Consultation on impact of new mobile coverage obligation on licence fees
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.
In August 2014 when Ofcom announced the proposed revised licence fees, operators were up in arms as the costs leapt collectively for the UK’s mobile operators from £24.8 million per year for 900 MHz spectrum and £39.7 million for 1800 MHz spectrum to £109.3 million per year for 900 MHz spectrum, and £137.5 million for 1800 MHz spectrum.
Ofcom’s initial view is that while there could be incremental costs incurred by the mobile operators in meeting the new 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 £223 million 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).
Fees are set to jump significantly for the UK’s operators, even with the 10% discount from Ofcom. Before consideration of the new geographical coverage obligation, Vodafone and Telefónica each currently pay £15.6 million annually for their 900 MHz and 1800 MHz spectrum licences, but the new provisional proposed price is £61.2 million each. EE currently pays £24.9 million for its combined 900 MHz and 1800 MHz spectrum licences (holdings after EE’s divestment of 1800 MHz spectrum to H3G, to be completed in October 2015) while H3G pays £8.3 million. The new proposed price before geographical considerations for EE is £75.6 million, and for H3G, £25.2 million. This is a total new proposed consideration of £223.3 million for the UK’s operators, compared to the current £64.4 million.
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.