficient in the spectrumwe have but we still need more spectrum. So we haveno desire to frustrate the timeline. In fact, we haveactively engaged and continue to actively engage withOfcom on the consultation to ensure that the auctionhappens as soon as possible and ideally on theplanned timetable.Dr Coffey: Thank you, Mr Dunne. Mr Laurence.Guy Laurence: We also have no interest in frustratingthe auction process. We do want a fair auction but wehave no interest in frustrating the process. We are nota litigious company. In the last eight years we havebacked Ofcom on 10 occasions on appeals. We havehad actions against Ofcom only twice and out of thoseone we won and one is still running.

Q129 Dr Coffey: So just thinking ahead, each of youhave the opportunity to bid for 1.8 MHz fromEverything Everywhere when they divest, but doesyour duopoly on the sub-1 GHz spectrum create anunfair advantage? I suggested last week perhaps,given you already have the 900 MHz, I recognisethere are technical difficulties in moving your 2Gcustomers off that in order to liberalise it forbroadband but the opportunity is there. Is there anyreason why, in fact, we should just say, “Actually,Vodafone and O2, you already have 900, youshouldn’t be bidding for 800”?Ronan Dunne: I think there are two points. The firstone, as you readily identify, Ofcom’s own numberssuggest that it would cost me £900 million to clearthe 2G spectrum to use it for 3G and I still would nothave anywhere to put my 2G customers, becauseeight-odd years after the launch of 3G services stillthe majority of people in the UK use 2G as theirpredominant and virtually everyone in the UK uses2G services as part of the overall. So that is the firstthing to say. The second thing, as you again rightlyrecognised, is that 900 spectrum is not a directsubstitute for 800 for a number of reasons. One isthere are relatively few operators around Europe, infact three out of 100, who have more than 10 MHzholding of 900 spectrum. So there is no currentexpectation that full speed LTE will be deliverable on900. So even if I could theoretically clear the 900spectrum, both the cost of that being uneconomic andfind somewhere to move my customers to, 900 wouldnot give me a comparable high speed LTE offering to800 MHz spectrum. So the reality is that I need tohave access to both capacity overall, because I havethe least spectrum, and I need to be able to competeso I should be in a position to bid in the auction forthat mix of spectrum that would give me the capacityI need and allow me to compete with similar speedservices.Guy Laurence: A very thorough answer. The onlything I would say is that I do not believe that we havean advantage having 900. If I take Orange, by 2002they had managed to get more customer numbers thananybody else in the market. If I look at the currentmarket today, and I take Hutchison again, the ownerof Three, they sell as many iPhones every week as

anyone else does in the marketplace. So if they weredisadvantaged how could Orange become so big, andhow could Hutchison sell as many iPhones aseverybody else?

Q130 Dr Coffey: I have a rural constituency,obviously the lower megahertz is more beneficial inthat we don’t have great coverage at all, a lot of not-spots, and I recognise LTE plus, or whatever thephraseology, that 900 may not be the same as 4G butthere has not been any attempt, in my view, to reallyaccelerate that in rural areas. So one of the lines Iwill be taking on this is to say how can we maximisecoverage for rural areas using the 800 MHz, and atthe moment we don’t necessarily see that in thecountryside today. That is why.Ronan Dunne: To go back to one of the points thatwas made earlier, I think one of the criticalities forrural coverage is not just the availability of spectrumbut it is the ability to connect cell sites to fibrebackhaul. Currently the passive access consultationthat is going on does not contemplate that accessbeing available for backhaul for mobile services; it isonly for retail services. The second thing is, and I amsure if my mailbox is anything like your mailbox, theability to build capacity in rural areas is a contentiousissue, because certainly my mailbox is very mixedbetween people who are writing to me asking forincreased coverage and those writing to me sayingthey don’t want a mast built in their area. So accessto suitable sites, access to appropriate backhaul andthe economics in the rural areas, perhaps in co-operation with local authorities and with localcommunities to bring the economics of provision inrural areas to a sensible place.Dr Coffey: Thank you for that. I think we are comingon to infrastructure later but thank you for that initialanswer.

Q131 Chair: I am tempted to say to you that on theconflict within your mailbox, welcome to our world,particularly since quite often the two differentcomplaints will come from the same person.Can I just clarify, Mr Dunne, when you said that youhad less spectrum per customer than any of yourcompetitors and that therefore you were very anxiousto acquire more, is it principally to allow you toextend coverage or what other benefits would you beable to provide if you got that?Ronan Dunne: Again, it will be a combination ofcoverage and capacity. We have seen about a doublingevery six months or so of data demand in the UK. Sothere is a clear demand for data services as devicesget better and as coverage and capacity increases. Soit will be a blend of coverage and a blend of capacity.We do anticipate rolling out coverage in rural areasbut we have to recognise that rural will have to bebalanced with the urban areas where there is a lot ofcongestion potentially on the network. So we haveboth aspirations but it would be balancing theinvestment on an annual basis, which currently runswe are investing about £500 million a year on abalance of capacity and coverage.

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Q132 Chair: When you say capacity, do you meandownload speeds?Ronan Dunne: It is the number of people who can beon the network at the same time, and I am no engineerbut capacity and speed are two sides of the same coin.So as more people come on to a cell site the averagespeed available reduces. As you build capacity iteither gives higher speed for those that are on or givesthe opportunity for more people to be on the cell atthe same time.

Q133 Chair: Are you finding that your customers arenow suffering from lack of available capacity?Ronan Dunne: Our ability to grow is constrained byour limits on our overall spectrum and there are twoways to increase your capacity: extra spectrum andmore cell sites. More cell sites is very, verychallenging because of the previously mentionedplanning and other restrictions that we have.Chair: I see. I think Mr Watson has some technicalquestions for you.

Q134 Mr Watson: Well, sort of. Slightly idiotquestions, I suspect. How many customers do youneed to stick a new mast up, to make it worth yourwhile?Ronan Dunne: A really good question andunfortunately there is not a simple answer. The costof a cell site can be anything from less than £100,000to multiples of that, depending on whether or not thereis ready access to backhaul, depending on site rentalsand so on. It can be significantly different so it willvary from place to place.

Q135 Mr Watson: When you come to siting a mast,you must look at centres of population, presumably?Ronan Dunne: Yes.Mr Watson: There must be a rule of thumb head ofpopulation you work off, isn’t there, more or less?Ronan Dunne: As I say, it really is that different. Ifwe had to dig a trench to connect a new cell site itmight be £350,000, in which case we would needmaybe 10,000 people using that cell site. Normally, ifthere are a few thousand people who will be servedby a cell site the economics will be there orthereabouts, but it is genuinely distinctly differentbetween one cell site and another because of thingslike backhaul and rent.

Q136 Mr Watson: So if you decide a couple ofthousand people living in a village, it is not worth ourwhile sticking this mast up, what is to stop you lettingsomeone else do that? Can you help the village puttheir own mast up? I know this might be an idiotquestion to you; there is obviously a million reasonsyou are going to tell me why you don’t do it, but isn’tthere a fairness argument that you can just work witha village and help them help you?Ronan Dunne: We absolutely support innovativesolutions and co-operations. We publicly applaudedthe trial that Everything Everywhere and BT are doingin Cornwall at the moment. We have active dialoguewith BDUK. I personally have engaged in dialoguewith Rory Stewart to look at the Penrith and TheBorders areas. So we all have an aspiration to find a

viable solution, which would involve communitiesand an operator working together, and also sharing theinfrastructure between other operators to try to bringthe economics to a point that they work. So, I agree.

Q137 Mr Watson: Rory Stewart has a point though,hasn’t he, that you are not really leading on it? Doyou have any innovative examples where you mightbe working with rural areas?Guy Laurence: We have a technology calledfemtocell. It is about the size of a hardback book; itis like the router you have for your broadband athome. What this does is it plugs into your broadband,if you have broadband, and then it gives you 5-barcoverage inside your house. We have been verysuccessful with that solution. It is not just for rural, itis also for basement flats, high rise flats, that kind ofthing as well, but it does work well in rural wherethere is broadband. Where there is not broadband,which is the next level of the problem, if you like,what we are experimenting with at the moment is athing called an open femtocell, so instead of beingrestricted to just the phones in your house it can applyto, say, a whole area of a village. Currently this is nota commercial offering. We have not commercialisedit yet. We have two trials running in West Berks, onein East Garston and I forget the name of the othervillage, where we have put these small microcells intothe local pub. One is on top of a telephone box, whichis slightly ironic, and we are seeking to put one in thechurch. As a combination of using a number of thesevery small cells it may allow us to provide mobilecoverage to small villages such as the one I described.So that is a piece of innovation that has only comeinto the market. We have only had a sure signalroughly a year and a half, I would say, but it is makingsubstantial difference to people who have broadband,number one, and if we can commercialise it to getit to an open femtocell structure it will benefit a lotmore people.

Q138 Mr Watson: I think he is a bit ahead of youthere, Mr Dunne. Is there anything you can learn fromhim on that?Ronan Dunne: We have also trialled femto. As Guyrightly points out, it only solves the problem whereyou have a broadband connection in the first place andin most of the areas we are talking about where wehave a challenge on rural broadband there isn’t anybroadband in the first instance. So innovativesolutions like satellite will be an essential part, butalso working in co-operation. Vodafone and ourselveshave a co-operation where we build networks togetherand that helps to reduce the unit cost of delivering anew cell site, so that is also part of the equation ofbringing the economics to a point where we can putmore cells into rural areas if there is a demand fromthe local community.

Q139 Mr Watson: Thank you. Can I just take youback to spectrum? I think I am right in saying that inyour submissions both companies possess chunks of900, 1,800 and 2,100 spectrum; is that right? Wouldit be unfair of me to say that it is just a load of specialpleading for you asking for more of this stuff?

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Ronan Dunne: On the contrary, as I mentionedearlier, we have the largest number of customers beingserved per unit, so on the face of it we are the mostefficient user of spectrum, which is a scarce resource,in the marketplace. We also, on the recent Ofcom data,have the lowest level of complaints for our services.So, on the face of it we are delivering a good serviceto customers and we have a restriction based on theamount of spectrum on how much we can deliver inthe way of new services or grow our business. I thinkwe are an efficient user of a scarce resource at themoment.

Q140 Mr Watson: The reason you both want more,you give slightly different reasons, I think. Tell meif I am characterising this incorrectly, because yourcolleague at Everything Everywhere was a bit stuckwhen I started asking these questions last week, but Ithink, Vodafone, you are saying you want morespectrum because—I think you guys call it refarm,which is essentially upgrading the 2G to 3G services.Refarm, is that a technical term everyone uses?Guy Laurence: Refarming, yes.Mr Watson: Refarming, yes. Mr Rodman, you saidthat refarming is very, very difficult and yet you guysupgraded quite quickly. In fact you guys said you weredelighted and thrilled that you had managed to refarmyour services in London. Is that just because yourengineers are better than their engineers or is there areason for that?Ronan Dunne: As I mentioned earlier, we have onlyrefarmed a small proportion of our 2G. To refarm thewhole lot on Ofcom’s own data would cost about £900million and be extremely complex. So there is only alimited opportunity for refarming of existingspectrum.

Q141 Mr Watson: But you have done that inLondon. Presumably that is your biggest market area,is it?Ronan Dunne: It means that in London, on a subsetof the sites in London we have deployed U900 butonly on a subset of the overall sites.

Q142 Mr Watson: So even though you were thrilled,it was not that big a deal?Ronan Dunne: As we acknowledged, because of oursuccess in the market, we had a potential capacityconstraint. By doing that we have been able torebalance the capacity between 2G and 3G in Londonand in dense urban areas. So we are happy that wecan give a better service to customers.Guy Laurence: If I may, I think you have to separateimmediate congestion problems on networks in aspecific small part of one town from refarming thewhole of the country. If I can give you an example: ifyou imagine a block of flats and let’s say it is 25storeys and let’s say 23 storeys are full of residentsand you need to refurbish that block of flats, then tomove the inhabitants up a floor so that you can thenclear it and then refurbish it, if you only have twofloors free, is incredibly difficult. If you only have totake one inhabitant and move them to another flat justto do one flat is very easy, so you have to separate theone flat from the block of flats.

Mr Watson: That is very clear. Thank you.Guy Laurence: Sorry, I wasn’t trying to becondescending; I was just trying to help.

Q143 Mr Watson: I just want to quiz you a bit more,if I can. If I can go to O2, I am right in thinking thatyou—because it is this low frequency stuff that is likethe magical dust for your industry, we now begin tounderstand, or think we do. You have 2x17.5 MHz ofthe 900 spectrum but effectively, am I right inthinking, you can only use 2x10 of that? Would thatbe an adequate characterisation?Ronan Dunne: Correct.Mr Watson: So are you going to sell the other stuff?Ronan Dunne: Two parts. We will need for theforeseeable future to provide 2G services, so we needto retain a proportion of our spectrum to provide 2Gservices. Theoretically we could refarm up to 10 butwe have only currently refarmed five in certain areas.So we will always have a need for that spectrum tocontinue to provide 2G services. What we need to getis access to additional spectrum because everythingwe refarm is just simply taking it from our 2G servicesand reducing the capacity of 2G services to provide iton 3G, and while 3G is more efficient we still are notincreasing our absolute amount of spectrum. That iswhy we need to be able, in the auction, to acquiremore spectrum to give us more capacity.

Q144 Mr Watson: I am a layman so it must be veryfrustrating for you, I know, because you are runningthis company and then you have a load of politicianswho ask you questions about your customers, but itdoesn’t strike me that you are making a verycompelling case for providing the very best broadbandin Europe if you are shilly-shallying around. Why canyou not invest quicker to get Scotland covered on the3G network, for example? It strikes me that you aredragging your feet a little bit.Ronan Dunne: We are currently investing more than£500 million a year, so over the last 11 years we haveinvested more than £10 billion in infrastructure in theUK. We are a major, major investor but we do haveto balance the requirements of capacity in an urbanarea with coverage in rural areas. So we have to, likeanyone else, allocate the scarce resource of capital inthe way that gives the broadest experience to thebroadest number of customers, and that is what we aretrying to do.

Q145 Mr Watson: I am sorry to keep labouring thisbut poor old Mr Sheridan here, your customers inScotland, they read the paper every day, they see youare spending £4 million sponsoring the England rugbyteam and they see that you have just upgraded yournetwork to 3G in London and that you are thrilledabout it but no one in Scotland is getting that kind ofservice. What do you think they think about that?Ronan Dunne: Again, we have extensive coverage:on 2G we are over 99% and mid-80% coverage on3G. We absolutely support the aspiration to havewider coverage and that is why innovations likeworking with Vodafone to reduce the overall cost todeploy network is helping us to increase our capacity.But again, like any business, we have to balance the

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demands of urban customers who are using up thecapacity at a faster rate with our rural customers whoare looking for coverage.Mr Watson: I am done for now, thank you.

Q146 Damian Collins: Just following on from mycolleague Mr Watson’s questions, in essence yourpriority as a business, Mr Dunne, and Mr Laurence aswell, is investing in meeting the growing demand inurban areas instead of investing in broadeningcoverage because that is where the market is?Ronan Dunne: Again, we have to strike a balanceand Guy, I am sure, will comment, but as I mentionedearlier getting sites in rural areas, getting access tobackhaul in rural areas is significantly more difficultthan it is in urban areas, so it is not simply a questionof we want to prefer urban areas to rural areas. It ismeaningfully more difficult for us to deploy in ruralareas because of the lack of available sites and thelack of fast backhaul. Those are real operationaldifficulties for us.

Q147 Damian Collins: But what I do not get, MrDunne, is a sense that you are driving the coverageissue. You say there are issues there, and I think wecan understand what those issue might be, but is yourpriority as a business saying, “What we are going todo is we are going to try and resolve these problemswhere they exist and that is the priority, what wereally want to do is expand coverage”? I don’t reallyget a sense of that. What I get a sense of is you saythere is a balance to be struck and at the moment thatbalance tips in favour of expanding your service inthe profitable urban areas and not doing very muchmore in terms of coverage or doing a much morelimited amount in terms of expanding coverage.Ronan Dunne: It is not that it is one versus the other.We have increased, and we continue to increase, our3G coverage. We don’t object to in principle having acoverage obligation in the format of the spectrumoptions. So it is not that we believe that there is not acase for expanding rural coverage and we areinvesting in expanding our coverage. As I say, it isjust a question of allocating our resources and thepracticalities that there is a significant part of thecountry that doesn’t today, and won’t in theforeseeable future, have access to fibre for backhaul.So even if I built a site you still would not get highspeed mobile broadband services in those areas.

Q148 Damian Collins: I just want to be clear onsome of the details. Sorry, Mr Laurence, do you wantto come in first?Guy Laurence: We have a slightly different answerbecause, of course, we are investing in complementarytechnologies such as femto and Sure Signal. We arealso investing in all the customer support systems thatare required when you move customers on to the moreadvanced phones such as smartphones. So, forinstance, our brand new store design, which isspecifically designed to help people with new kindsof phones, the first one we opened was in Edinburgh.So we are investing in Scotland heavily. However,where I do agree with Mr Dunne is that if you have asmall village in the middle of nowhere and BT can’t

run the fibre in there is not much that we can do aboutit. There are some technologies available but they areexceedingly expense and therefore the faster we canencourage and work with BT to run the fibre in so wewill get a solution for rural faster.

Q149 Damian Collins: Forgive me for being slightlycolloquial in this question; I am a Member ofParliament so it is the nature of the beast. As acustomer, when I moved to my new home inconstituency I had to move from Vodafone to O2because there was no Vodafone signal and a weak O2one. That is somewhere that would have BT fibre. Ina community like that, if Elham Parish Council wroteto you and said, “We would like to have a mast here.There may have been objections in the past but wewould like one now because the coverage is verypoor” what happens? How does a company like yoursrespond to that sort of request from a community thatmight tick a lot of the right boxes in terms of the sizeof community, it might be a bit small, but the size, thelocation, some of the back support you would need?How would you, as a big company, engage with acommunity like that?Ronan Dunne: We would absolutely actively engage.It is in our interests, because all of our customers, thevery nature of mobile services is that our customersexpect to have coverage wherever they go. So it is notjust about serving individual communities, it is alsoabout when people are out and about that they canalso get coverage. So it is in our interests where thereis an appetite in a local community to actively engagewith them to deliver that service and find the mosteconomic way of doing it, whether it is to be usingpublic land, whether it is to get an improved rentalagreement, whether it is to work with Vodafone sothat we can share the costs of building the site. So weactively do engage all the time with local communitiesdoing exactly that.Guy Laurence: Ours is exactly the same. Recently inWest Berks to do this trial I just talked about earlier,we engaged with the local MP and also with NickCarter, who runs West Berks Council. I rang both ofthem and said, “Look, you need to help me out, weneed to cut through the red tape if we are going to putthis in” and we did it within a relatively short periodof time and now we have the trial up and running.

Q150 Damian Collins: Mr Dunne, in the writtenevidence submitted by your company, although youjust said you did not have an in principle objection tocoverage obligations, in paragraph 25 it suggest thatyou think it would have a distorting effect oncompetition and potentially restrict new entrants fromentering the market because of the coverageobligations. Which new entrants were you thinkingof?Ronan Dunne: I was not thinking of a specificallyidentified entity, but the fact is that for a new entrantto have coverage obligations means that the rolloutcost to them may be prohibitive for them to bid for thespectrum. The other thing is that if you have coverageobligations people will factor into what they bid forthat spectrum, the cost, the additional costs associatedwith that coverage obligation, but they will also have

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the benefit of that spectrum available to them in urbanareas straight away. They are getting a discount forcovering rural areas that allows them to have coverageon a national basis, so they may be subsidising ruralversus urban coverage.

Q151 Damian Collins: I think it is quite animportant point if you are saying that you think thereare people who might enter the market who won’tbecause of the coverage obligations. Could you giveus an illustration of who that might be?Nicholas Blades: I think it is just an economicobservation and it is something we think policymakersneed to just bear in mind that there is an attractivenessfrom your perspective of recommending a coverageobligation but when you are coming to yourconclusions on that you need to bear in mind that itmay have this effect on new entrants. The auction willdetermine whether anyone turns up to bid. The morerestrictions and the more costs you place on biddersthe less likely you are to have people turn up.

Q152 Damian Collins: That to me soundstheoretical, but in terms of practical policy, is this areal threat or not? If this is theoretically possible, butin reality there is no other big entrant which mightcome in, therefore it is not a threat that I should worryabout as a decision-maker or policymaker. That iswhat I am trying to get to the bottom of here, becauseit is quite a big sort of claim to make.Nicholas Blades: Certainly it is not our concernwhether people come in to compete. As Mr Laurencesaid, the auction should encourage people to turn upand I think it was just flagging the issue that it is nota complete free ride having a coverage obligationfrom a policy perspective. There is a downside andthe downside potentially is that there might be fewerpeople turning up at the auction.

Q153 Damian Collins: Just to be clear, I amassuming both Telefonica and Vodafone would behappy to bid for licences if there was a 98% coveragerequirement? Yes?Guy Laurence: We have to look at the total packageof how much it is all going to cost. If we get 98%coverage, good, we get more customers and we getmore revenue and all the rest of it, so I would like tosee us get to a stage where there is 98% coverage, butthere is a total package as to how much it all costs atthe end of the day and part of that will be whetherBT—and sorry to harp on about it—come to the tablewith what they need to provide, because if we areforced to provide 98% and we have to use things likeIP microwave and other technologies it is a muchhigher cost to us. So I think you have to view this asa national infrastructure play, where a number ofparties need to come together. So the spectrum is onecomponent. You obviously need enough players of acertain size with the muscle to then go and build thesenetworks because they are not trivial things to buildand they obviously need to maintain them, and thenyou need other players such as BT to complete theparty. I think that is the best way to—

Q154 Damian Collins: I think is it a very valid pointthat you make. It is certainly one I think I would takeon board, and certainly when we had Ofcom inrecently we did talk about BT’s fibre networks and theexpansion or access to those. But I just want to beclear that if a 98% coverage requirement was setthen—I appreciate there is a cost involved—as far asyou are concerned it could be delivered, you coulddeliver against it?Guy Laurence: Physically it could be delivered, yes.David Rodman: There is a sting in the tail in biddingfor the lot with the coverage obligation for bothVodafone and O2 in that every pound we bid for thatlot comes back and bites us in the form of higherspectrum fees. So there is a bit of a double whammyfor us on that coverage obligation.

Q155 Damian Collins: We heard last week from MrWatson’s questioning that Everything Everywhere isset to make a profit of several hundred million poundsfrom the sale of spectrum. Do you think profits likethat should be ringfenced for investment in the UKinfrastructure?David Rodman: I don’t have a particular opinion onit, to be honest. I don’t know that EverythingEverywhere is going to make a profit on what theysell or how they are going to put it through the booksor anything. I would not describe it as an area I amcompetent to comment on.

Q156 Damian Collins: Again we are discussingother theoretical arguments that have been putforward. If companies like yours are in a positionwhere they can make substantial profits from sellingon, by being required to sell on areas of spectrum theyhave previously bought and, taking into account thepurchase price and the licensing fees they might havepaid, they are still going to make a substantial profitat the end of it, do you think there would be a casefor saying those profits should be reinvested by thatcompany or by some institution into the network asthat is something that those companies are potentiallymaking quite a lot of money out of but it is notnecessarily money they have earned?Guy Laurence: You are probably into a moral issue,which is probably something that Parliament shouldconsider rather than businessmen.

Q157 Damian Collins: I am asking the wrongperson. I am sorry to ask you a moral question.Finally, in our session last week Arqiva suggestedthere could be a 99% coverage obligation, where youeffectively go for total coverage. What do you think,from your point of view, the costs are associated withgoing for one of these high coverage numbers? Thereseem to be various different views that people have.It was suggested to us last week that it could be in theregion of £200 million and beyond, setting a coveragetarget, so the difference between, say, going from 95%to 98%. I wonder what your view was on the likelycost of making a step like that.Guy Laurence: From 95% to 98% would be about£200 million in our case, to get from where we aretoday. You are talking about indoor coverage?Damian Collins: Yes.

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Guy Laurence: So to get from where we today to95% would cost about another £200 million.Ronan Dunne: I think those are in the right ballpark.As I have said, it is about not only building out of thesites, but the availability of sites and of high speedtransmission as well. So those are critical components.It won’t just be our investment, because there will alsobe an investment requirement for others as well.

Q158 Damian Collins: Thank you for that. It iscertainly interesting to me to get your view on thatfigure and I do take on board what you say about it isnot something you are entirely in control of, althoughobviously there is a big role that you can play.Guy Laurence: Just to be clear, those are the capitalcosts. You have the opex to go on top of that. On the98% figure you have about another £140 million ayear in terms of opex to then run it, because once youbuild it you have to operate it. So you are talkingabout £540 million in total to get to 98%, in our case.Ronan Dunne: Again, similar numbers, yes.

Q159 Chair: Can I probe a little further? Youopposed the Ofcom coverage obligation by arguingthat competition will deliver greater coverage. Howgreat a competitive advantage over your competitorsdo you seriously think it gives you if you are able tooffer that little bit more coverage in the most remoterural areas?Ronan Dunne: We, in our submission, accepted thatthere can be a case for a coverage obligation and whatwe said was that we expected that competition wouldget you there, and the debate might be does thecoverage obligation get you there faster. This goesback to a point I made earlier that it is not just aboutserving those people who are residents in rural areas.Many of those areas are areas for tourism and otherthings and ubiquitous coverage is an aspiration of allof our customers, so we have an interest not just forthose customers who are located there permanentlybut for the wider customer base to have as muchubiquitous coverage as we can because that creates agreat user experience and means that the take up andadoption of digital services will be higher. So there isan economic attractiveness to us ultimately to buildout more and more of the geography.

Q160 Chair: When you are saying to me, “Youshould be an O2 customer, not a Vodafone customer”how big a part of your pitch would you see the extentof your coverage being? Do you think that is asimportant as saying, “I am not going to charge youas much”?Ronan Dunne: I think it is a significant factor. Thatis why we enjoy a significant market share inScotland, which was referred to earlier. We havesignificant coverage in Scotland. For each customer,it will be one element of the choice they make as towhich provider they use but there also will be factorslike the services that are available, which also meansit is not just coverage but when we talked earlier ifwe have spectrum that does not allow to compete atthe same speed that may be as significant a factor ina customer choosing which network as it would bewhether there is coverage in the first place.

Guy Laurence: Two things. First of all, just to yourquestion, I said £540 million for 98%; it is actually99% coverage. Apologies for that. To the question youposed, I would probably answer the same as MrDunne: I think it depends on the individual customer.If you are student living in London then whether youhave coverage in a small village in West Berks is nota big concern to you, to be quite frank, and thereforeif you are trying to attract that kind of customer itdoes not play into their, what we call, considerationset when they are making the purchase. But as anational company that provides national coverage thenwe would seek to have as wide a coverage as we can.You have seen, I think, in past years, and evenrecently in fact, some of the network operatorsadvertising that they have the widest coverage or thedeepest coverage or whichever word they choose touse.

Q161 Jim Sheridan: A brief supplementary aboutthe issue of rural areas. I think you said earlier youhad a mixed mailbag with people who want increasedaccess but equally so you have a number ofobjections. What are those objections based on? Is itthe fear of health risks or is it the landscape, or areyou trying your best to try and get a better serviceinto the rural areas, or is it just a matter of priority,“Our competitors aren’t doing it so we don’t need todo it”?Ronan Dunne: We are actively trying to increase ourcoverage and the responses in our mailbag have beenmixed. There is some that it is an objection inprinciple, that they just don’t want a mast; in others itis a debate about a particular location and whether ornot there is a better location. It tends to be, I suspect,the same mix that you get in your own mailbags.

Q162 Chair: We could spend a great deal of time onmobile phone masts, but that is a whole other inquiry.The two competitors who are not here today suggestedto us quite strongly that to extend rural coverage intothe most remote areas you really need to have accessto sub-1 GHz spectrum. Do you accept that?Ronan Dunne: I think if you were starting with agreen field, sub-1 GHz spectrum, low frequencyspectrum, the signal covers a wider distance, but whenyou have already built a network grid, as all of theoperators have, and as Mr Laurence identified earlier,the operators who do not have sub-1 GHz have beenvery, very effective national competitors already—once you have built an extensive cell site grid, thedifference between the low frequency spectrum andthe high frequency spectrum is not nearly assignificant. The second factor is that some of theexisting operators who do not have low frequencyspectrum have sufficient spectrum available to themalready, that is they have 2x20 MHz of spectrum intheir existing holding, which means that they are in aposition to deliver LTE services sooner than the 800spectrum will be available. So probably the firstavailability of LTE services will be from those whohave 2x20 MHz of 1800 spectrum.

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Q163 Chair: So are you saying that because theyhave quite a lot of base stations already, this argumentthey are advancing doesn’t really help at all?Ronan Dunne: It significantly reduces the economicadvantage of having the low frequency spectrum. Thelow frequency spectrum still has some benefits for inbuilding coverage but the general point of building anetwork is an 1800 network will have more cell sitesthan a 900 but if you have already built an 1800network then you have those sites anyway.Guy Laurence: I think this is a key point. The lastpart of what Mr Dunne mentioned, though, is that inthe case of Everything Everywhere, even after theyhave divested their spectrum obligation they still havea considerable quantity of spectrum, I think more thanany other operator I can think of in Europe. If I goback to my analogy of the flat, if I may, they have a50-storey flat and it is only 30 storeys full, so if theyneed to move those inhabitants around they have 20free storeys to move them to, which meanstechnically, and very simplistically, they can switch on4G faster than I can. That is why I have to buy 800spectrum because I can’t do it because I only have mytwo floors of freedom to go on.Chair: But your floors are luxury penthouses; theirsare rather downmarket, shabby ones.Guy Laurence: I think the empty floors can beanywhere in the building, but as you wish. But this isa key point. It is interesting that you call us the bigboys. Everything Everywhere is the largest operator;they are the big boys. They are nearly one and halftimes bigger than me, just to be clear, and they havethis 50-storey block of flats, they have only occupied30 floors, they can move the inhabitants around easilyand they can move on to 4G easier than I can. I haveto buy spectrum because I don’t have the ability torefarm my existing 900 spectrum fast enough tocompete with them. They could be in the market2013; it could take me nine years to reach the samepoint where I have the same amount of refarmspectrum and people using 4G.

Q164 Chair: Taking the two of you together, bothof you essentially are arguing that this is a spuriousargument being put forward by EverythingEverywhere that you have this huge advantagebecause you have the sub-1 GHz and they don’t?Nicholas Blades: If I can quote Ofcom. Ofcom saidin its advice to the Government, “Liberalising 900 and1800 spectrum in the hands of existing licensees islikely to benefit consumers and is unlikely to result inmaterial distortion of competition that requires furtheraction to be taken.” So it has been looked at for sixyears, 2,000 pages of consultation. I think we havegone over the subject and, to be honest—Mr Watson: With respect we haven’t yet though.Nicholas Blades: No, I know you haven’t but as anindustry it has been done to death.

Q165 Chair: We have touched on the fact that mastsare unpopular, and certainly every Member ofParliament would bear that out, and we have alsodiscussed the fact of Everything Everywhere havingmade a lot of investment, lots of different basestations. To what extent is extending coverage really

going to be of benefit if we could have greater sharingof infrastructure by the operators?Ronan Dunne: I think the evidence is already there.There are effectively two network sharingarrangements in the UK: Cornerstone, which is theagreement between Vodafone and Telefonica, andMBNL, which is between Everything Everywhere andThree. I think all of the operators in the marketrecognise that efficiency in the deployment ofinfrastructure is a good thing because it reduces theimpact on the environment of new cell sites, but italso reduces the cost to deliver, which increases thoseareas that are economically viable to put coverageinto. So I think it is an essential element of deliveryof services for customers going forward.Guy Laurence: I would agree with that and I wouldalso say that you start to see that with 4G as well. Forinstance, in Germany where we already have 4G Live,we have agreed with the Government to collaboratewith other operators in rural areas and to build ruralareas first.

Q166 Chair: If you both agree it is so important,why has it not happened? Why has it not happenedand why do we not have much more sharing ofinfrastructure than we do at the moment?Guy Laurence: We have more sharing ofinfrastructure in this country than virtually any otherEuropean country because the competitive dynamicshere are so tough that the margins that we enjoy aremuch lower than any other European market. So thefact that you have Everything Everywhere andHutchison together and the fact that we have a co-operation agreement on building steel masts is asubstantial amount of co-operation and unusual.

Q167 Chair: Why could you not, particularly in aremote area, have one mast and have all four of youuse it?Guy Laurence: We do not have an in principleobjection to that, to be quite frank. If I could split thecosts four ways instead of two ways I would do it,and if we can get BT to run the cable in then we canfire it up and make it work.Ronan Dunne: I would have no objection at all tosharing infrastructure like that.

Q168 Chair: But you are saying it is essential, youare saying that you have no objection to doing it andyet, even though you say we are ahead of othercountries, there is still, it appears—you don’t sharewith the other two companies that were here lastweek. Why have you not just got together and reachedan agreement?Ronan Dunne: There is a natural logic. As wereferred to earlier, we built out our original networkson 900 MHz spectrum so our footprints are moresimilar than those who built a grid on 1800. So thereis more efficiency in sharing between Vodafone andTelefonica O2 and that is why we have because thereis more overlap on our cell site grids. So the way theUK is working is the optimised pattern; those with1,800 and higher frequency are co-operating togetherand those who built their grids out on 900 are co-operating together. As Mr Laurence said, we are

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further advanced than virtually any country in Europeon sharing.Guy Laurence: We did have an agreement withFrance Telecom to try and combine our two networksusing our 900 and their 1800 grid and, to be quitefrank, it didn’t work. So we had a good run at it forabout 18 months, I guess, and the technical issues justgot too big versus the benefits we would derive andtherefore, at the end of the day, we cancelled theagreement. That was three years ago.

Q169 Chair: But you would in the future expect tosee much more sharing?Ronan Dunne: For pure new sites being built in ruralareas, certainly we have absolutely no objection to asmany operators as possible being on the sites to bringthe cost down.

Q170 Damian Collins: Just following on on that, Ihave been very interested in your answers to thosequestions so far. If the Government set a highercoverage target, said they wanted 98% coverage, inreality is that how it will be delivered, not put all theobligations on one provider but that it would be sharedamong a number of people to help meet that targetand that you as companies would find your ownsolution to making that work?Guy Laurence: That is how it works in Germany, sothat is an example that is live, if you like. You getcertain inflection points in the industry where newtechnologies come in and more spectrum is available.I think the Government has an opportunity then tolook at what it wants from the granting of those newlicences and if it deems that rural coverage is the No.1 priority it can use that in the rules for the auctions.What it needs to be very careful to do, though, if thatis your core objective is to make sure that that is whatcomes across in the spectrum auction and not thisseries of rules that give Hutchison and EverythingEverywhere a leg up, which is currently the way thatthese rules are written.

Q171 Damian Collins: If that was the case then,although you said for the 99% coverage you werelooking at effectively about £140 million, thelikelihood is that a company that made that type ofinvestment would recoup some of that investment byselling access to that extended infrastructure to othercompanies. Would that be the case?Ronan Dunne: But also they would have tocorrespondingly share the revenues as well, so itworks on both sides of the equation. They may get areduction in their costs but the revenues they mightenjoy are also reduced because they would then takeprobably their natural share of that particular market.So it works on both sides of the equation.

Q172 Damian Collins: But what I am trying to getat is if that is how it develops, the chances are thecost of delivering it might be slightly lower than hasbeen suggested?Ronan Dunne: It is certainly highly probable thatpeople would be looking to share in rural areas asmuch as possible.

Q173 Mr Watson: I think Thérèse picked up on thisearlier: you are concerned that the auction rulesconstitute illegal state aid. Just for the purpose of theCommittee, is that the view of Vodafone?Guy Laurence: I am not a lawyer so I am not goingto say it is illegal state aid. What I would say is thecurrent way that the rules are described I think givesboth Hutchison and Everything Everywhere an unfairadvantage.

Q174 Mr Watson: Would your lawyers say that theythink it is illegal state aid?Guy Laurence: I have not asked them that question.

Q175 Mr Watson: Would you mind asking them andletting us know afterwards? I am just trying find outwhether you agree with 02.Guy Laurence: I think whether it is illegal state aidor not, the question is is it a fair auction in the way itis currently configured and the answer I think in bothcases is no.Mr Watson: You are sounding like the politicianthough. I just want to know whether—Guy Laurence: I am not a lawyer, sorry.

Q176 Mr Watson: Don’t worry, do it afterwards.You probably know where I am going next, if youread the transcript of last week, but I couldn’t helphaving a little wry smile when I read Vodafone’ssubmission. You went to great pains to explain that aspectrum fee is not a tax, and I definitely don’t wantto get into the tax issue with you guys but can I askwhat you paid for your 900 and your 1800 spectrum?Guy Laurence: My total spectrum costs per year are£346 million.

Q177 Mr Watson: That is your licence fee but whenit was allocated can I ask what you paid for it?Guy Laurence: Sorry, for which?Mr Watson: For the 900 and the 1800.Guy Laurence: £25,000.Ronan Dunne: We paid £4 billion for our 3G licenceand paid a similar amount for our 2G.

Q178 Mr Watson: So again you probably knowwhere I am going, I am not very good at my sums, ifyou saw last week, but since then you have probablypaid, since it was allocated in 1998, just over £200million in AIP; would that be a broad figure?Guy Laurence: I am not sure of the maths but theAIP is a subset of our spectrum costs, just to be clear.Our spectrum costs are £346 million a year, per year.

Q179 Mr Watson: So you have AIP and what is theadditional bit?Guy Laurence: For the 3G we paid £5.9 billion and,to give you an idea, that cost is not paid off in ourbooks until 2022. We have paid off less than half ofthat cost. I guess you could think of the AIP as thecouncil tax but the big ticket issue is your mortgage.The mortgage we have to pay is on what we paid theGovernment for 3G, and that is £5.9 billion.

Q180 Mr Watson: I love the mortgage-flat thing.That actually does work for me. Let me go a bit

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further. Do you know how that would compare towhat you both paid for the equivalent spectrum, the800 MHz spectrum, in the German auction?Guy Laurence: I think we paid about a billion but wewould have to—

Q181 Mr Watson: Let me help you. I went toGoogle, so it might be wrong, but it said that you paid€1.42 billion and that Telefonica paid €1.38 billion.That is probably broadly right?Ronan Dunne: That sounds right, yes.

Q182 Mr Watson: Effectively, you are sort of payingabout £16 million a year for your UK spectrum. Doesthat mean that you think that your British spectrum isworth less than German spectrum?Guy Laurence: No, because that is the point, we arenot paying that figure. We are paying £346 million ayear in spectrum costs. It is £6.5 million a week wepay in spectrum fees and we put some of the moneyupfront, which is an advantage to the Government.You have the money upfront and then we pay a licencefee on the AIP, but just because you have moneyupfront does not mean to say I don’t have to thenexpense that through my books, and that will take meuntil 2022.

Q183 Mr Watson: I think I have to draw that out.Perhaps we could follow that up in writing, butessentially what I am trying to get to is to make thepoint that you seem to be paying a lot more forspectrum in Germany than you are in the UK. Wouldyou dispute that?Guy Laurence: Yes.

Q184 Mr Watson: Would you dispute that?Ronan Dunne: Yes, because, in fact, we are about togo into a spectrum auction where we will be chargedan amount, depending on the outcome of the auction,which is similar to what has happened in Germany.

Q185 Mr Watson: When Ed Richards is saying toour Committee that you should be paying a multipleof what you currently pay, is he right?Guy Laurence: You are the expert on AIP. Why don’tyou explain the history of this, because I think it isworth knowing?

Q186 Mr Watson: Before you hand over to yourregulatory god, can you just tell me whether you thinkEd Richards is right?Guy Laurence: The AIP was set up; I can’t rememberthe acronym. It is—David Rodman: Administrative incentive pricing.Guy Laurence: It was set up to pay for theMonopolies and Mergers Commission. It was thenchanged in 1997, I think—was it 1997?—and westarted then paying a fee that was greater than therecovery of the cost of the Monopolies and MergersCommission. Then in 2005 Ofcom looked at it againand saw no reason to increase it. If Ofcom wants tolook at it again in 2011 and, using the samemethodology, wishes to increase it, that is a debate Iam very happy to have with Ofcom. To have it linked

to the auction in a somewhat arbitrary way I don’tthink is fair.

Q187 Mr Watson: That is a clear point. Can I justgo back, though? Do you think Ed Richards was rightto say you should be paying a multiple of what youcurrently pay for licence fees?Guy Laurence: I am very happy to have a discussionwith Ed Richards on applying the formula that hefound to be applicable in the past to the circumstancesin 2011. If that results in a higher fee, then the answeris yes.

Q188 Mr Watson: Forgive me for responding, but Ithink I am probably going to take that as a “no”,though.Guy Laurence: No, it is a “yes”.

Q189 Mr Watson: Yes? So he is right, you shouldbe paying more?Guy Laurence: No, Ed Richards had a formula thathe used in 2005. If by applying that formula, whichwas deemed to be appropriate in 2005, to thecircumstances in 2011 that results in a higher AIP Iam very happy to pay it. What I don’t like in the waythat the consultation is written at the moment is thearbitrary link to the auction.

Q190 Mr Watson: Mr Dunne, presumably youwould agree with everything Mr Laurence has said?Ronan Dunne: The Competition Commission itselfsays that auction pricing is probably an inappropriatebenchmark measure for the value of spectrum, so wecertainly think that the mechanism that is in place atthe moment that Mr Laurence referred to is anappropriate mechanism for valuing AIP fees.

Q191 Mr Watson: I think when I read yoursubmission, this is Vodafone, I think this is theargument you are trying to deploy here—and Iunderstand it is very difficult in this Committee tomake a very detailed regulatory argument—you arearguing that tying spectrum fees to auction pricemeans that you are effectively paying twice, payingonce for the new spectrum and again for the spectrumyou already hold. Do I have that bit right? Yes, okay.You see, when I read that I was struggling to workout what the problem with that is. You are essentiallywanting Ofcom to give you some kind of massive“buy one, get one free” offer, aren’t you?Guy Laurence: I think what we are seeking to getfrom the auction is a fair and open auction processthat allows as many bidders as want to bid or have theability to bid to enter on a fair and equal basis. As Isaid, we don’t have an advantage from having the 900spectrum, because if we did then I don’t understandhow Hutchison can sell as many iPhones as I do. Idon’t understand how Orange managed to have morecustomers in 2002 even before they merged with T-Mobile. They are clearly not disadvantaged now;therefore, I see no reason to distort the auction with aseries of artificial rules. It is as simple as that.

Q192 Mr Watson: Do you not think your customerswould think, “These guys are paying £16 million a

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year in AIP and yet they are giving Lewis Hamiltonwith McLaren $75 million a year in sponsorship”? Iknow you don’t want to be moral about this and, bythe way, I understand that, but do you not think thereis some kind of corporate responsibility for thisspectrum, which is essentially a state asset, a publicasset, that you share the benefits of that with yourcustomers?Guy Laurence: I think the key thing is, first of all, weare paying £346 million a year in spectrum fees, justto go back to that fact, because it is a fact. The secondthing is that I do not pay Lewis Hamilton’s wages. Ipay a contribution to McLaren’s running costs, a verygreat British company, probably one of the finestBritish engineering companies that we have, that goout on the track every two weeks and try and winraces. They employ the best British drivers, two ex-world champions, to which they pay the market rateand is their business what they pay Lewis. I can assureyou I don’t get involved in his wage negotiations.Mr Watson: I would think he would be paid a littlebit less if you were, Mr Laurence, but thank youanyway.Chair: We want to stop at 11 am.

Q193 Louise Mensch: I think my colleague TomWatson has asked most of my questions, but just forclarity could I ask you both to say precisely how youthink licence fee levels ought to be determined goingforwards, if I could start with Vodafone? How do youthink licence fee levels ought to be determined in thefuture going forwards?Guy Laurence: Are you talking about the AIP or areyou talking about with respect to the auction?

Q194 Louise Mensch: No, I am talking about AIP.If you leave the auction out of it, we are talking aboutactual licence fees. How do you think those should bedetermined going forward?Guy Laurence: I would probably repeat what I saidearlier about the fact that the 2005 methodology,which was deemed to be appropriate, should bebrought up to date with 2011 facts and figures.

Q195 Louise Mensch: Including the spectrum youalready own or do you wish it to only include newspectrum? Should there be rates retrospectively addedto the stuff that is already in your possession, extrafees?Guy Laurence: I don’t think retrospective legislationis a fair demand to put on a business, to be fair.

Q196 Louise Mensch: Even if, as my colleague MrWatson points out, there is a massive discrepancybetween the valuation of British spectrum andGerman spectrum?Guy Laurence: But there isn’t, as I said.

Q197 Louise Mensch: You dispute that?

Guy Laurence: Well, no, there isn’t. We pay £346million in spectrum costs per year. You have chosenAIP, which is—

Q198 Louise Mensch: It does not equate to €1.6billion, does it?Guy Laurence: Sorry?

Q199 Louise Mensch: Did you not give me a figureof €1.6 billion for German spectrum?Guy Laurence: No, I paid £5.9 billion for my 3Gspectrum, which is considerably more than 1.4 billionthat Germany paid. On top of that—

Q200 Louise Mensch: Is German undervalued?Guy Laurence: No, because they also paid for 3G aswell. The thing is in our P&L you have to take all ofthe spectrum costs together. You can’t take one line.The cost to the business is the cost to the business.We have to take all of our spectrum costs because thatis the true cost to the business.

Q201 Louise Mensch: You are basically content torevise the 2005 mechanism to bring it into line withthe 2011 market and that is the way you would like tosee rates set?Guy Laurence: Why not, yes.

Q202 Louise Mensch: You agree with that?Ronan Dunne: Yes, entirely comfortable with that.There is an established mechanism there. Just forclarity, there are two pieces here. There is somespectrum that is bought upfront and there is somespectrum through which fees are paid. History recordsthat the UK generated £22.5 billion, a significantproportion of which then operators wrote off becauseessentially they paid more for it than the value of it.Actually, since then, every operator in the UK hasmade a major write-down of the value of thespectrum. It is a transfer of economic risk from thestate on to the operator. In the current auction we willhave the same equation again where the operators willbe asked to take the economic risk and I expect thatwe will see, similar to the auction in Germany, therewill be demand for the spectrum because everyone isexcited about new digital services. I wouldn’t expectthat the fees generated will be similar to those thatwere generated for 3G.Louise Mensch: I am certainly keen to see O2 acquiresome new spectrum since, having been an earlyadopter of the iPhone, of late I find I am gettingcoverage blackouts all over the place. There must beserious congestion. Thank you for those answers.Chair: I am conscious that you need to go so we willdraw a line there. Thank you very much.The Committee is now going to have a short privatesession before we move to the next set of witnesses,so if the public wouldn’t mind waiting outside whilewe do that.

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Examination of Witnesses

Witnesses: Rupert Pearce, Group General Counsel, Inmarsat, Chris McLaughlin, Vice President of ExternalAffairs, Inmarsat, Stephen Hearnden, Director of Telecommunications and Technology, Intellect UK, and RajSivalingam, Associate Director of Telecommunications and Spectrum, Intellect UK, gave evidence.

Q203 Chair: Thank you for your patience. We nowcome to the second part of this morning’s session andI would like to welcome Rupert Pearce, the GeneralCounsel of Inmarsat, and Chris McLaughlin, the VicePresident for External Affairs; and also from IntellectUK, Stephen Hearnden, the Director ofTelecommunications and Technology, and RajSivalingam, the Associate Director ofTelecommunications. Adrian Sanders is going to start.

Q204 Mr Sanders: What is the most realistic wayfor universal broadband coverage to be achieved inthe UK?Stephen Hearnden: I think it is a mixture of deliverymechanisms, obviously copper with fibre, wirelessbroadband, mobile broadband, and also for the veryhard to reach areas, satellite broadband. It is a mix ofdifferent technologies depending on the mostcost-effective method of delivery.Rupert Pearce: Yes, I would agree with that as well.Obviously, we feel that satellite has a part to play inthe overall policy of deploying next generationservices as far as possible within the UK, but it is atthe fringes. My own business, Inmarsat, is all aboutmobile satellite communications and our markets areglobal. Although we would immediately deliver trulyubiquitous coverage in the UK merely by having asatellite over the UK, which we do, we have several,there are small issues like being able to serve only afew hundred customers at a time in a beam with amobile satellite network and the fact that we don’twork in building. You actually have to have line ofsight to a satellite to be able to have a service.There is a next generation of satellite services comingalong in Ka band, which are very high throughput,high capacity satellites, which essentially take thepower that we spread over the globe and focus all ofthat power in on a single country. Probably the bestexample today of that is in the United States whereHughes Network Services and ViaSat both haveconsumer broadband by satellite offerings to nowmore than a million consumers in the United States.That is potentially something that we can take intotruly rural, remote areas where a 60 centimetre dishcan act as an adjunct to terrestrial systems to providebroadband into the remotest regions. Again, so longas the satellite can be seen and a dish can be set up,then Hughes and ViaSat are selling that service at $50a month, which I think is a pretty good valueproposition to people who would otherwise be in thenot-spots.

Q205 Mr Sanders: What sort of proportion of thecountry do you think would access services viasatellite if that were available in the UK?Rupert Pearce: One of the most interesting things thatwe have seen about the deployment of consumerbroadband by satellite in the United States, which Ithink is a good proxy for the UK—they are slightlyahead of us in terms of the deployment of theseservices—is that the take-up has been much more

profound and widespread than people had thought. Ithink because satellite is able to produce a 1 Mbpsservice for $50 a month it has proven to be verysuccessful in suburban regions. As we have seen, andas you heard in Committee over the last week, as newtechnology comes along it tends to come withreductions in coverage rather than extensions ofcoverage. What we are seeing in the United States isthat fibre and cable deployment is restrictedpredominantly urban regions and begins to bleed alittle bit into suburban regions but the cost-benefitanalysis starts to run out as you get into semi-rural,semi-suburban areas. There are still a lot of people inthose areas that want access to broadband, and thathas proven to be the sweet spot for satellite, whichtoday can compete very satisfactorily againsttechnologies like DSL. If you look at the businessplans of Hughes and ViaSat in North America, theyhave ambitions to serve several million customerseach in North America. It is more than just a rural,remote service.

