Three calls on Ofcom for protection from BT in spectrum auction

Telecoms operator Three has demanded protection from Ofcom in a forthcoming auction of the airwaves used to deliver mobile services, after Brussels blocked its proposed £10.5bn merger with rival O2 last month.

In his first interview since the deal collapsed, David Dyson, chief executive of the UK’s smallest telecoms operator, said BT could outbid operators that lack the necessary spectrum to expand.

Three had wanted to merge with O2 in part because it needed the additional capacity to meet growing demand for internet access via smartphone or tablet devices.

However, Mr Dyson warned that BT’s £12.5bn acquisition of EE has instead left the former telecoms monopoly in a commanding position with “close to half” of the spectrum that mobile operators need to connect calls and transfer internet data.

According to Citi, BT accounts for about 42 per cent of mobile spectrum, with 28 per cent used by Vodafone, 14 per cent by O2 and 15 per cent by Three.

“The combination of BT and EE is incredibly strong financially. It has got the financial ability to outcompete everyone in the market in how much they are willing to pay,” he said.

“Potentially, given how much spectrum they are already sitting on, BT is incentivised to strategically bid in the next auction to restrict the other operators in the market from increasing their spectrum portfolio . . . That could make life difficult.”

He called on Ofcom to bring in “fairly significant restrictions” on BT and Vodafone in the next auction, which is expected before the end of the year. This could include forcing BT to “relinquish” spectrum before allowing it to buy any more.

Some analysts were surprised that the competition authorities did not ask BT to give up spectrum as part of it decision to approve the EE acquisition, although some added that Three could have acquired more spectrum in previous auctions.

Ofcom is still considering how to design the next auction. The sale of 4G spectrum in 2013 guaranteed spectrum for a fourth operator, a proposal that Mr Dyson would support this time round.

BT did not respond to requests for comment.

The regulator opposed the Three-O2 merger, saying that it preferred a mobile market with four operators to protect consumer interests. Mr Dyson said that it now needed to help maintain competition.

“Ofcom wants credible operators. But to be credible you need enough spectrum,” he said, pointing to rising prices and patchy mobile coverage as evidence that the market is not working as well as it could.

“Hopefully Ofcom will make some pro-competition choices in the design of the auction and ideally starts to rebalance the distortion,” he added. “The UK has the most unbalanced spectrum ownership of all the countries in Europe. We need competitive restraints to stop the imbalance getting worse.”

Throughout the merger process, Three argued that it lacked the necessary scale to provide effective competition. In addition to spectrum, the O2 acquisition would have given it 24m additional customers.

Ofcom wants credible operators. But to be credible you need enough spectrum

Mr Dyson said that Hong Kong’s CK Hutchison, which owns Three, would dcontinue to support the company so long as “we can make the business model work”. Last month, the FT revealed that Hutchison had written down the value of Three by more than £6bn amid reports that the failed O2 bid could lead to a rethink of Hutchison’s position in the UK.

He added that Three would focus on improving its mobile services, and in particular its provision of data-heavy tariffs.

Mr Dyson saw an opportunity to be the best mobile-only operator in the UK while rivals such as BT and Vodafone struggle with customer service. He said the company would add more mobile masts to improve coverage and turn existing 3G spectrum into 4G use that can more efficiently carry mobile data.

“There is no residual animosity,” he said. “You have to move forward and make the most of the cards you’re dealt even if you disagree with the decision. We have got a challenger DNA in the business. At the right valuation, Hutchison will invest but as the smallest [operator] we have few customers to recoup the investment.”

He added that Three will not move into other services such as television and broadband in spite of similar attempts by rivals such as Vodafone. BT’s acquisition of EE has given the group the ability to bundle together telecoms, TV and broadband services in co-called “quad play” packages.

“Quad play will take off over time but not immediately,” he says. “For now — and over the next few years — all mobile operators have room to improve.”