We’ve done it! The 4G spectrum auction process has finally got under way in the UK, with the qualifying bidders having been announced[1] and Ofcom expecting new 4G services to go live around May/June of this year. But the road to conclusion of the 4G spectrum auction has been a long and winding one, raising numerous questions about spectrum policy and spectrum management in the UK. But will the results of the Government’s on-going communications review result in any legislative changes in relation to spectrum management?
Background
Radio spectrum is fundamental to the success of the communications sector. Whether you are making calls, accessing the Internet, or downloading movies whilst on the move, you need spectrum to do so. However, spectrum is also a finite resource, meaning that spectrum management is of key importance to a successful communications sector, an importance which is also reflected in the Government’s ‘Digital Britain’ report, which supports the need to release spectrum as soon as possible.
Under UK law, you need a licence to use spectrum to transmit wireless signals, regardless of the services being provided. Different frequencies have different characteristics and are therefore suitable for different types of services, but TV and mobile services generally operate in the same frequency ranges. Over the years, this has caused a bottleneck of demand for this premium spectrum and, given the further explosion of demand for mobile data predicted to coincide with the launch of 4G high speed services, Ofcom and the Government are under increasing pressure to ensure that this so-called ‘sweetspot’ of spectrum is managed fairly and efficiently.
Spectrum Reform in the UK
It was after the UK 3G spectrum auction in 2000 and the realisation of the high financial value of mobile spectrum (the mobile operators paid around £22 billion for their 3G licences) that substantial spectrum policy reforms were first introduced in the UK.
Until that point, the Government had allocated spectrum in accordance with a ‘command and control’ model. Under this model, it was the Government who was responsible for deciding who should be allocated spectrum, how that spectrum should be used, the services and technologies that the spectrum should be used for, and the length of time for which the spectrum was allocated (ie the licence term). Use of this model at the time of the 3G auction was criticised by operators who felt that they:
· were forced to buy the spectrum when it was auctioned and not when they needed it;
· were obliged to roll-out their services in areas where there was no real consumer demand for them;
· were required to use specified technologies that weren’t the most efficient at the time; and
· were then obliged to give the spectrum back to the Government after 15 years when they would probably just be beginning to see a return on their investment.
Following these criticisms, the Government decided that the ‘command and control’ model was not the most efficient way of managing such a scarce and valuable resource. As a result, it embarked upon a policy of spectrum reform, introducing two new models into the spectrum market and delegating responsibility for spectrum management to Ofcom.
Collective Use
The collective use model opens up a frequency range to multiple users to share without restrictions and without requiring a licence. This model allows providers to use the frequency to provide whatever innovative services they think the consumers might like. Important advantages of the collective use model are low barriers to entry, certainty of access (which in turn can encourage wireless innovations) and lower administrative burdens for both user and regulator. An example of this model in practice is the success of WiFi. Another example of a more complex version of the collective use model is the work being done by Ofcom in relation to TV white spaces. White space spectrum refers to frequencies that are not being used by existing licensees at all times or at all locations. A white space device can make use of these frequencies, provided that the risk of harmful interference to the licensed users of the spectrum can be appropriately managed. Ofcom has been investigating the prospects of access to white spaces in the UHF TV band (ie TV white spaces) since 2007 and is currently consulting on a proposed framework for the operation of white space devices in the UK. Such a framework would be the first of its kind in Europe.
Market-Based Approach
Despite the success of services such as WiFi adopting a collective use approach, Ofcom nonetheless recognised that certain services (eg mobile telephony services) require a lot of capacity and need to be run free from interference in order to guarantee quality of service. In these instances, an individual licence or use right is still required. In contrast to the ‘command and control’ model, under a market-based approach, spectrum is made available to the market and it is the market that has the ability to exploit such available spectrum. An example of this model in practice is spectrum auctions, where the available spectrum is auctioned to the highest bidder(s) but the licences received are service and technology neutral, tradable and of indefinite duration. However, this approach does come with some associated risks. For example, the risk of spectrum hoarding, where licence holders do not use their spectrum but retain it anyway so that it cannot be used by others. To guard against this risk, a few years ago Ofcom introduced the concept of administrative incentive pricing (AIP) whereby licence fees are set at such a level that an operator would not want to retain the spectrum if it didn’t need it. Instead, the operator should be incentivised to sell it on to another market player. In addition, Ofcom has competition law powers to be able to act to prevent anti-competitive spectrum hoarding.
