A battle for Europe's airwaves

With European countries planning to sell off broadcast and phone spectrum, everybody wants in on the action. Fortune's Mark Halper reports.

By Mark Halper, Fortune contributor

(Fortune Magazine) -- Europe's media and telecommunications industries are suiting up for another battle over valuable airspace. With large swaths of spectrum coming up for sale over the next two years, broadcasters, mobile-phone operators and providers backing new wireless technologies like WiMAX are jockeying to influence how regulators in Britain and across the continent will handle the allocation.

At least five European countries are planning auctions for this year or next. At stake is the future of broadcasting and communications, since many of the licenses coming up are for 20 years. The auctions will also influence devices, services and technologies that the average person uses to watch TV, make phone calls and surf the Net.

It's reminiscent of the frenzied 2001 auctions for 3G (third-generation) airspace, in which mobile operators plunked down more than $100 billion for licenses to gain access to a band of high-frequency 2.2-gigahertz spectrum.

But this time regulators are releasing several slices of spectrum, including two key tranches. One is in the traditional low-frequency analog-broadcast range, generally around 400 to 800 megahertz, which is freeing up as countries switch from analog to digital TV. Another is in the 2.6-gigahertz range. Britain plans a broadcast-spectrum auction in 2009, and other countries, including France and Ireland, could follow. Some, like Germany, are simply allocating switchover spectrum rather than auctioning it.

Many incumbents fear that regulators such as Britain's Office of Communications (OFCOM) will loosen bidding rules so that players in one industry can bid on spectrum that has long belonged to another.

Broadcasters could potentially lose airspace to mobile and WiMAX companies, which covet broadcasters' low-frequency spectrum, where signals travel much farther than they do in mobile's higher frequencies.

Likewise, mobile operators are concerned that regulators will let WiMAX and other providers bid on higher-frequency 2.6-gigahertz waves that regulators had reserved for mobile operators six years ago. Regulators pledged the band to mobile carriers like Vodafone and Orange in 2000 and 2001, when European mobile operators spent their billions on spectrum for advanced 3G services that are still behind schedule.

In theory any spectrum can transmit any type of signal, so a purely free market would allow a mobile vendor to outbid a broadcaster for airwaves, much as a trendy restaurateur might bump an old shoe shop off Main Street by paying higher rent. But broadcasters and mobile operators that have invested decades and hundreds of billions of dollars housing businesses in specific frequencies say completely free markets are nonsense.

"It might make sense from a pure economic point of view, but it's a bit weird," says Catherine Smadja, senior policy advisor with the BBC. A March filing with OFCOM by the BBC argued that the regulator should guarantee a big chunk of spectrum to Britain's traditional broadcasters to ensure that they can continue to fulfill their public-service obligations: "This is a public-policy objective which carries social value beyond and above its private value and which will not be achieved by market mechanisms."

The BBC, ITV, Channel 4 and Channel 5 also want the spectrum to offer high-definition services. They fear that mobile operators will bid prices way up. "The 3G process demonstrated that in auctions of scarce resources such as spectrum, bidders may bid more than is rational - in the case of 3G, up to four times what could have been justified rationally," says Michael Grade, executive chairman of ITV.

Mobile operators are eyeing the broadcast spectrum for purposes including mobile TV. But they worry that "the way the analog spectrum is being reallocated in many countries will mean that only [TV broadcasters] will be able to use these bands," says Tom Phillips, government and regulatory affairs officer of the GSM Association, a trade group of 700 global mobile operators.

Those concerns made their mark on OFCOM, which in late May said it would push back Britain's auction from 2008 to 2009. OFCOM spokesman Clayton Hirst says the regulatory body needs time to sort through the voluminous filings it has received. Although it's committed to allowing any bidder into the auction, it has to figure out how it will do that, Hirst says.

Although many mobile operators favor a free market in the broadcast spectrum, they are not feeling as liberal toward what they believe is rightfully their 2.6-gigahertz "3G expansion band." Some want to keep WiMAX providers out when 2.6-gigahertz auctions come up.

WiMAX providers are pushing for regulators to take a "technology-neutral" stance and allow newcomers. But many worry that big cellular carriers could snuff out bids by startups. "It's extremely valuable, but it's not worth £6 billion," says Kenneth Ashworth, a director with the WiMAX Spectrum Owners Alliance.

Even if regulators adopt technology neutrality, how they sell off spectrum could favor one sector over another. For instance, they might grant only three or four licenses, which would favor big-money bidders, especially if regulators take the highest bid as opposed to portioning out spectrum to providers that prove they offer a social benefit.

Whatever happens, European governments are almost certain to raise tons of money by selling a precious resource. As Jeremy Green, an analyst for research firm Ovum notes, "Air is for sale again. They're not making any more of it."  Top of page