Q206 Mr Sanders: Would you agree with whatArqiva told us, which is that satellite is only going tobe useful for users beyond the reach of the other typesof broadband?Rupert Pearce: Certainly, I respect that view. But itis not what has been seen to happen in the UnitedStates. Now, we have to decide whether the UnitedStates is a good analogy or not for the UK, but thefirst generation satellite capacity built for the UnitedStates did assume that it would be predominantly ruralcoverage and both suppliers were surprised when itturned out to be much more suburban, even to theextent that the next generation satellite capacity beingbrought into the United States won’t even beubiquitous coverage. Both of the satellite operatorsthere are going to offer only west coast and east coastcoverage because they are essentially competing headto head, in their views, with cable, fibre, DSL, and themore rural, remote areas of the United States up themiddle of the continent are being left to a priorgeneration of satellite technology, which I think isvery, very interesting.We have new technology coming along in this field aswell, not Inmarsat because we are about mobility, butAvanti in the UK has a Ka band service availabletoday and Eutelsat, a European operator, is bringingnext generation Ka band offerings, which will offer10–15 Mbps, 20 Mbps offerings to rural remote areas.I think they should definitely have a part to play in anoverall strategy to push technology out as far aspossible.

Q207 Mr Sanders: Can I ask both of you if youthink imposing coverage obligations on the nextspectrum auction will actually benefit customers?Stephen Hearnden: Certainly, getting a coverageobligation will, in fact, get us to a higher level ofcoverage. Whether or not doing it via the auction isthe best methodology, we have BDUK at the moment

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who are working towards the delivery of the final thirdand that will include areas that are very hard to cover.There is one school of thought that says impose acoverage obligation on the operators, but the cost forthe operators goes up very, very steeply when you getbeyond the 96% to 97%. There may be other betterways of delivering it. With the mobile broadband, aswe heard earlier, the costs become high when youhave to get backhaul into the remote areas, either byfibre or by microwave, and microwave is veryexpensive, especially if you need several hops to getin, you can’t have a line of sight from—if I call it—civilisation into the remote area. As a result of thatthe costs go up very highly. I know that BDUK areexploring a variety of different ways of delivering theservice in the most cost-effective manner through thecounty councils and local authority procurementprocesses.Raj Sivalingam: I would also add that I think there isan issue that we need to explore a bit further aboutthe idea of putting the coverage obligation on a single2x5 MHz channel, which is that there will be issues,challenges, when more than one or a number of usersare present in a cell. We can tackle it to some extentby, as was discussed in the previous session, addingmore and more cells, but that is an issue that I thinkneeds to be explored further. As my colleague said,we need to look at the coverage obligations in theround through the BDUK programme as well.Rupert Pearce: I guess it is easy for us to commentbecause we are not directly affected by it, but I wouldhave no issue with the concept of coverage being arequirement for someone bidding. I think that is justan example of joined-up policymaking. It will bereflected in the value that people bid. In theory, theyshould bid less because it is going to cost them moreto deploy, but you are accomplishing your policyobjectives through the auction. If they bid less, well,you expect them to bid less but then you expect themto deliver more. What you get, though, is the tensionof competition. Someone will take a different view onhow much it will cost to extend coverage to that extra2% to 3% of the UK population and it is in thatcompetition you get the combination of public policyobjectives and value. Of course, the people deployinghave the opportunity to invest in technology solutionsto deliver lower cost options for that extra 1% to 2%.It is very hard for you to drive that except by directinvestment in technology as a Government. Therefore,you are using the coverage requirement in the auctionto create competition, foster different views aroundhow to get there, and encourage innovation to find thelowest cost solution that makes everybody happy. Ithink it is a winning strategy.

Q208 Chair: The suggestion has been made that yourtechnology, satellite broadband, is not only moreexpensive but actually if more than a relatively smallnumber of people want to use it simultaneously thespeeds drop substantially. Is that true?Rupert Pearce: It is absolutely true in the main. Ourbusiness is a niche business. Our revenue base lastyear, for what is by far and away the leading mobilesatellite services operation in the world, was $1.2billion. We get that operating in more than 200

countries. We are a niche part of thetelecommunications world, but we serve very, veryimportant public policy objectives and we serve veryimportant communities. We are the provider of theonly global maritime safety system, for example. Weare the only supporter of global air traffic safetysystems on aircraft, and we are the only availablecommunications solution in many far-flung regions ofthe world. We are a mix of serving niche communitiesand serving very important policy objectives.If you step back, though, and look at satellite as amedium for distribution and communications, satelliteis extremely effective and extremely efficient atdeploying broadcast services, one-to-many services,because of its coverage. But when it comes totwo-way communications it is fundamentallyconstrained by the power of a satellite and thebandwidth that can be put through that satellite. Thelargest communications satellites that can be lifted byrockets today—and these are rockets that can take aman to the moon so they are very large, powerfulrockets, costing about $120 million a pop just tolaunch a satellite—they are six-tonne satellites aboutthe size of a double-decker bus and with a solar arraywingspan of about 30 metres, so about the width ofa football pitch. They are very, very large, complex,sophisticated beasts. But the communications capacitythey carry will only support tens of thousands of usersif you deploy that power across a third of the globe,which is what we do. We basically have a globalnetwork with three satellites.When we are looking at consumer broadband bysatellite, we are looking now exclusively, I think, atvery large satellites that harness that power to a verysmall area of the globe, for example, the UK or theUnited States of America. Even then, if you look atthe total communications capacity of a next generationHughes satellite or a next generation ViaSat satellite,they can probably cover a couple of millionsubscribers each in totality across the whole of theUnited States. That is at a 1Mbps data speed. If wescroll forward another decade and people laugh at theidea of a 1Mbps speed and they say, “Sorry, basichuman rights says it has to be 10, 20, 30Mbps”, thecapacity of those satellites can’t be changed and sothey won’t be able to provide that new level of serviceto large numbers of customers. You can’t send a manup with a screwdriver; you can’t send up a man witha new rack of line cards to plug in. You have got whatyou have got; it is locked and loaded.To that extent, satellite is always going to be pushedto the margins. It is always going to go somewherewhere you have a special community that can’t getthat level of service anywhere else. Equally, because asatellite takes five years to build and repays its capitalinvestment over the next 15 years, you are lookingat something that could be up to 15 to 20-year-oldtechnology. Again, that only gets used by people whoprobably have no choice to use anything else.Chris McLaughlin: I think we are very enthusiastic,and you must forgive us because as satellite peoplewe don’t get to talk to you very often, so bear with us.Essentially, a satellite is built for a purpose, whether itis obviously earth observation, or it is broadband asin Avanti’s case, or it is mobile communications for

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Inmarsat, everything from Haiti and Louisiana floodrecovery to things needed by the HerefordshireRegiment. So, lots of things to be done; lots ofdifferent purposes. Where satellite will help with yourspecific task is as part of the bridging, to MrSheridan’s point earlier: how do you touch areas thatare never going to be connected up with fibre? Maybesatellite of a community can help you.

Q209 Chair: Essentially, the limitations you aredescribing mean that satellite is not really going to beable to compete with other means of broadbanddelivery if they are available, but if you are in theOuter Hebrides and it is 1Mb off a satellite or nothing,then you are going to be happy with 1Mb from asatellite?Rupert Pearce: I 100% absolutely agree with you, andthat is true whether you are talking about mobileservices or whether you are talking about fixedservices, this being pushed towards—Chris McLaughlin: The sales pitch.Rupert Pearce: This is our poster child.1 This is ahalf a megabit per second data and simultaneous voiceterminal. The BBC use this a lot, for example; plonkit out there in North Africa, point it at the sky and youare away. I use it in my home, which has no terrestrialmobile coverage, and it works very nicely.I think satellite works in combination with othertechnologies at the fringe. It works to backhaul remotebase stations. If you plonk a base station down in avillage, satellite is a very good medium forbackhauling that back into the network, into theterrestrial network. Satellite operates beyond thatwhere someone won’t build a base station becauselogically you have very few people, because theeconomics don’t work for the person thinking aboutputting in a terrestrial network.The differences between satellite and terrestrial aregetting smaller. The next generation of satellitetechnology is faster. It can serve more people withmore power being harnessed. Our technology, with thesame amount of spectrum that we have always hadover 30 years, each generation of our satellites hascarried significantly more than the capacity of theprevious generation. That has been a huge investmentin technology. We have gone from one global beamcovering a third of the globe to each satellite nowhaving 250 spot beams. As these satellites get morepowerful—they are pretty much as large as they canbe now because we can’t find a rocket to push upbigger ones—we are innovating all the time in termsof what you put on the payload, but we are alwaysone step behind terrestrial technology somewhat bydefinition.One area that is particularly exciting is Europe.Europe has imported from the United States, theconcept of a hybrid network. The EuropeanCommission has engaged in a pan-European-widepolicy here. They have handed out two licences, oneto Inmarsat and one to a company called SolarisMobile, which is a joint venture between SES andEutelsat. This is a licence in the S band to deploy ahybrid satellite and terrestrial network,1 Note: Witness held up Inmarsat’s BGAN terminal to the

Committee.

complementing each other and fully integrated witheach other. The idea is that you can deploy a satellitenetwork with a complementary terrestrial networkwrapped around it. When the terrestrial network goesdown you have satellite ubiquity, but when you get tothe edge of coverage of a terrestrial network you thenhave a fully integrated satellite capability. That isquite an interesting concept because the idea is thateach network plays to its strengths, but most of allthat the mass market economics of terrestrial can beshared with satellite so that the satellite users can geta better service, access to better technology, and asmaller, cheaper handset or device for broadband.That is something that is going to be deployed acrossthe European Community over the next decade.Chris McLaughlin: The handset we have just passedaround is a joint little illustration. It is a BlackBerry-sized normal phone, which may have multiple bandcapability, and then the shoe around the outside of itis to make it Inmarsat or ATC or CGC compatible.Rupert Pearce: That in the context of this networkthat the European Commission has licensed us todeliver in terrestrial mode would be exactly like aBlackBerry or an iPhone, in satellite mode woulddeliver about half a megabit per second, so not truebroadband but not too shabby either.

Q210 Jim Sheridan: That is not a new iPhone 5, isit? No.Rupert Pearce: Some will speculate that these devicesare going to get bigger, not smaller.

Q211 Louise Mensch: That feels like 20 years old.Rupert Pearce: I know. It is retro chic, as you say.

Q212 Louise Mensch: You are not selling satellite tome hugely much, if I may say so, by your veryhonest—Sir Humphrey Appleby might even havecalled it courageous—description of satellite’slimitations in your last answers, because you basicallyappear to say that satellite is a very weak provider. Ittakes five years to build a satellite; it cannot then bechanged or altered at all, so you have got what youhave got, that is it. Presumably there is also limitedreal estate up in space in terms of the orbit of the earthand how many satellites we eventually stick up there.Once you have new generations they have to competewith, as you say, these massive monoliths the size ofa bus that you are sticking up now, which will beobsolete in a few years. Yet the benefit of satellite isthat it refreshes the parts that other networks cannotreach and that we need it, therefore, to run onmaritime operations and airlines.It does strike me that you are in a world of pain if theterrestrial networks develop technologies such that itwould make it more cost effective, which is now notcost effective, for them to reach the last 2% ofcoverage that they cannot reach, where at the momentsatellite is the reasoned alternative. What happens tothe satellite business if these technologies expand andthe terrestrial operators find ways to reach the OuterHebrides that are somewhat cost effective or at leastthey are willing to absorb as part of the price of doingbusiness? We heard from Vodafone an innovativetechnology that they are coming up with, which only

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works if you have broadband, where you plug a littlecell into your broadband thing and it will deliver you5-bar coverage in your house, which would be veryuseful in my house with its ancient thick walls in ruralNorthamptonshire that does have broadband butdoesn’t have any phone coverage. What happens tosatellite provision and, as a corollary, the harmonisedspectrum that you reserve to yourselves if theterrestrial guys can come to us and say, “Okay, it isthree years down the line, we are now capable ofgiving the Shetland Islands coverage. You don’t needsatellite any more. Can we have our harmonisedspectrum back?”Rupert Pearce: Well, you are talking about a part ofthe industry that is not where Inmarsat is present. Ifyou look at our business, I agree with your assessmentand I think consumer broadband by satellitepropositions are at grave risk of technologicalinnovation on the ground and terrestrial networksexpanding their coverage to compete more effectively,more efficiently for the particular customer. That isundoubtedly the case. What we do is we serve mobilecustomers and our business, a very large part of ourbusiness, is not affected by terrestrial deployments forthe simple fact that something like 50% of ourbusiness is maritime. We serve people at sea; we servethe aeronautical industry. The next innovation that weare bringing to a seatback near you is aero-passengerconnectivity to the back of an aircraft so that you willbe able to get voice and data services in your seat toyour own device. You won’t have to use the in-flightentertainment any more. Where we are on land, weare serving distinct communities like Government,military, aid agencies, media, first responders, peoplewho are dealing with the world where there are nonetworks or the networks are down because there hasbeen an emergency event or some kind of terroristoutrage or something like that. By definition, we areproviding them with something that is completelynovel and innovative that they can’t get anywhereelse.Chris McLaughlin: You are actually spot on in yourquestion, as Rupert says. There are two sorts of thingsto think about in your Committee here. The first is cansatellite bridge the broadband gap to remotecommunities? The answer is at the moment throughAvanti and through other solutions, Eutelsat, yes.Inmarsat has never been in that business because weare just in a particular area of global service withglobal requirements. We are disaster recovery. Wherewe would ask you to consider is that we have seen alot of mobile networks around Europe especially inthe last few years pushing to try to cut into satelliteallocated spectrum for the benefit of the Europeanconsumer. For example, WiMAX, we had a problemwith C band, which is used to control our satellitesand which it seemed perfectly reasonable to the EUthat C band spectrum should be redesignated forWiMAX without a thought for interference with thecontrol of our satellites, which were put up there manyyears ago.Separately, we see a logical evolution at Inmarsat. Wesee ourselves moving towards Ka band with the $1.2billion investment we have done for Global Xpresstaking us from half a megabit to 50 megabits. Equally,

we see that the Vodafones and the others needspectrum, I think it was fairly clear this morning,although perhaps a little bit unfair to Mr Watson, the$346 million debate that went on, but the questionreally is what did your spectrum cost for the original2G stuff and when are you going to get off the original2G stuff? In Inmarsat’s case, we have never had morespectrum than we have in the L band, approximately33 MHz or less.Rupert Pearce: The whole band is 33 MHz and wehave about 20%2 of that, because we share it withall the other MSS operators around the world.Chris McLaughlin: The emphasis on our entirebusiness has been on getting ever better performanceout of our equipment. This is an aside but I heard thismorning that so many people are on 2G that they arenever likely to want to be moved. I think the answeris the other way round. If the 3G network was there,they would get a 3G phone, and so there is a chickenand egg element to it. In our case, we have had tolearn to move within our small spectrum constraintsand get better services each time.

Q213 Louise Mensch: This comes back to myquestions here. You are worried as a satellite networkthat mobile operators are asking for your Kafrequency to provide backhaul services. You areworried that the harmonised spectrum that you need,because you provide a global service and it has to beharmonised spectrum, is going to be cannibalised bythe overweening necessity to have mobile coverage.Are you worried—and this will go to both sets ofwitnesses—that the demand that is growing all thetime for mobile services is going to increase otherspectrum users? Is it going to shove you out of thepicture? Is that a general concern?Rupert Pearce: Mobile satellite services I think willalways be different because we are by definitionglobal and ubiquitous and we serve communities thathave particular communication needs. If you look atthe consumer broadband by satellite offerings, I thinkall I would say there is they are always going to be afew years behind terrestrial technology evolutionsimply because of the cycle of building satellites.Whatever is new and shiny in the terrestrial world isalways going to be restricted in coverage. Theproliferation of that technology deeper to the edge ofnetworks, to the edge of a country and to rural, remoteor even suburban areas, frankly, is going to take manyyears. Satellite will always have a role filling in thosenot-spots. There will be a constant evolution oftechnology. Satellite technology does not stand still.Next generation satellites are 100 times more capablethan the ones that came only six or seven years ago. Ithink from a public policy perspective satellite willhave a continual relevance to play at suburban andedge of coverage areas.

Q214 Louise Mensch: You might describe what youdo as a safety net, in terms of phone coverage aroundthe world with your funky little phone there, andpresumably I would use that if I was stuck in ruralJordan and I needed to make a phone call. I could use2 Witness correction: 50 %.

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your satellite technology to make that phone call in aplace that nowhere else could I receive coverage.Rupert Pearce: Correct.

Q215 Louise Mensch: But also because you provideservices on which the public relies, like maritime, airtraffic control and so forth, those services, yourargument would be, must be protected and becauseyou need harmonised spectrum frequency they mustbe protected by European regulators. I know that Ihave used broadband on American airlines whenflying in the States, for example. I am assuming youprovide that broadband or a satellite companyprovides that broadband.Rupert Pearce: Yes, that is us.

Q216 Louise Mensch: Are you, therefore, satisfiedthat the European regulators who regulate spectrumare taking into account the needs of the niche safetyplayers like yourselves who provide other mobile—Rupert Pearce: No, they are not.

Q217 Louise Mensch: What about you, MrHearnden?Stephen Hearnden: No, I don’t think they are and Ithink also, if there is a criticism of Ofcom, they seemto be reducing their commitment to the Europeanprogrammes. We don’t see as much activity now withOfcom, who represent the UK in the discussionswithin Europe on these and other matters. It is asource of concern that certain bands seem to be cededto the broadband community and there are activitieslike, for example, the services that Mr Pearcementioned that could suffer as a result of some of thechanges in legislation that come out of the EU.

Q218 Louise Mensch: You would urge Ofcom to bemore proactive in reserving a little space for non-mobile operators to use that harmonised spectrum onwhich your business is run?Stephen Hearnden: Yes.Rupert Pearce: You have a conflict between the ITU,the International Telecommunications Union, whichsets overarching spectrum policy. They allocate bandsto different types of services, which is an internationalglobal approach to managing spectrum. The conflict isbetween that and regional or even national regulators’desires to farm spectrum as efficiently as possible.When it comes to mobile satellite spectrum or satellitespectrum generally, there are clearly bands allocatedprimarily to satellite. The L band is a good exampleof that, Ku band, Ka band and C band. But there is afistfight that goes on at the level of the local regulatorwhen whatever the ITU says, whatever happens atWorld Radio Conferences in terms of spectrumallocation, individual regulators are pulling againstthis and looking to—

Q219 Louise Mensch: You recognise it would bemore profitable to use that for broadband—Rupert Pearce: Much more profitable.

Q220 Louise Mensch:—but your argument is thatthe public policy issue, the need for us to have this

global safety net, requires that regulators set profitaside and carve out a little niche for you guys?Rupert Pearce: This is at the heart of the duality inour relationship with Ofcom because Ofcom is one ofthe world’s leading regulators in terms of their freemarket, economist-driven orthodoxy, which would sayjust give all spectrum to the highest bidder. Weobviously would say that is great nine times out of 10,but one time out of 10 recognise that there arecompanies like Inmarsat and others that are providingimportant services to vital communities on a globalbasis and that if you turn around and salami sliceInmarsat 200 times in 200 different countries, thewhole business model ceases to make sense.

Q221 Jim Sheridan: I feel like an extra in Star Trekhere. With the technological advances with thesesatellites that are up there just now, will these becomeobsolete and, if so, what happens to them then?Rupert Pearce: We currently have three generationsof satellites flying and in a sense they represent 2G,3G and 4G in terms of their technological evolution.Our oldest satellites provide just voice services andlow speed data. Our most recent satellites do half amegabit per second to a laptop-sized terminal that wejust showed you and deliver 60 times thecommunications capacity of our prior generation. Thatis since 1990 all the way to today, so it is not a verylong period of time to see that kind of technologicalevolution. The older satellites support legacy services,just like 2G does not just switch to 3G overnight, butover time a satellite lasts about 15 to 20 years. Thething that kills them is not the fact that they have aredundant technology—you can usually find someoneto sell this old technology to—they just run out offuel.

Q222 Jim Sheridan: Do they sort of disappear to besatellites in the sky or—Rupert Pearce: You de-orbit them, which means youturn them to face deep space and say, “Goodbye”. Youhave to leave enough fuel to de-orbit them so you cando a controlled de-orbit. They don’t fall back to earth.They are sent to a satellite graveyard, which is outsidethe orbital arc where satellites are sent to die.

Q223 Chair: As the mobile operators come to usethe 800 MHz spectrum, how great a risk do you thinkthere is that their activities are going to interfere withother users?Stephen Hearnden: If you look at the 800 MHz bandbeing given over to, say, LTE or 4G, which is thetechnology that seems to be the technology that willbe chosen by the mobile operators should they besuccessful in the auction, there is a case wherepotentially a mobile base station operating at 800MHz could interfere with terrestrial DTT receivers, inother words, a broadcast receiver, a TV that somebodyhas in their living room. There are a number ofmitigation techniques that can be used and Ofcomhave recently announced a consultation on this matter.They have identified a number of differentinterference mechanisms that can be resolved byfiltering techniques and repositioning antennas and soon. They also are proposing to set up an organisation

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that will deal with any potential interference cases thatoccur. These cases could be at one level just asporadic, very occasional problem, very much like theproblem that you see today when if you are in a publicplace with a system like we have here and somebodyhas a GSM handset that registers, you get the“dit-dit-dit” noise that I think we are all probablyfamiliar with. That is at one level of interference.At another level of interference it is so great that iteffectively prevents you from receiving that TVbroadcast. They are the ones that concern the mobileindustry and the proposals are that the mobile industrywould assist in the payment of alternativemethodologies or mitigation techniques to resolve theproblem. At the moment, Ofcom are out onconsultation to that. The consultation is scheduled toclose by some time in early August. They havealready done some technical studies, which have alsobeen published, and currently the industry is lookingat these studies to see whether this is a reasonableattempt at trying to measure the amount ofinterference that will be caused. It is likely to be a fewpercent and probably there will be one or two peoplewho will be permanently affected and the mitigationtechniques are not sufficient, but it will be very, verysmall. In those cases, possibly the viewer would beencouraged to move to perhaps Freesat as analternative delivery or cable TV as a deliverytechnology, as an alternative to Freeview. But it isvery small and the industry does recognise it and theindustry is working with the regulator to try andresolve it.

Q224 Chair: You think Ofcom are on top of this?Stephen Hearnden: I think Ofcom are on top ofthat, yes.

Q225 Chair: Intellect represent a number ofmembers from the PMSE sector who have been vocal,I think it is fair to say.Stephen Hearnden: They certainly have, yes.

Q226 Chair: Do you think they have a serious case?Stephen Hearnden: I think Ofcom have done a goodjob, on balance, of recognising that PMSE pervadesan awful lot of our lives in terms of entertainment,outside broadcasts, and the industry is vital if we areto get effective communications. Without PMSE therewould be no Olympics, effectively, so it is a veryimportant sector of the community. We don’t representthem, but we do recognise that they are an importantgroup of people. The methods that have beensuggested and adopted by Ofcom for moving themfrom channel 69, as we call it, down to channel 38 Ithink has been a fair and reasonable compromise.With the part funding of the new equipment wherethat equipment can’t tune down to the new frequency,I think that has been a fair and equitable solution forthe greater good of delivering mobile broadband as apublic policy objective.

Q227 Chair: Turning to Inmarsat, are you confidentthat Ofcom are fully taking your interests into accountin what they are proposing?

Chris McLaughlin: We have had some fun andgames, to put it mildly. Ofcom seems to be sufferingfrom a need to change. It is not too much of a secretto say that they have always seen themselves as theguardians of the consumer in the UK and nowhereelse. They have struggled, shall we say, to think abouthow they could also be the guardians of leadingBritish industry that operates with spectrum. Now,there is hope because they have expressed to usprivately the view that they would love Governmentto change their remit to enable them to also givesupport to business. Clearly, that is not for us to begfor here, but I just mention it.I think that one of the challenges we have is thatOfcom in the past has seen itself as a facilitatorwithin, if you like, the European tent, the Europeancamp. Spectrum has become an issue within Europeover the last Hungarian Presidency and it is going tobe a key output, as it was described to me, of thePolish Presidency. Their intention is to make aEurope-wide spectrum policy to be in place before theWorld Radio Conference in 2012 so that there will bea European alignment. From our perspective, the lastWRC was spent defending the C band links. Mycolleague has reminded me I misspoke. I said WiFi; Iof course meant WiMAX. I am also feeling like anextra as well. I am sure you picked it up, Mr Sheridan.We would like to feel that in these negotiations Ofcomis tasked with thinking about the business end of UKand the growth prospects that have been identifiedboth by this Government and the previousGovernment with regard to space.Rupert Pearce: I think, just to add a little bit on that,two things. First of all, I have to personally pay tributeto Ofcom’s great support to Inmarsat internationally,so it is not black and white. We have seen themmobilise teams tremendously powerfully to support usoverseas, most notably in the United States where ourL band spectrum was under attack from the FCCthrough their support of hybrid networks in NorthAmerica. It was through the support of Ofcom that wecame out with a very strong position there andsustained our business and, in fact, were able to enterinto a joint venture to provide ATC services in NorthAmerica. We had a lot of support from Ofcom there.Ofcom are also in the vanguard of supporting us inthe S band for next generation networks as well andhave developed a very solid, balanced regime for thedeployment of terrestrial services in the S bandcomplementing a satellite service. They have an AIPapproach for us there that for us is innovative andworks and actually can build with our business, so Ipay tribute to that.Nonetheless, the two areas we do worry about is wedo feel that Ofcom is split between wanting to be theregulators’ regulator, proselytising new ways ofregulating outside the UK to its comrades there, asagainst wrapping itself in the Union Jack andsupporting British business out there in the rest of theworld. Domestically, we feel uncomfortable with theeconomics-driven approach to spectrum policy, whichI think if that is the only approach and it is notleavened by public policy objectives as well andrecognising there are other businesses that can’tcompete for spectrum on the same basis as, say, a

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Vodafone or an O2, then over time businesses likeours will struggle to compete in the UK.Stephen Hearnden: Perhaps I could just add to that,and I agree entirely. I think Ofcom do a great job interms of delivering their requirements under theCommunications Act inasmuch as they are judged ontheir efficiency in terms of delivering what they calleconomic value. Economic value has served us verywell. However, there are some concerns that they arevery much geared towards the citizen consumer,which is nothing wrong in that, but the difficulty wehave as an industry is that we are striving to deliverinnovation and new services to the citizen consumer.The industry would like some sort of help and it isnot a pleading but what we are looking to do is totry and encourage Ofcom to strike a balance betweeneconomic value to the exclusion of everything elseversus the idea of recognising that some things don’tfall into that.A good example, which we made in our submission, isthat the emergency services are in need of additionalspectrum for the future growth of the emergencyservices, the blue light network. They are not in aneasy position to bid for spectrum on a pure auctionbasis. Similarly, other public sector needs are notadequately covered because under economic valuethey have to pay the full market rate and there needs,I think, to be a recognition. If the CommunicationsAct is revisited by Government, by Parliament, overthe coming two years, as Jeremy Hunt has indicatedmay be possible, then I think it gives Parliament theopportunity to look at that to see whether or notGovernment can assist these sorts of players in themarket and ensure that they are protected for theirlegitimate needs, which they would find difficult todeliver.Chair: That, I think, brings us quite neatly toDamian Collins.

Q228 Damian Collins: We have not discussed somuch in our public sessions so far but we are debatingthe use of public spectrum and the amount ofspectrum that is reserved for public use, particularlyfor the military, which does seem to be a great deal ofthe spectrum available. You said that we would nothave the Olympics but for white space, but we areseeing some of this military space as well that hassuddenly become available. How much spectrumshould the Government be releasing in order tomaintain a balance between the public need and alsothe public demand for increased commercial services?Stephen Hearnden: I think there is a good case forreleasing some of the under-utilised spectrum that isheld by MoD, CAA and other parts of the publicsector. However, the release of it, as we found in ourdiscussions with MoD, is not easy. We have beenworking with them. We provided a demand forecastlast year for them, which was an industry-collatedinput of where we saw the value of which pieces ofspectrum should be released first. The biggest benefitin releasing that spectrum is the spectrum that canbe harmonised within Europe. Harmonised spectrum,spectrum that is available not just in the UK but isavailable in Europe as well, and ideally globally, isworth a considerable amount more money because

harmonised spectrum commands a bigger premium interms of the volume of equipment that can bedeveloped and the cost of that equipment comes downand the innovation goes up. We have identified severalbands that we would like MoD to see about releasing,but we do recognise that in times of war and terroristthreats that spectrum may have to be clawed back foruse in the event of a national emergency. Whether 500MHz is the right number, which is the figure that hasbeen quoted, that seems to be a number that probablycame out of the US. It was part of PresidentObama’s statement.Whether it is 500 MHz or 300 MHz, what we see isthere are a number of bands and we have put an orderdown of those bands that we would be very happy asan industry to work with Government towards thatrelease in a timely and efficient and cost-effectivemanner. One of the things we are a little bit concernedabout is that Ofcom are quite a long way divorcedfrom that process, because in the release of spectrum,with respect to Government, they don’t have a lot ofexperience of releasing spectrum; Ofcom do. Thepitfalls and minefields of developing auctions thatdon’t result in litigation and judicial reviews are quiteimportant. We would encourage Government andOfcom to work more closely together to the release ofthis spectrum.

Q229 Damian Collins: From what you said, itsounds like there is a good degree of untappedpotential.Stephen Hearnden: Yes.Damian Collins: That is straight forward. Thank youvery much.

Q230 Chair: Just before we finish, can I just put onequestion to Raj? Putting on your previous hat, I thinkyou were at BIS before you went to Intellect?Raj Sivalingam: BIS, yes.

Q231 Chair: You will be aware that theresponsibility for spectrum policy has moved fromBIS now to DCMS. As a now more detached observer,do you think that that has any implications? Are youconfident that DCMS is going to be able to take onthis role?Raj Sivalingam: I think, to be fair, that caused quitea bit of concern within industry. I think that is quitewell known. We are very keen. We had an establishedrelationship with BIS and that is not the case withDCMS, certainly in the communications marketenvironment. I think we are reaching out, shall wesay, to build those relationships and certainly I thinkthere is a willingness. In fact, the mobile broadbandissue has helped heighten the importance withinDCMS, but I think there is some way to go. Certainly,I think we are working very hard to build thoserelationships with DCMS to do that.

Q232 Chair: Does anybody have anything to add tothat?Chris McLaughlin: I think the only observation, if Imay, is that in the move across I have noticed anumber of civil servants from the BIS have moved

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Ev 36 Culture, Media and Sport Committee: Evidence

28 June 2011 Rupert Pearce, Chris McLaughlin, Stephen Hearnden and Raj Sivalingam

across and so there must be some continuity betweenthe parties there as well, so that is encouraging.

Chair: Good. I thank you very much.

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Culture, Media and Sport Committee: Evidence Ev 37

Tuesday 5 July 2011

Members present:

Mr John Whittingdale (Chair)

Dr Thérèse CoffeyDamian Collins

________________

Examination of Witnesses

Witnesses: Ed Vaizey, Minister for Culture, Communications and the Creative Industries, DCMS, and SimonTowler, Head of Broadband Policy, DCMS.

Q233 Chair: This is the third session of theCommittee’s inquiry into spectrum allocation. I wouldlike to welcome Ed Vaizey, the Minister for Culture,Communications and Creative Industries, and SimonTowler, the Head of Broadcast Policy at DCMS. MayI first of all apologise for keeping you waiting. Therehave been one or two things going on elsewhere inthe DCMS remit, which has kept us busy.Ed Vaizey: I quite understand, Mr Chairman.

Q234 Chair: We now give our full attention tomatters concerning spectrum. Can I begin by saying,Minister, that you already had a pretty substantial brieffollowing the election—with responsibility for thecreative industries and broadcasting policy in themedia—and you now have a huge extra responsibilityfrom BIS concerning the whole of the spectrumallocation, as has the Department. Are you confidentthat you are going to be able to cope with this andthat your officials can?Ed Vaizey: Mr Chairman, I have had the responsibilityfor communications from the beginning of theformation of the Government, when I was appointedas a Minister. I was initially the Minister for Cultureand Heritage for 24 hours, and it was discovered thatthe communications Minister had a conflict of interest,so I gave up heritage and took on communications. Ihave found it a very smooth transition. Jeremy Huntand I, to a certain extent, shared the communicationsbrief as DCMS spokesmen in the last Parliament,covering issues to do with mobile phones, notunrelated to the fact that Ken Clarke at that time hadthe shadow BIS portfolio. So I was pretty familiarwith the issues already and I feel confident that I cancope with them within, as you quite rightly point out,my astonishingly large portfolio and workload.

Q235 Chair: And in terms of DCMS officials,obviously this represents a significant expansion in theresponsibilities of the Department. Are you sure thatthe Department can cope?Ed Vaizey: Basically, most of the officials responsiblefor spectrum in BIS have moved over to DCMS. I wasa joint BIS Minister with responsibility forcommunications, with officials reporting from BIS tome, and I have moved those responsibilities over toDCMS, which has simply meant that I have stoppedbeing a BIS Minister. At the same time, thoseofficials, the relevant officials, have moved over toDCMS, and it has been a pretty smooth transition,I think.

Philip DaviesMrs Louise Mensch

Q236 Chair: So essentially, it is the same officials,the same minister. The only person who has had totake this on is the Secretary of State, who obviouslynow is responsible, whereas previously it was theBusiness Secretary.Ed Vaizey: That is correct. The Secretary of State forDCMS obviously had a responsibility for broadband.That was decided again when ministerial portfolioswere being handed out at the beginning of theGovernment, but he now also has responsibility forspectrum, which he did not before, which was as yousay, the responsibility of the Secretary of State forBusiness.

Q237 Chair: With a lot of our inquiries focused onissues relating to broadband, arguably it is probablymore sensible to have the two under the sameSecretary of State. You could say it was pretty odd toseparate those to begin with.Ed Vaizey: I think that is a very fair point. I think thatthe rollout of broadband and fibre is very relevant tomobile telecoms as well. What people forget is thattelecoms operators do not just rely on the masts. Theyrely on the pipes that go to those masts—what isknown as backhaul. It should be joined up, andobviously as we have said again and again in terms ofour broadband rollout plans, they are technologyneutral and there will be a mix of solutions, fibreobviously being the main one, but satellite, and alsomobile, being a very important part. I think I wouldconcur that joining them up is a sensible approach.

Q238 Dr Coffey: Just before I move on to the nextquestion, Mr Chairman, can I just ask a generalquestion. We understand that the Ministry of Defencetakes up about 30% of the available spectrum between300MHz and 3GHz, and often it is a case of, “Weneed it just in case”. What is the Government’s policyon moving to liberalise some of that spectrum?Ed Vaizey: We set up quite a detailed programme atthe time of the last Budget. We published a documentsetting out our proposals to free up public sectorspectrum. We have set ourselves a target to release500MHz over the next 10 years, which is a veryambitious target. Obviously, quite a lot of that comesfrom the Ministry of Defence, but there are also otherrelevant Departments such as the Home Office and theDepartment for Transport. Quite a lot of work wasdone under the last Government. It got to a certainstage, as it were, in terms of identifying, as far as theMinistry of Defence is concerned, the kind ofspectrum that needs to be released. Now we need to

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Ev 38 Culture, Media and Sport Committee: Evidence

5 July 2011 Ed Vaizey and Simon Towler

do much more technical work in terms of internationalobligations and equipment. But we are confident thatwe can get spectrum out, and it leads to the widerpoint, which I suspect will be reflected in your report,which is that spectrum has now become thisextraordinarily important resource for UK plc, if I canput it in those terms, for driving the economy forwardwith a plethora of mobile data needs.

Q239 Dr Coffey: We have had various bits ofevidence from some of the operators and externalbodies, and it is a recurring theme that has come upin debates, but what discussions have you had withthe Treasury about the expected financial returns fromthis spectrum auction?Ed Vaizey: We have not had discussions with theTreasury about the expected financial return. We workwith the Treasury in terms of a joined-up approach tothe auction, so I work with Lord Sassoon. He and Ihave occasional joint meetings to discuss these issues,but as is quite well known now, the regulationsdirectly surrounding the use of spectrum are prettyclear. The point about getting spectrum out is aboutcompetition and the effectiveness of the services, notsimply an auction to raise as much money as youpossibly can from it, and the Treasury understand that,as do we. So we are looking at a range of factors, notleast a competitive mobile environment and a numberof companies who are able to provide a good serviceto the consumer.

Q240 Dr Coffey: So over the next 10 years, I thinkit is, or eight years, the Government have set asidejust over £800 million for investment into broadband,so £530 million in this Parliament. Will any of thefinancial returns be used to recoup that money or ringfenced for broadband in the future, perhaps for thingswe might have missed?Ed Vaizey: From the auction? No, the auctionproceeds of spectrum go into the Consolidated Fund,so they could be used for anything. They could begiven to the Arts Council, if the Treasury was sominded.

Q241 Chair: Have you put that suggestion to theTreasury?Ed Vaizey: Not yet. I thought about it this morning,when I was rehearsing in my office.

Q242 Chair: You might get a fairly dusty response.But that does raise a very important question abouthow strong a voice the Treasury is in this process.Ed Vaizey: I think the Treasury is a strong voice inpretty much every process. No, I think the Treasury iscontent to see this process play out. There would notbe any pressure from the Treasury to say, “You haveto engineer the auction in a certain way to maximisereceipts”. The Treasury’s focus, in my dealings withLord Sassoon, is on getting the auction up andrunning, getting the spectrum out there andmaintaining a competitive environment for themobile sector.

Q243 Chair: How do you view the potential conflictbetween getting maximum revenue return to the

taxpayer, and promoting competition and thereforebenefit to the consumer in the mobile telephonyindustry? Do you regard those as of equal importance,or do you think one is more important than the other?Ed Vaizey: The way I have approached it as a Ministeris to put my focus on competition, making sure thatwe have a competitive mobile environment, which hasbenefited the consumer in the UK in terms of lowerprices and better services. It has not been onmaximising revenue. I do not think there is aparticular tension; certainly there is a happy mediumbetween an auction that will extract the maximumamount of money from bidders and one thateffectively allows people to get the spectrum for free.I think that the Ofcom proposals, as they stand at themoment, strike that happy medium.

Q244 Philip Davies: Arqiva, in their evidence to us,said that the premise of spectrum auctions might bebecoming outdated. It said that, “As networkinfrastructure is increasingly shared, and with futuremobile technology supporting carrier aggregation, andtherefore pointing the way towards spectrum sharing,competition is increasingly focused at the servicelevel. So there is a risk that while the proposedmethod of spectrum allocation promotes competition,Ofcom may be engineering an outcome that may notreflect where the market of its own volition isheading.” Do you disagree fundamentally with that?Ed Vaizey: I never disagree fundamentally with acompany like Arqiva. What I would say is that thereis obviously a range of ways you can get spectrum outthere. One is an auction; another is what is known asa beauty parade, where you effectively assess thequality of the bids. That perhaps goes back to theChairman’s point about revenues versus competition,as it were. Certainly an auction is better for creatingthat competitive tension that will ensure that people atleast pay market value for their spectrum. Arqiva’spoint is perhaps that we are on a journey where, ascompanies become more established and theimportance of coverage and capacity increases, wemight get to a system where you move towardsdifferent ways of allocating spectrum. We began theprocess of establishing mobile phone operators,effectively, by allocating spectrum. We then moved toan auction system with the 3G auction in 2000. I thinkan auction system is the right system to auction thespectrum that is becoming available, but things maychange in the future. I don’t know, Simon, whetheryou want to add anything to that point about auctionsversus beauty parades, as it were.Simon Towler: Just a very quick addition, to say thatthere are, as Ed just said, certain circumstances inwhich different approaches may be possible.Particularly where you are looking at public sectorbodies or blue light services, there may be concernsabout their ability to bid against commercial playersfor the spectrum they need, so you may need to lookat different circumstances. That is the focus of thecommunications review and the views of theCommittee in your report will be extremely valuableas we move forward.

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Culture, Media and Sport Committee: Evidence Ev 39

5 July 2011 Ed Vaizey and Simon Towler

Q245 Philip Davies: Will the Government, certainlywhile you are the Minister, keep four operators? Isthat an absolute line in the sand—that you would notallow anything to happen to allow any consolidationin the market; that there need to be at least fourcompetitors out there?Ed Vaizey: No. But I will answer this questioncarefully. Obviously, the auction is designed tomaintain the four competitors who are capable ofbeing national wholesalers, that is, effectively runninga national service. But it is quite clear from Ofcom’sconsultation, that it is agnostic about who those fourcompetitors would be, in the sense that somebodycould come into the auction and get the spectrum androll out a service. Obviously, I support a competitiveenvironment, but there is nothing to say that therecould not be consolidation in the industry in thefuture. That is not a policy point, it is simply areflection of how the market works. We had a mergerbetween Orange and T-Mobile just before the lastelection, and that was subject to the normalcompetition regulations, and it has resulted in themerger being cleared subject to some spectrum beingmade available by the merged entity. I can have aphilosophical view that four mobile operators is agood thing, but that does not mean that there will notbe consolidation in the industry.

Q246 Philip Davies: What do you say to the peoplewho claim that the decision to liberalise the 900MHzand 1800MHz licences could be characterised asstate aid?Ed Vaizey: One of the things that I have learned in thisjob is the amount of try-ons you get from telecomscompanies. I am amazed that they do not litigate onthe basis of what tie Ed Richards is wearing when hemakes an announcement. The state aid has been triedin France and failed, and in terms of the liberalisation,we were following the law. Liberalising 900 and 1800was required by a European directive. We wererequired to liberalise that spectrum to provide 3Gservices, and that has benefited all the competitors;Vodafone and O2 in 900 and Everything Everywherein 1800. Obviously, Three has something to say aboutthat because they do not have either of thosespectrums, and their USP was that they had 3Gservice at 2.1. As for the state aid point, which isO2’s point about the spectrum floor, again I think thatargument is flawed, in both senses of the word. Weare entitled to set out rules for how people get hold ofspectrum and the rules surrounding that and as I say,I do not think it is an argument that is going to getvery far.

Q247 Philip Davies: Did the Government considercharging O2 and Vodafone for using the 3G serviceson the liberalised 900 licences?Ed Vaizey: We are going to charge them. We chargea licence at the moment and Ofcom, once the auctionis out of the way, will review the charges for thoselicences. The point there is, at what point do yourevise the licence fee? Do you revise it now, in whichcase you are slightly sticking your finger in the air anddeciding a price, or do you revise them after theauction, when you have a much better idea of the

current market value of sub-1GHz and over-1GHzspectrum. At that point, you can then have a properevaluation of what a market licence should be for thatspectrum. We are going to charge them for it.

Q248 Mrs Mensch: I am going to ask you about thebeauty parade concept, which I like very much as animage. What is the Government’s position onharmonised spectrum that cannot be competed forproperly in the open market by satellite operators, sothey provide coverage of last resort? We heardevidence last week from a satellite operator that itprovides mobile coverage around the world in placeswhere nobody else can reach. It is the Carling BlackLabel of mobile phone operators, but it needs thatharmonised frequency in order to do it. Of course,maritime communications and others are entirelyreliant on satellite operators for their communications;they cannot afford to pay the same market rates forharmonised spectrum. Do the Government have aposition on this as a public service versus cost-benefitpart of the auction?Ed Vaizey: I am struggling with the Carling BlackLabel reference, Chairman. Heineken reaches theparts that others beers cannot reach, so I assume—Mrs Mensch: I am a non-beer drinker.Ed Vaizey: Mrs Mensch, you were groping for aHeineken reference but I can’t remember what theCarling Black Label strap line was. Simon, what isyour view on Mrs Mensch’s statement, since you havepassed me a note that I am not sure I fully understand?Simon Towler: The satellite bands, the bands ofharmonised spectrum, are agreed at the InternationalTelecommunications Union, and we participate fullyin those discussions. So it is a question of the UKGovernment participating in the discussion to ensurethat there is spectrum available for satellite operatorsin those areas.Mrs Mensch: Thank you.

Q249 Dr Coffey: Building on that, I felt the satelliteoperators had suggested that the EuropeanCommission had almost been cavalier, not realisingthe impact on them. That is the impression I took fromour evidence session a couple of weeks ago. Theywere just nervous that they almost seemed to beforgotten.Ed Vaizey: I don’t understand the insecurities of thesatellite industry. We have a very successful spaceindustry in this country. I have the international spacecentre in my constituency, so I have a special interestin it anyway. But satellite cannot provide the kind ofcapacity that mobile phone companies can provide, orindeed fixed-line broadband is going to provide, interms of data. But it is there as a complementarytechnology, particularly for the parts that are difficultto reach. But the satellites that have recently been putinto orbit to cover European communications do nothave the kind of capacity that we are going to need.The fundamental point, and I think it is part of theOfcom consultation, is that the spectrum that is goingto be auctioned and is bid for and bought bywhoever—the main mobile phone companies andpossibly others—is going to provide 4G capacity forthe majority of the population. But there is certainly

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Ev 40 Culture, Media and Sport Committee: Evidence

5 July 2011 Ed Vaizey and Simon Towler

an argument about what one does about spectrum thatis not used by the mobile phone companies, simplybecause it might not be economic to put in place theinfrastructure to use that spectrum, and whether or notwe can make that available to other operators who areprepared to use it. There is an element of—we haveput in place trading rules for spectrum. Whether ornot that is relevant for, as it were, unused spectrum inuneconomic areas, or whether the trading system willdevelop in a different way, is also another question.That to me is what needs to be looked at; how youencourage the use of unused spectrum once mobileoperators have, as it were, put their networks together.

Q250 Dr Coffey: There is currently a duopoly on thesub-1GHz spectrum, Vodafone and O2 have the900MHz band. Clearly there is an opportunity; wouldOfcom be within its rights to say, “Actually, Vodafoneand O2, you are not going to get either any 800MHzor the smallest amount possible, to allow forcompetition”?Ed Vaizey: That is a tricky question to answer. WouldOfcom be within its rights? Ofcom could put forwardrules. It has not put forward rules, but it could putforward auction rules—I think, in theory it could putforward auction rules, Simon will kick me if I getthis wrong—

Q251 Dr Coffey: I should ask not whether it is rightbut whether it is reasonable.Ed Vaizey: I support Ofcom’s process. It is attemptingwith the auction process to make sure that everyonehas access to sub-1GHz spectrum. They recognise itsimportance and I think that that would be the outcomeof any auction. So that is a good thing, and I do thinkit is reasonable that there are four operators withaccess to sub-1GHz spectrum.Simon Towler: If I might add—Ed Vaizey: If you could just clarify.Simon Towler: It is absolutely right that the proposalsfrom Ofcom suggest—and we agree with it, we haveno reason to dispute that suggestion at all—that whatis required for the viability of four operators is amixture of both sub-1GHz and over-1GHz spectrum.The Ofcom proposals are designed to achieve thatbalance, and I think you have heard from just aboutall of the operators that some aspect of that balance iswrong. You might conclude that if they are all slightlyunhappy, the balance might just be right, on thepremise that you probably cannot please everybodycompletely.

Q252 Dr Coffey: You will be pleased to know that Iasked them about judicial review and neitherVodafone nor Telefonica seemed to have an appetitefor it, in public.Ed Vaizey: Good. We will see what happens. We hopethat certainly the operators do understand that this isa very clear and transparent process, and that Ofcomhas set out its proposals. It has had a full consultationand it will reflect on the responses and then set outthe rules. But I do hope that all the operatorsunderstand that the auctioning of spectrum isbecoming imperative for our economic growth. I hopethat they will reflect on that and the fact that they have

had a chance to put their views and Ofcom has hadthe chance to consider them and put forward rules. Ihope that the Select Committee will use its influenceand have discussions with them, should they chooseto go down a particular path.

Q253 Mrs Mensch: What is the Government’sthinking behind the imposition of a floor in spectrumauctions? It was an interesting evidence session in theSelect Committee last week, because we saw asignificant difference of approach between O2Telefonica and Vodafone. O2 Telefonica objected onlyto the floors on the auction and accepted the ceilingthat Ofcom proposed, whereas in contradistinction,Vodafone was quite happy with the floors, but did notlike the ceiling, thus perhaps leading us to believe thatO2 was quite happy for other smaller players to comein as owners of spectrum, whereas Vodafone wouldprefer a consolidation in the market. Given that thereis an aim to preserve competition, what is theGovernment’s thinking behind the imposition of thefloor in the auction?Ed Vaizey: I would like to stress, Mrs Mensch, that itis Ofcom’s thinking. So Ofcom has set out auctionrules, clearly, that are designed to maintain a fouroperator model, but also, importantly, to ensure thateach of those operators has the capacity to be anational wholesaler, i.e. run a national network.Therefore, the idea behind a floor is to ensure thatthey have a minimum amount of spectrum with whichthey can carry out that task, and the idea behind aceiling is to prevent people grabbing all the spectrumand therefore effectively knocking one of thecompetitors out of the game. So I am very much afloor and ceiling man.Mrs Mensch: Fair enough.