Both of these new approaches to spectrum management were first used in the UK market after the Communications Act 2003, which gave Ofcom its spectrum management powers. However, Ofcom adopted a cautious approach to spectrum reform, beginning by implementing the new models only in relation to less valuable frequency ranges where they could be adequately tested and any issues resolved. It is only in the last couple of years that the reforms have been applied to the all-important mobile and TV frequencies, and it is here that they have been really tested.
The 4G Auction
The digital switchover (the switch from analogue to digital TV broadcasting) has resulted in the so-called ‘digital dividend’. This digital dividend is the radio spectrum that will become available by virtue of the fact that digital broadcasting requires the use of less spectrum than analogue broadcasting. The digital dividend spectrum forms part of the 4G spectrum auction.
The sale of this spectrum has been subject to legal challenges and delays since it was first announced in 2007. In particular, there have been a number of issues with the auction process:
· The broadcasters originally wanted to retain their spare spectrum capacity to enable them to provide HD and local TV services. However, Ofcom maintained that efficient use of new compression and similar technologies would mean that the broadcasters should be able to provide such services using their existing spectrum and without any need to use the spare spectrum. In addition, adoption of a market-based approach means that there should be a presumption in favour of releasing unused spectrum as soon as it becomes available and letting the market find a use for it.
· For historic reasons, each of the current mobile network operators (MNOs) has differing spectrum holdings, leading to disagreement about the ‘fairness’ of one MNO ending up with more spectrum than the others. For example, the results of the 3G auction in 2000 meant that the ‘new entrant’ (Three) only holds 3G spectrum (ie spectrum in the 2100 MHz band) and does not hold any spectrum in the 900 MHz or 1800 MHz bands. As a result, Three currently holds significantly less mobile spectrum than the other MNOs. Numerous legal challenges and threats of legal challenges have therefore been raised by the MNOs themselves, causing multiple delays to the auction process.
· In 2010, two of the MNOs in the UK (Orange and T-Mobile) merged. Although ordered to divest some of their merged spectrum holdings by the European Commission as a condition of their merger approval, the merger nonetheless had an impact on the UK 4G spectrum auction process.
· Finally, Ofcom issued a decision not long before the start of the auction process allowing Everything Everywhere to launch its own 4G services ahead of the auction start date. This decision incensed the other MNOs and once again resulted in the threat of multiple legal challenges.
Future legislative reforms?
As a result of these issues and delays, the UK has now fallen behind its international peers in Europe (and much of the rest of the world) in relation to the allocation of 4G spectrum. At a time when the Government is reviewing the Communications Act and other legislation relating to the communications sector, the question is once again being asked: are current legislation and spectrum management policies ‘fit for purpose’, ie able to deal with the efficient allocation and use of this valuable resource?
Imposing international obligations?
The success of WiFi has been held up as a shining example of the way in which a collective use model can work for the benefit of consumers and service providers alike. But the success of the collective use model often depends upon other countries using the same frequency ranges for similar services. Manufacturers need to be able to take advantage of economies of scale in order to be able to put devices on the market that consumers can afford. Lobbying at the national/Ofcom level is therefore not enough. Stakeholders now want to know what Ofcom is doing at an international level to promote coordinated spectrum policy. Should there be express duties and obligations on Ofcom in relation to its international activities in this area? In actual fact, Ofcom already has a duty in relation to the representation of Government in the international arena and it therefore seems unlikely that the Communications Review will produce any substantive legislative reform in this area. It would perhaps not be surprising though if the review resulted in a requirement for greater transparency and consultation around the detail of Ofcom’s activities in the international arena.
