Spectrum - Culture, Media and Sport Committee Contents


Written evidence submitted by Ofcom

SUMMARY

Ofcom welcomes this inquiry into spectrum by the Committee. Spectrum is an increasingly important, valuable and finite national resource. As demands on the use of spectrum intensify the efficiency with which it is managed will become more important, and a failure to do so will become more detrimental to consumers, citizens and the economy.

We believe that the release of additional spectrum suitable for the provision of mobile broadband services is much more likely to promote rather than hinder competition in future; nevertheless we have proposed measures in the forthcoming auction for 800 MHz and 2.6 GHz spectrum specifically intended to ensure that competition is promoted.

While none of our statutory duties relate to the generation of proceeds for the Treasury we believe that a well designed competitive auction is very likely to achieve value for money for tax payers. Similarly we believe that our careful consideration of the costs as well as the benefits of any regulatory intervention, as required by our duty to act proportionately, mean that our regulatory decisions, taken following full consultation, strike an appropriate balance between benefits for citizens and consumers and any costs to tax payers and others.

The deployment of next generation mobile broadband services (ie 4G) should offer consumers higher speeds with wider, deeper and more consistent coverage than today's 3G services. Top headline marketed speeds could be up to 60Mbps or more, although typical speeds are more likely to be around 4Mbps and upwards. Coverage should, in time, be significantly better than today's 3G coverage, with 4G services available across more of the country and with better availability inside buildings—approaching if not exceeding today's 2G coverage. Capacity should also be significantly greater than that of today's 3G networks.

The forthcoming availability of 800MHz spectrum makes it entirely possible for next generation mobile broadband services to be widely available across the UK, in rural as well as urban areas. To ensure that this happens, and within a reasonable period of time, we have proposed a coverage obligation that would require at least one mobile network operator to provide next generation mobile broadband services to almost all areas of the UK where 2G voice services are available today, both urban and rural, by no later than the end of 2017 (an indoor service with 95% population coverage). Some stakeholders, as well as a number of Members of Parliament, believe that this coverage requirement should be higher, for example 98% UK population coverage. We are currently considering such arguments carefully, and we will carefully consider any and all additional evidence supporting such a position, bearing in mind the costs as well as the benefits of increasing the coverage obligation.

Ofcom last reviewed the level of licence fees payable for mobile spectrum in 2004. In line with the well established principles of Administered Incentive Pricing (AIP), those fees were set at a level in excess of our costs of administration with the objective of encouraging efficient use of the spectrum. (The mobile network operators pay, in total, approximately £65 million per year for access to this spectrum). Full details of the method used to calculate those fees were set out and consulted on at the time. In line with the government's direction to us of December 2010 we plan to review the level of these fees again in 2012, after the auction, and to set them then at a level that reflects "full market value". (For the avoidance of doubt, we do not believe that we have the power to apply revised fees retrospectively).

Consumers in the UK enjoy some of the best mobile broadband deals in Europe. As a result, consumer take-up of mobile broadband in the UK is ahead of most of Europe. We believe this is because of the good level of competition in the UK today.

Our proposals are intended to promote competition to at least this level in future by ensuring that at least four competitors have sufficient spectrum of the right type to have the opportunity of being a competitive national wholesaler in the market for next generation mobile broadband services. The market situation in other European countries differs, in some cases significantly, from that in the UK, and other European regulators have taken a different approach to the award of this spectrum.

While the technical licence conditions and auction design that we have proposed for the 800MHz and 2.6GHz spectrum are intended to facilitate the provision of next generation mobile broadband services (as the use expected to generate greatest benefit for consumers and citizens), we are not proposing to prohibit the use of these frequencies for other purposes if it turns out that those are more valuable. So far as users of adjacent frequencies are concerned, we are taking particular care to ensure that we understand the potential impact on such users of the deployment of next generation mobile broadband services, and are taking appropriate action to manage and where necessary mitigate those impacts.

Whether the proposed method of spectrum allocation promotes, or hinders, competition in the provision of mobile broadband services

One of the greatest barriers to competition in mobile markets is the scarcity of suitable spectrum, in particular spectrum that has been internationally harmonised for mobile service use and for which there is strong demand for consumer devices worldwide—such as the 800MHz and 2.6GHz spectrum. The award of this spectrum therefore represents a very significant opportunity for competition to be enhanced in future, through both the potential entry of new players into the market and through an overall increase in market capacity.

At the same time we cannot ignore the possibility that one or more players might seek to corner the market in this additional mobile spectrum in order to restrict future competition, or that some other market failure might lead to less competition in future than would be in the best interests of consumers. It is for these reasons that we have already undertaken an assessment of likely future competition in mobile markets post the award of the 800MHz and 2.6GHz spectrum, and proposed ex ante specific measures in the auction to promote competition.

