Confidential Study into the potential application of Administered Incentive Pricing to spectrum used for Terrestrial TV & Radio Broadcasting Final Report for Ofcom Indepen and Aegis October 2005 Indepen Diespeker Wharf 38 Graham Street London N1 8JX Telephone +44 (0) 20 7324 1800 Facsimile +44 (0) 20 7253 4949 http://www.indepen.co.uk Final Report - Confidential This report was prepared by Indepen and Aegis for Ofcom. Dr Damian Tambini, head of the Programme in Comparative Media Law and Policy at Oxford University, provided input on issues concerning the public value of broadcasting. Indepen is a management and economic consultancy providing advice and assistance to organisations addressing the challenges of regulation, deregulation, competition, restructuring and internationalisation. Indepen understands government and regulation, as well as companies and their investors. Based on this knowledge, we challenge and develop policies that seek to reform and align incentives. We work in this way to promote both public and private value, with clients in the EU and elsewhere in the world. Further information can be found at www.indepen.co.uk Aegis Systems Ltd provides consultancy services relating to regulation and use of the radio spectrum. The company has expertise in all types of radio systems and is able to undertake work ranging from strategic issues to detailed technical analysis. The company comprises six full time staff, all of whom are Chartered Engineers and have collectively more than 130 years of consultancy, regulatory or industrial experience relating to the management or use of radio spectrum. Further information can be found at www.aegis-systems.co.uk. Project team Phillipa Marks (Indepen) Brian Williamson (Indepen) Justine Bond (Indepen) John Burns (Aegis) Richard Rudd (Aegis) Advisor Dr Damian Tambini © Indepen, 2005 1 Final Report - Confidential CONTENTS Summary ................................................................................................................................... 4 Scope of the study ................................................................................................................. 4 Background............................................................................................................................ 4 Economic issues .................................................................................................................... 4 Demand and constraints on use ............................................................................................ 6 Approach to estimating opportunity costs.............................................................................. 7 Setting AIP from opportunity costs ........................................................................................ 8 Opportunity cost estimates - TV............................................................................................. 8 Opportunity cost estimates - Radio...................................................................................... 10 Conclusion ........................................................................................................................... 12 1 Introduction ..................................................................................................................... 13 1.1 Background................................................................................................................. 13 1.2 This report................................................................................................................... 14 2 Economics of Applying AIP to Broadcasting................................................................... 16 2.1 Introduction................................................................................................................. 16 2.2 Efficient spectrum pricing for broadcasting ................................................................ 18 2.3 Should spectrum pricing explicitly reflect social value? ............................................. 22 2.4 Spectrum as a quid pro quo ....................................................................................... 26 2.5 What are the benefits from spectrum pricing?............................................................ 26 2.6 Conclusions ................................................................................................................ 27 3 Policy Issues in Applying AIP ......................................................................................... 28 3.1 How should AIP be applied? ...................................................................................... 28 3.2 What response should be anticipated? ...................................................................... 30 3.3 What account should be taken of associated policies?.............................................. 32 3.4 Conclusions ................................................................................................................ 35 4 Television – Demand and Constraints............................................................................ 37 4.1 Introduction................................................................................................................. 37 4.2 Demand in UHF TV Bands......................................................................................... 37 4.3 Constraints on changing spectrum use ...................................................................... 43 4.4 Implications for spectrum pricing................................................................................ 47 © Indepen, 2005 2 Final Report - Confidential 5 Radio - Demand and Constraints ................................................................................... 49 5.1 Demand ...................................................................................................................... 49 5.2 Constraints on use...................................................................................................... 54 5.3 Implications for spectrum pricing................................................................................ 59 6 Methodology ................................................................................................................... 61 6.1 Introduction................................................................................................................. 61 6.2 Current approach........................................................................................................ 62 6.3 Non-marginal spectrum changes................................................................................ 64 6.4 Use of market information .......................................................................................... 65 6.5 Setting prices using opportunity cost.......................................................................... 67 6.6 Conclusions ................................................................................................................ 68 7 Estimating Opportunity Costs and Setting AIP ............................................................... 69 7.1 Introduction................................................................................................................. 69 7.2 UHF TV spectrum....................................................................................................... 69 7.3 Radio .......................................................................................................................... 79 7.4 Conclusion.................................................................................................................. 88 Appendix 1: Measuring the Social Value of Broadcasting ...................................................... 90 1. Introduction................................................................................................................. 90 2. Measurement of Social Value in Policy Context......................................................... 90 3. Conceptual Frameworks for Measuring Social Value of Broadcasting ...................... 94 4. Methodologies: Summary.......................................................................................... 97 Bibliography ....................................................................................................................... 102 Appendix 2: Opportunity cost calculations ............................................................................ 103 1. Calculations for UHF TV spectrum: DVB-H used to deliver TV services ................. 103 2. Opportunity Cost Band III: DMB used to deliver multi-media content...................... 108 3. Opportunity costs for analogue and digital TV services ........................................... 110 © Indepen, 2005 3 Final Report - Confidential Summary Scope of the study This study is concerned with the application of administered incentive pricing (AIP) to terrestrial TV and radio broadcasting and a key requirement is that it addresses in detail the implications of broadcasting policy for the application of AIP. The study involves • Reviewing previous approaches used to estimate opportunity costs for the UHF TV spectrum • Identifying bands used by radio and TV broadcasting to which AIP might be applied • Considering whether AIP should be applied to spectrum used by broadcasting using a forward looking analysis • Providing a methodology for the calculation of opportunity cost, and so AIP, for broadcasting spectrum, including an analysis