The case for replacing ALFs for UK mobile licensed spectrum

Competition for mobile spectrum has made it a valuable as well as a scarce resource. Given the evolving technological and regulatory landscape, the UK Spectrum Policy Forum (UK SPF) asked Analysys Mason to lead a project reviewing the market mechanisms currently applied to licensed mobile spectrum to help ensure fair and efficient usage. Our team sifted through data and research to conclude that a central aspect of current spectrum management may be an unnecessary hindrance to market development. We therefore support the idea that the UK’s annual licence fee (ALF) scheme for licensed mobile spectrum should be refined or replaced. 

Regulatory mechanisms have not adapted to market and technological change

Market dynamics have changed during the 20 years since the landmark ‘Cave report’ into spectrum management, which transformed the way that regulators (including Ofcom) assign spectrum to users, and paved the way for trading under-used resources on the secondary market.

UK SPF operates as an industry body representing spectrum users and wanted an up-to-date, independent, evidence-based reference source examining the pros and cons of the three market mechanisms (auctions, pricing and trading) as applied to licensed mobile spectrum bands in the UK.

Shedding light through research, discussion and peer review

Analysys Mason undertook detailed research into published material including industry responses to Ofcom consultations and third-party reports; Analysys Mason’s own in-house research and a small number of targeted one-to-one discussions with selected companies active in the UK mobile market. Professor Cave from the original report also provided insight. 

The draft findings of the report went through independent peer review by a group of experts, including three former Ofcom directors, appointed by techUK on behalf of the UK SPF, leading to a broad consensus on the findings from Analysys Mason’s project team and Professor Cave. 

Alternatives to ALFs

While spectrum trading and auctions both broadly stood up to scrutiny (albeit with the possibility of future improvements), the third market mechanism (pricing) was found to be more problematic. ALFs were introduced using the principle of administrative incentive pricing (AIP) to ensure that spectrum licensees meet the opportunity cost of their spectrum holdings, in order to promote the most economically efficient use of spectrum. However, mobile networks are the highest-value usage of the spectrum bands already licensed for mobile use, and the trading framework introduced since the Cave report has meant that spectrum hoarding has not been a feature of the market. The current ALFs therefore provide limited benefit. 

Our report explored a number of alternatives to ALFs – which include simply scrapping the fees altogether, or replacing them with a commitment to invest an equivalent sum in network expansion and improvement. Our research has provided a clear and independent assessment of current mechanisms, and will be used to ensure that the regulation of spectrum is fit for the evolving mobile telecoms market.