The auctioning of the UK's 4G spectrum in the coming weeks will be the biggest of its kind and we look at just how it will work, who's bidding and what it will mean for consumers.

Ofcom's 4G Auction

While the 4G auction will see the biggest chunk of mobile data bandwidth ever put up for sale in the UK, it will be nowhere near the most lucrative. The 3G sell-off over a decade ago filled the government's coffers to the tune of £22.5bn compared to the expect £3.5bn return from the 4G auction.

However, this may be a good thing, as the networks clearly overpaid for the 3G spectrum and as a result they were under financial pressure, which limited their ability to roll out proper infrastructure, leading to poor customer experiences during the early days of 3G.

Ofcom, who will run the auction, has set the reserve price for the auction as low as £1.3bn, but the Office for Budget Responsibility, has estimated a £3.5bn boost to public finances. The Labour Party has called for the government to invest the windfall in UK housing projects, though it is unlikely the Conservatives will go down this route.

 Ofcom has said it is not sure when the auction will begin, though it told IBTimes UK it is like to be next week (21 January) or the following week (28 January).

Background

The UK is quite a way behind most other developed countries of comparable size when it comes to 4G, and by the time most people around the country get to try out 4G for the first time later this year, about 40 percent of mobile users in South Korea will be already using the service.

Ofcom began its consultation period for the 4G auction way back in 2010, but the process has faced several delays with the networks becoming more and more frustrated at the inability to get the service up-and-running.

However things became a little more complicapted last year when one network, Everything Everywhere (now known as EE), took matters into its own hands and applied to Ofcom to re-farm its spare 2G spectrum for use as the UK's first 4G network.

Surprisingly, Ofcom approved the deal, prompting an angry reaction from the other networks. Despite threats of legal action to delay the 4GEE network going live, the matter was resolved and EE launched the network to the public in October.

Ofcom finally began the auction process in early December, inviting submissions from prospective bidders, who needed to submit a £100,000 fee in order to secure their place in the auction. Just over a week later, it announced the list of seven successful applicants.

The Bidders

As expected all the major networks, including EE, were named among the successful bidders, with smaller operators such as Virgin Media, opting not to bid for the spectrum - though these networks will likely offer their customers 4G by piggy-backing on one of the larger companies' networks.

The full list of successful applicants is:

  • EE - formerly known as Everything Everywhere and operator of the Orange and T-Mobile brands. It currently operates the UK's one-and-only 4G network.
  • Vodafone - it will be eager to get the process started as quickly as possible having been angered by Ofcom's decision to approve EE's application to get a head-start on the 4G process.
  • Telefonica - The Spanish owner of the O2 network in the UK, and like Vodafone, it will want to have a 4G network up-and-running as soon as possible.
  • Hutchison 3G - operator of the 3 brand here in the UK, it has already done a deal with EE to use some of its 1800MHz network from next September.
  • BT - through its subsidiary Niche Spectrum Ventures, BT will also bid for the 4G spectrum as it can be used to offer high-speed broadband in areas fixed-lined broadband can't reach, such as rural areas.
  • MLL Telecom - a network management company, MLL support mobile phone operators with traffic growth and increased data loads.
  • PCCW - the holding company of HKT Group Holdings Limited, a Hong Kong based Information and Communications Technologies (ICT) company.

The Auction

The auction process which will take place over the next couple of weeks is highly complex and will probably need to be sorted out by computers crunching the numbers to come up with the highest total for the 28 lots that the spectrum on offer has been divided into.

The format the auction will take is a refined version of one first created back in the 1990s to help the privatisation of the London Regional Transport, and is known as a "combinational clock" auction. According to an Ofcom spokesman:

"This format is designed to achieve the most efficient outcome - putting the spectrum in the hands of the bidders who value it most highly, while also ensuring they pay a competitive price."

Ofcom is selling off two bands of the spectrum, the 800MHz band and the 2.6GHz band. The former is more suited to a wide geographical spread, needing less network masts and will help connect rural areas, while the latter band will offer faster speeds in built-up areas.

The 800MHz spectrum will be the most highly sought-after band, with Vodafone, O2, EE and Three all looking to grab a slice of this spectrum in order to roll out a truly nationwide network. The 2.6GHz spectrum will be more important for BT, to extend its current fixed-line broadband service.

Each bidder can submit multiple bids for as many or as few of the 28 lots as they like. Bidders will not be competing to win individual lots, but will be bidding to win a combination of lots. The bidding will be blind, meaning one network won't know whay the other is bidding.

The amount bidders are prepared to pay for each individual lot will vary depending on what it is combined with, meaning O2 could bid two different amounts for the same lot, dependant on what other lots they are combining the first lot with.

The amount of resources each bidder has to put into preparing for the auction is quite staggering. Teams of mathematical economists, lawyers, accountants, network engineers, and even game theorists will lock themselves into a room for several weeks trying to work out the best combination of lots to bid for.

Stefan Zehle of telecoms management consultancy Coleago told the Guardian the whole process costs each bidder somewhere in the region of £3m to £10m each.

The auction will begin with a preliminary round of bidding, and a day later the principal or clock stage of the bidding begins, with about six rounds of bidding taking place each day - with the auction taking a number of weeks to complete.

At the start of each round Ofcom announces a price for each lot and each bidder then specifies what combination of lots they would most like to win at those prices. In each subsequent round Ofcom increases the prices for lots that have excess demand, until eventually demand matches supply. At this point the clock stage ends.

Any unsold lots will then be put into a final supplementary round where bidders will be asked for their "best and final offers." These supplementary bids have to be submitted together as a single batch of sealed bids.

Ofcom will then work out which combination of all of the bids from all of the bidders has the highest total value. This will be the winning combination of bids.

The Result

Having worked out the best combinations of bid, Ofcom will then work out how much each winning bidder should pay using a so-called 'second price rule'. Each winning bidder will pay the smallest amount that they would have needed to bid in order to win - as on auction website eBay.

"If the second price rule was not used, the bidder who values the spectrum the most might miss out by second guessing and misjudging what their competitor was bidding - leading to an inefficient outcome where the spectrum is awarded to someone who values it less," an Ofcom spokesman said.

The outcome is likely to see O2, Vodafone and EE all emerge with some of the 800MHz spectrum as well as some of the 2.6GHz spectrum while Three, the smallest of the four major networks, could be squeezed out - though it already has a deal in place with EE to use its 1800MHz 4G network from next September.

Once the auction process comes to a close and the winners and losers have been announced, both Vodafone and O2 will be hoping to roll out a 4G network by June, with a lot of the background work carried out already, to allow them to offer their customers the faster speeds as soon as possible.

When EE launched its 4G services last year, there was a lot of negative reaction to the prices they were charging, and it is expected by many that competition from Vodafone and O2 will drive prices down, though EE's head of business Martin Stiven told us that is necessarily going to be the case:

"I can't see why the other guys [Vodafone, O2] would not view [charging a premium for 4G] in the same way, so I expect there will always be a small price premium on the 4G service, simply because it gives you a much, much better experience."