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1. This paper outlines a future market scenario for public mobile communications over the next ten years and concentrates specifically on the introduction of UMTS. Three particular factors have been taken into account in creating a market scenario: the continuing and increasing demand for mobile telecommunications, the existing balance of power in the mobile communications market, and the ability of service providers to alter the environment. It does not address the full impact of convergence in the economy or its competition benefits in a broader market, nor the impact of secondary trading of spectrum.
2. Voice services seem set to continue to dominate the mobile market and grow strongly in both consumer and business markets, at least in the short to medium term. Market growth will be strongly influenced by competition, quality of service and universality of access, and also by the decreasing differential in costs of use between fixed and mobile services. Although the stated population coverage of current GSM systems is high, the geographical coverage is poor. The future mobile communications environment, whether through terrestrial systems alone or through a combination of terrestrial and satellite access, will have to involve a much greater degree of universality of access.
3. The market for data services has so far been limited because of the lack of distribution channels, user friendly terminals, and applications with mass appeal. Progress has also been help up because of the low channel bandwidth and access quality of GSM networks for data. These problems are gradually being resolved, but it is the bandwidth capability of UMTS which will provide subscribers with the facility to access new services and information previously obtained via other media. Data services, such as fast internet access, are likely to be a very important driver for UMTS, and the highest growth service.
4. To date the balance of market power has been heavily in favour of network operators. This is partly because:
The scope to innovate in these areas is likely to extend significantly with UMTS.
5. The development of the service provider sector will depend on the growth of a much wider (non voice) variety of services in the converged telecommunications environment. This will extend from a wider richness of content (enabled by higher data rates), through interactive services (transactions; mobile commerce) to systems integration (solutions; integrated network offerings such as fixed and mobile) and applications development (sector specific or horizontal such as Transport Telematics).
6. The increased data capability of UMTS is expected to open new opportunities for service providers, perhaps as Value Added Service Providers (VASPs) or Service Operators (with infrastructure of their own). The key competencies will include matching a customer focus to some ‘value added’ element (e.g. content packaging) that contribute to market development. It is imperative that both service providers and new hybrid companies (e.g. VASP’s) have non-discriminatory access to UMTS networks.
7. A key market strength lies in owning and operating a mobile telecommunications network. There is a natural inclination for network operators to take on the service provision role so as to maximise the proportion of the value chain controlled. The network operator today continues to own the SIM card and the Home Location Register, thus effectively "owning" the customer, and possessing the majority of the market intelligence on customer behaviour.
8. The prices at which the service provider is able to sell airtime to the mobile subscriber are dictated by the wholesale price at which airtime can be purchased from the network operators which should be the same offered price as to the service provision units owned by the network operators.
9. If a substantial development of the service provider sector occurs through opportunity for growth of new services, significant business flows over and above expected levels of voice traffic could occur. Service providers who developed specific market and service expertise, or provided proprietary information or content, could add significant value to the market. If network operators were not able or willing to develop equivalent services cost effectively, the balance of market power might shift somewhat in favour of the service providers.
10. Perhaps most likely is that the role of the service provider will evolve to the maximum extent possible, without service providers becoming network operators. Service providers could issue their own SIM cards for use in handsets/terminals or maybe own Home Location Registers. Calls to and from customers will be connected by roaming onto a network operator’s network. The service provider thus serves its customers in the same manner as a foreign mobile operator, with a roaming agreement with a UK network operator, serves its customers when they are in the UK. Such a service provider could become a Virtual Network Operator (VNO).
11. There is currently no obligation on UK network operators to enter into roaming agreements with any party. Roaming agreements with foreign operators are freely negotiated and act to the mutual benefit of both operators. The price to a foreigner of making a call from a foreign jurisdiction is also substantially higher than for domestic subscribers as there is no monthly fee or other cost recovery methodology. No UK virtual network operators have been set up, as the only prices at which they would be able to gain access to networks would be uncompetitive at roaming wholesale in the domestic market, and would not attract subscribers.
12. The creation of Virtual Network Operators would be likely to generate a substantially different market structure to that seen today. They would be likely to extract a substantial proportion of the value chain from the network operators. Although some arguments suggest that the creation of VNOs would lead to substantial cutbacks in new investment in networks, it is more probable over time that an equilibrium could be reached at which the value of network operation would be sufficient to generate appropriate levels of investment. It is possible that some service providers would also persist, providing specialist services or content via the network operators and VNOs.
13. Given the effective increase in network operators (both real and virtual)
and the increase in competition that would result, this scenario would probably
only arises if there is substantial growth in demand for mobile
telecommunication services. Yet, of course, such growth in demand can itself
be driven by the effects of competition that this scenario would cause. The
regulatory environment would also have to be significantly modified to assure
the access of VNOs to networks.
