European competition for the internet market

Posted: March 14, 2011 in Uncategorized

Europe’s Consumers Could Lose in Auctions of Internet Spectrum

By KEVIN J. O’BRIEN
Published: March 13, 2011

BERLIN — In Europe, the digital dividend may not pay off as well as it should.

Across the Continent, the sale and redeployment of lucrative television broadcast frequencies for high-speed mobile Internet service — the so-called digital dividend — has so far done little to increase competition, instead reinforcing the position of existing market leaders.

Consumers appear to be in danger of losing out because the largest operators are using their superior financial and political clout to shut newcomers out of the bidding process and out of the mobile market, advocates said.

Limiting competition is likely to have the effect of increasing the cost of mobile Internet services, slowing the adoption of its use and realization of the European Commission’s ambitious goal of providing broadband service with ultrafast, 30 megabit-per-second download speeds to every European household by 2020.

“What is happening with the auctions so far has not been in the interests of consumers,” said Ilsa Godlovitch, the director of the European Competitive Telecommunications Association, a group in Brussels that represents smaller telecommunications operators in Europe. “These are only reaffirming a stagnant status quo in most of these markets, or even reducing competition.”

In addition to the leading operators, the other beneficiaries stand to be the cash-strapped European governments, which still reap dividends from their former national telecommunications monopolies.

France and Germany, for example, still own large stakes in France Télécom and Deutsche Telekom, respectively, and receive millions of euros each year in dividends. In both countries, as well as in Spain with its former monopoly, Telefónica, these operators are still among the biggest domestic employers, which also increases their political influence.

Rival operators have long complained that the former monopolies continue to receive special treatment from domestic regulators, which is hindering competition in these markets.

Neelie Kroes, the European commissioner who oversees telecommunications, said she would use her powers to work with national regulators to design auctions that increase competition.

“Spectrum auctions should be designed in a way to ensure that operators make optimal use of scarce resources,” Mrs. Kroes said. “The amount of the charge should not have the effect of hindering access for new operators to the market or of reducing the capacity of telecommunications service operators for innovation.”

Britain, France, Italy, Spain and Switzerland have yet to set terms for national auctions of 800 megahertz bandwidth that will take place over the next year. The spectrum is being freed up by television broadcasters as they switch to digital broadcasting, which uses only a fraction of the spectrum required for analog transmission. But from the initial auctions, the trend is not encouraging for consumers.

In Germany, a six-week auction raised €4.38 billion, or $6.1 billion, for government coffers in May 2010, but only the three largest operators, T-Mobile, Vodafone and O2, a unit of Telefónica, were able to buy spectrum. The design of the bidding process shut out a fourth operator.

The losing bidder was E-Plus, a unit of the Dutch operator KPN. Without the additional spectrum, E-Plus will be hard-pressed to handle the skyrocketing digital traffic being generated by data-hungry smartphones and similar devices.

On March 4, Sweden raised $324 million in its auction. Only the four biggest operators, TeliaSonera, 3 Sweden, Telenor and Tele2, obtained spectrum. Two smaller bidders, Com Hem, a cable operator, and Netett Sverige, a rural mobile broadband seller, lost out.

Per Borgklint, the chief executive of Netett Sverige, which is based in Stockholm, said the Swedish auction set a higher priority on generating revenue for the government than on ensuring a new competitor in the domestic mobile business. Netett Sverige is owned by Access Industries, a private equity group in New York founded by the Russian-born American entrepreneur Len Blavatnik.

“The Swedish auction has only confirmed the status quo, which is to basically preserve what is an oligopoly in the domestic mobile business,” Mr. Borgklint said. “This was not a victory for consumers. This has maintained or decreased competition over time.”

In Britain, where the regulator, Ofcom, plans to release the terms of its auction March 21, the country’s smallest network operator, 3 U.K., is concerned that the sale may eventually force it to leave the British market.

