UK regulator takes first step to investigate Motorola Solutions about Airwave market power

As the UK Home Office seeks a four-year extension of the Airwave TETRA network that supports British public safety, Motorola Solutions could see its profits limited or be required to sell Airwave, based on the outcome of a market investigation that could be launched by the Competition and Markets Authority (CMA) later this year.

CMA yesterday announced that it is conducting a proceeding to gather input into whether it should launch the market investigation reference (MIR). Input can be provided through Sept. 2, after which CMA would be allowed to formally decide to launch an investigation, according to a 36-page report on the matter.

At the heart of the potential investigation is Motorola Solutions’ dual role as the owner of Airwave—the nationwide TETRA system that provides mission-critical communications to UK public safety—and as a key supplier of the Emergency Services Network (ESN), the public-safety LTE network that is supposed to replace Airwave. ESN was supposed to replace Airwave in 2019, but delays in ESN’s deployment resulted in an Airwave extension through 2022, and negotiations are ongoing for another deal to extend Airwave through 2026.

Under this arrangement, Motorola Solution is positioned to realize about £1.2 billion—$1.66 billion—in “excess profits” from 2020 through 2026, according to the CMA report.

“At the moment, Motorola is the only provider of critical mobile radio network services used by our emergency-service workers and is involved in both the current and future setup,” CMA Chief Executive Andrea Coscelli said in a prepared statement. “We’re worried that the company could be cashing in on its position, while taxpayers are left to foot the bill.

“The CMA is minded to launch a market investigation to dig deeper into its concerns and will now consult with a range of stakeholders, including the Government, on its plans.”

A market investigation cannot be launched until after the consulting proceeding is completed, but the CMA indicated its potential courses of action in the matter.

“We have identified two potential remedies at this stage: (a) A form of rate-of-return regulation typically employed by regulators setting price caps for natural monopoly networks,” the CMA report states. “The price control would fall away as soon as ESN is operational, and the Airwave network is turned off. This would address the adverse effects resulting from the exercise of market power by Airwave Solutions.

“(b) Divestiture of the Airwave network.”

Motorola Solutions acknowledged the CMA announcement in a statement provided to IWCE’s Urgent Communications.

“We are aware that the U.K. Competition and Markets Authority is consulting on whether to launch a market investigation into the Airwave network,” according to the Motorola Solutions statement.

“As a trusted technology partner to the U.K. market for more than 50 years, Motorola Solutions remains committed to working with the Home Office to deliver mission-critical communications. This includes the Airwave network that U.K. emergency services rely upon every day, and the safe transition to next-generation technologies (Emergency Services Network).”

As the lone bidder for ESN Lot 2, Motorola Solutions is responsible for developing new public-safety applications like LTE push to talk, providing customer and service support, some core network functions and approval services for applications and devices. The CMA report did not mention the possibility of replacing Motorola Solutions as the Lot 2 vendor as a potential solution of resolving concerns about the company’s dual roles in Airwave and the ESN.

Motorola Solutions dual role in Airwave and the ESN has been a longtime concern for UK politician, auditors and other officials. Because Motorola Solutions realizes much more profit from Airwave extensions than it can make from the completion of the ESN—an event that would result in Airwave being shut down—many have wondered whether financial incentives would Motorola Solutions to slow the development of ESN.

CMA did not issue any preliminary findings on this matter but vowed to investigate whether Motorola Solutions was slowing delivery on its ESN obligations so it could profit from more Airwave extensions.

“While the CMA has not to date reached a view on Motorola’s part in the delays to the ESN roll-out, it considers that this merits further investigation, given the incentives created by Motorola’s dual role in the roll-out of ESN and operation of the Airwave network,” according to the CMA report.

Motorola Solutions’ dual-role incentives were identified as a potential issue as early as late 2015, when Motorola Solutions was contracted as the ESN Lot 2 vendor. Weeks later, Motorola Solutions closed its purchase of Airwave—owned at the time by Macquarie Communications Infrastructure Group, although Motorola Solutions was the main contractor on the project—in a deal that was approved by the CMA and closed in 2016.

“The merger was cleared by the CMA, in part because of the expectation (and assurances of both Motorola and the Home Office) that the Airwave network would be shut down by 2019,” according to the CMA report.

