Chapter 20

FROM CONSULTATION TO COMPETITION

The intention of my licensing colleagues was to follow the consultation phase with a competition run by OFTEL to select two Personal Communications Network (PCN) operators. This was envisaged to have been completed by the end of the year. Pressure came from Lord Young to speed up the timescale. We met with OFTEL officials to discuss how this might be done. It was there that we first heard of OFTEL’s wish for Mercury to be given one of the licences immediately. My licensing colleague Peter Smith and I objected. We argued that Mercury should have to compete like anyone else. This would stimulate them to improve their proposals.

There followed a meeting between Sir Brian Carsberg and Lord Young. In advance of the meeting, Lord Young indicated his support for our advice for no special treatment for Mercury. But at the meeting, Sir Brian Carsberg argued with some force in favour of giving Mercury a bye in the competition. He said that we had already set this precedent when Cellnet and Vodafone had been chosen for the UK’s first cellular radio operators. British Telecom (the partner in Cellnet) had been given a licence in advance of the competition for the second licence that Vodafone had eventually won.

Sir Brian argued that Mercury was the Government-chosen vehicle to apply competition to BT. The importance of mobile radio was such that he doubted if Mercury could compete effectively if its portfolio lacked a mobile radio dimension. Alastair Macdonald and Peter Smith were swayed. I was less than happy, largely as I had run the consultation round and told all the companies that there would be two licences on offer. I insisted that Sir Brian Carsberg put his recommendation to the DTI in writing. I could see from my DTI colleagues’ faces that they thought I was pushing my luck a bit. But it was later to save the DTI’s reputation.

After Lord Young left the DTI, he joined the Board of Cable & Wireless, which had been a beneficiary of his decision to give Mercury a mobile radio licence without a competition. A leading Sunday newspaper claimed that something improper had happened at the DTI in respect of this decision. An inquiry followed, and the letter I had insisted the Director General of OFEL send to us provided the audit trail to an absolutely clean bill of health.

The decision on Mercury led to further DTI consideration of the number of licences. My licensing colleagues felt that a competition for just one licence might be seen by industry as an anti-climax, having been promised two.

Radiocommunications Division expressed concern on whether they could find enough spectrum for the new total of three new mobile operators. Already some of the spectrum at 1800 MHz was blocked by the existence of some Home Office Police and Fire Service point-to-point radio links. I said to my Radiocommunications division colleague at one meeting with Lord Young that I couldn’t see how anybody could have been so stupid as to have put police and fire radio links in this band. Lord Young must have wondered what brought on this outburst. It was a private joke. Some eight years earlier, I’d been in charge of these services in the Home Office and secured this allocation for the Home Office from the same colleague, Mike Goddard.

My view on the number of PCN licences was that I did not think the UK market would bear three PCN operators, i.e., a total of five UK mobile operators. I lost that argument.

The competition then proceeded. A number of powerful consortia were formed, including many international companies. We were particularly generous in allowing bids from US companies despite US laws forbidding UK companies in the States from having more than a 20% holding in any company using radio frequencies. I was some distance from the competition. This was run by OFTEL. However, I did remark to a colleague at the time how British Aerospace was going to feed so many capital-hungry businesses as aerospace, motor cars and telecommunications.

A ‘musical chairs’ in the industry followed, with the very capable John Carrington from BT finishing up in Cable & Wireless, who were the leading shareholders in a PCN consortium with Motorola and Telefonica. He brought with him Peter Carpenter and Robin Potter from BT Research Laboratories. So much for my concerns about competence at Mercury! They now had a first-rate team.

My next mission was the European Commission. A few months earlier, one of my staff had run into a Commission official who had expressed misgivings at the UK’s going off on its own in this way… again! The Commission had in mind a frequency conference in 1992 to find some common frequency channels for a third-generation system being introduced around 1996. A presentation was fixed up with Commission officials via our representation in Brussels. The presentation was well attended. It was also remarkably warm. What was demanded of us by Christian Garric was that we use the European Telecommunications Standards Institute (ETSI) to make the PCN standard for us. He also wanted us to share our strategic perspective with our colleagues in Europe. He said that the rest of Europe viewed the UK telecommunications market as a sort of laboratory. The more successful UK outcomes (e.g., our mobile radio policy) offered Europe a view of the best way ahead for them. This was an endorsement of our efforts to engage with the rest of Europe.

The move of the PCN standards making to ETSI proved tougher than I had expected – particularly considering that I was, by then, Chairman of its Technical Assembly. But nobody in Europe understood what personal communications networks were. This was evidenced by the collapse of the Vodafone share price, which I come to later. Industry was also finding the development burden of bringing GSM to the market straining their skilled resources and money. They were not looking for anything new to come along quite so soon.

When it came up in the Technical Assembly for decision, I found myself in a slightly awkward position. I got support from Alcatel, who recognised the strength that the use of GSM technology in new frequency ranges would bring to Europe. There was also some opposition, particularly from Philips. I was in the chair. My style of chairing these large assemblies of several hundred delegates was to let all viewpoints be expressed and then see where the balance of opinion was. I would then test the meeting by suggesting there was wide support for proposition ‘X’ and ask whether this was a view everyone could support.

