Ofcom has announced it will reduce the Annual Licence Fees (ALFs) that mobile network operators (MNOs) pay for certain spectrum bands in the UK. This reflects mounting evidence that the previous fees no longer reflected the market value of the spectrum. Frontier supported Vodafone during this review, providing economic analysis and evidence that helped inform Ofcom’s final decisions.

In the UK, spectrum for mobile services is auctioned when it is made available for use for mobiles with the auction price reflecting market value. ALFs apply to spectrum which was auctioned a long time ago, meaning the initial licence to use it has expired, or was never auctioned. Ofcom aims to set ALFs at a level that is consistent with what MNOs might pay if the spectrum were auctioned, i.e. market value.

In total, the previous ALFs cost MNOs around £325 million per year. However, following operators arguing that technological and market changes since these ALFs were set implied that overall ALFs are now too high, Ofcom launched a review of ALFs in July 2024.

In December 2024, Ofcom proposed reducing the overall bill by around £40 million. Following further evidence in response to this consultation, Ofcom will reduce the ALFs that MNOs pay by almost £60 million, to a total of around £265 million. These reductions reflected a number of factors including:

·       Lower prices paid for spectrum in recent UK auctions which in turn reflects the higher supply and greater fungibility of mobile spectrum;

·       Evidence that the value of spectrum has not kept pace with recent increases in consumer prices; and

·       Changes to the cost of capital.

Frontier supported Vodafone throughout the Ofcom’s review of ALFs, helping to interrogate Ofcom’s assumptions and present evidence on where and how ALFs had diverged from underlying spectrum values. We provided detailed economic analysis on the drivers of recent inflation, the implications for the real discount rate of recent market volatility, trends in financial performance in the mobile sector, and the implications of technological change for spectrum values.

This engagement helped shape Ofcom’s decision, with Frontier’s analysis cited throughout the final statement.

To find out more, contact media@frontier-economics.com or call +44 (0) 20 7031 7000.