14. A critical factor in the evolution of the market and the roles of the existing players is therefore the availability and encouragement of new services. Data services are probably the most critical (faster rate Internet access, for example), followed by still image and video services.
15. A key issue in the UMTS competitive environment is the choice of the number of licenses and the amount of spectrum available to each licensee. There are also other technical and regulatory issues such as the balance between licensed and unlicensed spectrum, access by UMTS licensees to second generation networks and the possible licensing of unpaired spectrum, perhaps as a shared resource between licensees.
16. There are a number of objectives which the Government would wish to pursue through the licensing process. These include:
(i) the efficient use and management of spectrum;
(ii) the encouragement of competition and rapid development of market opportunities;
(iii) the encouragement of new entrants;
(vi) the encouragement of technological development and the industrial base;
SMAG notes that Mrs Roche, in her statement of 18 May, stated that the Government’s first priority was the utilisation of UMTS spectrum with optimal efficiency.
17. The licensing options available appear to be limited to three, four or five licenses.
18. SMAG considered that, from a purely technical point of view, three licenses could favour optimal exploitation of UMTS technology by making available to the successful operators sufficient bandwidth to optimise fully the multimedia potential of UMTS and to clearly differentiate UMTS from second generation mobile telephony. If only three licenses were offered this should maximise competition, at the auction stage, between the four existing operators and new potential operators. This competition might continue after the auction as the operators competed to make headway in an essentially new market by providing innovative new services. SMAG recognised that the resources to compete successfully against the incumbents in a three license auction could limit the choice of new entrants. Under this scenario, not all the existing operators would have a license and there might be scope for bidding by consortia or joint ventures in which smaller specialist businesses might be able to participate.
19. By contrast, with five licenses, SMAG considered that a key issue was whether the bandwidth available to operators would be sufficient to provide adequate service levels and to permit provision of the new services essential to the extra growth in demand. On balance, this seemed unlikely. The Group felt it unlikely that the five license option would produce a particularly competitive auction, unless there were an unexpectedly high number of bidders, since the four incumbents would, in any event, seem very likely to secure a license under this option. On the other hand, the presence of an innovative new contender might well act as a spur to the major operators to roll out services more quickly than might happen under a four license approach.
20. SMAG concluded that, subject to the conclusions of the work being carried out by Ovum/Quotient, a four license approach seemed likely to provide sufficient spectrum for operators to provide a range of services that would clearly differentiate UMTS from GSM. It was recognised that the behaviour of bidders in such a situation would depend on whether strong new bidders were interested in competing against the four incumbents. Preliminary indications show that there is strong interest from new potential licensees, who see the opportunities for providing a range of new services orientated towards information and multimedia. The four-license approach, if it led to awards to the existing operators, could lead to a slower roll out of UMTS since the operators would be concerned to balance the gains to be made from providing UMTS quickly with the need to maximise the return on their existing second generation investments. Nevertheless, there would still be a strong incentive by those who had paid a considerable sum for a license to roll out services to meet new market demands to the extent that these would not overlap with second generation services. The license conditions should in any case have strong emphasis on conformance to roll-out milestones.
21. Although the amount of frequency spectrum allocated for UMTS is firm (60 MHz and 60 MHz paired and 15 MHz and 20 MHz unpaired), the number of carriers that can be accommodated (and hence the number of services or volume of traffic that can be carried) is not yet clear. Some projections assume capabilities which have not yet been verified, which in turn may affect the appropriate detail of the roll-out obligations proposed.
22. Key issues are:
(a) international agreement needs to be achieved on the technical standards to be used. Without this, manufacturers will not commit to production.
(b) there needs to be resolution of the relative importance of delay-sensitive and delay-insensitive multimedia services. For example, if delay-sensitive multimedia services are to be provided, no more than three operators may be given exclusive spectrum allocation.
23. UMTS is vital for the creation of a content-rich mobile environment. Service providers, service operators and other service specialists should be encouraged to be active in the market, in order to assist the development of more mobile choice. Convergence of fixed, mobile, broadcast and data networks means that UMTS must play its part against the backdrop of wide-ranging changes in the market and regulatory environment.
24. UMTS represents a huge opportunity for the UK economy in terms of innovation, customer choice and investment. If these are to be fully realised, SMAG considers that the licensing process must seek to ensure, as the Minister has said, that the technical possibilities of UMTS can be fully realised so as to obtain the maximum benefit from the spectrum. On balance SMAG considers that these objectives can be best achieved through issuing four licences, but coupled with a vibrant services sector to complement the network activities and deliver a feature-rich world of mobile multimedia.
Spectrum Management Advisory Group
December 1998
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