Q254 Chair: May I turn to the new rules that Ofcomhas announced, which are going to allow mobileoperators to sell some of their existing capacity? Wetook evidence earlier in this inquiry from EverythingEverywhere, which has taken over both the twoprevious operators who were essentially given the1800MHz spectrum. It is now keen to be able to sellit at a vast profit. Are you comfortable that the mobileoperators are going to make so much money on thebasis of what was a public asset?Ed Vaizey: I think there are a number of points tomake there, Chairman. First of all, while it is truethat the spectrum was effectively allocated to theseoperators, they have paid an annual licence for it, andthat was in effect the financial arrangement that weput in place in whenever it was—1991, I think—inorder to gain revenue, rather than an auction. It wasobviously the auction of 3G spectrum that turnedauctions into the norm. So we got revenue from thatspectrum and we have had it for 20 years.The second thing is that Everything Everywhere, O2and T-Mobile have invested an enormous amount inthis country—I think the figure they use is somethinglike £50 billion—and we are grateful for thatinvestment and the creation of British jobs.Thirdly, it remains to be seen what value EverythingEverywhere gets from the 1800MHz that it is goingto sell, because obviously any operator buying that

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5 July 2011 Ed Vaizey and Simon Towler

spectrum will know that it is going to be paying alicence fee for it, and not just the current licence feebut a revised licence fee because 1800MHz has nowbeen liberalised. So whoever bids for that spectrumwill factor that cost in. I think, all things being equal,I am comfortable with that process, but obviouslyEverything Everywhere can reflect on the fact that toa certain extent they have been able to get someincome from this and therefore will not perhaps looktoo horrifically at Ofcom’s proposals for the auction.

Q255 Chair: It is not just a question of getting someincome. On a rough calculation, the amount of moneythey have paid for that bit of spectrum over the timethey have had it comes out at £160 million, and theestimates of how much they are going to receive fora sale is £450 million. That is nearly a £300 millionprofit on something that they were given. Surely youcannot feel that that is entirely right.Ed Vaizey: Well, I watched the rough calculationbeing made in public in the Select Committee by MrWatson—Chair: Indeed.Ed Vaizey:—and I was impressed, but I am not surethat I accept the estimates. As I say, I think there area number of factors to be considered, not least the factthat anyone bidding for this spectrum is effectivelygoing to have to pay for it in enhanced licence fees. Icannot comment on the price, but I am comfortablewith the process.

Q256 Chair: You referred earlier to the Treasuryhaving a strong voice in everything. Are the Treasurynot going to be on the telephone to you saying, “Holdon a minute. How come we gave away something thatis now being sold off at a profit of around £300million?”Ed Vaizey: I wouldn’t say we gave it away. Weallocated it to an operator who then invested in anetwork that has benefited consumers and the UK, andfor which they paid a licence fee.

Q257 Chair: So they are entitled to make a profit?Ed Vaizey: I think they are entitled to sell thespectrum they have been allocated, yes.

Q258 Philip Davies: Can I just check on that point?It was a sight to behold Tom Watson, as it always is,wiping the floor with Everything Everywhere. I wasas impressed as you were by that, but if I could justpress you on the principle. If Tom’s back-of-a-fag-packet calculation turns out to be right and they dowalk away with a profit of £290 million, is the scaleof the profit not an issue to you? As far as you areconcerned, whatever they have paid, whatever theyget in return, whatever that happens to be andwhatever the profit at the end of it, you arecomfortable with it?Ed Vaizey: I am comfortable with the process. Wehave put in place now a system for trading spectrum,for example, and I think if people felt that they couldnot put spectrum on to the market—which is what wewant people to do to make sure that it is used asefficiently as possible—because the Governmentwould then come in and take the receipts, that would

stop trading in its tracks. As I say, I am not sure Iaccept the back-of-the-fag-packet calculations, but Iam not going to get into that. I am comfortable withthe system as proposed, yes.

Q259 Philip Davies: Whatever the profit it comesout with?Ed Vaizey: Yes.

Q260 Dr Coffey: Just moving on to coverage.Minister, you have been in several Westminster Halldebates and in the Chamber as well. I think in themost recent debate an impassioned plea was made toOfcom that it should raise its coverage expectationsfrom 95% to 98%. As part of its submission andevidence, Arqiva suggested that 99% should be goingfor a once-in-a-generation opportunity to reallyhammer it. In terms of asking for figures, I understandthat a figure of about £200 million to £230 millionwould be the additional cost of making the last fewpercentages—rather a lot of money, I accept. Do youthink we should be aiming as high as possible in thisauction?Ed Vaizey: To a certain extent, it comes back to whatthe Chairman was asking me about earlier, which isthe balance between getting spectrum out for thepublic good—the benefit of the country—and gettingsome money for the spectrum. A balance has to bestruck between auction receipts and the cost-benefitanalysis of 98%, 99% coverage. Coverage obligationsare always problematic because they areextraordinarily difficult to measure. You could have95% coverage, which could in effect be 98%coverage, depending on how many people are usingthe system, or it could be 85% coverage if a lot ofpeople are using the network. As you know, coveragewaxes and wanes depending on how many people areusing the network. So it is very difficult to measure,and I think that I am right in saying that the last timewe tried coverage obligations, it was very difficult forthe mobile operators to match it.So I think 95% is a realistic target, but I remain open-minded. I would like to stress, and I said in the debate,that this is a consultation and it is not just the mobileoperators who are entitled to make representations toOfcom; we all are as well. I think the debate, certainlyin the Chamber, was extraordinary in terms of thenumber of colleagues who appeared and wanted tomake the case for 98% coverage. Parliamenteffectively has passed a motion calling for 98%coverage; 100 MPs signed that motion. So Ofcom willhave heard what Parliament said. I don’t knowwhether I can quite say it is the will of Parliament,but certainly a very strong message has come out fromcolleagues about what they would like to see, and Ithink Ofcom will reflect on that.

Q261 Dr Coffey: You do not have a figure in yourown head of what you would like Ofcom to come outwith in the end, in terms of—Ed Vaizey: No.

Q262 Dr Coffey: In trying to get the coverage, therehas been quite a lot of talk about infrastructure, andinitially mobile network operators seemed to be

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reluctant to have open platform sharing within it. Sothey might hook up; Vodafone and O2 might sharesome masts and others might be starting to worktogether, but if you press them they seem to think,“Yes, if we are obliged to go to 99% we will have toshare”. In one way, from the outside you think that isa good thing—fewer masts, all concentrated—but oneof the key things is the backhaul to get the fibre fromwhatever to the masts. To what extent is ruralbroadband coverage really going to hinge on this ideaof the digital pump, the BT’s fibre network or otherpeople’s fibre network, which Broadband DeliveryUK money is being spent on as we speak?Ed Vaizey: I think the digital pump is a very importantpart of the process. Again, we are not mandating anyparticular technology or method to deliver thebroadband target. What we are trying to do is get themoney out to counties and devolved Administrationsto come up with solutions that are suitable for theirareas. The village pump is, I think, one of thosesolutions, which is effectively, as you say, to put apipe into a village with a cabinet from which you canthen run different technologies in order to deliverbroadband to a small community. But, as I say, thebackhaul network is going to be very important forthe success of mobile in any event. Simon, you arethe expert in this area. Do you want to add somepoints about the village pump and backhaul?Simon Towler: I think you and Dr Coffey have madethe critical point—you made it in your openingremarks and Dr Coffey has made it here—that inputting a high-capacity fibre connection intosomething like a street cabinet—the village pumpidea—you are putting fibre further out into thenetwork, you are putting in a point of connection thatthe mobile operators can also use to increasecoverage. The point that the Minister made at thebeginning was that the fibre programme also benefitsmobile coverage and the mobile industry, and that isthe interconnectedness of the different technologiesand also one of the reasons why we are technologyneutral in our approach.

Q263 Dr Coffey: Just building on that—I am afraidI am not following the script exactly; apologies tocolleagues.Chair: Off-piste.Dr Coffey: I am off-piste on this one. I think I raiseda few eyebrows a couple of weeks ago when I wassaying about this, “Isn’t it obvious then they canpiggyback on the infrastructure?” and a commentcame back—I can’t remember which person madeit—that effectively this is county-by-county build-upand they are not necessarily following the digitalpump idea, so they are just deciding what is bestcounty by county. So the original assumptions ofhaving a digital village pump may not actually beborne out in BDUK’s plans with counties.Simon Towler: Well, that rather depends. Surely thewhole point is that you design your networkappropriate to the circumstances of the coverage thatyou are trying to achieve. You do not specify aparticular solution as the one and only approach. It isnot to say that the village pump, the digital point ofpresence, is a defunct idea or changed. It is just that

they are working on a county basis to define localbroadband plans. In addition, in the hardest-to-reachareas a small fund, the community broadband fund, isgoing to be available of around £20 million,particularly targeted at the smaller communities, andI would say they are most likely to be the ones whoare going to be picking up and running with that idea.But I do not think that they will have a single conceptof exactly what that one village pump, one point ofconnection will be; that it will be based on a fibrepoint in the first instance.

Q264 Dr Coffey: The Government in their originalthing—I have taken the Secretary of State’s wordsalmost literally in my discussions in my community—was saying, “We will get fibre to every village,because that is the idea of the digital pump”. Is it fairto reflect on that now saying, “Actually, that mightnot happen. It will be whatever is needed that isappropriate to deliver broadband in Suffolk”? Myworry, a little bit, is that we will end up with peopleable to get broadband but they may only be able toget it from one supplier. They will not be able to goand, say, get Sky, Virgin Media or whatever. They willbe confined to Suffolk county broadband, if thatmakes sense, and I have a slight worry for consumersin that regard in terms of computers in their home. Iam slightly getting away from spectrum here, but it ispart of the same thing; is the consumer still going tobenefit from competition and choice?Simon Towler: That is part of the intention and it ispart of what needs to be built into local broadbandplans. You need to be building and offering somethingthat is going to be attractive to the over the top serviceproviders—the ISPs—so that they are going to wantto come in. If you are a small community project, partof the challenge is always going to be to provide theservice in such a way that it is attractive. That iscertainly very much on BDUK’s mind and somethingit is working actively to address through demandaggregation projects and things like that.

Q265 Dr Coffey: You already know my view of howimportant coverage is, and mobile broadband couldactually be a better solution for parts of thecountryside than fixed broadband, if you like, fordelivery of services. Sometimes local communitiesobject to the erection of masts, even though theymight deliver services. What action is DCMS takingwith DCLG to help with the erection of masts?Ed Vaizey: I will ask Simon to answer that specificquestion. Our relationship with DCLG is more, frommy perspective as a Minister, on the rollout ofbroadband fibre, so we have obviously spent a greatdeal of time focusing on passive infrastructureaccess—access to ducts and telegraph poles and thingslike that. We have worked, for example, with DCLGon regulations to ensure that new housingdevelopments are properly broadband enabled—orcodes of practice, I should say, to be more accurate.So in that sense the sharing of infrastructure is veryimportant. As far as I am aware, the issue of the sitingof masts and changes in any planning regulationsaround that has not surfaced, unless some discussionshave been happening at a different level.

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Simon Towler: Ed is absolutely right, we have a veryactive dialogue with DCLG on a range of issuesassociated with facilitation of the rollout ofbroadband, and that does include planning for masts.You are quite right that some people do not like them,either because they have concerns, well founded ornot, about the potential health effects, or simplybecause they find them ugly. Discussions are goingahead in the context of the development of theNational Planning Policy Framework betweenmembers of my broadband team and the relevantofficials in CLG. That is at the development andconsultation stage, so we are engaged with CLGofficials. They sit on the broadband deliveryprogramme board, so there is an opportunity to airwith each other interdepartmental concerns so thatthey can be addressed. In the Budget the Governmentannounced a strong presumption that planningregulation should not hinder the development ofbroadband deployment, so we are trying to ensure thatplanning regulation does not hinder broadbanddeployment, including mobile and masts, but as everwith all of these issues there is a balance to be struckbetween the rights of individuals and economicdevelopment needs.

Q266 Dr Coffey: The Government have already paidfor a lot of fibre to go to different parts of thecountry—to schools, to prisons and similar. I knowthat this is a perennial question, but what do you thinkis stopping mobile phone operators and others frompiggybacking on that network? There seems to be areluctance. They want their own fibre to gosomewhere as opposed to sharing somebody else’s.What do you think the barriers have been in theirminds to not using already established assets?Ed Vaizey: There should not be any ideologicalbarriers, if I can put it that way. I think the twobarriers were, first of all, confusion about whetherstate aid rules applied, that somehow you were gettinga hidden subsidy by using a network that had beenpaid for by the Government, the taxpayer. We haveclarified those rules, as far as I am aware, and there isno issue with state aid, but it is often what councilsbring up with us. The other reason is often pragmatic,which is that technically it is much more difficult thanpeople assume and sometimes the fibre is in the wrongplace. The classic question you always get is, if thefibre is running down the side of an A road so thatyou can put traffic signals up, why can’t it run to thelocal housing estate? Often there are technical orphysical reasons for that, but in theory, unless I amcompletely wrong, there should be no problem. Weare very much supportive of public sector networking.

Q267 Dr Coffey: There is no reason why phonemasts could not be put on top of those traffic signals,is there?Ed Vaizey: Yes, that is right.Simon Towler: You are right. You are getting to thelimits of my knowledge, but as technology improves,designs of masts change so that they are smaller, lessintrusive, require less power—all of those things.There are designs, for example, that fit on the top oflamp posts now, and so forth. So, as the need for

mobile data increases exponentially, what you will seeis a need for greater numbers of mast sites, but theywill get smaller and, again, that is balanced. There isan inverse relationship between the requirement formast sites and the requirement for spectrum. The morespectrum you have, the fewer mast sites you need; thegreater the density of mast sites you can achieve, theless spectrum you need for a given amount of data.

Q268 Mrs Mensch: Just a quick supplementary,Minister. I wonder whether your Department hastaken a view on the intriguing technological advancethat the Committee heard about last week, wherebybroadband fibres are used to deliver mobile phonecoverage by plugging a cell into a broadbandconnection, which then provides mobile phonecoverage in a limited area where there may not be amast. It may be a village of outstanding naturalbeauty—no mast, no coverage, yet people can have afive-bar service delivered via wired broadband. Thisseemed to me to be a very creative solution that wouldbenefit a number of villages in my constituency and Iwas wondering whether the Department was lookinginto it as a way forward for areas where there is hard-to-reach mobile phone coverage.Ed Vaizey: Yes, I think you are referring to femtocells,Mrs Mensch, which I have seen in operation inSwindon in the research laboratories of Alcatel-Lucent, which is based in Swindon. It was veryinstructive, by the way, to hear how a foreigncompany still wants to invest in the UK because ofthe quality of the people they can recruit, but that is aside issue. The only mobile company at the momentthat is using femtocells for the consumer is Vodafone.The other ones are using them for business, but theyare not rolling them out for consumers, which I findbaffling. I am in a similar position, I suspect, to youin the sense that I have to stand in the middle of theroad in my village to get a signal, and unfortunately Iam not a Vodafone customer.

Q269 Mrs Mensch: Vodafone told us that it wastrialling these cells for consumer use at the momentin various out-of-the-way villages which have wiredconnections but do not have good mobile phonecoverage. I presume that this is something that theDepartment would welcome were it to be rolled outon a wider basis.Ed Vaizey: We absolutely do welcome it, and wewould encourage other mobile operators to adopt thistechnology as soon as possible.Simon Towler: If I may add, as part of theconsultation document, of course, the more prosaicelement here is the low power device spectrum that isbeing made available, because there is still a spectrumrequirement. That is aimed at possibly promoting theuse of femtocells, so that would be a welcomedevelopment.

Q270 Chair: Can I come back to the issue of licencefees? We have already explored the windfall that itappears Everything Everywhere may be about toreceive from the sale of their spectrum. My colleaguePhilip Davies touched on the question of how muchthe two other biggest operators, Vodafone and O2,

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have been paying for their existing spectrum. Surelyby acknowledging that the price is going to go upsubstantially following the auction, that is anadmission that they have been underpaying ever sincethe liberalisation of that spectrum.Ed Vaizey: Yes, but the spectrum has been liberalisedeffectively only since December of last year, so theyhave been underpaying, if I can use your phrase,Chairman, for six or seven months. As I say, once weget the auction out of the way we will have a chanceto review those licence fees and they will be paying aproper rate. If you think that, if that takes 18 monthsthey have got away with it at a discounted rate, I amnot sure that I agree because there is a differencebetween passing an Act that says you can nowliberalise your spectrum and actually putting in placethe technical measures that mean you can takeadvantage of that liberalisation. So, again, I am notsure that Vodafone and others will have yet seen thebenefits, despite what their competitors say.

Q271 Chair: Nevertheless, that spectrum suddenlybecame more valuable, which is recognised in the factthat you are about to increase the price for it. Theybought a spectrum, originally, that was restricted tocertain things and then they got a free benefit when itwas liberalised.Ed Vaizey: Yes, they got the benefit because wecomplied with the European Commission directly,which required us to liberalise that spectrum, and theywill pay for it after the auction when we can put avalue on that spectrum, based on what the market wasprepared to pay for similar spectrum, and come upwith an appropriate licence fee.

Q272 Chair: Do you accept that the price they paymay well be double what they are paying at themoment?Ed Vaizey: I wouldn’t like to speculate.

Q273 Chair: But it does sound as if the three biggestoperators in this country, for different reasons, havemade a killing at the expense of the taxpayer.Ed Vaizey: I don’t think they have made a killing atthe expense of the taxpayer. I think they have beenpaying a licence for their spectrum that has been set atan appropriate level and, to be fair, has been reviewedseveral times. I think the last time it was reviewedwas in 2004. So they have been paying an appropriatelicence for that spectrum. That spectrum has now beenliberalised, which will benefit the UK consumer. Theconsumer will benefit from the investment thesecompanies have made, albeit they are not doing it forcharity, obviously. Once the auction is complete, wewill then know the value of that spectrum and Ofcomwill be able to consult and set appropriate licence fees.If it tried to do it now it could be subject to judicialscrutiny because, as I said earlier, it would be gropingin the dark for a proper value for the licence.

Q274 Chair: Can I also come on to the more generalquestion about the usage of spectrum. A lot ofattention is focused on the benefits for mobile datatransfer and so on, but we also heard last week fromInmarsat, who pointed out that they had spent a great

deal of money launching satellites and you cannot justgo up and tweak a satellite to change the spectrumthat it uses. Are you confident that existing users,particularly the satellite industry, are not going to bedisadvantaged by this?Ed Vaizey: As I say, I don’t think that the spectrumauction should disadvantage satellite users. I don’tknow, Simon, whether you want to—Simon Towler: I have no reason to believe that theywould be disadvantaged by the auction process.Ed Vaizey: It wasn’t an issue at the last auction, forsatellite users, and I am not quite sure what theirspecific concerns are. As I say, we regard satellite asan important part of the mix of technologies that willdeliver broadband to the consumers, but I think eventhe most fervent supporter of satellite technologywould acknowledge that it is not going to be a centraldelivery mechanism for broadband. It is going to becomplementary; it is going to fill in spots that aredifficult for conventional providers of broadband toreach.

Q275 Chair: Indeed, but we are talking aboutsatellites that are using spectrum not just for thepurposes of delivering telephone services. We aretalking about extremely important marine navigationaluse and that kind of thing.Simon Towler: Spectrum proposals will not interferewith existing services in the adjacent bands.

Q276 Chair: There has been some concern that theremight be some interference. You are pretty confidentabout it?Simon Towler: It would be a matter for Ofcom, in itsrole as the manager of the radio spectrum, to ensurethat that did not happen, but there is no reason tobelieve or suspect that that would be the case. It hasnot been the case with previous rounds ofdevelopment of mobile telephony and mobilebroadband.

Q277 Chair: Can I come on to another concern thatwas expressed to us, which is that Ofcom’s prime dutyhas been to look after the interests of the consumer.Yet it has not always been able to take full account ofthe interests of British business and the two might notalways be the same thing. Do you accept that theremight be an argument for widening the remit ofOfcom in that area?Ed Vaizey: Yes, I do, and that is why thecommunications review is important. I have not seenmany of the representations we have received sincethe Secretary of State, Jeremy Hunt, sent out his callfor evidence in May, but I suspect that one of theissues that will come up, particularly in terms ofspectrum usage, is that Ofcom could have a duty totake into account the interests of business. I am notexpressing a view on that, by the way, Chair. I am justsaying that that would be a legitimate argument thatcould be put forward, and we would reflect on it inthe Green Paper that we hope to publish at the end ofthe year.

Q278 Chair: Finally from me, the PMSE sector,which has occupied the attention of this Committee

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and others in the past; they remain concerned. Do youthink that their interests are being properly lookedafter?Ed Vaizey: I would hope that they are, Mr Chairman,genuinely. When I came in as the Minister, we hadthe issue of compensation for channel 69 equipment.We had a range of options from the Treasury, from aslittle as possible, to the industry, to as much aspossible, and I think we came down somewhere in themiddle. I was quite pleased that my submission to theTreasury was accepted, that we should give PMSEoperators more compensation than the bare minimum.Obviously, I am aware of a range of concerns aboutpotential interference and so on, but I think that weare moving them from channel 69 to channel 38. It isa more than like-for-like channel, so there is enoughbandwidth and spectrum for them to use newequipment. We have put in place a compensationregime. We are aware of the concerns about whitespace devices. There is a trial going on in Cambridgeat the moment, as you know, looking at white spacedevices and the impact they have on other devices. SoI would like to think that we reflect on their concernsand we act on their concerns. That is where I thinkwe are. Do you want to add anything, Simon?Simon Towler: I think that covers it fairlycomprehensively. The point and the reason why youare, very properly, holding this inquiry is that youhave a scarce resource with competing demands on itand you have to try to strike a series of very difficultbalances between different uses of radio spectrum,balancing public good, economic benefit and a rangeof other issues, and you try very hard to make surethat if you are changing use of spectrum theincumbent users are not unduly disadvantaged. Butwhen there are growing requirements for new usesthere is bound to be a trade-off of people having to

Examination of Witnesses

Witnesses: Ed Richards, Chief Executive, Ofcom, and Graham Louth, Director of Spectrum Markets, Ofcom,gave evidence.

Q280 Chair: We now come to the second part of thismorning’s session. Can I welcome a familiar face tothe Committee, Ed Richards, Chief Executive ofOfcom, and also with him Graham Louth, who isDirector of Spectrum Markets. Philip Davies to start.Philip Davies: Will the restrictions you proposeplacing on the auction reduce the chances of the truemarket value of the spectrum being realised?Ed Richards: I think the restrictions that we areproposing—it is important to say that they are onlyproposals at the moment and we are currently wadingthrough a huge volume of submissions on that verytopic—would clearly affect the auction, and they areintended to affect the auction. One can contrast thatwith an absolute free-for-all approach. Clearly it ispossible that one would get different outcomes interms of the actual revenue raised with those twodifferent approaches. So I think it is important to goback to say, “What are our duties here fromParliament?” Our duties, as you probably know, arenot to maximise revenue. They are to make sure the

give up spectrum in certain areas. By making channel38 available, we are trying very hard to make surethat their needs are met.

Q279 Chair: The sector has already been required tomove bands at some considerable cost and now on topof that it faces the danger that there is going to beinterference, particularly from white space devices,and they are told, “Don’t worry, Ofcom will come andsort it out within a matter of hours”. If you are in themiddle of—I gave the example of a Bon Jovi concertlast time, it isn’t much reassurance that in a couple ofhours’ time the interference may be dealt with.Ed Vaizey: Well, I think Metallica might have been abetter example, Mr Chairman.Chair: My colleague had a particular concern.Ed Vaizey: I was not aware that Ofcom was going toturn up in a van at the concert and tweak the aerials.I do not want to comment on that. As far as I amaware, channel 38 would be no different from channel69, and the white space device issue is not an issue todo with the new channel. It is to do with the fact thatwhite space devices are coming on the market. So,quite properly, trials are being conducted to ensurethat there is not interference. I do not see any threatto PMSE with the new channel so I am not quite surewhat their concern is.Simon Towler: I think you have hit the nail on thehead with the white space trial. To make sure thatinterference issues are minimised trials will beconducted and, as far as can possibly be managed,people will ensure that new white space equipmentdoes not interfere.Chair: I think that is all we have. Thank you bothvery much.

spectrum is used as efficiently as possible and also topromote competition. So the approach that we havetaken in this area is primarily concerned with ensuringthat after the auction there is effective competition,and we have set that out in considerable detail in theconsultation document.However, those proposals will not take all theintensity and competition out of the auction, so wedo not expect that the result will be no bidding, nocompetition and no intensity in that auction. I do notthink that is our judgment about what the result willbe. But the prime motivation, without any doubt, is toensure that after the auction there is effectivecompetition for consumers and businesses across theUK, because all the evidence shows that effectivecompetition delivers substantial economic benefits tothe whole economy.

Q281 Philip Davies: You said your priority was notto maximise revenue, which probably has alarm bellssounding in the Treasury as we speak. I just wondered

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what discussions you might have had with people inDCMS and the Treasury about the expected financialreturn.Ed Richards: What we tend to do always is keep therelevant Government Departments abreast of ourthinking in areas of this kind, where they would quiterightly have an interest. What we have not done isprovide any Department with a number or an expectedrevenue from the auction. The reason for that is that Idon’t think anybody can do that reliably and I wouldbe very cautious about doing it. It is instructive tothink about the last auction in this regard, the 3Gauction. I think expectations were for a very smallnumber of billions and we all know that the outcomewas in excess of £20 billion. Nobody that I am awareof predicted a number anything like that and that wasthe product of the circumstances at the time, thedotcom boom and all the rest of it. I think the worldis very different now. It is very difficult to predictprecisely how many people will compete and bid inthe auction, and therefore I honestly think it is a fool’sgame to try to predict exactly what the number is.Inevitably there has been discussion about the overallapproach and where we are heading, but I have not,and nobody in Ofcom has, volunteered any number.

Q282 Philip Davies: No, it wasn’t that you mighthave provided them with a number, it was more thatthey might have provided you with a number that Iwas more interested in; that there was a certainamount of money that they wished to realise from itthat then would govern your approach.Ed Richards: I see. I misunderstood the question. Theanswer to that is no. Nobody at any point has said tous, “What you need to deliver is X billion or million”.That has not happened. There have been interestingexchanges, and completely reasonable and legitimateexchanges, about the approach we were proposing totake to the auction and to the timing and things of thatnature, but no number on their side and no number onour side either.

Q283 Philip Davies: So your approach genuinely isthat this is the outcome that you want to see andwhatever that raises is what it raises and that is that?Ed Richards: Our starting point is ensuring that thespectrum will be used efficiently and to ensure thereis effective competition. If you combine those twostarting points then what you have is an approach tothe question of how we design the auction, but I don’tthink that either of those, or indeed the approach wehave taken, are inconsistent with a competitiveauction. I think the kind of situation you might beimagining to stretch the issue and see where it breaksis where we took a particular approach that meant thatthere would be only one bidder with consequences forthe intensity of bidding in the auction, but we are notin that territory, partly because no one can predictaccurately or precisely who will bid. I think we knowthat the mobile operators are interested in thespectrum; I think they are all publicly on the recordin relation to that. I think a number of otherorganisations, companies, might also be interested andwe simply do not know that at the moment.

So our approach is to promote effective competition,to ensure the spectrum is used efficiently. That iswhere the wider benefits and the much more long-term benefits to the economy lie, but the proposalswe are making are not inconsistent with competitivebidding in the auction either. Graham, do you want toadd anything?Graham Louth: I was going to add one point thatwe have had an example in Europe of over-regulationleading to a failed auction. The Dutch attempted toaward their 2.6GHz spectrum, reserving a very largeamount of that spectrum for new entrants, andbasically not enough new entrants turned up at theauction and consequently they didn’t even sell all ofthe spectrum and the spectrum they did sell went forthe reserve price. We are absolutely nowhere near thatsort of situation with our current proposals in the UKand I don’t envisage that we will get anywhere likethat going forward either.Ed Richards: One point to add, which is interesting,is that because we want to ensure that the spectrum isused efficiently, we want the people who value it mosthighly to end up with it, because that is your proxyfor the value they can deliver to the economy. Toensure that that is the case, you need somecompetitive bidding. So I think from our ownperspective we want to see people reveal theirpreferences and reveal their value or the value theyplace on the spectrum.

Q284 Philip Davies: In light of the backlash againstthe decision to liberalise the 900MHz licences held bytwo operators, in hindsight do you wish you had donethat differently?Ed Richards: The process of liberalisation? Grahammight want to come in on this in a moment, but Idon’t think so. There are two points to be made on it.The first is that we have a longstanding commitmentto liberalising spectrum where we can because wethink it makes the spectrum more economicallyattractive and of greater value. Secondly, there was aEuropean directive on this subject requiringliberalisation and the Government enacted that. Sothere was a general objective, but there was also arequirement on us to do it. As we approachliberalisation we always keep a careful eye on anycompetitive implications and that is what we did inthis particular case. Graham, you might want to talk alittle bit more about how we did that in this case. Butoverall we would want to liberalise where we can andwe would do so with an assessment of the competitiveimplications, and that is what we did in thisparticular case.Graham Louth: A couple of points from me. Weliberalised at the beginning of this year, implementingthe Government’s direction of December last year. O2has already started to make use of that flexibility. Theyare deploying 3G technology in the 900MHz band incertain city centres. That is bringing consumerbenefits today. O2’s customers are getting a better 3Gmobile service as a result of that than they would havedone if we had not liberalised that spectrum. As Edhas said, the key question for us was, does that giverise to a distortion of competition? I see no evidencetoday that consumers are suffering detriment as a

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result of a distortion of competition as a result of thefact that O2 can make use of that spectrum for 3G.We did a lot of analysis over a number of years toreach the final decision. It revealed that there is thepotential for a competitive distortion, but it is not animmediate risk. It is not something that is likely tomaterialise in the next year or so. It is something thatmight materialise in three to five years’ time if otherspectrum is not available to match the 900MHzspectrum, but the key point is that other spectrum isavailable. We have the 800MHz spectrum. It will beavailable from the beginning of 2013 and onwardsfrom then, and so there are opportunities for otheroperators to acquire spectrum that will allow them todeploy services that match and even better theservices that Vodafone and O2 can deliver using the900MHz spectrum. Some years ago when we lookedat the issue we were concerned about the impact oncompetition and we were proposing some potentialmeasures to mitigate those concerns. As time went on,the 800MHz spectrum became more of a reality. Itbecame increasingly close in time to the point wherewe felt comfortable that liberalisation of the 900MHzwould bring consumer benefits and would not harmcompetition because the 800MHz spectrum would beavailable to balance the benefit of the 900MHzspectrum.

Q285 Philip Davies: What other measures did youconsider?Graham Louth: We considered requiring Vodafoneand O2 to give up some of the 900MHz spectrum sothat it could be made available to another operatoror operators.Ed Richards: It is worth adding that this is a verygood example of the kind of very difficult judgmentsthat we have to make sometimes in this area. Thereason they are so difficult—this is not the onlyexample, there are others as well—is that many of theadvocates within the industry, so one player or anotherplayer, would like the world to be exactly equalbetween everybody. The problem is that in resourcemarkets of this kind, and this is in a sense a resourcemarket because it is control of spectrum rights, theworld is never in a position where everybody can startequally. Somebody has a historic right from many,many years ago to something; somebody else boughtsomething else; this is at one price, that is at another.So, often people have this ideal objective in whicheverybody can be exactly equal and the world justsimply is not like that.The kinds of calculations we have to get into are howcan we make sure that there is sufficient competition,effective competition, to secure that on one side—thatis the concern that Graham was expressing; theconcern we would have in this case—but on the otherhand recognise that in a case of this kind, for example,there are immediate real benefits to consumers fromliberalising. So we have to try and balance those twoup and look at the relative risk of this particularliberalisation in relation to competition against theimmediate consumer benefits of liberalisation. On thisissue the key was that the prospect of relatively near-term supply of 800MHz spectrum, and therefore asubstitute alternative to the 900MHz, diminished our

concerns from a competition perspective and weweighed those diminished concerns against fairlyobvious immediate benefits from the liberalisation. Itis a good example of a series of the kind ofcalculations that we have to make.

Q286 Philip Davies: Did you anticipate a backlashfrom some people on the back of the decision youmade?Ed Richards: Yes. As I am sure the Committee isdiscovering, in this particular sector opinions amongthe players are highly polarised, and if one takes aregulatory decision that affects players X and Y in oneparticular way it is usually the case that A and B donot like it. So I think we assumed that that would bethe case rather as night follows day, and it usually is,I have to say.

Q287 Dr Coffey: Can I add a sub-question, whichmight come up later in our brief. I heard you sayingthat you considered requiring Vodafone and O2 togive up some of their 900MHz. Would it make senseto restrict how much of the 800MHz they can have inorder to get the playing field level for the fouroperators, especially on the rural broadband issue,which I obsess about?Graham Louth: Our proposals include what we calla sub-1GHz spectrum cap, and that would have theeffect of limiting the amount of 800MHz spectrumthat Vodafone and O2 could acquire in the auction.That is part of our existing proposals. Obviously, weare reviewing that. As Ed has indicated, the responsesare polarised; Vodafone and O2 are not entirely happywith that cap and Everything Everywhere andHutchison do not think it goes far enough.Ed Richards: I think that is absolutely at the heart ofthe auction design and at the moment everything wehave put in that consultation; everything is aconsultation. So the proposal for debate is that we dothink there is a competitive issue in the holdings in aspectrum sub-1GHz and therefore we are proposingthose restrictions that Graham described. That isexactly what we are discussing with all the players atthe moment.

Q288 Dr Coffey: You could go further and say thatVodafone and O2 cannot have any of it.Ed Richards: We could. As I am sure you havediscovered from the views on this, if you strip it downto its bare bones, this particular question, what youdiscover is that you have two players who think thatthere should be no restrictions whatever and twoplayers who think that the restrictions we haveproposed do not go anywhere near far enough, andthey cannot both be right. They are at opposite poles.It is important to say that we haven’t made theseproposals somehow just by splitting them down themiddle. We would never do that. We have thoughtvery carefully about the technical characteristics of thespectrum and the economic nature of competition inthis market and we are trying to ensure that we canbe confident that there will be effective competitionin the future—to design the auction in that light, butto do so by being the least intrusive we can be. So wedon’t want to put in regulations in relation to the

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auction that are any greater than the minimumnecessary to ensure effective competition. Otherwise,going back to Mr Davies’ question, that would be tobegin to interfere with and mitigate the intensity ofbidding around the auction. So we do not want to dothat. We want to do the minimum necessary to ensureeffective competition and that is the approach wehave taken.

Q289 Dr Coffey: I will move on to my favouritetopic of coverage. Your own research has shown that2G covers about 97% of the UK population; 3G Ithink is about 87%. That is from the study publishedlast year in November. You are aware of the debate inParliament about going to 98%. In fact, Arqiva in itssubmissions to us has suggested making it 99%. Whydid you choose 95% originally?Ed Richards: The origin of the 95%, which I shouldemphasise is part of that same consultation, so it iswhat we are considering at the moment, was anestimate of the coverage that could be delivered byexisting base stations. So, in other words, you wouldexpect the existing operators to be able to deliverbroadly that level of coverage without any significantdiminution in the value they would place upon thespectrum, and it was a starting point. It was a startingpoint that we thought was a positive one, in the sensethat it already proposed an obligation or a coveragelevel that was in advance of 3G, so a very good start.What we want to do, as I think we set out in thedocument, is now make sure that we have understoodthe costs and benefits of extending it, and indeedchallenges that we set it too highly. I know Vodafone,for example, thinks that we have underestimated thecost associated with even reaching 95%, and othersmay take that view as well. Primarily, the debate nowseems to be around the actual cost of taking itbeyond 95%.Let me just say a couple of things about that, if Imay. The first is that we are fully engaged with thatdiscussion and listening carefully to what a very widerange of people want to say about this. The second isthat we are doing our own work. We have increasedthe amount of effort we are going to put into this,partly because of the level of interest, and that willensure that we have the best cost estimates we canhave. We have studied the topography, the quality ofservice expectations, the characteristics of thespectrum and so on and so forth, so we have the bestunderstanding of the cost estimates possible. The thirdthing that we will do, which I think is very important,is try to make a credible, sensible assessment of therelative costs and benefits. The benefits side of that isobviously quite challenging in some levels. How doesone calculate the benefit or the monetary value ofwhat is essentially an inclusive approach? Theeconomic benefits may be easier.The difficulty will probably also be on the costs side,but that is what we are trying to ascertain now. Wehave been listening to the evidence that people havebeen giving you, and I think you have heard a range ofnumbers somewhere between £200 million and £540million, to take you from 95% to 98% or 99%. Thatis quite a big difference, so it is important for us totry to pin down more precisely what the number might

be as we go from 95% towards those higher numbers.If you think about it on a per person basis, you aretalking about the difference in estimates between £100to £300 or £400 per person, and I think as you goabove 98% and 99% those numbers probably risequite dramatically because of what would benecessary at that point. So there is a significant job ofwork to do at the moment. It is both costs and benefits,and we are very much engaged in that at the moment.Graham Louth: May I just make one comment? Youalso need to be conscious of the fact that the qualityof service and the nature of the service that is to beprovided has a huge influence on the cost. I do notknow what underlies Arqiva’s cost estimates, or thespecific ones they mentioned to you, but it is possiblethat they do not relate to an indoor mobile broadbandservice, which was the coverage obligation weproposed. You have heard evidence about the way inwhich mobile technologies might contribute towardsthe Government’s fixed broadband agenda, and it is alot easier and a lot less expensive to provide a fixedbroadband service wirelessly than it is to provide atrue mobile broadband service.Arqiva manages to deliver TV coverage to 98.5% ofthe population from a relatively limited number oftransmitters. It is able to do that because you have tohave an aerial on the roof of your house pointingtowards the transmitter in order to receive that service.If you had a handheld mobile TV in your living roomit would not work. So there is a big differencebetween a fixed broadband service deliveredwirelessly and a true mobile broadband service. Ourfocus was on the true mobile broadband service andthe cost of delivering that is likely to be materiallyhigher than the cost of providing a fixed broadbandservice using wireless technology.

Q290 Dr Coffey: Thank you for that. I think that wasvery helpful. You have not obviously decided on afigure of what the extra coverage would be. If youstuck at 95%—you will have heard the argumentsbefore—that is 3 million people who don’t have it,and it would not surprise me if that included peopleon the Suffolk coast. There are quite a lot of placeswhere there are not-spots. But in your consultationyou talk about the 95% coverage obligation results inbroadband services having the equivalent coverage totoday’s 2G services by 2017. Just for my ownunderstanding, why do you think it will take quite solong to do that? If we encouraged you to push it upto 98%, or even 99%, how much longer will it take?Ed Richards: It is a very interesting question. Itbroadly comes back to the same conundrum, which isthat you could do it faster and you could even have ahigher number faster, but that simply requiresengineers to deal with the masts, so there is a costimplication. Again, I think we set 2017 as the aimbecause we thought that was consistent with nothaving a significant impact on the assessment of theoperators. So the operators would start, as everyonewould expect, in the more urban areas, particularly inthe areas that will be cleared first and therefore theywill be able to deploy first. London is an obviousexample after the 2012 switchover process. Theywould start there, get that done, begin to make money

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and then roll out throughout the country after that.Now, clearly you could say to them, “Right, we wantthe 95% done on a much tighter time scale or we wanta higher number done on the same time scale”. Theimplication of that is not that it cannot be done. It ismerely that they would say, “Well that’s going to havea cost associated with it and we will need to reflectthat in our bidding process”.Graham Louth: We also need to be slightly consciousthat there is a limit to how much roll-out a networkoperator can do in any given period of time, and ifyou require them to roll out into rural areas, then theymay well not be able to deploy as quickly and asextensively in urban areas and there will be aconsumer impact there. It is a trade-off between urbanconsumers and rural consumers for who gets theservice, possibly even who gets the service first.Ed Richards: We can certainly—

Q291 Dr Coffey: But if urban already have 3G itis—Ed Richards: Yes, fair point. It is something wewould be very happy to challenge them on and makefurther enquiries about to make sure we are optimisingthe approach.

Q292 Dr Coffey: We have also heard quite a lotabout whether, if push comes to shove, mobileoperators would work together to share infrastructureand to share masts and similar. What is in your mindsabout trying to encourage that? And in one waythrough increasing coverage by mobile operators, is itaccess to the spectrum or investment in theinfrastructure that is really the crucial bit?Ed Richards: The obstacles to site sharing and thingsof that kind were largely removed some time ago andquite substantial site sharing is now already takingplace. There is site sharing between what was T-Mobile and Orange, now Everything Everywhere, andthat also extends to Three. There is also site sharingnow between O2 and Vodafone.There are other areas of sharing in the network aswell, particularly on the Everything Everywhere side,so there are opportunities to do that, and our generalapproach is to look at the economic benefits, but alsoat the risks to competition of those sorts ofcollaborations. There is no in principle objection, andit clearly does offer benefits in terms of reach, and Ithink that is what has happened over the years.In relation to the choice between investment ininfrastructure and spectrum, I think our view is thatthey are not alternatives. You have to have both.Clearly you have to invest in infrastructure to deploy,but you have to make your judgement about howmuch spectrum you need as well. The reason why thatis important is that the only alternative seems to meto be to give them the spectrum for nothing, and ifyou give them the spectrum for nothing you have noconfidence that you are giving it to the people, thecompanies, the organisations who most highly valuethat spectrum. It does seem to us that one goes withthe other and we should not see them as alternatives.It is also worth adding that in our experience—certainly in the UK and I think in Germany, Europe’slargest economy—even though many people have

made an argument about the cost of spectrum or priceof spectrum being an obstacle to investment innetworks, the evidence that we have seen does notseem to bear that out. The reason why it does not bearit out is that, once you have paid for the spectrum,that is a sunk cost and you are making future decisionson the basis of those costs being sunk. If you look atGermany and the UK where the greatest amount ofrevenue is raised in the 3G auctions, there does notseem to be any detriment in relation to roll-out orindeed the level of competition or final outcomes forconsumers—in other words, the availability ofsuppliers, the quality of services, the prices and so on.I think we are certainly among the best in Europe,among the best in the world on those criteria and Ithink the Germans are as well.

Q293 Dr Coffey: I have one last question. Whatdiscussions have you been having with BDUK abouttheir roll-out plans for rural broadband? One of theconstant things we hear from mobile phone companiesis they need that backhaul to make sure they candeliver it. Meanwhile, other money is being spentelsewhere. Can you tell us a bit more about that?Ed Richards: We are closely in contact with BDUK;there is an important relationship on a whole varietyof fronts. We tend to have information and can analyseit and give support in that way. Some of it we will bereleasing later this week, which I hope will be useful.There is close discussion about the regulatoryenvironment for these kinds of things and we givethem a lot of technical input on the technology sideas well, where we have substantial expertise. So thereis a lot of dialogue.Backhaul is clearly one of the issues that comes upregularly, and I hope we have made a usefulcontribution to their thinking. It is definitely true thatyou need backhaul—it has a dual function today, andin the future even more so, which is for not just fixedbackhaul but fixed backhaul for mobile. I think we arevery conscious of that; it is important that we makesure that the regulatory environment adapts andevolves in light of that, and I hope we havecontributed to BDUK having a full understanding ofthat, certainly from a regulatory perspective.

Q294 Chair: Can I come back to the issue of fees.The Minister who gave evidence before you appearedto accept that those who got 900MHz licences hadessentially been underpaying ever since youliberalised the spectrum and would perhaps have hadup to two years during which they were payingconsiderably below the market value. Would youagree?Ed Richards: Rather than agree or disagree, it mightbe useful for me to describe how I think we see it,and the situation that we are in.There were many years when the spectrum was used.There was then a period after, I think, 1994 when wewere able to introduce administrative incentivepricing; or our predecessors were. That was 1998—thank you, Graham—that was done and the mobileoperators were paying some tens of millions betweenthem. We reviewed that at a certain point from ourperspective which was, as I have said, not to maximise

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revenue. Our perspective was efficient use of thespectrum, and the amount of money that they werepaying we calculated to be within the range of whatwe would expect to ensure efficient use of thespectrum. We always said then, and have always saidsince, that there would need to be a review postliberalisation.The liberalisation process was, as described earlier,driven by a requirement under a European directive,and we have followed that through under theGovernment’s direction. The Government also thenmade it very clear that in this particular case they hada specific view about how we should price thatparticular spectrum, and said that we should look toensure that it was full market value, having particularregard to the auction result. Clearly you cannotactually have particular regard to the auction outcomeuntil you have done the auction, so we have aninterregnum; that is true to say.Two points on that are worth clarifying. First, webelieve that we have no powers; we cannot doanything retrospectively so we cannot go back andsay, “Well, you should have been paying more whenit was liberalised”. We don’t believe we can do that.The second point is that we face another challenge inrelation to this which is that we could immediatelyhave re-priced, or set about consulting upon a highernumber or a different number, but to do that we wouldhave used essentially the same people who arepreparing the work for the auction—Graham and histeam and others. In our view, the administrative andeconomic priority, or the public interest priority wasvery clearly to get on with the auction and then comeback and deal with the pricing question. We have beenvery clear about that all the way through. So Irecognise the point you are making, but I think fromour perspective we have considered the alternativeoptions available to us, as I have described, and I thinkwe are adopting the most sensible one.

Q295 Chair: Can I put to you two arguments, bothof which I suspect you will be familiar with. The firstcomes from Vodafone, which says, “What you areproposing is unfair because we are bidding a price forthe newly released spectrum and at the same time weare going to face the additional cost of its reflectingback on the amount we are currently paying for thespectrum we already have. This is unfair because thatdoes not apply to all the others”—obviously it does toO2—“and it is going to distort the competition”.Ed Richards: There is a circularity of the kind thatthey describe. I am not sure that I would describe itas unfair because others might say it is unfair thatthey are paying what they are currently paying forliberalised spectrum. So making judgments aboutwhat is fair and unfair is difficult. I think the questionfor us is whether we believe that this would distortthe auction in a process that jeopardised efficient useof the spectrum or indeed competition in due course?That is a more focused question and challenge. Thatcircularity, or that apparent circularity clearly couldrisk what you might describe as an approach to theauction affected by a future price. So you could seesomebody making an argument for a strategicapproach to bidding that reduced your level of

demand so that you did not have to pay as much indue course. I think that is conceivable, but it suffersfrom a couple of very profound flaws; one is that wehave also made it very clear that the auction price willbe only one of the potential benchmarks we could use.So if there was a strategic reduction in demand withthe intention of seeking to depress the revenues andtherefore the price they would pay in due course, thenthe consequence of that would be that we would seethat and we would choose an alternative benchmark.We have been crystal clear about that.The second weakness is that the danger from thebidders’ perspective of that sort of strategic reductionis quite straightforwardly that somebody else buys thespectrum that they actually need to compete in thefuture. So it is an interesting case, but there are oneor two quite significant holes below the water line.

Q296 Chair: Can I put to you another argumentmade by another operator that you may be familiarwith, which is that it is quite right that people shouldpay more for the 900MHz spectrum because there arenew uses of this, particularly for high-speed mobilebroadband. But when it comes to the 1800MHzspectrum there are no devices that use that high-speedmobile broadband and so it is unfair that that isequally going to face higher charges in the futurebased on the auction. You will be amazed to hear thatthis comes from Everything Everywhere.Graham Louth: I am assuming that EverythingEverywhere is referring to the fact that there is not 3Gtechnology for the 1800MHz plan. It is possible todeploy 3G technology in the 1800MHz band, but it isnot widely adopted around the world so the equipmentis quite expensive. However, the next generation 4Gtechnology, LTE, is definitely going to be used in1800MHz band. In fact that is one of the leadingcontenders for the next use of the 1800MHz band. Ithink in the longer term it is absolutely clear that the1800MHz will have other uses and potentially adifferent value, although whether it is much higherthan the current price of the 900MHz is yet to be seen.

Q297 Chair: Will you take that into account whenyou are setting the prices?Graham Louth: Yes, absolutely.

Q298 Chair: Can I turn to another aspect of the1800MHz spectrum, which is the sale by EverythingEverywhere of a chunk of that, and the Tom Watsonquestion, which I will put in his absence, which I amsure you will have heard about when we hadEverything Everywhere before us. Essentially,Everything Everywhere is going to make a substantialamount of money from a public asset that it was givenfor nothing and for which it has been paying a licencefee that is considerably less over the period of time ithas had it than it is going to recoup through the sale.Ed Richards: Again, that is a good question and it isa fair challenge, and I think we have to say that inresource markets of this kind these things sometimeshappen. Crucially, we wanted to make trading possibleand available in order to make sure the spectrum wasin the hands of the people who valued it most highly.So that is the general approach to trading. Now that

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is not quite what has gone on here; this is a forceddivestment as a result of the merger. Nevertheless, itenables that spectrum to be reallocated for alternativeuse to other parties and we will have to see who bidsfor it and indeed what they raise as a consequence ofit. The slight difficulty I have with this is that if onepermits trading because of the general economicbenefits, it is very difficult to then go back and say,“Well, you made too much money out of that so wehave to somehow claw it back”. I think that wouldremove all incentive, in certain circumstances, to tradeand you can think about analogies in land, in oil rightsor gas rights and other situations where these kinds ofthings can happen. It isn’t—I do see the point entirely,but another set of factors is operating.Graham Louth: It should not be forgotten, however,just linking the two questions, that we are about torevise the annual licence fees applying to the1800MHz spectrum. So any acquirer of the divested1800MHz will not pay what EE currently pays; theywill have to pay the same full market value price thatevery other 1800MHz licensee will have to pay. So Istruggle to see why anybody would be willing to payEverything Everywhere a very large price to get holdof that spectrum if they are going to have to pay “thefull market value” for that spectrum as soon as theyacquire it.Ed Richards: So whatever amount they pay, youwould fully expect the bid to be discounted in light ofthe amount that they would be expecting to pay in thefuture, and that addresses a significant part of theissue, but one also needs to see it in the generalcontext of trading.

Q299 Chair: Are you suggesting that the speculationthat it might realise £450 million is far above what islikely to occur?Ed Richards: We don’t know.Graham Louth: We just don’t know.

Q300 Chair: Were you surprised when you saw thatfigure being—Graham Louth: The calculation that I saw usedtoday’s annual licence fee for 1800MHz; it did not usea full market value licence fee for 1800MHz. We donot at this stage know what the value of that spectrummight be to an acquirer, so I do not know whether the£450 million is correct and, at this stage, we do notknow what the full market value of that spectrum willbe either, so it would be wild speculation for me tosay quite how much EE might make out of that sale.Ed Richards: I think bandying around numbers of thiskind is very difficult territory. I really do, and again itis very similar to the auction. It depends who comesin, how much they want it and what value they thinkthey can attach to it. That, in a sense, is what themarket will tell us rather than what we will dictate.

