Oliver Helm

Category: Broadband Market Commentary

Spectrum Licensing – The barrier to entry

Established by the Office of Communications Act in 2002 Ofcom is, among other things, responsible for issuing, policing and, importantly, costing spectrum space in the UK.   It is often accused of being inefficient and overly costly with accusations of a “top heavy salary bill” and “extravagant offices” being levied at it continually.  More importantly though, it can be argued that its inefficient and high-cost spectrum licensing is stifling competition, innovation and growth in the UK’s telecommunications market – something that with the impending cloud of Brexit and an increasingly skills-based economy is an even more concerning situation.

Ofcom reports that, for the year 2014/15, total spectrum management costs totaled just under £51.5 million, whilst fees totaled just over £267.9 million (Source: Ofcom: Spectrum management costs and fees 2014-15).  Removing the MoD’s contribution from this (as this is essentially just public money moving hands) Ofcom brought in a spectrum licensing surplus of a little over £61.5m.  Two questions arise from this:

Firstly, it is hard to see how the costs of managing such a fundamentally intangible asset can be so high.  Spectrum is, after all, not a physical asset that has to be maintained.  Applications for frequency use require a comparatively binary decision as to whether or not the requested assignment is (or should be) available within an area.  Applying for a licence, at the moment, however is not a straight-forward process.   Fixed wireless link licence details still largely have to be submitted in paper form (albeit though PDFs) and are manually processed by Ofcom’s spectrum licensing team.  This paper-pushing exercise is slow, ineffective and one directional, often incurring a high opportunity-cost loss to businesses.  A self-administered, truly digital, solution with instant licence approval and payment would be an obvious solution to this problem.

Secondly, these surplus generating licence fees are simply a tax on business, equivalent to the rates / “fibre tax” paid on traditional infrastructure.  As with any tax, this has two effects. In the first instance it pushes up the cost to the licesncees’ end users and in the second it reduces the capital companies have availed to spend on infrastructure improvements and R&D.  A fraction of the £199.6 million annual licence fees (source: Ofcom: Annual licence fees mobile spectrum) set for the mobile spectrum in 2015 would go a long way to improving coverage and stability in a now vital communications channel.  And that’s only the  It is a regularly voiced concern of the imbedded mobile networks that they are forced to focus on returning their investment in this extortionately priced band when they could be looking at pushing forwards the next generation of service delivery – namely 5G.  For the smaller companies, and in particular wireless ISPs, who are innovating in lower-cost delivery solutions, this tax adds substantial extra costs, which in a B2C environment, can be hard to justify.

It is therefore easy to argue that the high costs Ofcom places on spectrum licensing, combined with the bureaucratic costs associated with processing a licence, act to discourage effective competition and innovation in the market.  Access to the mobile operators’ spectrum space is cost prohibitive to anyone other than big business, and for WISPs looking to stabilise outside the self-coordinated licence bands the costs significantly hamper growth.  With the self-coordinated bands looking likely to become increasingly saturated (and in the case of the 5Ghz spectrum telcos still being the secondary user) the problem looks likely to increase further.  If the UK really wishes to invest in the digital economy and to truly connect 100% of the country to “Superfast Britain”, removing or reducing these barriers would be a good way to go.

It can also be argued that Ofcom’s focus is too heavily split.  The numerous amends, clarifications and additions to Ofcom’s responsibilities (the Communications Act 2003, the Wireless Telegraphy Act 2006, the Digital Economy Act 2010 and the Postal Services Act 2011) only serve to muddle the situation further.  Ofcom’s roll appears now to be more focused on reporting and mediation than strategic forethought and spectrum administration.  Is it any wonder that the costs of running the agency are so high?

Perhaps Ofcom is simply too large and dealing with too many areas. A remit ranging from infrastructure reporting to arbitrating and monitoring digital broadcast media and from handling domain name squabbles to oversight of the postal system is bound to spawn a large and bureaucratic machine.  Would an entirely separate smaller, lighter and above all more ‘digital’ agency not be more effective at both managing the current UK spectrum space and planning for its future?  David Cameron certainly though so in July 2009 when he pledged to remove the policy making function and return them to the Department for Culture Media and Sport. Perhaps it’s time to reverse the 2001 decision to form this “super-regulator”.

