PRINT THIS PAGE The digital divided16/07/2008. Source: SJ Berwin. Charlotte McMillan 
The right to use the radio spectrum is a highly prized asset. The economics are obvious: the supply of available frequencies is naturally limited, and, because the spectrum is needed to operate every type of wireless service - from satellites and radars to broadcasting and mobile communications, the demand is huge and growing fast. Even now, the European Commission reckons that the total value of electronic communications that depend on the use of radio spectrum in the European Union exceeds €250bn, or 2.2 per cent of annual European GDP. Getting a share of that market - at the right price - is an attractive prospect. Private equity firms in Europe are among those watching that market with interest, as companies prepare for the next wave of auctions of UK radio spectrum. At present, just under half of the most valuable part of the spectrum (with the optimum combination of range and capacity) is used to broadcast analogue television in Britain. However, television broadcasting around the world is moving to an all-digital model and, in the UK, "digital switchover" will be completed by 2012. That will free up a considerable part of the spectrum - known as the "digital dividend".
But how should such a valuable resource be dished out? Ofcom, the UK's telecoms regulator, has decided to take a "market led" approach to awarding the digital dividend and, with one important exception regarding the Programme Making and Special Events sector, it will auction the spectrum in a way that will allow users to decide how the spectrum should be used, and to create the maximum flexibility and opportunities for different technologies and services.
Many will recall the last bidding frenzy for frequencies in the UK, when five mobile phone networks paid £22.5 billion (€28.4 billion) for 3G networks - some of whom worried soon afterwards that they had paid too much. But, as in 2000, the release of the digital dividend is a major opportunity for the development of new technologies and services. Ofcom has estimated that the potential gains for the UK economy alone from the use of the digital dividend are between £5 billion and £10 billion (€6.3 billion and €12.6 billion) over 20 years.
Consultations have now been launched to ask for views on the proposed methodologies for the digital dividend auctions.
Although the licence conditions for each of three categories of spectrum vary slightly, Ofcom has proposed that all licences are tradable in order to create maximum flexibility. In addition, the licences will not impose any "use it or lose it" conditions, or any roll-out obligations or access requirements. Ofcom is proposing that the licences have an indefinite duration, with initial terms ending in 2026.
The release of the digital dividend is not just a UK issue. The management of the spectrum in the UK takes place within international frameworks, determined globally and in the European Union, and most investments in new wireless technologies are carried out on a European or global scale. In a communication issued last year, the European Commission said that it is moving towards a common spectrum plan at European level to enhance the overall capacity and range of uses of the digital dividend. However, it is not yet clear how this will affect member states, and Ofcom has decided to continue with its consultation regarding the digital dividend whilst discussions at EU level are being concluded.
The closing dates for responses to the Ofcom consultations are in August, and it is proposed that the auctions will begin as early as late 2008, with the main auction for "cleared spectrum" anticipated in summer 2009. Those auctions will create huge opportunities for investors into this sector; although, of course, only time will tell whether the frequencies are good value for money.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris, Brussels, Milan and Turin. If you would like further information on the firm's services to the private equity industry please contact Simon Witney in the London office on 020 7111 2222 or visit the website at www.sjberwin.com.
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