Our key proposal in this regard is that we introduce measures into the auction intended to ensure that at least four players each hold sufficient spectrum of the right sort after the auction to have the potential to be credible national wholesale competitors—what we have termed "spectrum floors". A second proposal is that we impose spectrum caps in the auction so that no one player can acquire so much spectrum through the auction, relative to others, that competition might be distorted in future.

At the same time we are also seeking to promote competition in other ways, for example by proposing to allow part of the 2.6GHz spectrum to be used potentially on a shared low-power basis by up to 10 licensees. This could allow a number of new approaches to mobile broadband service provision to develop and grow; for example providing competitive mobile broadband services in homes, offices, shopping centres and campuses through the use of low power femtocells and picocells, rather than the more traditional high power macrocells.[42]

Overall we believe that our proposals strike the right balance between securing efficient use of the spectrum and promoting competition; in both cases for the benefit of consumers and citizens. We are however currently reviewing stakeholder responses to our consultation and our proposals may change as a result.

Whether the upcoming auction can provide value for money for tax payers and how that should be balanced with benefits for consumers

As a public body, Ofcom is keenly aware of the need to provide value for money for those that fund our work, including tax payers.

Ofcom's statutory duties, in so far as they affect our regulatory decision making, do not include any reference to value for money for tax payers or proceeds to the Treasury arising from the release of any public asset, including spectrum. Consequently these are not matters that explicitly figure in our regulatory decision making. Our main duty in relation to spectrum is to secure its optimal use in the interests of citizens and consumers.

Nevertheless, in practice we believe that a well designed competitive auction is likely to achieve value for money for tax payers when it comes to the awarding of the 800MHz and 2.6GHz spectrum, both as regards the cost of the process itself and in respect to the proceeds from the auction. Evidence from previous auctions tends to support this view.

Perhaps of more significance however is the fact that when taking regulatory decisions we give very careful consideration not only to the benefits that any regulatory intervention might generate for consumers and citizens, but also to the costs that are likely to be incurred, as required by our duty to act proportionately. All of our proposals for interventions in the auction of the 800MHz and 2.6GHz spectrum, for example in relation to the promotion of competition and the proposed coverage obligation, have therefore been arrived at following a careful consideration not only of the benefits of such intervention but also the potential costs. All of this analysis is open to comment and challenge by stakeholders, as part of our consultation process, and we will look carefully at all stakeholder responses before making our final decisions.

We are therefore confident that our final decisions will strike the appropriate balance between benefits to citizens and consumers on the one hand, and the cost to tax payers and others on the other.

The potential for next generation mobile internet services offered by the forthcoming availability of spectrum

The deployment of next generation mobile broadband services (4G services) should offer consumers higher speeds with wider, deeper and more consistent coverage than today's 3G services. Top headline marketed speeds could be up to 60Mbps or more, although typical speeds are more likely to be around 4Mbps and upwards. Coverage should, in time, be significantly better than today's 3G coverage, with 4G services available across more of the country and with better availability inside buildings - approaching if not exceeding today's 2G coverage. Capacity should also be significantly greater than that of today's 3G networks.

Whether the upcoming auction can deliver improved mobile broadband coverage in rural areas, as well as cities

Future availability of the 800MHz band for next generation mobile broadband services definitely has the potential to facilitate the delivery of improved mobile broadband coverage in rural areas, as well as cities. The ease with which mobile networks can deliver services in rural areas depends, in part at least, on the frequencies that are available for the provision of those services. In this regard lower frequencies are preferred, because lower frequency signals tend to travel further than those at higher frequencies, and so wider coverage can be provided for similar cost. The 800MHz band frequencies are almost ideal, being comparable to those used to provide 2G services today at 900MHz.

We therefore currently see no reason why, in due course, the coverage of next generation mobile broadband services should not approach that of today's 2G (voice) services, in both urban and rural areas, which would be a considerable improvement on today's 3G (mobile broadband) coverage levels.

To ensure that this happens, and does so within a reasonable period of time, one of our proposals for the auction is that one 800MHz licensee be required to provide a next generation mobile broadband service (a minimum 2Mbps service indoors) with coverage approaching that of today's 2G networks (covering at least 95% of the UK population), by no later than the end of 2017.

Some stakeholders, as well as a number of Members of Parliament, believe that this coverage requirement should be higher, for example 98% UK population coverage. We are currently considering such arguments carefully, and will carefully consider any and all additional evidence supporting such a position, bearing in mind the costs as well as the benefits of a more extensive coverage obligation than that currently proposed.

Whether licence fees for mobile operators have previously been set at appropriate levels, and how this should be assessed

We last reviewed the level of annual licence fees payable in respect of mobile spectrum in 2004. We did so within the context of a wide ranging review of fees set to encourage efficient use of spectrum—so called Administered Incentive Prices (AIP)—that had previously been set by the Radiocommunications Agency - the predecessor of Ofcom as regards spectrum licensing, and a branch of the former Department for Trade and Industry. Our analysis and proposals were the subject of a full public consultation at the time.

