July 2006

The "cost" of broadcast spectrum - will spectrum pricing hit broadcasters?

The "cost" of broadcast spectrum - will spectrum pricing hit broadcasters?

Protestations from various media owners of their devotion to the free market may soon be tested if plans by UK media regulator Ofcom for Administered Incentive Pricing (AIP) for spectrum are taken up widely elsewhere.

Initial plans to introduce this for broadcast spectrum were delayed this month but UK broadcasters still face hefty charges starting in 2008 for radio analogue spectrum, 2012 for commercial radio digital spectrum and 2014 for TV digital spectrum (analogue is to be turned off in 2012) under proposals not put up for consultation (See RNW Licence News Jul 30).

Regarding the introduction of spectrum charges for analogue radio, Ofcom says existing fees for commercial broadcasters - based on population coverage- "already reflect AIP principles to a significant extent" and thus it anticipates that the charges will only have a significant effect on the BBC. In addition it says that it intends to apply AIP immediately for any new terrestrial services unless the spectrum is acquired through an auction.

Figures from Ofcom in its consultation document indicate that UK broadcasters have around a 40% share of UK spectrum below 1GHZ whilst mobile operators have 7% and even including spectrum up to 3GHZ they have only a little more spectrum than the broadcasters. Bearing in mind that the UK mobile operators in 2,000 paid GBP 22.5 billion - around USD 42 billion at current exchange rates for 2G and 3G spectrum there is obviously significant value tied up in broadcast spectrum.

Ofcom says that its intention in introducing spectrum pricing is to ensure through cost mechanisms that it is efficiently used - as it puts it: "Any use of spectrum imposes an opportunity cost on society - the value foregone of alternative use. This is because spectrum is finite and use is exclusionary."

Manageable but not negligible.

The kind of sums being spoken about for the UK are of the order of GBP 32 - 48 million (USD 60 - 90 million) for the BBC digital TV services; around GBP 8 - 12 million (USD 15 - 22 million) for the ITV and Channel 4 public service digital multiplexes and GBP 10 - 20 million (USD 19 - 37 million) for the commercial multiplex operated by ITV; and a further GBP 20 to 40 million (USD 37 - 75 million) for the remaining UK multiplexes- a grand total of GBP 70-120 million (Radio on a pro-rata basis for the spectrum used - see below - would be liable for around GBP 5.3 - 9.2 million (USD 9.9 - 17.1 million).

We have concentrated on TV in the examples above because it is more demanding of spectrum - at the time of digital switchover planned for 2012 Ofcom estimates that TV will be using around 256 MHz of spectrum in the UHF Bands IV and V, down from its current 368 MHz whilst digital radio will be using around 9.5 MHz, up from the current 12.5 MHZ.

The figures above are certainly manageable but they could dent profits significantly and they raise a further question, that of the degree that there should be a discount to normal prices because of the constraints faced by broadcasters in their use of the spectrum they lease and also because of the value generated for society by the broadcasters, particularly by public service broadcasters.

In the UK public service broadcasters argued that they should be exempt from AIP because it would be less efficient to charge it and then have to provide additional funding for public service broadcasts but they lost this argument.

Success so far.

Ofcom claims that its policies in regard to AIP have already had some success with the release by users of some 28MHz of more valuable spectrum (<3GHz) and 160MHz of second-tier spectrum (3-10GHz) including 12MHz of spectrum from the Ministry of Defence - saving it GBP 3 million (USD 5,6 million) a year; 76MHz of spectrum returned by private sector licensees and a reduction of a half in the number of fixed links in the 11GHz band reflecting a move to more efficient technology.

But what of public service value?

Ofcom's view of this is a market one. It takes the view: "There is no economic merit in discounting the level of AIP applied to broadcasting uses of spectrum, notwithstanding that broadcasting delivers societal value in excess of the private value enjoyed by its providers" and says that it has provisionally conclude "…that it is both practical and appropriate to apply AIP to the spectrum used for terrestrial broadcasting…"

It then says the "most significant issue with applying AIP to spectrum used for broadcasting is its potential impact on the financial capacity of broadcasters to deliver PSB and other socially desirable, but perhaps commercially non-viable, broadcasting services. This raises the challenge of how to maintain the desirable level of such services once AIP has been introduced."

On that latter matter Ofcom is not specific, commenting that "there is plenty of opportunity, between now and when we propose to introduce AIP for other policy reviews to reflect upon the likely impact of our proposals and to make appropriate provision to maintain the desired level of services or make alternative policy choices."

The overall result of AIP.

Looking at the manner in which Ofcom has proceeded so far, it would seem that much will depend on changes in technology but that there will be a general tendency to move towards pricing spectrum according to its market value rather than its traditional use. This seems likely to increase the costs to broadcasters as spectrum is finite and thus its value is almost certain to increase as technology increases demand for it.

Certainly charging for spectrum will provide incentives to develop technology to use it more efficiently but this has limited potential for broadcasters - very little for those using analogue spectrum and not much more for digital broadcasts except perhaps through the development of software-defined systems that allow a broadcaster to change frequencies according to where spectrum is available and receivers to switch accordingly.

We therefore see a potential for significant pressures on broadcaster at a time when other developments are already making things difficult.
As a result while on the one hand we go along with Ofcom in agreeing that setting a price for spectrum, whoever uses it, is likely to increase the economic efficiency of allocation on the other we are concerned that due value be assigned by society in general to broadcasters.

That indicates to us that broadcasters need to think hard about how far they can justify their use of airwaves, a use that of necessity means it cannot be available to others.

We do think however that the emergency value of radio needs to be an essential part of any such calculations. After all it may not matter that much in the ultimate analysis that someone can't watch MTV or listen to the latest hip-hop but it could be a matter of life or death when there is no power because of a catastrophe - at which time people wouldn't be watching the former or sensibly be listening to the latter -that there is information available to a battery-powered radio receiver.

On that basis alone some radio spectrum needs to be reserved for emergencies whatever the cost: How it is done is a matter for discussion - it could be subvention of the spectrum cost for a station on the basis that its programming can be pre-empted without warning or a number of other ways - but that radio be regarded as essential for information in such cases seems to us self-evident.

What you think? Please E-mail your comments.

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