Google is considering a move into the UK wireless market after the regulator Ofcom yesterday proposed grabbing back more than a third of the mobile phone spectrum that Vodafone and O2 have been using for 22 years to auction it for new entrants.
Google is already planning to bid more than $4.6bn (£2.3bn) on spectrum in the US when it comes up for sale early next year and is rumoured to be working on its own mobile phone, nicknamed the Gphone, and a mobile payments service called GPay.
Acquiring a slice of the airwaves in Britain would allow the Californian search engine to launch its own fully fledged mobile phone service or push for the sort of open standards-based wireless broadband network it is proposing in the US.
Any move by Google into wireless would present a threat to the UK's existing five mobile phone networks, which are trying to persuade customers to access the internet on their mobile phones to offset steep price declines in their core voice and text businesses. Rather than fund any wireless operation by charging customers for access - as the mobile networks do - Google would be able to leverage its dominant position in online advertising to make its money.
Google is understood to be considering its move into wireless after Ofcom's surprise proposal yesterday that it will take back part of the 2G spectrum handed over in 1985 so it can auction it off. It reckons up to three operators could use it for wireless broadband services. The original mobile phone companies Vodafone and O2, formerly Cellnet, were given 2G spectrum when the UK mobile industry began 22 years ago. The two companies will receive no compensation and will not be allowed to bid in the auction, proposed for 2009, to try to retain the portion they will lose.
The last time mobile phone spectrum came up for auction, for 3G networks during the dot.com boom in 2000, five companies - including new entrant 3 - paid £22.5bn. Though the new auction is unlikely to attract those prices, Ofcom estimates that "liberalising" the market could bring £6bn of benefits to the UK economy.
The 2G spectrum used by Vodafone and O2, which they were granted in a "beauty parade" by the government of Margaret Thatcher, is particularly good for long-range wireless broadband, making it ideal for rural areas. It also works well inside buildings. When One2One, now T-Mobile, and Orange were granted their 2G licences in 1991 they were given spectrum in a slightly higher band, which is not so efficient. The four networks pay £16m a year each for their 2G spectrum.
All four "legacy" operators have been lobbying for the regulator to remove restrictions on what services they can run over their old networks. They were not expecting Ofcom to propose a full-scale re-auction of part of the existing spectrum.
Orange, T-Mobile and 3 will be allowed to bid for the old Vodafone and O2 spectrum, but it is unclear whether they need the extra capacity. Vodafone has a network-sharing deal with Orange that should cover both companies' needs when the new spectrum is released in 2010, and T-Mobile and 3 are exploring a similar arrangement.
It was unclear last night whether the removal of a third of its 2G network capacity would harm O2, but the move is certainly a blow as that is the spectrum over which the iPhone will operate. The mobile phone company, owned by Spain's Telefonica, clinched the high-profile iPhone deal this week, seeing off competition from Orange, T-Mobile and Vodafone.
Companies have until November 29 to respond to Ofcom's proposals. One company, 3, is expected to push for Vodafone and O2 to be charged for the 2G spectrum they retain after the auction.
Ofcom, meanwhile, has also proposed lifting the technology restrictions on what the mobile phone companies can do with the rest of their mobile phone spectrum, paving the way for a roll-out of 3G services into more areas of the UK.
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