That review confirmed that the fees for mobile spectrum should continue to be at a level in excess of the costs of administration, with the objective of encouraging efficient use of the spectrum in line with our statutory duties, European law, and the, by then, well established principles of AIP. We recognised at the time that the level of those fees would likely need to be reviewed again, once it became possible for new technology to be deployed in the bands, but this was not imminent at the time.

Following this review, the four (now three) mobile network operators with licences to use the 900MHz and 1800MHz spectrum have been paying annual licence fees totalling approximately £65 million per year. (Annual licence fees are not currently payable in respect of the 3G spectrum at 2100MHz as the winners of that spectrum paid upfront for the initial period of those licences, to 31 December 2021).

As with all spectrum licence fees all of these monies go to the Treasury.

In December 2010 the government directed us to vary the existing 900MHz and 1800MHz licences to allow the use of Universal Mobile Telephony Service (3G) as well as Global System for Mobile communications (2G) technology. At the same time the direction also instructed us to carry out a review of the annual licence fees payable in respect of this spectrum after the auction of the 800MHz and 2.6GHz spectrum, and to then set fees that reflect "full market value", having particular regard to the sums bid for licences in the auction. This we will do.

Given that we are required to undertake a fee review in the near future (after the 800 MHz and 2.6 GHz auction), at which point we expect to have considerably better information about the true value of mobile spectrum (as a result of bids in the auction), it would not appear to us to be a good use of our limited resources to undertake an additional review of these licence fees before then.

How the position of the UK compares with other countries, with regards to the allocation and utilisation of mobile broadband spectrum

Consumers in the UK enjoy some of the best mobile broadband deals in Europe. As a result, consumer take-up of mobile broadband in the UK is ahead of most of Europe. We believe this is because of the good level of competition that we have in the UK today. Our proposals are intended to promote competition at at least this level in future, by ensuring that at least four competitors have sufficient spectrum of the right type to have the opportunity of being a competitive national wholesaler in the market for next generation mobile broadband services. The market situation in other European countries differs from that in the UK, and other European regulators have taken a different approach to the award of this spectrum.

The possible impact of the auction on alternative uses for spectrum

The technical licence conditions and auction design that we have proposed for the 800MHz and 2.6GHz bands are intended to facilitate the efficient and competitive provision of next generation mobile broadband services in the near future, since this is the use that is currently expected to generate the greatest benefit for consumers and citizens.

However, we are not proposing to prohibit the use of these frequencies for other purposes in either the short or longer term. Indeed we see it as essential to our statutory duty to secure optimal use of the spectrum for the benefit of citizens and consumers to ensure that it is possible for the use of the spectrum to be both different from that which we as the regulator anticipate will be the most valuable at any given point in time, and for that use to change over time as both technology and markets evolve.

We are therefore entirely content for rights to use this spectrum to be acquired and for it to used for purposes other than next generation mobile broadband if the parties that wish to do so are able to demonstrate the greater value that they expect to generate from this use by out-bidding those that would use it for next generation mobile broadband, although for the moment at least we consider this outcome unlikely.

So far as the users of adjacent frequencies are concerned, we are taking particular care to ensure that we understand the potential impact on such users of the deployment of next generation mobile broadband services, and are taking appropriate action to manage and where necessary mitigate those impacts. Examples of potential impacts include increased interference into digital terrestrial television (DTT) receivers and increased interference into aeronautical radar systems. [I can see Graham's concern but as he says these are the best examples, and some MPs know about them already}.

In relation to the potential interference into DTT receivers we have undertaken a significant amount of technical research and testing to understand, as far as is possible prior to mobile network deployment, the likely mechanisms and scale of potential interference and the possible means of mitigation. We have also identified a number of alternative ways in which such mitigation measures might be delivered in practice. Our work on this to date has culminated in the recent publication of a consultation document[43] setting out the nature and scale of the issue, and putting forward proposals for how it should be addressed. We intend to actively engage with a wide range of stakeholders on this issue over the coming months, prior to us making decisions on these issues later this year.

In the case of aeronautical radar systems, we are actively working with all of the key aeronautical stakeholders to plan and ensure delivery of a coordinated programme of radar upgrades which will make these systems more robust to incoming interference, and consequently capable of operating effectively even after next generation mobile broadband services have been widely deployed. We are at the same time developing rules to ensure that, both in the interim and the longer term, the deployment and operation of next generation mobile broadband systems are appropriately coordinated with the operators of aeronautical radar systems.

June 2011


42   Picocells and femtocells are both examples of small mobile base stations, generally used to provide coverage or additional capacity in particular areas eg inside buildings. Macrocells are the more traditional mobile base stations used to provide coverage and capacity across large areas. Back

43   http://stakeholders.ofcom.org.uk/consultations/coexistence-with-dtt/ Consultation closes on 11 August 2011. Back


 
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Prepared 3 November 2011