Consultation on impact of new mobile coverage obligation on licence fees

19 February 2015

Ofcom has today published a consultation on whether a new obligation to extend mobile phone coverage agreed by the network operators should affect how much they will pay for their revised annual licence fees.

The new obligation, to provide geographic voice coverage across 90% of the UK landmass, was agreed between the Government and the mobile network operators in December 2014. It was implemented through a variation of the mobile network operators’ licences in January.

The Government directed Ofcom in 2010 to revise fees paid for the 900 MHz and 1800 MHz spectrum bands to reflect full market value, after the completion of the 4G auction. The two bands are used to provide voice and data services using a mix of 2G, 3G and 4G technologies.

Ofcom’s initial view is that while there could be incremental costs incurred by the mobile operators in meeting the coverage obligation, it is unlikely to have a material effect on the market value of the spectrum. However, Ofcom is open to considering alternative views before reaching a final decision.

In Ofcom’s view the ‘market value’ required under the Government Direction should reflect the value to an operator not holding the spectrum at present, as opposed to the value to the operator that currently holds the spectrum - in a similar way that the price paid by the winning bidder in an auction is typically set by how much the next highest bidder was willing to pay.

Ofcom has also today set out provisional decisions on the revised licence fees, subject to consulting on the impact of the geographic coverage obligation on those fees.

These provisional decisions would see total fees payable by operators of £223m per year. This is 10% lower than Ofcom’s earlier proposals in August 2014, reflecting:

• A reduction in the discount rate that Ofcom considers to be appropriate when converting a ‘lump-sum value’ (of the type paid by licensees when they acquire a licence in an auction) into an equivalent annual payment. This change affects both the 900 MHz and 1800 MHz bands; and
• A reduction in the assessment of the market value of the 1800 MHz band (expressed as a lump-sum value).

Current and proposed total annual licence fees for 900 MHz and 1800 MHz spectrum, before considering the impact of the geographic coverage obligation (March 2013 prices)

* EE and H3G figures relate to holdings after EE’s divestment of 1800 MHz spectrum to H3G, to be completed in October 2015. ** Today’s proposals build on earlier analysis, following consideration of responses from stakeholders. Taken together, the changes to the analysis decrease the overall proposed levels of fees, although some of the individual numbers that make up the fees have risen.

Subject to this consultation, Ofcom will make final decisions on the revised annual licence fees, which, subject to those decisions, are likely to come into effect later this year. The consultation closes on 17 April 2015.

ENDS

NOTES FOR EDITORS

1. Ofcom’s initial view is that the coverage obligation does not, in this case, affect the opportunity cost of the annual licence fee spectrum at 900 MHz and 1800 MHz. Opportunity cost is the spectrum’s value to the marginal operator. This is the operator which - aside from the operator currently holding the spectrum - would place the highest value on its use. Ofcom considers it unlikely that additional 900 MHz or 1800 MHz spectrum would change the cost to the marginal operator of meeting its own coverage obligation, given its existing spectrum holdings. 
2. The Government’s Direction was made on 20 December 2010. Ofcom has been consulting on revising these fees since the conclusion of the 4G auction in February 2013.
3. On 17 December 2014, the Government and the mobile network operators (EE, H3G, Telefónica and Vodafone) signed a Statement of Commitment in which the operators each agreed to implement 90% geographic voice coverage throughout the UK by no later than 31 December 2017.
4. At the time of the December agreement, Ofcom agreed that it would provide all interested parties with the opportunity to comment on whether the new geographic voice coverage obligation, taking account of the associated incremental costs incurred by the operators, should impact future licence fees.
5. Ofcom’s 4G auction was completed in February 2013. Everything Everywhere Ltd, Hutchison 3G UK Ltd, Niche Spectrum Ventures Ltd (a subsidiary of BT Group plc), Telefónica UK Ltd and Vodafone Ltd all won spectrum.