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Written evidence submitted by O2
Broadband and the Road to 5G:
A Submission by O2 to the Digital, Culture, Media and Sport Select Committee
About O2
O2 is a mobile network operator and the principal commercial brand of Telefónica UK Limited, which is part of the global telecommunications group Telefónica S.A, headquartered in Spain and operating in Europe and North, Central and South America.
With 34.5 million connections to its network, O2 runs 2G, 3G, 4G and 5G services across the UK, as well as operating its nationwide O2 Wifi service. The company is the network of choice for mobile virtual network operators such as giffgaff, Sky Mobile and Lycamobile, as well as managing a 50:50 joint venture with Tesco for Tesco Mobile. O2 has been named uSwitch Best Network Coverage provider for three years running (2018, 2019, and 2020).
O2 has around 6,700 employees and 450 retail stores and sponsors England Rugby, The O2 and twenty O2 Academy music venues across the UK. Through a comprehensive sustainability strategy, O2 is enabling customers to reduce their impact on the environment by recycling their old devices through O2 Recycle and, in partnership with the NSPCC, helping parents to keep their children safe online. O2 has committed to become a net zero business by 2025 and to reduce supply chain emissions by 30% in the same timeframe.
Executive Summary
The rate of progress to date suggests that delivering gigabit capable broadband to every house and business by 2025 will be difficult. O2 believes that competition drove the rapid roll-out of 4G by all four mobile network operators, while the lack of effective competition has contributed significantly to the slow rollout of fixed broadband.
The biggest challenge to the roll-out of 5G is the high level of investment required, set against low returns and regulatory interventions that are taking funds out of the sector.
A vital requirement for the successful rollout of 5G in the UK is access to sufficient 5G spectrum for all four mobile network providers. Failure to achieve spectrum contiguity would be a bad outcome for consumers; for competition and innovation; and for the government’s ambition to achieve 5G leadership for the UK.
The major challenge to addressing the digital divide in mobile lies is creating or strengthening the business case for infrastructure investment in remoter, more rural areas. In order to make further significant and high scale improvements to rural mobile coverage, the operators, the government and Ofcom need to work collaboratively and in partnership behind the common objective of improving rural coverage. As an investment model for the future, the Shared Rural Network is an encouraging precedent that should be developed and built upon.
The demand for digital connectivity is no in doubt. Instead, the public policy focus needs to be on delivering a policy and regulatory environment that enables operators to meet consumer and business demand in all parts of the United Kingdom.
The industry has strong and ongoing relations with the devolved governments of the UK. As with the Westminster government, we urge the devolved governments to be bold in ensuring that their planning policies support and enable the provision of digital infrastructure that is necessary to deliver improved coverage and service.
The COVID-19 pandemic led to major increases and changes in demand on our network. We doubled the capacity of our network and increased resilience and capacity to ensure that it coped with the higher and evolving demands that were placed upon it. O2 has continued to roll out its 5G network and as at June 2020 was ahead of schedule. As we have seen with 4G, the 5G challenge the industry is most likely to face will be a lack of return on investment in remoter areas. A collaborative relationship with government and Ofcom, allied to a sensible and progressive planning policy, will help overcome these challenges.
1.1. The UK’s first home broadband service was installed twenty years ago, but in December 2019 Ofcom’s ‘Connected Nations 2019’ report found that only “three million homes and businesses (10%) now have access to full-fibre broadband”.
1.2. Theresa May’s government had a target to deliver full-fibre broadband nationwide coverage by 2033. The Conservative Party’s 2019 general election manifesto made a bolder commitment “to bring full fibre and gigabit capable broadband to every home and business across the UK by 2025.”
1.3. The House of Commons Library ‘Full-Fibre Broadband in the UK’ Briefing Paper (January 2020) noted that the shift in language from “full-fibre” to technology neutral “digital capable broadband” will allow a broader range of technologies to be applied in pursuit of this 2025 target.
1.4. The rate of progress to date suggests that delivering gigabit capable broadband to every house and business by 2025 will be difficult, despite the government allocating £5 billion of funding to help connect premises in remoter, hard-to-reach areas.
1.5. EE launched its 4G network in 2012, while O2 and the other two operators did so in 2013. Four years later the 4G networks of all four UK operators had reached 98% of the population. O2 believes that competition drove the rapid roll-out of 4G by all four mobile network operators, while the lack of effective competition has contributed significantly to the slow rollout of fixed broadband.
2.1. The biggest challenge to the roll-out of 5G is the high level of investment required, set against low returns and regulatory interventions that are taking funds out of the sector.
2.2. The government’s Future Telecoms Infrastructure Review (July 2018) found that “the capital costs of deploying 200,000 5G small cells (which could, for example, provide outdoor coverage in most urban areas) could be in the region of £3 billion… In addition to the costs of the new radio equipment, capital investment is also likely to be required to strengthen some masts to support new 5G equipment. Taken together, our high-level assessment is that the total capital expenditure that would be required to upgrade existing sites is likely to be in the region of £4 billion to £5 billion.”