In an effort to ensure that this Motorola dual-role situation would not slow the rollout of the ESN, the Home Office included Deed of Recovery (DoR) language that was supposed to incentivize Motorola Solutions to complete its ESN work in a timely manner. The details of the DoR measure largely were redacted from the CMA report, but the report notes that the DoR has not been implemented.

“The Home Office told the CMA that despite the [ESN] delays to date, the DoR mechanism has never been applied for a number of reasons,” according to CMA report. Home Office officials noted that the DoR could only be used once and that “the priority of the [ESN] programme has been to motivate delivery, rather than punish Motorola,” the report states.

In addition, Home Office officials said the financial penalties associated with the DoR “would not be a sufficient deterrent to Motorola,” in part because of “the imbalance between the revenues/profits earned by Motorola from the Airwave network and ESN, which creates incentives for Motorola to prioritise the former which is far more profitable,” according to the CMA report.

This current Home Office evaluation of the DoR is in stark contrast to Motorola Solutions’ assessment of the measure when the Airwave deal was cleared by the Home Office and the CMA in 2016.

“Motorola argued that … ‘in the event that any delay is incurred with regard to the transition to the new ESN programme—whether such delay is caused by Motorola or otherwise—there are no remotely reasonable hypotheses under which Motorola could benefit financially in net terms from any extension of the Airwave contracts beyond 2019,’” according to the CMA report.

In addition, Motorola Solutions also claimed that “the broader market opportunities for Motorola in relation to the ESN programme are considerably greater than the opportunities that would otherwise arise should the ESN programme be delayed,” the CMA report states, noting that “the Home office did not express any concerns about possible delays to ESN.”

UK officials initially planned to begin migrating first-responder communications to LTE as early as 2016, with the ESN completely replacing TETRA when the original Airwave contract expired in 2019. But the ESN was far from ready at that point, so the UK Home Office signed a three-year extension in September 2018 with Motorola Solutions to keep the Airwave system running through at least 2022.

Home Office Permanent Secretary Matthew Rycroft told members of the UK Parliament’s Public Accounts Committee during a hearing last September that the goal was to “turn it [Airwave] off by the beginning of 2024” while noting that “the absolute latest that we could turn Airwave off is 2025.”

But Rycroft again changed that target date for the Airwave-to-ESN transition recently to the end of 2026 during a Public Accounts Committee hearing last month.

Any further Airwave extension would be subject to commercial negotiations with Motorola Solutions, but correspondence from Rycroft to the Public Accounts Committee has indicated that such a deal likely would cost the Home Office more than £400 million ($558 million) per year and is “rising with inflation.” Including the expense of replacement radios and other associated items causes the overall total cost of an Airwave extension to increase even more.

Motorola Solutions CEO Greg Brown noted in May that the current contract requires any Airwave extension agreement be signed by the end of this year. As a result, negotiations for the Airwave extension and a potential CMA market investigation could be ongoing simultaneously during the fall.

Given the “natural monopoly” that Motorola Solutions holds in the UK public-safety-communications market, the terms of a new Airwave extension could prove to be very costly to British taxpayers, according to the CMA report.

“There are reasonable grounds to suspect that the current pricing of the Airwave network reflects the significant level of market power that Airwave Solutions and its owner, Motorola, are able to exercise, and may be able to continue to exercise until the Airwave network is switched off,” the CMA report states.

“Such pricing appears capable of resulting in very high levels of excess profits going forward: our preliminary calculations indicate that Airwave Solutions may be able to extract around £1.9 billion in excess profits overall, largely as a result of the continuation of the [Airwave] Agreement well beyond its original term.”

This situation might be repeated beyond 2026, if the UK government does not take action to change the current circumstances surrounding public-safety communications, according to the CMA report.

“The CMA … is provisionally of the view that the situation originally established through an ineffective procurement process, exacerbated by the unexpected lengthy extension of the Airwave network and potentially also by the incentives resulting from Motorola’s dual role as owner of Airwave Solutions and key supplier to ESN, and as a result of which Airwave Solutions appears to be able to derive significant excess profits, is likely to continue until the end of 2026, if not longer, given the risk of further delays to the roll-out of ESN,” the report states.