5.16 The barriers to entry for sub-national RAN operators may be higher than for some retailers (though much lower than for national wholesalers, as discussed later in this section). Sub-national RAN operators need to build some RAN infrastructure and may need to hold spectrum (if using licensed spectrum, as opposed to licence- exempt spectrum, such as that used to deliver Wi-Fi services). These fixed costs may make entry harder.
5.17 Entry or expansion by sub-national RAN operators could potentially have different kinds of competitive benefit compared to entry by other retailers. It may allow competition over more of the value chain, and may facilitate different types of business model and innovation in terms of retail offers. It could therefore be an important source of increased innovation and competitive pressure in the retail market, although the nature and scale of the benefits is uncertain. We consider there is a relatively high likelihood of sub-national RAN operators having a positive impact in terms of increasing competitive pressures in the retail market for specific or niche customer groups. We consider there is a smaller chance of a more radical effect on competition and consumers from entry by sub-national RAN operators with more unpredictable or paradigm-shifting commercial models – for example if “inside-out” models of network provision prove to be significantly more effective at providing high speed mobile broadband services.
5.18 Low powered use of (paired) 2.6GHz may be particularly attractive for sub-national networks, given that a wide variety of handsets may be able to use LTE at this frequency in the near future. It may be possible for a number of different companies to coexist by sharing access to the spectrum, as is currently the case with the DECT guard band spectrum. Shared low power use of some 2.6GHz by a number of different operators could be an effective and efficient use of spectrum. But potential entry using shared low-power use of spectrum may be more difficult if companies need to buy spectrum in the auction. This is because of the coordination problems involved with bidding for shared spectrum use. In particular:
• There is a risk that low powered users may not be able to acquire spectrum efficiently through a competitive award if they cannot coordinate effectively in an auction. In particular, it may be difficult to negotiate a joint bid between a number of sharers, and these difficulties are likely to increase the more sharers there are.
• Also, even where individual bidders are able to coordinate and put forward an aggregate bid, there is a risk that the bid does not fully reflect the aggregate
value of the shared use. Depending on the precise arrangements, an individual low powered bidder may face two types of competition in the auction. First, if there is a limit on the maximum number of sharers (e.g. 10 users), there is competition against other low powered bidders to be in the top 10. Second, in conjunction with other low powered bidders (up to the limit of 10), there is competition against the high powered bidder with the highest bid to determine whether the winning bid(s) are for low powered or high powered use .
Considering this second type of competition in the auction, the bids put forward by the potential users will only determine who will obtain access to the relevant spectrum. It will not determine how much spectrum they can secure (since for low powered users, the spectrum is shared). Therefore, given that there are multiple low powered bidders, individual bidders seeking to share spectrum may have an incentive to ‘free-ride’ by bidding less than their full value in order to pay less of the cost of outbidding the high powered bidder compared to other
potential sharers. This risk will be greatest where the probability of being
included in the top 10 bidders is high, i.e. where the first type of competition in the auction is relatively weak.
5.19 There may also be other market failures that mean that, even if the coordination failure were addressed, the outcome of the auction would not be optimal for consumers. For example:
• National wholesalers may have strategic incentives to secure more spectrum than may otherwise be profitable, in order to deter potential entry by sub national operators that might provide a competitive threat in the future.
• Even absent any coordination failure or strategic incentives, the outcome of an unconstrained auction may not deliver maximum benefits for consumers. This is because the private valuations for spectrum by sub-national operators will reflect the profits they expect to earn following entry. They may not fully reflect the wider dynamic benefits to consumers that entry might generate, through increased competition and innovation.
5.20 Separate from 2.6GHz paired spectrum, sub national RAN operators might be able to use the unpaired 2.6GHz centre gap for TDD technologies. In auctions in some other European countries, new entrants have won unpaired 2.6GHz.57 There are also some promising signs regarding the supply of equipment in this part of the 2.6GHz band. Sprint, the third largest US national mobile operator, already markets handsets that use WiMAX in an unpaired mode at 2.6GHz for high speed data services, in addition to several dongles and laptops. China Mobile, a Chinese mobile operator with over 575 million subscribers,58 has been clear about its plans to develop and roll-out TD-LTE including at 2.6GHz.59
5.21 Despite some promising signs, we consider that there remain doubts about the availability of a sufficiently large range of user devices using TD-LTE or WiMAX at 2.6GHz, especially in the short to medium term. A lack of suitable devices may make it difficult to offer a compelling retail product with unpaired 2.6GHz band (whether for
57
For example in the Netherlands, Finland and Sweden new entrants bought unpaired 2.6GHz, though in Austria, Germany and Denmark this did not happen.
58
See http://www.chinamobileltd.com/ir.php?menu=11 as at 31 October 2010. 59
See for example http://www.rethink-wireless.com/2010/06/07/china-mobile-promises-td-lte-tests- abroad-year.htm.
low or high powered use), reducing the benefits to consumers of entry with this spectrum.
5.22 Therefore, we consider that there is a risk that potential users of low powered shared spectrum may not be able to compete effectively in an award process without any measures to promote competition. This could potentially lead to material losses for consumers, particularly if entry by sub national operators provides competition over more of the value chain and facilitates different types of business models and innovation in terms of retail offers. However, the scale and nature of these benefits (over and above what other operators may deliver), as well as the extent of any market failures, is uncertain. Section 88 below considers whether there is a case for taking measures in the auction to promote competition by sub-national RAN
operators.