Competition: 02

Edward Smith

In January O2 UK head of legal Edward Smith finally got the news he had been waiting months, if not years, for: UK telecoms regulator Ofcom had given so-called refarming the go-ahead.

The move means the lower frequencies used by mobile phone operators for basic ­second generation (2G) ­services, such as making calls and sending texts, can now be used for more advanced third generation (3G) services, including internet browsing.

For Smith, it was the ­culmination of a long run-in with the regulator that had dominated his workload for 18 months. “Given that the laws of physics allow for refarming we always knew it was on the cards,” he says. “So we’ve had it on the agenda ever since I can remember, but it really came into focus in the past couple of years. During 2010 it was right at the top of the agenda for the legal and regulatory team.”

In September 2009 the EU issued an amended version of the 1987 Global System for Mobile Communications Directive. The amended ­directive, along with an ­associated decision from the EU’s Radio Spectrum Policy Group, a high-level advisory group that assists the ­European Commission in
the development of policy, meant the UK was required to make 2G ­frequencies ­available for 3G services by 9 May 2010.

Currently, mobile operators provide 2G and 3G services depending on what licences they own. O2, along with ­Vodafone, was one of the first operators to market, starting life as part of BT before being spun off in 2001. Both O2 and Vodafone were allocated 2G licences as they were the only two operators in the market, before going on to buy 3G licences at auction. They pay an annual fee for their 2G licences.

Later entrants, such as Everything Everywhere (the company formed by the merger of Orange and T-Mobile) and 3, only have 3G licences, as the companies did not exist in their current form when the 2G spectrum was allocated.

O2 and Vodafone have long been in favour of refarming as they seek to expand networks and satisfy increased demand for data services.

“This is all about making sure that we can continue to run a first-rate network,” explains Smith. “We’ve seen a massive increase in data ­consumption since the ­introduction of the smartphone. We’re ahead of the curve: it’s something that all networks may experience but we’re right at the cutting edge.”

So Smith was pleased when the EU made its ­intentions clear, but it was not long before he realised the timeline was unlikely to be met.

“By March 2010 we had no notice that liberalisation was going to happen and felt the need to make a formal request to Ofcom to vary our licence in line with the directive,” he says. “Their response was that they were unable to reach a decision as a result of the uncertainty about the upcoming general election and potential change of government.

“We didn’t think that was acceptable, so in May we filed an appeal with the Competition Appeal Tribunal (CAT) and asked for a direction that Ofcom amend the licence.”

It was not just the potential change in government that was muddying the waters, however. While Smith and O2 were ­lobbying for the directive to be implemented, Everything Everywhere was threatening legal action. It argued that refarming would give its two rivals a competitive advantage because lower band licences such as 2G are more effective at covering rural areas, where the main 3G gaps currently lie.

T-Mobile and Orange paid for their 3G licences in a 2000 auction that raised around £22bn for the Treasury. ­Everything Everywhere argued that it bought the spectrum on the basis that it was the only frequency that 3G services would be allowed on, and opening up lower frequencies would significantly devalue that investment.

The previous government proposed settling the 2G ­dispute by installing spectrum caps. The theory was that these would limit the amount of 2G spectrum any one operator could hold. O2 and Vodafone were known to be unhappy at the prospect of caps and were considering their options when the ­proposal was dropped by the new ­government.

All this was going on in the background while the CAT considered O2’s appeal. On 7 October it ruled against O2, claiming that Ofcom was both entitled and required to carry out further authorisation processes before the licences could be varied.

Refarming today

Smith adds that the CAT was also critical of Ofcom for not carrying out that process ­sooner, and agreed with O2 that liberalisation was in the best interest of consumers.

O2 sought to appeal and a date was set for July this year. Smith did not want to pursue legal action, but believes he had no other option.

“We didn’t want to get drawn into the action that we did last year,” he says. “As far as we were concerned it was incumbent on the Government and regulator to implement the directive, and we were at a loss to see why that didn’t happen. In the end we didn’t have a non-litigious alternative.”

From that point on, events started to move in O2’s favour. Ofcom published its advice to ­government on 27 October 2010, stating that allowing operators to use 2G spectrum to carry 3G mobile services was likely to benefit consumers and unlikely to distort competition. The next month Everything Everywhere suspended its threat of legal action.

The Government directed Ofcom to vary the licences on 20 December 2010, and on 6 January 2011 Ofcom finally announced the liberalisation.
Smith worked on refarming with colleagues from the boardroom to press office, but especially so with regulation head Nick Blades and ­competition law and litigation head Kent Dreadon.

“We were delighted that ­several years of hard work had come to fruition,” says Smith. “More importantly, it’s absolutely the right thing for consumers.”
The company has already started using 2G spectrum for 3G services in urban areas such as Birmingham and Leeds. Smith does not expect further legal action from rival ­operators, and is withdrawing O2’s appeal to the CAT.

The next milestone in the mobile telecoms industry is an auction for the 4G spectrum as well as lower 800Mhz ­wavelengths. Consultations will continue this year, with the auction scheduled for the first quarter of 2012. Smith is ­therefore unlikely to see any let-up in his frantic work rate, but he remains particularly pleased with his team’s work on refarming.

“The means to achieve our goals all involved legal and ­regulatory routes,” he says. “Lawyers were crucial. It was something that came up in top-tier meetings and discussions with the board. Everyone understood the consequences.

“Mobile telecoms is a ­complex business and sometimes the reasons behind what you’re doing as a lawyer seem obscure. But in this case they absolutely were not – it was so important that the reasons for our actions were quite clear.”