Ofcom’s proposals update rather than overhaul its approach to calculating charges for the use of spectrum, but nonetheless represent a win for industry
Ofcom seeks input on proposed annual licence fees for 900MHz, 1800MHz and 2100MHz spectrum
On 13 December 2024, Ofcom published a consultation on its Review of Annual Licence Fees (ALFs) for spectrum, opening its proposals up to feedback from stakeholders until 7 March 2025. A review of ALFs for the 900MHz, 1800MHz and 2100MHz bands was launched by Ofcom in July 2024 following a request submitted by BT/EE. BT/EE requested a review of the ALFs charged for use of the 1800MHz band as it believed that the fees were misaligned with the spectrum’s market value. Citing the similarity between the formula used to assess fees for all relevant spectrum bands, Ofcom instead decided to initiate a review of all of the ALFs it currently charges. Ofcom has since worked with each of the major UK mobile operators to understand their views on the issue and inform the review, with Virgin Media O2, Vodafone and BT/EE all making written submissions.
The total amount of ALFs paid by mobile operators would reduce, with BT/EE set to benefit the most in absolute terms
Ofcom’s review proposes a reduction in ALFs for the 900MHz and 1800MHz bands by 21% and an increase in fees for the 2100MHz band by 12% (see Table 1). These changes would see operators paying around £40m less than the current total of approximately £320m a year. However, for each operator, the change in their fees varies slightly. Both BT/EE and Vodafone would see a 13% reduction in their total fees, meaning around a £15m fall in costs for BT/EE and a £10m drop for Vodafone. Virgin Media O2 would benefit from the largest reduction in fees at 15% meaning that it would pay approximately £11m less than it currently does in ALFs. Lastly, Three’s fees would only be reduced by 8%, working out at a cut of just under £4m. It is important to note the recent approval of the Three/Vodafone merger here, which once completed will see Virgin Media O2 acquire spectrum at “market value” from the newly created company, thereby impacting the balance of fees across operators.
The regulator has revised its approach to determining the cost of ALFs in light of industry concerns
In its review, Ofcom has proposed changes to its approach to determining the market values of spectrum access across different bands. Previously, Ofcom has used past spectrum auction results in the UK and internationally to estimate the value of spectrum, which in turn inform the ALFs paid by operators. For example, when Ofcom set ALFs in 2018 for 900MHz and 1800MHz spectrum, it used the results of the 2013 auction of 800MHz and 2.6GHz spectrum in the UK alongside the auction results of 800MHz, 900 MHz, 1800Mhz and 2.6GHz in various European countries. Although Ofcom has proposed to continue to use past spectrum auctions to estimate current market values, it has made alterations to its process in response to operator concerns that the use of older auction evidence is less informative of current spectrum values. Greater weight will therefore be placed on more recent UK auctions, such as those in 2018 and 2021, and less weight will be placed on older auctions, e.g. the auction of 4G suitable spectrum in 2013. Ofcom will also place more weight on international examples of post-2015 assignments.
Ofcom expects that its proposals will promote efficient allocations of spectrum, while encouraging competition
By seeking to set ALFs according to a forward-looking estimate of a band’s market value, Ofcom believes that the optimal use of spectrum by operators will be secured by incentivising some licensees to relinquish some or all of their spectrum if they do not wish to pay the set fee. This spectrum can then be made available to licensees who are willing to pay the specified value, enabling a more optimal use of spectrum. Ofcom also believes its changes to ALFs will encourage licensees to make more efficient investment decisions. As operators hold varying amounts of ALF and non-ALF spectrum, Ofcom believes that competition would be distorted without its setting of ALFs as certain operators would be subsidised over others based on which spectrum they own. Ofcom also argues that by setting ALFs at spectrum market values, differences in value for operators could be revealed, which could encourage them to trade spectrum in order to enhance their competitive positions. Finally, Ofcom also assesses that its proposed changes will positively impact consumers through the improved efficiency of spectrum allocation, which it believes will maximise investment and innovation from operators.
