EBU • UER - Technical Review

No. 286 (March 2001)

Spectrum pricing

In the past, not all users of the radio spectrum recognized the need for efficient use of the spectrum. The spectrum auctions for UMTS licences held during the last year have emphasized the fact that the radio spectrum is a valuable resource. It was initially thought that the first auction, held in the UK, would generate about £5 billion (€8.6 billion), but there was so much competition for the spectrum that the five successful bidders agreed to pay the astounding total of £22.5 billion (€ 38.7 billion). The second auction, held in Germany, generated more cash, 99.3 billion DM (€ 50.8 billion), but this was not unexpected as Germany is larger than the UK. In both cases, the "winners" had agreed to pay around € 600 per head of population. The UK and German Governments realized they had discovered a new method of generating huge revenues without upsetting the public – a form of "stealth" tax. Politicians could argue that the mobile phone companies had volunteered to pay these huge amounts of money, even though the mobile operators would pass on these costs to the public in the form of higher call charges.

A consequence of these spectrum auctions was the appearance of various articles in newspapers and trade journals concerning the enormous value of the spectrum currently used for analogue terrestrial TV. These reports assumed that the price per MHz paid for access to the 2 x 15 MHz bands of UMTS spectrum would also apply to the 350 MHz or more used for analogue TV. Such calculations were clearly wrong: the mobile phone operators paid such large amounts of money because they believed that no further spectrum would become available in the foreseeable future. As they would not have paid twice the money for twice the bandwidth, the concept of a price per MHz is fallacious.

Furthermore, although other Governments rapidly set up similar auctions in the hope of replicating the windfall gains of the UK and German Governments, the telecoms industry soon realized that the winners had paid too much, especially given the uncertainty about when UMTS will be successful. The result was that subsequent spectrum auctions yielded very much less – even to the point where some UMTS auctions have had to be abandoned because the number of bidders was less than the number of licences on offer.

Despite this fiasco, it is now certain that Governments will renew their interest in some form of spectrum pricing. Broadcasters will not be exempt from spectrum pricing. Analogue broadcasting currently consumes a great deal of "valuable" spectrum in the VHF and UHF bands, but no one is sure of its value.

Over the years, various Governments have attempted to establish how much spectrum is worth. But it is difficult to find a formula that can be applied to widely differing uses of spectrum, such as mobile phones, broadcasting, private mobile radio (e.g. taxis), amateur radio, emergency services (police, fire, ambulance), aeronautical services and military applications. It is also important to take into account that, in practice, use of the radio spectrum is often subject to severe constraints on its use, which can dramatically reduce its value. For example, in the mid-1980s, VHF Band III was reallocated to mobile radio services in the UK. However, as mobile radio users in the UK were required to avoid interference to broadcasting services in France, Belgium and Ireland, the UK has been unable to make intensive use of this "valuable" piece of spectrum.

At first sight, auctions appear to be the ideal mechanism to determine the value of spectrum. Auctions are widely used to find the market price of items, ranging from ordinary items, such as furniture or cars, to "priceless" objects, such as rare paintings by famous artists. However, the recent experience of spectrum auctions underlines the problem that even the purchasers may not know how much to pay!

Even if auctions are no longer the preferred mechanism, Governments and regulators will increasingly use spectrum pricing as a tool to encourage all users to be more efficient in their use of the spectrum. For example, traditional private mobile radio systems are widely used by taxi firms, but better spectrum utilisation could be achieved by use of more modern technologies (e.g. data rather than voice communication). The prospect of lower licence fees can encourage these taxi operators to change to more efficient technologies – especially if the cost of new equipment for their entire fleet of taxis can be recovered in, say, 3 years through reductions in the licence fees.

In the case of the transition from analogue to digital broadcasting, the calculations are far more complex: firstly, the broadcaster does not own the millions of receivers (which are, by far, the most expensive part of the broadcasting "network") and, secondly, most broadcasters are obliged to operate their analogue and digital transmitter networks in parallel until their Government or regulator decides that the analogue broadcast services can be withdrawn. Most broadcasters would welcome a rapid transition from analogue to digital, but the speed of this transition will be set by others, namely by the public and by Governments.

In the USA, it has been suggested that the FCC should impose punitive spectrum licence fees on broadcasters if they continue to transmit analogue TV services after 2006 (the nominal date set some years ago for the closure of analogue TV). However, it seems grossly unfair to penalise broadcasters who can have little direct influence on the public's adoption of digital TV services.

On the other hand, pay-TV operators have no obligation to provide their services on a universal basis: hence, their timetable for the transition to digital can be based purely on economic factors. In some cases, pay-TV broadcasters have provided free digital set-top boxes to encourage rapid take-up and to permit the closure of analogue pay-TV transmissions. However, this model is obviously not applicable to free-to-air broadcasting – except perhaps to persuade the last few users of analogue services to change to digital. In such cases, who should pay? Should it be the broadcaster, or should it be the new user of the spectrum?

The principle of equitable treatment for all users of the spectrum is essential. Today, there is a disparity between terrestrial and satellite broadcasters: in some countries, terrestrial broadcasters already pay significant licence fees, whereas satellite broadcasters pay very small fees for their satellite up-links and pay no licence fees for the satellite downlinks to the public. This anomaly occurs because satellites are not located within the territory of a national Government and because most satellite services cover many countries. In effect, broadcasters who use terrestrial networks to cover a single country pay far more for their use of spectrum than satellite broadcasters who sterilise the spectrum across half a continent.

It has been argued that spectrum pricing is not necessary for satellite services because broadcasters have to purchase or lease satellite capacity. This argument neglects the fact that terrestrial broadcasters also have to pay for the construction and operation of their terrestrial networks. This unfair discrimination against terrestrial broadcasters needs to be addressed in the near future.

As a principle, spectrum pricing is an attractive option for Governments. It would not be sensible for broadcasters to argue against the general adoption of spectrum pricing if it were applied equally to all users of the radio spectrum. In some countries, spectrum pricing will be applied to the military, which is one of the largest users of the radio spectrum. However, as military activities are funded directly by national Governments, their income will probably be increased by an amount equivalent to the spectrum charges. Such an arrangement would be attractive to free-to-air broadcasters – but it is not very likely!

Philip Laven
Director
EBU Technical Department