Q301 Chair: Can I now just move to the other usersof spectrum and some of the concerns that they haveexpressed? Firstly it has been suggested that this roll-out of 4G services on 1800MHz may result insignificant interference for people watching digitalterrestrial television. Do you think that is a danger?

Ed Richards: It is a danger. It is a danger that we arewell aware of, and we have been working withindustry very carefully now for some months. Wehave a plan to deal with it. The proposals to addressthe risk of digital terrestrial interference are out forconsultation at the moment and it is very importantthat we conclude that before the auction so thateverybody knows where they stand. We think that asignificant number of households could be affected—possibly as high as 750,000—but the vast bulk ofthose should be able to have the issue addressedthrough a simple filter. Once one has taken account ofthe effects and the benefits of that filter, we think thenumber is very much lower—more like 0.1%—andfor those households we may have to look at specificmeasures. So it is an issue, but we are consulting ona set of proposals already and we are listeningcarefully to what people say about the best approachto tackling that issue.

Q302 Chair: But you are suggesting that all thesehouseholds who already had to go through the processof buying a set-top box as a result of the analogueswitch-off, may now have to go through anotherprocess of going off and getting a filter so that theydo not have a fuzzy screen.Ed Richards: It is a very small subset. Essentially,everybody who didn’t already have digital TV has hadto go through the digital switchover process region byregion; this is a small subset of that number. It is aprocess, but let me be really clear about this; we havemoved from a world in which spectrum wasessentially very static, was used by the same peoplein the same way year after year, to a world in whichspectrum is now intensely demanded, with lots ofcompeting users and a huge amount of use out therein the world every day. That world is very different,and it is going to require people, businesses andconsumers to face change as we try and use thespectrum more efficiently. In order to be absolutelyclear, I do not see that general trend changing,probably for the next 20 years. This will not be theonly example of this kind of challenge. PMSE, whichyou are very familiar with, Chairman, is anotherexample. The spectrum was all being used and wenow need to find ways to use it much more efficiently,and that inevitably means people shuffling a little bit,moving from one place to another, dealing with someinterference in order to accommodate a more valuableuse. For me, this is the world we are now in and itwill be like this for many years to come.

Q303 Chair: You mentioned PMSE; you will beaware that users remain concerned about the dangersof interference, and in particular point out that in theirbusiness you cannot actually leave it a while to sortout. It will have a devastating effect on them if thereis interference.Ed Richards: Yes. I hope we have arrived at a goodpoint with PMSE. I feel we have done the right thing;we have dedicated channel 38 to that use. The existingchannel can be used, I think, up until the end of 2012so there is a good overlap period because channel 38is already available. There is £46.2 million availableand we have already received claims for some £40

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million. We have already distributed, I think, some£13 million and we know that many providers arealready buying replacement equipment. So the processis working well in our experience; the distribution ofmoney is prompt when people have surrendered theirequipment, and I think we will see a change of thiskind. I hope that that will ensure that PMSE cancontinue to do the very important work that it does.

Q304 Chair: Finally, it was suggested to us that theremit under which Ofcom operates, which is verymuch consumer focused, means that you aresometimes not able to take sufficient account of theneed to help support British business. The Ministersuggested earlier that there might be a case forchanging Ofcom’s remit to take account of that whenwe come to the forthcoming communicationslegislation. Do you feel that your remit should bewidened?Ed Richards: There is bound to be a case for it; thereis no doubt about that. It is a kind of argument anddebate that we do expect to see take place in the run-up to the next Communications Act, so I wouldcertainly not be remotely uncomfortable with thatdebate taking place. We do not feel discomfort at themoment with our duties at all. We are very consciousof the business sector and the needs of businesses toensure that they can invest successfully and make areturn and provide competitive services to consumers.So it certainly is not the case that we do not takeaccount of business needs. Whether our duties need tobe adjusted to guide us to take more account ofbusiness as a voice or of particular businesses, willultimately be a matter for Parliament. This questionoften comes up when we are dealing with some of theinternational questions because then you are in anation-versus-nation, company-versus-companynegotiation. So that is where we tend to see it. Inmany respects, particularly in terms of internationalnegotiations and so on, we act on guidance; we actessentially on behalf of the Government and we dothat in the international negotiations so that we canuse our technical expertise, but under guidance fromthe Government. If that turns out to be the main areaof concern, it is possible that the Government canmodify their framework or their guidance to us.In relation to more domestic business, I would bemildly concerned about any significant move awayfrom the general principles of focusing on the interestsof consumers and citizens and promoting competition.

Q305 Chair: I think it was principally in theinternational area. You think that that can be donewithout legislation?Ed Richards: Quite possibly. It is something to lookat.

Q306 Damian Collins: My apologies for joining thesession late. I was at a public inquiry in myconstituency, but thanks to high-speed nationalinfrastructure, I managed to make it back for the endof the session.I want to pick up on one point that we discussed lastweek with Telefonica and Vodafone—my apologies ifthis has already been covered. They raised the

expansion of coverage and the need for BT fibre toprovide points for masts to extend coverage. Theremay be problems there if BT is not able to providethat infrastructure. Have you considered as a regulatorthe role of BT in supporting the operators inextending coverage?Ed Richards: Yes, it is. We did touch upon this, butnot in quite the way that you are asking and I thinkyou are raising a different and additional point. Sobackhaul for mobile operators is extremely importantand it is something we know they are very concernedabout, and with the rise in capacity required from, letalone 3G, in due course 4G technology, it is going tobecome more and more important. We are very awareof that and we are looking at some of the issuesaround that at the moment.One of the issues is the relationship between the likesof Telefonica, Vodafone and others and BT and/orother companies who can provide them with thebackhaul circuits that they need. I am aware that therehas been a bit of healthy debate between thecompanies on that particular topic. Equally, we needto look at it in relation to our market reviews and ouroverall approach to regulation, and that is happeningin something called the business connectivity marketreview, which we are under way with at the moment.It is a big topic, and we will need to make sure thatwe take proper account of it in our regulatory workover the next few months.

Q307 Damian Collins: Is this something you wouldalso consider as part of your oversight of the pricingfor access to BT infrastructure, if it was felt that othercompanies could support the deployment of that fibre?Ed Richards: Yes. It depends on our analysis of themarket, so if we determine that the evidence showsthat BT has market power then we would look atremedies and those remedies could be controlling theprice that BT can charge, or they could be going upstream and opening up the access of ducts and poles,for example, for others to consider investing in. Wewould look at both of those in the event that wedetermine in the review that BT does have marketpower. We clearly cannot do it without an evidencebase. We cannot do it just on the basis of disagreementbetween companies because, as we all know,commercial disagreement happens all over the place.We need to root it in the analysis of the market power,and if that is what we find, we will look at theremedies. Those are the kinds of things that we wouldcertainly consider in those circumstances, yes.

Q308 Damian Collins: Just finally, if a highercoverage target is set, 98% say, do you feel that froma regulatory point of view it would not give you anyundue concerns?Ed Richards: We are consulting on the highercoverage target at the moment and it certainly doesnot give us undue concerns in relation to our duties inany ideological or other way. In fact, on the contrary,it is the kind of thing that we are quite comfortabledealing with. We have to look at the costs, have tolook at the benefits, try and match one against theother and see where a sensible position will be. Thatis the work we are currently undertaking at the

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Culture, Media and Sport Committee: Evidence Ev 53

5 July 2011 Ed Richards and Graham Louth

moment. We are doing a considerable amount of workon that and we are going to have to try and pin downthe cost estimate of the increased coverage that wewere discussing earlier. That is under way at themoment, but certainly we have no discomfort in termsof the general principle or general question at all. Infact we see it as a marriage really of the classictension between our duties on the one hand toconsumers and on the other hand to citizens. The ideaof extending coverage to a broader base than the

market might otherwise go to, I think, is an exampleof what we interpret as our meeting the interest ofcitizens rather than just individual consumers. So weare very comfortable thinking about it, and I hope wewill produce a good analysis to explain where we endup on the topic.

Q309 Chair: Thank you. I think that is all we have.Ed Richards: Very good, thank you very much.

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Ev 54 Culture, Media and Sport Committee: Evidence

Written evidence

Written evidence submitted by the Musicians’ Union

1. The MU represents over 30,000 musicians working in all genres of music. As well as negotiating onbehalf of our members with the major employers in the industry we also offer services tailored for the self-employed by providing assistance for full-time and part-time professional musicians of all ages. We areresponding to this consultation in order to protect the interests of our members and will therefore focus on thequestion that affects them most.

The Possible Impact of the Auction on Alternative Uses for Spectrum

2. The proposal to clear channel 69 of PMSE has led to a severe decline, and in some cases near-halt, insales of channel 69 equipment; those businesses that depend on these sales are consequently under threat. Thisis because under current proposals, anyone who buys channel 69 equipment subsequent to the publication ofthe 800 MHz consultation document will not be entitled to financial assistance. Therefore, those who wouldotherwise buy new equipment are reluctant to invest. In addition, suppliers of channel 69 equipment cannotoffer alternative equipment until replacement spectrum is both confirmed and made available on a UK-widebasis.

3. Users who need to buy new channel 69 equipment (ie that can be used and licensed UK-wide) have noother option but to invest in equipment that is not future-proofed. Again, this is because:

(a) viable alternative spectrum, and hence equipment, are not available; and

(b) the date of publication of the 800 MHz consultation is the proposed cut-off point for entitlement tofinancial assistance.

4. In order to address these problems, Ofcom should accept that, in the absence of confirmation andavailability of replacement frequencies and equipment, users who need new equipment have no option but toinvest in equipment that operates in currently-available frequencies. We would also ask that Ofcom stronglyencourages the Government to make provisions for those that have purchased and will need to purchaseequipment before replacement options are confirmed and available.

5. We would also ask that it be confirmed, as soon as possible, that Channel 38 will be awarded to PMSE/band manager and that every effort is made to ensure that channel 38 is as widely available as possible forPMSE use, as soon as possible. This will involve significant engagement with incumbent radioastronomy usersof channel 38.

6. As the replacement for channel 69 must at least replicate its current benefits to PMSE, we agree withOfcom that none of the following would be acceptable:

(a) Interleaved spectrum (not UK-wide and no additional bandwidth);

(b) Channel 70 (more isolated than channel 69 and no additional bandwidth);

(c) FDD duplex split (no certainty that it will either exist or be useable for PMSE);

(d) 1785–1805 MHz (isolation, lack of equipment availability, not UK-wide); and

(e) 870–876 MHz and 915–921 MHz (isolation, interference issues and high opportunity cost).

7. If the migration of PMSE from channel 69 and the provision of replacement spectrum is considered inisolation from the wider impact of the digital dividend on PMSE spectrum access, then it would be reasonableto conclude that channel 38 is an adequate replacement. It will be available on a UK-wide basis by 2012, hasa low opportunity-cost (and hence licence fee attached to it) and lies in closer proximity to post-DSO (digitalswitchover) interleaved spectrum than channel 69 will.

8. However, the spectrum provided to PMSE/band manager must take into account the wider impact of thedigital dividend on PMSE spectrum access. As BEIRG has demonstrated in its responses to the cleared andgeographic consultations, Ofcom’s currently available white space maps show that there will be insufficientspectrum available in order to operate necessary quantities of PMSE equipment for large-scale musicalproductions to be staged at certain prime venues across the UK, including at theatres in Edinburgh, Bradford,Southend, Woking, Swansea, Nottingham, Stoke, Guildford and Tunbridge Wells . In addition, and as ourmodels derived from Ofcom’s data show, equipment costs for touring theatre will increase by a minimum of100% post-DSO due to the increased fragmentation of available spectrum.

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Culture, Media and Sport Committee: Evidence Ev 55

9. Whilst Ofcom have agreed to update the white space maps, they will not be available for some time dueto the clearance of channels 61–69. Until definitive white space maps are publicly available, it is impossibleto determine whether the PMSE spectrum allocation is demonstrably interference-free and sufficient in termsof quality, bandwidth and continuity to meet the PMSE sector’s needs without imposing undue financial costs.Ofcom must accept that they must retain the ability to address any shortfalls in PMSE spectrum should theyarise. In order to do so (and hence avoid the risk that the PMSE allocation will not be sufficient), Ofcom mustdo one of the following:

(a) Award two additional cleared channels to the band manager in addition to channel 38. In this regard,BEIRG submitted a document to Ofcom in December 2008 which stated “We believe that channel 38along with cleared channels 39 and 40 would offer the best replacement for channel 69. Alternatively,if channels 61 and 62 are cleared of DTT and DTT broadcasting has to spill over into channels 39and 40, then channel 38 and the cleared channel 37, along with the interleaved spectrum in channels39 and 40, would offer the best replacement for channel 69.” Ofcom should explore this option as amethod of prioritising PMSE, rather than PMSE being a consequence of other developments.

(b) If the 600 MHz auctions are to take place before definitive white space maps are available, it wouldbe a good idea to hold back the two additional cleared channels from sale until it is known for certainwhich interleaved frequencies will be available for PMSE. The channels could be awarded to the bandmanager if the interleaved allocation is insufficient, or auctioned if not. This option would bothmitigate the risk to PMSE and ensure efficient spectrum allocation.

(c) Not release the lower cleared channels (ie do not hold the 600 MHz auctions) until definitive whitespace maps have been published and the PMSE sector has had sufficient time to ascertain theimplications. Further to this, Ofcom will be able to address any shortfalls in spectrum availability orcontinuity by awarding additional spectrum to the band manager.

10. We welcome Ofcom’s commitment to ensure that “existing authorised and planned authorised users ofchannels 61, 62 and 69 do not bear extra costs that must reasonably be incurred to clear the spectrum”. In linewith this, finance must be available when the costs to the PMSE sector arise in order to facilitate an orderlyand efficient migration. The best solution would be an early Government commitment to set aside funds andensure that an effective distribution mechanism is established.

May 2011

Written evidence submitted by Barry McKeown, Datod Ltd

Structure of Submission1. Response to Terms of Reference issues.

2. Other relevant matters arising.

3. Supplementary relevant Datod published information.

4. Contact Details.

5. References.

6. Appendix.

1. Response to Terms of Reference Issues

1.1 Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provisionof mobile broadband services

1. Datod Response: The nature of the Electromagnetic Spectrum, inherently a mathematical model, beingauction to the highest bidder permits scope for abuse of market dominance to arise by directly prohibitinginnovative technology companies, who make technical breakthroughs, accessing the spectrum for the durationof the License, which in the case of 3G are for 20 years, without the consent of both the Licensee and OFCOM.

1.2 Whether the upcoming auction can provide value for money for tax payers and how that should bebalanced with benefits for consumers

1. Datod Response: Tax payers are consumers. Auctions inherently involve an abdication of responsibility.So the current arrangements do not provide best value for the tax payer who would be better served by afloating revenue charge based on the actual data traffic content application the customer (individual or business)is undertaking. This would necessarily involve a new tax regime.

2. Customers would be further served by the intended Auction Fees instead being spent on a more rapid rollout on infrastructure.

3. Fundamentally this situation arose due to the inability to foresee what actual services would be providedthrough direct transmission of data traffic compared with envisioned voice or video traffic, circa 2,000, whenin the then jargon no “killer app” was identified.

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Ev 56 Culture, Media and Sport Committee: Evidence

4. This lack of foresight is not the case today.

1.3 The potential for next generation mobile internet services offered by the forthcoming availability ofspectrum

1. Datod Response: It has been stated that 1G was built on voice, 2G was built on pornography and 3G onbusiness traffic. Datod believes 4G will be built on mobile healthcare services. This new world wide industryhas also been recognised by the GSMA World Mobile Congress, when the industry met in Barcelona thisFebruary. It established a supplementary forum, the mobile Health Summit, which is meeting in Cape Town,this July, to chart the way forward. It is the recognition of this market potential and the benefits to society,now, that shall enable an appropriate regulatory framework to be enacted. We note that this is not one of thefive legacy issues raised with you by the Secretary of State.

2. The Datod view is that OFCOM is an obstacle to enabling this mobile healthcare industry being establishedin the UK and the UK becoming a leading global player to the detriment of the economic well being of theUK. The issues are dedicated spectrum and Net Neutrality.

1.4 Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as wellas cities

1. Datod Response: No. The auction in itself and the apportioning off coverage either by people or geographyto 95% or 97% is inherently exclusive.

2. The proffered OFCOM argument that the use of a lower frequency enables greater propagation range,while true, is misleading if actual transmitted power levels are not complementary maintained by changingtechnology and transmission standards. This is to misunderstand the limitations of the propagation models.

3. This is a technology platform, from smart device to smart device, delivery issue. Whereby a change to aregulatory regime permitting the network operators and communication companies being enabled to provide,in the License mix, a multiple of delivery mechanisms through adopting converged wireless, fixed line, satelliteand future High Altitude Stratospheric Platform Stations (HAPS) pipelines can ensure that 100% coverage ofboth people and geography is attained, seamlessly, from smart device to smart device. One issue is to appreciatehow the introduction of upgraded Internet Protocols, such as IPv6, shall facilitate such capability.

4. The key issues are safety critical applications and combating vested interests of the current stakeholdersin fixed line and satellite infrastructure and in the healthcare infrastructure.

1.5 Whether license fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed

1. Datod Response: Absolutely not. Witness the statements by Richards/Bowe before you from 3 May onThe Work of OFCOM as to how the current liberation of the 2G spectrum to enable higher valued 3G servicesis being mismanaged by OFCOM.

2. Historically, the UK 3G auction raised £22 billion for a 20 year License. This simple established monetaryfact may be used as a benchmark for a true financial evaluation of the current commercial services providedby enabling a simple transposition of this actual price paid for the initial 3G spectrum amortized over theremaining period of the License less the 2G fee paid by the liberated network operators. The future auctionfees attainable for 4G services are a red herring as these 3G services are being delivered now.

3. Provision for a comparison incorporating actual revenues accrued and not tax planning arrangementsshould be established.

4. It is foolhardy of OFCOM to assume 4G services shall be similar to 3G services and thus of a similarcommercial value.

1.6 How the position of the UK compares with other countries, with regards to allocation and utilisation ofmobile broadband spectrum

1. Datod Response: We are at a disadvantage due to the Communications Act 2003 and OFCOM’s cultureand practise. OFCOM should not be compared with the EU as OFCOM prefers but instead with the US.Inherently OFCOM has a conflict of interest between regulation and technical innovation and pursuingbreakthrough research, which should not be confused with risk. In the US these remits are separated betweenthe FCC and the NTIA. Whereas OFCOM consults and deliberates, the NTIA acts. Witness that during the US4G 800MHz spectrum auction, begun in January 2008 by the FCC and raising $19 billion, the NTIAconcurrently initiated a Spectrum Sharing Innovation Test Bed for developing Dynamic Spectrum Accesstechnology adopting Spectrum Sensing techniques. Witness also the NTIA process underway for makingavailable an extra 500MHz of spectrum.

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Culture, Media and Sport Committee: Evidence Ev 57

1.7 The possible impact on alternative uses for spectrum

1. Datod Response; The strategic key issue is ensuring that mobile healthcare, both infrastructure andservices, are available to the NHS, to enable best value to the tax payer to be attained. This issue should notbe left to the mercy of the network operators to deliver. Putting it simply; with an ageing population we cannotprovide millions of extra hospital or care beds so therefore mobile healthcare shall have to take the strain.

2. The foresight issue is in establishing the worst case real time spectrum bandwidth application, for this weturn to the opposite end of the age spectrum.

3. In appendix A are two scanned pages extracted from Professor Stuart Campbell’s book “Watch me grow”on ultrasound imaging. The key statement from the Behaviour Patterns section is: “For about 10% of the timethe foetus is “awake” when there will be continuous movements of the body and limbs, the eyes will be movingand the heart-rate will be fast. It is during this time that the face of the baby will be very expressive andyawning, blinking and sucking will occur”. This occurs from week 31 till tem and equates to roughly threehours of bonding activity per day or 100 hours till birth. In February the US FDA approved the first 2D (slice)ultrasound smart-phone. However, for such an application to come to fruition shall require wearable devicetechnology broadcasting into the cloud and back to the user specified display on either a 3G or 4G smartdevice. The issue OFCOM has failed to address is what bandwidth is required for the uplink of 3D raw realtime unprocessed volumetric data instead of processed downlink video images.

4. Such an application shall raise cultural and philosophical issues as to when human life begins to the widerpublic consciousness.

2. Other Relevant Matters Arising

1. The latest OFCOM commissioned research into technology enhancements that 4G shall bring waspublished on the 12 May. An extract from their web site summarises the key findings thus

“4G mobile technologies will be able to send more information than 3G, for a given amount of spectrum.This increased efficiency means that 4G networks will be able to support increased data rates and moreusers. The research that we commissioned indicates that early 4G mobile networks with standardconfigurations will be 3.3 times (230%) more spectrally efficient than today’s standard 3G networks. Toput this in context, a user on an early 4G network will be able to download a video in around a third ofthe time it takes today on a 3G network. It is anticipated that this efficiency will increase to approximately5.5 times (450%) by 2020.” and

“The research revealed that the capacity gain from the increased spectral efficiency of 4G technologieswill not on its own be sufficient to meet the expected growth in demand for mobile data. As well as usingexisting spectrum more efficiently, more spectrum itself is also needed, some of which will be gainedfrom the auction of new spectrum at 800 MHz and 2.6 GHz in 2012—the largest ever single auction ofadditional spectrum for mobile services in the UK, equivalent to three quarters of the mobile spectrum inuse today.

Finally, mobile networks will also need to be designed intelligently to ensure the best use of spectrum. Inparticular, the research anticipates a greater use of small cells to meet demand in specific areas.”

2. However, this OFCOM position fails to take into consideration the consequences of breakthroughtechnologies emerging.

3. Accordingly, we present a Technical Challenge for the Select Committee to consider bring to the attentionof OFCOM in order to determine OFCOM’s technical competence. The attached Excel file contains a stringof numbers comprising 1,000 samples of time domain data representing baseband spectrum composed from 11non-integer spectral components.

4. The issue to ascertain is can OFCOM provide you with an accurate estimation of the spectral componentparameters (amplitude, frequency and phase) to two decimal places. The ability of Spectrum Sensingtechnology to achieve this seemingly simple technical feat will provide the basis for the enabling signalprocessing technology to deliver a capacity gain of 100 times to be achieved. Please note that experts at boththe NTIA and Stanford University (Stanford is Silicon Valley) were provided with a similar exercise and alsoa far harder technical challenge which both institutions failed. The test provided is for OFCOM alone.

5. What is at stake is the technical ability to process fractional or non-integer frequencies. Current spectrumprocessing is based on periodic or integer frequencies. ie 1,2,3,4, etc cycles per second completed over theObservation Interval. Spectrum processing of non-integer based ie 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 3.0cycles per second over the Observation Interval shall enable a 10 times capacity gain and processing 2.10,2.11, 2.13, 2.14, 2.15 etc cycles per second shall enable a 100 times capacity gain over existing techniques tobe engineered.

6. In the following figure is graphed the Datod Test Signal data form the attached data file with the preferredtechnology the NTIA considers state-of-the art applied for spectrum estimation.

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Ev 58 Culture, Media and Sport Committee: Evidence

Datod Test SignalDFT WITH FLAT-TOP WINDOW SPECTRUM

0 20 40 60 80 100 120 140 160 180-120

-100

-80

-60

-40

-20

0

20

The green lines coincide with the actual spectral frequencies in the attached data file.

7. If OFCOM cannot accurately identify these spectral components the issue they shall have to explain toyou is why not and hence not just the system engineering consequences that such a technical capability shallbring but also the economic consequences.

8. The correct parametric answers with the background information leading to this development shall bepublished in a forthcoming Electronics World magazine article. The far harder exercises are as yet to bepresented to the readership. The clear cut issue is that if OFCOM don’t understand the technical problempresented they cannot be part of the solution; as there is still some way to go to engineer a communicationsystem.

3. Supplementary Relevant Datod Published Information

The following Datod published articles in Electronics World magazine are relevant:

(a) The Spectrum Anomaly: Volume 116 Issue 1892 August 2010.

(b) Net Neutrality and a New Communications Act: Volume 117 issue 1898 February 2011.

Copies of both Electronics World magazines are being forwarded by post for consideration.

4. References

(a) The Spectrum Anomaly: Electronics World Volume 116 Issue 1892 August 2010

(b) Net Neutrality and a New Communications Act: Electronics World Volume 117 issue 1898 February 2011

(c) Health and Well-Being in the Home: A Global Analysis of Needs, Expectations, and priorities for HomeHealth Care Technology: Commissioned by Philips and conducted by the RAND Corporation. The report isavailable at www.rand.org/pubs/occasional_papers/OP323.html

(d) FCC: Chairman Julius Genachowski, Remarks as prepared for delivery: The Cloud: Unleashing GlobalOpportunities: March 24 2011 : www.fcc.gov

(e) NTIA: The Spectrum Sharing Innovation Test-Bed Pilot Program Fiscal Year 2010 Progress Report:Lawrence E. Strickling, Assistant Secretary for Communications and Information: March 2011: www.ntia.gov

(f) NTIA: Plan and Timetable to make available 500MHz of Spectrum for Wireless Broadband: Gary Locke,Secretary and : Lawrence E. Strickling, Assistant Secretary for Communications and Information: October2010: www.ntia.gov

(g) NTIA: Radio Spectrum Estimates Using Windowed Data and the Discrete Fourier Transform: NTIATechnical Report TR-10–470 by Roger Dalke : September 2010

(h) OFCOM: The latest OFCOM commissioned survey into potential 4G spectrum technology:

The reports are available at: http://stakeholders.ofcom.org.uk/market-data-research/technology-research/2011/4G-Capacity-Gains/

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Culture, Media and Sport Committee: Evidence Ev 59

(i) First FDA approved Ultrasound Smartphone details are at: http://www.mobilehealthnews.com/10165/fda-approves-mobisantes-smartphone-ultrasound/

(j) Wearable device technology: web searchable keywords: E-Textiles, Smart shirt

APPENDIX

The following two scanned pages are extracted from Professor Stuart Campbell’s book “Watch me grow” ISBN9781–903258–85–5 and provide the relevant information.1

Written evidence submitted by the Department for Culture, Media and Sport

The Committee has asked for submissions and views on the following issues:

— Whether the proposed method of spectrum allocation promotes, or hinders, competition in theprovision of mobile broadband services;

— whether the upcoming auction can provide value for money for tax payers and how that should bebalanced with benefits for consumers;

— the potential for next generation mobile internet services offered by the forthcoming availabilityof spectrum;

— whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, aswell as cities;

— whether licence fees for mobile operators have previously been set at appropriate levels, and howthis should be assessed;

— how the position of the UK compares with other countries, with regards to the allocation andutilisation of mobile broadband spectrum; and

— the possible impact of the auction on alternative uses for spectrum.

Summary

We welcome this timely investigation into spectrum. A Communications Review is currently underway inDCMS and all the issues raised by this investigation are pertinent to the work being undertaken.

Specific Points

1. Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision ofmobile broadband services

The method of spectrum allocation is by market mechanisms, specifically auctions, whereby the spectrum isallocated to the user(s) who place the highest value on the spectrum to their business (or use), thereby ensuringthat the most efficient use of the spectrum is promoted. Though this might seem at first to be a competition-agnostic approach the regulator, Ofcom, as the relevant competition authority, conducts assessments of thecompetition effects of any spectrum auctions where relevant so that they can be satisfied that the auction isdesigned in such a way as to avoid distorting the market. The forthcoming European Radio Spectrum PolicyProgramme contains an article dealing with competition.2

In the context of the forthcoming auction of 800Mhz and 2.6GHz spectrum, Ofcom has been directed bythe Government to carry out a competition assessment with regards to the future mobile broadband market andaddress any competitive distortion in the design of the forthcoming auction. Ofcom has carried out such anassessment and is consulting on its proposals to ensure competition in the mobile broadband market.Specifically, Ofcom is proposing an outcome where four viable mobile network operators emerge from theauction. Viable in this instance means with sufficient spectrum to be able to compete effectively in futuremobile markets and for that reason Ofcom is proposing to have caps and floors on the amount of sub-1GHzspectrum and on the overall spectrum holdings of each mobile network operator.

2. Whether the upcoming auction can provide value for money for tax payers and how that should bebalanced with benefits for consumers

Ofcom’s principal duty as set out in the Communications Act 20033 is to “further the interests of citizensin relation to communications matters and to further the interests of consumers in relevant markets, whereappropriate by promoting completion”. It is not in their remit to maximise revenues, nor would that be legalunder European law. In line with their duties however, Ofcom will seek to keep intervention to a minimumconsistent with achieving the desired levels of competition. An efficiently and effectively run auction will1 Ev not printed.2 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0471:FIN:EN:HTML3 http://www.legislation.gov.uk/ukpga/2003/21/contents

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Ev 60 Culture, Media and Sport Committee: Evidence

deliver the greatest value to the citizen and the taxpayer, through ensuring that spectrum is made available tothose best placed to maximise its use.

3. The potential for next generation mobile internet services offered by the forthcoming availability ofspectrum

Current mobile internet technology is generally referred to as 3G (third generation, referring to a technologycalled UMTS). The accepted 4G technologies are LTE (“Long Term Evolution”) and WiMax. Both deliversubstantially greater bandwidth (faster downloads) but require larger contiguous blocks of spectrum, which isan issue for most operators using existing spectrum allocations. The combined auction of 800MHz and 2.6GHzwill deliver an additional 250MHz of spectrum suitable for the delivery of next generation mobile broadbandservices. The spectrum is suitable for allowing coverage over wide areas (800MHz) with capacity to deal withareas of high demand (2.6GHz). It is expected that the release of this spectrum into the market will enable theroll-out of next generation mobile services from 2013 onwards.

4. Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities

The 800MHz spectrum being auctioned has characteristics that are particularly suitable for coverage so mayresult in improved rural coverage. In addition, Ofcom is proposing a coverage obligation on one of the 800MHzlicences, to provide services to 95% of the population. Ofcom believes that this level is proportionate, balancingthe costs of providing the level of coverage against the benefits that would result. Ofcom does recognise thatthis would still deny services to a number of people, it has therefore invited views, along with any relevantevidence, on whether additional, perhaps more localised coverage obligations, should be set. The House ofCommons recently passed a motion urging Ofcom to increase the coverage obligation to 98% of the population.

5. Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed

The Radiocommunications Agency (the predecessor to Ofcom) went through due process when it originallyset the level of licence fees in 1998. Ofcom likewise followed due process when it reviewed the level of thosefees in 2004. We have no reason to doubt that the method used was appropriate or correctly applied. Inaccordance with the Secretary of State’s direction Ofcom of December 2010, Ofcom is to re-assess the levelof licence fees for 900MHz and 1800MHz spectrum after the auction. That is an appropriate time to do so asat that stage the value for similar spectrum will be known and this will be used by Ofcom as part of the processto determine new licence fees for 900MHz and1800Mhz. In any event, the direction specifically requires Ofcomto have particular regard to the sums bid for the 800MHz and 2.6GHz licences. Ofcom has set out their initialproposals for how they intend to proceed in the consultation document on the auction.

6. How the position of the UK compares with other countries, with regards to the allocation and utilisationof mobile broadband spectrum

The UK has a competitive mobile communications market with four major competing mobile networkoperators proving voice and data services, specialist wireless broadband suppliers, several virtual mobileoperators (such as Tesco Mobile and Virgin Mobile). The position with regard to spectrum allocations is onethat has arisen as a result of the history of mobile development in this country.

Initially, spectrum at 900MHz was first allocated to the two (at the time) mobile operators. Later when1800MHz became available it was awarded to four operators (with the bulk going to the new operators thatare now known as T-Mobile and Orange, recently combined to form Everything Everywhere). In 2000 the UKran an auction for 3G spectrum at 2100MHz and designed it in such a way as to result in five successfuldifferent bidders. The existing four operators were successful plus Three joined the market as a new entrant.

Operators without access to 900MHz have been unhappy that their spectrum with different characteristics to900MHz (higher data rates but reduced coverage) has left them at a perceived disadvantage and have lobbiedfor 900MHz spectrum to be redistributed or auctioned. With the recent liberalisation of 900MHz and 1800MHzspectrum (to allow 3G technology to be used at those frequencies) there were additional concerns over possiblecompetitive advantage of those holding such frequencies. Ofcom’s competition assessment (contained withinthe current consultation) concluded that operators would in future need a reasonable portfolio of spectrum atdifferent frequencies to be credibly competitive. This is a key factor behind the proposal to introduce spectrumcaps and ensure that four operators with appropriate portfolios result from the auction.

The tables below detail spectrum holdings at the main 3 bands used for mobile telephony (and broadband)but broadband can be delivered at other frequencies. In the UK there is spectrum allocated the UK Broadbandat frequencies over 3GHz.

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Paired spectrum allocations as at May 2010

UK Vodafone O2 Everything H3GEverywhere

900 MHz 2x17.4 2x17.4 0 01800 MHz 2x5.8 2x5.8 2x45* 02100 MHz 2x14.8 2x10 2x20 2x14.6

*Merger conditions include that JV must release 2x15MHz

Finland* DNA Elisa TeliaSonera

900 MHz 2x13.4 2x13.4 2x13.41800 MHz 2x24.8 2x24.8 2x24.82 GHz 2x19.9 2x19.9 2x19.92.5 GHz 2 x20 2x25 2x25

*National networks only

Germany T-Mobile Vodafone O2 E-Plus

900 MHz 2x12.4 2x12.4 2x5 2x51800 MHz 2x5 2x5.4 2x17.4 2x17.42 GHz 2x10 2x10 2x10 2x10

Italy Telecom Italia Vodafone Wind H3G

900 MHz 2x12.6 2x12 2x9.8 01800 MHz 2x15 2x15 2x15 02100 MHz 2x15 2x15 2x15 2x15

From the tables above it can be seen that there are similarities, in particular with Italy where H3G as thenewest entrant again only has 3G spectrum. Ofcom’s assessment has been that the current differences inspectrum holdings between operators is unlikely to lead to consumer harm from a material distortion ofcompetition in the short term. However, the auction design currently being consulted upon is designed to ensurethat four viable competitive operators with sufficient spectrum holdings to be a credible spectrum wholesaler,emerge from the auction, thereby allowing operators to address perceived imbalances or disadvantages.

7. The possible impact of the auction on alternative uses for spectrum

The spectrum at 800MHz and 2.6GHz is most suitable for mobile broadband services and it is on this basisthat it is being made available.

Demand for spectrum is increasing for a range of services other than mobile broadband. There is howeverother spectrum coming available that would be suitable for a range of services, for example broadcasting. Thisincludes spectrum at 600MHz (part of the digital dividend) and geographic interleaved, sometime referred toas white space spectrum. Ofcom intend to conduct auctions for this spectrum at a future date.

Increasingly licences are being made transferable and liberalised, which will allow future users to enter intocommercial arrangements to acquire to have access to spectrum they require. A nascent spectrum market isstill evolving in the UK and both Ofcom and the Government are taking a keen interest in how efficientlyit evolves.

June 2011

Written evidence submitted by Telefónica UK Limited

Summary

— Ofcom’s proposed Combinatorial Clock Auction (CCA), with safeguard caps, will address thecompetition concerns identified by Ofcom both to this Committee and in the consultation.

— The proposed spectrum floors cannot be justified, based on the proposition put before thisCommittee and contained within the consultation. They will distort the prices paid in the auctioncould give rise to £1 billion of unlawful state aid to “hugely resourced global corporations”.4

— If policymakers include a coverage obligation, then they should also ensure that suitable backhaulproducts are available nationally, otherwise the objective of the obligation will not be achievable.

4 Uncorrected oral evidence to the Committee (3 May 2011)

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Submission

1. Telefónica UK Limited welcomes this opportunity to respond to the CMS Committee’s call for evidenceto its spectrum inquiry. Telefónica trades under the “O2” brand in the UK mobile market, serving 22.3 millioncustomers. Our network also provides services to other “virtual” network operators, such as Tesco Mobile,which has a further 2.6 million customers. Telefónica has the smallest volume of spectrum available on a “percustomer” basis. Equitable access to further spectrum for 4G is therefore of particular importance to us.

Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision ofmobile broadband services.

Ofcom’s position before the Committee

2. An open auction should determine the most efficient assignment of scarce resources by allocating thoseresources to the bidders that value them the most. Ofcom’s view is that a completely open auction might leadto negative competitive outcomes. As Mr Richards put it:

“We should design the auction to support four [operators] and we should let competition unfold fromthere..... If you didn’t do that, in a sense, you might as well just have a spectrum free-for-all, but theconsequence of a spectrum free-for-all, it is almost a racing certainty that you would move to three quitequickly and possibly to two in due course. I think consumers, both ordinary individuals and businesses,would pay for that in the long term.” (3 May 2011)

3. The underlying assumption behind Mr Richards’ comment is that it is only the number of licensees thatdetermines the intensity of competition in the market. If this were the case, the European Commission wouldnot have approved the T-Mobile UK/Orange UK merger, as a priori, a reduction in the number of competitorswould have reduced competitive intensity. The equation that determines competitive intensity is much morecomplex than Ofcom suggests.

4. In Ofcom’s view, the auction design itself should not be a trigger for a market consolidation to take place.Whilst Ofcom would like there to be “four players”, under the proposed rules if it transpires that only threeplayers have viable investment cases and were willing to pay the reserve prices, only three players wouldemerge. If bidders do not have viable investment cases, it is not a legitimate concern for Ofcom. It is notOfcom’s place to prop-up businesses with unsustainable business models.

5. Ofcom consulted on two competition remedies for the Combined Award. They are proposed in order toremove the competition concern articulated by Mr Richards:

— (a) Safeguard caps, which limit the total holdings of specific classes of spectrum (to whichTelefónica does not object); and

— (b) Spectrum floors, which effectively ensure that there will be two “guaranteed winners” ofminimum quantities of spectrum in the auction.5 On Ofcom’s reasoning this gives rise to “fourplayers” being on the 4G market (however defined) when Telefónica and Vodafone are included.

No strategic behaviour possible

6. Ofcom’s argument for the spectrum floors rests entirely on the contention at Annex 6 §5.8 of theconsultation:

“Those national wholesalers who currently have spectrum holdings that may enable them in the future toprovide higher quality data services may have an incentive to pay more in the auction, in order to keepother national wholesalers from being able to match the services they can offer. Because of this, weconsider there is a material risk that only three national wholesalers (or possibly even only two) mayemerge from the combined award with spectrum portfolios that allow them an unmatchable competitiveadvantage in the provision of higher quality data services that are likely to be valued by consumers.”[our emphasis]

7. Ofcom’s technical analysis seeks to show that Telefónica and Vodafone have (uniquely) “spectrumholdings that may enable them in the future to provide higher quality data services”, ie it is the biddingbehaviour of Telefónica (and Vodafone) which is of concern to Ofcom.

8. This appears an odd justification, as Ofcom has specifically chosen a type of auction that minimises theability of bidders to act in such a strategic manner (it relies on this, in terms). Furthermore, the “safeguardcaps” limit Telefónica to no more than 2x10MHz 800MHz in the auction. Telefónica’s bidding is therefore notpivotal to the auction outcome. It could not undertake a foreclosure strategy even if it wanted to (which itdoes not).

9. There is no “free-for-all”, which was Mr Richards’ primary concern. Ofcom’s CCA design and safeguardcaps remove the ability for strategic bidding by Telefónica or Vodafone.5 The spectrum floors are specifically designed to ensure that Telefónica and Vodafone are not guaranteed to win any 4G spectrum

on the erroneous presumption that their existing spectrum holdings will suffice.

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10. The CCA and safeguard caps are an efficient mechanism to allocate scarce resources to those that placevalue on them. There is no justification to go beyond these remedies and introduce spectrum floors.

Technical justification for discriminating against Telefónica is also flawed

11. Mobile communications technology and the whole issue of spectrum is particularly complex, as Ofcom’sChair identified to the Committee.6 With regard to the issue of 2G liberalisation, reaching an evidence baseddecision took six years and 2,000 pages of analysis by Ofcom. Ofcom’s position quite rightly and properlymoved significantly, as the factual matrix became clearer to it. This experience demonstrates the risk ofregulatory failure inherent in such a complex subject. Intervention must be kept to a minimum and be soundlybased in fact.

12. Ofcom’s technical analysis attempts to demonstrate that the 900MHz holdings of Telefónica andVodafone (2x17.4MHz each) create the incentive effect set out at Annex 6 §5.8 of the consultation.

13. It is easy to demonstrate that it is not the volume of spectrum an operator has that counts, but what canbe done with that spectrum. Ofcom’s presumption rests on large volumes (2x15MHz or more) of 900MHzspectrum providing Telefónica or Vodafone each with a competitive advantage in a hypothetical future 4Gmarket. However, whilst we have 2x17.4MHz of 900MHz, the standards for LTE900 are such that only a2x10MHz carrier is (and will be) supported in the standards, network equipment and devices.

14. There is a simple reason for this; only three7 out of around one hundred operators in Europe havemore than 2x10MHz of 900MHz. Manufacturers will not make devices or equipment for such a small marketof operators, there being no scale economies. This crucial fact undermines the whole basis for discriminatingagainst Telefónica and Vodafone through the spectrum floors proposal.

15. It is unclear to us why Ofcom has not alighted on this fact in preparing its competition assessment.

Negative consequences for competition and consumers arising from spectrum floors

16. If, by virtue of the auction rules, operators cannot gain access to spectrum assets they are willing topurchase, their network costs will be driven up. Less spectrum equates to more base stations, which leads tohigher costs which will be passed through to consumers; whereas if others are allocated resources that they arenot otherwise willing to pay for, they will accrue windfall gains. These gains will either accrue to shareholdersor be ploughed back into the retail market thus distorting competition.

Whether the upcoming auction can provide value for money for tax payers and how that should be balancedwith benefits for consumers.

17. The “spectrum floors” proposed by Ofcom mean that at least two bidders will each be guaranteed a“minimum quantity” of spectrum. This may have three effects:

(a) Those bidders might only bid for the minimum quantity and acquire it at the reserve price, whilstother bidders will pay the price determined by the level of competition in the auction (this effect isrecognised in the consultation); or

(b) If acquiring more than the minimum quantity becomes too expensive as the auction prices rise,“guaranteed winners” have the option to reduce their demand such that they acquire the minimumquantity at the reserve price, a strategy not open to other bidders; and

(c) The bidding activity of those bidders guaranteed to pick up spectrum (potentially only at the reserve)will still have inflated the prices paid by those bidders not guaranteed to pick up spectrum.

18. It is our strong view that this would amount to a state aid. Ofcom would be selling assets to one set ofbidders at preferential rates, whereas other bidders—competing on the same market and in the samegeographical areas—would be sold the same inputs at the full price determined by the auction.

19. Whilst the courts have stated that it is acceptable for the same type of spectrum to be sold at differentprices,8 the courts have been clear that it is not open to Member States to award spectrum to one group oflicensees based on one pricing mechanism (or set of rules) and to award the same asset to another group basedon a different pricing mechanism.9

20. In its consultation document Ofcom helpfully estimates the potential market value of the spectrum to beawarded. By deducting the reserve prices from these estimates, we can project the magnitude of the state aid.On this basis, the level of state aid granted would be around £1 billion of tax payers’ assets.6 “It is simultaneously somewhat complex but exceedingly important” (3 May 2011)7 Telefónica UK, Vodafone UK and Mobilkom Austria8 For example, in France the original 3G spectrum award process led to an unsold licence, which was later sold at a lower price

than the licences in the original award process.9 See in particular the CFI in Cases T-474/04 Bouygues SA v Commission [2007] II-02097 and C-431/07P Bouygues SA v

Commission [2009] ECR I-02665 at §110 of the CFI’s judgment “if the national authorities decide as a general principle thatlicences will be awarded free of charge, or awarded by means of public auctions or awarded at a standard price, there is noaid element, provided these terms are applied to all the operators concerned without distinction.” [our emphasis]

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21. We believe that such state aid is unlikely to be compatible with the EU Treaty. If such state aid were tobe contemplated, then it would have to be notified to the European Commission, which recently publishedguidelines regarding state aid in the delivery of broadband infrastructure (the relevant product market). Thoseguidelines clearly state:

“The Commission has taken an overwhelmingly favourable view towards State measures for broadbanddeployment for rural and underserved areas, whilst being more critical for aid measures in areas wherea broadband infrastructure already exists and competition takes place.”10 [our emphasis]

22. If Ofcom constructs the auction so that state aid arises, it is unlikely to be compatible with the internalmarket. Consequently the auction would be declared null and void, causing significant delay. We would alsoexpect there to be substantial litigation, as both winners and losers in the auction will have already disclosedtheir preferences and valuations, potentially distorting any future award.

The potential for next generation mobile internet services offered by the forthcoming availability of spectrum.

23. The move from 3G to 4G is analogous to the migration from copper based ADSL to fibre basedbroadband in the fixed internet. The capacity, quality and speed of the bearer technology is vastly improved.The 2x100MHz spectrum to be sold in the Combined Award represents a c.50% increase in the supply ofresources. In the long run, when all mobile spectrum migrates to 4G we would expect the total available mobilebroadband capacity in the UK to increase by between 20–40 times from what we see today.

Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities.

24. We believe that ensuring the broadest possible ownership of 800MHz spectrum will secure competitionin rural coverage provision. This is why we have proposed a 2x10MHz 800MHz cap, as happened in theSwedish auction.

25. Whist coverage obligations are superficially attractive, they can have the effect of deterring entry by newplayers and therefore potentially reduce the level of competition in the auction. The higher the obligation (interms of %pop. coverage and/or shorter timescale), the larger the entry deterrent effect. There is a clear trade-off to be made between encouraging more competition and securing more coverage than the market mightotherwise deliver (an externality).

26. In addition, any coverage obligation will distort network investment incentives in pursuit of an arbitraryobjective. We note the research from eBay regarding the untapped potential for m-commerce in both ruralareas (due to coverage) and some urban areas (due to reliability and capacity issues).11 This researchdemonstrates the diffuse nature of the network investment challenge.

27. eBay’s commercial interest in better 4G coverage shows that there are other well funded actors in thevalue chain that have the incentive to contribute towards network investments. Business models will emergethat tap into these incentives. If coverage is a key driver of value for eBay and others then they should usetheir commercial relationships with the networks to drive investment in (their) desired level of quality andcoverage. We do not believe that eBay and other content providers should leave the burden of funding thecoverage externality to the taxpayer (through lower auction receipts).

28. If, notwithstanding the above, coverage obligations are included in licences then, to be effective indelivering rural mobile broadband coverage, they must go hand-in-hand with the availability of cost effectivebackhaul12 solutions from BT, plus the ability to use BT’s “ducts and poles”. There is little value in forcingmobile operators to build masts when those masts cannot be connected back to the core network with a fit forpurpose backhaul solution.

Whether the licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed.

29. Ofcom is required to have a sound factual and empirical basis for determining future spectrum fees.Ofcom’s view is that the auction may provide an indicator of “full market value” that would allow proportionatespectrum fees to be calculated.

How the position of the UK compares with other countries, with regards to the allocation and utilisation ofmobile broadband spectrum; what is the possible impact on alternative uses for spectrum?

30. All countries in the EU have broadly the same volume of available spectrum for mobile services, butvery different numbers of potential mobile customers (ie population). Countries with large populations,therefore, tend to have mobile networks that are more capacity constrained than smaller Member States. Thismeans that mobile spectrum is a particularly scarce and valuable resource for the UK’s mobile sector.10 §9 of http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2009:235:0007:0025:EN:PDF11 http://www.ebay-mediacentre.co.uk/Latest-News/ACT-NOW-ON-M-COMMERCE-TO-UNLOCK-1–3BN-BOOST-TO-

ECONOMY-EBAY-fa.aspx12 Backhaul refers to the connection between the base station and the main network of the operator. In order to move from 2G/3G

to 4G, such connections will need to be upgraded to fibre based solutions in order to deliver the higher speeds and throughput.

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31. If there were less spectrum available more base stations (masts) would have to be built to make up forthe shortfall in capacity. There is therefore a substantial environmental benefit for citizens in securing as muchspectrum as possible for mobile uses.

Conclusions

32. We recognise that Ofcom is keen to avoid strategic behaviour in its auction. This is achieved by a CCAplus the safeguard caps proposed in the consultation. The case for spectrum floors, as put forward by Ofcom,isn’t supported by the evidence and goes beyond what is necessary, based on the justification put forward.

33. We believe that an auction without spectrum floors will secure four players, if there are four playerswith viable 4G investment cases. An open and transparent auction is the best way to allocate scarce resources—taxpayers’ assets. The regulator is not best placed to predetermine which operator should get what, which is theeffect of Ofcom’s spectrum floors proposal. Ofcom simply cannot second guess the efficient market outcome, itlacks sufficient technical expertise and the private information known only to bidders. The proposed provisionof £1 billion of state aid for, most likely, Hutchison and Everything Everywhere is unlawful and, in any event,wholly inappropriate given the current economic climate.

34. If Ofcom wishes to revisit its spectrum floors proposal, then it will need to consult on a new factualbasis. Whatever remedy it proposes must not distort the prices paid in the auction.

35. Ensuring the broadest possible access to 800MHz spectrum13 will, in our view, create a sufficientlycompetitive environment for rural 4G coverage over time. If policymakers wish to accelerate the delivery ofthat coverage, through licence obligations, then the auction must allow bidders to clearly express the cost ofthe obligation in their bids, the current design does not do that. Any coverage obligation must be accompaniedby certainty of supply for the backhaul necessary to deliver a 4G experience to rural customers. Without thatpiece of the jigsaw, rural customers will remain in the data slow lane.

June 2011

Written evidence submitted by Inmarsat Group Limited

1. For over three decades, Inmarsat has been the leading provider of mobile satellite communications servicesaround the globe. From its headquarters in London, Inmarsat has contributed significantly to the nationaleconomy and provided an ever-growing set of services, including advanced plans for mobile broadband foruse at sea, on land and in the air. The life-blood of all these services is access to radio spectrum for sophisticatedsatellites that cost many hundred millions of pounds to build, launch and operate. For this reason, Inmarsatwelcomes the opportunity to provide written evidence to the Committee as part of its inquiry into spectrum.

