Regulators should keep their hands off 4G

In the US as well as the UK, regulators are beginning to flirt with the temptation of 4G and LTE services. They should keep their hands off

4G could be hampered by regulation
William Rinehart
On 7 April 2013 11:00

Earlier this year, telecommunications regular Ofcom began the bidding process for UK’s next generation LTE (Long-Term Evolution) wireless spectrum or "4G" technologies, almost five years to the day that the US did the same.

At the end of February, the winners were announced with EE, 3, BT, Telefónica's O2 UK and Vodafone all getting a piece of the coveted spectrum. Each of the firms will soon roll out LTE service, but the hard part has yet to begin. For ubiquitous service in both the UK and the continent, officials need to be conscious of the difficult task in wireless deployment and defer to a hands off approach in regulation.      

Many look to 4G auctions as a means to shore up national balance sheets, which have suffered in the recent downturn, but spectrum’s potential should not be hampered by this narrow view. The concern shouldn’t be in maximising revenues, but optimising auction rules for sustainable investment in next generation wireless infrastructure.

As Federal Communications Commission (FCC) Commissioner McDowell similarly warned to US legislators:

I am hopeful that the Commission will not put America’s positive momentum in the wireless area at risk as we explore the myriad options related to the incentive auctions. History teaches us that past regulatory efforts to micromanage the wireless market, despite presumed good intentions, have resulted in harmful unintended consequences.

Designing auctions for the explicit purpose of high returns is just one kind of micromanagement, of which the UK is all too aware.  

The memory of the millennial 3G auctions haunts both companies and government officials. In that spectrum sale, the exchequer netted nearly £22.5 billion (€26.3 billion), drastically above the projected £3 billion.

For the auctions held just a couple of months back, the bids totaled £2.34 billion (€2.74 billion), a little below the government’s budgeted £3.5 billion. Many sighed a breath of relief at the lower number, seeing it as the end of lacklustre profits and investment in the telecom sector. But this isn’t the only message to be read from these numbers. If the auction is indicative of the perceived value of spectrum, then the short term prospects of LTE might not be as rosy as expected.

Firms will need to persuade consumers to adopt the myriad services available on smartphones, which have been accepted more readily in the US and Asia. Partly, this is due to behavioural patterns set in the early 2000’s; from 2001 to 2005, smartphone behaviors developed in the context of high prices, while U.S. and Japanese habits were shaped by lower rates for calling and data. The result, as WIK-Consult analyst J. Scott Marcus points out, is relative restraint by Europeans in calling and mobile surfing.

Other analysts are similarly bearish about the short term prospects of LTE. Due to prices and cultural behaviors, a mere 1 percent of the mobile users on the continent use LTE services. Compare this to the US-based company Verizon, which has nearly 23 percent of its 98 million customers on 4G.

While the United States prepares for a second round of 4G auctions, the UK and a number of others are finalising their first. As with the States, LTE adoption won’t be immediate, but a continued measured approach will be beneficial for consumers in the long run.

For one, texting will increasingly be substituted for “over-the-top services,” free apps that use the network but are difficult to monetise by the telcos. As this transition does occur in both messaging and calling, it is imperative that new rules are not placed on the carriers or over-the-top services, hampering the transition.  

Moreover, the rest of Europe needs to move forward with their 4G LTE auctions. Under the European Commission’s Radio Spectrum Policy Programme, each of the member states should have conducted auctions to make the 800 MHz band available for mobile broadband services, but only nine have done so. A comprehensive and fast market will make the switch even more attractive.   

In those countries where there has been 4G rolled out, smartphone portfolios have been limited to a few compatible devices, which are typically on the top end. As a result, the lack of entry priced handsets have slowed adoption generally.

It will take a couple of years for 4G LTE services to be an alternative to the 3G services that are currently enjoyed. But the benefits for customers will surely be well worth the wait, only if regulators make sure to keep theirs hands off the process and move forward with auctions.

William Rinehart is a Research Fellow at TechFreedom and tweets at @WillRinehart

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