Who Will Benefit from the Digital Dividend?

On 13 December 2007 Ofcom published what it described as one of the most important decisions it has ever had to make: how it will award the valuable radio spectrum that will be made available by the switch from analogue to digital television broadcasting, otherwise known as the ‘digital dividend’.  Over the next few years the UK market for wireless communications services is likely to undergo a step-change, as this newly-released radio spectrum is utilised to bring new services to market or to significantly enhance existing services.  Ofcom’s recent statement[1] (DDR Statement) is the starting point for this transformation and will be crucial to the future strategies of current spectrum users such as the mobile operators and the radio and television broadcasters.  It will also be of interest to organisations that may wish to bring new services to market, particularly since Ofcom has confirmed that new entrants will have an opportunity to bid for the newly-released spectrum alongside current spectrum users. 

 

What is the Digital Dividend?

 

The digital dividend is the radio spectrum that will be made available by the switch from analogue to digital television broadcasting.  In the UK, analogue terrestrial television broadcasting currently occupies 368 MHz of prime radio spectrum.  The analogue broadcast signals are being turned off region by region across the UK to be replaced with digital terrestrial television (DTT) signals in a process called Digital Switchover (DSO).  DSO started in Whitehaven, Cumbria in November 2007 and will continue until 2012, when the last region is scheduled to achieve DSO. 

 

DTT is significantly more spectrum-efficient than analogue television and will use only 256 MHz, leaving 112 MHz of unused spectrum.  The way DTT works means there is also some spare capacity within the 256 MHz allocated to DTT, called the ‘interleaved’ spectrum.  The radio spectrum is divided into a number of ‘channels’ and the channel that is currently used for aeronautical radar (Channel 36) is also being cleared so as to be available for new uses.  Together this makes up the digital dividend. 

 

Why is the Digital Dividend so important?

 

All spectrum is not equal – the characteristics of radio spectrum vary according to its frequency.  In broad terms, low frequency signals can travel or ‘propagate’ well over large distances but cannot hold much information.  High frequency signals can carry much more information but do not propagate well and can be blocked by buildings.  The spectrum generally regarded as being of most value in the UK lies between 200 MHz and 1 GHz, because at these frequencies signals propagate well and can penetrate buildings (allowing large areas to be covered at relatively low cost) while at the same time offering substantial data bandwidth.  DTT currently occupies most of the radio spectrum between 470 and 862 MHz, which represents the ‘sweet spot’ in the middle of the prime spectrum range.  The digital dividend is 112 MHz of this ‘sweet spot’ spectrum, and is suitable for a broad range of applications because it combines high data capacity with wide geographical coverage.  The possible uses for this spectrum include high definition (HD) television services, mobile broadband services, mobile television and many others. 

 

Another reason why the digital dividend is so valuable is the scarcity of spectrum and the rarity of spectrum releases, particularly on this scale.  Ofcom expects this to be one of the largest releases of valuable spectrum that is likely to occur in the UK for many years. 

 

Ofcom’s Decisions

 

It is not surprising that there has been considerable interest in Ofcom’s decisions as to how the digital dividend should be awarded.  The consultation process took nearly a year, and Ofcom received over 750 responses from a variety of industry stakeholders. 

 

Ofcom faced a key strategic choice between whether to intervene and select the uses of the digital dividend, or whether to let the market decide how the spectrum should be used.  Historically, use of the UK radio spectrum has been subject to a ‘command and control’ regime, under which the uses and users of the spectrum have been determined by the regulator.  However, Ofcom has now signalled a departure from this approach by deciding to auction virtually all of the digital dividend.  The only exception is for the programme-making and special events (PMSE) sector, as explained later.

 

The adoption of auctions as the method of allocating the digital dividend means that, as mentioned earlier, new entrants will have an opportunity to bid for the newly-released spectrum alongside current spectrum users, such as the existing radio and television broadcasters and mobile operators.  It is unclear how much revenue the auctions will raise, but it is not expected to be anywhere near the £22.5 billion that was paid for the 3G mobile licences when they were auctioned in 2000. Ofcom is keen to stress that the auctions will not be a revenue-raising exercise, but rather that they are intended to allow market mechanisms to determine the best use for the spectrum.

 

In addition to its key strategic decision to adopt a market-led approach, Ofcom’s other specific decisions include the following.

 

·         No spectrum allocated to HD television: Ofcom rejected a strong lobby which argued that much or all of the digital dividend should be set aside for HD television broadcasting.  The argument was that this was necessary to ensure that DTT remained competitive with, for example, the HD services available through satellite. However, Ofcom took the view that, with some reorganisation and with the introduction of new compression and transmission technologies, the spectrum currently allocated to DTT for standard definition (SD) television can accommodate HD television services.  Ofcom is consulting separately on its proposals to reorganise the SD spectrum. 

 

·         No spectrum for more SD television: Ofcom also rejected calls from some stakeholders to reserve further spectrum for SD television broadcasting.  Ofcom was concerned that this might displace other, more innovative uses and users of the spectrum. 

 

·         Interleaved spectrum packages will be suitable for local television: Ofcom believes there is support for some of the digital dividend being used for local television, but that local television operators would not be able to co-ordinate bids for UK-wide packages of spectrum.  Ofcom has therefore decided to package the interleaved spectrum geographically, so that it can be acquired and used for local television.  However, the spectrum will not be restricted to this use.  Ofcom plans to auction this interleaved spectrum region by region following the DSO programme, starting with the Border, Granada, West Country and Wales regions towards the end of 2008.