On this occasion, there were very few interventions. In essence, three people had shown strong support, one had shown strong opposition, and most had kept their heads down. When I got to the bit ‘…there appears to be wide support for ETSI taking on the PCN standardisation task’, I could see the Director of ETSI, Karl-Heinz Rosenbrock, adjust his glasses several times to try to see where all the raised hands were I had obviously seen. As my luck would have it, nobody sustained their objections.

This outcome was in the best interest of ETSI. It strengthened their GSM standard and showed that it could respond to the requests of member state governments for standards. The Commission supported it.

The UK’s PCN initiative also created another technology revolution in linking remote base stations back to the core telecommunications networks. One of the dreams most mobile radio engineers have is a mobile radio base unit on every lamp post. A nice metal or concrete structure exists. It is fed with electricity. It illuminates where people walk. One reason why the idea has never got anywhere is that each lamp post has to be linked back to the telephone switch. The cost of these communications links starts to be a dominant cost element in the system. It occurred to me that Personal Communications Networks at 1800 MHz would start to accrue this sort of overhead. Several submissions to the ‘Phones on the Move’ consultation document had brought out this point in varying degrees. If Personal Communications Networks came to heavily depend upon BT local wire connections to connect their base stations, it would leave BT to set a price floor on local mobile telephone calls. That couldn’t be good news for competition with the local copper wire telephone loop.

My colleagues in the Radiocommunications Division were pressed by me to find some radio spectrum to allow the Personal Communications Networks operators to provide their own radio links to their base stations. Since my concept was short distances between base station sites, this would allow frequency ranges to be used in the millimetre ranges of the spectrum. For many applications, these ranges are not suitable due to high signal loss during heavy rain. But with well-focused aerials, short distances and perhaps daisy ring configurations, they could be successfully used. I backed this up with data showing the cost of linking by other means. They agreed. Spectrum was found at 38 GHz. I think they were quite pleased to find a viable application to open up wider commercial use of these very high reaches of the radio spectrum.

Sir Bryan Carsberg added his own creative contribution to the personal communications network intervention. The new PCN operators were to get more spectrum at 1800 MHz, pay lower unit radio spectrum annual licence fees and receive a higher mobile call termination rate than Vodafone and Cellnet – all to offset the high cost of the much larger number of base stations these new networks would require.

It is worth noting the care with which a supportive regulatory framework was put behind the initiative.

The OFTEL recommendation on who should receive PCN licences was put to the DTI. I was disappointed that this hadn’t included GEC but having given the job to OFTEL of choosing the winners, there was nothing anyone in the DTI could say on the outcome. My opinion was based on the technical quality of their earlier submission.

Whilst not being personally involved in the selection process, I found a copy of the proposed press announcement from our licensing colleagues on my desk. It was careful to point out the space still left in the market for telepoint. I checked it for its technical accuracy. That was all.

Just after it had gone out, I saw a copy of a note from Alan Marshall in the Radiocommunications Division. He expressed concern about the effect of the press release on Vodafone. What had come across to him was that it seemed all bad news for Vodafone. I had not read it from this viewpoint possibly because, like everyone else, the concern had been the weak position of telepoint. Vodafone was the strongest player in the market.

Two days after the announcement of the PCN licence competition winners on 22nd June 1989, Ted Beddoes, now back at Vodafone, faxed me. Could the DTI endorse a press release they were proposing to send out to their City analysts? This was simply passed on immediately to my licensing colleagues who were now driving the policy.

The Vodafone press release was trying to make clear that they could also introduce Personal Communications Networks but at the 900 MHz frequencies. My licensing colleagues were not sure it was the DTI’s role to argue Vodafone’s case with their City analysts. There was a delay. The Vodafone share prices started to slide. City analysts started to phone the DTI. Vodafone was saying one thing, and the DTI simply rehearsed the competition mantras that came across as something different.

A letter from Sir Ernie Harrison came in on 29th June, demanding clarification. The letter contained some differing interpretation from that held by the DTI. It all centred around what exactly Personal Communications Networks were. There was a further delay. By this time, the share price was in free fall. By the time the DTI had got to the point of sorting out a line, the damage was done. The share price had dropped by some 30%.

The effect on the Vodafone management was traumatic. They had lost personal fortunes in share options measured in millions. They also believed that plans for overseas expansion on the back of share deals had been scuppered. Sir Brian Carsberg was quite sanguine about the fall in share value. He believed that the price was inflated by a speculative element that was due to burst anyway. I had regrets. If my colleague in the Radiocommunications Division had spotted the unintended downside of the press release, why hadn’t we? Vodafone must take some of the blame. Days were lost over a misunderstanding with words. It wouldn’t have taken much for one of them to come up to London to sort matters out around a table. Whatever the rights and wrongs we could have helped but didn’t Without telling my colleagues, I went down to Vodafone several months later and personally apologised to the Chairman Gerry Whent on behalf of the DTI for being less than helpful.