2. This submission concerns the following four points:

— Spectrum is critical to the satellite communications industry.

— The satellite communications industry is important to the UK economy—when identifyingbroadband spectrum, the UK also should take into account this and other industries.

— Satellite communications should be an integral component of the UK broadband plan.

— Satellite operators provide other critical services in addition to mobile broadband.

Introducing Inmarsat

3. We are the leading provider of global mobile satellite communications services (“MSS”). We provide dataand voice connectivity to end-users for use at sea, on land and in the air.

4. Inmarsat’s mission started as an Inter-Governmental Organization providing MSS to maritime users, whichinclude companies engaged in merchant shipping, passenger transport, fishing, energy and leisure, as well asgovernment and maritime patrol organisations (such as navies and coast guards). Inmarsat subsequently hasexpanded its service portfolio and provides MSS as well to the land mobile and aeronautical sectors, with userssuch as government entities, media users, aid agencies, the oil and gas industries, and commercial airlines.

5. Today, as a privatised entity, Inmarsat is in the forefront of developing sophisticated new technology forsatellite services. We currently operate three generations of satellites, starting with three Inmarsat-2 satelliteslaunched in the early 1990s, five Inmarsat-3 satellites launched between 1996 and 1998, and three Inmarsat-4satellites launched in March and November 2005 and August 2008. Each of our Inmarsat-4 satellites is up to60 times more powerful, and has up to 16 times more communications capacity than an Inmarsat-3 satellite,and the Inmarsat-4 satellites are expected to extend the commercial life of our satellite fleet beyond 2020.

6. Inmarsat is one of the two operators selected through EU procedures to provide MSS across Europe, usingtwo GHz frequencies. The selection of Inmarsat’s EuropaSat system is part of EU policy to facilitate theintroduction of innovative pan-European satellite communications services. In adopting the selection procedure,the European Parliament and the Council recognised that this type of new MSS system is an innovative13 A 2x10MHz 800MHz cap in the auction, meaning that at least three players will have either LTE800 or LTE1800 to deploy

nationally.

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alternative platform, which should contribute to enhanced competition and efficient investment. They explicitlyreferred to MSS improving coverage of rural areas and anticipated that new MSS applications will emerge inthe coming years.

Spectrum is Critical to the Satellite Communications Industry

7. Use of radio spectrum is the “life blood” of satellite communications because highly expensive andsophisticated satellites must be designed for operation in the harsh space environment to operate over a lengthylifespan using spectrum coordinated through a complex international process. Inmarsat uses spectrum belowthree GHz (the so-called “sweet spot”) and will continue to do so in the long term future.

8. For example, in November 2007, Inmarsat entered into a contract with Astrium for the construction of anew satellite called Alphasat to be deployed over the European and Middle East region. The Alphasat satellitewill provide our services across the complete 41 megahertz of MSS spectrum available over this region.Alphasat’s advanced digital processor capability and optimised antenna coverage will allow up to 50% morecapacity for our services. The total cost of the Alphasat programme, including manufacture and launch of thesatellite, is expected to be in the region of £215 million.14

9. Inmarsat already is planning ahead for its next generation of satellites (the “Inmarsat-5” constellation).For instance, in 2013 we expect to commence offering our “Global Xpress” service, in downlink frequenciesbetween 18 and 22 GHz and uplink frequencies between 27 and 31 GHz. These frequencies are often referredto as the “Ka-band”. Inmarsat plans to offer connectivity at speeds of up to 50 Mbps to small antennas via ourInmarsat-5 satellites using the Ka-band.

10. These kinds of investment and technology development can only be made if there is suitable assurancethat spectrum will be available during the lifetime of the satellite. Satellite registrations to obtain internationalrecognition through the International Telecommunication Union have a lead time of up to seven years beforethe satellite is placed into service. Today’s sophisticated communications satellites have lifespans up to fifteenyears or longer. Once launched, satellites cannot be “retuned” or modified to operate using other spectrumassignments. A threat to the availability of the appropriate spectrum means that substantial investments simplycannot be made. Regulatory certainty is an important element for high upfront business planning in thesatellite sector.

11. Satellite operators must also assess the availability of spectrum across the entire “footprint” of thesatellite. Moreover, unlike terrestrial mobile phone operators who can choose from a variety of spectrumallocations within any single country, satellite operators must rely on a fairly narrow set of internationallycoordinated spectrum bands. If a single country within the footprint decides to make spectrum available inways inconsistent with its neighbours, it can either create unacceptable interference for satellite operations orimpede the economic viability of the business case for the satellite services, or both. A failure by one regulatoryauthority to take into account the unique benefits of satellites services can thus deny those services to usersacross Europe.

The Satellite Communications Industry is Important to the UK Economy

12. When identifying broadband spectrum, the UK also should take into account this and other industries.These activities are a large component of the UK Space industry, which itself makes significant contributionsto the national economy. Policymakers have already recognised this contribution:

— In March this year, the Parliamentary Space Committee welcomed UK Chancellor GeorgeOsborne’s budgetary support for the Space industry in “The Plan for Growth”. The latter recognisesthe Space industry as “an expanding industry”, and highlights the UK Space sector’s growthaverage of 10% per year over the last decade. A quarter of these revenues come from the satellitetelecommunications sector.

— In the foreword to the UK Space Innovation and Growth Strategy (the “IGS”) in February 2010,the Minister for Science and Innovation, stated that “the UK Space sector is a genuine successstory. We’re responsible for world-class science in our laboratories and on international missions.We manufacture many of the satellites surrounding the Earth, and are experts in software designand systems integration. The sector contributes £5.6 billion to the economy and supports 68,000jobs.”

13. Inmarsat is an important part of this Space industry that contributes significantly to the UK economy.Our 11 in-orbit satellites are licensed under the UK Outer Space Act. The majority of our 500+ employeeswork in London. During 2010, revenues from Inmarsat Global were £465.4 million, an increase of £42.2million, or 10.0%, compared with 2009 (translated at 7 June 2011 exchange rate).

14. These positions highlight that there are numerous UK policy and legislative initiatives related to spectrumthat should be considered as part of spectrum policy. These different societal policies must be assessed togetherwith broadband planning to ensure the right mix of spectrum uses is fostered.14 This amount is taken from Inmarsat Group Limited’s 2010 Annual Financial Information Disclosure Report, with sums originally

expressed in US$ converted to GBP at the prevailing exchange rate on 7 June 2011.

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Satellite Communications should be an Integral Component of the UK Broadband Plan

15. A central part of this inquiry is to assess how best to provide mobile broadband services, in particularfor rural areas where normal networks have not been rolled out. Policymakers recognise that satellitecommunications must be an integral part of planning for broadband networks:

— In December 2010, the Government released “Britain’s Superfast Broadband Future,” laying outstrategy for ensuring the UK’s broadband networks. The summary acknowledges that “a mix oftechnologies—fixed, wireless and satellite—will be needed to deliver superfast broadbandthroughout the UK.” It notes that satellite “will need to be a part of any solution aiming atuniversal coverage”.

— Most recently, on 31 May 2011, European Commission Vice President and Digital AgendaCommissioner Neelie Kroes said that satellites will play a role in achieving EU digital agendagoals. She noted that satellite communications “can provide a great contribution to deliver theimportant goal of basic broadband for all”. She also raised an important notion that “supporting arange of fixed and mobile solutions promotes competition among technologies, allowing them todevelop their comparative advantages and ensuring that in future we can select from the bestpossible range of options”.

— This same thinking is well-developed in the United States. As recently as January this year, theFederal Communications Commission (FCC) recognised that the network of the U.S. satellite MSSlicensee LightSquared “will be able to provide mobile broadband communications in areas whereit is difficult or impossible to provide coverage by terrestrial base stations …, as well as at timeswhen coverage may be unavailable from terrestrial-based networks (such as during naturaldisasters)”.

Satellite Operators Provide other Critical Services in Addition to Mobile Broadband

16. The focus of this inquiry on mobile broadband should not obscure that many other services rely onspectrum in the same portion of the radio frequency spectrum that mobile terrestrial operators seek. Amongthe recommendations of the IGS that we noted above is that the Government should take full account of thewider value of Space-enabled services when engaged in activities relating to radio frequency spectrumallocation. The spectrum most in demand below three GHz has been a prime focus for mobile terrestrialoperators, but it also is used by many other users and regulated safety services. A sophisticated approach to“co-habitation” amongst the different services is required to maximise welfare for all users.

17. As we have noted above, Inmarsat provides a wide range of services in addition to mobile broad bandusing its satellite fleet in frequency bands below three GHz:

— In the maritime area, Inmarsat supports position reporting as a key component of fisherymanagement and ocean resource conservation. We also provide safety services for distresspurposes, some of which are required by the International Maritime Organization for cargo shipsover a certain size and for all passenger vessels.

— Military and government agencies constitute the largest end-users of our services in the land mobilesector and demand reliable, high quality services. Inmarsat provides important links to supportrelief missions in response to natural disasters.

— Aeronautical users rely on Inmarsat satellite communications services for Air Traffic Control safetyservices, while aircraft crew and air traffic controllers use our services for data and voicecommunication between the flight deck and ground-based control facilities.

18. These are but a few of the examples of services that Inmarsat provides using spectrum in the traditionalbands below three GHz. As part of our mission to innovate with new technology approaches, however, we alsoare working to expand operations in higher spectrum bands, such as the Ka-band service described above.Although part of the band is shared with fixed links, any future oriented policy for this band should alsoconsider the use by satellite communications. Some mobile terrestrial operators seek to use these samefrequencies for backhaul purposes (ie carrying traffic from masts back to network control centres for furtheronward transmission, and not between customer handsets directly). This approach needs to be addressedreasonably to ensure continued growth of the satellite sector while balancing needs of terrestrial operations.

In Summary

19. It is timely and important for the Committee to review UK policy towards the use of radio spectrum. Itmust consistently be kept in mind that many different industry sectors rely on spectrum, some as the majorinput into their services, and those industries in turn contribute very substantially to the national economy. Theprovision of broadband service is a compelling goal, especially to rural areas where the contribution of satellitenetworks can be substantial. The satellite industry also contributes to wider goals, providing services thatcannot be obtained through any other networks and as a real, competitive alternative. International aspects ofthis industry must also be taken into account, because of the complex international regulatory structures and

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the export opportunities that UK satellites offer. We welcome a careful balancing of these different needs forspectrum as part of the UK broadband plan.

June 2011

Written evidence submitted by the Countryside Alliance

1. In May 2008, Ofcom published a report which assessed television, radio, internet and communicationhabits across the regions and nations. The report found that rural households were more likely to havebroadband connections than those who live in urban areas, indicating that 59% of rural households hadbroadband services, compared to 57% in urban homes. There is clearly a high demand for broadband in ruralareas, however rural towns and villages do not benefit from the level of competition common in urban areasdue to low consumer density and poor existing infrastructure.

2. Broadband service in rural areas is often poor. The National Farmers Union ran a poll last year regardingbroadband access in rural areas and results indicated around 40% of respondents reported that they couldn’tget broadband at all, while 90% who could access broadband didn’t get a reliable connection.

3. The Countryside Alliance therefore supports Ofcom’s proposal to structure the release of 800 MHz and2.6 GHz spectrum to ensure the continuation of four-player wholesale mobile broadband market.

4. It is vital that rural communities and businesses have access to effective and affordable broadband if thedigital divide is not to grow even wider and rural economies are going to grow and prosper. Reliable broadbandis imperative for competitive and successful enterprises in a growing digital economy. The CoalitionGovernment has made clear its desire to make more public services available online, which provides a morecost effective means of accessing public services. However online access to public services will only work ifthey are accessible to all and do not exclude those in remote areas, who already struggle to access publicservices.

5. Farming businesses are increasingly required to meet certain obligations online, such as VAT returns,animal movements and applying for agriculture support. Farming businesses and other rural businesses canonly meet these obligations if they have a decent and reliable broadband connection.

6. The Countryside Alliance therefore supports Ofcom’s proposals to apply a coverage obligation to one ofthe 800MHz licences, however we have urged Ofcom to increase this from 95% to 98% population coverage.

7. It is important that there is competitive roll out of broadband services, if the current problems of highprices and poor service in rural areas are to be overcome. The Alliance would like to see the spectrum auctiondesigned to maintain as much competition as possible in the marketplace, allowing operators to compete on alevel playing field to ensure market growth, which benefits consumers and ensures greater choice for thoseliving in rural areas.

8. It is hoped that the sale will take place in late 2011. Any delay will seriously jeopardise the ability of thisGovernment to meet a universal service commitment. The auction of the radio spectrum provides a hugeopportunity for all the mobile companies to provide better broadband at competitive prices. However, if theauction is not structured to maintain competition, a duopoly may emerge and rural coverage will suffer whilstprices for “non profitable” areas increase. Set up costs for the mobile companies to increase coverage is notgoing to be huge as it will just be an expansion of coverage over their current masts. There is no need to digup the countryside which is expensive, time consuming and riddled with planning concerns.

9. Valuable low-frequency spectrum will be required to make mobile broadband accessible and affordablein the countryside, but rural users must not be left in a position where the low-frequency spectrum ismonopolised by a few operators, and where only two players have the amount of low frequency spectrumrequired to deliver universal broadband at 2mbps.

10. The Countryside Alliance has urged Ofcom to ensure that an outcome of the auction is a competitivemarket to support universal coverage at 2mbps in all parts of the UK.

June 2011

Written evidence submitted by Hutchison 3G UK Ltd (Three)

Introduction

Hutchison 3G UK Limited (“Three”) is the UK’s fourth mobile network operator (fifth before the merger ofOrange and T-Mobile in the UK), having won the 3G licence reserved for the new entrant in the 2000 spectrumauction. Three has been instrumental in both increasing competition in the UK mobile phone market and indriving the migration to 3G technology which delivers a range of mobile broadband services. Three is the UK’sleading provider of mobile broadband carrying 50% of all mobile data (according to independent estimates) andhas over 97% population coverage for its mobile data services.

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Summary

(i) The internet is now mobile. Government and regulatory policy must therefore preserve a competitivemobile market that maximises benefits for consumers and citizens, including rollout of mobile data across theUK and enables Government to better target funding to those areas where the market will genuinely not delivermobile broadband, such as rural areas.

(ii) The combined auction for 8H00MHz and 2,600MHz spectrum must be seen in the context of thecompetitive distortion caused by the January 2011 liberalisation of 900MHz and 1800MHz spectrum. O2,Vodafone and Everything Everywhere each received significant benefits from liberalisation. Yet Ofcom’sproposed method of allocation does not mention this link. This distortion must be remedied through minimumspectrum packages that provide performance at least equivalent to that which O2 and Vodafone can achievethrough the low frequency spectrum gifted to them.

(iii) Three strongly supports Ofcom’s view that competition between a minimum of four wholesale mobileoperators is essential to future competition in mobile markets. Against a background of consolidation in theUK and US this is a clear and strong commitment that will stimulate investment and protect consumers. Toachieve this policy objective requires a minimum spectrum portfolio that gives wholesale operators the abilityto compete credibly, or Ofcom risks the possibility of other operators marginalising Three or forcing it out ofthe market completely.

(iv) Ofcom must also impose a linkage between the licence fees for liberalised spectrum and the auctionprices payable in this auction. Without such a linkage, operators who benefit from liberalised spectrum willgain a financial advantage which could undermine the positive competition benefits which would otherwisearise from a reasonable spread of spectrum holdings.

(v) Mobile internet services are the most cost effective means of serving rural areas where there is typicallyno fixed internet. Improved mobile broadband coverage will be provided to rural areas in an auction thatmaintains a competitive market and effectively remedies the market distortion caused by liberalisation of900MHz spectrum.

(vi) Three supports the proposed national coverage obligation and proposes that this is further extendedsubject to suitable minimum spectrum portfolio. Three would be prepared to support an increased coverageobligation of 97% indoor population coverage at 2Mbps. This would guarantee mobile data services to anadditional 1.2 million people compared with the 95% proposal. With government funding allocated tobroadband, it may be possible to achieve over 98% national coverage.

1. Does the proposed method of spectrum allocation promote, or hinder, competition in the provision ofmobile broadband services?

1.1 While Three agrees with much of the proposed method of spectrum allocation there remains the concernthat the proposed allocation will fail to address the distortion of competition in the mobile market caused byliberalisation of 900MHz and 1800MHz spectrum in January 2011.

1.2 In seeking to ensure that Ofcom achieves its stated policy objectives, Three considers that Ofcom shouldapply three tests to ensure the preservation of competition:

— Will the Combined Auction remedy the competitive distortion arising from O2 and Vodafone’spreferential access to low frequency spectrum?

— Will the spectrum awarded under the Combined Auction ensure that at least four national wholesaleoperators are credible and sustainable competitors?

— Will the Combined Auction avoid spectrum being a source of competitive distortion in the future?

1.3 Will the Combined Auction remedy the competitive distortion arising from O2 and Vodafone’spreferential access to low frequency spectrum?

1.4 Ofcom’s method of allocation does not make the link between the 2012 auction of 800MHz and 2.6GHzspectrum and liberalisation. Prior to liberalisation, 3G capability (using the 2.1GHz 3G spectrum exclusively)was relatively evenly distributed between operators following allocation by competitive auction in 2000. Thiscreated a level playing field which stimulated competition between operators resulting in increased 3G rollout,lower prices and innovation and investment in new mobile services.

1.5 In January, Ofcom lifted the restriction on the use of lower frequency 2G (900 MHz) spectrum, alongwith higher frequency 2G (1800MHz) spectrum. Lower frequency spectrum is particularly effective inproviding connections over a wider geographic area compared to existing 3G 2.1GHz spectrum. Liberalisationled to a 150% increase in the total 3G spectrum in the UK mobile market. However, the benefits have not beendistributed evenly across the market and liberalisation has caused a fundamental shift in the balance of 3Gcapabilities of the various operators, without the benefit of a competitive process.

1.6 O2, Vodafone and Everything Everywhere (EE) have each received significant benefits fromliberalisation. Three is the only wholesale mobile operator whose share of 3G capable spectrum is much lessnow than before liberalisation. Indeed, its share of 3G capable spectrum has dropped hugely, from 25% to just

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10%. Furthermore, without any holdings of 900MHz spectrum, Three and EE are the only operators that donot have access to valuable low frequency 3G capable spectrum.

1.7 Ofcom’s current proposals will not remedy the distortion in relation to access to low frequency spectrumbecause they may result in the fourth operator lacking sufficient spectrum to match the performance of O2,Vodafone and Everything Everywhere in terms of capacity, speed or coverage.

1.8 Almost all other Western European countries took steps, when conducting the liberalisation, to re-allocateor re-auction spectrum between operators in a more balanced way. The UK has failed to do so and has therebygiven certain operators a substantial unearned competitive advantage.

1.9 Will the spectrum awarded under the Combined Auction ensure that at least four national wholesaleoperators are credible and sustainable competitors?

1.10 Three strongly supports Ofcom’s view that competition between a minimum of four national wholesalemobile operators is essential to future competition in the mobile market—maximising consumer and citizenbenefits and the UK’s economic and social growth.

1.11 Given the increasing importance of being able to provide high quality mobile data in the current market,a credible national wholesaler will need access to sufficient spectrum to provide high quality national coverageto consumers. The other existing national wholesale operators have strong incentives to support a reduction incompetition and a realistic possibility of achieving it by limiting Three’s access to new spectrum. With Threehaving driven 3G rollout out and lowered consumer prices the other operators would benefit substantially ifThree ceased to be an effective competitive force.

1.12 It is for this reason that Ofcom must enact measures to promote competition by ensuring that there areat least four national wholesalers with a “minimum spectrum portfolio” needed to compete credibly in asustainable manner. Three considers that the minimum packages required to provide performance at leastequivalent to that which O2 and Vodafone will be able to achieve with their 900MHz spectrum are 2x15MHzof 800MHz spectrum; or 2x10MHz of 800MHz spectrum plus either 2x15MHz of 1800MHz spectrum or2x20MHz of 2.6GHz spectrum.

1.13 Will the Combined Auction avoid spectrum being a source of competitive distortion in the future?

1.14 In addition to a minimum spectrum portfolio that enables sustainable competition, Ofcom needs to domore to avoid large disparities between holdings of different operators. Large holdings will tend to encourageinefficient hoarding of spectrum, to the detriment of competition. To address competition in the future Ofcomis proposing the introduction of spectrum caps on the amount of spectrum that operators can hold. Ofcomshould revise its proposed overall spectrum cap to 2x95MHz at most rather than 2x105MHz. This would limitthe largest possible spectrum holding to 33% of total available spectrum.

2. What is the potential for next generation mobile internet services offered by the forthcoming availability ofspectrum?

2.1 New technology and applications, as well as growing consumer demand, will require ever greateramounts of spectrum. Further spectrum liberalisation will provide faster download speeds to mobile broadbandcustomers across a wider area of the UK and support the take up of mobile broadband.

2.2 Developments over the last three years, since Three led the market to develop mobile broadband (MBB)as a mass-market proposition, have shown how rapidly the market can develop. Three anticipates that the paceof change will increase over the coming decade with the launch of 4G/LTE networks.

2.3 Over the past two years internet traffic on mobile networks has exploded, with Ofcom reporting a 2,200%increase in data traffic on mobile networks in 2009 alone. This is being fuelled by the rapid uptake ofsmartphones and tablets by citizens and businesses alike. Efficient, equitable spectrum allocation is necessaryto sustain this growth and to provide continued connectivity to the public at fair prices.

2.4 The competitiveness of the future market will depend on operators having the right spectrum, and enoughof it, to be able to service the demand. Consumers and the economy will suffer, possibly irretrievably, if thewrong decisions are made now. In particular, UK consumers will no longer receive leading, high quality mobileservices at reasonable prices.

2.5 To realise the potential of next generation mobile internet services, next year’s UK spectrum auctionmust ensure the competition that existed prior to the decision to allow legacy 2G spectrum to be used for 3Gis re-established. Before liberalisation in January Three handled 50% of UK mobile data traffic with 25% of3G spectrum, secured in a competitive auction. After January Three now handles 50% of UK mobile datatraffics with just 10% of available 3G spectrum. If the auction fails to address the spectrum imbalance createdin January 2011, then there is a very real risk of higher prices, stalled rollout of new technology and marketstagnation.

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2.6 The chart below illustrates operators’ spectrum holdings following liberalisation in January.

2010 liberalisation decision:spectrum allocation

UK

spe

ctru

m (p

aire

d M

Hz)

Source: Ofcom

3. Can the upcoming auction deliver improved mobile broadband coverage in rural areas, as well as cities?

3.1 Mobile internet services are the most cost effective means of serving rural areas where there is typicallyno fixed internet. Lower frequency spectrum can be used to deliver mobile broadband and address “not spots”in rural and urban locations as well as increased in-building penetration. Improved mobile broadband coveragewill be provided to rural areas in an auction that preserves and enhances competition by ensuring access tolower frequency spectrum for all operators.

3.2 As a new entrant into the mobile market Three has invested heavily in its network to extend 3G coverage.Three currently provides outdoor 3G coverage to 97% of the UK population. With just under 13,000 basestations Three possesses the infrastructure required to support low frequency spectrum and extend coverage torural areas. If 800MHz was deployed over Three’s network 96% of the UK’s population would enjoy indoormobile broadband coverage overnight.

3.3 Three supports the government’s objective of providing 95% indoor coverage at 2Mbps (based on alightly loaded cell). However, under Ofcom’s proposal only speeds of around 1Mbps can be provided; speedsof 2Mbps could be provided using 2X10MHz 800MHz. Furthermore this allocation could deliver 97% indoorpopulation coverage without likely effect on auction prices, and enable funding from BDUK to be moreeffectively targeted to hard to reach areas.

3.4 Three would therefore be prepared to support an increased coverage obligation of 97% indoor populationcoverage at 2Mbps. This would guarantee mobile data services to an additional 1.2 million people comparedwith the 95% proposal. With government funding allocated to broadband, or acceptance of slightly lowerauction prices, it may be possible to achieve over 98% national coverage.

4. Have licence fees for mobile operators previously been set at appropriate levels, and how should thisshould be assessed?

4.1 900MHz 2G spectrum was gifted to Vodafone and O2 in the 1980s. It is a valuable public asset forwhich Vodafone and O2 each pay an annual fee of just over £12.4 million. Everything Everywhere pay anannual fee of just over £33.2 million for the 1800MHz spectrum they hold. Ofcom recently told this Committeethat the fees should be a “multiple” of this as the effect of liberalisation was to increase the value of thisspectrum.

4.2 Three re-iterates the importance of maintaining the linkage proposed by Ofcom between the licence feesfor liberalised spectrum and the auction prices payable in this auction. Without such a linkage, operators whobenefit from liberalised spectrum will gain a financial advantage which could undermine the competitionbenefits which would otherwise arise from a reasonable spread of spectrum holdings.

4.3 Three supports the linkage suggested by Ofcom (800MHz prices for 900MHz and the average of 800MHzand 2.6GHz prices for 1800MHz) but notes the need to address the considerable first-mover advantagesassociated with early availability of this spectrum.

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4.4 900MHz spectrum is significantly more valuable in the short and medium term due to:

(i) earlier availability;

(ii) lack of legacy problems; and

(iii) earlier availability of handsets.

We estimate that the potential incremental cash flows for operators with 900MHz spectrum could be aroundGBP80–100 million per annum over the next five years, with diminishing benefits afterwards.

4.5 This translates into a net present value (NPV) of around GBP500 million over the next ten years. Thisis consistent with international benchmarks as higher prices were paid in recent auctions for 900MHz spectrum(Hong Kong) than for 800MHz or equivalent (Germany and US).

5. How does the position of the UK compare with other countries, with regards to the allocation andutilisation of mobile broadband spectrum?

5.1 In 1999, the UK took the lead in transforming its mobile communications market, announcing thatcompetition was the key to the future of next generation mobile phones and seeking to encourage the entryinto the market of new 3G entrants. 12 years later, the UK’s belief in the power of increased competition hasbeen vindicated. In addition to the benefits brought by encouraging 3G market entry, Three strongly believesthat a mobile market with four or more competitors is of significant benefit to consumers. The UK now benefitsfrom materially lower prices and greater penetration of new and innovative mobile communications services.

5.2 Where 3G market entry has been successful, the revolution in 3G mobile communications has clearlydemonstrated the benefits of creating effective and sustainable competition. In contrast, many other largeWestern European economies have not tried or have failed to support 3G market entry and create effective orsustainable competition in mobile communications services—and this has resulted in much higher prices andlower availability of new mobile services.

5.3 The UK is in the fortunate position in which it currently has a mobile market with four active nationalwholesalers, one of which is a 3G market entrant. From the evidence available, this would appear to be theoptimal competitive situation, to the benefit of UK consumers. However, following 2G liberalisation, the UKnow has the most unequal holdings of mobile spectrum in Western Europe. It may be argued that the UK isnow at risk of becoming an anti-competitive market. Ofcom must remedy this via the combined auction.

5.4 The lack of speed with which the UK has sought to allocate spectrum to facilitate the provision of 4Gservices risks its status as a world leader. The US currently offers 4G LTE services yet the UK is still someway off achieving this. Further legal challenges by operators could delay spectrum allocation even further.Parliament must support Ofcom, even if opposed by other operators, in the timely allocation of spectrum toensure that the UK remains competitive.

6. What is the possible impact on alternative uses for spectrum?

6.1 There exists a number of alternative, valuable uses for spectrum with particular regards to PMSE use(800MHz) and Olympic use (2.6GHz). Three respects the right to alternative uses of spectrum and fullysupports Ofcom’s measures to make spectrum available for such uses. However this must not further delay theavailability of 800MHz and 2.6GHz spectrum for mobile use, as required by international harmonisationcommitments.

June 2011

Written evidence submitted by the Federation of Communication Services

Summary

The FCS understands the objective of releasing the 800 MHz and 2.6 GHz spectrum is to ensure rapid andmaximum deployment of mobile broadband.

— The FCS is concerned that there will continue to be barriers to entry into the UK mobilebroadband market.

— The spectrum packages should contain adequate spectrum for each national licensee and aminimum of 2x10 MHz of 800MHz spectrum to enable a healthy fourth operator to competeeffectively.

— There is concern that the proposed coverage obligations do not appear to guarantee bettergeographic coverage than currently achieved for voice services. We propose that the obligationsare extended to include geographic coverage of important public transport routes.

— The licences should include an obligation to support roaming between providers. This may helpto improve the service coverage available to consumers.

— Rapid delivery of services requires regulatory oversight and FCS suggests wholesale accessobligations on the licensees and national roaming between the networks.

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— FCS supports an allocation for sub-national RANs to encourage niche services and argues thatthere may be a role for setting aside sufficient spectrum to ensure that the Critical NationalInfrastructure has broadband spectrum for the future, following the example of the USA.

— The use of auctions for spectrum assignment may not be appropriate in cases of services of publicinterest such as the Critical National Infrastructure.

— The band 821–832MHz is not included in the current award. This is clearly a potentially importantfuture opportunity into which other types of services could be deployed. We would expect that afull analysis of other uses, particularly services of public interest, will be necessary prior to anypolicy of a future auction of this spectrum being established.

Introduction

The Federation of Communication Services, FCS, is the trade association for the communications servicesindustry representing 320 member companies who deliver products and services by means of wireless, copperand fibre. The majority of FCS members are affected in some way by this consultation and we are pleased tohave the opportunity of offering this response.

The views that we put forward are from FCS members who are:

— Existing and potential new entrant mobile licensees.

— Mobile service providers and resellers of mobile services who wish to deliver mobile broadbandto their customers.

— Providers of services to the critical national infrastructure and business radio.

Each of these companies is able to support the government’s growth agenda by delivering service either tobusiness customers or the general public or both.

Key Issues

In its recent consultation, Ofcom has carefully set out its objectives and stresses the importance of promotingcompetition and delivering wide coverage of services, which we applaud. These objectives combine to deliverboth UK Government and European requirements for mobile broadband. However it is unclear when fullmobile broadband service will be delivered. Once the spectrum is released and network operation is startedcommercial delivery is probably up to five years away and the challenge is to ensure rapid deployment.

Spectrum Packages

Ofcom’s own research in The Measuring Mobile Broadband in the UK report [May 2011]:http://stakeholders.ofcom.org.uk/market-data-research/telecoms-research/broadband-speeds/main/mobile-bb-10demonstrates that dongles and data cards have limitations when delivering data over 3G and that, even thoughnetwork optimisation can maximise service, there is increasing customer demand. The spectrum released bythe proposed auction should support projected demands into the next decade.

Ofcom has proposed that in line with the current public mobile market there should be a minimum of fournational wholesale licensees and up to 10 shared low power licensees,15 which maintains Ofcom’sinfrastructure competition policy.

In this scenario, Ofcom’s high level rules for spectrum floors, safeguard caps and spectrum set aside for sub-national operators appear reasonable.

The spectrum packages proposed in this award could be combined with existing spectrum holdings of thefour current national wholesalers and/or those released by the Everything Everywhere entity. All providerswould need to be able to support an equivalent service to maintain the fair infrastructure competition principle.A healthy fourth operator will require a minimum of 2x10 MHz of low frequency spectrum to be able tocompete effectively as Ofcom says it wishes.

Mobile Competition at the Retail Level

The FCS believes it is crucial to ensure a healthy competitive retail market so that customers across the UKcan easily access current and new services and applications. The FCS retains the view that there continue tobe barriers to retail competition in the mobile sector that are not experienced in the fixed broadband market.

Wholesale Access Obligations to Ensure Rapid Ddelivery

Ofcom and Government are clear that this award is critical to the delivery of mobile broadband, but receiptof services by customers is not certain. The FCS is inclined to favour fair and equivalent regulated access tonational wholesalers either as a spectrum licence condition or as a consequential regulatory measure in theevent that wholesale access is not forthcoming for the scenario of competing national licensees.15 It is not clear how the number of 10 low-power licences was determined.

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National Roaming

A national roaming obligation among competing licensees would ensure that mobile broadband is deliveredwhere needed. There are already roaming obligations for access to 999 and 112 calls, which demonstrates thatthis is technically possible. Ofcom would need to ensure that fair termination rates are set without any delaysdue to reference to the Competition Appeals Tribunal, but this approach would help to satisfy “not spots” and“patchy access”. Mandatory national roaming would avoid consumers having to purchase mobile services froma particular carrier on the basis of coverage; it would also reduce the problem of consumers being sometimesreluctant to port away from one network operator to take advantage of new services on a different network incase the coverage of the new operator is not as good.

Role of Auctions

While auctions will be suitable for the national commercial wholesale operators, as in this case to encourageroll out and use of mobile broadband, we do not support allocation of spectrum by auction for every type oflicence and noted that in Ofcom’s draft annual plan 2011–12 section 3.8 et al, Ofcom now recognise “Themarket alone is unlikely to secure efficient allocation and use of public assets like spectrum and numbering inall cases”.

Once spectrum is released by auction into the market place it is difficult to recover unless rules on “hoardingwithout use” are brought into play.

Other Licensees

Ofcom accepts that national wholesalers may act to constrain entry by sub national RANS and as thecompetition regulator should act to negate this tendency.

We believe that there is demand for sub national RAQNS/low power licences. DECT guard band licencesacquired by auction in May 2006 are in use and providing useful services to consumers and business customersin niche markets. The proposal for 10 licences (although this number is not clearly justified) would be supportedby existing and potential new licensees. The FCS Mobile 200 group of DECT guard band licensees hasdemonstrated that competing licensees can work together to develop an engineering co-ordination code ofpractice which currently operates effectively for the licensees. This template could be brought into play for thenew low power spectrum licensees.

Ofcom has not considered the requirements of other potential licensees that require national coverage butfor whom the service levels of public mobile telephony services are inadequate for some of their functions.The Critical National Infrastructure community including the utilities, transport and emergency services requirecertain access to spectrum to fulfil their primary legal obligations. Each of these sectors has time limitedobligations set by government and European policy, where communications that are both self provided andpublicly available are required.

The railways are one example and quoting from the submission to Ofcom’s consultation by Network Rail:

“The railway, in common with other critical national infrastructure, relies on high-quality, highly reliabletelecommunications. The quantity and quality of information needed to run the network safely andefficiently is set to continue to grow as signalling, passenger information and train management becomeincreasingly sophisticated to deliver the railway Britain’s economy needs.

Currently, GB mainland railway operational communications, to train drivers and key staff, is deliveredusing legacy analogue radio systems, which are gradually being replaced by GSM-R. All of these systemsare built upon a common foundation of good quality, dedicated radio spectrum. This is however just onesystem element required to deliver a mobile communication system fit for purpose. The next generation ofoperational mobile communications, such as Automatic Train Operation and In-Cab CCTV, will requireeven more intensive data flows.

Auctioning spectrum to commercial users makes sense if we want to maximise government’s revenues.However, requiring providers of critical national infrastructure to compete with mobile telephoneoperators risks either under-providing essential spectrum, or over-paying for it.

Maximising income from the auction must be set against the cost to essential public services of doing so.Network Rail’s income is made up of direct grant from government and income from train operators, manyof whom are in receipt of public subsidy. Most other critical national infrastructure is publically funded;forcing competition between essential public services and commercial operators is unlikely to delivervalue for money.

One way to proceed would be to reserve sufficient spectrum for critical national infrastructure. Thisapproach has been followed in the United States and ensures that revenue from commercial operations ismaximised and the public interest protected.

If this approach is not followed, in favour of a conventional price-led auction, it is likely that criticalnational infrastructures may have to buy mobile data services from commercial operators. This would beproblematic, because the specifications of the two types of use are quite different. The railway requiresextremely reliable and high-quality communications, well beyond what is required for mobile telephone

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networks. If a mobile telephone signal is weak it is an irritation; if a train with in-cab signalling losescontact with the control centre it would cause significant delays to multiple trains; in the worst-casescenario it could become a safety risk.

In summary, we believe that auctioning spectrum is appropriate for commercial users but not criticalnational infrastructure or emergency services users. The different specifications required, as well as valuefor money for taxpayers, mean that to require Network Rail and others in a similar position to competewith mobile telephone services risks under-specifying or over-paying, or both. Reserving a proportion ofthe spectrum for critical national infrastructure would enable the government to maximise revenue fromcommercial operators without denying essential public services’ rather different telecommunicationsneeds. This approach could either be achieved through direct access to suitable spectrum, or by applyingpublic service commitments to some of the auctioned spectrum”

Answers to Specific Questions

1. Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision ofmobile broadband services;

The FCS stresses the importance of competition at the retail level.

For either of the spectrum package scenarios set in Ofcom’s consultation the crucial means of deliveringmobile service to customers is to ensure a healthy competitive retail market so that customers across the UKcan easily access current and new services and applications. The FCS retains the view that there continue tobe barriers to retail competition in the mobile sector that are not experienced in the fixed broadband market.

The FCS notes that the assignment of spectrum through an auction process may be efficient in economicterms for commercial uses such as public mobile telephony however, it is not the only way to assign spectrum.Were any part of the spectrum to be considered to be valuable for other services the FCS would recommendthat other assignment processes be used for that part. In the particular case of spectrum to be used for servicesof public interest the FCS believes that auctions are inappropriate and a more “directed approach” to satisfyingthese needs be taken.

2. Whether the upcoming auction can provide value for money for tax payers and how that should bebalanced with benefits for consumers;

The Ofcom approach appears to only consider assignment by means of an auction process. There appearsno substantive wider consideration of the total value to the UK that might be achieved by this spectrum weresome of it to be used for other purposes. This approach may be in danger of failing to identify other uses thatmight provide better value for tax payers.

The use of some of the spectrum to provide services of public interest that UK citizens will need for theforeseeable future and which may be very difficult to support by other means is a case in point. The 800MHzspectrum bands could provide excellent geographical coverage opportunities for these services at modest cost.Whereas, the auction appears to seek to place these frequencies into the same class of use as the 900MHz bandwhich today does not provide total geographical coverage. The coverage obligations within the Ofcomconsultation proposals will not (and are not intended to) guarantee good coverage on a geographical basis.Therefore it is not clear why improved geographical coverage should be expected as a result of this auction,especially for broadband services which will require even higher levels of infrastructure investment.

In addition to the points relating to operational efficiency in Network Rail’s response to the Ofcomconsultation (noted above), the needs of rail passengers to use broadband services while travelling areimportant. There is likely to be strong economic advantages to the UK to having the rail passengers to workefficiently while travelling. This will require good coverage along the railway lines which include ruralgeographies. The specification of coverage in terms of population density may not align well with the UKGovernment’s growth agenda. The use of mobile communications and especially mobile broadbandcommunications may be extensive while travelling on trains (for example). Coverage for on-traincommunications is already acknowledged to be inadequate (see section 6.7 of Ofcom’s consultation) and theproposed coverage specification appears to not address this.

To alleviate this potential shortfall it may be preferable to examine a coverage obligation that seeks a highlevel of population to be addressed while at the same time specifically providing adequate broadband serviceto the railway and other critical transport routes throughout the UK. Thus the 800MHz licensee may beobligated to meet the population coverage requirement with specific geographical obligations also (perhapsalong transport route lines). As an incentive they may be offered more radio spectrum.

3. The potential for next generation mobile internet services offered by the forthcoming availability ofspectrum;

The FCS wishes to highlight the opportunity presented by having low-power assignments included in theavailable packaging. Shared access could be arranged in similar to the DECT guard band licensees through thedevelopment of an engineering code of practice co-ordinated by their trade association and in addition wouldbenefit from mandated roaming.

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It is not clear how Ofcom settled on the total of 10 low power licences and we suggest that there is no limiton the number of low power licence holders if they are to be allocated by auction. However Ofcom’s policiesto encourage competition and maximum spectrum use should not be restricted by limiting leasing and tradingamong the low power licensees.

We question whether 2Mbps is sufficient and whether 6Mbps would be a more suitable threshold

4. Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities;

The FCS notes that the proposed packaging of the spectrum is rather small for some of the options in the800MHz band. This will severely curtail the extent to which good mobile broadband services can be deliveredto many users outside the reach of the 2.6GHz network. In other words, the FCS is concerned that the proposedpackaging arrangement will make a two-tier society quite likely in the UK. The urban-based group would haveaccess to mobile broadband where they live but the other group would not able to take advantage of thosesame service levels. Taking in to account that these same people may remain similarly challenged in gettingquality broadband access through wired means for the foreseeable future, this is a very serious impediment forthe realisation of the UK Growth Agenda.

The FCS notes it may very well be possible to deliver services at a relatively slow data rate to many placesusing this spectrum. But, this slow rate will restrict the available services and consequently the uptake. Theoperators having licences for these smaller 800MHz packages will thus be placed in a difficult commercialposition and their customers will remain largely poorly served if that spectrum is all they have to rely upon.

The FCS urges that the smallest 800MHz package sizes are reconsidered and a minimum of 2x10MHzintroduced (as suggested under Option 2 noted in table 5.1 the Ofcom Consultation).

5. Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed;

The FCS makes no comment on this.

6 How the position of the UK compares with other countries, with regards to the allocation and utilisation ofmobile broadband spectrum;

The FCS makes no comment on this.

7. The possible impact on alternative uses for spectrum.

Ofcom has not considered the requirements of other potential licensees that require national coverage butfor whom the service levels of public telephony services are inadequate for some of their functions. The CriticalNational Infrastructure community including the utilities, transport and emergency services require certainaccess to spectrum to fulfil their primary legal obligations. Each of these sectors has time limited obligationsset by government and European policy, where communications that are both self provided and publiclyavailable are required.

It is also noted that the specification of coverage by population significantly reduces the likelihood that thepublic networks resulting from this award will be usable for mission-critical communications by the emergencyservices (and others). Whilst these users will no doubt continue to use public services on a best-efforts basis,the coverage specification proposed within the award appears to confirm that a further series of spectrumarrangements will be necessary to meet the future needs of the emergency services.

In relation to indoor reception, the current rules restricting the use of cell enhancers etc. imply that themobile network operator must make provision for indoor coverage. This may prove challenging at 2.6GHz dueto the high frequency and the absorption of the signal by modern building materials.

In this context it is important to note that measures taken under the carbon agenda to improve temperaturecontrol by shielding the glass (for example in railway carriages and commercial and domestic buildings) havethe unfortunate side effect of reducing the likelihood of adequate signal reception. Broadband connectivity hasbeen achieved within carriages by some Train Operators through the use of access equipment but this has beendone with WiFi technologies and not mobile technology. Mobile radio network reception has been leftunaddressed due to the regulations banning enhancers.

The band 821–832MHz is not included in the current award. This is clearly a potentially important futureopportunity into which other types of services could be deployed. We would expect that a full analysis of otheruses, particularly services of public interest, will be necessary prior to any policy of a future auction of thisspectrum being established.

June 2011

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Written evidence submitted by the Northumberland National Park Authority (NNPA)

1. Submission

1.1 This submission is provided by the Northumberland National Park Authority (NNPA).

1.2 NNPA has the responsibility to look after Northumberland National Park—one of ten national parkauthorities—special purpose local authorities established to conserve the landscape, heritage and wildlife ofthe area and to provide opportunities for people to enjoy and understand it. We are also committed to supportingthe local economy in and around our borders to ensure a thriving, living countryside for future generations.The issues and suggested solutions NNPA raise for Northumberland National Park are relevant to the otherEnglish National Parks and this submission is made on behalf of the English National Park AuthoritiesAssociation.

1.3 Our concern is specifically focused on the question of whether the upcoming auction can deliverimproved mobile broadband coverage in rural areas.

1.4 NNPA was advised by GreySky Consulting Ltd on the specific technical issues involved in thissubmission.

1.5 Our submission is informed by data on 2G and 3G mobile service access obtained as a part of ourresidents’ survey completed as part of our intelligence used to update planning policies under the localdevelopment framework for the Northumberland National Park. This survey shows that many of thecommunities in the National Park suffer from an absence of any mobile phone coverage (see Map 1 page 4).

1.6 We believe that without changes to the current proposals the communities of our rural areas are againlikely to miss-out from access to modern communication technology which is ironically becoming increasinglynecessary in these areas as the cost of providing essential public services in the more traditional mannerbecomes less cost effective.

1.7 In addition, England’s National Parks offer recreational and holiday experiences for over 100 millionvisits pa. This forms a vital component of the national tourism offer. This business sector is increasinglycompetitive and without access to new generation technology the sector (dominated by private sector micro-businesses) will undoubtedly suffer and miss growth opportunities.

1.8 We also believe that with a small number of modest but important changes the current draft proposalsoffer a generational opportunity to enable rural areas to move forward with the rest of the country and addresspast inequalities. These recommendations are summarised on the following page and the rationale is explainedin the body of the main report.

Summary of Recommendations

Recommendation 1. Bidders for the A3 frequency block of the 800 MHz spectrum are required to submitplans as to how they will achieve the 95% coverage obligation detailed to local (county) level.

Recommendation 2. Changing the specification of the obligation to require a minimum signal strength,rather than 90% probability of indoor reception.

Recommendation 3. The holder of the A3 frequency block in the 800 MHz spectrum must be required toprovide open retail access to the wholesale services delivered over this frequency.

Recommendation 4. Bidders for the A3 frequency block of the 800 MHz spectrum should be required tosubmit details of how they will deliver open retail access to the wholesale services they provide over thisfrequency block, and to allow wholesale providers of geographically complementary services to access thisopen retail market.

Recommendation 5. The geographic coverage obligation of the A3 block in the 800 MHz spectrum shouldalso have an obligation to provide wholesale access to these services to all retailers—including the retail armsof their wholesale competitors.

Recommendation 6. The “90% probability of indoor reception” element of this specification is not easilyverifiable and should be replaced by a definition as a minimum signal strength which can be more transparentlymeasured as a 90% probability of indoor reception for the 800 MHz frequency. This represents the same levelof coverage, but in a more easily verifiable form.

Recommendation 7. There should be a local (county) level breakdown of the overall national delivery toallow effective verification at local level.

Recommendation 8. Bidders are required to submit competitive plans at local (county) levels as a part ofthe bidding process for block A3 of the 800 MHz spectrum.

Recommendation 9. Other wholesale providers should be enabled to have access the full retail market.

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Recommendation 10. That provision of 4G services in rural areas should be significantly enhanced byestablishing a central trading capability to enable all retail providers to access wholesale services deliveredthrough the A3 block and encourage innovative solutions

Recommendation 11. To include the requirement to provide retail access to wholesale services in rural areaswith the other obligations associated with the A3 block.

Recommendation 12. To require bidders for the A3 block of the 800 MHz spectrum to submit as a part oftheir bid the technical and operational details of how they will ensure open retail access to services deliveredover the A3 frequency block, and how they will allow wholesale providers of geographically complementaryservice to access the same retail market.

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Map 1

LACK OF MOBILE PHONE USABILITY IN NORTHUMBERLAND NATIONAL PARK 2010

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2. Summary

2.1 Ensuring the maximum geographic coverage of the 800 MHz spectrum is of critical importance to ruralcommunities and the rural economy.

2.2 We support Ofcom’s proposal to include a geographic coverage obligation with the A3 frequency blockof the 800 MHz spectrum as an effective way of ensuring efficient investment in infrastructure in the 4Gmobile market.

2.3 We support Ofcom’s proposal to set the level of the obligation at 95% of the UK population and 2Mbpsdownlink speed.

Recommendation 1

2.4 We suggest that bidders for the A3 frequency block of the 800 MHz spectrum are required to submitplans as to how they will achieve the 95% coverage obligation. These should be detailed to local (county)level to enable more equitable solutions to be delivered across the whole of the country. The plans for thewinning bidder would form an integral part of the specification of their obligation.

Recommendation 2

2.5 To improve verifiability of the obligation, we recommend changing the specification of the obligation torequire a minimum signal strength, rather than 90% probability of indoor reception.

2.6 We do not support Ofcom’s belief that ensuring four credible national wholesale competitors is sufficientin itself to ensure retail competition in rural areas.

Recommendation 3

2.7 We believe that the holder of the A3 frequency block in the 800 MHz spectrum must be required toprovide open retail access to the wholesale services delivered over this frequency.

Recommendation 4

2.8 We suggest that bidders for the A3 frequency block of the 800 MHz spectrum should be required tosubmit details of how they will deliver open retail access to the wholesale services they provide over thisfrequency block, and to allow wholesale providers of geographically complementary services to access thisopen retail market.

2.9 It is important that the terms, conditions and obligations of the licences are effectively enforced. Wesupport Ofcom’s proposals to include effective and proportionate penalties to ensure their ability to enforce thelicence requirements.

3. Overview

3.1 Our review of the approach proposed by Ofcom for the upcoming auction of 800 MHz and 2.6 GHzspectrums is focused on their impact in rural areas, and whether the approach is appropriate to the specificdemands of rural areas.

3.2 Two issues are of paramount concern in our review—the impact of the approach to maximise geographiccoverage of services to consumers, and the impact of the approach on competition, particularly retailcompetition, and specifically in rural areas. Our comments are principally focused on these two areas, withadditional comments regarding enforceability.

3.3 The 800 MHz spectrum is of greatest significance in rural areas due to the technical characteristics ofthe frequency compared to the 2.6 GHz spectrum. Our comments are restricted to the auction of the 800MHz spectrum.

4. Competition

4.1 Retail competition is essential to the provision of affordable, innovative services to consumers. Theconsultation document focuses on the requirement to have four credible national wholesale competitors as ameans to ensure wholesale competition, and as a result retail competition. We believe this is credible for urbanareas. However, in rural areas we believe this is unlikely to serve the needs of consumers in the short term, orbe sustainable in the long term.

4.2 We believe it is unlikely, and undesirable that four credible national wholesale competitors will exist inrural areas.

4.3 The expectation that four national wholesale competitors is sufficient to maintain retail competition inrural areas appears to require the assumption of a single UK-wide market to be correct. We believe thisassumption is already fragile, and will not be sustained in the medium and long term without additionalmeasures to those proposed.

