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June 9, 2011, 3:20 p.m. EDT

O2 objects to UK spectrum auction proposals

By Kathy Gordon

LONDON -(MarketWatch)- Telefonica SA's (MCE:ES:TEF) U.K. arm Thursday said it objected to plans by the regulator aimed at ensuring next year's auction of mobile spectrum results in healthy competition, saying some of the current proposals amount to state aid.

In March, Ofcom outlined plans for the auction of fourth generation, or 4G, mobile spectrum, with limits on how much each mobile operator can buy. At the time, it said wanted limits on the minimum and maximum amounts of spectrum that bidders can be awarded to ensure that at least four wholesale operators remain in the country.

In its response to the proposals published on Ofcom's website Thursday, Telefonica UK, which trades under the O2 brand, said it objected to Ofcom's current plans aimed to guarantee that at least four operators end up with valuable sub-1 Gigahertz spectrum.

O2 and rival Vodafone Group PLC (VOD.LN), already own sub-1 Gigahertz spectrum, while Everything Everywhere--the joint venture between France Telecom's (FTE) Orange and Deutsche Telekom AG's (DTE.XE) T-Mobile--and Hutchison Whampoa's (0013.HK) Three UK do not.

O2 said Ofcom's proposal to have 'spectrum floors' has the "side-effect of providing nearly GBP1 billion of unlawful state aid, potentially to bidders which might not otherwise have viable investment cases for 4G," O2 said. It also objected to plans by Ofcom to liberalize what the mobile operators can use their current spectrum for.

O2 is the only major mobile network operator to have provided a non-confidential version of its response to Ofcom's consultation. The remaining three, Vodafone, Three UK and Everything Everywhere, are expected to do so shortly.

Fixed-line operator BT Group PLC (BT.A.LN) also expressed concerns over Ofcom's proposed "structural measures" to ensure competition.

"BT is doubtful whether this approach will be sufficient, not least because such an outcome cannot be guaranteed," it said, and called for Ofcom to clarify how it will respond if the auction doesn't result in four wholesalers or if the market doesn't develop as expected.

Ofcom received 55 responses to its proposals, including from individuals, U.K. county councils, consumer groups, telecom equipment vendor Telefon AB LM Ericsson (NAS:ERIC) and Google Inc. (NAS:GOOG) .

In its submission, Google UK said it believes "innovation is the key to realising the economic potential of new data markets and overcoming infrastructure hurdles." It cautioned that operators "should not be able to act together to take advantage of their crucial role as the intermediary between consumers and the mobile internet," in an apparent reference to the principle of net-neutrality--the idea that carriers shouldn't impose any limitations on Internet traffic.

The 4G mobile spectrum is equivalent to three-quarters of the mobile spectrum in use at present, and there is 80% more spectrum than when 3G was auctioned in 2000, according to Ofcom. The long-awaited auction is expected to provide additional capacity for 4G long-term-evolution technology, which will allow users to watch high-definition video and get much faster download speeds on mobile devices.

Ofcom expects the auction, which is expected to raise billions of pounds for the cash-strapped U.K. government, to start in the first quarter of 2012. The government approved the process last July as part of wider efforts to improve the speed of Internet broadband in the country.

The switch to digital TV in the U.K. has freed up valuable radio spectrum previously used to transmit analog signals, but more is needed given the sharp rise in data usage, driven partly by the surge in smartphones like Apple Inc.'s (NAS:AAPL) iPhone.

Two spectrum bands will be auctioned, 800 megahertz and 2.6 gigahertz, which together total 250 MHz of additional mobile spectrum. The lower frequency 800 MHz band is part of the spectrum which is being freed up as the U.K. switches from analog to digital TV and is ideal for widespread mobile coverage. The 2.6 GHz band is at a higher frequency and best suited for delivering the capacity needed to achieve higher speeds.

(Lilly Vitorovich contributed to this article.)

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