Brace yourselves, telcos: Ofcom triples cost of 2G spectrum holdings

Ofcom has set out charges for mobile operators who want to keep the 2G spectrum they were allocated in the '80s, and it's about triple what they're paying now.

Numbers are in millions of pounds, and will go up every year

Following the 4G auction, the problem remains of allocated spectrum; frequencies which were handed over to network operators for nothing to kickstart the mobile revolution and are now extremely valuable. So operators who want to hang onto their allocations will have to stump up an annual fee indefinitely, and Ofcom is consulting on what exactly that fee should be.

The news shouldn't come as a shock to the operators. Though they'll no doubt dispute the numbers, the premise of an annual fee calculated from the estimated market value was proposed – and agreed – back in December 2010, but the details will provide plenty of scope of argument. And with millions of pounds at stake, there's every reason to argue.

The problem goes back to 1985, when "Racal Vodafone" (as it was known in those days) and Cellnet were allocated bands at 900MHz in which to run competing mobile networks based on GSM technology. They were joined by Orange and Mercury (remember them?), which were given bands at 1800MHz in 1990, with Vodafone and Cellnet getting small slices of 1800MHz too.

Then came the 3G auctions of 2000, and suddenly radio spectrum was an extremely valuable commodity.

With refarming (which allows any technology to be deployed in any band) those chunks of spectrum became a political hot potato as Three – the only operator not to get allocated spectrum – called for restitution and EE (which ended up with most of it) got a 12-month monopoly on 4G.

The incumbents do pay an annual fee for their allocated spectrum – it's just not very much and certainly not market rates. Three pays nothing, but once it finishes buying spectrum off EE, it too will face the annual charge.

The new fees are calculated purely on the value of the spectrum, which Ofcom pegs at £25m per Mhz for the 900MHz band and £15m for a MHz at 1800 where propagation isn't quite so good.

What the regulator has not counted is the size of the holding or how useful it is, which is bad news for Vodafone and Telefonica, whose holdings at 900MHz are stripped between them – preventing either having access to contiguous blocks suitable for 4G, at least until they exchange some bands.

The rates are also pegged to the Retail Price Index, so will rise every year and continue to do so for at least the next 29 years. The only way an operator can avoid paying is to sell the band, or hand it back to Ofcom, which can then auction it off and stop collecting annual rates.

The numbers aren't very surprising, and the operators are certainly braced to pay them, but with the consultation (PDF, long) open until 19 December, expect to see the network operators fighting to reduce them every step of the way. ®