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4.4 We believe that the approach to ensure widespread geographic coverage will put direct pressure on thesingle UK-wide market at the wholesale level, forcing a split between urban and rural markets. This positionis already beginning to emerge in the fixed broadband market and we expect 4G mobile services to followwithout further measures to avoid this.

4.5 If the rural provision of wholesale 4G mobile services becomes a separate market at wholesale level,then the current proposals appear to have no mechanisms to ensure any retail competition in this market.

4.6 Since wholesale providers maintain 42% and retail providers only 17.5% of the overall value in themobile communications market, we believe that even if a level of retail competition is maintained, it may notbe sufficient to ensure competitive pricing in rural areas without an effective UK-wide market condition.

4.7 The A3 block in the 800 MHz spectrum is critical to the provision of rural services. The factoring ofthe geographic coverage obligation into this frequency block ensures that the holder will be required to deliverservices to many rural areas. It will be inefficient if competitive forces require other wholesale operators toreplicate this service provision in areas of low demand capacity. Better to encourage them to providegeographically complementary service provision.

Recommendation 5

4.8 We believe that the geographic coverage obligation of the A3 block in the 800 MHz spectrum shouldalso have an obligation to provide wholesale access to these services to all retailers—including the retail armsof their wholesale competitors. We believe this is necessary to maintain a single UK-wide market at retaillevel, and central to maintaining effective retail-level competition.

5. Geographic Coverage

5.1 The principal objective in terms of geographic coverage is to achieve maximum geographic reach forthe majority of consumers.

5.2 We are concerned that the past arrangement for 2G and 3G failed to address issues of market failure indeep rural areas—including the 10% of England covered by the national parks. In Northumberland NationalPark many of the communities suffer from an absence of any mobile phone coverage. This information is fromour residents’ survey completed as part of our intelligence used to update planning policies under the localdevelopment framework. In some cases those areas without mobile phone coverage are where mobile phonemasts were granted planning permission but the telecom companies failed to install the infrastructure—ie clearevidence of market failure.

5.3 The consultation document suggests that 2G mobile services have achieved 97% coverage of the UKpopulation. This is not supported by our research. We believe that this is the aggregated coverage of allwholesale service providers and does not represent the coverage achieved by consumers. We suggest thatcoverage should be measured in terms of what a normal consumer with a single retail contract can experience.Our research identified that in many areas that do have some mobile phone coverage, local businesses arerequired to have up to five handsets to ensure access—this clearly is no way to expect businesses to operatein the 21 Century.

5.4 2G mobile services are delivered principally by four national wholesale competitors. These aresupplemented by many more retail competitors. This is very effective in urban areas, but far less effective inrural areas. Retail choice for rural consumers is constrained by the coverage profile of wholesale providers intheir area. We suggest that this situation should be avoided as far as possible in the mechanism for the 4Gspectrum auction and subsequent management.

5.5 We support the proposal for a geographic coverage obligation on only one frequency block in the 800MHz spectrum presents an opportunity for a far more efficient infrastructure investment model for rural areasthan is currently observed in UK mobile markets. This proposal will also enable government to focus its“subsidy” incentive to the areas of greatest market failure.

5.6 To ensure effective bidding for the A3 block, it is important that the cost and commercial return ofsatisfying the geographic coverage obligation is easily evaluated as part of the bidders’ preparations. Ofcom’sanalysis suggests that 95% of the UK population can be covered using the 800 MHz spectrum from existingmobile sites. We support Ofcom’s proposal that 95% coverage of the UK population is an appropriate level forthe obligation.

5.7 For the obligation to be effective, it must be clearly specified at the outset, verifiable and enforceable.Ofcom’s proposed specification is largely effective:

“An obligation to serve by the end of 2017 an area in which 95% of the UK population lives, whileproviding a sustained downlink speed of 2Mbps with a 90% probability of indoor reception.”

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Ev 82 Culture, Media and Sport Committee: Evidence

Recommendation 6

5.8 However, the “90% probability of indoor reception” element of this specification is not easily verifiable.We suggest that this is better defined as a minimum signal strength. This can be calculated to correspond to90% probability of indoor reception for the 800 MHz frequency, and so represent the same level of coverage,but in a more easily verifiable form.

Recommendation 7

5.9 Although the 95% national coverage is verifiable, this verification would represent a significantundertaking at national level. We suggest that a local (county) level breakdown of the overall national deliverywill allow effective verification at local level. These two changes (recommendation 6 and 7) would empowerlocal communities and their elected representatives to hold large multi-national companies to account for theirdelivery of vital access services.

5.10 Imposing geographic coverage levels at local levels will impose different restrictions for differentpotential bidders depending on the distribution of their existing sites—essentially imposing a greater than 95%coverage obligation. This is not considered appropriate.

Recommendation 8

5.11 We suggest that bidders are required to submit competitive plans at local (county) levels as a part ofthe bidding process for block A3 of the 800 MHz spectrum. This would seem to be consistent with thegovernment’s wider localism agenda. These plans will present how they will achieve 95% coverage of the UKpopulation. This flexibility will allow all bidders to compete on an equal basis, and the submitted plans willform a part of the specification of the locally verifiable coverage obligation for the winning bidder.

5.12 Ensuring access by all retail providers to wholesale services in the A3 frequency block is necessary toensure efficient market investment in infrastructure in rural areas. We believe this will allow further investmentin rural areas to be geographically complementary, though further measures will be required to encourage this.

5.13 In the UK fixed broadband market, BT is the dominant operator of infrastructure in rural areas. BecauseBT wholesale allows retail access to their infrastructure, strong retail competition persists and good utilisationis made of their infrastructure. However, other wholesale providers are not able to access this retail market.Consequently there is little wholesale competition in rural areas and differential retail pricing is emergingbetween rural and urban areas. It is also difficult for small-scale infrastructure projects to provide greatergeographic reach because they do not have access to the retail ISPs to sell services over their networks.

5.14 Obliging the A3 frequency block holder to provide retail access to its services will ensure that 4Gservices match the position of the fixed broadband market by ensuring all retail service providers have accessto good geographic coverage through a single efficient infrastructure investment.

Recommendation 9

5.15 We believe it is also highly desirable to encourage other wholesale operators to provide geographicallycomplementary infrastructure, and selected areas of competitive infrastructure in rural areas where there isstrong capacity demand. We believe this will be most strongly encouraged if other wholesale providers canaccess the full retail market.

5.16 In the fixed broadband market, BT does not allow other infrastructure providers to use its platform forconnecting ISPs (the retail providers) with its infrastructure.

Recommendation 10

5.17 We believe that provision of 4G services in rural areas will be significantly enhanced by establishing acentral trading capability. This capability will allow all retail providers to access wholesale services deliveredthrough the A3 block. It will also allow other wholesale operators to “sell in” wholesale capacity into thesingle platform used by retail providers to obtain services—providing a trading mechanism to ensure efficientutilisation of geographically complementary infrastructure investment. We believe this will encourageinnovative solutions to evolve and for them to be commercialised across the whole of rural England.

Recommendation 11

5.18 We believe it is appropriate to include all requirements associated with achieving strong geographicalcoverage with the A3 block of the 800 MHz frequency. Hence we believe it is appropriate to include therequirement to provide retail access to wholesale services in rural areas with the other obligations associatedwith this block.

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Recommendation 12

5.19 As with achieving the 95% coverage requirements, we believe it is appropriate to require bidders tosubmit proposals as to how they will deliver these obligations. We suggest that bidders for the A3 block of the800 MHz spectrum should be required to submit as a part of their bid the technical and operational details ofhow they will ensure open retail access to services delivered over the A3 frequency block, and how they willallow wholesale providers of geographically complementary service to access the same retail market.

6. Enforceability

6.1 It is essential that the obligations associated with the spectrum licences are effectively enforced. Wesupport Ofcom’s proposals to include measures that ensure the achievement of all obligations are verifiableand enforceable.

6.2 Effective enforcement requires proportionate penalties to be available. We support proposals to allowspectrum allocations to be revoked at any time for significant failures to meet obligations. We also supportproposals to allow fines to be imposed where these represent a more proportionate approach.

June 2011

Written evidence submitted by the British Entertainment Industry Radio Group

— Demand for PMSE services is continuing to grow, whilst PMSE access to spectrum is beingfurther eroded.

— Access to sufficient quality and quantity of spectrum is vital to the continuing operation of thePMSE sector.

— PMSE’s eviction from the 800MHz has caused significant disruption to the sector.

— Future sell-offs of the 600MHz or 700MHz bands would lead to market failure in the PMSE sector.

— The PMSE sector delivers financial, cultural and social benefits to UK citizens and consumers; itis essential that these benefits are balanced against the potential financial windfalls of selling-off spectrum.

Introduction

BEIRG is an independent, not-for-profit association that works for the benefit of all those who produce,show, distribute and ultimately consume content made using radio spectrum in the UK. As such it advocatesthe interests of the Programme Making and Special Events (PMSE) sector in the UK.

The PMSE sector is responsible for both content production and content delivery for live and recordedentertainment. It plays a critical role in the ongoing success of the British entertainment and creative industries.It consists of a wide and diverse community, both professional and amateur, including broadcasters, theatres,freelance engineers, rental companies, schools, houses of worship, and organisers of events large and small;all of which use spectrum to relay sound and/or picture data across relatively short distances. This allows, forexample, wireless microphones to be used on stage in musical theatre, and at events such as Live 8 and theOlympics. These wireless technologies are used extensively in the production of entertainment content, addingsignificant value to production. As an Independent Report commissioned by Ofcom notes, there are productionsthat are simply “not possible without using wireless technology”.16

The entertainment industry contributes at least £15 billion annually to the UK economy. This is a growingindustry with an ever increasing importance for the UK economy and cultural reputation. For example, in 2009(the last figures available) revenues and attendance at London theatres reached their highest ever. Gross boxoffice revenue was over £500 million, with over 14 million attendances at shows.17

This submission addresses how the Government is proposing to increase the radio spectrum available fornext generation mobile (wireless) broadband and the impact of these proposals on the PMSE sector. BEIRGbelieves the benefits that PMSE brings to consumers and the economy must be considered of equal value tothe financial gains which may be made by auctioning the spectrum. This submission also addresses the futuredemand for spectrum by broadband providers, and the dangers posed to PMSE by white space devices, whichare seen by some as a means to increasing mobile internet access.

Executive Summary

Ofcom has decided to clear the entire 800 MHz band (UHF channels 61–69) of television signals and PMSEservices so that it can be released via auction for new services, such as mobile broadband. The Governmentsupports this decision. Whilst some spectrum capacity in lower UHF channels has been maintained for PMSEuse post-Digital Switchover (DSO), the clearance of PMSE services from their previous nationally available16 http://www.ofcom.org.uk/research/technology/research/sectorstudies/entertainment/entertain2028.pdf section 7.117 Society of London Theatre Annual Attendance and Revenue figures (last available)

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Ev 84 Culture, Media and Sport Committee: Evidence

dedicated channel, channel 69, has caused a great deal of disruption to the industry. The 800MHz band auctionwill also reduce the level of interleaved spectrum available for PMSE use. PMSE users have becomeincreasingly concerned about whether there will be sufficient spectrum available to them post—DSO.

As a disparate and diffuse community, the PMSE industry is unable to compete financially at auction againstmultinational telecoms companies for access to spectrum. However, the social and cultural benefits of thisindustry are immeasurable. As the Committee has recognised, in the Terms of Reference for this inquiry, it isessential to strike a balance between raising funds for the Treasury and ensuring that the best outcome isdelivered for citizens and consumers.

Not only is quantity of spectrum vital to ensuring the continuance of the PMSE industry, the spectrum mustalso be free from interference. White space devices pose a real problem for the PMSE industry. These devicesseek to make use of interleaved spectrum, which PMSE relies on for its continued operation. The PMSE sectoris extremely concerned that there are moves to introduce these devices into the spectrum currently used bylicensed PMSE users, before any “real life” testing has taken place and before Ofcom is in a position toguarantee that existing licensed users will not be negatively affected.

White space devices are an unproven technology. If they are permitted into the UK market in line withcurrent proposals they will, in all likelihood, cause interference to licensed PMSE applications and consequentlyundermine the UK’s ability to produce quality content because they will render radio microphones, in-earmonitor systems and talkback effectively unusable. This will devastate the live music, theatre and film and TVproduction industries, amongst others.

This submission addresses the following points in the Terms of Reference:

— Whether the upcoming auction can provide value for money for tax payers and how that shouldbe balanced with benefits for consumers; and

— The possible impact on alternative users of spectrum.

Context: Clearing the 800 MHz Band of PMSE

1. The PMSE sector currently operates in the interleaved spectrum in channels 61–68 on a secondary basis,and in channel 69 as the primary user. Channel 69 has acted as a dedicated channel for PMSE use UK-wide.The vast majority of radio microphones and in-ear monitor applications in the UK operate in these bands.PMSE is currently being cleared from these bands.

2. In December 2006, Ofcom consulted on a deregulated channel 69 retained for PMSE use. BEIRG opposedderegulation: without official licencing of frequencies, PMSE users would have no statutory protection frominterference. Ofcom announced, in December 2007, that channel 69 would not be deregulated; instead it wouldcontinue to be licenced and awarded to a band manager with responsibilities to the PMSE industry.

3. Then in February 2009, Ofcom announced a change in policy and that channel 69 would be cleared forauction. As a disparate and diffuse community, the PMSE industry is unable to compete financially at auctionagainst multinational telecoms companies for access to spectrum. Recognising the importance of the industry,but also the constraints it faces in competing with telecoms companies, Ofcom decided on the policy of a bandmanager with responsibilities to PMSE. These constraints still exist for the industry.

4. Channel 69 has been an essential component of PMSE use of spectrum, being the only channel availableUK-wide. Ofcom estimates that 95% of PMSE equipment tunes to channel 69. The clearance of channel 69has resulted in significant costs and disruption to PMSE users. PMSE users were originally expected by Ofcomto fund their forced move.

5. BEIRG led the “Save Our Sound” campaign aimed at securing funding for the move, and limited fundinghas since been secured for certain PMSE users. However this move has still put a significant financial andadministrative burden on owners of wireless equipment:

— Only 55% of the cost of replacement equipment is being funded;

— Only those who held a channel 69 licence between February 2008 and February 2009 are eligibleto claim funding; and

— There is a heavy burden of proof of ownership, despite some equipment having been purchasedmany years ago.

6. Channel 38 will be the new dedicated PMSE channel. This is still not available UK-wide, due to radio-astronomy activities in Jodrell Bank (Cheshire) and Cambridge. As a consequence of the requirement to protectradio astronomy from interference, channel 38 is currently unusable for PMSE in large areas of the North East,the Midlands and East Anglia.

7. Clearance of the 800MHz band has caused significant financial and operational disruption to the PMSEindustry. Despite being a compliant and conscientious user of spectrum over many years, the PMSE industry’sability to continue operating is being threatened.

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8. Ofcom’s recent publication “Future access to interleaved spectrum for programme making and specialevents”18 has considered whether, post-DSO, there will be sufficient level of spectrum available for PMSE tomeet its requirements. BEIRG is extremely concerned about the availability of good quality interleavedspectrum available to PMSE. BEIRG is currently undertaking a full analysis of the deficiencies of futurespectrum availability. In the course of this, it is necessary to consult other stakeholders and industry experts.As a result, this analysis will not be completed before 7 June. BEIRG will provide a copy of this analysis tothe Committee upon completion.

9. It is essential that PMSE has access to a sufficient quantity of spectrum in order to ensure that allsizes of events can operate at locations throughout the UK. It is also essential that the quality of thisspectrum is protected by ensuring that in all instances it is free from interference.

New Services in 800MHz

10. BEIRG believes any future users of the 800MHz spectrum must be prevented from interfering withexisting licensed users in the adjacent bands. Ofcom must make every effort to ensure that new use of the800MHz band is as clean as possible, as soon as possible. Given the disruption already faced by the PMSEsector, any further disruption would be unacceptable and unsustainable.

11. Ofcom must ensure that any new services in channel 69 do not interfere with the 863—865 MHz band(“channel 70”). Applications that operate in the 863—865 MHz band include hearing aids, wireless headphones,and touring guide systems all of which must be protected from damaging out-of-band interference.

12. Following PMSE’s eviction from channel 69, many users have been advised by Ofcom,19 Equiniti20

and the PMSE band manager JFMG21 that channel 70 is available to them as an alternative to channel 69.Indeed, many ex-channel 69 users have equipment which is still able to operate within channel 70. Ofcommust protect those users who are now migrating to channel 70. If no protection is available, it is essential thatOfcom makes every effort to warn users that channel 70 will become unusable once new services come online.Until they have undertaken testing to ensure that channel 70 will not suffer interference from adjacent users,Ofcom and its agents must not continue to advise users to move to channel 70.

13. BEIRG believes that in the case that new service operators do cause interference to adjacent users;this must be considered a suitable condition for their licence to be revoked. Existing PMSE spectrumusers must be protected from interference caused by new technologies within the 800 MHz band.

UHF Bands IV and V

14. Without access to spectrum PMSE professionals would not be able to produce the quality of showrequired for live events such as the Olympics, festivals, West End shows or Saturday night live entertainment.These events contribute to the £15 billion annual contribution which the entertainment industry makes to theBritish economy. Not only would this revenue be lost, but the negative cultural and social impact would begreat. Britain would no longer be able to produce the content which is exported worldwide, and would be putat a significant disadvantage when competing for international events.

15. Ofcom is currently consulting on long term future access to UHF Bands IV and V.22 Having alreadyfaced severe disruption, the PMSE industry is now totally reliant on access to clean spectrum in UHF BandsIV and V. Any future move to reallocate this spectrum away from PMSE and broadcast use would likely leadto market failure. A return to wired microphones would mean a reduction in production qualities, and asignificant scaling down of live events.

16. As with the 800MHz auctions, those likely to acquire spectrum released from UHF Bands IV and Vwould have significantly greater financial leverage than the disparate and diffuse PMSE sector. If a decision ismade to sell-off further UHF spectrum, then Ofcom must continue to acknowledge the inability of the PMSEsector to compete at auction. The PMSE sector neither possesses the required financial resources, nor is therea mechanism to coordinate bidding for the collective needs of this community. Were spectrum in the 700MHzband to be auctioned, new dedicated PMSE channels must be awarded to the band manager with specificresponsibilities to PMSE.

17. Modern live events are continually increasing in size, and consequently the size of their production isincreasing, meaning that PMSE demand for spectrum is strong and growing. Any consideration of the long-term future of UHF spectrum must take into account the increasing access that PMSE requires to spectrum,which is driven by high consumer demand from PMSE professionals and audiences.

18. Developments in technology in the late 1970’s had a massive impact on the type of shows which couldbe staged by theatres. A range of new tools in set construction, automated scenic control, greater sophisticationin lighting and its control and the development, understanding and use of High Fidelity live sound along with18 http://stakeholders.ofcom.org.uk/binaries/consultations/bandmanager09/statement/pmse-future-access.pdf19 http://media.ofcom.org.uk/2010/08/05/ofcom-explains-how-government-funding-package-for-wireless-microphone-users-will-

work/20 http://www.shareview.co.uk/clients/Ofcom/Documents/OfcomFrequentlyAskedQuestions.pdf p.1521 http://www.jfmg.co.uk/pages/equip/Radiomics/dtv.htm22 http://stakeholders.ofcom.org.uk/binaries/consultations/uhf-spectrum-band/summary2/condoc.pdf

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radio mics of better quality and reliability, added hugely to artistic freedom and helped creative teams topresent the highest quality live performances. These developments lead to the creation of the “mega musical”.

19. Shows such as Les Miserables, Phantom of the Opera, Cats, Lion King, Miss Saigon and Mama Miatoday could not be staged without the use of these now important tools. The West End relies on shows of thissort for its continuing economic success. Musicals regularly occupy almost half of the mainstream theatres inthe West End.

20. In London the rise of the mega musical started at a time when the annual audience attendance figure forall types of theatre was estimated at eight million. With the rise in popularity of the mega musical attendancefigures rose to 10.2 million in 1986 on to 12 million by 2004 and currently stand at 14.1 million. As theirpopularity increases, so does the demand for access to spectrum. Without access to sufficient levels ofinterference free spectrum these shows, and the economic and cultural benefits which they produce, wouldbe lost.

21. At the same time as demand is greatly increasing, PMSE access to spectrum is continually decreasing.As more channels have been cleared of broadcast services, the maximum amount of channels available forPMSE use is declining. This trend is illustrated by the following graph:

41 4034

26

05

10152025303540

1996 1997 1998 2012 2013 2014 2015 2016

Max No. of Channels

Year

Best Case UHF Interleaved Availability

22. Alongside the decline in available interleaved spectrum for PMSE, there has also been a fragmentationof available spectrum across the UK for PMSE users. This manifests two distinct problems: there are a numberof areas in the UK which have severely reduced quantity of spectrum available; and that across the UKPMSE spectrum access is becoming increasingly fragmented, presenting logistical and financial barriers totouring productions.

23. From the information provided by the updated JFMG look-up tool,23 indoor venues such as Sunderland,Edinburgh and Richmond will be clearly restricted in the amount of spectrum available. The same scenario islikely to apply to the outdoor usage as this is much more restricted by DTT protection issues. An initial viewof the quantity and continuity of available spectrum for some of a sample of 17 larger arena/outdoor venuessuggests that locations such as Chelmsford, the Isle of Wight and Glasgow will have great difficulty staginglarge scale concert productions.

24. The fragmentation of spectrum also has the potential to cause severe damage to the industry. Lack ofcontinuity of spectrum access means touring production companies require duplicate sets of equipment to tuneto different channels in different geographic areas. For many companies this will likely prove economicallyunviable and will force them to cease operating. Ofcom must recognise that the reduction and fragmentationof available interleaved spectrum could greatly reduce the capacity of the PMSE industry to continue to produceworld class content across the UK.

25. Until the fate of UHF Bands IV and V have been decided, there must be no further moves towardsselling off the lower cleared band (600MHz). In the event that the 700 MHz band is earmarked forauction, and PMSE is cleared from this band, PMSE must be granted access to the 600MHz band.Without this access, the PMSE industry would be without access to spectrum, which is essential to itsability to produce world-class content.

White Space Devices

1. White space devices (WSD) pose a risk to the interference free access to spectrum which is essential tothe PMSE sector. WSD are proposed to act as a new communications technology that could be used for mobileinternet access without a requirement for a wireless telegraphy licence. Ofcom currently expects that WSDwill use the same interleaved frequencies as PMSE. BEIRG, and many other respondents to Ofcom’sconsultations on WSD,24 are extremely concerned about the level of harmful interference which these devicescould cause existing licensed users.23 http://www.jfmg.co.uk/jfmgecom/wireless/public/microphonedso.aspx24 Including Vodafone, BBC and JFMG. http://stakeholders.ofcom.org.uk/consultations/geolocation/?showResponses=true

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2. Any interference with PMSE will disrupt content production at its live source. As a consequence, thevalue and benefits this content generates will be significantly reduced or lost at the beginning of the valuechain. Any interference, irrespective of its transience, is harmful to PMSE, particularly for live professionalperformances. No audio distortions or disruptions are acceptable to contemporary audiences.

3. BEIRG has severe reservations that any form of white space device will be able to operate in the samespectrum as PMSE without causing harmful interference. To date no “real life” testing of WSD has beenundertaken. BEIRG continues to lobby Ofcom to undertake “real life” testing. BEIRG would gladly participate,or facilitate participation by other members of the PMSE community, in such testing to ensure that the mostrigorous protection parameters were developed.

4. For example, in “Implementing Geolocation”, Ofcom proposed that “we will immediately deal with theproblem by removing the relevant frequencies and areas from the database which we will require databaseproviders to reflect within one hour”.25 For many PMSE users such as theatres, live TV broadcasts, live musicand large political and industrial events, this proposed hour turnaround would be disastrous. For any of theseevents, an hour can encompass the entire event.

5. Even if action could be taken more quickly to prevent interference, it can only be corrected after theevent, under Ofcom’s present implementation model. It is essential for the PMSE industry that interference isprevented in the first place, rather than simply addressed after the event.

6. If Ofcom allows WSD access to interleaved spectrum, it must ensure that PMSE and televisionbroadcast and the consequent benefits they bring to UK citizens and consumers, are not damaged bysetting weak interference prevention standards and allowing inexpensive devices to enter the band thatwill not only interfere existing licenced services, but also with each other.

Suggested Actions

1. BEIRG urges the Committee to recommend that Government halts any auctioning of the 600MHzspectrum band until the future of UHF Bands IV and V is determined.

2. BEIRG further requests that that the Committee works with colleagues both at home and abroad to pushfor a harmonised decision on UHF Bands IV and V throughout the European Union.

Conclusion

The Committee has accepted that there must be some balancing between the potential for financial gainthrough these auctions, with the enriching of the lives of UK citizens and consumers. The PMSE sectorprovides vast cultural and social benefits to citizens and consumers in the UK, whilst also comprising a vitalcomponent of the £15 billion a year British entertainment industry.

The PMSE sector has suffered a great deal of disruption as a result of the clearing of the 800MHz band. Forthis sector to be able to continue operating, it is essential that PMSE has access to sufficient quantity andquality of spectrum in the long term. Having already suffered significant upheaval, security of spectrum accessis now required to ensure confidence in the industry, and its continued contribution to the financial and culturalsuccess of the UK.

June 2011

Written evidence submitted by the Incorporated Society of Musicians

1. Summary

1.1 This is a short submission by the Incorporated Society of Musicians (ISM) the professional body formusicians in the UK to the committee’s inquiry into spectrum.

1.2 The submission draws your attention to the possible impact some spectrum arrangements can have onthe use of radio microphones and should be read as a supporting statement for the more substantial submissionfrom BEIRG (British Entertainment Industry Radio Group).

2. The Programme Making and Special Events (PMSE) Sector

2.1 The campaign group Save Our Sound UK (SOS UK) represents the concerns of BEIRG—BritishEntertainment Industry Radio Group, PFA—Professional Footballers Association, RSC—Royal ShakespeareCompany, and SOLT—Society Of London Theatres in relation to spectrum sell-offs.

2.2 Live music, newsgathering, musical theatre and other events all use spectrum wavelengths and thepotential impact of further sales of spectrum on the PMSE is significant.25 http://stakeholders.ofcom.org.uk/binaries/consultations/geolocation/summary/geolocation.pdf a6.22

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3. Specific Comments

3.1 The PMSE sector is growing, not shrinking, and as production values and professionalism of the sectordevelop, so the bandwidth required increases. The sector needs sufficient quality and quantity of bandwidth tocontinue to put on high quality events.

3.2 The disruption to sector by evictions from 800Mhz band—the focus of the earlier Save Our Sound UKcampaign—focused on should be considered again and borne in mind during future sell-offs of spectrum space.

3.3 No sell-off of 600MhZ bandwidth should take place or be proposed or consulted on until the fate ofUHF Bands IV and V is known. If the 700MhZ band is sold off, then the 600MhZ band must be protected toenable the PMSE sector to function.

3.4 The value of the events sector to the UK economy should not be overlooked. We have an entertainmenteconomy estimated to be worth £15 billion with music alone contributing £5 billion26 to our economy andmusic tourists contributing at least £864 million to the UK economy.27

3.5 In our previous evidence to the committee’s inquiry into the Olympic Legacy, we highlighted the possibleimpact spectrum changes could have on the Olympic events themselves and re-iterate this concern.

4. About the Incorporated Society of Musicians

4.1 The Incorporated Society of Musicians (ISM) is the professional body for music and musicians. We areindependent of government and not financially dependent on any third party; our mission is to champion theart of music and support the music professional.

4.2 Founded in 1882, we have over 5,700 members who come from all branches of the profession: soloists,orchestral and ensemble performers, composers, teachers, academics and students. Our corporate membershipof over 100 organisations includes the Association of British Orchestras (ABO), Classic FM, the AssociatedBoard of the Royal Schools of Music (ABRSM), the International Artists Managers Association (IAMA),the Music Industries Association (MIA), all the UK conservatoires, several universities and our specialistmusic schools.

4.3 The ISM is a member of the Council for Subject Associations (CfSA) and provides secretariat supportto the All-Party Parliamentary Group for Music Education. Our Chief Executive, Deborah Annetts, is Chair ofthe Music Education Council (MEC).

4.4 Our internationally recognised Distinguished Musician Award, first awarded in 1976, has been receivedby Sir William Walton OM, Jacqueline du Pre OBE, Sir Michael Tippett OM CH CBE, Sir Colin Davis CBE,Sir Charles Mackerras AC CH CBE and Pierre Boulez. Sir Adrian Boult, Sir Thomas Beecham, Sir MalcolmSargent, The Lord Menuhin OM KBE (Yehudi Menuhin), Sir David Willcocks and Dame Gillian Weir are allpast presidents of the Incorporated Society of Musicians.

June 2011

Written evidence submitted by Vodafone

Spectrum has been a contentious subject for the mobile operators for a number of years. We are now atparticularly critical point. For the first time in over ten years a significant amount of new spectrum is availablefor purchase. This spectrum is a vital to the provision of the next generation of higher speed mobile broadbandservices—known as Long Term Evolution (LTE) or 4G. We welcome the Committee’s timely inquiry.

The Committee has invited submissions on a number of matters. In our response we have focused mainlyon the issues of competition, coverage and licence fees.

Summary of our Submission

Vodafone has no in-built advantage in providing high speed mobile broadband, either now or in theforeseeable future, because of its current holdings of spectrum. Our existing spectrum is being fully utilised byover 19 million customers and it cannot be freed up quickly enough to be a substitute for the clean spectrumsold in the auction. Ofcom’s assumption to the contrary has led it to make errors in the way in which it wishesto allocate spectrum. These errors could be to the detriment of both competition and consumers.

The proposed spectrum floors and caps distort the auction and competition because, in effect, they giveEverything Everywhere (EE) an advantage by all but guaranteeing that it wins spectrum in the auction. Andyet the European Commission established that EE already had sufficient spectrum for 4G deployment. EEtherefore has a material advantage over its competitors and requires no additional protection.26 Music, Department for Culture, Media and Sport27 Destination Music, UK Music, 16 May 2011

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Vodafone therefore believes that the auction should be allowed to run freely without restrictions. We considerthat the auction rules, as currently proposed, will distort competition and ultimately harm consumers. Vodafoneaccepts that some operators may be unsuccessful in the auction—not because others will bid simply to forcethem out but because others will value the spectrum more—but the evidence from today’s market shows thatthe successful bidders will compete hard to supply them with a wholesale service.

Vodafone acknowledges that its annual spectrum fees need to be reviewed in light of the Direction fromGovernment. However the method proposed by Ofcom is likely to distort the outcome of the auction. Spectrumfees, by law, cannot be a tax on the mobile operators; they are in place to ensure that operators use theirspectrum efficiently; the review must have this objective at its heart. We know of no evidence that suggeststhat spectrum has been used inefficiently by the mobile operators subject to the current regulatory regime forannual licence fees.

Other operators have made much of the fact that Vodafone and O2 are now permitted by Ofcom to use theirlow frequency spectrum to provide 3G data services (known as re-farming). In reaching its decision Ofcomcarried out a thorough competition assessment. It concluded that competition would not be harmed by re-farming because both EE and 3 could match any improved coverage on the part of Vodafone and O2 by usingtheir existing networks. There is therefore no sense in which the forthcoming auction needs to be tilted to thebenefit of EE and 3 in order to “level the playing field”.

High speed mobile broadband can serve less densely populated areas—this is already happening inGermany—however achieving this will require the building of additional sites rather than simply upgradingexisting ones. The danger for the auction is that this additional cost may deter bidders from purchasing the lotof spectrum with the coverage obligation. Analysis of this risk requires further joint work between Ofcom andthe mobile operators.

Whether the proposed method of spectrum allocation promotes, or hinders, future competition in theprovision of mobile broadband services;

1. The current holdings of mobile spectrum in the UK together with the bands to be auctioned next year areshown in the table below. Vodafone and O2 hold all of the available sub-1GHz or low frequency spectrum andEE holds a large part of the higher frequency spectrum both before and after the divestment of spectrum agreedwith the European Commission.

TOTAL PAIRED SPECTRUM HOLDINGS IN EACH BAND

Frequency (MHz) 900 1800 2100

O2 17.4 5.8 10.0Vodafone 17.4 5.8 14.9Everything 60.028 20.0Everywhere3 14.8

2. Auctions are now the preferred method in most countries of allocating spectrum. Individual bidders put avalue on the spectrum that they wish to buy and, in a free auction, those with the lowest valuations drop outof the running until the number of bidders is equal to the available spectrum. Consumers are well served bythis mechanism because these valuations ultimately come from a calculation of the benefits that they areexpected to receive.

3. Ofcom is not proposing to have a “free auction”. Their proposed method of spectrum allocation is via anauction that is restricted by both spectrum floors and spectrum caps. Although the auction is designed to fostercompetition we believe that it could have the opposite effect.

The spectrum floors could distort competition

4. Ofcom believes that a new market for higher quality data services will emerge in which coverage withinbuildings will be particularly important. In view of this, Ofcom says that holding sub-1GHz (or low frequency)spectrum will be critical because of its superior ability to provide a signal indoors. In fact, it will be soimportant that any operator with access to a significant holding of sub-1GHz spectrum (Vodafone and O2)would have an “unmatchable competitive advantage” which could never be equaled by those with only accessto the higher frequencies above 1GHz (EE and 3). Knowing this, Vodafone and O2 would bid “strategically”in the auction to shut out one or more competitors: an “I’m alright jack pull up the ladder” strategy.

5. Ofcom conducts a technical analysis to determine the minimum amounts of low frequency and higherfrequency spectrum which would enable its holder to match the performance of a network with significantholding of sub-1GHz spectrum. These minimum holdings are translated into a number of spectrum floors and28 EE is required to divest 15MHz of this spectrum

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the auction is structured to deliver at least four operators (the minimum number that Ofcom says is requiredfor a competitive market) who have the minimum portfolio of spectrum required to compete.29

6. However, Ofcom has incorrectly assumed that Vodafone’s existing low frequency spectrum can be usedto provide the next generation of mobile broadband services in the near term ie, by early 2013 when the800MHz band will become available. Vodafone’s existing holding of 900MHz spectrum is already used inproviding voice and data services; we carried around 42 billion voice minutes across our networks in the lastfinancial year. To clear the 900MHz band within the space of a year would require thousands more sitesbecause we would need to cater for the calls and data services displaced from the cleared spectrum in otherspectrum. This is clearly impractical and would result in a terrible experience for our customers.

7. What we can see is that EE is the only mobile operator in the UK with sufficient spectrum to be able toroll out a high speed mobile broadband network in the near future. This is what the European Commissionfound when it reviewed the merger between T-Mobile and Orange. It was the potential adverse consequencesof this spectrum advantage for competition that persuaded the European Commission to require EE to give up25% of its 1800MHz spectrum.

8. The spectrum floors thus distort the auction to the advantage of EE by all but guaranteeing it a blockof 800MHz.

The spectrum caps will distort competition

9. This serious shortcoming in the auction design is then compounded by the proposed spectrum caps whichallow EE to buy 2x25MHz or over 80% of the sub-1GHz spectrum for sale in the auction. This could havepotentially serious consequences for competition in the future by creating a two-tier market.

Unsuccessful bidders can buy wholesale capacity from others

10. We believe that the auction should simply be allowed to run without restrictions. We acknowledge thatthere is a possibility that the smallest operator (and others) will fail to acquire any low frequency spectrum.This would not be because the other operators will bid strategically30 to force out a competitor but becausethey simply put a higher value on the spectrum. This is what happens in a competitive market and it is whathappened in the German auction. All the current available evidence from the UK suggests that thoseunsuccessful operators would then conclude a commercial wholesale arrangement with one of the successfulbidders. Failing this, Ofcom could intervene ex post or even ex ante by attaching a wholesale access obligationto one or more of the 800MHz lots.

Using the auction to set annual licence fees will distort its outcome

11. Ofcom’s proposals for the setting of the annual licence fee (ALF) will also distort the outcome of theauction. The proposals mean that the amounts paid in the auction for 800MHz spectrum will translate directlyinto the annual fees for 900MHz spectrum paid by Vodafone and O2.31 In effect, Vodafone is required to paytwice for any spectrum that it purchases: once in the auction and once via the new annual licence fee. Thesimplified example in the box shows how the auction can be distorted.

Suppose there is only one 2x10MHz lot which is being contested by two bidders: A and B where A is a900MHz operator and B has no 900 or 1800MHz spectrum. Suppose that A and B have the followingtrue valuations of the lot which is the most that each would be prepared to pay:

A £1,100 million

B £500 million

In other words if A has to pay more than £1,100 million for the lot it is not worth them acquiring thespectrum. Similarly, if B has to pay more than £500 million then it is not worth them winning the spectrum.

In a free auction A would acquire the lot. B would drop out once the bidding reached £500 million andthis is what A would pay. However, the ALF distortion means that A will not bid as much as £500 millionand therefore it will not acquire the spectrum.

Why? This is because A would not bid more than £400 million. At £400 million the extra cost to A viathe increase in the annual licence fee will be the average price per MHz in this simple example grossedup for the amount of 900MHz spectrum that A holds ie,17.5/10 x 400 million = £700 million. So if Abids more than £400 million it knows that the total cost to it will be over £1,100 million. The spectrumis therefore acquired by B even though A puts a higher value on it.

In fact, the distortion is further compounded: given that A knows (or it can reasonably suspect) that Bwill acquire the spectrum then it should not bid for the lot at all; every bid that A makes just drives up

29 Vodafone and O2 are assumed to have enough spectrum to be able to supply 4G services and so neither needs to acquire anynew spectrum in the auction. In contrast, EE and 3 are all but guaranteed at least one block of 800MHz spectrum each in theauction by virtue of the spectrum floors.

30 The auction is explicitly designed to minimise the risk that participants can bid strategically because the identity of the biddersis not revealed.

31 A similar method is proposed for calculating the annual licence fee payable on 1800MHz spectrum based on the average of theprice paid for the 800MHz and 2.6GHz spectrum.

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the price that B will have to pay, and so drives up A’s ALF. In these circumstances the best thing that Acan do is to let B acquire the spectrum for the reserve price.

12. The distortion arises because the disincentive effect is not faced by all bidders. 3 and any potential newentrants do not hold either 900 or 1800MHz spectrum and so will not face this disincentive to bid.

13. Vodafone accepts that the annual licence fees must be reviewed but we believe that the method adoptedshould break the link between the prices paid in the auction and the level of the fees. Ofcom has a tried andtested method for doing this which it can adapt for the future.

The auction does not need to” level the playing field”

14. In a recent briefing on spectrum 3 said that “[t]here is a real risk that unless the auction addresses theadvantage that the older mobile networks gain from being permitted to use their legacy spectrum for mobilebroadband, competition will be distorted and the consumer benefits that have flowed from a competitive marketwill be lost.”

15. Ofcom looked at this matter in 2010. Ofcom concluded that there was little likelihood of a competitivedistortion as a consequence of allowing Vodafone and O2 to use the 900MHz spectrum (“our legacy spectrum”)for 3G. It recognised that, because of the merger, EE, and to a lesser extent H3G through its network sharingarrangement with EE, is already in the strongest position in terms of network capability for providing mobilebroadband services. They have the largest amount of 2100MHz spectrum and access to the largest number ofbase station sites. These operators would be able to improve their coverage (if required) and consequentlyreduce any competitive advantage that O2 or Vodafone might realise from using 900MHz spectrum for theprovision of 3G services.

16. Therefore the decision to allow Vodafone and O2 to re-farm confers no distortive advantage on theseoperators. The service provided can be replicated by EE and H3G using their access to a greater number ofsites. There is therefore no sense in which either EE or H3G needs to be advantaged in the forthcoming auctionof sub-1GHz spectrum in order to correct for a distortion caused by the re-farming decision. Such restorativerough justice, by Ofcom’s own analysis, has no basis in evidence.

Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed;

17. Under section 13(3) of the 2006 Wireless Telegraphy Act, Ofcom may, if it thinks fit, prescribe chargesthat would be greater than those that would be necessary for the purposes of recovering costs incurred byOfcom in connection with its functions relating to the management of the radio spectrum.

18. These fees however are not a tax; they must take into account the need to promote the efficient use ofspectrum, innovation and competition. Ofcom previously reviewed the level of fees for mobile spectrum in2005. It emphasised that “Ofcom can only set fees in excess of the costs of administration in order to promoteefficiency in the use of spectrum” and concluded that “Ofcom has no evidence that the current level of fees is,or is likely in future, to give rise to inefficient under-utilisation of this spectrum. At the same time Ofcom isnot convinced that it would be appropriate to increase these fees at this time..”32

19. We concur with Ofcom. We know of no evidence that the mobile operators are using spectruminefficiently or that their use of spectrum is “crowding out” other higher value uses. We consider that theproposed approach to setting spectrum charges in future will likely distort the auction process and futurecompetition.

Whether the upcoming auction can provide value for money for tax payers and how that should be balancedwith benefits for consumers

20. Ofcom is required by law to consider the need to promote the efficient use of spectrum and competitionwhen allocating spectrum rather than raising revenues. However, it is questionable whether the proposedauction structure will provide value for money for tax payers because the use of the spectrum floors (togetherwith the distortive effect of the proposed setting of annual licence fees) means that it is perfectly possible thatone-third of the sub-1GHz spectrum will find its way into the hands of EE and 3 for the reserve price.

21. We do not believe that removing the spectrum floors will harm competition and consumers: EE alreadyhas sufficient spectrum to deploy a mobile broadband network and 3 can either acquire more spectrum or, if itis unsuccessful, buy wholesale capacity from one of the successful bidders. If this fails then Ofcom has thepower to intervene.

Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities;

22. Ofcom has recently published research on mobile not-spots.33 Ofcom quotes figures of approximately97% of the UK population and 91% of the UK land mass for 2G coverage and 87% of the population and32 Spectrum Pricing: A statement on proposals for setting Wireless Telegraphy Act licence fees paragraph 3.1633 Mobile not- spots—An update on our research. November 2010

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76% of the land mass for 3G coverage. Ofcom finds that “[i]n the vast majority of case study areas, not-spotsexisted because it was not a commercial priority for mobile operators to extend their coverage, influenced bylow levels of traffic discouraging investment.”34

23. However, there are good reasons to believe that coverage of 3G will improve over time. First, as operatorsreduce costs through sharing infrastructure (for example Vodafone and O2) it becomes more economic toexpand coverage. Second operators will seek innovative ways to improve indoor coverage; for example,Vodafone is the only provider currently offering consumers “Sure Signal” which uses femtocell technology(indoor equipment that looks like a wireless router and connects via a fixed line broadband connection) as apotential solution to improve indoor coverage and for which we have hundreds of thousands of registeredusers. And third, all operators now have a 90% coverage obligation in their 3G licences.

24. Ofcom has proposed that one of the spectrum lots in the 800MHz has an indoor coverage obligation for95% of the population by 2017. This will mean that the upcoming auction can deliver improved mobilebroadband coverage in rural areas; Vodafone Germany has live base stations using the 800MHz frequencyband providing coverage to communities with fewer than 5,000 inhabitants in Northrhine-Westphalia.

25. However, our estimates of the cost of meeting the proposed coverage obligation are somewhat higherthan Ofcom has suggested; it is not just a case of upgrading existing infrastructure with the right equipmentbut new sites will have to be built in order to comply. This may be a problem if it dissuades bidders fromacquiring the lot with the coverage obligation.

June 2011

Written evidence submitted by British Telecommunications plc (BT)

Executive Summary

— BT is pleased to provide this input to the Inquiry into Spectrum. Our response addresses the termsof reference for the Inquiry, to the extent that they are relevant to BT.

— In summary, we are content with the current EU and UK regulatory framework for spectrum, andthe general approach that Ofcom takes in relation to its spectrum duties within that framework.

— We are content with the basic approach of Ofcom’s proposed auction of 800/2600MHz spectrum,although commenting on certain details in our submission to Ofcom on 31 May 2011. We are keento see the spectrum out in the market as soon as possible.

— We do not take a position on the issue of spectrum fees for mobile networks, but have providedsome general comments in relation to how spectrum pricing may be used, including in relation tofixed radio links.

— We see a need for close coordination and interworking between Government and Ofcom in relationto the foreseen release of at least 500MHz of Government spectrum.

Introduction

1. BT is a significant user of radio spectrum, both on a licensed and licence-exempt basis. Our use spansapplications including fixed radio links, satellite communications and mobile applications and services. BTholds spectrum licences acquired in past auctions (eg the 32GHz fixed links spectrum auction in 2010), as wellas a large number of individual wireless licences that are subject to annual charges. BT and its customers makeextensive use of low power licence-exempt technologies, including cordless phones, and WiFi technology formobile broadband in homes, business premises and public places, with many millions of devices in use on adaily basis.

BT’s Views on the Specific Issues Under Examination by the Committee

Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision ofmobile broadband services;

2. An auction is the best approach to award the new mobile spectrum licences at 800/2600 MHz, since thespectrum will be available to those that value it most and are, therefore, most likely to put it to the mosteconomically efficient use. An auction should also support the legal requirements to assign spectrum in anobjective, transparent, non-discriminatory and proportionate manner. If properly designed it can also promoteinnovation and competition that should benefit consumers. It is the detailed design of the auction that isimportant and it should give the possibility for potential new entrants as well as existing players to participate.

3. Ofcom’s consultation proposals that closed for comments on 31 May appear to be a generally reasonableapproach. However, we have suggested to Ofcom that certain details would need to be modified in order toensure that the possibility for innovation and participation by new players beyond the existing four nationalmobile network operators is encouraged.34 Paragraph 2.15

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4. BT is unconvinced that ensuring four competing national wholesale competitors is sufficient or can beguaranteed to be realized in the way Ofcom may envisage. We have suggested that other safeguards may beappropriate in the event that the outcome does not deliver the level of competition at the wholesale mobilenetwork level that Ofcom would like to see; this could be addressed in licence conditions.

5. Ofcom’s proposal to make some spectrum available for sub-national networks using some shared lowpower 2.6GHz spectrum is an interesting concept. It has potential to enable wider participation in the deliveryof mobile services. It could also lead to innovative solutions being introduced and an efficient use of spectrumthat is consistent with the general trend to move to small cell systems to cope with rapid growth in capacitydemand. It would be necessary to secure wholesale access to national mobile networks to provide servicesbeyond the small cell systems. Sufficient spectrum would need to be reserved for this purpose and the technicalconditions and auction rules would need to be appropriately specified.

Whether the upcoming auction can provide value for money for tax payers and how that should be balancedwith benefits for consumers

6. The detailed design of the auction is likely to have an impact on the revenue that may result from theaward process. For example, caps on the amount of spectrum that a given player can bid for or the provisionof minimum spectrum packages for four national wholesale competitors, have potential to lead to lower pricesthan if these measures were not in place. Inclusion of measures to promote competition and innovation wouldbe expected to benefit consumers and the absence of such measures could be detrimental to consumer interestsin the longer term, for example if prices for services are higher or new technology was deployed later becauseof less competition.

7. Relevant EU and UK legislation is focused on ensuring the assignment of spectrum in an objective,proportionate, non-discriminatory and transparent manner, as well as promoting competition via efficientinvestment in infrastructure, promoting innovation and encouraging efficient use of radio frequencies. Thisappears to be the correct focus for the spectrum auction. However, this should be within a framework thatallows market forces to determine the best allocation outcome, whilst achieving sufficient competitive tensionin the auction so that prices reflect the wider market value of spectrum, rather than producing a distortedoutcome leading to inefficient spectrum use. Since Ofcom proposes taking into account the values bid in theauction when setting annual fees for other existing spectrum (as required by a Government Direction), it is allthe more important to understand how the auction design may affect the auction prices. When finalising itsauction rules, Ofcom must ensure a balance between promoting competition and ensuring that the true valueof the spectrum is identified.

The potential for next generation mobile internet services offered by the forthcoming availability of spectrum

8. The new mobile spectrum bands to be released in the Ofcom auction are undoubtedly well suited to theprovision of high speed mobile broadband services with globally standardised technologies available, notablythe LTE technology standards. Roll out of services using this technology has started in other European countriesalready (eg Germany). These so called “4G” mobile technologies can deliver higher speeds than current 3Gsystems, but higher speeds and increased network capacity are not simply a matter of more spectrum and newtechnology. The use of smaller cell systems and off-loading of traffic from wide area mobile networks to WiFitechnologies connected to the fixed broadband network will also have a role to play.

9. In order to see new high-speed mobile services made available in the UK, the spectrum should be awardedas soon as possible, but in an appropriate manner promoting innovation and competition and leading to timelynetwork roll-out. The use of the spectrum will, we understand, initially be constrained by existing radar systemsin spectrum adjacent to the 2.6GHz band and at 800MHz by the completion of the analogue-digital switchoverand reconfiguration of the TV band. Potential interference issues between new mobile services and TVreception may also require attention and, we understand, will be subject to further consultation by Ofcom.

Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities

10. The 800MHz spectrum is undoubtedly well suited to rural coverage and this is recognised in the draftdecision of the European Parliament and of the Council establishing the first radio spectrum policy programmethat is currently undergoing approval. In the absence of specific obligations it is a question of economics andcommercial plans as to the extent to which coverage of new networks will materialize. It should be noted thateven in rural areas it is not simply a question of coverage of networks but whether they have sufficient capacityto deliver services at adequate speed when multiple users simultaneously require services.

11. We have examined Ofcom’s proposals to place a population coverage obligation on one 2x5MHz packageof 800 MHz spectrum and are very doubtful that the specified obligation could be achieved (with significanttake up of service) without significant additional spectrum being available to the licensee. This capacitychallenge could be particularly significant in cases where fixed broadband services are not available.

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12. Any obligations on mobile broadband coverage that go beyond the extent of coverage that mightotherwise be commercially viable may be expected to result in a lower auction value for the relevant spectrum.This is effectively a public subsidy to the holder of the relevant 800MHz licence to support broadband deliveryto rural homes. The holder will benefit from valuable spectrum holdings of spectrum in urban areas, for whichit will have paid a reduced price. This is a cross-subsidy to rural broadband, where the licence holder will haveto pay for the costs of coverage. This is an anti-competitive subsidy against other rural broadband technologies,in particular fixed broadband lines or satellite broadband.