The Superfast rollout – are supersized grants really the best option?

Fast broadband access has long been regarded as the fourth utility and one that it is increasingly hard to live without.  For both professional and personal interactions we are increasing dependent upon it and with the governments musings around creating a legal right to fast broadband it is only going to become more of a ‘hot button’  and emotive topic.  But the solution perused at present – offering supersized BDUK grants to fund the enhancement and expansion of largely existing infrastructure networks (and largely granted to that of the incumbent BT), is not the solution.

Underlying this debate is the fact that large scale infrastructure upgrades are, and always will be expensive.  BT themselves said it would not be commercially viable to improve their network in some areas without the intervention of government support.  However by subsidising this through grants the true cost of this is masked and the free market, that should encourage and stimulate smaller, innovative firms to compete, is damaged.  Consumer broadband costs largely do not reflect the cost of creating this infrastructure and the ‘bundle sale’, whereby the cost of broadband is made negligible by grouping it in with other services such as calls, TV and line rental, acts only to muddle the position further.

Encouraging large scale, nationwide infrastructure is not always cheaper or more efficient either.  Under the present scheme millions of pounds have been allocated to BT / OpenReach to roll out a high speed network, yet the results have been variable and have by no means provided universal coverage in targeted areas.  Furthermore access to this infrastructure for competing enterprises is woefully limited and bureaucratic, stifling competition – an issue key to the debate on BT / OpenReach’s joint or separated future.  Whist it can be argued that these superseded infrastructure projects and matching grants are keeping prices down for consumers it can equally be argued that completion would have a similar effect.  Whilst grants may be necessary to make connecting some areas commercially viable, reducing the size of these and allowing firms to bit for smaller parts of them is likely to encourage the emergence of competitive, innovative and lower cost solitons.

Smaller networks are also often more efficient, more customer focused and more in tune with the genuine needs and requirements of the communities they serve.  Customer service for these smaller and micro providers is key and, as the BT rollout continues to storm on, a primary area by which they compete.  Where there is an alternative for customers they can, and do, demand a better all round service.  Smaller providers are often far better and more agile at delivering this.

The drive to focus on ultrafast (100Mbps to 300Mbps) is also questionable.  Much is made of this offering, yet recent statistics show take up of these services to be comparatively low (the official statistics can be found here http://media.ofcom.org.uk/facts/).  Ultrafast speeds may make infrastructure improvements look and sound impressive, but at present, are largely surplice to the requirements of the average consumer.  Highly reliability and low contention would be a better focus in the medium term.  Agile providers often will focus on this model but in a market where consumer education is heavily focused on the ‘faster equals better’ model  competing with these high budget marketing campaigns is a hard sell.

It is also easy to forget that a large number of people are still lacking even the basic usable broadband service (10 or 24Mbps) that the grants system was established to resolve.  The much discussed ‘remaining five percent’ is a big number (over a million house holds).  With the trend towards more remote working and the apparent overcrowding of many of our cities this problem is only going to become more apparent.  This five percent is also not only in the rural country side – pockets of London and other major cities suffer from  poor broadband speeds.  Supersized grants have so far failed to make a significant enough impact on these numbers.

Furthermore the scale and administration of these grants makes it harder still for competition in the market to become more prominent.  The size and clout of the incumbent makes them the obvious choice for government and local councils to turn too to meet their obligations in providing superfast connectivity, and deters them from looking to assess and trial alternative methods for the delivery.  Equally these smaller firms may lack the resources to build a pitch of the size and quality of the large providers.  For farmers, the very definition of the rural 5%, the NFU has long supported satellite as the solution as it is both fast, and low cost to install.  Perhaps therefore the answer lies not only in removing or further dividing the grants, but in putting more of the money directly into the hands of the consumer.  By doing so all providers would be forced to compete in a local market, helping to level the field.  Further roll out of the connection voucher scheme would quickly and efficiently encourage this.

Through the current grants provision the tax payer is primarily funding the long term network improvement of a privately owned company and in doing so is support the monopolisation of an increasingly key national infrastructure.  Providing high speed connectivity to all is an admirable idea but is not, through the current method, being delivered.

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