2.3. The mobile sector is confronting this 5G investment challenge after a decade in which it has shrunk by 5%, while the fixed sector has experienced an expansion of 30% over the same period[1].
2.4. Spectrum auctions took £2.3bn out of the industry in 2013 and £1.4bn in 2018. More will be taken out by the forthcoming 5G spectrum auction. When the term of auctioned spectrum expires, Ofcom charges the operators Annual Licence Fees (ALFs) based on its own view of the market value of the spectrum. These ALFs are set to increase as more spectrum terms expire over the coming years.
2.5. Downward pressures on prices, increasingly encouraged and pursued by Ofcom, have reduced average mobile tariff prices by 19% since 2016, while average mobile data consumption has gone up by 146% over the same period[2].
2.6. While the government has allocated £5bn to support the rollout of fixed broadband in rural areas, it has designated less than one-tenth of this sum to support 4G rollout in the same parts of the country through the Shared Rural Network (SRN).
2.7. Many of the most innovative and transformative applications of 5G, such as smart cities and 5G enabled healthcare and agriculture, require almost universal coverage. It will be challenging for the mobile industry to provide all of the investment to fully deliver such coverage, when faced with the headwinds of these established trends. The case, therefore, for government funding to support and extend the provision of 5G may strengthen over time.
2.8. Another vital requirement for the successful rollout of 5G in the UK is access to sufficient 5G spectrum for all four mobile network providers. Ofcom is to release suitable spectrum in the forthcoming award. This auction is expected to take place in November 2020 or later, following a short consultation exercise that Ofcom has carried out.
2.9. Operators will require a contiguous block of 80-100MHz block of 5G spectrum to provide good 5G services. At present, only one operator – Three – has such a block. Three currently has 140MHz of 5G spectrum in the important 3.4-3.8GHz band (the band designated to be used for 5G) – more than the other operators have between them. Vodafone has 50MHz, while O2 and EE each have 40MHz.
2.10. Ofcom has proposed not to insist that the 3.4–3.8GHz spectrum band is organised in such a way as to ensure that all operators will have access to large contiguous blocks. They prefer an approach which relies on operators trading amongst themselves to achieve that goal. However, experience suggests that operators’ incentives are not aligned in such a way that results in trading.
2.11. While regulators overseas are taking action to ensure all operators have the opportunity to acquire contiguous blocks of spectrum, Ofcom is stepping back in the hope that post-auction spectrum trading will produce the same outcome. We do not believe it will and we think that it is so important to the UK that it should not be left to chance. Failure to achieve spectrum contiguity would be a bad outcome for consumers; for competition and innovation; and for the government’s ambition to achieve 5G leadership for the UK.
2.12. O2 expects Ofcom to consider the issue again, following the responses to its recent consultation, to ensure a better outcome for consumers and businesses.
2.13. Finally, the mobile industry has for years been hampered by a planning policy regime that does not support it in the way other essential services are supported. Anomalies in policy between mobile and fixed - and between mobile and other essential services - must be removed; Permitted Development Rights (PDRs) must be extended; and the Electronic Communications Code (ECC) must be fully and properly implemented (see also paras 7.2 and 7.3 below).
3.1. The biggest challenge to addressing the digital divide in mobile lies is creating or strengthening the business case for infrastructure investment in remoter, more rural areas. The mobile industry has delivered almost universal 4G coverage to premises across the UK. However, only 66% of the UK‘s geographic landmass currently receives 4G services from all four mobile operators (Ofcom, Connected Nations 2019). This is largely because in many such areas the revenue generated by providing coverage is exceeded by the cost of building and maintaining the infrastructure that is required to deliver the coverage.
3.2. In order to make further significant and high scale improvements to rural mobile coverage and to eradicate any digital divide, the operators, the government and Ofcom need to work collaboratively and in partnership behind the common objective of improving rural coverage. The traditional means of securing coverage rollout has been based on prescriptive regulatory interventions (e.g. the application of coverage obligations to spectrum licences), but a new way of working is now required.
3.3. As an investment model for the future, the SRN – which the government announced it will support in March 2020 - is an encouraging precedent that should be developed and built upon. Its strength lies in the way every stakeholder makes a unique contribution to achieve the shared goal of improving rural coverage: the operators will deliver over £500m of investment and an unprecedented level of infrastructure sharing to address Partial Not Spots; the government will deliver a modest level of investment to build mobile masts in Total Not Spots; while Ofcom has agreed to drop coverage obligations from its forthcoming mobile spectrum and instead will amend the operators’ licences to include the enhanced coverage levels that should be delivered by the programme.
3.4. The SRN will increase the geographical landmass of UK that receives 4G coverage from 66% to 88%; all four operators will each deliver at least 90%; and their combined aggregate landmass coverage will be 95%. Operators, the government and Ofcom will have to collaborate more strongly and deeply to improve coverage yet further, but the SRN demonstrates what can be achieved when all parties work together and move away from a traditional ‘command and control’ approach to regulation.