After the successful licensees were chosen in late 1989, I set myself the task of trying to steer all the PCN licence winners towards a common standard and was very explicit that this should be GSM. Bullets started flying from all directions. This was ‘intervention’. I was trying to ‘pick winners’. It was a matter that should be left to market forces. We had to be technology neutral.

I never bought into the thesis of regulatory or government ‘technology neutrality’ when it came to national infrastructures. The technology defined what the nation finished up with. We had influence, and not to use it when things could travel in a direction that would leave the UK with an inferior infrastructure seemed itself to be a decision – and a wrong one.

On this occasion, I had the support of my colleagues in the TP Division, who were in the policy driving seat, the industry itself, who fell behind my idea remarkably quickly, and most important, the support of the Secretary of State, Lord Young.

Although I won that battle (and it was the right call), I was to lose the war over ‘technology neutrality’ of governments and regulators for telecommunications infrastructures in general.

A new breed of economic regulator was emerging, focussed only on the short-term interests of consumers and taking decisions with wilful blindness to the technology consequences. The result was to make the regulator process like a loose cannon sliding over the deck of a ship as far as technology outcomes were concerned. Serious consequences from this doctrine were only averted due to the overwhelming momentum that had built up behind GSM. To all these new kids on the block, the market seemed to deliver all the benefits of network standardisation without anyone having to lift a finger. Magic indeed!

The war we did win overwhelmingly in 1989 (and rightly so) was the case for mobile network competition. Both Orange and Mercury One-2-One added huge momentum to the UK mobile radio market, and for a while, it was Europe’s largest mobile radio market.

Orange focussed on building up their brand and investing in a really good network. In parts of the country, they had a better network than O2 and Vodafone, and this underpinned their brand value. They were probably the most successful GSM 1800 MHz operator in Europe.

Mercury One-2-One went for a different strategy. Eric Sharp left Cable & Wireless, and the senior management changed. Richard Goswell took over at One-2-One. The C&W Board rationed the capital they were prepared for Mercury One-2-One to invest in their new mobile network. They launched their new service with a network covering only London out to the M25. It was a big mistake from which they never fully recovered. The team under Richard only stopped this becoming a disaster with their ground-breaking ‘free calls evenings and weekends’.

One of their marketing executives told me at the dinner to celebrate the launch of the new Mercury One-2-One service that they took advice from a leading PR guru on how they could get the public to take any notice of them with such a poor network. The guru said that there were only two words in the English language that were guaranteed to grab the public attention: ‘sex’ and ‘free’. Since ‘sex’ was quite inappropriate, this left them struggling to find how best to work the word ‘free’ into their proposition. They did it in style and undoubtedly, in the process, advanced my vision of the mobile phone as a mass consumer product by several years.

The ‘Personal Communications Network’ initiative was a second distinct industrial policy intervention that re-enforced the first intervention on GSM:

• Government set a well-judged strategic vision for a mobile radio infrastructure that would comprise a very high density of base stations (needed to support a consumer mass market in mobile phones).

• It released new mobile radio spectrum at 1800 MHz tied to this vision.

• It directed the technical standard towards a GSM technology back-end to ensure very early economies of scale and interoperability (a technology defined by industry itself through a public standardisation process).

• It intervened to bring down the back-haul costs of linking such a high cell density mobile radio network by releasing the 38 GHz spectrum.

• It tilted the playing field to get the economic conditions right for investment by giving more spectrum at 1800 MHz, charging lower unit radio spectrum annual licence fees, and mandating a higher mobile call termination rate than the two incumbent mobile radio operators.

• It harnessed the competitive energy of the private sector to deliver the vision.

It was a model intervention. It was in a demonstrably expanding market, there was a well-defined public good (more choice, better networks, and more industry opportunity), the intervention was comprehensive, and the timing was aggressive. It took the future destiny of GSM out of the business market and into the new world of consumer electronics. It led directly to GSM’s becoming the most successful communications network in history – with over 5 billion users by 2012.  

(Note: The GSM element of this account was written within 12 months of the signing of the GSM MoU in Copenhagen in 1987. I had no motive to spin the story in any particular direction or make any particular claims for the success of GSM, which was still a few years away from even getting off the ground. It was simply a means of unwinding on holiday in the French Alps from a tumultuous 18 months by recording to paper what I had just seen and been through. It went straight into a drawer. The GSM 1800 MHz (PCN) element was added a few years later. Shortly after the launch of GSM (in 1991) would have been an ideal time to publish the story. A close friend and former DTI colleague Sir Jonathan Phillips stayed up one night and read the manuscript. His red ink over the draft said it all. There was no way it would have got official approval for publication without ripping out the very heart of the story – the political dynamics. The story was to remain hidden behind the Official Secrets Act for the next 17 years gathering dust. It was cleared for publication in 2010.)