Mobile licence fees: market value still not realised?

To close the year – as indeed I did on the last day of 2020 – this post constitutes the text of my autumn 2021 column for Stage, Screen & Radio – the quarterly magazine for members of BECTU, the media and entertainment union and a part of Prospect. The text, which focuses on a consultation on mobile licence fees launched in the summer by Ofcom, the UK’s communications regulatory authority, has been updated to account for the outcome of the consultation, while some links have been added.

Ofcom is consulting on new licence fees for 3G mobile spectrum. Here, we revisit a horror story and update it for our age.

In the middle of July, Ofcom issued a consultation proposing new annual licence fees for mobile spectrum in the 2100 MHz range, commonly used by operators to supply 3G mobile services.

Readers may well recall – with a shudder – Ofcom’s original auction process, back in the spring of 2000, for 20-year licences to use this spectrum. At the outset, the auction was thought likely to raise around £5bn (a sum in excess of operators’ bidding models but which could still have been absorbed), inflated by a competitive bidding process designed by economists and based on games theory alongside huge interest in the potential of 3G spectrum to revolutionise our usage of mobile phones (then used for little more than voice calls and minimal data). However, it ended up raising some £22.48 billion after an exhausting process lasting nearly seven weeks. At the time, such a sum represented around 2.5 per cent of UK GDP – and could have built 400 hospitals.

Faced with the prospects of paying a similar amount per head in Germany in another 3G auction there, as well as elsewhere in Europe, the sheer unsustainability for the operators involved of financing such sums led – among other things – to a bursting of the telecoms asset bubble, economic recession and a delay in capital expenditure which put back the introduction of 3G services. Lessons were learned – but the process was a scarring one, even for those of us charged only with monitoring progress and analysing the potential impact. For members of the union working in the industry, the damage caused was both deep and long-lasting.

Just to put some perspective on such sums, inflation (as measured by the Retail Price Index) has risen by 78 per cent since then. £22.48 billion would now be worth some £40 billion – and, in 2021, you could probably get a working Covid-19 Track and Trace system for that.

Crisis

Ofcom’s regime was modified in 2011 in the wake of the banking-led financial and currency crisis and it is now, in 2021, proposing comparatively modest fees, ranging between £290,000 and £567,000 per MHz, depending on the type of spectrum involved, which will lead to annual licence fees of between £12.79m (for O2) and £25.58m (for EE).

These sums compare interestingly with the auction-led outcome which led to a total annual cost in excess of £1bn. Perception of the market value against which Ofcom is obliged to set the fees is associated with many things, not the least of which is that 3G has now been surpassed, with 6G likely to come on stream in the 2030s, and with EE announcing that it will switch off its 3G network in 2023 to support its 4G and 5G networks. Even so, the figures are starkly divergent.

O2 has some 24 million direct mobile customers while EE has around 32 million so the fees are unlikely to make much of a dent in consumers’ contract prices – they amount to around 53p/year for O2 customers and around 80p/year for EE ones. Neither will they make much of a contribution to public finances (Ofcom is self-financing on the basis of the fees it generates and the fines and penalties it levies, and it is a net contributor to the Treasury (p. 55)).

For workers in these and the other mobile operators, however, the impact is likely to be a little more significant. Ofcom is rather dismissive of the argument based on narrow economic considerations (consultation document, p. 33), but each pound of fees that mobile operators are forced to pay is likely to lead either to a reduction in capital expenditure or an increase in the never-ending search for efficiencies (or, indeed, both). Ofcom takes no view about the impact on workers, but anyone arguing that each £1 million of fees is insignificant has never sat in on pay, or other, negotiations with a corporate employer.

Workers and the operators for which they work might well be justified in arguing that 3G licence fees have already been paid in full.

Ofcom was – at the time the column was written – due to finalise the proposals later in 2021 with the fees to apply as from 4 January 2022.

On 13 December it announced a fractional reduction in the licence fees to £561,000 for paired spectrum and that it would consult further on unpaired spectrum – a very minor win for the operators with annual fees for EE and O2 now set at £22.44 million and £11.22 million, respectively (although, depending on the outcome of the further consultation, this may rise further). Ofcom continues to maintain that its licence fee proposal has no impact on investment (response, pp. 45-47) on the grounds that setting fees below market value’ would effectively amount to it giving operators an ‘unconditional subsidy’ (p. 47) – an argument which, in the historic context, demands a certain amount of chutzpah to deliver.

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