By Claire West

Providers of wireless services will have greater access to the airwaves than ever before as new spectrum capacity is auctioned. However, the UK risks being a late comer to the 4G mobile party if the terms of the spectrum auction are not resolved quickly.

Governments are under increasing pressure to raise funds and spectrum auctions can be perceived as a good way to generate income. Some regulators are looking to increasingly complex auction designs to ensure that the prices bidders pay reflect the underlying value of spectrum.

PwC believes the likelihood of a new entrant bidding for spectrum in the UK is relatively low given the significant start up investment required in network and the difficulty in penetrating an already mature market. Also, given the recent merger of T-Mobile and Orange reducing the number of operators from five to four, it would seem unlikely that the auction will be as competitive as the 3G auction in 2000.

Simon Harris, senior manager in the telecoms team at PwC, said:

The structure of the auction will have an important bearing on the prices paid, but a similar outcome to Germany would not be surprising - in which case an operator may expect to pay up to around £1bn for an 800 MHz licence. However, prices could be higher if licence conditions are minimal, or lower if, for example, the licences carry obligations to provide access in rural areas or if value is extracted through a requirement to pay future annual licence fees.

Last year PwC estimated that the value realised for the new spectrum to be released in Europe would be around £40bn.

Simon Harris, senior manager in the telecoms team at PwC, said:

"Auctions which have taken place so far have confirmed PwC's estimate as operators have been prepared to pay significant sums to realise the benefits of lower frequency spectrum and the ability to harness value from 4G service provision.

"Network capacity is at a premium as mobile broadband and smartphone take-up (more than half of US handset shipments will be smartphones by 2012)* drives significant growth in wireless data consumption. Data traffic over mobile networks increased by 2,200% over the period Q4 2007 - Q4 2009**. In this context spectrum acquisition becomes a strategic imperative".

Implications for the UK auction

Towards the end of February, Ofcom will publish details of the consultation process, which will run until May. The latest public announcements have suggested that spectrum caps, which were previously contemplated to avoid excessive concentration of low frequency spectrum, will not be a feature of the auction. However, the eventual proposals from Ofcom could still be subject to legal challenges.

Simon Harris, senior manager in the telecoms team at PwC, said:

"3G licences no longer have a fixed legal life, with annual licence fees to be collected from 2021 to reflect their market value. If the new spectrum being auctioned also has an indefinite life, the level of annual fees applied to it will have a significant bearing on the price which operators will be willing to pay upfront.

"It's an unlikely outcome, but if the cumulative annual fee reflected the full market value of the licence there would be no upfront fee".

Simon Harris, senior manager in the telecoms team at PwC, concluded:

"The challenge for the UK regulator is to get the industry to buy in to the process quickly, to allow operators to deploy by early 2014. Even then, the UK would lag behind some other markets. If legal challenges continue to disrupt the process as they have done thus far, there is a significant risk of the UK being a laggard in the adoption of mobile 4G services".