Why spectrum licence renewals are key to hitting Europe's Digital Decade targets

Gabriel, our industry regularly highlights the importance of 5G pioneer spectrum availability and affordability, but this report focuses on spectrum licence renewals. Why is that?

The availability and pricing of new 5G spectrum bands is, of course, critical to enabling communication service providers (CSPs) to invest in new mobile network coverage and capability. The report looks at the different components of spectrum pricing and urges policy makers and regulators to keep this holistic view of spectrum costs – the Total Cost of Spectrum Ownership (TCSO) - in mind as they develop policy. This is as important for guiding policy on the renewal of existing licences as it is for new spectrum assignments.

This report focuses on the renewals side of the equation because it rarely gets the same attention and yet there are many mobile spectrum licences coming to term over the next few years. Getting policy right in this area can be a key lever for incentivising investment and helping deliver on Europe's connectivity ambitions.

What's the link between Europe's Digital Decade connectivity targets and spectrum pricing?

With the European Parliament now having signed off on the Digital Decade Policy Programme, Europe will have a clear target for wireless connectivity: "all populated areas are covered by next generation wireless high-speed networks with at least 5G equivalent performance".

That is an impressive statement of intent but represents a massive investment challenge for European CSPs as their return on capital is often below its cost.  Smart policy on spectrum pricing can rebalance the cost versus return dilemma and incentivise investments, helping bridge the connectivity gap and, in turn, drive progress towards achieving the EU's Digital Decade and Green Deal ambitions.

Ensuring spectrum renewals are aligned with Europe's Digital Decade targets

Explore the report

The reports points to the Total Cost of Spectrum Ownership - what does that consist of and why it is so important to design award processes and renewals with this in mind?

There are three components to the TCSO:

• auction payments
• annual licence fees
• indirect licence costs including those generated, for example, by the need to meet coverage obligations

We believe it is very important for policy makers and regulators to factor in these different elements and the interplay between them. A CSP will only seek to acquire spectrum if the TCSO is lower than the spectrum’s value to it. Consequently, the true ‘reserve price’ in an auction is the sum of the auction reserve price, annual licence fees over the licence period, and indirect licence costs – if one is high, the others should be reduced to account for this. That is why the report recommends trading off auction fees and/or licence fees for coverage obligations. And we would agree that that is a sensible approach from governments looking to put connectivity at the heart of their green growth agendas.

How significant are spectrum costs when compared to total CAPEX?

Very significant. The reports suggests that spectrum costs equate to 7 percent of mobile service revenues on average across Europe. Given that the total capital intensity of European mobile CSPs is estimated at around 18 percent, spectrum costs are broadly equivalent to an average of 35-40 percent of capital expenditure.

Barclays recently reached a similarly conclusion pointing to spectrum costs representing about 30 percent of mobile capex and 5-10 percent of CSP's free cash flow.

The report also refers to a "spectrum tax". What is meant by that?

Spectrum is an essential input to the provision of mobile services – mobile CSPs' businesses cannot exist without it. It follows that the associated costs can be considered as an additional form of taxation on the industry – a ‘spectrum tax’. This is particularly true of spectrum renewal costs – specifically, annual licence fees and one-off fees for previously assigned spectrum. While this spectrum is required for continuity of services and, over time, will be re-farmed to more spectrally efficient technologies, it does not directly enable the provision of new services or open up new revenue streams.

Why are existing spectrum holdings so important to CSPs?

CSPs require a portfolio of low-, mid- and high-band spectrum and need to acquire new spectrum and retain existing spectrum to maintain a competitive spectrum portfolio. Renewal is particularly important because:

• it affects CSPs’ short-term ability to continue offering 2G, 3G & 4G services
• there are pre-existing equipment deployments so comparatively less capital expenditure is required to use the spectrum

The spectrum to be renewed commonly forms an integral part of CSPs’ spectrum portfolios, without which they would be unable to offer a full set of services to customers. Given the size of the risk, any lack of clarity or timely information over how expiring spectrum licences will be re-assigned and at what cost, leads to uncertainty that impacts investment, particularly when the licence is close to term.  

It is important for mobile CSPs to have confidence that spectrum renewal processes will enable them to retain key spectrum bands at a reasonable price so that they can focus their resources on deploying 5G and enhancing mobile network coverage.

What should policy makers and regulators have front of mind when organising spectrum licence renewals?

The report sets out a series of detailed recommendations and points to specific examples of global best practice in this area. I would see the following three areas as key:

First it is important to define renewal processes and conditions well ahead of the licence expiry date to help CSP's plan and provide a level of certainty to help investment planning. Second, regulators should set as a clear objective of reassignment the incentivisation of investment rather than revenue maximisation. Finally, when it comes to the duration of renewed licenses indefinite is best as it allows longer for amortisation and avoids ‘dead periods’ before expiry. At a minimum, licences should have a duration of 20+ years as set out in the European Electronic Communications Code.

Where else should policy makers focus their attention?

The focus must be on maximising private investment incentives and accelerating and amplifying investments with carefully targeted tax incentives and public funding. Governments should enable innovation, promote green and digital transformation across public services and industry, and support the adoption of digital solutions by citizens and businesses. Let me highlight three policy areas from many.

First, unnecessary obstacles to building out networks remain and the European Commission's forthcoming Connectivity Infrastructure Act proposal could play a key role in focusing national and local authorities’ efforts to remove them. Facilitated access to more public infrastructure and streamlined planning and license processes would certainly help.

Second, Europe needs to revisit its approach to consolidation with competition authorities placing greater emphasis on longer term dynamic efficiencies and specifically assess how a merger can enable a ramp up investments and innovation. Any remedies should be also handled with care as these can deter investment and undermine the gains from the merger.​

And finally, we need to ensure that 5G's unique capability to deliver tailored connectivity to support multiple new use cases is not unnecessarily constrained by a lack of clarity or inflexibility in national regulatory authorities' application of the EU's Open Internet Regulation.

Working in partnership industry and governments can achieve limitless connectivity, to improve lives, redefine businesses and pioneer a sustainable future in line with Europe's green and digital agendas.

Related reading

Learn more about the key principles of spectrum licencing.

Find out more about spectrum management.

Find out why harmonized and unrestrictive regulatory conditions are pivotal for future spectrum.

Blog post: What you need to know about spectrum licensing.

Explore the report: Ensuring European spectrum renewals are aligned with Digital Decade targets