O2 accuses Ofcom over 'state aid' in 4G auction rules

O2 has accused Ofcom of setting rules for the upcoming 4G spectrum auction that constitute state aid for rivals Everything Everywhere and 3.

The "spectrum floor" rules were proposed in an attempt to create competition in the 4G market, by making sure Everything Everywhere, O2, Vodafone and Three would all hold enough 4G spectrum to be able to wholesale some connectivity to smaller 'virtual' operators, such as Tesco Mobile or Virgin Mobile.

However, in the operators' responses to an Ofcom consultation on the upcoming 2.6GHz and 800MHz LTE spectrum auction, O2 said the rules would disadvantage O2 and Vodafone and favour Three and Everything Everywhere in a way that amounts to "state aid", illegal under EU law.

"The spectrum floors would distort the auction process, allowing all bidders, except Vodafone and O2, to potentially acquire spectrum at discounted prices," O2 said. "Ofcom’s own figures suggest this effect could cost taxpayers £1bn."

An O2 spokesperson later explained that, although O2 would be allowed to bid for up to 2x10MHz in the 800MHz band, two bidders that are not O2 or Vodafone would be guaranteed one of five minimum portfolios of 800MHz spectrum, potentially at the reserve price.

An Ofcom spokesperson said the regulator is "fully aware of state aid rules and would not have made proposals that we considered illegal".

Ofcom's proposals limit the amount of sub-1GHz spectrum that any one operator can hold. Spectrum in that range allows mobile broadband services to be run over much greater distances than those possible in the 2.6GHz band. Everything Everywhere's 2G spectrum is at 1800MHz, but O2 and Vodafone's is at 900MHz.

"Because we and Vodafone already have sub-1GHz spectrum, we could not be able to approach the auction with the same terms as Everything Everywhere and Three," O2's spokesman told ZDNet UK on Friday. The spokesman also said that Ofcom was incorrectly assuming that O2 would be able to reuse its 900MHz spectrum — already being 'refarmed' for 3G services — for 4G LTE mobile broadband.

"We're already using that spectrum for 2G and 3G services," the spokesman said. "The channel we have is 2x15MHz, but the standard of 4G is 2x10MHz. Equipment makers won't make equipment for anything higher than 2x10MHz. We're being denied [running 4G services] on the same terms as 800MHz."

Telecoms analyst Dean Bubley of Disruptive Analysis told ZDNet UK on Friday that 900MHz is perfectly capable of supporting LTE, but there will "probably be more phones and chipsets that support 800MHz LTE than 900MHz".

Vodafone said Ofcom's proposed rules would guarantee 800MHz spectrum for Everything Everywhere, which already has LTE-capable spectrum in the 1800MHz band, adding that the regulator had failed to make the case for guaranteeing 800MHz spectrum for Three either.

"While we understand Ofcom's desire to ensure that the UK remains one of the most competitive mobile phone markets in the world, to do that by giving the largest player in that market [Everything Everywhere] control over even more of the nation's airwaves seems completely nonsensical," Vodafone said in a statement. "The European Commission has already requested that Everything Everywhere sell some of its spectrum holdings to prevent a distortion of competition, so it would be odd if the effect of the rules that Ofcom lays down for the forthcoming auction was to guarantee it even more."

Everything Everywhere also complained about Ofcom's proposals, saying they would "limit competition amongst the operators by undermining the long term prospects of the [operators] who do not currently hold critical sub-1GHz spectrum".

Three chief Kevin Russell said in a statement that "Ofcom has rightly made competition the main objective" of the upcoming auction.