Reducing legal challenges?
As discussed above, the numerous legal challenges launched by MNOs against Ofcom in relation to the 4G auction have resulted in lengthy delays to a process that was first intended to be undertaken in 2007. In 2011, partly in response to concerns that the telecoms appeals process in the UK currently goes beyond what is required by the EU Directives, and partly in response to the numerous legal challenges being launched by MNOs, the Government announced plans to reform the telecoms appeal process in order to try and reduce: (a) the number of challenges being launched; and (b) the length of time taken to conclude each legal challenge process. The Government proposed that the basis of legal claims (to the Telecoms Appeal Tribunal) should be changed from a full review on the merits of the case to something more akin to a judicial review basis. This proposal was subsequently dropped and the Government instead focussed its efforts on pushing through the 4G auction process, possibly safe in the knowledge that it would be a very brave judge who would unwind the whole auction once it had taken place. However, it is still possible that legislative reform of the appeal process could return as part of the Communications Review.
Action against spectrum hoarding?
The key importance and value of spectrum has led once again to concerns around spectrum hoarding. In particular, there are concerns about the amount of spectrum that will be held by each of the MNOs following the 4G auction, and the Government is worried that the market may not be best placed to decide how to allocate and use spectrum after all. Whilst competition law powers and administrative incentive pricing (AIP) may go some way to dealing with any hoarding problem, the Government has also been looking at express anti-hoarding powers. With the aims and objectives of a ‘Digital Britain’ in mind, would compulsory purchase orders and ‘use it or lose it’ spectrum obligations be a better solution to ensure the efficient use and management of spectrum? Unfortunately, there are inherent difficulties with this type of approach. It would be very challenging for the Government or Ofcom to decide when and if one operator was using spectrum less efficiently than another operator might. Similarly, how would the Government or Ofcom be able to decide that an operator was hoarding spectrum rather than simply taking time to develop its spectrum plans or get financing together before using its spectrum? These types of issues mean that it is unlikely that any substantive legislative reform in this area will be introduced as a result of the Communications Review. Administrative incentive pricing (AIP) was introduced into the UK market specifically to mitigate the risk of operators hoarding spectrum and Ofcom already has the power to revoke licences for spectrum management purposes. Perhaps more likely than reform is some regulatory clarification of what those spectrum management purposes might be as, to date, there have been no such revocations undertaken by Ofcom.
Responsibility for spectrum management?
Looking back just a few years, it was clear that Ofcom was in charge of spectrum policy and spectrum management. However, the difficulties encountered by Ofcom with the 4G auction have muddied the waters regarding this allocation of responsibility. In 2010, the Government issued legislative directions to Ofcom requiring it, inter alia, to auction the 4G spectrum as soon as possible. This was the first time that the Government had utilised its power to direct Ofcom to take specific actions. Was this a sign of the Government taking back spectrum management responsibilities and returning to the days of command and control? It seems unlikely that the Communications Review will result in Ofcom being relieved of its spectrum management powers. However, the Government has clearly become frustrated with the current process and such frustration may result in it being more willing to step in and issue directions whenever it perceives there to be an issue in the future.
Comment
Overall, it seems unlikely that the current Communications Review will result in any major overhaul of legislation in relation to spectrum policy and spectrum management. However, the saga of the 4G auction process has clearly shown that there are issues with the current policy and fine tuning of its implementation, and some regulatory clarification could be required if the UK is to avoid falling even further behind its international peers in relation to the management of this hugely important resource.
Amanda Hale is a partner and Miriam Everett is a professional support lawyer in the Global TMT practice at Herbert Smith Freehills LLP.
[1] The list of qualifying bidders is: Everything Everywhere; PCCW (a major Hong Kong telecoms conglomerate, operating through its subsidiary HKT); Hutchison Whampoa; MLL Telecom (a telecom network supplier founded in 1992 and based in Marlow, Buckinghamshire); BT (via its subsidiary ‘Niche Spectrum Ventures’); Telefonica; and Vodafone.