 

·         No spectrum reserved for mobile multimedia:  Ofcom believes applications such as mobile broadband could be a valuable use of the digital dividend, but saw no case for reserving spectrum specifically for this use.  However, Ofcom promised to package the spectrum in a manner that will enable the widest possible range of uses, including for additional DTT multiplexes, mobile broadband and mobile TV.

 

·         No spectrum will be held back as an innovation reserve:  Ofcom received arguments that some spectrum should be held back for innovative new uses that may be developed in the future.  Ofcom decided not to do this as it felt that the uncertainty over when this spectrum would be allocated could stifle competition rather than promote it.

 

·         Cognitive radio may be used on a licence exempt basis:   Cognitive radio is a new technology which can detect and use unused spectrum without causing harmful interference.  Provided that cognitive radio can be proved to operate without causing harmful interference, Ofcom has proposed that it should be licence exempt, particularly as it may be able to make efficient use of the interleaved spectrum.

 

·         Beauty contest for PMSE package:  As mentioned above Ofcom has decided to reserve a package of interleaved spectrum for PMSE users, such as commercial theatres and event organisers who need access to spectrum for wireless microphones.  Ofcom took the view that the market place for PMSE broadcasting was diverse, and that the users would have difficulty co-ordinating a bid for spectrum at auction. Ofcom will therefore award a single package of interleaved spectrum to a ‘band manager’ to whom PMSE users can apply for use of spectrum.  Ofcom has decided to appoint this band manager by beauty contest rather than auction, arguing that qualitative criteria such as technical and managerial ability will be crucial.

 

Next Steps

 

Ofcom has said that it would like to award the digital dividend as soon as possible.  It has suggested that the auction of cleared spectrum could be held in the first half of 2009, with the award of the geographic packages of interleaved spectrum and the PMSE package being made sooner, possibly towards the end of 2008.

 

Ofcom will publish a second important consultation in Spring 2008 to address the detailed design of the auctions and the terms of the licences that will be ultimately awarded. 

 

International Considerations

 

Europe

 

The DDR Statement reveals an interesting tension between Ofcom’s approach to allocating the digital dividend and the proposed approach of the European Commission.  In November 2007 the Commission published a Communication[2] proposing a common approach to spectrum allocation across the EU on the basis of ‘clusters’ of services in particular spectrum bands.  Essentially, it is proposed that the possible uses of particular parts of the radio spectrum be limited and controlled in the interests of ensuring more harmonised use of spectrum across the EU.  Ofcom’s market-led approach is inconsistent with the approach set out in the Commission’s Communication, and effectively rejects the Commission’s more interventionist proposals.  While not openly critical of the Communication, Ofcom’s statement comments that any pan-European requirements need to be discussed and finalised much more quickly than the Commission currently proposes.  Ofcom also suggests that a common approach across the EU will be virtually impossible to achieve, due to the fact that different Member States have different digital dividends (eg in some countries such as Belgium, the Czech Republic, Italy and Spain, little or no digital dividend has been identified) and are at different stages in the DSO process.  It is unclear whether European communications regulators will ultimately be required to comply with the approach set out in the Communication, and Ofcom has indicated that its award of the UK digital dividend will comply with any mandatory EU measures imposed on it.  However, given the substantial differences between Ofcom’s approach and that of the Commission, it is difficult to see how the two might be coherently reconciled. 

 

The United States

 

DSO in the United States is more advanced than in the UK, with analogue television broadcasts scheduled to cease on 17 February 2009.  The US equivalent to Ofcom, the Federal Communications Commission (FCC) has also decided to auction the US digital dividend, which comprises 62 MHz in the 700 MHz band.  The auction process will have commenced by the time this article is published on paper,[3] and UK observers will be watching with interest to see which companies secure the spectrum.  Incumbent spectrum users such as AT&T and Verizon Wireless are expected to bid, together with new entrants such as Google.  The FCC had been expecting to raise between US$10 billion and US$15 billion from the auction, but there are now concerns that the impact of the credit crunch may mean that companies are not able to bid as much as this. 

 

Is Ofcom’s Approach Correct?

 

Ofcom’s approach was expected, but it remains to be seen whether it is correct.  The digital dividend presents an unprecedented opportunity for new and innovative services to be brought to market, to the benefit of UK citizens.  An open auction process should mean that the widest range of potential users of the spectrum will have the opportunity to bid.  However, complex auctions tend to favour larger organisations because they have greater financial and human resources to devote to the auction process.  If the current spectrum users secure most or all of the new spectrum, will they use it for innovative services or will they use it to improve the quality of their current services?  If they decide to improve their current services, would UK citizens have preferred more innovation?  It is extremely difficult to say at the moment.  Ultimately, Ofcom’s approach will be judged several years after the auctions when the wireless services available in the UK market are compared with those available in other digital dividend countries.  If the quality and range of UK services suffer by comparison, Ofcom’s approach to awarding the digital dividend is likely to be criticised.

 

Sam Parr is a Senior Associate in the IT/Com Group at Baker & McKenzie LLP, London:

sam.parr@bakernet.com