Mobile operators fight for lifeblood of smartphones

The launch of 4G mobile internet and broadband in the UK will be delayed by the regulator postponing a £3bn auction of licences. Nick Clark reports

As mobile phone users increasingly turn to their devices to surf the internet – whether to watch music videos or update their Facebook status – operators are preparing to battle for the crucial radio frequencies needed to support the spike in demand for high-speed data connections. Yet a process that has rumbled on for years is facing further delays, prompting anger from the industry and fears for Britain's competitiveness.

In 2013, a series of blocks of radio spectrum – the "lifeblood" of smartphones – will become available. Mobile companies plan to use frequencies freed up by the switchover from analogue TV and radio to digital to launch fourth-generation (4G) telephony services that will offer mobile download speeds up to 20 times faster. As demand for data increases and handsets become more powerful, the spectrum will prove crucial as operators battle for market share.

The telecoms watchdog Ofcom has been trying to work out an auction process that will distribute spectrum fairly between the "big four" operators – Everything Everywhere, Vodafone, O2 and Three – and maximise revenue for the Treasury. Yet in recent weeks the regulator has become twitchy amid reports that the process could become bogged down by legal challenges from operators. On Friday Ofcom said that, after consulting on its proposals since earlier this year and receiving "a number of substantial and strongly argued responses", it was heading back to the drawing board. James Barford, an analyst at Enders Analysis, said: "Everyone thought delays might happen. Now the regulator has to do it again and there are no guarantees that there will not be delays at the end of it."

The auction was due to be held before next summer but has been pushed back closer to the end of 2012. Given the release date for the wider spectrum, the rollout of 4G will not necessarily be delayed, the regulator insisted. Yet one telecoms industry insider said Ofcom would be cutting it fine to make the deadline, adding: "Any delays would make the regulator look bad."

The delays have annoyed the entire industry. One senior source at a mobile operator said: "There needs to be political leadership here. What do the Treasury and the Department of Culture, Media and Sport want? If it is short-term gains they can raise a significant amount of money. If it is long term, then there will be less money up front but better [mobile phone] coverage across the UK."

The launch of 4G has dragged on for more than five years. The auction was originally scheduled for 2009, when Kip Meek, a former Ofcom board member, was brought in as a "spectrum adviser", but Lord Mandelson was forced to drag operators to the table to order them to come to an agreement. Mr Meek's proposals were then hit by the merger of T-Mobile and Orange to create Everything Everywhere. The threat of legal action from mobile operators and BT also hung over the entire process.

Spectrum auctions in some other European countries have already taken place, giving an indication of what UK operators can expect to pay. According to figures drawn up by Enders, Germany raised €3.5bn from its auction last year, while Italy raked in €2.9bn and Spain €1.3bn earlier this year. While it is a far cry from the £22.5bn that British firms paid the Treasury for their 3G licences at the turn of the century, the UK sale is expected to raise about £3bn when the auction finally concludes.

In its original proposals, Ofcom was keen to maintain four national operators to preserve competition in the market, particularly after the merger of Orange and T-Mobile.

The operator most under threat is the smallest, Three. Its new chief executive, David Dyson, said earlier this month that without the extra spectrum, it might run out of capacity in the largest urban areas by the end of next year.

The various spectrum frequencies offer different properties. Of the two wavebands up for auction, the 800Mhz band is particularly sought-after because it works better indoors and in urban areas. One of Ofcom's controversial early proposals was to "cap" the amount of 800Mhz spectrum that one network could own, and to impose a minimum "floor". This would have guaranteed Three and Everything Everywhere at least one spectrum block each, possibly at less than market price. But this enraged Vodafone and O2. "There is a genuine consideration that the carrier that needs the spectrum most has the least ability to pay for it. In a completely competitive auction, Three would likely be outbid," Mr Barford explained.

O2 has threatened legal action, and although the other companies have backed away from public pronouncements, dramatic proposals from Ofcom could spark other lawsuits. The issue has become so serious that the Culture Minister, Jeremy Hunt, plans to haul in the bosses of every operator to a meeting later this month where he will warn them not to delay the bidding process.

Operators' investment in their networks is huge but their returns from customers' data use is levelling off, so this auction is seen as crucial for their development over the next decade. "All of their most valuable customers have smartphones, and if the data does not work they will take their business elsewhere," Mr Barford said. "High-speed connections will become increasingly important."

One mobile operator insider said: "Delays only lead to further delays. While this whole process is complicated we need to see action."