In January, Ofcom allowed the three largest British operators — O2, Vodafone and Everything Everywhere, a joint venture of Deutsche Telekom and France Télécom — to redeploy their 2G spectrum for 3G services. But 3 U.K., the low-cost leader in Britain and the only operator to offer unlimited data plans, had no 2G spectrum and did not benefit. On the contrary, 3’s share of British 3G spectrum fell from 25 percent to 9 percent.

“There is a real risk in the U.K. auction that strategically the incumbents have a great opportunity to squeeze 3 out of the marketplace,” said Kevin Russell, the chief executive of 3 U.K., which has asked Ofcom to reserve part of the frequency for smaller operators and to place a cap on the amount of spectrum an operator can control.

A spokesman for Ofcom, who did not want to be named citing his agency’s policy, said the regulator was considering whether to cap the amount of 3G spectrum that could be held by a single operator. Operators will have a chance to comment on Ofcom’s auction design before it is formally adopted in the autumn, he said. The auction is set to take place in the first half of 2012.

Potential bidders in other European countries are similarly worried. Manuel Kohnstamm, the president of Cable Europe, the association in Brussels representing cable television operators, said governments were focused on maximizing revenue, not increasing long-term competition.

“The more money that governments take off the table in license fees, the less that operators will have to invest to rapidly build out mobile broadband networks,” said Mr. Kohnstamm, who is a managing director of Liberty Global, a Colorado company that sells cable TV, voice over Internet and broadband service in 11 European countries.

The mobile industry, like the cable industry, is maturing, Mr. Kohnstamm said, and consolidation is inevitable, which will reduce the number of mobile operators. Having failed to design auctions that encourage new entrants, cable TV companies looking to add mobile service to their TV and broadband packages will have fewer potential partners, he said.

The only European country so far to use its auction to increase competition is the Netherlands, which in April 2010 designed a sale that ensured that two newcomers, Tele2, a Stockholm-based operator, and Ziggo 4, a joint venture of the Dutch cable operator Ziggo and UPC, a unit of Liberty Global, were able to buy spectrum.

In the approach to the sale, a Dutch court rejected a challenge by the major operators KPN, Vodafone and T-Mobile, which argued that the government’s cap on their spectrum holdings was illegal.

The coming spectrum auctions in other European countries will be critical to the competition in wireless markets. In Portugal, one of the Continent’s smaller mobile markets, three operators, Portugal Telecom, Vodafone and Optimus, have carved up the business for the past decade.

A potential new bidder, Oni Communications, a company in Porto Salvo, Portugal, that provides broadband, voice and video telecommunications services to 3,000 businesses, is not confident that the Portuguese government, which wants to raise €200 million from its spectrum auction, will structure a sale that lets new competitors into the market.

For most of the past decade, the spectrum shares of major Portuguese carriers have been relatively stable, with Portugal Telecom and Vodafone each having 40 percent, and Optimus 20 percent.

“It is absolutely critical how this auction is structured to the future of competition in Portugal,” said Xavier Rodríguez-Martín, the chief executive of Oni, which is controlled by a New York-based private equity firm, Riverside. Oni plans to join a consortium with a major European operator to bid for new Portuguese spectrum.

But Mr. Rodríguez-Martín, a former executive at Telefónica, said he was not confident that the Portuguese regulator would construct an auction that gives new entrants like Oni a realistic chance of obtaining spectrum. Current discussion in government circles, Mr. Rodríguez-Martín said, suggests that Portugal may hold a so-called beauty contest that gives away free licenses to bidders on the basis of their commitments to build out their networks quickly.

Such a format would favor established operators, he said, which can more quickly expand to use new spectrum. That may speed the rollout of mobile broadband networks in Portugal, but at prices that are less attractive to consumers.

“Today this market is functioning in a closed loop,” Mr. Rodríguez-Martín said. “Across Europe we have to stop playing poker and start playing chess, and doing things that make sense in the long term.”

The Portuguese regulator, Anacom, has so far released no details of its plans for the auction. Last December, a vice president at the agency, Jose Manuel Ferrari Careto, told journalists that Portugal planned to conduct an auction rather than a beauty contest because it was more fair and transparent.

Posted by Sadina Todorovac ’12 International Affairs

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