UK mobile operators pay annual license fees (ALFs) to use mobile spectrum once the initial license term has expired. There are currently three bands subject to ALFs: 900 MHz, 1800 MHz, and 2100 MHz. In July 2024, Ofcom announced it would undertake a review of ALF charges for all three bands. It also invited stakeholders to submit evidence as part of a pre-consultation phase of the review.

NERA was commissioned by Virgin Media O2 to prepare a report for the purposes of submission to Ofcom as relevant evidence for reviewing ALFs. We were tasked with reviewing Ofcom’s methodology for setting ALFs and updating annual payments and estimating the current lump sum market value of spectrum in all three bands. Virgin Media O2 also asked that we consider the implications of the 5G era decline and convergence in prices paid for spectrum worldwide, a trend we identified and analyzed in NERA’s 2024 book Round-by-Round: Learnings from the First 35 Years of Spectrum Auctions.

Since 2016 there has been a significant decline in the prices paid for mobile spectrum worldwide, particularly in the 5G awards era. Prices for mobile bands below 4 GHz have converged, with a notable decrease in the value of low-band spectrum (sub-1 GHz) and lower mid-band spectrum (1800 and 2100 MHz).

For the 900 MHz band, our report recommends setting the ALF at the lower of the unadjusted 700 MHz UK benchmark of £14.0 million per MHz or 25% above the 1800/2100 MHz lump sum value. For 1800 and 2100 MHz, we suggest a common ALF value of around £9.3 million per MHz.

The report proposes using a CPI-X model for future annual fee adjustments, with X set equal to CPI, effectively resulting in a zero annual adjustment. This approach aims to prevent future misalignment between ALFs and market values, considering the likelihood of continued spectrum price declines and inflationary conditions.

The report highlights the need for Ofcom to revise its approach to setting and adjusting ALFs to reflect current market conditions and prevent overstatement of spectrum values. By adopting the recommended changes, Ofcom can ensure ALFs are set at a conservative estimate of full market value, minimizing the risk of overcharging mobile network operators.

This report serves as a critical input for Ofcom’s review process, providing evidence-based recommendations to align ALFs with the evolving landscape of mobile spectrum pricing.