4.1. The demand for digital connectivity continues to rise. Pre-COVID-19 data consumption from O2 customers was increasing by about 60% each year and doubling in some locations. In the first seven days of the COVID-19 lockdown, O2 experienced about nine years of anticipated voice growth.
4.2. We know, therefore, that digital connectivity is highly and increasingly valued by consumers. The COVID-19 pandemic lockdown has further underlined the importance of digital connectivity to businesses, communities and consumers.
4.3. The demand for digital connectivity is not, therefore, in doubt. Instead, the public policy focus needs to be on delivering a policy and regulatory environment that enables operators to meet consumer and business demand for digital connectivity in all parts of the United Kingdom.
5.1. O2 is investing over £2bn/year its network to ensure mobile connectivity can be maximised. We are committed to doing everything we reasonably can to overcome any digital divide between urban and rural communities in the UK. Over 99% of premises in the UK have 4G coverage from O2 and the company will deliver 4G coverage to at least 90% of UK landmass through the SRN. At the time of writing we are providing 5G coverage in 60 towns and cities – ahead of forecast - and our roll-out is continuing.
6.1. The industry has strong and ongoing relations with the devolved governments of the UK and we meet regularly with them to discuss issues of mutual interest. These discussions are often led by Mobile UK, the industry’s trade association, with the operators in attendance. O2 also has regular bilateral discussions with the devolved governments of the UK.
6.2. The devolved governments have been involved in the development of the SRN. Their inclusion in these discussions and the collaboration and cooperation that has been secured as a result have been welcome. There is frequent and useful discussion with the devolved governments about how the SRN and our own 4G rollout work can best be aligned and coordinated with initiatives of the devolved governments – e.g. the 4G Infill Programme in Scotland and the Mobile Infrastructure Infill Project in Wales.
6.3. As with the Westminster government, we urge the devolved governments to be bold in ensuring that their planning policies support and enable the provision of digital infrastructure that is necessary to deliver improved coverage and service.
7.1. The COVID-19 pandemic and lockdown measures taken by the Westminster and devolved governments triggered massive demand in voice traffic on our network, with approximately nine years of forecast growth coming in the first seven days of the lockdown. There was also a significant, though less pronounced, increase in data traffic. The time of peak demand on our network shifted from late afternoon to mid/late morning. The locations of highest demand also changed. Demand reduced in urban centres and other places of normally high employment and business activity; and increased in suburban areas, commuter ‘belts’ and smaller towns and villages, as people switched to working from home and school children and students studied from home. O2 doubled the capacity of our network and increased resilience and capacity to ensure that it coped with these higher and evolving levels of demand.
7.2. One impact of the lockdown is that it has helped people better understand and experience the importance of digital connectivity. We hope that this higher appreciation will lead to reforms in public policy that better enable the mobile industry to provide the infrastructure necessary to provide better coverage. The mobile industry has for years been hampered by a policy regime that does not support it in the way other essential services are supported.
7.3. For example, business rates relief is applied to fixed digital infrastructure, but not to mobile digital infrastructure; electricity pylons in the UK can be 50m, but mobile mast heights are generally restricted to 25m – even though taller masts is the measure more than any other that would improve coverage. It is time for the government to decide: will it give the industry a policy regime that matches the importance attached to mobile connectivity by consumers and businesses across the UK? Anomalies in policy between mobile and fixed - and between mobile and other essential services - must be removed; Permitted Development Rights (PDRs) must be extended; and the Electronic Communications Code (ECC) must be fully and properly implemented.
7.4. Throughout the pandemic, the mobile industry has continued to undertake work to progress the SRN and O2 has continued to roll out its 5G network. When we launched our 5G network in October 2019, our target was to bring our 5G to fifty towns and cities by the summer of 2020. By mid-June our 5G network was in sixty such locations, so we are ahead of our rollout schedule.
7.5. The industry is still in the relatively early stages of rolling out 5G. There are more investments to be made and some issues to be resolved that will impact upon how fast competitive and credible 5G networks can be rolled out. These include the forthcoming auction of 5G spectrum and possible changes in the Controls over so called High Risk Vendors, such as Huawei. O2 may be relatively unaffected by the latter issue, as we are the only UK mobile operator that has no Huawei equipment in its 5G network.
7.6. O2 launched its 5G network simultaneously in all four nations of the UK. As was the case with 4G, the industry is rolling out 5G first in more urban areas, where there is a greater density of customers. In due course, 5G will be rolled out to more rural areas. As we have seen with 4G, the challenge the industry is most likely to face will be a lack of return on investment in more remote and sparsely populated areas, where the cost and challenge of delivering connectivity is at its greatest and the numbers of customers are low. This is why a collaborative relationship with government and Ofcom, allied to a sensible and progressive planning policy, is so important.
June 2020
[1] ‘Telecoms Sector Returns: Money’s too tight to mention’ (Enders, October 2019).
[2] ‘Pricing trends for communications services in the UK’ (Ofcom, January 2020)