13. It should be noted that indoor mobile broadband can be achieved with fixed networks and WiFi. In BT’sview it would be better to have an explicit subsidy mechanism through the work of BDUK to make best useof the public support available for rural broadband of all types, rather than a hidden subsidy in the form of acheaper spectrum licence.

Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed

14. Under relevant EC and UK legislation, licence fees should both promote efficient spectrum use andsupport other objectives such as promoting competition. These principles apply to mobile networks as well asother uses of spectrum, such as BT’s fixed microwave links, Professional Mobile Radio systems and satelliteEarth stations. Incentive pricing has also been applied to some Government uses of spectrum.

15. To date the fees for mobile spectrum (and other cases such as fixed links) have been set based onconsideration of the marginal opportunity cost (ie the cost of using more efficient equipment, additionalequipment or alternative technology) to deliver the same service with less spectrum.

16. More recently the competition aspect has received greater attention where it is necessary to look at thecosts of existing spectrum that was assigned administratively, compared with the costs of new spectrum thatmay be auctioned and hence charged at full market value. We have noted Ofcom’s proposals to more clearlylink auction prices of new mobile spectrum and future annual fees for existing spectrum in line with theGovernment’s Directions to Ofcom. This Direction requires that fees for existing 900/1800MHz spectrum arecharged annually at full market value, to be set taking into account the prices bid in the auction. In the case ofBT’s fixed links we feel that, based on the outcome of the auction of fixed links spectrum in 2010, some ofour annual fees may in fact be too high.

17. Turning to the question of whether mobile operator fees have previously been set at “appropriate” levels,and how it should be assessed, it is necessary to first consider what objective is to be fulfilled. If the aim is torecover full market value then it is unlikely that past fees have achieved this, especially since the fees were setat a fraction of the calculated full opportunity cost. If the aim is to promote efficient spectrum use then it isnot possible to say, particularly as no spectrum has been given up as a result of the fees charged. The spectrumhas also not been tradable so that incentive to release spectrum where someone else places higher value on ithas not been a relevant factor as more spectrum could not be acquired by MNOs.

18. BT takes no position on whether or not mobile operator fees have been set appropriately in the past. Forthe future, fees should promote efficient use and not distort competition. The requirement to base annualcharges for spectrum that was not auctioned on the full market value of similar spectrum awarded by auctionmay achieve a similar equivalent cost for the different types of spectrum (auctioned and administrativelyassigned) over the longer term. This seems sensible. We have urged Ofcom to do this also for fixed linksspectrum since, based on auction prices, it appears that annual fees may be set at too high a level.

How the position of the UK compares with other countries, with regards to the allocation and utilisation ofmobile broadband spectrum

19. The UK has in the past (eg 3G mobile) led the rest of Europe in the award of spectrum for mobilebroadband and has been a champion of innovation and competition, including allowing WiFi technologies tobe used in public as well as private networks and opening additional bands (5GHz for WiFi). For the nexttranche of spectrum releases at 800MHz and 2600MHz some other countries are moving ahead faster than theUK, notably Germany where this spectrum is already awarded and France where an award process is plannedto be completed this year.

20. The UK was at the forefront of promoting use of licence-exempt spectrum for public WiFi networks andhas one of the most extensive networks of public WiFi in Europe. The same technology is used in millions ofUK homes to supply mobile broadband connectivity on the end of a fixed broadband connection. The UK isnow at the forefront of work to make more spectrum available for licence-exempt use in the so called “TVWhite Spaces” spectrum.

21. Given unresolved radar interference issues with the 2.6GHz spectrum and that the 800MHz spectrum isnot cleared of TV nationwide, arguably the delay to the awards has not been too problematic as the spectrumis anyway not available for use.

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The possible impact on alternative uses for spectrum

22. The mobile auction proposals are based on the principles of technology and service neutrality and thusoffer a degree of flexibility as to how the spectrum can be used. Nevertheless the new use for mobile serviceswill be at the expense of other services that previously used the spectrum, notably wireless cameras at 2.6GHzand digital TV in the case of 800MHz. The new use may have some impact on adjacent band services, notablyTV reception below the 800MHz band and radar systems above the 2,600MHz band. We understand that thelicensing conditions would protect these adjacent band uses and as such we have no particular concerns to raise.

Other Matters

23. Many of the important areas of focus for spectrum management in the coming years are identified in thefirst Radio Spectrum Policy Programme that is currently passing through the EU Council and EuropeanParliament. The UK should press for the early adoption of this draft Decision and work to implement thisprogramme once approved.

24. In general we are content with how Ofcom manages spectrum and the existing EU and UK legislativeframework.

Recommended Actions

25. We have no suggestions for changes to the present EU and UK regulatory framework in relation tospectrum and are broadly content with the way in which Ofcom operates with this framework.

26. We are aware of Government plans to release at least 500MHz of spectrum for civil use over the comingyears and would suggest that this is coordinated closely with Ofcom, for example in the timing and methods ofspectrum release and in preparing international harmonisation work to make the spectrum as useful as possible.

June 2011

Written evidence submitted by Arqiva

Summary of Key Points and Recommendations:

— Access to broadband increasingly matters. There is an increasing social and economic cost to eachperson who falls on the wrong side of this “digital divide”.

— The longer that areas which are broadband “not spots” remain unconnected, the less desirable theywill be for inward investment, and the less attractive they will be as a place to live to eachsuccessive year’s school leavers.

— The 800 MHz and 2.6 GHz spectrum are both needed to meet growing demand for data by usersof smartphones (such as the iPhone) and tablets (such as the iPad), where the 2.6 GHz is bestsuited to delivering high bandwidth in urban areas, while the 800 MHz is ideal for covering non-urban areas, including very rural areas.

— But it is also essential that the 800 MHz spectrum achieves what fibre cannot do—universal accessto broadband.

— Arqiva strongly believes that it would be proportionate and highly desirable for Ofcom to increasethe coverage obligation for one of the 800 MHz licences from 95% of the UK’s population to 99%of each Nation’s population.

— This would bring considerable economic and societal benefits and would also achieve optimal useof this precious spectrum.

— A range of international studies show that a 10% increase in broadband penetration increases GDPby 1%.

— In our view, any short-term cost to the Treasury of imposing a 99% coverage obligation on one800 MHz licence would, over the long term, be considerably less than the opportunity cost of notproviding access to broadband, or of providing it years later, to at least hundreds of thousands ofhomes, schools and farms and other small businesses.

About Arqiva

Arqiva is a media infrastructure and technology company operating at the heart of the broadcast and mobilecommunications industry and at the forefront of network solutions and services in an increasingly digital world.Arqiva provides much of the infrastructure behind television, radio and wireless communications in the UKand has a growing presence in Ireland, mainland Europe and the USA.

Arqiva is implementing UK Digital “Switch-Over” from analogue television to Freeview—a huge logisticalexercise which touches every Parliamentary constituency, requiring an investment by Arqiva of some £700million and which is successfully being delivered to time and budget.

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Arqiva is also a founder member and shareholder of Freeview, and operates two of the UK’s three Freeviewcommercial multiplexes, providing 40 services on Freeview to 19 million homes.

Arqiva was a key launch technology partner for Freesat and is also a shareholder in YouView and thelicensed operator of the Digital One national commercial DAB digital radio multiplex.

Arqiva operates nine international satellite teleports, over 70 other staffed locations, and around 9,000 sharedradio sites throughout the UK and Ireland including masts, towers and rooftops from under 30 to over 300metres tall.

In addition for broadcasters, media companies and corporate enterprises Arqiva provides end-to-endcapability ranging from:

— outside broadcasts (10 trucks including HD, used for such popular programmes as Question Timeand Antiques Roadshow);

— satellite newsgathering (30 international broadcast SNG trucks);

— 10 TV studios;

— spectrum for Programme-Making & Special Events (PMSE);35 to

— satellite distribution (over 1200 services delivered).

Elsewhere in the communications sector, the company supports cellular, wireless broadband, video, voiceand data solutions for the mobile phone, public safety, public sector, public space and transport markets.

Arqiva’s major customers include the BBC, ITV, Channel 4, Five, BSkyB, Classic FM, the four UK mobileoperators, Metropolitan Police and the RNLI.

Arqiva has bid in three Ofcom spectrum auctions, securing spectrum in two of them.

Arqiva is a British success story, owned by a consortium of long-term investors and has its headquarters inHampshire, with other major UK offices in Warwick, London, Buckinghamshire and Yorkshire.

Arqiva welcomes the opportunity to respond to the Culture, Media and Sport Committee’s new Inquiryinto Spectrum.

Answers to Questions

Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision ofmobile broadband services;

1. Arqiva agrees with Ofcom that mobile operators would need access to spectrum for both capacity andcoverage (essentially sub-1 GHz spectrum) in order for there to be effective competition. There was thereforea risk that one or more of the current operators could have found itself post-auction with a sub-optimal spectrumportfolio with which to maintain its market position, hindering competition. Ofcom has addressed this byproposing an auction design intended to achieve each of four mobile network operators having spectrum forboth capacity and coverage.

2. However as network infrastructure is increasingly shared, and with future mobile technologies supportingcarrier aggregation (and therefore pointing the way towards spectrum sharing), competition is increasinglyfocussed at the service layer.

3. So there is a risk that, while the proposed method of spectrum allocation promotes competition, Ofcommay be engineering an outcome which may not reflect where the market, of its own volition, is heading.

Whether the upcoming auction can provide value for money for tax payers and how that should be balancedwith benefits for consumers;

4. Although securing best value for tax payers is usually thought of purely in terms of auction proceeds,best value should also take account of the economic contribution and achievement of public policy objectivesderiving from its use. Indeed Ofcom is charged with securing optimal use of spectrum, not maximising proceedsfrom its sale.

5. Of all the spectrum currently lined up for future award by Ofcom, the forthcoming auction of 800 MHzand 2.6 GHz is the single most important. This importance results not just from the need for the mobileoperators to address rapidly increasing subscriber demand for data, but also because of the widespreadrecognition that ensuring universal access to broadband is one of the most important public policy objectivesto achieve over the medium term.

6. Not everyone will be offered fibre; wireless will be the only cost- and time-effective means of providingaccess to broadband for virtually all those who won’t be, with 800 MHz the optimal spectrum to use for that.Satellite broadband will also play a role, but its higher cost and lower speed (combined with higher latency)makes it sub-optimal for all but those who couldn’t be cost-effectively offered broadband by other means.35 Such as the wireless cameras operated by the BBC and Sky News, and the radio mics used in virtually all television production

and many West End shows.

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7. In meeting these expectations, and of satisfying its statutory duties to secure optimal use of spectrum andto serve the interests of citizens and consumers, Ofcom must balance:

— competition concerns;

— spectrum efficiency (which, for LTE36 “4G”, is maximised with large contiguous holdings);

— enabling innovation; and

— contributing to achieving public policy objectives.

8. Arqiva believes that Ofcom has got the balance about right—apart from one major issue which must berevisited before Ofcom publishes its draft Regulations for the auction.

9. While Ofcom has recognised the key role which 800 MHz could and should play in delivering universalaccess to broadband, their proposed coverage obligation stops short of actually ensuring that universality wouldbe achieved.

10. This is short-sighted. There is an ever-greater social and economic cost to each person who falls on thewrong side of this “digital divide”.

11. Set against any reduction in auction proceeds directly attributable to an increased coverage obligationwould be the economic and societal benefits (visible benefits to consumers). Universal access to broadbandmaximises digital inclusion, which is an instrument of real social change:

— Improving the life chances for the unemployed;

— Widening access to online educational materials and resources, raising children’s grades and lifechances; and

— Enabling the financially-disadvantaged and less knowledgeable, or media literate, to pay the samediscounted prices for commercial products and services as everyone else.

12. Studies undertaken by McKinsey, Allen, OECD and the World Bank show that a 10% increase inbroadband penetration increases GDP by 1%.

13. Surely ensuring that the 800 MHz spectrum achieves what fibre alone cannot do—universal access tobroadband—must be a key component of providing the best value for money for tax payers, and deliveringbenefits for consumers?

The potential for next generation mobile internet services offered by the forthcoming availability of spectrum;

14. The take-up of internet-connected personal mobile wireless devices—smartphones, tablets, Kindles—hasbeen astonishing and continues apace.

15. In addition to fast access to the internet, with pages re-sized for a smaller screen and hundreds ofthousands of apps optimised for handsets (and for as long as it’s connected, a smartphone is constantly sendingand receiving data), smartphones are also supplanting stand-alone music and video players, portable gamesmachines and satellite navigation devices.

16. And with Near Field Communication (NFC) technology becoming integrated, smartphones are becomingthe most ubiquitous means of making contactless payments, and will likely become consumers’ loyalty cardsas well. Smartphones are also becoming a new way to shop, allowing awareness of your interests, tastes, pastpurchases and location—and your “phone may alert you to purchasing opportunities accordingly.

17. So handsets acquired principally for their internet connectivity offer much more besides. And technologyallows these phones to get smarter (dual core processors now here) with bigger, better screens and more storage.

18. Therefore the forthcoming availability of additional mobile broadband spectrum offers a twofoldadvantage. Firstly, the spectrum provides operators with an additional tool37 to address their subscribers”insatiable appetite for data. Secondly, when the latest LTE technology is deployed, it will offer consumersmuch faster download and upload speeds.

19. In 2009 there were 10 million UK mobile internet subscribers, but by 2014 PwC forecast there will be24.5 million. For many of those consumers mobility, with the ability to be reached anywhere and all the timewith personalised, context-specific services, has huge value.

20. By 2015, Enders Analysis expects:

— UK smartphone penetration to reach 75%;

— Mobile internet use to reach 28% of total time spent online; and

— Mobile advertising spend in the UK to reach £420 million, equivalent to 10% of desktop spend.

21. 400 million smartphones worldwide use more bandwidth than the six billion standard cellular phones inuse.38 60% of time spent on smartphones is a new activity (maps, games, social etc) for mobile users.39

36 Long-Term Evolution, the next mobile technology after 3G.37 In addition to technology upgrades and the deployment of more sites (ie more efficient use of spectrum).38 Source: Orange Business Services.39 Source: AppsFire.

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22. This is a revolution. There can be little doubt that the smartphone is the new PC. But without a dataconnection, its value is hugely reduced.

23. The UK needs the 800 MHz and 2.6 GHz spectrum to be awarded without delay—and for the 800 MHz(ideally suited to covering large non-urban areas) to be deployed as widely as possible. This is both to spreadthe benefits of smartphone (and tablet and laptop dongle) use widely, and to enable that spectrum to be availablefor use to offer fixed substitute broadband to homes, schools, farms and other small businesses which couldnot economically (even with public subsidy) be offered fibre.

24. The most certain way to ensure that the potential for next generation mobile internet services offered bythe forthcoming availability of spectrum is spread widely is for Ofcom to require universal coverage from oneof the 800 MHz licences.

Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities;

Why improved coverage of broadband matters

25. Businesses have long realised the importance of having broadband access to stay connected to suppliersand customers, and to have the potential of expanding their geographic spread of their customer base—worldwide if they wished.

26. Farmers are becoming increasingly vocal where lack of broadband access to the commercial and publicservices necessary for their chosen profession becomes an additional burden to an essential line of work which,for many, is hard enough already. Other rural SMEs share that view.

27. Increasingly consumers and citizens need access to broadband for education, work, interacting withpublic services and for their social life too. Access to broadband at home enables remote working and hobbiesto be turned into cottage businesses, and future SMEs.

28. As we have said previously, recent studies have shown that a 10% increase in broadband penetrationincreases GDP by 1% and, in addition to the economic benefits, access to broadband can be an instrument ofreal social change.

29. There is an increasing social and economic cost to each person who falls on the wrong side of this“digital divide”. The longer that areas which are broadband “not spots” remain unconnected, the less desirablethey will be for inward investment, and the less attractive they will be as a place to live to each successiveyear’s school leavers.

30. Achieving universal access to broadband, ensuring that no-one is excluded from the connected, digitalsociety of the future, is one of those rare public policy objectives which has the strong support of all of themain political parties.

Universal Access to Broadband Makes Economic and Social Sense

Why 800 MHz spectrum has a key role to play

31. While many broadband “not spots” are in urban and suburban areas, and best addressed by fibre, a largenumber of not spots are in rural areas and the outer suburbs where the need to upgrade individual connectionsto each home or business to provide broadband by fibre or other fixed line solution can be ruinouslyexpensive—and this will all take considerable time.

32. If insufficient homes are clustered together, fixed line solutions are unviable. Fibre requires 50 householdsper cabinet to make it economic to deploy, so many rural homes could not be offered fibre with the fundscurrently available for subsidy.

33. Fibre is not cost effective to deploy for more than 1 million households—wireless broadband is the onlypractical solution for virtually all of them (with satellite broadband being offered to the final few). Wirelessbroadband could be deployed quickly and offered to all consumers within range of each transmitter as soon asit was switched on.

34. The 800 MHz spectrum is ideal for providing universal broadband access (having previously provideduniversal public service television), covering large areas, bending around hills and going through walls.Conversely the 2.6 GHz spectrum offers high bandwidth but small cell size, and is ideally suited to urban andinner suburban areas,

35. The effectiveness of using 800 MHz spectrum to deploy 4G wireless broadband in rural areas wasmodelled for Ofcom and Arqiva in 2009 and, at the end of 2010, Arqiva borrowed some of this spectrum fromOfcom and carried out an extensive 4G trial.

36. We were able to demonstrate delivery of high speed broadband (in excess of 50 Mbit/s) in a challengingrural environment (difficult and highly costly for fibre to address) where citizens currently experience typicalspeeds which are less than 500 kbit/s.

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37. 800 MHz wireless broadband must be an essential part of the solution to achieve the government’s keypublic policy objective of universal broadband. The special contribution which 800 MHz spectrum shouldmake to achieving this objective has also been recognised by the European Commission, where a recentCommission Proposal40 to the European Parliament and the Council included:

“Member States…shall ensure that the provision of access to broadband content and services using the…800MHz band is encouraged in sparsely populated areas, in particular through coverage obligations.”

38. Of course, wireless broadband spectrum could be implemented both for mobile broadband (handsets,tablets, dongles) and for fixed substitution (where fixed broadband wouldn’t be cost-effective).

800 MHz is Essential to Achieve Universal Access to Broadband.

The optimal coverage obligation

39. While Ofcom, in its proposals for the auction, has recognised the key role which 800 MHz should playin delivering universal access to broadband, their proposed coverage obligation stops short of actually ensuringthat universality would be achieved.

40. 95% population isn’t universality. Indeed it is an obligation so unadventurous that an operator couldtheoretically comply without deploying its 800 MHz spectrum in the whole of Suffolk, Northern Ireland andCumbria combined.

41. Using the same spectrum, and infrastructure still in place, Arqiva delivered more than 98.5% populationcoverage of television. It is clear that at least some of the 800 MHz spectrum ought to achieve far closer touniversality than has been proposed by Ofcom.

42. The 98% population coverage called for recently by MPs following a debate in the House of Commonson rural broadband would almost achieve the goal, but only a 99% obligation would leave so few consumerspotentially requiring a satellite solution (slower and more costly) that there would be no need for alternative,far more interventionist means of ensuring wireless broadband could be offered to them.

43. The proposed coverage obligation should be assessed by Nation, to ensure that the benefits are spreadwidely. The Committee should note that the French proposal for their 800 MHz is for the 99.6% coverageobligation to be measured regionally.

44. Only by imposing a 99% population coverage obligation by Nation—and ensuring universal access tobroadband, and hence digitised public services—would the projected huge cost savings from slimming down“offline” Whitehall be achieved.

45. If imposing a 99% population coverage obligation by Nation on one 800 MHz licence reduces theauction proceeds from that licence (which, given that each block of this spectrum has different characteristics,may not be apparent even when the auction has closed), that short-term loss to the Treasury may be dwarfedby the long term economic and societal benefits of providing access to at least hundreds of thousands of homes,schools, and farms and other small businesses, which would otherwise have been left without.

The Right Coverage Obligation will Achieve Universal Access to Broadband.

Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed;

46. Prior to the 3G licences, the licence fees paid by the relevant operators of mobile spectrum wasdetermined by Ofcom without any market benchmarks and with that spectrum being non-tradable.

47. Only when the outcome of the 800 MHz/2.6 GHz auction is known will it be clear whether those licencefees were set at an appropriate level.

How the position of the UK compares with other countries, with regards to the allocation and utilisation ofmobile broadband spectrum;

48. Legal proceedings, and then the last government’s Digital Britain initiative, delayed Ofcom awardingthe 800 MHz and 2.6 GHz spectrum, but equipment is only just becoming available now and neither spectrumband will be available UK-wide until 2014. There are still many countries which have yet to allocate thesebands. So, contrary to the views of some commentators, the UK is not obviously lagging behind in allocatingand (more importantly) using this spectrum.

49. In addition, the MOD has given priority to the release of its 2.3 GHz mobile broadband spectrum.

50. In terms of utilisation, the UK’s adoption of smartphones (28% share of total handset users by March201141) compares favourably with other major European countries, and all of the operators have felt theimpact of their subscribers’ insatiable demand for data on their mobile broadband spectrum in urban areas.40 COM(2010) 471 final41 Source: Enders Analysis.

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51. But meeting the demand for data requires a data connection, and here the UK arguably has sub-optimalutilisation because there are so many data “not spots”. The 3G licences contained population coverageobligations of only 80%, a far less challenging coverage target than was placed on 1G and 2G licences, and3G is unavailable in many rural areas. This strongly suggests that there is little commercial incentive forinvestment beyond this level.

52. The UK should learn the lesson of 3G when licensing 4G, where the 800 MHz spectrum is ideally suitedto rural coverage and that spectrum will be awarded against a backdrop of a series of public procurements ofbroadband where up to £830 million of public subsidy identified by Central Government, plus additionalfunding from the Devolved Assemblies, the EU and industry itself, will be available by 2017 to make accessto broadband of at least two Mbit/s downlink universally available.

53. Unless the 800 MHz coverage obligation is for close to 100% population coverage, with sanctions fornon-compliance, there could be no guarantee that the operator would choose to deploy the spectrum to anythingapproaching that level.

54. If Ofcom were persuaded to set a coverage obligation of 99% population, measured by Nation, on justone of the 800 MHz licences, then more than one million homes (maybe two million citizens and consumers)wouldn’t be left on the wrong side of an ever-widening digital divide.

55. Any outcome which left all of the 800 MHz spectrum unused across large swathes of the UK couldhardly be assessed to have been the optimal use of that precious spectrum—and it is optimal use of spectrum(a Crown asset) which Ofcom is charged by Parliament to achieve, not maximising auction proceeds.

The possible impact of the auction on alternative uses for spectrum.

56. Decisions taken by Ofcom on auction timing, auction design, technical licence conditions (ie whatpurchasers would be permitted to do with their spectrum) and methods of payment for purchased spectrum allinfluence who might be awarded spectrum and what they might then do with it. Technical- and service-neutrality is a goal for spectrum awards, but it can never be achieved.

57. In determining an auction design and technical licence conditions, Ofcom has regard to what the markettells it is the most likely source of demand, taking account of current and imminent equipment availability. Foran 800 MHz/2.6 GHz auction in 2012, that demand is almost certainly going to be to deploy LTE technology.Arqiva believes that Ofcom is right to assume use of LTE for this auction.

58. Obviously an auction designed with LTE use in mind might then preclude an alternative use, but Ofcomcannot design an auction to accommodate every potential use and, given the potential for spectrum betweendifferent uses to have to be left fallow to minimise interference, arguably seeking to maximise different usescould also lead to a sub-optimal use of that spectrum.

59. One other factor to note is that there is a risk that, in seeking to derive new licence fees for existingmobile spectrum from the auction values achieved for 800 MHz and 2.6 GHz, Ofcom may be tempted to thendetermine licence fees for other spectrum with very different economic value, such as the spectrum usedby Freeview.

June 2011

Written evidence submitted by Network Rail

Network Rail and Spectrum

1. The railway, in common with other critical national infrastructure, relies on high-quality, highly reliabletelecommunications. The quantity and quality of information needed to run the network safely and efficientlyis set to continue to grow as signalling, passenger information and train management become increasinglysophisticated to deliver the railway Britain’s economy needs.

2. Currently, GB mainland railway operational communications, to train drivers and key staff, is deliveredusing legacy analogue radio systems, which are gradually being replaced by GSM-R. All of these systems arebuilt upon a common foundation of good quality, dedicated radio spectrum. This is however just one systemelement required to deliver a mobile communication system fit for a safety critical operational purpose. Thenext generation of operational mobile communications, such as Automatic Train Operation and In-Cab CCTV,will be characterised much increased bandwidths, whilst maintaining the current service integrity.

3. Auctioning spectrum to commercial users makes sense if we want to maximise government’s revenues.However, requiring providers of critical national infrastructure and the emergency services to compete withmobile telephone operators risks either under-providing essential spectrum, or over-paying for it.

4. Maximising income from the auction must be set against the cost to essential public services of doing so.Network Rail’s income is made up of direct grant from government and income from train operators, many ofwhom are in receipt of public subsidy. Most other critical national infrastructure is publically funded; forcingcompetition between essential public services and commercial operators is unlikely to deliver value for money.

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5. One way to proceed would be to reserve sufficient spectrum for critical national infrastructure. Thisapproach has been followed in the United States and ensures that revenue from commercial operations ismaximised and the public interest protected.

6. If this approach is not followed, in favour of a conventional price-led auction, it is likely that criticalnational infrastructures may have to buy mobile data services from commercial operators. This would beproblematic, because the specifications of the two types of use are quite different. The railway requiresextremely reliable and high-quality communications, well beyond what is required for mobile telephonenetworks. If a mobile telephone signal is weak it is an irritation; if a train with in-cab signalling loses contactwith the control centre it would cause significant delays to multiple trains; in the worst-case becoming asafety risk.

7. In summary, we believe that auctioning spectrum is appropriate for commercial users but not criticalnational infrastructure or emergency services users. The different specifications required, as well as value formoney for taxpayers, mean that to require Network Rail and others in a similar position to compete with mobiletelephone services risks under-specifying or over-paying, or both. Reserving a proportion of the spectrum forcritical national infrastructure would enable the government to maximise revenue from commercial operatorswithout denying essential public services’ rather different telecommunications needs. This approach couldeither be achieved through direct access to suitable spectrum, or by applying public service commitments tosome of the auctioned spectrum.

June 2011

Written evidence submitted by Ofcom

Summary

Ofcom welcomes this inquiry into spectrum by the Committee. Spectrum is an increasingly important,valuable and finite national resource. As demands on the use of spectrum intensify the efficiency with whichit is managed will become more important, and a failure to do so will become more detrimental to consumers,citizens and the economy.

We believe that the release of additional spectrum suitable for the provision of mobile broadband servicesis much more likely to promote rather than hinder competition in future; nevertheless we have proposedmeasures in the forthcoming auction for 800 MHz and 2.6 GHz spectrum specifically intended to ensure thatcompetition is promoted.

While none of our statutory duties relate to the generation of proceeds for the Treasury we believe that awell designed competitive auction is very likely to achieve value for money for tax payers. Similarly webelieve that our careful consideration of the costs as well as the benefits of any regulatory intervention, asrequired by our duty to act proportionately, mean that our regulatory decisions, taken following fullconsultation, strike an appropriate balance between benefits for citizens and consumers and any costs to taxpayers and others.

The deployment of next generation mobile broadband services (ie 4G) should offer consumers higher speedswith wider, deeper and more consistent coverage than today’s 3G services. Top headline marketed speeds couldbe up to 60Mbps or more, although typical speeds are more likely to be around 4Mbps and upwards. Coverageshould, in time, be significantly better than today’s 3G coverage, with 4G services available across more of thecountry and with better availability inside buildings—approaching if not exceeding today’s 2G coverage.Capacity should also be significantly greater than that of today’s 3G networks.

The forthcoming availability of 800MHz spectrum makes it entirely possible for next generation mobilebroadband services to be widely available across the UK, in rural as well as urban areas. To ensure that thishappens, and within a reasonable period of time, we have proposed a coverage obligation that would requireat least one mobile network operator to provide next generation mobile broadband services to almost all areasof the UK where 2G voice services are available today, both urban and rural, by no later than the end of 2017(an indoor service with 95% population coverage). Some stakeholders, as well as a number of Members ofParliament, believe that this coverage requirement should be higher, for example 98% UK population coverage.We are currently considering such arguments carefully, and we will carefully consider any and all additionalevidence supporting such a position, bearing in mind the costs as well as the benefits of increasing thecoverage obligation.

Ofcom last reviewed the level of licence fees payable for mobile spectrum in 2004. In line with the wellestablished principles of Administered Incentive Pricing (AIP), those fees were set at a level in excess of ourcosts of administration with the objective of encouraging efficient use of the spectrum. (The mobile networkoperators pay, in total, approximately £65 million per year for access to this spectrum). Full details of themethod used to calculate those fees were set out and consulted on at the time. In line with the government’sdirection to us of December 2010 we plan to review the level of these fees again in 2012, after the auction,and to set them then at a level that reflects “full market value”. (For the avoidance of doubt, we do not believethat we have the power to apply revised fees retrospectively).

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Consumers in the UK enjoy some of the best mobile broadband deals in Europe. As a result, consumer take-up of mobile broadband in the UK is ahead of most of Europe. We believe this is because of the good level ofcompetition in the UK today.

Our proposals are intended to promote competition to at least this level in future by ensuring that at leastfour competitors have sufficient spectrum of the right type to have the opportunity of being a competitivenational wholesaler in the market for next generation mobile broadband services. The market situation in otherEuropean countries differs, in some cases significantly, from that in the UK, and other European regulatorshave taken a different approach to the award of this spectrum.

While the technical licence conditions and auction design that we have proposed for the 800MHz and2.6GHz spectrum are intended to facilitate the provision of next generation mobile broadband services (as theuse expected to generate greatest benefit for consumers and citizens), we are not proposing to prohibit the useof these frequencies for other purposes if it turns out that those are more valuable. So far as users of adjacentfrequencies are concerned, we are taking particular care to ensure that we understand the potential impact onsuch users of the deployment of next generation mobile broadband services, and are taking appropriate actionto manage and where necessary mitigate those impacts.

Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision ofmobile broadband services

One of the greatest barriers to competition in mobile markets is the scarcity of suitable spectrum, in particularspectrum that has been internationally harmonised for mobile service use and for which there is strong demandfor consumer devices worldwide—such as the 800MHz and 2.6GHz spectrum. The award of this spectrumtherefore represents a very significant opportunity for competition to be enhanced in future, through both thepotential entry of new players into the market and through an overall increase in market capacity.

At the same time we cannot ignore the possibility that one or more players might seek to corner the marketin this additional mobile spectrum in order to restrict future competition, or that some other market failuremight lead to less competition in future than would be in the best interests of consumers. It is for these reasonsthat we have already undertaken an assessment of likely future competition in mobile markets post the awardof the 800MHz and 2.6GHz spectrum, and proposed ex ante specific measures in the auction to promotecompetition.

Our key proposal in this regard is that we introduce measures into the auction intended to ensure that atleast four players each hold sufficient spectrum of the right sort after the auction to have the potential to becredible national wholesale competitors—what we have termed “spectrum floors”. A second proposal is thatwe impose spectrum caps in the auction so that no one player can acquire so much spectrum through theauction, relative to others, that competition might be distorted in future.

At the same time we are also seeking to promote competition in other ways, for example by proposing toallow part of the 2.6GHz spectrum to be used potentially on a shared low-power basis by up to 10 licensees.This could allow a number of new approaches to mobile broadband service provision to develop and grow; forexample providing competitive mobile broadband services in homes, offices, shopping centres and campusesthrough the use of low power femtocells and picocells, rather than the more traditional high powermacrocells.42

Overall we believe that our proposals strike the right balance between securing efficient use of the spectrumand promoting competition; in both cases for the benefit of consumers and citizens. We are however currentlyreviewing stakeholder responses to our consultation and our proposals may change as a result.

Whether the upcoming auction can provide value for money for tax payers and how that should be balancedwith benefits for consumers

As a public body, Ofcom is keenly aware of the need to provide value for money for those that fund ourwork, including tax payers.

Ofcom’s statutory duties, in so far as they affect our regulatory decision making, do not include any referenceto value for money for tax payers or proceeds to the Treasury arising from the release of any public asset,including spectrum. Consequently these are not matters that explicitly figure in our regulatory decision making.Our main duty in relation to spectrum is to secure its optimal use in the interests of citizens and consumers.

Nevertheless, in practice we believe that a well designed competitive auction is likely to achieve value formoney for tax payers when it comes to the awarding of the 800MHz and 2.6GHz spectrum, both as regardsthe cost of the process itself and in respect to the proceeds from the auction. Evidence from previous auctionstends to support this view.

Perhaps of more significance however is the fact that when taking regulatory decisions we give very carefulconsideration not only to the benefits that any regulatory intervention might generate for consumers and42 Picocells and femtocells are both examples of small mobile base stations, generally used to provide coverage or additional

capacity in particular areas eg inside buildings. Macrocells are the more traditional mobile base stations used to provide coverageand capacity across large areas.

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citizens, but also to the costs that are likely to be incurred, as required by our duty to act proportionately. Allof our proposals for interventions in the auction of the 800MHz and 2.6GHz spectrum, for example in relationto the promotion of competition and the proposed coverage obligation, have therefore been arrived at followinga careful consideration not only of the benefits of such intervention but also the potential costs. All of thisanalysis is open to comment and challenge by stakeholders, as part of our consultation process, and we willlook carefully at all stakeholder responses before making our final decisions.

We are therefore confident that our final decisions will strike the appropriate balance between benefits tocitizens and consumers on the one hand, and the cost to tax payers and others on the other.

The potential for next generation mobile internet services offered by the forthcoming availability of spectrum

The deployment of next generation mobile broadband services (4G services) should offer consumers higherspeeds with wider, deeper and more consistent coverage than today’s 3G services. Top headline marketedspeeds could be up to 60Mbps or more, although typical speeds are more likely to be around 4Mbps andupwards. Coverage should, in time, be significantly better than today’s 3G coverage, with 4G services availableacross more of the country and with better availability inside buildings—approaching if not exceeding today’s2G coverage. Capacity should also be significantly greater than that of today’s 3G networks.

Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities

Future availability of the 800MHz band for next generation mobile broadband services definitely has thepotential to facilitate the delivery of improved mobile broadband coverage in rural areas, as well as cities. Theease with which mobile networks can deliver services in rural areas depends, in part at least, on the frequenciesthat are available for the provision of those services. In this regard lower frequencies are preferred, becauselower frequency signals tend to travel further than those at higher frequencies, and so wider coverage can beprovided for similar cost. The 800MHz band frequencies are almost ideal, being comparable to those used toprovide 2G services today at 900MHz.

We therefore currently see no reason why, in due course, the coverage of next generation mobile broadbandservices should not approach that of today’s 2G (voice) services, in both urban and rural areas, which wouldbe a considerable improvement on today’s 3G (mobile broadband) coverage levels.

To ensure that this happens, and does so within a reasonable period of time, one of our proposals for theauction is that one 800MHz licensee be required to provide a next generation mobile broadband service (aminimum 2Mbps service indoors) with coverage approaching that of today’s 2G networks (covering at least95% of the UK population), by no later than the end of 2017.

Some stakeholders, as well as a number of Members of Parliament, believe that this coverage requirementshould be higher, for example 98% UK population coverage. We are currently considering such argumentscarefully, and will carefully consider any and all additional evidence supporting such a position, bearing inmind the costs as well as the benefits of a more extensive coverage obligation than that currently proposed.

Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed

We last reviewed the level of annual licence fees payable in respect of mobile spectrum in 2004. We did sowithin the context of a wide ranging review of fees set to encourage efficient use of spectrum—so calledAdministered Incentive Prices (AIP)—that had previously been set by the Radiocommunications Agency—thepredecessor of Ofcom as regards spectrum licensing, and a branch of the former Department for Trade andIndustry. Our analysis and proposals were the subject of a full public consultation at the time.

That review confirmed that the fees for mobile spectrum should continue to be at a level in excess of thecosts of administration, with the objective of encouraging efficient use of the spectrum in line with our statutoryduties, European law, and the, by then, well established principles of AIP. We recognised at the time that thelevel of those fees would likely need to be reviewed again, once it became possible for new technology to bedeployed in the bands, but this was not imminent at the time.

Following this review, the four (now three) mobile network operators with licences to use the 900MHz and1800MHz spectrum have been paying annual licence fees totalling approximately £65 million per year. (Annuallicence fees are not currently payable in respect of the 3G spectrum at 2100MHz as the winners of thatspectrum paid upfront for the initial period of those licences, to 31 December 2021).

As with all spectrum licence fees all of these monies go to the Treasury.

In December 2010 the government directed us to vary the existing 900MHz and 1800MHz licences to allowthe use of Universal Mobile Telephony Service (3G) as well as Global System for Mobile communications(2G) technology. At the same time the direction also instructed us to carry out a review of the annual licencefees payable in respect of this spectrum after the auction of the 800MHz and 2.6GHz spectrum, and to thenset fees that reflect “full market value”, having particular regard to the sums bid for licences in the auction.This we will do.

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Given that we are required to undertake a fee review in the near future (after the 800 MHz and 2.6 GHzauction), at which point we expect to have considerably better information about the true value of mobilespectrum (as a result of bids in the auction), it would not appear to us to be a good use of our limited resourcesto undertake an additional review of these licence fees before then.

How the position of the UK compares with other countries, with regards to the allocation and utilisation ofmobile broadband spectrum

Consumers in the UK enjoy some of the best mobile broadband deals in Europe. As a result, consumer take-up of mobile broadband in the UK is ahead of most of Europe. We believe this is because of the good level ofcompetition that we have in the UK today. Our proposals are intended to promote competition at at least thislevel in future, by ensuring that at least four competitors have sufficient spectrum of the right type to have theopportunity of being a competitive national wholesaler in the market for next generation mobile broadbandservices. The market situation in other European countries differs from that in the UK, and other Europeanregulators have taken a different approach to the award of this spectrum.

The possible impact of the auction on alternative uses for spectrum

The technical licence conditions and auction design that we have proposed for the 800MHz and 2.6GHzbands are intended to facilitate the efficient and competitive provision of next generation mobile broadbandservices in the near future, since this is the use that is currently expected to generate the greatest benefit forconsumers and citizens.

However, we are not proposing to prohibit the use of these frequencies for other purposes in either the shortor longer term. Indeed we see it as essential to our statutory duty to secure optimal use of the spectrum for thebenefit of citizens and consumers to ensure that it is possible for the use of the spectrum to be both differentfrom that which we as the regulator anticipate will be the most valuable at any given point in time, and forthat use to change over time as both technology and markets evolve.

We are therefore entirely content for rights to use this spectrum to be acquired and for it to used for purposesother than next generation mobile broadband if the parties that wish to do so are able to demonstrate the greatervalue that they expect to generate from this use by out-bidding those that would use it for next generationmobile broadband, although for the moment at least we consider this outcome unlikely.

So far as the users of adjacent frequencies are concerned, we are taking particular care to ensure that weunderstand the potential impact on such users of the deployment of next generation mobile broadband services,and are taking appropriate action to manage and where necessary mitigate those impacts. Examples of potentialimpacts include increased interference into digital terrestrial television (DTT) receivers and increasedinterference into aeronautical radar systems. [I can see Graham’s concern but as he says these are the bestexamples, and some MPs know about them already}.

In relation to the potential interference into DTT receivers we have undertaken a significant amount oftechnical research and testing to understand, as far as is possible prior to mobile network deployment, thelikely mechanisms and scale of potential interference and the possible means of mitigation. We have alsoidentified a number of alternative ways in which such mitigation measures might be delivered in practice. Ourwork on this to date has culminated in the recent publication of a consultation document43 setting out thenature and scale of the issue, and putting forward proposals for how it should be addressed. We intend toactively engage with a wide range of stakeholders on this issue over the coming months, prior to us makingdecisions on these issues later this year.

In the case of aeronautical radar systems, we are actively working with all of the key aeronauticalstakeholders to plan and ensure delivery of a coordinated programme of radar upgrades which will make thesesystems more robust to incoming interference, and consequently capable of operating effectively even afternext generation mobile broadband services have been widely deployed. We are at the same time developingrules to ensure that, both in the interim and the longer term, the deployment and operation of next generationmobile broadband systems are appropriately coordinated with the operators of aeronautical radar systems.

June 2011

43 http://stakeholders.ofcom.org.uk/consultations/coexistence-with-dtt/ Consultation closes on 11 August 2011.

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Written evidence submitted by Everything Everywhere

1. I am writing on behalf of Everything Everywhere in response to your Committee’s Inquiry on Spectrum.Our response is structured as follows:

— Brief Background on Everything Everywhere.

— Our view on Ofcom’s consultation on competition in mobile and proposals for the award of 800MHz and 2.6 GHz spectrum.

— The role of wireless in extending broadband coverage.

We provide brief answers to your specific questions at Annex A.

Background on Everything Everywhere

2. With over 27 million customers and 16,000 people working on our behalf, Everything Everywhere is theUK’s leading communications company offering services under the Orange and T-Mobile brands. EverythingEverywhere is a key investor and contributor to the UK economy, with our shareholders having invested £52billion in this business over the last 10 years—about 7% of total foreign investment into the UK.

Our View on Ofcom’s Consultation

3. Ofcom recently published its consultation document on its assessment for future mobile competition andproposals for an auction of spectrum in the 800 MHz and 2.6 GHz bands (“the Consultation”). As you know,access to the right spectrum is a critical input to our business and the upcoming auction is an important eventfor our company. We welcome the timely nature of the Committee’s inquiry into spectrum and related issues.We would like to take the opportunity to bring up some serious concerns we have over Ofcom’s proposals forthe auction.

4. The increased media coverage of launches of new mobile devices and services highlights that we are inthe midst of a fundamental extension of the role of mobile devices in society. Tablets and smartphones arebringing (first of all) the internet and (secondly) video in a variety of forms onto mobile devices. For theaverage consumer smartphones could replace PCs as the standard entry point on to the internet44 in the nextfive years. In addition, we anticipate a significant extension in the functions of mobile devices with, forexample, mobile devices becoming payment systems and an upsurge in machine-to-machine applications.

5. This rapid evolution is not in question and Ofcom refers to it at length in the Consultation. The consequentexplosion in data traffic on mobile networks has been visible for several years and there is little basis toquestion the forecasts of Cisco45 that suggest compound annual growth rates in data traffic of 90% or moreover the next five years.

6. More data traffic on mobile networks means mobile network operators will need more spectrum to providecapacity to carry the increased traffic load. We expect that traffic growth will increase by at least a factor of30 by 2020 and we find it difficult to identify how this demand can be met—given what we know now, greaterefficiency of spectrum use and identifiable additional spectrum will be only partly able to satisfy this hugeincrease in traffic. We do however believe that a competitive market is of pivotal importance in ensuring thatany gap between the underlying growth in demand and capacity is minimised or eliminated—it is competitionthat will produce the necessary investment and innovation.

7. Ofcom recognises of course that competition is important and that because spectrum is a critical input tothe provision of mobile communications services, access to spectrum is of fundamental importance tocompetition.

8. As the Committee will be aware the current allocation of spectrum is the result of public policy decisionsmade between 10 and 30 years ago. The first UK licences for mobile services using 900 MHz spectrum wereawarded to Vodafone and O2 (Cellnet) in 1983, and subsequently they were permitted to use this spectrum forso-called “2G” (or GSM) mobile telephone services. Both operators gained additional, high frequency spectrumat 1800 MHz in the early 1990s. T-Mobile (One2One) and Orange entered the market in 1993 and 1994, havingbeen awarded 1800 MHz spectrum. The most recent spectrum allocation for mobile services took place in2000, when the then Government auctioned the 2.1 GHz spectrum for “3G” mobile services. This auctionresulted in Hutchison 3G (“Three”) entering the UK market, and the existing four operators added to theirspectrum holdings.

9. In January this year, the original 2G licences were liberalised. This means that Vodafone and O2 can nowoffer 3G services using their 900 MHz licences. In contrast to the experience in most other European markets,Everything Everywhere and Hutchison 3G have no low frequency spectrum and, despite years of debate onthe issue, the liberalisation process did not result in any redistribution of this spectrum.44 The Guardian 5 June 2011—‘How the smartphone is killing the PC’:

www.guardian.co.uk/technology/2011/jun/05/smartphones-killing-pc45 www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11–520862.html

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Ev 106 Culture, Media and Sport Committee: Evidence

10. For mobile services, competition depends critically on spectrum. As the Committee will be aware, anoperator’s spectrum portfolio determines its ability to offer its customers capacity, coverage and performancein a cost competitive way. “Sub-1 GHz” spectrum, ie spectrum in the 800 MHz or 900 MHz bands, hasparticular characteristics compared to spectrum at 1800 MHz or 2.1 GHz. Locations deep inside buildings canonly be reached with sub-1 GHz spectrum and sub-1 GHz spectrum also has greater geographical reach, whichmeans that rural areas can be better covered with fewer masts. This means that customers will get a betterexperience from a mobile network operator that has access to sub-1 GHz, and operators with such lowfrequency spectrum will have lower costs. Hence access to sub-1 GHz spectrum is critical to a mobile networkoperator’s ability to compete.

11. On the basis of its competition assessment, Ofcom has now recognised that sub-1GHz spectrum providesan “unmatchable advantage” and accordingly proposed measures for the upcoming spectrum auction, which itbelieves should help to ensure future competition. The core concept underpinning these measures is that thereshould be at least four operators after the auction, which have access to a sufficient amount of sub-1 GHzspectrum. However, whilst we fully support the critical link between spectrum and competition that Ofcom hasmade, we believe Ofcom has got the pro-competitive measures to achieve this wrong.

12. Ofcom has focused on understanding the minimum amount of sub-1 GHz spectrum that an operatorneeds, and come to the conclusion that this is 2x5 MHz (of the total 2 x 65 MHz available46). Ofcom’stechnical work aims to demonstrate the equivalence of spectrum portfolios including such small amounts ofsub-1 GHz spectrum with portfolios including much larger amounts of sub-1 GHz spectrum in terms of thecoverage and capacity that a mobile network operator can deliver for its customers. However, competitivenessis not about minimum holdings. What will matter for healthy and robust competition is the relative holdingsof sub-1 GHz that mobile network operators will have after the auction.

13. The view, as set out in Ofcoms’ Consultation, that to be viable a mobile network operator requires onlya certain minimum amount of low frequency spectrum misrepresents the nature of the market today, and ignoresthe differing holdings of sub-1 GHz spectrum. Everything Everywhere is extremely concerned that the auctionrules as proposed could facilitate an outcome where Vodafone and O2 each hold more than five times theamount of critical sub-1 GHz spectrum than Everything Everywhere and Hutchison 3G. This would amount tothe continuation of an effective duopoly of sub-1 GHz spectrum and it must be avoided through a change inthe auction rules. We think that Ofcom’s intervention must ensure that mobile operators other than Vodafoneand O2 hold at least 2 x 10 MHz of business critical sub-1 GHz spectrum.

14. Extending the current duopoly of operators with sub-1 GHz spectrum will perpetuate Vodafone and O2’scurrent unmatchable competitive advantage. This would harm investment incentives in next generation, “4G”mobile services, dull incentives to ensure data network coverage, reduce the competition to provide access torural areas and ultimately mean less effective competition (with higher prices, lower quality and less innovation)for mobile broadband customers generally.

15. We expect that Vodafone and O2 may suggest to the Committee that Everything Everywhere has morespectrum overall than any of its competitors. Whilst we desperately lack access to sub-1GHz spectrum, it istrue that Everything Everywhere currently has more spectrum above 1 GHz than Vodafone, O2 or Hutchison3G. We note that we serve more customers with our spectrum holding than Vodafone and O2 do, and hencewe need more spectrum for capacity. However, it is important to stress that the forthcoming auction will makeavailable at least 2 x 90 MHz to 2 x 105 MHz of additional spectrum above 1 GHz.47 Vodafone and O2 willalmost certainly win significant quantities of this spectrum in the auction. Hence after the auction EverythingEverywhere will not have more spectrum above 1 GHz than our competitors, when taking into account thenumber of customers we serve. The critical issue for competition is access to sub-1 GHz, which is extremelyscarce. Ofcom themselves recognise that mobile network operators offering services over 900 MHz spectrumenjoy efficiencies of two thirds over those operators who do not possess sub 1 GHz spectrum as they requirefewer masts to provide services.

16. Whilst Ofcom’s intention to ensure healthy competition through adequate spectrum portfolios is one wesupport, we do not think the current proposals, as they stand, will deliver the desired outcome. We are extremelyconcerned that Ofcom’s proposals could result in two healthy mobile operators, and undermine the long termviability of the two other holders of spectrum.

Rural Broadband

17. The 800 MHz spectrum to be awarded in the upcoming auction offers a great opportunity to improverural broadband coverage. Ofcom has set a coverage obligation on one of the licences to be awarded that itmust provide mobile broadband with a downlink speed of 2Mbps to 95% of the population. We are not opposedto this—provided that Ofcom gets the details right—but we do not believe that it is the most effective way ofdelivering rural broadband.46 2 x 30 MHz in 800 MHz to be awarded in the forthcoming auction and 2 x 35 MHz in the 900 MHz band which is shared

between Vodafone and O2 including guard bands.47 This is 2x70 MHz of paired spectrum at 2.6GHz plus 50 MHz of unpaired spectrum at 2.6GHz, which is equivalent to at least

2x20 MHz of paired spectrum plus 2x15 MHz of 1800 MHz that Everything Everywhere undertook to divest as part of themerger of Orange UK and T-Mobile UK, which we may sell privately or add to the auction.

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18. We would like to draw the Committee’s attention to a rural broadband trial in Cornwall that EverythingEverywhere has recently launched jointly with BT. This trial sets out to develop a hybrid fixed and mobilesolution to deliver broadband to those homes which do not currently have access to basic broadband of at least2Mbps. BT will extend its fixed fibre network as widely as possible. Everything Everywhere has obtained non-operational licences for 2 x 10 MHz of 800 MHz spectrum and based on that, we will deliver wirelessbroadband to the last few households and businesses that are very costly to reach with BT’s fixed network.

