LONDON, Jan 12 - Mobile regulator Ofcom revised its plans for the country's key spectrum auction on Thursday, making some concessions to Vodafone and O2 but insisting it would protect the smallest operator to maintain competition.

Securing fourth-generation (4G) spectrum, released by the move to digital TV from analogue, is crucial for operators which need to support the increasing use of bandwidth-hungry smartphones and tablets.

It is also a rare opportunity for the operators to refresh the line-up of spectrum they own, as the different frequencies offer different possibilities such as rural or urban coverage and require different levels of investment, meaning the terms have been hotly contested.

Vodafone and O2, owned by Telefonica, which already own the most efficient sub-1 gigahertz spectrum, had objected to a proposed system of caps and floors that they said favoured Everything Everywhere, the biggest operator, and Three, the smallest.

Ofcom said on Thursday it was now less concerned about Everything Everywhere, a France Telecom-Deutsche Telekom joint venture, and would no longer seek to reserve sub-1 GHz for the market leader, meaning it would have to compete on price if it wants the crucial spectrum.

Ofcom said it remained determined however to ensure that four operators remained in the market, meaning it would reserve spectrum for Three, and it now expects coverage to extend to 98 percent of the country with 4G.

In focusing on promoting competition and a large roll-out, analysts say the money raised will be lower than could otherwise have been expected. Forecasts range from 2 billion to 4 billion pounds.

INCREASING PRICES

Analysts said the new proposals were as expected, potentially negative for Everything Everywhere, positive for 3 and probably acceptable to Vodafone and O2. They could also make the auction for the sub 1 GHz spectrum more intense.

From this, Ofcom's second consultation, it's clear that Ofcom continues to value Three's disruptive nature and wants to in effect guarantee its existence post-auction, Ovum analyst Matthew Howett said. However it considers that Everything Everywhere has sufficient spectrum available not to be protected in the same way.

The decisions they take now are likely to affect the level of competition in the sector for at least a decade. Striking a balance was never going to be easy.

Three welcomed the proposals and urged the regulator to proceed as quickly as possible while the other operators said they were still analysing the proposals.

Robin Bienenstock, senior analyst at Bernstein, said there was another alternative. Everything Everywhere agreed to sell some 1800 MHz spectrum as part of their deal to merge, meaning that Three could acquire that spectrum if it deems it cheaper.

That would leave the three largest operators to buy the most efficient sub-1 GHz spectrum, and improve their network offerings.

Because of their current spectrum holdings, and/or the much lower risk that these national wholesalers would fail to acquire further spectrum in the auction, we do not consider it necessary to reserve any spectrum for Everything Everywhere, Telefonica or Vodafone, Ofcom said in a statement.

Analysts and politicians have warned that Britain risks falling behind in the international roll-out for 4G technology if the operators continue to contest the rules.

Many major European countries have already completed their auctions, and in the United States, Scandinavia and elsewhere 4G networks are already being built or in place.

Ofcom has already delayed the auction and it is now expected to happen in the fourth quarter of this year.

(Editing by Helen Massy-Beresford)