On 10th October Ofcom launched a consultation on annual licence fees for 900MHz and 1800MHz spectrum. Licences for this spectrum have been issued with an indefinite term and are subject to payment of annual licence fees. Ofcom has been directed by the Government to revise these annual fees to reflect the full market value of the spectrum concerned, in particular taking into account the prices achieved in the recent 4G auction for similar spectrum.
Winning prices in the recent 4G auction were determined individually for each bidder and applied for the package of spectrum won by that bidder. In a combinatorial auction package prices cannot be simply broken down into prices of blocks of spectrum in the individual bands that make up the package. In order to find price points for lots in the 800MHz band and the 2.6GHz band, respectively, DotEcon and Ofcom developed two methodologies to arrive at a price per lot, namely:
- a linear reference price methodology, which attempts to establish a price that is as close as possible to a market clearing price at which each bidder would demand exactly the package it has won in the auction rather than any of the other packages on which they have bid, whilst raising exactly the same revenue with those prices per lot as in the actual auction; and
- an ‘additional spectrum methodology’ that is based on the concept of a shadow price and looks at the impact that adding the spectrum under consideration to the auction would have had on the outcome.
More information about the two methodologies and the results can be found in our report which is available here.
Another key input considered by Ofcom in determining the market value of these bands is an analysis of the prices that have been achieved in spectrum auctions and other transactions elsewhere. DotEcon was commissioned of Ofcom to examine the available evidence of value achieved in international awards of spectrum (using data from our in-house Spectrum Awards Database), renewal fees set by governments and regulators in other jurisdictions, and spectrum values established in secondary markets. Our report is available here, and more information about our database can be found here.
Based on this evidence, Ofcom has proposed an annual licence fee of £1.99 per MHz for 900MHz and £1.19 per MHz for 1800MHz frequencies. This represents a four to five and a half fold increase over current annual licence fees.