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Need for spectrum trading

2.1 Under the Communications Act 2003, Ofcom has a duty to ensure the optimal use of the radio spectrum in order to further the interests of citizens and consumers. However, the task of managing spectrum has become much more difficult in recent decades as the demand for spectrum has grown for existing uses, and entirely new uses of spectrum have developed. This has meant that there is not enough spectrum for all those wishing to use it. As a result, spectrum management has increasingly involved finding ways of allocating spectrum most efficiently between competing uses and users.

2.2 In November 2003, Ofcom issued a consultation document seeking comments on proposals to introduce spectrum trading which would allow holders of Wireless Telegraphy Act licences to transfer their rights to use spectrum. In addition, the document contained proposals to liberalise the use of spectrum by permitting licensees to change the use of, or reconfigure, their licences in certain circumstances - see Related Items for full document.

2.3 The November document explained how the introduction of trading would enable spectrum to be transferred to, and used by, the user that values it most, thus bringing greatest benefit to the economy. Ofcom believes that the introduction of spectrum trading should have a positive impact on consumers through:

• lower prices for the most profitable and popular wireless services as wider availability of spectrum increases competition and supply;
  
  
• greater choice as alternative suppliers enter the market by acquiring rights to use spectrum; and
  
  
• innovation as entrepreneurs acquire spectrum and offer new services.
  
  

2.4 However, Ofcom also acknowledged in the document that the introduction of spectrum trading could have some less welcome side-effects. These include the risk that spectrum trades could lead to distortions of competition in spectrum markets, or in markets to which spectrum is an input. The consultation sought views from interested parties on the most appropriate design of the trading system so that the maximum benefit could be realised and any risks avoided or mitigated.

2.5 The process through which spectrum trading will be introduced and an explanation of how it will actually work in practice will be set out in a statement to be published at the beginning of July. This will also explain which licence classes will be included within the first phase of trading and set out Ofcom’s proposals for the expansion of trading to a number of other licence classes.

Promotion of competition

2.6 A key goal of the introduction of spectrum trading is that it should help to promote effective competition in the markets in which spectrum is used and thereby encourage efficient use of spectrum.

2.7 Under the EU Framework Directive, which was implemented in the UK in July 2003, Ofcom has a duty to ensure that competition is not distorted as a result of spectrum trading transactions.

2.8 Ofcom recognises that there is potential for individual spectrum trades to lead to a distortion of competition. By allowing companies to purchase more spectrum, trading could lead to the acquisition of market power both in the market for a particular type of spectrum, or in a related downstream market (i.e. a market, like mobile telephony, to which spectrum is an input). Such market power could then be used in ways which distort competition. For example:

• Companies could limit competition in downstream markets by purchasing spectrum which forms an input to the downstream market and then preventing competitors from accessing it.
  
  
• Companies could obtain control of a large proportion of the spectrum necessary for a particular service. They could then seek to distort competition in other related markets by requiring customers to purchase additional products sold by the company when they purchase access to the spectrum. For example, a company holding a large proportion of particular spectrum could force customers to purchase transmission equipment from them along with access to the spectrum.
  
  
• Intermediaries such as spectrum management organisations (SMOs) could dominate access to particular spectrum bands and may then be able to charge excessive prices for access to the spectrum that they control. Users could be forced to pay the excessive prices because their transmission equipment works only on the frequencies controlled by the SMO.
  
  

2.9 The November consultation document described some proposals as to how Ofcom could address potential competition concerns. It briefly explained how the Competition Act 1998 could be applied following the introduction of trading and highlighted some of the potential difficulties of applying competition law to spectrum. The consultation also considered whether Ofcom should attempt to address the acquisition of market power as well as abusive conduct by a dominant party. One proposal, put forward in the document, was for Ofcom to establish a test to assess whether a particular trade of spectrum might be expected to result in a substantial lessening of competition within a relevant market in the UK. Ofcom asked for comments on the appropriateness of such a test and sought views on how it might be applied in practice.

2.10 The November document committed Ofcom to hold a separate consultation on the procedures and substantive assessment that will apply in assessing competition issues in relation to spectrum trading. This document fulfils that commitment to consult. It considers in more detail many of the issues raised in the November consultation. The document takes account of comments received in response to the November document.

Next Steps

2.11 Consultation on the proposals in this document closes on Friday 16 July 2004. This consultation is shorter than Ofcom's standard 10 week period because, following the November 2003 document, it represents a second consultation on this issue meaning that respondents have already had the opportunity to provide comments. In addition, this consultation is focused on a relatively narrow field and consequently Ofcom considers that a 5 week period should be sufficient.

2.12 Following this consultation Ofcom intends to publish a statement, by the end of August 2004, confirming the approach that we will follow to prevent distortions of competition in relevant markets following the introduction of spectrum trading. The statement will take account of comments received in response to this consultation document.

2.13 In addition to the above, Ofcom will issue a statement on the introduction of spectrum trading which will cover the other points raised in the November 2003 consultation document. It is anticipated that this will be published at the beginning of July.

2.14 At the end of August, Ofcom intends to publish draft Trading Regulations which will set out the rules under which Ofcom will permit the transfer of rights and obligations under a spectrum licence. Following a 1 month statutory consultation, it is expected that the final Trading Regulations will be published in November which will allow for the effective introduction of spectrum trading from December 2004.

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