19. Everything Everywhere can demonstrate that 2 x 5 MHz of sub-1 GHz spectrum will not be capable ofproviding sufficient performance or capacity to handle broadband traffic levels in such rural broadband not-spot areas. A key finding from the Cornwall trial is that 2x10 MHz is the minimum quantity of sub-1 GHzspectrum necessary for the commercial viability of wireless access as a solution for rural broadband. Otherwise,the percentage of not-spots covered to the right performance level is so limited that it no longer justifies thesignificant investment involved.

20. In addition to providing coverage at a given speed, the mobile site must have sufficient capacity todeliver broadband service to all the not-spots covered by that site. If not, customers in not-spots will facecongestion and severely reduced performance. The step up from 2x5 MHz to 2x10 MHz also brings benefitshere, reducing the number of not-spots with insufficient capacity by 24 percentage points.

21. Prior to this auction, only O2 and Vodafone have the necessary sub-1 GHz spectrum, creating a duopolyfor such rural broadband projects. If this continues, it will reduce the value for money achieved from the publicfunds set aside for rural broadband projects (administered by BDUK) as well as initiatives taken by thedevolved administrations. We believe that it is crucial that after the forthcoming spectrum auction, otheroperators are able to compete for rural broadband projects with public funding.

Annex A

Q1. Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provisionof mobile broadband services:

A1. This has been covered. We like the proposed auction design but not the detail.

Q2. Whether the upcoming auction can provide value for money for tax payers and how that should bebalanced with benefits for consumers:

A2. We believe that by undermining the ability of two players to compete the current proposals forthe upcoming auction run the risk of depriving consumers of operator investment and innovation,and in the long term risking consumer surplus. In addition the overall spectrum cap unnecessarilyconstrains our ability to bid without compensating benefits. This will reduce benefits to the tax payer.

Q3. The potential for next generation mobile internet services offered by the forthcoming availability ofspectrum:

A3. We believe that the auction of 800 MHz and 2.6 GHz spectrum offer great potential for nextgeneration mobile internet services. The spectrum auctioned will reduce, but not eliminate, thespectrum shortage which will materialise over the next few years. Government and Ofcom aretherefore right to focus on finding additional spectrum to compensate for the inevitable gap betweendemand and supply.

Q4. Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as wellas cities:

A4. We believe that new mobile technologies can play a pivotal role in reducing the unavailabilityof high speed broadband in the UK. We are particularly enthusiastic about developing hybrid fixedand mobile solutions for areas where broadband is not currently available as demonstrated by ourCornwall trial with BT. The auction is a vital step in permitting such solutions being developed.

Q5. Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed:

A5. Vodafone and O2 have essentially paid insignificant amounts for their 900 MHz spectrum since1983. The proposal to charge them realistically is welcome, although we believe that the detail ofthese proposals undervalues 900 MHz and overvalues 1800 MHz and we would like to see thisaddressed. 900 MHz spectrum can and is being used for high speed mobile broadband now. There isno equipment for UMTS1800 MHz.

Q6. How the position of the UK compares with other countries, with regards to the allocation and utilisationof mobile broadband spectrum:

A6. The position that Everything Everywhere and Hutchison 3G find ourselves in is unique in Europe.Nowhere else has 900 MHz spectrum been liberalised in the hands of the existing licensees wheresuch spectrum is concentrated between just two of the operators.

Because of long standing disputes about the allocation of spectrum, the UK has been relatively slowto award spectrum in the new bands, with damaging consequences for the development of mobilebroadband. New 4G services have already been launched in Scandinavia who were first to award the

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Ev 108 Culture, Media and Sport Committee: Evidence

new bands from 2007. The German spectrum was auctioned in 2010, and many other Europeancountries are ahead of us. We firmly believe that any subsequent delays to the auction should beavoided in the national interest.

Q.7 The possible impact on alternative uses for spectrum:

A7. Our view is a straight forward one. We believe spectrum that is suitable for mobile broadbandis most valuably deployed for mobile broadband. Consequently whilst other considerations mightneed to be taken into account, government policy should be designed to secure relevant frequenciesquickly so that they can be exploited for wireless use.

June 2011

Written evidence submitted by Intellect

About Intellect

Intellect is the trade association for the UK technology industry. In 2007, the industries Intellect representsaccounted for 8% of UK GDP, £92 billion of Gross Added Value and employed 1.2 million people.

Intellect provides a collective voice for its members and drives connections with government and businessto create a commercial environment in which they can thrive. Intellect represents over 750 companies rangingfrom SMEs to multinationals. As the hub for this community, Intellect is able to draw upon a wealth ofexperience and expertise to ensure that its members are best placed to tackle challenges now and in the future.

Our members’ products and services enable hundreds of millions of phone calls and emails every day, allowthe 60 million people in the UK to watch television and listen to the radio, power London’s world leadingfinancial services industry, save thousands of lives through accurate blood matching and screening technology,have made possible the Oyster system, which Londoners use to make 28 million journeys every week, and arepushing Formula One drivers closer to their World Championship goal.

In the past 12 months 14,500 people have visited Intellect’s offices to participate in over 550 meetings and3,900 delegates have attended the external conferences and events we organise.

Inquiry Question Responses

1. Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision ofmobile broadband services;

Intellect response: The methods adopted by regulators for releasing spectrum range between a “beautycontest” approach and the holding of auctions. The beauty contest methodology involves the regulatorpublishing a detailed call for proposals (including business plans) and selecting the successful licensees byscrutinising the various bids. In the past this has laid the regulator open to criticism and challenge. Auctionshave not completely removed the threat of challenge. However on balance, Intellect believes that the mostappropriate methodology lies nearer to the auction method as it enables the market to determine the licenceoutcome based on the perceived economic and commercial value. However, experience from previous auctionssuggest that auctions may not always deliver all public policy objectives such as on competition (number oflicensees) and facilitate new entrants. Lack of sufficient spectrum and perceived market potential also limitthese objectives. Ensuring that the spectrum to be released is ideally harmonised (common channel plan butno restriction on use) at a European level is important. However other available spectrum should not be heldback and made available to the market as early as possible.

The methodology for releasing spectrum for non commercial applications (e.g military, emergency, publicsafety etc.) also requires specific consideration. In these cases the end users are often public sector organisationswho may not be in a position to bid for spectrum. The potential suppliers will not be able to seek spectrumwithout certainty of customer contracts. In these cases the pragmatic alternatives are for Government to setaside spectrum for such public service applications or to enable spectrum sharing between public service andcommercial applications. While there obviously needs to be spectrum for such societal applications we believethat more innovative ways to share spectrum should be considered before allocating spectrum to a particularuse.

Whilst mobile broadband is a particular priority currently, there is a diverse range of important wirelessapplications which also rely on spectrum availability. Space applications have a particular reliance oninternationally harmonised spectrum. Any properly integrated spectrum strategy needs to ensure that all havereasonable access to spectrum.

Intellect recognises the difficulties and conflicting factors faced by Ofcom. The Government’s plans to updatethe Communications Act is a useful opportunity to conduct a dialogue between Government and industry todevelop a set of principles to balance these various factors in future spectrum releases beyond that already inplace for the 800 MHz/2.6 GHz award in 2012.

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2. Whether the upcoming auction can provide value for money for tax payers and how that should bebalanced with benefits for consumers;

The ultimate objective of spectrum releases should be to ensure that the benefits of innovation in services,applications and technologies can reach consumers as quickly as possible and provide them better (commercialor social) value. It should not be focussed on narrow and short term revenues for the Treasury/Government.The benefits (and indeed revenue) from the long-term sustained used will far outweigh the short-term revenuegain from its actual release.

3. The potential for next generation mobile internet services offered by the forthcoming availability ofspectrum;

Mobile internet and data volumes are escalating. In its Communications Market Report (Aug. 2010), Ofcomestimates that mobile data traffic increased by 240 %, in the UK over 2009. This trend is likely to continue forthe foreseeable future, with the increasing uptake of smart devices and tablets. Even the least optimistic forecastshows very strong Compound Annual Growth Rates (CAGR) of worldwide mobile broadband traffic (rangesfrom ~40% to ~100% CAGR).Thus there is certainly considerable demand for the 800 MHz and 2.6 GHzspectrum. Spectrum license auction delays are costly to a nation’s economy (billions of pounds in lost revenuefor each year of delay) and without additional spectrum, congestion will eventually creep in, curtailing growth.The experience of recent auctions in these bands conducted in Europe and elsewhere tends to suggest that the800 MHz spectrum (with better coverage characteristics) is currently valued higher (per MHz, per population)but with increased demand for broadband services this could be subject to readjustments into the future.

4. Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well ascities;

The coverage characteristics (ie need for smaller number of base stations due to the larger cell sizes) of 800MHz band is well suited to provide rural coverage in sparsely populated rural areas. However the limitation inthe amount of spectrum available to operators will severely limit the data speeds and numbers of users thatcan be accommodated in a given location.

The 2.6 GHz band while offering potential for rural coverage has two important limitations: the need for alarger number of base stations and reduced in-building penetration. That said, the 2.6 GHz band is better suitedfor urban broadband deployments where 800 MHz band becomes capacity constrained due to the samepropagation characteristics which enable greater cell sizes.

The delayed timescales (Q1 2012 at the earliest) for the 800 MHz/2.6 GHz auctions will complicate mattersfor any operators wishing to use these bands for wireless solutions as part of the Government/BroadbandDelivery UK’s initiative to enable superfast broadband infrastructure in rural areas. This is because theavailability of these spectrum bands will be uncertain within the timeframe of some of the broadband projectbids.

5. Whether licence fees for mobile operators have previously been set at appropriate levels, and how thisshould be assessed;

Intellect understands that Ofcom plans to review, following the 800 MHz and 2.6 GHz auction, the licencefees for mobile operators using other, nearby spectrum bands for similar mobile broadband applications with aview to ensuring equitable charges. Whilst understanding the need to review spectrum fees periodically andthe requirements of the Government direction, Intellect wishes to reiterate that such fees are in place toincentivise operators to use spectrum efficiently and should take into account other policy objectives includingensuring effective competition and should not be used as a tax on operators. In reviewing such spectrumhowever, Ofcom should recognise the different usage conditions that are present in the existing bands to bereviewed. Thus the review of fees should take into account a number of factors including the legacy usage(such as voice telephony) in the existing bands as well as the impact of the prices paid in the auction.

6. How the position of the UK compares with other countries, with regards to the allocation and utilisationof mobile broadband spectrum;

Many of our counterparts in Europe as well as US, China, Hong Kong, India, Brazil etc have alreadyconducted their release of spectrum for mobile broadband. Having been at the forefront of previousdevelopments in mobile allocations, UK is now lagging our counterparts. Intellect believes that theGovernment/Ofcom should ensure that no further delays occur.

7. The possible impact of the auction on alternative uses for spectrum.

In preparing for the deployment of mobile broadband services in the 800 MHz and 2.6 GHz spectrum, therewill be a need for consideration given to the protection of existing services (TV broadcasting and radars) inadjacent bands. Intellect is disappointed that Ofcom has not concluded the necessary considerations andarrangements sooner and with greater clarity.

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Finally, whilst recognising the importance of (terrestrial) mobile broadband and the Select Committee’sreasons for focussing on the auctions at this time, Intellect wishes to highlight the demands for spectrum froma range of other uses, from satellite communications applications to emergency services. Ensuring suitableaccess to these crucial services is also important and Intellect hopes the Committee will give due considerationto the wider applications of spectrum (and the relevant regulatory challenges) also.

June 2011

Written evidence jointly submitted by BBC, ITV, Channel 4, Channel 5, S4C, Arqiva48 and SDN

1. Introduction and Summary

The above-named organisations welcome the opportunity to make a joint submission to the Committee’sinquiry into Spectrum. As public service broadcasters and multiplex operators on the Digital TerrestrialTelevision (DTT) platform, we have a clear interest in policy about future spectrum use.

As broadcasters and multiplex operators, we have played a key role in delivering consumer and citizenvalue, and have enabled the future roll out of fourth generation mobile services by working to free up spectrum:

— Our investments and efforts in driving Digital Switchover (DSO) and the roll out of DTT havecreated a vibrant, free to air TV platform, highly valued by viewers. This has incentivisedconsumers to take up digital TV, thereby making the process of DSO much easier and so helpingto free up large amounts of analogue spectrum for new uses.

— We have also co-operated fully with Ofcom’s process to amend the post-DSO spectrum plan so asto clear DTT from the 800 MHz spectrum band—thereby directly enabling the auction of the 800MHz spectrum for mobile uses on a harmonised basis.

— The multiplex operators are investing hundreds of millions of pounds to build out a universal DTTnetwork, and the public service broadcasters and multiplex operators have funded the managementof the Digital Switchover (DSO) programme by Digital UK.

— Consumers have made significant investments in DTT reception equipment—with more than 65million digital TV Freeview devices sold in the UK. Consumers have made these investmentsbased on the Government’s promise to deliver universally available television via DTT—they willtherefore expect continuity of service.

At set out in Section 2 below, we have continued to deliver on the viewer interest through services on theDTT platform, and have evolved the platform to deliver new HD services via existing spectrum. Looking tothe future, we consider that any spectrum release process—whether that carried out by Ofcom in relation tothe spectrum released by DSO, the Government’s public sector spectrum release process, or any future releaseprogrammes—needs to take full account of the interests primarily of DTT viewers (as well as of broadcastersand multiplex operators). In this regard, Section 3 of this submission proposes a series of principles that webelieve should underpin the future of the DTT platform.

However, and as we highlight in Section 4 below, there is a significant risk that these principles will beundermined by the planned 800 MHz auction process, as new 4G mobile services in the 800 MHz spectrumare likely to create significant interference for DTT viewers—with Ofcom’s analysis suggesting that 760,000UK households could be affected. Given the potentially significant impact on DTT viewers, we believe thatthe Committee should urge Government and Ofcom to ensure that interference is managed proactively—iebefore it affects consumers—and ideally by putting in place guard bands to ensure that DTT is properlyprotected.

2. The DTT Platform Delivers Significant Consumer and Citizen Benefits

DTT is a highly successful broadcast platform, which delivers very significant value to UK consumers.Importantly, all indications are that DTT will remain highly important to UK viewers for the foreseeable future:

— Take-up of DTT: DTT is the most popular UK television platform:49

— As at the end of 2010, 92.5% of UK homes have digital TV on at least the main TV set.

— DTT is the most common digital TV platform, providing the primary means of receiving TVfor 39% of UK homes—and almost three quarters of UK homes use DTT on a primary orsecondary set.

— More than 65 million digital TV Freeview devices have been sold in the UK.48 In addition to this joint response Arqiva has a separate response that addresses specific matters relating directly to the use of

spectrum for the provision of mobile internet services.49 All data in the sub-bullets which follow are from Ofcom Digital TV Update, Q4 2010.

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— Key Driver of Platform Competition and Economic Value:

— DTT has brought with it a huge expansion of choice (via both the PSB and the Commercialmultiplexes), with new services available for free to virtually all of the UK. Indeed, we notethat, prior to DSO, DTT was considered so important that Parliament required the PSBs tobuild out the DTT platform to 98.5% coverage (the same as analogue television).

— DTT drives significant consumer value and competition—particularly for householdsunwilling or unable to pay for subscription TV, and for the great majority of multi-sethouseholds.

— In the absence of a DTT platform of scale, platform competition would be weakened, to thedetriment of UK consumers.

— DTT is an open, gateway-free platform, offering both free and pay services.

— DTT has created wider economic benefits, by stimulating a horizontal consumer equipmentmarket. Further, in 2010, 40% or c.£1.3 billion of the TV advertising market was deliveredvia DTT (enabling brands to reliably reach mass audiences and to drive product sales).50

— Efficiency and Innovation:

— The UK’s DTT multiplex operators are committed to investing hundreds of millions of poundsin the platform. The transmission contracts with Arqiva run significantly beyond the currentmultiplex licence periods, with the costs spread over a longer period in order to reduce risk.

— The broadcasters and multiplex operators’ investment in the DTT platform is creating auniversally available free to air TV platform, and in so doing has enabled the release of 156MHz of spectrum freed up by Digital Switchover.

— The DTT multiplex operators have worked together and with Ofcom to introduce HD servicesin the existing spectrum, using the most advanced and efficient technologies (DVB-T2 andMPEG-4) to enhance the platform in the interests of viewers.

— By innovating in this way, DTT has continued to drive platform competition—includinghelping to drive innovation by pay TV operators; has brought new technology to everyone inthe UK (thereby addressing the digital divide); and has used new services to incentiviseconsumers to take up digital TV thereby enabling the freeing up of large amounts of analoguespectrum for new uses.

Looking to the future, all indications are that the DTT platform will be of enduring significance for the nextdecade and beyond:

— Future DTT take up:

— Forecasts suggest that DTT will account for c.40% of primary set homes in 2020 and,including secondary set connections, will remain the single most popular TV platform (55%of all television sets).51

— Future content preferences:

— We expect that demand will continue to be strong for production and broadcasting of livenews and events—such as the Royal Wedding and General Election debates—and other mass-audience event TV that brings the nation together. Linear broadcast of such events andprogramming will continue to be important, and DTT—as the key free to air platform ofscale—will be central to enabling access to these events by viewers unwilling or unable topay for subscription TV.

— Future technologies:

— HD is likely to become even more important in the future—as the standard for all TV setsand the norm for content production. Consumers are likely to expect at least their mainchannels to be broadcast in HD on a free to air basis, and so the role of DTT will becritical here.

— Whilst we expect only modest growth in demand for 3D TV, it has the potential forunexpectedly high take-up. There will be some demand for major events broadcast in 3D,requiring flexibility to enable it to be offered on an ad-hoc basis.

3. Key Principles for the Future of the DTT Platform

In light of the very significant benefits delivered by the DTT platform, we consider that any considerationof the future of the platform and UK spectrum policy more generally needs to be informed by the followingfive principles:

(i) Meeting consumer expectations: As set out above, consumers do (and will continue to) placesignificant value on DTT services, and indeed consumers have made significant investments in DTT

50 Based on an allocation of 2010 TV Net Advertising Revenues, by platform according to the volume of adult commercial impactsdelivered

51 3Reasons Limited 2011

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Ev 112 Culture, Media and Sport Committee: Evidence

reception equipment. They will therefore expect continuity of service, and it is in the public interestthat these expectations are met.

(ii) Securing platform competition: In the absence of a DTT platform of scale, platform competitionwould be significantly weakened—thereby creating consumer detriment. DTT must retain the abilityto compete with the other, predominately pay-TV platforms.

(iii) Safeguarding infrastructure investment: As set out above, the UK’s DTT multiplex operators areinvesting hundreds of millions in the platform. These investments are of such a scale that the multiplexoperators should have sufficient certainty that the investments will be safeguarded in order to enablean appropriate return on investment. This is line with the Government’s Principles for EconomicRegulation, which state52:

— the framework for economic regulation should provide a stable and objective environmentenabling all those affected to anticipate the context for future decisions and to make long terminvestment decisions with confidence; and

— the framework of economic regulation should not unreasonably unravel past decisions, andshould allow efficient and necessary investments to receive a reasonable return, subject to thenormal risks inherent in markets.

(iv) Enabling evolution of the platform: We recognise that the DTT platform needs to evolve in orderto continue to deliver consumer benefit—in order to enhance the platform going forward, this mayinvolve improving spectrum efficiency over time and harnessing new technologies to deliver furtherHD and 3D services. .

(v) Supporting the delivery of public service content: Public service content is of enduring value toUK citizens. Therefore, any decisions about the future use of DTT spectrum also need to considerthe implications for the funding of PSB content—we consider that Ofcom should ensure that itsrecommendations seek to maintain and strengthen the quality of PSB in the UK.

In summary, we expect the DTT platform to remain very attractive to consumers—although it may need toevolve to offer enough HD services, some 3D opportunities, and an interactive complement. We thereforeconsider that UK spectrum policy needs to take full account of the principles set out above.

4. Interference to DTT from new 4G Mobile Services in the 800 MHz Band

It is possible, however, that Ofcom’s process to release the 800 MHz spectrum will undermine the aboveprinciples—due to the fact that, as Ofcom’s own analysis has demonstrated, new 4G mobile services in the800 MHz spectrum will create significant interference to DTT reception.

It is useful in this context to recap on Ofcom’s own policy position—as set out in Ofcom’s statement on“Digital Dividend: clearing the 800 MHz band”, published on 30 June 2009—that disruption to DTT viewersmust be minimised. Specifically, Ofcom made clear (at paragraph 1.16 and elsewhere in that document) that itis “very important to protect the integrity of the DSO programme and ensure that any disruption to DTTviewers is minimised”.

In this regard, it is worth highlighting two of Ofcom’s DTT migration criteria, namely:

“existing authorised and planned users of channels 61 and 62 should not bear extra costs that mustreasonably be incurred in order to clear the spectrum”

“any solution should be consistent with existing policy objectives for DTT coverage after DSO, andthe process should aim to minimise the impact on viewers of broadcasts from the existing DTTmultiplexes”

These criteria mean that the existing DTT multiplex operators should not bear additional costs as a result ofthis process, and—arguably most importantly in the current context—that DTT coverage should be maintained,and disruption to DTT viewers should be minimised.

Ofcom stated (at paragraph 1.17 of the above-named statement) that:

“We have therefore decided to adopt the DTT migration criteria and we will develop plans forimplementation [of the 800 MHz clearance programme] with reference to these.”

Given this commitment, it would be inappropriate if Ofcom were now to implement the 800 MHz award insuch a way that would permit significant and harmful interference, and which would therefore undermine theconsumer benefits delivered by the DTT platform.

However, Ofcom’s consultation on co-existence of new services in the 800 MHz band with DTT television(published on 2 June 2011) set out Ofcom’s own analysis that new 4G mobile services could adversely affectDTT reception in 760,000 UK households. As far as we are aware, the 800 MHz award represents the firsttime in the UK that a regulator will license a new service knowing in advance that the new service willadversely impact on an existing service, and moreover that the regulator has expressed a view in advance thatit is acceptable for some users of the existing service to have their access to that service either impaired orcompletely removed.52 Page 7 of BIS, Principles for Economic Regulation, published April 2011.

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In the past, conditions would have been placed on the new licensee requiring it to protect existing servicesrather than to adopt post-event mitigations as Ofcom is now exploring. In contrast to Ofcom’s apparentapproach, we consider that the appropriate starting point would be for Ofcom to put in place effectiveintervention to prevent interference before it happens. We consider that the ideal solution would be to putguard bands in place to ensure that DTT is properly protected—and that any deviation from this approachwould have to be clearly justified.

It is also important to be clear that managing viewer issues for DTT interference is likely to involve questionsof a significantly different kind to those that have arisen during the DSO process. Whereas switchover concernsevents on specific dates, with any side issues arising primarily in the weeks and months following the specificDSO date, DTT interference will be much more complex and could happen over a period of many months oreven years. Therefore, if Ofcom decides not to implement guard bands to minimise the interference risk, dueto this complexity we consider that the licences for new services in the 800 MHz band should contain stringentinformation, notification and staggering provisions around the roll-out of new services, so as to ensure thatthere is sufficient time and scope for effective consumer communication and remedial action.

Helpfully, Ofcom has expressed its intention to work with DTT stakeholders, Government and new licenseesin the 800 MHz band to ensure that DTT is properly protected, through the appointment of a single organisationto manage the DTT interference issues. Ofcom is currently consulting on its high-level approach, and intendsto issue a further more detailed consultation later in 2011 regarding the DTT protection body. We hope thatDTT interference will be properly mitigated, and therefore that adverse consumer impacts will be minimised.However, we would urge the Select Committee to keep a watching brief on this issue, and to encourage Ofcomand Government to ensure that new mobile services do not create a threat to the very significant consumer andcitizen value delivered by the DTT platform.

June 2011

Written evidence submitted by BSkyB

1. This submission presents the views of British Sky Broadcasting plc (“Sky”) to the Culture, Media andSport Committee’s inquiry into spectrum allocation.

2. In the past few months, Ofcom has issued a number of important consultations. In addition to the auctionsof 800MHz and 2.6GHz spectrum, Ofcom is considering how best to approach the use of spectrum in the470MHz-792MHz band, both national and geographic lots of interleaved spectrum.

3. Sky has engaged with Ofcom in this process, and is now keen to contribute to the CMS Committee’sinquiry to explain the new and exciting uses for spectrum, which we believe can be a real driver of economicgrowth.53

4. In summary, we urge legislators and policy-makers provide for flexibility that will allow spectrum to beused by emerging technologies which will contribute to economic growth.

5. Technological developments and digital switchover mean that spectrum in the 470Mhz-792Mhz (UHF)bands will increasingly become available. Ofcom has identified a range of policy drivers for ascertaining thebest use of this spectrum. We believe that an overall policy objective should be to secure the most creativeuses for spectrum that will best drive economic growth.

6. We further believe that this policy objective can best be achieved by realising the benefits of wirelessbroadband services (implemented as “Wi-Fi”). In our submission to Ofcom we set out the consumer andeconomic benefits of Wi-Fi, and why spectrum should be allocated to this technology.

7. In summary, Wi-Fi operates on open standards technologies and unlicensed spectrum which encouragesfierce competition to bring products and services to market in the fastest time to meet customer demand. Wi-Fi standards are currently being updated for UHF operation.

8. The spectacular growth of devices with Wi-Fi inbuilt54 has demonstrated that open standards technologiesand unlicensed spectrum have a considerable role to play in the delivery of mobile/roaming services to anincreasing number of handheld devices in the market.

9. One of the reasons for the growth in demand for Wi-Fi devices is that they offer consumers a lower-costalternative to 3G technology which generally involves follow-on costs, such as monthly data charges, inaddition to the purchase of equipment. In terms of public Wi-Fi services, Wi-Fi already accounts for over 20%of iPhone data traffic in the US by offloading from 3G networks.

10. Wi-Fi is also supporting new user applications with higher data traffic demands which are unsustainableover 3G in high population density areas, such as streaming video. Wi-Fi is also increasingly being used in theUS as a means of providing low cost calls using VOIP application with T-Mobile reporting that five million53 Wi-Fi usage in the home may be generating anywhere between $4.3 and $12.6 billion in annual economic value for consumers

in the United States “The economic value generated by current and future allocations of unlicensed spectrum”, PerspectiveAssociates, September 2009. http://www.ingeniousmedia.co.uk/websitefiles/Value_of_unlicensed_-_website_-_FINAL.pdf

54 there are approx. 5 billion Wi-Fi enabled devices worldwide, a figure which is forecast to grow annually by 20% to 2013

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of its 34 million subscribers routing calls over Wi-Fi. In the US Wi-Fi offload is widely used by AT&T, T-Mobile, Cablevision, Metro-PCS as a key element of their data network.

11. We believe that with the growing demand for broadband connectivity outside the home, and theincreasing problems of congestion and interference in licence-exempt Wi-Fi spectrum (at 2.4GHz) Ofcomshould be looking to secure sufficient UHF spectrum to ensure that this demand can be met.

12. UHF is particularly attractive for broadband data services because it has far improved propagationcharacteristics compared to both existing Wi-Fi bands at 2.4GHz and 5GHz.

13. Ofcom's approach to the release of this spectrum should be designed to maximise the potential uses forthis spectrum. In particular, Ofcom should avoid placing unnecessary technical constraints on its use.

14. Two such restrictions that are being contemplated are limitations on the ability for spectrum to be freelytraded, and the imposition of unnecessary blanket technical constraints surrounding the protection of DTTbandwidth. We believe that either of these limitations would constrain the economic potential being fullyrealised from this valuable UHF spectrum.

June 2011

Supplementary written evidence submitted by Arqiva

The Committee asked about the number of 3G masts the four providers currently have and Arqiva agreedto follow this up in writing:

Question 1: Number of Masts and “Points of Presence”

Sites may contain many transmitters for different operators and different spectrum. It is important todistinguish between a mast and ‘point of presence’ (PoP):

— Mast: A physical piece of infrastructure, mast or rooftop, which can support multiple operatorsand points of presence.

— Point of Presence: The radiation of an operator’s frequency for a specific technology. Noting thatthe electronics used to deliver this may be shared, as in the case of Everything Everywhere and3UK, but individual operator frequencies are emitted from the antenna.

Arqiva believes there are 35,500 masts deployed across the country, split between those self provided by theMNOs and those provided by independent third parties:

— MNO Self Provide = circa 23,300

— Independent Third Party = circa 12,200

These masts support circa 86,000 2G and 3G points of presence as shown below:

Technology 2G 3GPoP Frequency PoP Frequency

EverythingEverywhere 18,00055 1800 MHz 18,0001 2.1 GHz

2.1 GHz &O2 10,000 900 MHz 8,500 900 MHz

2.1 GHz &Vodafone 10,000 900 MHz 8,500 900 MHz3UK N/A N/A 13,00056 2.1 GHzTotal 38,000 N/A 48,000 N/A

Question 2: Number of Additional Masts/Points of Presence to deliver 99%

Arqiva believes that the current 35,500 masts would be sufficient to deliver 99% outdoor population coveragewhen utilising the 800 MHz frequency band.

In other words, this public policy objective of universal coverage could be achieved without building newphysical sites.

However, this would be achieved by the addition of 4G points of presence to the existing infrastructuredeployed in the UK. To deliver 99% we believe that circa 15,000 points of presence would be required at800 MHz.57

June 2011

55 This is the proposed situation once the legacy T-Mobile and Orange networks have been consolidated56 3UK’s 13,000 PoP for its own spectrum are delivered via the use of shared electronics with T-Mobile (Everything Everywhere)57 Assuming a 10 MHz pair of 800 MHz

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Supplementary written evidence submitted by Everything Everywhere

Thank you for the opportunity to give evidence to the Culture, Media and Sport Committee last week.

We have been reflecting on some of the questions we received and also on how these questions weresubsequently reported; and we thought it might be useful to you (and important for us) to provide you withsome supplementary views and information.

Our comments below are focused around the suggestion in the Financial Times article, published on themorning of our hearing (Tuesday 21 June) and that Mr Watson quoted, to the effect that the sale of EverythingEverywhere’s 1800 MHz spectrum might result in proceeds for Everything Everywhere of £450 million; andthe subsequent discussion in the Committee’s proceedings which revolved around whether this wan appropriateoutcome (given that the spectrum had attracted low annual fees up to this point and the proceeds of a disposalwould benefit a French and German owned company).

The following observations seem to us to be relevant to the issues raised:

1. Allocating property rights to spectrum users is an Ofcom policy that dates back to 2004; while we arebroadly supportive of this policy, it has not been something that Everything Everywhere or itantecedent businesses (T-Mobile and Orange) have been prominent in arguing for. It applies to allspectrum designated for mobile use in the UK, not just the spectrum that is used by EverythingEverywhere.

2. The requirement to 2 x 15 MHz of 1800 MHz spectrum is something that was required of EverythingEverywhere , as part of the merger between Orange and T-Mobile. If we were to be given the choicebetween retaining the spectrum or disposing of it and keeping the proceeds, we would choose theformer.

For both the reasons mentioned above, the inference which might be drawn from the Committee’s line ofquestioning (and from the subsequent press reporting) that Everything Everywhere has set out to securesomething for nothing is quite wrong.

3. Setting aside Everything Everywhere’s motivation and what it has been arguing for, the broader issuewhich concerned the Committee—that a “free” resource was being gifted to a Franco-Germancompany—is not one, in our view, that the Committee should be concerned about. We say this for avariety of reasons, namely:

— Little directly comparable data is available for spectrum valuation, but indications from theGerman and Spanish markets are that comparable block of 800 MHz spectrum are worth£40–50 million in those markets;

— Ofcom proposes to charge an annual fee for the spectrum to its acquirer. This fee will be setto reflect the full economic value of the spectrum; it is therefore designed to address preciselythe issue which the Committee raised, namely that the UK tax-payer may lose out from theproposed arrangements;

— This annual free will obviously depress the capital value received by Everything Everywhere;as spectrum valuation is a notoriously inexact science, we cannot state with any certaintywhat the proceeds might be—but the notion of charging annually for the full economic valueof the spectrum after the sale clearly suggests that the sum received by Everything Everywherecould be negligible;

— Everything Everywhere will incur substantial costs in vacating the disposed spectrum. There isno mechanism envisaged to ensure that these costs will be covered by the disposed proceeds;

— The value of the spectrum that is sold by Everything Everywhere is also not independent ofwhat Everything Everywhere has contributed in the past; Everything Everywhere is one ofthe UK’s largest inward investors and the value of the mobile spectrum is intimately associatedwith years of investment by Everything Everywhere and other companies involved in themobile industry.

To sum up therefore—first, we want to make it very clear that the outcome that Mr Watson was concernedabout, ie that Everything Everywhere keeps the proceeds of the sale, is an issue that has not figured in ourdiscussions with any of the relevant decision-makers in the recent past and derives from a long-standing policyon which we had no substantial influence; and, second, there is no basis for the view that the proceeds will besubstantial or provide any form of unfair transfer of resources at the expense of British tax-payers.

As the topic addressed in this note has received widespread press coverage, we would like to put ourconsideration of it into the public domain. However, before doing so, we thought we should ask your opinionon this and check whether you would have any objection.

July 2011

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Supplementary written evidence submitted by Hutchison 3G UK Ltd (Three)

1. Summary

1.1 Three welcomes the opportunity to respond to some of the points raised in oral evidence to theCommittee.

1.2 In particular, we would like to address: the role of Mobile Virtual Network Operators (“MVNOs”) inthe mobile market; the perceived challenges and costs of increasing the 800MHz coverage obligation; theannual fees paid by the holders of the 900Mhz & 1800MHz spectrum licences; spectral efficiency; theimmediate benefits of access to 900MHz spectrum and; differences between 3G and 4G services.

2. Competition, National Wholesalers and MVNOs

2.1 In oral evidence to the Committee on 28 June 2011, Vodafone explained that there were 20 notable,individually branded MVNOs in the UK. They told the committee that there was no evidence to show thatoperators that were unsuccessful in the auction would be unable to secure wholesale access agreements andthat, where the market was seen to be operating non-competitively, Ofcom has the power to intervene.Telefonica, meanwhile, argued that market competitiveness in the UK is defined by “innovation, the numberof people of people providing retail services, as well as the availability of capacity within the overall networksto be able to sell that capacity to customers”.

2.2 We believe there are several points that the Committee may wish to take into account when consideringthis evidence given by O2 and Vodafone.

2.3 Wholesale versus retail competition

2.3.1 In response to questioning from Adrian Sanders MP about the wholesale operators controlling the priceto MVNOs, Vodafone CEO Guy Lawrence replied that there was no evidence of price abuse by the wholesaleoperators and that “Ofcom has powers to control the market if any of the operators started abusing that, butthere is no evidence that that happens”. This is incorrect.

2.3.2 In their 2009 Mobile Evolution report58 Ofcom found that “Some MVNOs stated that there areproblems with securing wholesale network access and that Ofcom should consider imposing an ‘access-relatedcondition’ to require MNOs to provide access on a fair reasonable and non-discriminatory (FRND) basis. OtherMVNOs stated that it was difficult for new entrants to gain wholesale contracts due to the difficulty ofnegotiating wholesale contracts without an existing customer base”. Furthermore, in a submission to the Ofcomconsultation that preceded the Mobile Evolution report, Which? raised concerns about the impact a reductionin the number of mobile wholesale operators would have on competition and in particular the impact thiswould have on MVNOs, stating that further consolidation (after the merger of T Mobile and Orange) couldweaken the bargaining power of MVNOs.59

2.3.3 The evidence from Which? and from MVNOs about wholesale negotiation supports Ofcom’sconclusion that the spectrum auction must be structured so as to sustain four viable wholesale networks andthereby widen the wholesale choice available to MVNOs.

2.4 Ofcom’s powers to intervene

2.4.1 As referenced above, Vodafone in their oral evidence told the Committee that Ofcom has the power tointervene should wholesale operators be found be abusing their wholesale position. This is technically correct,but the process that would lead to such an intervention would not be expeditious.

2.4.2 Unlike in the fixed market, where Ofcom has a range of regulatory interventions at its disposal shouldit believe that BT is abusing its wholesale position, Ofcom does not have an immediate regulatory lever thoughwhich it could correct an abuse. Instead, Ofcom would have to undertake a market review to establish the levelof competition in a market. If a market is found not to be effectively competitive, Ofcom can impose thefollowing Significant Market Power conditions under the Communications Act: Network access (includingconditions about network pricing); and provisions for securing fairness and reasonableness in the way in whichrequests for network access from MVNOs are responded to.

2.4.3 The difficulty with a market review is the length of time it can take, with approximately three to sixmonths for MVNOs to make a case that an intervention is required and for Ofcom to consult. This is followedby upwards of a year for a final decision and a possible further year if a decision is then appealed.

2.4.4 In the interim MVNOs would be left having to accept the terms imposed on them by the mobilewholesale provider, potentially to the detriment of consumers. This, however, is less of an issue where MVNOshave a larger range of wholesale providers to choose from and can switch to the provider offering betterwholesale terms. By seeking to guarantee competition Ofcom may reduce the need for intervention after theevent which would likely be costly and time consuming.58 Mobile Evolution—Mobile Market Assessment. Ofcom, December 2009

http://stakeholders.ofcom.org.uk/binaries/consultations/msa/statement/MSA_statement.pdf59 http://stakeholders.ofcom.org.uk/binaries/consultations/msa/responses/Which.pdf

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2.5 More wholesale providers lower prices

2.5.1 There is a clear correlation between fewer national mobile wholesalers and higher end user prices,regardless of the number of MVNOs with access agreements. Figure 12 in our response to Ofcom’s consultationdemonstrates the advantages of four wholesale player markets across Europe where there is an effective newentrant.60

2.6 Wholesale competition and service quality and innovation

2.6.1 Improved service quality is one of the key benefits of spectrum allocation. Presenting oral evidence tothe committee on 5 July, Minister for Culture and Communications Ed Vaizey MP stated that “the point aboutgetting spectrum out is about competition and the effectiveness of the service”.61 The way in which spectrumis allocated affects the quality of service. For example, in addition to lower prices, markets with four nationalmobile wholesalers demonstrate a better level of network quality (via innovation and penetration) than threeplayer markets. Figure 13 in our response to Ofcom’s consultation demonstrates the advantages of four playermarkets with effective new entrants.62

2.6.2 On a broader issue of competitiveness and innovation, the Committee heard in response to questioningfrom Tom Watson MP that the recently announced mobile payment joint venture between O2, Vodafone andEverything Everywhere had specifically excluded Three from joining the venture as a partner. We believe theexclusion of Three from this joint venture is not only contrary to the approach taken in other countries whereall wholesale providers are partners in such a joint venture, but could be construed as indicative of a desire bythe other mobile network operators to reduce the level of wholesale competition in the UK mobile market, andruns contrary to evidence given to the Committee by O2 CEO Ronan Dunne that the effectiveness ofcompetition is defined by innovation.

3. Coverage Obligations

3.1 On 19 May 2011 Rory Stewart MP led a debate calling for an increase of the coverage obligationattached to one 800MHz licence from 95% to 98%.63 Mr Stewart’s motion received strong backbench support.In oral evidence to the committee, neither Telefonica nor Vodafone objected to a coverage licence, howeverTelefonica did raise concerns about problems in providing coverage to the “last 4% or 5%” because “the returnsbecome disproportionately lower and the cost becomes significantly higher”.

3.2 The scale of investment required by Telefonica and Vodafone to achieve coverage levels upwards of95% is far above what Three considers to be necessary. In their oral evidence, Telefonica calculated that itwould cost an additional £540 million of public investment to provide indoor coverage to 98% of the UKpopulation. Three calculates that it would cost £270 million of public investment to provide 99% of indoorcoverage. The difference in projected costs, we believe, is the result of under-investment of Telefonica andVodafone in their network infrastructure rather than, as suggested by Vodafone and Telefonica, the perceiveddifficulties in the UK’s planning regime. Three, which possess over 12,600 sites, operates within the very sameplanning regime and yet we propose to extend our network by a further 3000 sites over the next three years.

3.3 Three supports the proposed 95% population coverage obligation and we believe that this could beextended to 97% without requiring public subsidy. However our technical modelling shows that the obligationwould need to be attached to 2x10MHz of 800MHz spectrum, rather than the current proposal of 2x5MHz inorder to achieve a speed of 2mbps.

3.4 When considering coverage obligations, the Committee might wish to take into account discussionsaround the coverage obligation that was placed on the 2100MHz licences awarded at auction in 2000. Whenthe DTI consulted on the proposals for the auction of 2100MHz in 1997, they proposed an 80% coverageobligation. O2 was alone among the operators in objecting to the imposition of a coverage obligation; “Asregards coverage, Cellnet is less convinced of the usefulness of defining coverage obligations. Considerationcould be given, for example, to a ‘let the market decide’ approach”.64

3.5 Having acquired a 2100MHz licence with an 80% coverage obligation, O2 then responded to Ofcom’s2006 consultation on how Ofcom would measure whether the coverage obligation has been met; “O2 does notbelieve that the terms of its licence and the content of the 3G Information Memorandum fetter Ofcom’sdiscretion or provide a justification for ignoring the need to ensure that regulatory burdens remain objectivelyjustified, proportionate, non-discriminatory and transparent as required by Article 6(1) of the AuthorisationDirective”.65

60 http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf Pg 47.61 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmcumeds/uc1258-iii/uc125801.htm62 http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf, Pg 48.63 HC Deb, 19 May 2011, c557.64 http://www.ofcom.org.uk/static/archive/ra/topics/pmc/consult/m_media/umts06.pdf, page 22.

http://www.ofcom.org.uk/static/archive/ra/topics/pmc/consult/m_media/umts06.doc65 http://stakeholders.ofcom.org.uk/binaries/consultations/3g_rollout/responses/O2.pdf

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3.6 What O2 appear to suggest is that even when an operator has acquired a licence with a coverageobligation it should still be possible for that operator, after the award of the licence, to provide Ofcom withevidence that it would not be proportionate for that operator to meet that licence obligation.

3.7 All mobile operators apart from O2 met their coverage obligation by the deadline set by Ofcom. Ofcomgranted O2 an extension to the deadline. Given this, the Committee may wish to consider the approach Ofcomwill take to enforcing the coverage obligation on the 800MHz licence.

4. Spectrum Fees

4.1 The Mobile operators were asked by Tom Watson MP what their annual licence fees were for the900MHz and 1800MHz licences. Vodafone replied that their total yearly spectrum fee was £346 million. Thisis the licence fee for the 900MHz & 1800MHZ spectrum plus the amortised amount Vodafone include in theirannual accounts for the purchase of their 2100MHz licence in 2000. A parliamentary question, tabled byStephen Timms MP and answered by the Minister of State for Culture and Communications on 4 May 2011,revealed that both Vodafone and O2 pay £15,618,240 for their 900MHz and 1800MHz spectrum licences, ofwhich £12,402,720 is for the 900MHz licences66. Therefore the bulk of the £346 million given in evidenceby Vodafone relates to their 2100MHz licence which was paid for in full and no fee is payable on an annualbasis to the UK Government.

4.2 In its evidence to the Committee, O2 said all operators had “made a major write-down of the value ofspectrum”. That is true of O2, but not of Vodafone. Therefore O2’s annual spectrum costs will be lower thanthe £346 million cited by Vodafone. Although O2 failed to tell the Committee what its annual spectrum costswere, its annual licence fees are a matter of public record.67 However these figures appear to be contradictedby oral evidence from O2 CEO, Ronan Dunne who told the committee “We paid £4 billion for our 3G licenceand paid a similar amount for our 2G”. Vodafone told the committee that it paid £25,000 for its 2G licence.

4.3 Ofcom in its evidence set out the rationale for linking the annual licence fees for the 900MHz &1800MHz licences to the auction prices for 800MHz and 2.6GHz prices. Based on the German auction values,using the formula proposed by Ofcom would see licences fees rise as follows:

— £105 million per annum for each of the licences for 2x17.5 Mhz of 900Mhz spectrum and£18.8 million for each of the licences for 2x5.8Mhz of 1800Mhz spectrum held by Vodafoneand O2;

— £146 million per annum for 2x45 MHz of 1800 Mhz spectrum held by Everything Everywheretaking into account the 25% of spectrum they must divest.

Total licence fees based on existing spectrum holdings of O2, Vodafone and Everything Everywhere wouldtherefore be £356 million rather than the £64.5 million currently paid.

4.4 The Committee may wish to confirm in their report the actual amount paid in annual licence fees whenreaching its conclusions on Ofcom’s proposals for the setting of annual licence fees.

5. Spectral Efficiency

5.1 During the committee’s oral evidence session on 28 June, Tom Watson MP suggested that O2 andVodafone were indulging in “special pleading” in reference to the fact they possess 900MHz, 1800MHz and2100MHz licences. In response to this, Telefonica told the committee that the operator is the “most efficientuser of spectrum” since it serves the highest number of customers per MHz of spectrum. However, the numberof customers per MHz is not a relevant measure of how efficiently an operator uses its spectrum. The mostimportant measure of spectrum efficiency is how much data is carried using the spectrum.

5.2 Based on estimates by Enders Analysis68 Three carries 50% of mobile data. Everything Everywherecarries 23%, Vodafone carries 14% and O2 carries 11%. This would suggest that Three is using its spectrumefficiently and in line with the requirements placed on Ofcom to ensure efficient use of spectrum. Despitecarrying a disproportionate amount of traffic compared to its spectrum allocation, research shows that Three’snetwork performs well. The respective ranking of UK operators against 94 other European operators alsohighlights Three’s spectral efficiency. Vodafone and O2 (Telefonica UK) are mid table, Everything Everywhere(T-Mobile and Orange) are near the bottom of the rankings. Three ranks 14 out of 94.69

6. Using 900MHz for High Quality Data Services

6.1 Much of the evidence given by Vodafone and O2 centred on their inability to use their existing spectrumto support 3G services.

6.2 In their written submissions to Ofcom’s consultation, both parties claimed it would take around twoyears to clear 2G spectrum for 3G use. However the Committee were told that Telefonica had already switchedon 3G services in London on 900MHz.66 HC Deb, 4 May 2011, c753W.67 HC Deb, 4 May 2011, c752W.68 Enders Analysis 2010.69 http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf, Pg 125.

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6.3 Furthermore, evidence from Turkey suggests that 2G customers can be supported on a minimum amountof spectrum. Turkish operator Turkcell that provides services in demographically and geographically similarenvironments to UK cities to 37 million70 2G customers using 11MHz71 of 900MHz spectrum. Vodafone andO2 have 19 million and 22.3 million customers respectively, significantly fewer than the 37 million customersTurkcell support off significantly less spectrum than the 22.5MHz of 900Mhz and 1800MHz Vodafone and O2

hold. This would suggest that Vodafone and Telefonica could release significantly more than the 2x5MHz of900MHz that O2 have currently deployed for 3G in London and still support their 2G customers.

6.4 The demand for 2G services is expected to drop to less than a quarter of its current level by Q4 2015.This is a point alluded to by Inmarsat during the 28 June oral evidence session, in response to Telefonica andVodafone’s concerns about 2G clearance. Mr Chris McLaughlin of Inmarsat told the committee that “I heardthis morning that so many people are on 2G that they are never likely to want to be moved. I think the answeris the other way round. If the 3G network was there, they would get a 3G phone”. Ofcom’s most recentcommunication market report72 found that 27% of adults and 47% of young people aged between 12 and 15now own a smartphone. 59% of these consumers had acquired their smartphone in the previous twelve months.

6.5 The committee may wish to consider whether spectrum currently allocated is being used efficiently inline with Ofcom’s obligations under the Communications Act.

7. Is 4G better than 3G?

7.1 The performance of networks operating in the 3G market place has reached a point where it is possibleto offer a quality of service nearing that of 4G technologies at a considerably lower cost. The table below(extracted from our consultation response) shows the performance difference in megabits per second betweenthe most recent development in 3G technology (HSPA+) and 4G (LTE). The performance differences aremarginal in terms of the download speeds available to customers using a 3G network operating (HSPA+),which is available now and a customer using a 4G network (LTE), available in several years time.

Table 10

PEAK DOWNLINK COMPARISON OF DATA RATES BETWEEN HSPA+ AND LTE

Technology MIMO usage Carrier six (MHz) Peak downlink data rates (Mbit/s)

HSPA+ Single stream 5 21LTE Single stream 5 22HSPA+ MIMO (2 X 2) 5 42LTE MIMO (2 x 2) 5 43HSPA+ Single stream 10 42LTE Single stream 10 43HSPA+ MIMO (2 x 2) 10 84LTE MIMO (2 x 2) 10 86

Source: Analsys Mason.

(NB: MIMO refers to “Multiple In, Multiple out”. This is the use of multiple antennas at both the transmitterand receiver to improve communication performance.)

7.2 The GSM suppliers association reports that there are currently 618 devices available that are compatiblewith HSPA+ in the 900MHz spectrum. Contrast this against the 98 4G devices currently in existence. Thesefactors, combined with the opportunity for Vodafone and Telefonica to free up the majority of their 900MHzspectrum for 3G services means that they are in a very strong position to offer data services immediately to amarket that is simply not practically addressable by Three and Everything Everywhere who have no lowfrequency spectrum.

7.3 The later arrival of 4G devices and the time it will take for them to penetrate the market, mean that itwill be extremely difficult for Three to compete with the established tariffs and similar service levels availableto Vodafone and Telefonica using their 900MHz spectrum.

7.2 Telefonica also claim that devices available for 4G services in 900MHz are not compatible with carriersizes over 2x10MHz. If there is truly such a disadvantage to these holdings as claimed by Vodafone andTelefonica then they will be able to demonstrate this by surrendering their holdings and availing themselves ofthe spectrum floors currently proposed.

5 August 2011

70 http://www.mobiadnews.com/?p=327971 http://www.turkcell.com.tr/c/docs/announcements/announcements_2008_0620_fass_Additional_frequency.pdf72 http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr11/UK_CMR_2011_FINAL.pdf

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